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The Spectranetics Corp. (NASDAQ:SPNC)

Q3 2007 Earnings Call

October 31, 2007 11:00 am ET

Executives

Don Markley - Lippert/Heilshorm and Associates, InvestorRelations

John Schulte - President and Chief Executive Officer

Guy Childs - Chief Financial Officer

Will McGuire - Chief Operating Officer

Analysts

Ahmet Bala - Citigroup

Jason Mills - Canaccord Adams

Suraj Kalia - Piper Jaffray

Charles John - Goldman Sachs

Matt Dolan - Roth Capital Partners

Spencer Nam - Summer Street Research

Brian Kennedy - Jefferies

Sean Fitz - Stevens

Shawn Boyd - Westcliff Capital Management

Operator

Welcome to the Spectranetics 2007 Third Quarter FinancialResults Conference Call. At this time all participants are in a listen-onlymode. Following management's prepared remarks, we'll hold a Q&A session.(Operator Instructions). As a reminder, this conference is being recordedtoday, October 31, 2007.

I'd now like to turn the conference over to Mr. Don Markley.Please go ahead sir.

Don Markley

Thank you. This is Don Markley with Lippert/Heilshorm andAssociates. Thank you for participating in today's call. Joining me fromSpectranetics are President and Chief Executive Officer, John Schulte, ChiefFinancial Officer Guy Childs, and Will McGuire, the company's Chief OperatingOfficer.

Earlier today Spectranetics released financial results forthe three and nine months ended September 30, 2007. If you have not receivedthis news release or if you'd like to be added to the company's distributionlist, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and ask forEleanor Tang.

Before we begin I'd like to remind you that management willmake statements during this call that include forward-looking statements withinthe meaning of Federal Securities Laws. These statements involve material risksand uncertainties that could cause actual results or events to be materiallydifferent from those anticipated.

For a list and description of those risks and uncertaintiesplease see the company's filings with the Securities and Exchange Commission.Spectranetics disclaims any intention or obligation to update or revise anyfinancial projections or forward-looking statements whether as a result of newinformation, future events, or otherwise.

Furthermore, this conference call contains time sensitiveinformation and is accurate only as of the date of the live broadcast, October31, 2007. Finally, due to the high attendance on today's call, we ask thatduring the Q&A session you limit yourself to one question and then onefollow up.

Now I'll turn the call over to John Schulte. John?

John Schulte

Thanks Don and good morning to everyone joining us fortoday's earnings call. I'm very pleased to report another nice quarter forSpectranetics. We achieved record revenues. We're profitable for the secondconsecutive quarter, launched the exciting TURBO-Booster product and weenrolled our first patient in an important trial for treating in-stentrestenosis.

As usual, I will focus my comments mostly on revenue and thekey drivers for our top line growth and then Guy will comment in more detail onour operating performance. We'll then open up the call for your questions. Ourtotal revenue grew to $21.2 million in the third quarter, which represents a 31%growth over last year and a 4% increase compared with the second quarter ofthis year.

Our sequential revenue increases; we believe our sequentialrevenue increase was noteworthy this quarter really for two reasons. First, asyou all know procedural volumes are usually lighter in the third quarter andsecondly, last quarter we had a $600,000 disposable products order from acustomer in Europe as part of a tender offer process which we knew would not berepeated this quarter.

Our total disposable product revenue increased 36% from theyear ago quarter. As usual, our atherectomy products led the way increasing 42%from the prior year and up slightly from the second quarter if we exclude theimpact of the tender order. Lead removal product revenue grew 18% from lastyear and was up 7% sequentially.

It's important to note that we completed the initial phaseof our dedicated lead removal sales organization sooner than anticipated so wewill have a fully staffed and trained lead removal sales organization goinginto this quarter. We placed a net of 20 new lasers this quarter bringing ourtotal for the year to 90 new lasers and now have a worldwide install base of713 systems.

This quarter we made a strong effort to clean upunderperforming lasers that had been placed in earlier quarters and we broughtback 12 lasers. We believe we have taken care of the key underperformingaccounts and expect to see return lasers to go back to historical levels in Q4.Laser sales were very strong this quarter at $1.2 million and that includedthree sales to VA hospitals where we believe we have an excellent opportunityfor both our atherectomy product line as well as lead removal.

Due to our limited market release we experienced onlymoderate sales from our new TURBO-booster product line as expected. However, Iwas very pleased with its performance. As you will recall, during the last sixweeks of the quarter we asked each of our sales team to focus just on one totwo accounts to ensure that they could properly train their key positions andthe cath lab staff in order to achieve optimal results.

The TURBO-booster was ordered by approximately 180 accountsand more importantly, almost half of those accounts reordered. Our sales peoplehave observed more than 400 cases, which told us that the TURBO-boosterachieved excellent outcomes and either met or exceeded expectations in terms ofincreased atherectomy capability.

As of October 1st, the TURBO-booster is in full launch mode.At TCT last week, the six-month results of the Cello trial were present by Dr.Raj Dave, the Principal Investigator of the trial. As you recall, the acuteprocedural results were previously disclosed in connection with the FDA's 5-10Kclearance of the TURBO-booster.

The Cello trial met its primary endpoints of tissuereduction as measured by an angiographic core lab. And achieved its safetyendpoint with no major adverse events at 30 days. The six month datademonstrated the durability of the procedure as measured by low target leadsand revascularization, or TLR, of only 14% which significantly exceeds balloonangioplasty reintervention rates of approximately 40% to 50% at six months asevidenced in two recently published studies.

Equally important, the patients in the Cello trialexperienced significant clinical improvement as measured by improvement inAnkle-Brachial Index, walking distance, and Rutherford category. Laseratherectomy with the TURBO-booster significantly improved the quality of lifesix months after the procedure with no MACE events.

We believe the Cello study will be well received by theinterventional community and will be regarded as a scientifically valid studydue to the use of three independent core labs and a clinical trial protocolthat was approved by the FDA.

In addition to the presentation of the Cello six-monthresults, TCT highlighted numerous podium presentations, presentations on theclinical benefits in treating patients with peripheral arterial disease withlaser atherectomy.

Our technology was prominently featured in thesepresentations many of which were made by thought leading physicians. Inaddition to TCT, we had our strongest showing ever at VIVA. VIVA is becomingone of the most prominent educational forums for intravascular intervention.And was attended by almost 1,000 physicians this year.

At VIVA, we had two successful TURBO-booster live cases andour Quick-Cross Catheter was used in a significant number of live cases focusedon the treatment of peripheral arterial disease. I believe that our strongshowing at VIVA and TCT will provide a very nice springboard for our fullmarket launch of the TURBO-booster.

This quarter also saw meaningful progress on the clinicalfront. Our near term clinical priorities are focused on getting data on the useof the TURBO-booster to treat in-stent restenosis or ISR. We believe that ISRis one of the most challenging lesions facing interventionalists today, asthere are currently no good treatment options.

Balloon angioplasty has failed miserably and mechanicalatherectomy may have difficulty with stent strut interaction. Laser atherectomyis the only atherectomy technology currently approved for treating coronaryin-stent restenosis as we demonstrated to the FDA's satisfaction that theultraviolet laser energy does not harm stainless steel stent struts.

We represent the only atherectomy technology that's notcontraindicative for the treatment of in-stent restenosis. We believe that ISRmay represent between 25% and 35% of all interventions above the knee.

As a result, we've initiated two clinical studies toevaluate the efficacy of laser atherectomy with the TURBO-booster in thetreatment of ISR. The first study which we call PATENT is a multi center, 100patient trial being conducted in Germany using the TURBO-booster followed byballoon angioplasty.

The primary endpoint is 12-month patency is measured byduplex ultrasound. I'm pleased to say that we enrolled our first patient thisquarter in Leipzig, Germany by our Principal Investigator, Dr. Andre Schmidt.

We expect to have five sites qualified this quarter and I'llbe able to give an update on projected enrollment rates on the fourth quartercall when we will have some color on each site's enrollment rate.

Our second study, called SALVAGE, is also a multi centerprospective registry targeting 100 patients with in-stent restenosis in theSFA. The study will combine laser atherectomy with the TURBO-booster followedby a covered stent made by W.L. Gore.

The primary endpoint is similar to PATENT which is a12-month patency measured by ultrasounds. SALVAGE will be jointly sponsored bySpectranetics and W.L. Gore and will be conducted and managed independently bythe VIVA group of physicians.

We had hoped to enroll our first patient in SALVAGE thisquarter. However, the trial was delayed as Gore wanted to include their newheparin-bonded covered stent graph, which was only recently cleared by the FDA.We just received clearance from the FDA to add it to the SALVAGE trial.

We've just sent investigator packages to four hospitals for theIRB review and if all goes well, we expect to enroll our first patients inSALVAGE this quarter.

I believe that these two trials will provide crediblescientific information as to the value of laser atherectomy in the treatment ofSFA in-stent restenosis and I look forward to updating you on our progress onthese two important studies.

Also as I mentioned on last quarter's call, we've made thedecision to increase our investment in an attempt to grow the lead removalbusiness at an accelerated rate. We now have 11 Business Development Managers,or BDMs, which represents one for each of our 11 sales regions.

These BDMs are chartered to first, train new positions onlead extraction with a particular emphasis on developing cardiac surgeons. Wethink this specialty is ideally suited for lead extraction as they are the mostwell equipped specialty to handle the infrequent, but potentiallylife-threatening complication associated with this procedure.

They will also educate physicians on the concept of what wecall lead management rather than lead extraction. Lead management focuses onthose specific patients for which lead extraction may provide clinicalbenefits, which outweigh the complications risk.

Our initial targets are patients with pacemaker pocket infections,lead malfunctions, and patients who are undergoing an upgrade from a Bradypacer to an ICD. We believe these segments represent approximately 50,000 to70,000 patients per year.

To support the concept of lead management, we are gatheringdata from our top centers to identify the current complication rate associatedwith laser lead extraction. We also want to test the hypothesis thatcomplication rates are directly related to the implant life of the lead.

We believe that leads implanted for less than five yearshave a very low rate of complication during lead extraction and that patientswith pacemaker infections, lead malfunctions, or upgrades to ICDs might benefitfrom lead removal rather than simply capping the lead.

Furthermore, we intend to hold our first ever LeadManagement Master Summits this quarter at two high profile centers. One will behosted by an electra-physiologist and the other jointly hosted by a vascularsurgeon along with an electra-physiologist.

This will give us an opportunity for valuable peer-to-peerinteraction for physicians and for us to highlight the concept of leadmanagement and share best practices along with our commitment to make leadremoval a mainstream technology for selected patients.

In summary, I'm very pleased with our accomplishments thisquarter.

We grew our revenues to record levels, met all of ourobjectives for the limited market release of the TURBO-booster, enrolled ourfirst patient in the PATENT ISR trial, and accelerated our investment in growingthe lead removal business.

In addition, we're actively evaluating a number of newbusiness development opportunities, which we believe will fit will with ourcurrent product lines and call points.

Now let me turn the call over to Guy who will review ourfinancial performance in more detail.

Guy Childs

Thanks John. I will begin with a recap of our third quarterresults followed by a discussion of our updated financial guidance for 2007.

For the quarter ended September 30, 2007 revenue was $21.2million, up 31% compared with the $16.2 million during the year ago quarter andup $800,000.00 compared with the second quarter of 2007, or 4%.

The sequential increase was aided by strong laser salesduring the quarter and growth in both atherectomy and lead removal productrevenues after adjusting for a large atherectomy product order from a Europeancustomer in the second quarter, that John mentioned.

This adjusted sequential growth is particularly noteworthygiven the seasonality challenges in the third quarter as a result of reducedprocedure volumes consistently observed during the summer months.

As John noted, sales of our TURBO-booster catheter weremodest due to the limited market release during the last half of the thirdquarter.

While I do not intend to go into the details, averageselling prices of all disposable products were consistent with second quarterlevels as anticipated. On a geographic basis, U.S. revenue was $19 million,which represents 90% of worldwide revenue and increased 33% on a year over yearbasis and 7% as compared with the second quarter of this year.

Revenue outside the U.S. this quarter totaled $2.2 million,which is up 18% compared with the year ago quarter and down $500,000 on asequential basis.

Gross margin for the first quarter was 74%, which is equalto gross margin of 74% in the year ago quarter and down slightly from 75% inthe second quarter of this year. The slight sequential decrease during thequarter is reflective of a higher laser sales mix, which generates lower grossmargins in our disposable products.

Operating expenses in the quarter were $15.6 million, up 24%compared with $12.6 million last year and up 4% on a sequential basis primarilyreflecting continued expansion of our field sales organization.

As of September 30, 2007 we had a total of 100 individualswithin our field sales team compared with 71 at the end of the year ago quarterand 83 at the end of the second quarter of this year. Of the 100 individualscurrently within the sales team, 84 are now quota carrying and 16 are in salesmanagement.

Pre-tax income for the third quarter of 2007 was $844,000compared with pre-tax income of $32,000 in the prior year quarter and $1million during the second quarter of this year. We believe that pre-tax incomeis the most relevant measure of our operating performance given that incometaxes are a non-cash expense due to historical net operating losses availableto offset any taxable income.

Our cash and investment securities totaled $53.8 million atSeptember 30, 2007, which represents an increase of approximately $300,000during the quarter.

I will close with some commentary on our annual financialguidance for 2007. In our press release this morning we revised our 2007revenue guidance toward the high end of the previous range and raised previouspre-tax income guidance for the second time this year.

The company expects revenue for 2007 to be within the rangeof $81 million to $83 million representing 28% to 31% growth compared with lastyear. This guidance is towards the high end of the previous range of $79 to $83million.

The company expects pre-tax income to be within the range of$2.5 million to $4 million. This compares with previous guidance in the rangeof $1.5 million to $3 million and original guidance provided in February 2007in the range of a $600,000 pre-tax loss to pre-tax income of $1 million.

It's important to note that the low end of our revisedpre-tax income guidance includes estimated costs of $400,000 to $500,000associated with lease obligations on the facilities we're moving from.

These costs may not be reported until 2008 depending on thestatus of the move at year-end. Further, these costs may not be incurred if weare successful in locating a new tenant for these facilities.

We continue to believe that pre-tax income is the mostrelevant measure of its operating performance given that income taxes are anon-cash expense and for that reason and the fact that significant fluctuationsin the effective income tax rate are expected from quarter to quarter, thecompany is not providing guidance on net income.

This guidance takes into consideration that net new laserplacements for 2007 will fall within the previously communicated range of 120to 140 laser systems.

In testing the company's financial guidance, Spectraneticsmanagement considered many factors and assumptions including, but not limitedto, current projected sales trend data, status timing and progression of thecompany's product development projects, current and projected spending levelsto support sales, marketing, development, and administrative activities,anticipated timing and costs associated with the relocation and consolidationof its headquarters and manufacturing operation, and other risk factorsdiscussed in Spectranetics publicly filed documents.

This concludes our prepared remarks. Now we'll open up thecall for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) One moment please for the firstquestion. Your first question comes from Ahmet Bala with Citi.

Ahmet Bala - Citigroup

Hi, thanks for taking the question. Guy, I just wanted tofollow up with a comment you just made. You said that ASPs were consistent withsecond quarter levels. If we use that assumption, I come up with kind of totalcatheter units essentially flat with the second quarter. Does that make sense?

Guy Childs

Yes it does Ahmet and of course if you exclude the Europeanorder it's slightly up.

Ahmet Bala - Citigroup

Okay, and I guess just a little bit, one level deeper there,that would also imply that lead removal units were up on a sequential basis. Isthat correct too?

Guy Childs

That's correct.

Ahmet Bala - Citigroup

Okay just one follow up here, can you kind of talk a littlebit about what kind of impact you're seeing from competitive atherectomyplayers in the market, if at all, and just also comment about just longer termgoals for the business from the operating margin and gross margin perspective.Thanks.

John Schulte

Ahmet, this is John. I will handle the first part and thenturn the second piece over to Guy. As you know there is a new atherectomycompetitor, CSI, which received approval in the third quarter. It's arotational atherectomy technology that's focused primarily on the lower leg.It's limited in artery diameters from about 1.5 or 2 millimeters up to 3.5millimeters.

As you are well aware in this field, physicians are anxiousto try all types of new technology whether it be atherectomy or stenting andwhatever so certainly a trialing will take place and everyone kind of knows whothe top volume positions are for treating below the knee disease so certainlythey will get some trialing.

We believe that any impact that we might have we think willbe temporary for a number of reasons, that any technology to gain long termtraction has to demonstrate that it performs well in terms of four parametersoutcome, safety, ease of use, and cost. We think that our atherectomy technologyhas by far the best clinical data as it relates to both LACI and the recentlypublished Cello data.

We think we have a very strong safety profile with I thinkthe acknowledged lowest disembolization rate of virtually any atherectomytechnology and in fact even lower than balloons and stents.

In terms of ease of use, the only technology that can dothrombus through calcium and the ability to treat arteries ranging from as lowas 1.5 millimeters up to 7 millimeters in diameter and in some cases with a newTURBO-booster with a single catheter so we think there's a high costeffectiveness advantage in our favor as well so that being said, I also believethat the more atherectomy companies that there are in the market, the better itis for all of us.

We estimate that atherectomy represents only about 20% ofall endovascular procedures in the leg and my guess is that if we candemonstrate solid clinical benefits, atherectomy could represent as much as 50%of all endovascular procedures so the more companies that are preaching thebenefits of tissue removal, the better it is for all of our companies and wefeel confident that we can share the advantages of our atherectomy technologyover other atherectomy technologies.

So that's I guess my take on the competitive situation. Guy,maybe you can talk about the longer-term comments on the business.

Guy Childs

Ahmet, we have done a lot of work in this area and I thinkhave set appropriately aggressive goals for the team here at Spectranetics.Over time which I would peg as a two to three year timeframe, we are looking atoperating margin targets in the low to mid 20s and gross margin targets in thehigh 70s and we have begun that journey here. We anticipate continuing thatjourney in 2008. We'll not be at those levels in 2008. Like I said, it's a twoto three year journey to get to those targets.

Ahmet Bala - Citigroup

Thanks Guy. Can I just sneak one more in? I just wanted tosee if you could comment on how receptive the larger cath players have been onthe lead removal side in terms of addressing the issue of lead removal as itrelates to lead fractures.

Guy Childs

We'll let Will handle that one.

Will McGuire

Sure, I mean the Fidelis recall has been a significant fieldaction that's going to have an impact on our lead removal business obviously,but I think the impact is going to be quite limited initially as the physiciansgain a better understanding of the failure mode and the data provided by themanufacturer but for sure the impact of this field action will be somethingthat will probably span several years and impact our business over thattimeframe.

If you think through it, I think the majority or the majorimpact will probably start sometime late next year as the ICD's batteries startto deplete and you start reaching the five year mark and we see the physiciansgoing back in and opening up the pocket to replace the ICD and at that point adecision will in many cases have to be made what to do with the Fidelis leadand in some cases, we are sure that lead will be extracted.

Ahmet Bala - Citigroup

Okay, thanks a lot.

Operator

Our next question comes from Jason Mills with CanaccordAdams.

Jason Mills - Canaccord Adams

Hey guys, congratulations on another good quarter.

John Schulte

Thanks Jason.

Guy Childs

Thanks Jason.

Jason Mills - Canaccord Adams

So one question, I guess we're supposed to be limited to twohere. One question on the atherectomy side, one question on the lead removalside. Just stemming off one of the last questions, John, you talked about thepercentage of procedures in the leg that use atherectomy, 20%, I think you cango to 50%.

My guess is that part of that growth with respect to shareof atherectomy in the leg will be above the knee and in-stent restenosis whereas you've talked about in the past, there isn't a lot of indicated treatmentsfor it.

So what I was hoping you could do is help us understand sortof beyond the fourth quarter which at the top end of your guidance suggestsabout 31% total revenue growth or about 48, 50% atherectomy growth, howTURBO-booster should impact your business in 2008 before you receive the datafrom the trials that you're running, understanding that you probably, you'regoing to run into some difficult comps below the knee.

You have other competitors so perhaps growth could come downbut perhaps give us a sneak peek into sort of what we should be thinking aboutwith respect to your atherectomy business in '08 vis-à-vis TURBO-booster aheadof the trials.

And then my second question on the lead removal side, Willgave a very good sort of synopsis of what he expects with respect to whengrowth should accelerate in that business vis-à-vis the lead issues currentlybut I'm wondering also if you can comment about the new lead connectortechnology, the IS4 ICD lead that the big three are working on and perhaps howthat could impact your business going forward.

If we are looking at very, very small penetration ofpotential lead removal patients right now couldn't that be a business thatgrows commensurate with what atherectomy has done for you over the last threeyears and clearly that's not in people's models. Thanks.

John Schulte

No problem Jason. Let me handle the atherectomy piece and Iwill ask Will to take the lead extraction piece. I think it's been wellunderstood the majority of our revenues and the majority of our growth inatherectomy has come from the smaller catheters historically which are used totreat the lower leg because we think, we have significant advantages there.Obviously we will be facing additional competition there.

I think we believe we have some significant advantages overany atherectomy technology for treating below the knee disease and so we wouldexpect to see continued growth in our smaller catheters. However, I think anygrowth acceleration over previous levels I believe will be coming more from ourpenetration into the upper leg because for the first time we have a credibletechnology to deliver five plus millimeter lumens with our technology.

Certainly we believe, I believe that the major opportunitiesin treating above the knee disease will be for the treatment of in-stentrestenosis. Obviously we don't have an indication for that specific lesionsubset but we are working aggressively to get podium presence time and livecases to showcase the fact that our technology we think is a very effective wayto treat in-stent restenosis which I mentioned I believe represents it could beas much as a third of all upper leg procedures and so that's a very importantfocus point for us.

I think the other area where we see atherectomy playing arole could be in debulking plus stenting in complex calcified vessels so, Ithink as we look to the future, I would see a mix shift from 2/3 of ouratherectomy revenues from the smaller catheters going to perhaps more like a50/50 split next year where we'll see our, I will call midsize catheters, our1.7 and 2.0 catheters which are used with the TURBO-booster driving our growth.

The difficult stuff for us to tease apart is that each ofthese catheters can also be used as a standalone in below the knee disease aswell so we will have to make some estimates as to the mix shift going forwardbut I certainly believe that, the major growth driver for '08 will be comingfrom our deeper penetration into the upper leg so with that, let me turn thesecond half of your question over to Will.

Will McGuire

Hey Jason.

Jason Mills - Canaccord Adams

Hey Will.

Will McGuire

I want to let you know, the new connection standardizedscore has not been introduced yet, but we have addressed a lot of questionsfrom our customers regarding the impact of this new design standard and whetheror not our system will be capable of extracting these leads sometime in thefuture and the answer to that is we see no issues with our system and abilityto extract these leads.

In terms of lead management, IS4 represents anotherpotential advancement in the design of defibrillator leads and it may be quiteattractive to some implanting physicians.

But for the patients that already have existingdefibrillation leads, this new standard would probably only be offered to avery small percentage of these patients and in that small subset of patients anolder defibrillation lead may be replaced with this new design depending uponthe added benefits.

Until it's introduced it's really difficult to speculate onwhat those benefits may be and how lead removal may come into play but I thinkit's safe to say at a high level just based upon our investment into our leadremoval team and into the lead removal business.

We certainly feel there is an opportunity in the futureyears to accelerate the growth of this business in excess of what we'veexperienced over the last two or three years, which is probably in the, itprobably averages about 18% year-over-year growth over the past two or threeyears.

So, we certainly think we can accelerate it to a levelhigher than that, but at this point I'd say it's hard to pin a number on it andspeculate what IS4 will contribute to that.

Jason Mills - Canaccord Adams

Great, thanks for that very detailed commentary and thenJohn, just as a follow up and I'll get back in queue, very helpful with respectto where you see the business long term from a top level, I'm just wondering ifI could just push you a little bit in just giving you a few numbers and Ipromise I'll get back in queue on this.

You're going to grow your atherectomy business this year perhapsthree times market growth. If market is growing 15 to 20, you're going to growat the top end of your range, 48%. If street models are out there looking forgrowth to decelerate but still in the 32% range, it seems to imply, I knowthat's kind of where we are -- it seems to imply to us that you're going togrow faster, but yet could we be conservative here considering you're gettinginto, as you said, 2/3rd of the market you aren't in with a product that treatssomething, instent restenosis, that really no one else treats very well or atleast is contraindicated against.

I'm wondering if you could, maybe push you a little bit ontrying to help us set expectations for '08 on which most folks are valuing thebusiness as we stand currently.

John Schulte

Jason, I appreciate you pushing, but I think at this point,let me refrain from '08 guidance. As you know we always present that at the endof the fourth quarter call. It's somewhat challenging.

We're still obviously in super early days of the TURBO-boosterlaunch. As I mentioned, I'm very pleased with the product performance. It seemsto be gaining traction which is very encouraging, but we'll have a much betterhandle on giving guidance when we finish the quarter so hopefully my earlieranswer in terms of how we see the mix shift of our business will help you fornow.

Jason Mills - Canaccord Adams

It does. Thanks John.

John Schulte

Thanks.

Operator

Your next question comes from Suraj Kalia with PiperJaffray.

Suraj Kalia - Piper Jaffray

Good morning gentlemen, congratulations on a nice quarter.

John Schulte

Thanks, Suraj.

Guy Childs

Thank you, Suraj.

Will McGuire

Good morning.

Suraj Kalia - Piper Jaffray

John, in terms of TURBO-Booster's sales, how many went intoyour top 25% accounts and how many of them, if you can share, have inventory,vis-à-vis the catheters?

John Schulte

Yes, Good question Suraj. First of all, as you might imaginein our limited market launch we targeted our top accounts so as I mentioned, wehave 70 sales people that are focusing on atherectomy and we said to go intobasically your top one or two accounts and so obviously, those are the top onesand we achieved an extraordinarily high penetration rate of those. In terms ofinventory, it's really not an inventory bill situation.

We sell TURBO-boosters in boxes of three and so for anaccount to get started they would usually buy one box of 7-French and one boxof 8-French so, and it's $1500.00 a box so it's not a big inventory situation.

As I mentioned, the most encouraging thing to us, Suraj, wasthe fact that almost half of the accounts, within the first six or seven weeks,have placed a reorder so that tells us that we're gaining some traction.

Suraj Kalia - Piper Jaffray

Okay. John, in terms of the competitive landscape, I thinkof it as sort of being harped upon quite a bit, we do understand there are somemergers. There are some new entrants.

To the best you can share, how does Spectranetics intend, oreven Will you might jump in, but how does Spectranetics intend to handle thesituation where there could be a potential procedure you've lost because eithercompetitors are lowering prices and or offering non-clinical incentives to thephysician at hand?

John Schulte

Okay. Let me try to gingerly handle this one. As far as onthe pricing front Suraj, the new technology is in the $2500.00 range, which iskind of similar to where the other atherectomy devices are.

Reimbursement is very attractive for atherectomy and so atthis point we don't see price as a major driver for selection of an atherectomytechnology. That's not to say in the longer term future, it could become moreof a factor, but today we believe physicians are selecting technology based onits outcome, on its safety profile, on its ease of use and obviously cost isalways a factor so if something is two or three times, or significantly moreexpensive than something else then that could certainly have an impact.

With regard to the other piece, obviously we're a publiccompany that is very straightforward in the way we do business with physiciansand that's just the way we handle it.

As far as how other companies handle their business thenthat's their business and there's nothing that we can do about that.

Suraj Kalia - Piper Jaffray

One last question, I will hop back in the queue. John, theclinical trial you're conducting in Europe for instent restenosis, remind meagain. Maybe I misheard. The primary endpoint for that trial is, you can say?

John Schulte

It's clinical patency as measured by duplex ultrasound,that’s right, an increase in the velocity of blood flow from the baseline.That's the standard way at 12 months, at one year -- that's kind of thestandard way that, it's a noninvasive technique and it's a standard that hasbeen used historically.

Duplex, say "restenosis by duplex" doesn'tnecessarily mean that a patient is symptomatic and therefore needs treatment,but it's just a benchmark that has been used historically for the evaluation ofdevices.

Suraj Kalia - Piper Jaffray

So, is it fair to say that instent restenosis probably willbe factored into your FY09 guidance and FY08 is pretty much going to be -- itcannot factor in anything…

John Schulte

Yes, certainly it will be difficult, Suraj, for us to get areal handle on that because obviously we don't have an indication in the U.S.and can't promote it although we -- it's not limiting us outside the U.S. whichis one of the reasons why we chose Germany as a trial because we don't havethat limitation.

But a lot of it will depend on the interim trial results sowhile the 12-month endpoint is the primary endpoint we will have proceduraloutcomes. We'll have six month outcomes as well and in the institutions thatare participating both in the PATENT trial which is the one in Germany and theSALVAGE trial which is the one here in the U.S. where we're jointly sponsoringwith Gore, the physicians are very high presence podium speakers and it'salready been mentioned, the trial design was discussed in some detail for bothtrials at TCT and so, the more discussion we have about the benefits ofatherectomy and the treatment of instent restenosis and the potential benefitsthat laser atherectomy may have for this application, we would hope to see thatthat would have a positive impact and I think '09 is probably the righttimeframe, Suraj.

Suraj Kalia - Piper Jaffray

Gentlemen, thank you very much.

John Schulte

Thanks.

Guy Childs

Thanks.

Operator

Your next question comes from Charles John with GoldmanSachs.

Charles John - Goldman Sachs

Great, thank you, good morning.

John Schulte

Hi Charles.

Guy Childs

Good morning.

Will McGuire

Good morning.

Charles John - Goldman Sachs

Thank you for taking the question. First of all I just wantto make sure I understand your mindset around the lead removal opportunity. Isthere an incremental benefit dialed into the full year 2007 expectations fromthe recent entire (ph) recall and if so, how much?

Guy Childs

Okay, I would say no we did not put really put anyincremental revenue into our full year '07 forecast due to this opportunity. Wethink anything in the near term will be very modest, Charlie, and the longerterm or the more significant impact as I mentioned earlier, is going to happenlater in '08 and going out into '09 and 2010.

Charles John - Goldman Sachs

Okay. Great, thanks for that clarification and with respectto the size of the sales force, now that we are at 100 reps strong should weanticipate that hiring for the year is largely done and this should be the newbase level of spending on a quarterly basis for SG&A?

Guy Childs

I think from a hiring standpoint, I can take that question.I would say yes, you should assume at 100 now that we're pretty much where wewant to be for the foreseeable future. There may be some changes, but we'reonly talking changes, Charles, in the neighborhood of two or three reps here orthere.

Charles John - Goldman Sachs

Great, thanks a lot.

Guy Childs

Sure.

Operator

Your next question comes from Matt Dolan with Roth Capital.

Matt Dolan - Roth Capital Partners

Hi guys, good morning.

John Schulte

Hey Matt.

Guy Childs

Good morning.

Matt Dolan - Roth Capital Partners

As we look at a pretty strong Q3 and somewhat of a lack ofprocedural seasonality and also looking at this morning's ev3 Fox Hollowresults, it appears that Fox Hollow came in below prior year levels. John, doyou have a sense that you've been able to or maybe expect to convertcompetitive procedures and if so, are you sensing any disruption out there interms of the merger and anything correlated with the integration?

John Schulte

Any integration between two substantial companies is verydifficult for sure and it's been acknowledged that there were significantnumbers of territories that were changed. Relationships are built up and thoseare disrupted so any company will face that so, that's always challenging.Obviously, our goal is to provide stability with our customers and hopefullythat will make sense for us in the short and the long-term.

With regard to other issues, I think the fact that we nowhave a product, which can create large lumens which has been the primarylimitation for our technology, is something that is very interesting for oursales force to be able to talk about and as I said, the early results from ourearly market release were very promising.

And we've always known that it's a very safe device and thatit's effective against a wide range of lesion types and now for the first time,we've been able to create five plus millimeter lumens with our technology andtherefore can now play much more fully in treatment of lesions in the entireleg and we know that the procedures in the upper leg are probably twice as manyas are in the lower leg. So, it's a very exciting opportunity for us.

Matt Dolan - Roth Capital Partners

Sure. Okay. Great and secondly, with your two trialsappearing to be relatively on-track here, can you give us an idea of what someof your longer term clinical study plans might be, meaning do you have anupdate on any new indications you might be investigating whether it becoronary, thrombus, etcetera.

John Schulte

That's a great question, Matt. We are considering doing acoronary trial for the treatment of AMI. Our extended family study, which was aregistry study using the laser to treat patients with heart attack, with bigthrombus burden.

That's in the publication preparation process and as wementioned on earlier calls, we think the benefits of a bleeding thrombus withthe laser prior to putting a stent in can potentially reduce the risk ofdisembolization as measured by something called a blush score.

And we presented those trial results and showed that ourdata had significantly better blush scores meaning lower rates ofdisembolization than any other device technology whether it be aspirationthrombectomy or disembolization and so we're considering whether or not we wantto do a more formal study to evaluate that potential so that would be probablythe next trial that we'd be looking for and if we do decide to go forward, I'llannounce the specifics of that on our next quarter call.

Matt Dolan - Roth Capital Partners

Sure, okay great, and just a quick statistical number.Looking at reimbursement in the outpatient setting improving, can you give us aquick breakdown in install base between hospital and outpatient?

John Schulte

Sure, Will?

Will McGuire

Between outpatient and inpatient?

John Schulte

Procedures, you mean, Matt?

Matt Dolan - Roth Capital Partners

Right.

Will McGuire

It varies quite a bit across the country but I would say onaverage across the country, we're probably doing about 60 or 70% are inpatientand the remainder being outpatient but again it could vary by region butoverall I'd say probably 60 to 70% are inpatient.

Matt Dolan - Roth Capital Partners

Okay, very good. Thanks a lot guys.

Will McGuire

Sure.

John Schulte

Thanks Matt.

Operator

Your next question comes from Spencer Nam with Summer StreetResearch.

Spencer Nam - Summer Street Research

Thanks for taking my questions. Just have a couple offollow-up questions. The first question I have is you mentioned this box ofthree catheters. When a doctor uses that, does he or she use up all threecatheters at once or how does it work?

John Schulte

We wish that were the case, Spencer, but no. Basically, it'sa box of three individual packaged inside so you open it up and there are threesterile packages inside. They just use them one at a time.

Spencer Nam - Summer Street Research

And do you know what the typical, the number of cathetersthey use per procedure?

John Schulte

Well, for a TURBO-booster, it would only be one.

Spencer Nam - Summer Street Research

Okay.

John Schulte

But potentially for the laser catheters it could be morethan one although one of the nice advantages of the laser system withTURBO-booster is for example, in our 7-French system you'd use a TURBO-boosterwith a 1.7 millimeter catheter to treat the upper leg and perhaps at the kneeand then if that same patient had lesions below the knee, they would simplytake the laser catheter out of the TURBO-booster and use it by itself.

So, there are some potentially very nice economic advantagesto treat lesions in the upper leg and the lower leg with the same cathetersystem. Other atherectomy technologies will have to use different sized devicesto treat large arteries and small arteries.

Spencer Nam - Summer Street Research

I see. And then, on kind of the follow-up question to thisis what would be, when you look at the top accounts that you are working withfor this early launch of booster, what would be the number of procedures thatwhere the physicians would feel comfortable with the usage of booster? I meanis there some sort of number that you have in mind? Is that four procedures perphysician? Or is it eight? Can you give any comment to that?

John Schulte

Great question. It really depends on the experience of thephysician, both in terms of their interventional skills and their experiencewith the laser. We found in the Cello trial, we used only physicians who werevery experienced with the laser and we found that their initial case, which wasa training case was identical to an enrolled case so there was zero learningcurve for those guys.

Now that's an exception and so one of the reasons why wechose this limited market release to focus on a selected number of accounts andselected number of physicians was to be sure that they did have the rightnumber of cases under their belt and felt comfortable using the device when oursales person wasn't there and so it can be from one to two up to five to sixdepending on the experience and the skill set of the physician.

Spencer Nam - Summer Street Research

Great, and then just on the, rounding up the SFA, the topic,we gathered at TCT that ev3 was focusing more on below the knee for theatherectomy opportunity. Do you get a sense that, now that you're going intothe SFA, that direct competition from the atherectomy angle is not assignificant or how would you describe your current SFA atherectomy competitivelandscape?

John Schulte

Previously, Fox Hollow had significantly higher revenues inthe upper leg than we did because they could drill a larger hole and theyobviously were looking for growth into the smaller vessels below the knee whereour stronghold was so, while they were trying to focus in the areas that theywere not participating as heavily in, in our stronghold, obviously now with theTURBO-booster, we're trying to go into the upper leg.

And so it has always been a very strong competitivelandscape but as I mentioned, I think it's very important that the moreatherectomy companies there are preaching the benefits of tissue removal fortreatment of lesions in the leg, I think the better it is for all of us becauseI certainly believe that it's easier to convince a physician who believes intissue removal to try a different type of atherectomy than it is to convince aconfirmed balloon and stent user to try any kind of atherectomy so the morepeople that try atherectomy, they are more open minded to try different formsof atherectomy.

Spencer Nam - Summer Street Research

I see. That's really helpful. A couple just quick questionsand I'll get back to queue, on the lead removal business side, in the preparedcomments you mentioned that there are 50,000 to 70,000 cases per year thatcould fall into the removal category.

What's the current penetration of removal? How many of those50,000 to 70,000 leads are being removed today and what do you think the realsay the next couple of years, how much that number could grow? Any sense onthat?

Guy Childs

There’s approximately leads per year that are being extractedright now and as we said earlier, our historic growth rate if you look over thepast two or three years has been around 18% per year and I would probably saythat the lead removal volume has grown probably by about 18% a year as well.

We feel with our dedicated lead removal specialist team, theBDMs, and with some recall action as well as promotion of lead management, wecertainly feel that that growth rate could accelerate over 18% per year. Howmuch we're probably not prepared to say right now but certainly we think itwill be a higher growth rate than we've seen in the past.

Spencer Nam - Summer Street Research

Great, appreciate that. And then the final question is whenwill we get some early data on PATENT and or SALVAGE?

John Schulte

Probably the earliest that we will get would be the middleof next year and it would probably come first on the PATENT trial because we'vealready enrolled some patients there, and we would probably have someprocedural 30 day outcomes but six month data.

Which would be the first patency endpoint probably wouldn'tcome until best case, the third quarter of next year and Salvage will go behindit. It'll be difficult to know until we get all the sites up and running andenrolling but clearly it would be that it's a big problem.

We're going to high volume centers but as with any clinicaltrial, there's a very tight exclusion and inclusion criteria and so while thesephysicians may see a lot of patients that fit the, potentially fit thecategory, they're excluded for one reason or another.

So you almost have to kind of screen two or three patientsfor every one that you enroll. We'll have a better handle on that at the nextquarter's call when we see what the enrollment rate is and we'll have a flavorfor the PATENT which is the German trial and then we'll have -- we have nowfour of the five sites which are ready to enroll.

Only one is enrolled so far and this is all happening realtime and so we'll have a much better handle in the fourth quarter call as tohow many patients will be enrolled per site per month.

Spencer Nam - Summer Street Research

Great, thanks very much.

John Schulte

Thanks.

Operator

Your next question comes from Brian Kennedy with Jefferies.

Brian Kennedy - Jefferies

Hi guys. Thanks for taking my question.

John Schulte

Hi Brian.

Guy Childs

Hi Brian.

Will McGuire

Good morning.

Brian Kennedy - Jefferies

Good morning. My first one concern laser placements. I'mcurious about that 12 number. Can you go through some of the criteria you usedto determine whether a laser will be called in and has there been any kind ofchange in disposable usage quotas recently?

Will McGuire

Sure. This is Will. I can take that question.

Brian Kennedy - Jefferies

Okay.

Will McGuire

We are -- in general, I'd say that the lasers are not beingreturned or brought back from customers because of bad experiences. If you lookback over the past several years, or going back several years.

Placements were probably driven more by, with an emphasis ongrowth and getting into new accounts versus ensuring that the laser was alwaysplaced in the right account and the right account being one that has sufficientperipheral and lead removal volume to justify the capital outlay as well as theservice expenses.

So, if you evaluate the lasers that we brought back I'd saythe majority of them were just placed in institutions that did not havesufficient volumes so, what we do is we look at volumes or business that we'regetting from these lasers over a period of six months, nine months, or 12months.

And those that are not hitting the hurdle that weestablished, then we'll make an effort to either bring the laser back that'susually the last ditch option that we choose. We'll probably start off withconverting it to a rental or putting some sort of plan in place to get thevolume up and only when we feel like the volume is not going to reach asufficient number do we initiate an action to bring it back.

I'd say right now we're doing a much better job ofqualifying institutions and by qualifying we look and see how many users theyhave and what their overall peripheral lead removal volumes are and looking forcertain hurdles there.

And going forward, I would say we'd expect to see returnscloser to what historical averages have been, in reference to John's commentsthat we think we've got the lowest performers cleaned up right now.

Brian Kennedy - Jefferies

Okay, because it looks like if you look at the full yearguidance you put out there for placements, that Q4 number is going to have togo up, right?

John Schulte

That's correct.

Will McGuire

That's correct.

Brian Kennedy - Jefferies

Okay, and can you just refresh my memory, what is the volumeyou're targeting specifically or is there not a hard number out there?

John Schulte

For cath free lasers, we'd like to see 15 catheters perquarter.

Brian Kennedy - Jefferies

Okay, still at 15, okay. That's great. Thank you very much.

John Schulte

Thanks.

Operator

Your next question comes from Sean Fitz with Stevens.

Sean Fitz - Stevens

Good morning.

John Schulte

Hi Sean.

Sean Fitz - Stevens

John, just quickly, as you talked about earlier in the callhow you envision your mix evolving from your small catheter business and yourlarge catheter business from somewhere around 2/3 to more of a balanced mix.How do you envision the trajectory of your small catheter business as we thinkabout that mix evolving?

John Schulte

We would expect Sean, to continue to see growth in the smallcatheters simply because we believe that procedural volumes for treating belowthe knee disease will continue in that 15 to 20% range. And we would expect tocontinue to see growth in that product line.

I think we would expect to see potentially acceleratedgrowth in the above the kneed procedures because now we can play with theTURBO-booster and so historically the faster growth drivers for atherectomybusiness have been in the small catheters. Now we see the faster growth perhapscoming in the larger catheters but still seeing growth in the small cathetersas well.

Sean Fitz - Stevens

Okay great. Hey John, last question, in previous callsyou've talked a lot about your position, training efforts, and your MasterSummit specifically. Could you maybe just talk about what's going on there aswe look into the fourth quarter and into 2008 and how the TURBO-booster launchimpacts those training workshops?

John Schulte

Sure. Well we continue to believe that that's the best wayto learn about our technology, these live case Master Summits and how do youhave the statistics of how many we've trained so far?

Guy Childs

Yeah, through the third quarter we've held 14 Master Summitsand trained just a little over 300 physicians, which is right on track withwhat we anticipated.

John Schulte

And we got a couple more in the fourth quarter. I think whatwe're very excited about is these two we'll call them Lead Management MasterSummits. Maybe Will could make a comment on those because we've never donethese before but we're kind of building on the success that we've had inatherectomy to demonstrate the same benefits for lead removal.

Guy Childs

As John mentioned earlier, we have two lead managementMaster Summits scheduled in the fourth quarter, one led by anelectra-physiologist, the other one led by a CT surgeon with an EP as well andthese Summits will do a couple things.

First, it will provide a forum for physicians to meet anddiscuss laser lead removal. It also will provide a forum for discussion aroundthe concept of lead management. They'll be able to share best practices.They'll observe live cases.

Sometimes it will be taped live cases, and I think from thecompany's standpoint it will demonstrate our commitment to this business and tomoving this business forward. Probably about 40 to 50 physicians would betrained during the fourth quarter with these Summits.

Sean Fitz - Stevens

Okay. Will, John, Guy, thanks for your time.

Will McGuire

Sure, thank you.

Operator

And management has time for one final question and thatquestion comes from Shawn Boyd of Westcliff Capital Management.

Shawn Boyd - Westcliff Capital Management

My question has been answered, thank you.

John Schulte

Hi Shawn.

Operator

I'd now like to turn the call back to John Schulte for anyclosing remarks.

John Schulte

Well, thanks everyone for listening in to today's call. Wereally do appreciate the very insightful questions that you've posed to us andI remain very pleased with our progress this quarter and continue to be veryexcited by our prospects for the future and look forward to speaking with youon the fourth quarter call. Thanks again.

Operator

Ladies and gentlemen, that concludes your conference callfor today. We thank you for your participation and ask that you pleasedisconnect your lines.

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