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Executives

Don Markley - Lippert/Heilshorm and Associates, Investor Relations

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

The Spectranetics Corp. (SPNC) Q3 2007 Earnings Call October 31, 2007 11:00 AM ET

Operator

Welcome to the Spectranetics 2007 Third Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, 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 and Associates. Thank you for participating in today's call. Joining me from Spectranetics are President and Chief Executive Officer, John Schulte, Chief Financial Officer Guy Childs, and Will McGuire, the company's Chief Operating Officer.

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

Before we begin I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws. These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

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

Furthermore, this conference call contains time sensitive information and is accurate only as of the date of the live broadcast, October 31, 2007. Finally, due to the high attendance on today's call, we ask that during the Q&A session you limit yourself to one question and then one follow up.

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

John Schulte

Thanks Don and good morning to everyone joining us for today's earnings call. I'm very pleased to report another nice quarter for Spectranetics. We achieved record revenues. We're profitable for the second consecutive quarter, launched the exciting TURBO-Booster product and we enrolled our first patient in an important trial for treating in-stent restenosis.

As usual, I will focus my comments mostly on revenue and the key drivers for our top line growth and then Guy will comment in more detail on our operating performance. We'll then open up the call for your questions. Our total 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 of this year.

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

Our total disposable product revenue increased 36% from the year 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 the impact of the tender order. Lead removal product revenue grew 18% from last year and was up 7% sequentially.

It's important to note that we completed the initial phase of our dedicated lead removal sales organization sooner than anticipated so we will have a fully staffed and trained lead removal sales organization going into this quarter. We placed a net of 20 new lasers this quarter bringing our total for the year to 90 new lasers and now have a worldwide install base of 713 systems.

This quarter we made a strong effort to clean up underperforming lasers that had been placed in earlier quarters and we brought back 12 lasers. We believe we have taken care of the key underperforming accounts 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 included three sales to VA hospitals where we believe we have an excellent opportunity for both our atherectomy product line as well as lead removal.

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

The TURBO-booster was ordered by approximately 180 accounts and more importantly, almost half of those accounts reordered. Our sales people have observed more than 400 cases, which told us that the TURBO-booster achieved excellent outcomes and either met or exceeded expectations in terms of increased 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 acute procedural results were previously disclosed in connection with the FDA's 5-10K clearance of the TURBO-booster.

The Cello trial met its primary endpoints of tissue reduction as measured by an angiographic core lab. And achieved its safety endpoint with no major adverse events at 30 days. The six month data demonstrated the durability of the procedure as measured by low target leads and revascularization, or TLR, of only 14% which significantly exceeds balloon angioplasty reintervention rates of approximately 40% to 50% at six months as evidenced in two recently published studies.

Equally important, the patients in the Cello trial experienced significant clinical improvement as measured by improvement in Ankle-Brachial Index, walking distance, and Rutherford category. Laser atherectomy with the TURBO-booster significantly improved the quality of life six months after the procedure with no MACE events.

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

In addition to the presentation of the Cello six-month results, TCT highlighted numerous podium presentations, presentations on the clinical benefits in treating patients with peripheral arterial disease with laser atherectomy.

Our technology was prominently featured in these presentations many of which were made by thought leading physicians. In addition to TCT, we had our strongest showing ever at VIVA. VIVA is becoming one 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 and our Quick-Cross Catheter was used in a significant number of live cases focused on the treatment of peripheral arterial disease. I believe that our strong showing at VIVA and TCT will provide a very nice springboard for our full market launch of the TURBO-booster.

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

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

We represent the only atherectomy technology that's not contraindicative for the treatment of in-stent restenosis. We believe that ISR may represent between 25% and 35% of all interventions above the knee.

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

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

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

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

The primary endpoint is similar to PATENT which is a 12-month patency measured by ultrasounds. SALVAGE will be jointly sponsored by Spectranetics and W.L. Gore and will be conducted and managed independently by the VIVA group of physicians.

We had hoped to enroll our first patient in SALVAGE this quarter. However, the trial was delayed as Gore wanted to include their new heparin-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 the IRB review and if all goes well, we expect to enroll our first patients in SALVAGE this quarter.

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

Also as I mentioned on last quarter's call, we've made the decision to increase our investment in an attempt to grow the lead removal business 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 on lead extraction with a particular emphasis on developing cardiac surgeons. We think this specialty is ideally suited for lead extraction as they are the most well equipped specialty to handle the infrequent, but potentially life-threatening complication associated with this procedure.

They will also educate physicians on the concept of what we call lead management rather than lead extraction. Lead management focuses on those specific patients for which lead extraction may provide clinical benefits, 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 Brady pacer to an ICD. We believe these segments represent approximately 50,000 to 70,000 patients per year.

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

We believe that leads implanted for less than five years have a very low rate of complication during lead extraction and that patients with pacemaker infections, lead malfunctions, or upgrades to ICDs might benefit from lead removal rather than simply capping the lead.

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

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

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

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

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

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

Guy Childs

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

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

The sequential increase was aided by strong laser sales during the quarter and growth in both atherectomy and lead removal product revenues after adjusting for a large atherectomy product order from a European customer in the second quarter, that John mentioned.

This adjusted sequential growth is particularly noteworthy given the seasonality challenges in the third quarter as a result of reduced procedure volumes consistently observed during the summer months.

As John noted, sales of our TURBO-booster catheter were modest due to the limited market release during the last half of the third quarter.

While I do not intend to go into the details, average selling prices of all disposable products were consistent with second quarter levels 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 year basis 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 a sequential basis.

Gross margin for the first quarter was 74%, which is equal to gross margin of 74% in the year ago quarter and down slightly from 75% in the second quarter of this year. The slight sequential decrease during the quarter is reflective of a higher laser sales mix, which generates lower gross margins 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 primarily reflecting continued expansion of our field sales organization.

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

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

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

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

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

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 range of $1.5 million to $3 million and original guidance provided in February 2007 in 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 revised pre-tax income guidance includes estimated costs of $400,000 to $500,000 associated with lease obligations on the facilities we're moving from.

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

We continue to believe that pre-tax income is the most relevant measure of its operating performance given that income taxes are a non-cash expense and for that reason and the fact that significant fluctuations in the effective income tax rate are expected from quarter to quarter, the company is not providing guidance on net income.

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

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

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

Question-and-Answer Session

Operator

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

Ahmet Bala - Citigroup

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

Guy Childs

Yes it does Ahmet and of course if you exclude the European order 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. Is that correct too?

Guy Childs

That's correct.

Ahmet Bala - Citigroup

Okay just one follow up here, can you kind of talk a little bit about what kind of impact you're seeing from competitive atherectomy players in the market, if at all, and just also comment about just longer term goals 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 then turn the second piece over to Guy. As you know there is a new atherectomy competitor, CSI, which received approval in the third quarter. It's a rotational 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 3.5 millimeters.

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

We believe that any impact that we might have we think will be temporary for a number of reasons, that any technology to gain long term traction has to demonstrate that it performs well in terms of four parameters outcome, safety, ease of use, and cost. We think that our atherectomy technology has by far the best clinical data as it relates to both LACI and the recently published Cello data.

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

In terms of ease of use, the only technology that can do thrombus through calcium and the ability to treat arteries ranging from as low as 1.5 millimeters up to 7 millimeters in diameter and in some cases with a new TURBO-booster with a single catheter so we think there's a high cost effectiveness advantage in our favor as well so that being said, I also believe that the more atherectomy companies that there are in the market, the better it is for all of us.

We estimate that atherectomy represents only about 20% of all endovascular procedures in the leg and my guess is that if we can demonstrate solid clinical benefits, atherectomy could represent as much as 50% of all endovascular procedures so the more companies that are preaching the benefits of tissue removal, the better it is for all of our companies and we feel confident that we can share the advantages of our atherectomy technology over 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 think have 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 at operating margin targets in the low to mid 20s and gross margin targets in the high 70s and we have begun that journey here. We anticipate continuing that journey in 2008. We'll not be at those levels in 2008. Like I said, it's a two to three year journey to get to those targets.

Ahmet Bala - Citigroup

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

Guy Childs

We'll let Will handle that one.

Will McGuire

Sure, I mean the Fidelis recall has been a significant field action 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 physicians gain a better understanding of the failure mode and the data provided by the manufacturer but for sure the impact of this field action will be something that will probably span several years and impact our business over that timeframe.

If you think through it, I think the majority or the major impact will probably start sometime late next year as the ICD's batteries start to deplete and you start reaching the five year mark and we see the physicians going back in and opening up the pocket to replace the ICD and at that point a decision will in many cases have to be made what to do with the Fidelis lead and 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 Canaccord Adams.

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 two here. One question on the atherectomy side, one question on the lead removal side. Just stemming off one of the last questions, John, you talked about the percentage of procedures in the leg that use atherectomy, 20%, I think you can go to 50%.

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

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

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

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

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

John Schulte

No problem Jason. Let me handle the atherectomy piece and I will ask Will to take the lead extraction piece. I think it's been well understood the majority of our revenues and the majority of our growth in atherectomy has come from the smaller catheters historically which are used to treat 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 over any atherectomy technology for treating below the knee disease and so we would expect to see continued growth in our smaller catheters. However, I think any growth acceleration over previous levels I believe will be coming more from our penetration into the upper leg because for the first time we have a credible technology to deliver five plus millimeter lumens with our technology.

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

I think the other area where we see atherectomy playing a role could be in debulking plus stenting in complex calcified vessels so, I think as we look to the future, I would see a mix shift from 2/3 of our atherectomy revenues from the smaller catheters going to perhaps more like a 50/50 split next year where we'll see our, I will call midsize catheters, our 1.7 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 of these catheters can also be used as a standalone in below the knee disease as well so we will have to make some estimates as to the mix shift going forward but I certainly believe that, the major growth driver for '08 will be coming from our deeper penetration into the upper leg so with that, let me turn the second 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 standardized score has not been introduced yet, but we have addressed a lot of questions from our customers regarding the impact of this new design standard and whether or not our system will be capable of extracting these leads sometime in the future and the answer to that is we see no issues with our system and ability to extract these leads.

In terms of lead management, IS4 represents another potential advancement in the design of defibrillator leads and it may be quite attractive to some implanting physicians.

But for the patients that already have existing defibrillation leads, this new standard would probably only be offered to a very small percentage of these patients and in that small subset of patients an older defibrillation lead may be replaced with this new design depending upon the added benefits.

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

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

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

Jason Mills - Canaccord Adams

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

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

I'm wondering if you could, maybe push you a little bit on trying to help us set expectations for '08 on which most folks are valuing the business 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 end of the fourth quarter call. It's somewhat challenging.

We're still obviously in super early days of the TURBO-booster launch. As I mentioned, I'm very pleased with the product performance. It seems to be gaining traction which is very encouraging, but we'll have a much better handle on giving guidance when we finish the quarter so hopefully my earlier answer in terms of how we see the mix shift of our business will help you for now.

Jason Mills - Canaccord Adams

It does. Thanks John.

John Schulte

Thanks.

Operator

Your next question comes from Suraj Kalia with Piper Jaffray.

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 into your 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 imagine in our limited market launch we targeted our top accounts so as I mentioned, we have 70 sales people that are focusing on atherectomy and we said to go into basically your top one or two accounts and so obviously, those are the top ones and we achieved an extraordinarily high penetration rate of those. In terms of inventory, it's really not an inventory bill situation.

We sell TURBO-boosters in boxes of three and so for an account to get started they would usually buy one box of 7-French and one box of 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, was the 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 think of it as sort of being harped upon quite a bit, we do understand there are some mergers. There are some new entrants.

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

John Schulte

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

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

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

As far as how other companies handle their business then that'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, the clinical trial you're conducting in Europe for instent restenosis, remind me again. 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 the standard way that, it's a noninvasive technique and it's a standard that has been used historically.

Duplex, say "restenosis by duplex" doesn't necessarily mean that a patient is symptomatic and therefore needs treatment, but it's just a benchmark that has been used historically for the evaluation of devices.

Suraj Kalia - Piper Jaffray

So, is it fair to say that instent restenosis probably will be factored into your FY09 guidance and FY08 is pretty much going to be -- it cannot factor in anything…

John Schulte

Yes, certainly it will be difficult, Suraj, for us to get a real 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. which is one of the reasons why we chose Germany as a trial because we don't have that limitation.

But a lot of it will depend on the interim trial results so while the 12-month endpoint is the primary endpoint we will have procedural outcomes. We'll have six month outcomes as well and in the institutions that are participating both in the PATENT trial which is the one in Germany and the SALVAGE trial which is the one here in the U.S. where we're jointly sponsoring with Gore, the physicians are very high presence podium speakers and it's already been mentioned, the trial design was discussed in some detail for both trials at TCT and so, the more discussion we have about the benefits of atherectomy and the treatment of instent restenosis and the potential benefits that laser atherectomy may have for this application, we would hope to see that that would have a positive impact and I think '09 is probably the right timeframe, 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 Goldman Sachs.

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 want to make sure I understand your mindset around the lead removal opportunity. Is there an incremental benefit dialed into the full year 2007 expectations from the recent entire (ph) recall and if so, how much?

Guy Childs

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

Charles John - Goldman Sachs

Okay. Great, thanks for that clarification and with respect to the size of the sales force, now that we are at 100 reps strong should we anticipate that hiring for the year is largely done and this should be the new base 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 we want to be for the foreseeable future. There may be some changes, but we're only talking changes, Charles, in the neighborhood of two or three reps here or there.

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 of procedural seasonality and also looking at this morning's ev3 Fox Hollow results, it appears that Fox Hollow came in below prior year levels. John, do you have a sense that you've been able to or maybe expect to convert competitive procedures and if so, are you sensing any disruption out there in terms of the merger and anything correlated with the integration?

John Schulte

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

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

And we've always known that it's a very safe device and that it'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 and therefore can now play much more fully in treatment of lesions in the entire leg and we know that the procedures in the upper leg are probably twice as many as 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 trials appearing to be relatively on-track here, can you give us an idea of what some of your longer term clinical study plans might be, meaning do you have an update on any new indications you might be investigating whether it be coronary, thrombus, etcetera.

John Schulte

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

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

And we presented those trial results and showed that our data had significantly better blush scores meaning lower rates of disembolization than any other device technology whether it be aspiration thrombectomy or disembolization and so we're considering whether or not we want to do a more formal study to evaluate that potential so that would be probably the next trial that we'd be looking for and if we do decide to go forward, I'll announce 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 a quick 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 on average across the country, we're probably doing about 60 or 70% are inpatient and the remainder being outpatient but again it could vary by region but overall 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 Street Research.

Spencer Nam - Summer Street Research

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

John Schulte

We wish that were the case, Spencer, but no. Basically, it's a box of three individual packaged inside so you open it up and there are three sterile 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 catheters they 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 more than one although one of the nice advantages of the laser system with TURBO-booster is for example, in our 7-French system you'd use a TURBO-booster with a 1.7 millimeter catheter to treat the upper leg and perhaps at the knee and then if that same patient had lesions below the knee, they would simply take the laser catheter out of the TURBO-booster and use it by itself.

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

Spencer Nam - Summer Street Research

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

John Schulte

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

Now that's an exception and so one of the reasons why we chose this limited market release to focus on a selected number of accounts and selected number of physicians was to be sure that they did have the right number of cases under their belt and felt comfortable using the device when our sales person wasn't there and so it can be from one to two up to five to six depending 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 the atherectomy opportunity. Do you get a sense that, now that you're going into the SFA, that direct competition from the atherectomy angle is not as significant or how would you describe your current SFA atherectomy competitive landscape?

John Schulte

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

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

Spencer Nam - Summer Street Research

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

What's the current penetration of removal? How many of those 50,000 to 70,000 leads are being removed today and what do you think the real say the next couple of years, how much that number could grow? Any sense on that?

Guy Childs

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

We feel with our dedicated lead removal specialist team, the BDMs, and with some recall action as well as promotion of lead management, we certainly feel that that growth rate could accelerate over 18% per year. How much we're probably not prepared to say right now but certainly we think it will 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 when will we get some early data on PATENT and or SALVAGE?

John Schulte

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

Which would be the first patency endpoint probably wouldn't come until best case, the third quarter of next year and Salvage will go behind it. It'll be difficult to know until we get all the sites up and running and enrolling but clearly it would be that it's a big problem.

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

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

Only one is enrolled so far and this is all happening real time and so we'll have a much better handle in the fourth quarter call as to how 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'm curious about that 12 number. Can you go through some of the criteria you used to determine whether a laser will be called in and has there been any kind of change 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 being returned or brought back from customers because of bad experiences. If you look back over the past several years, or going back several years.

Placements were probably driven more by, with an emphasis on growth and getting into new accounts versus ensuring that the laser was always placed in the right account and the right account being one that has sufficient peripheral and lead removal volume to justify the capital outlay as well as the service expenses.

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

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

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

And going forward, I would say we'd expect to see returns closer to what historical averages have been, in reference to John's comments that 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 year guidance you put out there for placements, that Q4 number is going to have to go 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 volume you'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 per quarter.

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 call how you envision your mix evolving from your small catheter business and your large 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 think about that mix evolving?

John Schulte

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

I think we would expect to see potentially accelerated growth in the above the kneed procedures because now we can play with the TURBO-booster and so historically the faster growth drivers for atherectomy business have been in the small catheters. Now we see the faster growth perhaps coming in the larger catheters but still seeing growth in the small catheters as well.

Sean Fitz - Stevens

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

John Schulte

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

Guy Childs

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

John Schulte

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

Guy Childs

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

First, it will provide a forum for physicians to meet and discuss laser lead removal. It also will provide a forum for discussion around the 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 the company's standpoint it will demonstrate our commitment to this business and to moving this business forward. Probably about 40 to 50 physicians would be trained 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 that question 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 any closing remarks.

John Schulte

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

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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