Vnus Medical Technologies Inc. Q4 2007 Earnings Call Transcript

Feb.18.08 | About: Vnus Medical (VNUS)

Vnus MedicalTechnologies Inc. (VNUS)

Q4 2007 Earnings Call

February 7, 2008 05:00 pm ET

Executives

Scott Murcay – Corp. Controller

Brian Farley – President and CEO

Peter Osborne – CFO

Analyst

Matt Dolan – Roth Capital

Tom Gunderson - Piper Jaffray

Benjamin Andrew – William Blair & Company, LLC

William O’Brien – William Blair & Company, LLC

Max Jacobs - Richmark Capital

Sean Boyd – Westcliff Capital

Operator

Good day everyone and welcome to the Vnus Medical TechnologyTeleconference Call for the Fourth Quarter 2007 results.

(Operator Instructions)

Now for opening remarks and introduction, I would like toturn the call over to Mr. Scott Murcray. Please go ahead sir.

Scott Murcray

Welcome to Vnus Medical Technology’s regular teleconferenceon cordially financial results. Joiningme today is Brian Farley, President and Chief Executive Officer, and Peter Osborne,Vice President of Financial Administration and Chief Financial Officer. Approximately one hour ago, we released ourfinancial results for the fourth quarter in the December 31, 2007.

In today’s call, we will discuss our business and financialhighlights of the fourth quarter of 2007. We will also provide our business outlook for the first quarter and fullyear of 2008. After our preparedremarks, we will open the call for questions.

The statements that will be made on this call may containcertain forward-looking statements and involve a number of risks anduncertainties. Word such as ‘expects’, ‘believes’,‘intends’, ‘plans’, ‘estimates’ or variations of such word and similarexpressions, are intended to identify such forward-looking statements, and suchstatements in this conference call will include statements regarding theoutlook for Vnus’s revenue and earnings, gross margins, operating expenses, newproduct development and pending patent litigation. Investors are cautioned that actual eventsand results may differ maturely from Vnus’s expectations based on various risksand uncertainties. Informationconcerning risk factors that may affect Vnus’s forward-looking statements canbe found in press releases issued by Vnus’s filings with the Securities andExchange Commission including its annual report on Form 10K filed with the SEC onMarch 30, 2007 and its quarterly report on Form 10Q filed with the SEC onNovember the 8, 2007. Copies of Vnus’s pressreleases and additional information about Vnus are available on our corporatewebsite at www.Vnus.comwww.vnus.com.

Investors are cautioned not to rely on forward lookingstatements. Vnus is providing thisinformation as of the date of this conference call and expressly disclaims anyintent or obligation to update these forward looking statements except asrequired by law.

Now, I would like to turn the call over to Brian for asummary of our Fourth Quarter and more recent business highlights. Brian?

Brian Farley

I am pleased to be reporting Vnus’s financial and businessresults for the fourth quarter of 2007 and for the year. Before I get started with results, I want toformally recognize some of the new officers here at Vnus, Kirti Kamdar joinedus in December as Senior Vice President of Research and Development, and PeterOsborne as of January, became our Chief Financial Officer as an employee,whereas previously, Peter had been our interim CFO. Also our controller, Scott Murcray had beennamed our Principal Accounting Officer. Scott has been with the company for the last three reported quarters,and we are very pleased to have this fine team on board.

Now to the business results, fourth quarter revenues came inat $20.6 million, exceeding our fourth quarter guidance, which was for revenuesof $18.0 million to $18.5 million. Essentially, every revenue producing aspect of the business performedbetter than expected in Q4, including US sales, international sales, catheterunit sales, closure RFS devise sales, and RF Generator Units. In addition, US catheter ASP’s declined only 1%in the prior quarter as expected. The54% increase in fourth quarter 2007 revenues compared to Q4 of 2006, follows a47% revenue growth in Q3. This strongback to back quarterly growth in the second half of 2007 is indicative of thecontinuingly strong market acceptance of our Closure FAST catheter. After adjusting for deferred 2006 revenuesfourth quarter revenues increased by 41% year-over-year versus the fourthquarter of 2006. Our net profit in thequarter of $0.05 per share came in better than our guidance of a $0.07 to $0.08loss, primarily due to the higher revenues and higher margins and significantlydecreased litigation cost as a result of the delay of the patent trial.

Peter Osbourne will provide further detail on all our financialsafter I finish the business update for you.

Our Closure FAST catheter represented 91% of our totalcatheter unit sales in the fourth quarter up from 85% in the thirdquarter. Production of the Closure FASTcatheter in the quarter continues to increase and production costs havedeclined nicely with cumulative increases in production volume. The gross margins in the fourth quarter of65.8% represent a major improvement compared to the prior quarter. This emanated from the many cost reductioninitiatives implemented in the third quarter. Reductions in catheter and devise unit production costs were also due toincreased amortization of fixed cost over the increased production volume,supply chain, and labor efficiencies.

In fact our cost reduction and issues where successful forboth the Closure FAST catheter and the closure RFS devise for perforator veintreatment. We expect to see acontinuation of manufacturing cost reductions in the coming quarters as wecontinue to focus engineering resources on tooling and process improvements andon our supply chain became further economies of scale. Most importantly, our manufacturing quality organizationshave shown that we can consistently produce very high quality products thatproduce terrific experiences for doctors and patients, all the while drivingdown costs while significantly ramping up production volume.

We are also happy to report that unit volumes continue togrow dramatically. Disposable catheterand devise units grew 53% in the fourth quarter, compared to the fourth quarterof 2006. For the past three quarterssince we launched the Closure FAST catheter, we have generated annual unitgrowth for these proprietary products of 35% in Q2, 51% in Q3, and 53% in themost recent fourth quarter. When we lookfurther into where the quarterly unit growth is coming from, we see that in thefourth quarter, approximately 40% of the year-over-year growth is fromincreases in utilization rates amongst our existing costumer base, and 60% ofthe growth is from costumers who did not order from us in the prior Q4 of2006. Our unit growth in our generatorswas also very solid with 122 of our generators sold in the fourth quarterdoubled the number of generators sold in the one year ago quarter, and thatnumber is a quantity that it is the second number of generators ever sold by Vnusin a single quarter.

The combination of large increases in unit sales along withour large market share within the Vnus business suggest not only that we have asuperior product, but that our target market is continuing to grow at a fastclip. This growth is evident both inprocedure volume and in the number of doctors coming in to the field ofendo-venous vein ablation.

As a point of reference, we have historically seen good growthrates in the fourth quarter periods. Continuing this high growth rate is a challenge and as you will soonhear from Peter Osborne when we discuss our business outlook, we expect Q1 seasonalityeffects to slow our rate of growth. Wehelp facilitate market growth in many ways. Our staff provides tools and assistance to doctors who want to growtheir vein practice, whether if it is by reaching out directly to educatepatients through advertising, PR, patient screening events, or theinternet. We also help doctors toeducate referral physicians and recently released a new tool to facilitate thatprocess. In the past, we have discussedour television advertising that occurred during the second quarter of 2007 whenwe ran approximately 1100 TV spots.

Enough time now has lapsed for us to learn how effective theTV ad was to getting patients to seek out a physician and get scheduled for avein procedure when appropriate. We havelearned from our survey of patients who responded to the TV ad, that our ad canbe a cost affective way of educating patients and have therefore, created a 30-secondversion of the TV ad for our costumer if they wish. They also plan to share the TV surveyinformation with costumers, so they can see the level of response that might beachieved if they used a customized version of the TV ad customized to theirpractice.

All in all, these are just some of the ways we continue toinvest in growing the market and help doctors reach out to vein patients.

Another way we are attempting to grow the market is throughscientific channels. We are sponsoring twomulti-center of perspective clinical trials with the Closure FAST catheter. The most recent Closure FAST clinical trialresults were presented in November at the Vnus Catheter Surgery Symposium andshowed a 96.2% vein occlusion rate one year after treatment. This result was observed form the populationof 142 treated limbs that received an ultrasound scan at one year.

This month, at the American Vnus Forum Meeting at Charleston, South Carolina, we are sponsoring a lunch symposium wherethe most recent data on approximately 200 limbs at one year follow up from the ClosureFAST clinical trial will be presented, and where the preliminary results fromthe recovery trial will also be presented.

The recovery trial is a single-blinded trial, conducted in 5centers, comparing the Closure FAST catheter to 980 nm endovenous laser. Preliminary results from this trial showpatients undergoing laser where one-third is more likely to experience postoperative pain, and 50% more likely to require post operative pain medicationthan patients who used the Closure FAST treatment. We also saw a data that indicates thatpatients treated with the Closure FAST catheter have a very low rate ofbruising and tenderness compared to laser.

We are also confident that when the final data is reportedand statistically analyzed that the incidence of total complications fromthrombosis, paresthesia, phlebitis, erythema, and hematoma will be less withthe Closure FAST catheter than with laser vein ablation. The recovery trial also produce proceduretimes similar to those seen in the Closure FAST clinical trial with catheter into catheter out times with the Closure FAST procedure that average 13.4 minutesversus 15.4 minutes for laser. Theresults from clinical trials are important but equally important to us are the resultsthat doctors generate during routine clinical use of our products.

Therefore, as part of the commercial use of the product, weplace a significant priority on clinical training and then trying to create thebest possible experience for doctors and patients. As we have previously reported, we issued aletter to doctors in August advising costumers to place the catheter tip twocentimeters below the saphenal-femoral terminal junction versus the previous1.5 to 2 centimeter recommendation. Wealso informed FDA of this action which they subsequently classified at therecall for administrative reasons. However, I want to emphasize that no product was ever returned norneeded to be returned as part of our field action to notify costumers of thechange in procedure technique.

Also, as indicated in our last earnings call, we assessedthe effectiveness of this small but important modifications of the proceduretechnique and found the number of reports who trialed this extension havedeclined to very low level since sending out letters in early August. We remain confident in the safety andeffectiveness of the Closure FAST catheter and trust that based upon the rapidgrowth of product sales that we have seen, that this is a shared belief withinnumerous doctors who have used the products.

The last new development I would like to cover is an updateto the 2008 National Medicare rates for our procedure. In early January, Congress intervened toprevent CMS from instituting an across the board 10% reduction in physicianfees and instead Congress increased doctor’s fees by 0.5% until June 30 ofthis year. The effect of the fee changeis that office-based procedures utilizing our radio frequency vein ablationproduct such as the Closure FAST catheter will be reimbursed in 2008 at$1900.00, whereas laser ablation will be reimbursed $1645.00. This translates into a $255.00 higher levelof reimbursement for our vein ablation than with laser. The previously reported rates for hospitaloutpatient in the Ambulatory Surgery Centertreatments did not change with recent Congressional intervention. As a result, we continue to receive that theMedicare facility fee for our vein ablation in 2008 is $2714.00 in the outpatienthospital setting which is $1068.00 more than for laser ablation.

Before turning this over to Peter, I would like to point outthat not only were we able to over achieve essentially all of our financialgoals during the fourth quarter and for the year, but that our management teamexecuted very well this year and at all essential aspects of theorganization. This is very notable giventhe amount of senior management turnover we experienced in 2007 and speaksvolumes for the depth and the strength at every level. Our strong execution was evident with USsales and marketing, international sales, product development, clinicalresearch and education, our finance and HR staff, as we grew to approximately310 employees, and in our quality and manufacturing staff who deliverednumerous cost improvements in the second half of 2007, while maintaining highproduct quality levels and ramping production.

Here is a quick rundown of seven notable 2007 achievementswhich translate into strong fundamentals that are in place for us in 2008. First, we had a successful launch to the ClosureFAST catheter in the first quarter of 2007. Secondly, we demonstrated the clinical data excellent product andclinical performance compared to both our previous catheter and laser ablation. Third, we increased our market share fromapproximately 50% at the beginning of the year to over 55% by the end of theyear, and these numbers are more and more difficult to beat precisely establishedwith fewer public companies reporting their numbers now. Fourth, we have had a restoration of fastrevenue and unit growth for the company. Fifth, we have demonstrated that the market is continuing to grow at avery fast clip with large increases in procedure volumes and a healthy numberof new costumers coming into the field. Sixth, we have seen improvements in relative reimbursement for RF vein ablationcompared to laser in both 2007 and again in 2008. And seventh, a return to profitability in thefourth quarter.

Now I will turn over the call to Peter for his review of ourfinancial results from the fourth quarter and our business outlook for thefirst quarter and full year of 2008. Peter?

Peter Osborne

For the fourth quarter net revenues were $20.6 million anincrease of 54% from the prior year and an increase of 18% sequentially, comparedto a year ago, we experienced a 54% increase in catheter unit sales, whilecompared to Q3 of this year, we saw a 19% increase. We may include the RFS family of deviseswhich is primarily used to treat perforator vein reflex, the disposablecatheter and devise unit volume improved 53% year over year, and increased 19%sequentially. The RFS family of devisesrepresented approximately 10% of our disposable vein catheter and devises unitvolume in the fourth quarter of 2007.

Sales of disposable vein catheters and devises accounted forapproximately 76% of fourth quarter net revenues. Sales of RF generators are accounted for 11%of fourth quarter revenues with new clip accessories and other revenuerepresenting the remaining 15%. In thefourth quarter of 2006, sales of disposable catheters and devises accounted forapproximately 87% of net revenues and accessories and other revenuerepresenting the remaining 13%. Comparedto sales in Q3 of 2007 of disposable catheters and devises representing 76%, RFgenerators are accounting for 10% in new clip accessories and other revenues, theremaining 14%. International salesincreased more than four times from a year ago and accounted for approximately11% of fourth quarter net revenues, compared to 4% for the fourth quarter of2006 and compared to 6% sequentially.

In Q4 2007, we sold into 36 different countries. This is the comparable period in 2006 of 17countries. The increase in internationalsales was seen in both RF generator and catheter unit sales. Our average UScatheter pricing decreased approximately 1% from Q3 and the average US sellingprice for the RF generator decreased approximately 3% sequentially as we sold alarge number of units in the yearend quarter.

We continue to track the rates as which our costumersperform the closure procedure in the office, this is the hospital. Sixty-one percent of new costumers added inthe fourth quarter in the USare performing the closure procedure in the office, compared to 46% of newcostumers added in the third quarter.

US costumers performing the closure procedure in the officerepresented approximately 64% of the unit volume of catheters for the fourthquarter, compared to 68% in the third quarter. Excluding upgrades and trade-ins, we sold 122 RF generators worldwide inthe fourth quarter of 2007, compared to 61 in the fourth quarter of 2006 and 80sequentially. The significant increasein the fourth quarter was mainly in our international business and was drivenby broad acceptance of the Closure FAST catheter along with expiring yearendcapital expenditure budgets. The numberof US costumers ordering catheters in 2007 were 1376 versus 1121 in 2006, anincrease of 22.8%.

The size of our US sales organization remainedconstant throughout the quarter with 63 persons. Going forward into 2008, we do not have any immediateplans expand the USsales force, but have added a few sales persons to our European direct salesorganizations where the business has grown so quickly. We are pleased with the current levels ofsales efficiency that continue to have a goal of increasing our annual revenuesper unit as we drive to become more profitable.

Gross margins for the fourth quarter were 65.8%, an increaseof 1.5 percentage points from the 64.3% for the fourth quarter of 2006 primarilydue to improvements and overall supply chain and in production cost for the ClosureFAST catheters.

Gross margins also increased 430 basis points from 61.5% forthe third quarter of 2007, primarily due to increased production and supplychain efficiencies of the Closure FAST catheter. We expect that gross margins will continue toimprove and range from 65% to 67% for the first quarter of 2008, primarily dueto ongoing cost reduction in the Closure FAST catheter and the fourth quarterproduction volume, whereas in the fourth quarter, we have fewer work days dueto the holidays. We also expect to seecontinued cost reductions in the Closure FAST catheter into 2008.

Our gross margin estimates are influenced by our product’smixed full cost, particularly our sales estimate from lower margin accessoryproducts and our expectations for the Closure FAST production costs. Fourth quarter operating expenses were $13.5million or 65% of net revenues, compared with $11.5 million or 87% of netrevenues year over year and with $13.8 million or 79% of net revenuessequentially. Fourth quarter operating expensesinclude 400,110 of non-cash stock based compensation, compared with 502,000year-over-year and 588,000 sequentially.

Sales and marketing expenses were $6.9 million, up 20% froma year ago and 26% sequentially, primarily due to higher sales commissionexpenses and yearend sales bonus and awards. Research and development expenses were $2.3 million flat from a yearearlier and 5.1% sequentially. General andadministrative expenses were $4.3 million, an increase of 22% from $3.5 millionfor the fourth quarter of last year, primarily due to increase starting andconsulting fees in a decrease of 50% sequentially primarily due to $2.2 millionlower patent litigation expenses. Patentlitigation expenses in the quarter were $600,000.00 substantially lower thanthe $1.1 million to $1.3 million expected for the quarter. This decrease was due to the delay of thetrial.

Our present profit for the fourth quarter was $67,000.00 or 0.3%of net revenues, compared with an operating loss of $3 million or 22% of netrevenues for the fourth quarter a year ago, and with an operating loss of $3.1million or 18% of net revenues sequentially. Interests in other income nets were $882,000.00 compared with $973,000.00year-over-year and with 945,000 sequentially. Net profits for the fourth quarter was $908,000.00 or 4% of netrevenues, compared with the net loss of $2 million or 15% of depth revenues ayear earlier, and a net loss of $2.2 million or 12% of net revenuessequentially.

Fourth quarter net income per share was $0.05, based on $16.9million weighted average shares outstanding. This compares with a loss of share of $0.13 in the fourth quarter a yearago, based on $15.1 million weighted every shares outstanding and at thirdquarter 2007 net loss per share of $0.14, based on $15.5 million weightedaverage shares outstanding.

On the balance sheet of December the 31, 2007, we had cashand cash equivalent and short term investments totaling $63.3 million, a decreaseof approximately $4.6 million from a year ago, primarily due to operatinglosses and a decrease of $651,000.00 sequentially, primarily due to increasesin; accounts receivable and inventory. Accounts receivable days sales outstanding at the end of December were52 compared with 57 days year-over-year and 67 days sequentially.

We expect day sales outstanding will remain relativelyconstant at this level for this quarter of 2008. Inventories increased to $3 million from ayear ago and increased $633,000.00 sequentially. Our inventory levels at the end of Decemberrepresented approximately 5 annual terms, which compares to approximately 7annual terms year-over-year, and 5 annual terms sequentially. We expect inventory to remain constant in thefirst quarter and annual inventory terms to range from 4 to 5 for the quarter.

Now I will provide our first quarter and full year 2008business outlook, which takes into account the risk factors regarding forward-lookingstatements that we cited at the beginning of this call.

Before I do that, I wanted to share a quick word ofbackground to the use of adjusted EBITDA by Vnus. As Vnus manages the business in 2008, we areusing earnings before interest, taxes, amortizations, and known tax charges forstock-based compensation to make operating decisions.

The company believes adjusted EBITDA is useful to both managementand investors, in analyzing the company’s ongoing business and operatingperformance. We currently estimate thatfirst quarter 2008 net revenues will range from approximately $18.2 million to $19.2million. Gross margin is expected toimprove and range from 65% to 67% in the first quarter.

First quarter operating expenses are expected to range from $13.6million to $13.8 million. We expectadjusted EBITDA for the first quarter to range from $0.00 to negative $700,000.00. First quarter net loss is estimated to rangefor approximately $500,000.00 to $1.1 million or a loss of $0.03 to $0.07 pershare. This estimated net loss for thefirst quarter includes estimated charges for patent litigation of $300,000.00to $300,000.00 or one penny per share. The number of weighted average shares outstanding used to calculateestimated loss per share for the first quarter is expected to range fromapproximately $15.7 million to $15.8 million.

We estimate full year 2008 net revenues will range fromapproximately $82 million to $86 million. This assumes a growth rate in 2008 over 2007 of up to 25% of the upperrange after adjusting for the $1.9 million of net revenue that was previouslydeferred and recognized in 2007. Thestrong growth rate reflects the high level of customer demand we have seen forthe closure. Gross margin is expected torange from 66% to 67.5%. Operatingexpenses are expected to range from $54 million to $55.5 million includingestimated charges for stock-based compensation expenses of $3.4 million to $3.8million and patent litigation expenses of $1.5 million to $2 million. We expect adjusted EBITDA for the full yearto range from $5.3 million to $7.6 million. Full year 2008 net income is expected to range from approximately $3.3million to $4.2 million or net income of $0.19 to $0.24 per share of which$0.10 to $0.12 is patent litigation related.

This outlook assumes approximately $17.3 to $17.6 millionweighted average diluted shares outstanding for the full year.

One of our key goals for 2008 is to achieve an operatingmodel for the business that by Q4 is close to producing at 10% operating profitafter excluding patent litigation expenses. While we are not providing more specific guidance for any other 2008quarters on this call, we expect to be profitable after the first quarterseasonality as we one, continue to gain market share, two, benefit from theincreasingly favorable reimbursement environment, three, expand our costreductions and manufacturing the Closure catheter and four, reduce thecomparative level of expense from patent litigation. However, since our patent trial date is setfor late June, we are not going to position currently to provide any specificdetails about future quarters.

Now, we will open the call for your questions.

Question and AnswerSession

Operator

(Operator Instructions)

We will go first toMatt Dolan with Roth Capital.

Matt Dolan – RothCapital

On theinternational front, Brian, can you give us an idea here of the sales force andpotential additions there. I know in theUS, it looks like you are going to remain pretty consistent here in the low60’s, but is there a need there and could you be expanding in terms ofinternational distribution?

BrianFarley

We are direct inthe UK, Germany and Franceoutside the United Statesand we are adding an additional two staff people to those organizations to helpgrow the sales there and that is really in reflection essentially of the strongperformance that they have had. Did thatanswer your question?

Matt Dolan – RothCapital

Yes. Absolutely! And then in terms of maybe a broader question with you growing in thelast two quarters, unit were over 50%, Brian can you give us an idea, I knowyou indicated where you think you are in the market share, but where is thismarket rate growing today in your opinion as you come into 2008?

BrianFarley

Well, it is prettyinteresting to look at that for our business when we looked at this in thepast, we have seen in the past couple of quarters, we saw that about half ofthe year-over-year quarterly growth was from our existing customer base andhalf was from new customers and I think now with three quarters under theirbelt, our existing customer base is already grown some of the practice and someof the volume that we would normally see kind of in the early phase of adoptinga faster, easier to use catheter and so, now that is shipped and where the newunits is coming is coming more towards from new customers, so that is why wesee that 60% now in the fourth quarter came from new customers. As far as any further details, where it camefrom, it is broad based, lots of different specialties, some of these are newdoctors coming in to the field of intravenous ablation, some of it is takingmarket share from doctors who had previously used laser and are now convertingto RF and it is pretty broad in all of those categories in terms of how thatdistributes out.

Matt Dolan – RothCapital

And then in termsof new products, we expect R&D spend continues to be pretty healthy in yourearlier guidance, any updates there on your Tumescent project or any new itemswe might see throughout the year?

Brian Farley

As we get closer to first human clinical use, we willprovide further details on that, but we are not prepared at this time to getinto that detail.

Operator

We will go next to Tom Gunderson with Piper Jaffray.

Tom Gunderson - PiperJaffray

I will follow up on some of the international questions,number one, you have been growing that business quite nicely, you are adding toit as you just said in 2008, what was your expectation when you gave us thisguidance numbers for the year on revenue for international mix?

Brian Farley

It was I believe that we have stayed pretty constant at the4% or 5% range, 4% or 5% total sales where we are going to remain internationalso we have really seen quite a healthy up tick there. I think we reported last quarter thatinternational sales had tripled in the Q3 period from the prior quarter. This past quarter, they were up like 4X ormore from the prior year, so we are clearly at a point now where it is a muchmore meaningful part of the business. Itis a profitable part of the business thanks to our direct operations, but alsobecause of low cost of distributor sales.

Tom Gunderson - PiperJaffray

And then micro on international. You sold a 122 generators in the quarter andyou said the majority of that was coming from international, Brian, can youbreak that out even roughly if you cannot do it exactly as to what was US and non-USand then in the US, how many of those generators do you think went to brand newcustomers?

Brian Farley

The international sales of generators was a little bit overhalf as probably closer to maybe 60% of the total generators sold in thequarter and then for the US units sold, we saw the vast majority of these goingto new customers, but we see a modest amount of those for as much as 20% or 25%that went to existing customers who are opening up a second office or buying asecond generator because of increased volume of procedures that they are doing,which is all a great news for us obviously, it directly translates into morecatheter volume just as much if not even more so than when we get a newcustomer entering the field. Also, Ishould point out that what is not reported in that 122 generator sales are theupgrades that we do when we upgrade our customer from our old generator to anew generator and sometimes when we do that upgrade, it might be on a customerof the past who had maybe been a very early user of RF switched to laser andnow is back and so in that case even though it is not reflected in the 122number we gave that is actually a net new customer.

Also not reflected in those numbers are the situations wheredoctors essentially swap a laser generator for our RF generator.

Tom Gunderson - PiperJaffray

If you do a swap, you do not count it as an edge generatorbecause it did not generate revenue?

Brian Farley

That is correct.

Peter Osborne

Because it is not sold as a generator.

Tom Gunderson - PiperJaffray

But it is still a new customer that can use catheters?

BrianFarley

Yes.

Tom Gunderson - PiperJaffray

And then speakingof catheters, your marching rate along into 2007 like you said you would withClosure FAST you are at 91% for the quarter and I am assuming that that marchedup within the quarter, are you making the old catheter anymore or did you buildup the supply and you are just working off of that supply?

BrianFarley

We make ClosureFAST catheters everyday and we ship them everyday. Certain international markets use more ClosureFAST than others probably for regulatory reasons, partly just becauseconversion takes a little more time in certain markets, but there is certainlya subset of the US customers and highly experienced customers who prefer the ClosureFAST catheter for a certain short length vein treatment and we expect to seesome continuing modest demand there at least for 2008.

Tom Gunderson - PiperJaffray

Am I right inassuming that if that line closes down that there will be greater efficienciesthan if we go into late 2008 or early 2009 that gross margin could improve justfrom that?

BrianFarley

I do not thinkso. The Closure FAST catheter ismanufactured now after essentially seven and a half years, eight years oflearning how to make that. It is made ofvery high level efficiency even if we have fewer staff allocated to thatparticular line these days, so there are still able to be quite efficient andwe are now at a point where the Closure FAST catheter manufacturingefficiencies are located about where we would like them to be and caught up towhere we had been historically with Closure FAST or close to that and with thecontinuing improvements, at some point, what you are suggesting may become moretrue as the Closure FAST cost reductions continue, but right now, it is notmuch of a differential, so there would be much of a cost benefit from shiningdown Closure FAST manufacturing.

Tom Gunderson - PiperJaffray

Has your products,Vnus and the closure products are reimbursed, you have gone throughreimbursements very well with us and using other people’s money to pay for thecorrection of a medical condition, so you do not really fit in to thataesthetic market that is under so much pressure because of the economy, butsome of your customers have vein clinics where they have other products outthere, are you seeing any of them under any unusual pressure and I would thinkthe more business oriented of those customers that they are feeling pressure onthe aesthetic side might move even more over towards the closure products, havewe picked up any anecdotes like that, Brian?

BrianFarley

We really have notand for those doctors who have dedicated vein clinics and vein practices, evenif their aesthetic volume declines, I think prior to that they always placedthe priority on intravenous vein ablation because it was not onlytherapeutically beneficial but it was beneficial to their practice to do so, soemphasizing it even more, I suppose is a possibility, but we have not reallyseen any kind of commentary from the field in our customer base about that, butit is early in the year and the 2008 reimbursement numbers have only had30-plus days of traction with individuals and as the economy changes furtherand there is more time that has lapsed with doctors seeing what their 2008payment rates are, there could be some shift, but I think all in all, we take alot of comfort in knowing that the reimbursement levels are still healthy thephysicians are reimbursed at a level that still makes us a very good decisionfor them economically as well as for the therapeutic results that they gainfrom their patients.

Operator

(Operator Instructions)

We will go next to go next to Ben Andrew with William Blair.

Benjamin Andrew – William Blair &Company, LLC

Brian it is Ben, I actually came over for another call so I apologize, I ama little behind the curve on the details. But I was curious, if you talked about kind of reorder rates by existingcustomers, something you still talk a lot about the rates of new customers andyou are seeing a dramatic shift in the volumes because when that was done atSGS, we were surprised to see you guys there. But as you mentioned that there is a fair number of newer doctors comingin. So, how does that work, that mixworking in terms of reorders from existing as well as the new guys?

Brian Farley

Well, we do not tract reorders, maybe in the way you are asking. So I will try and answer the question that isbest as I can, and then sell follow-up if did not. The way we look at it is. how is theutilization rate tract with the existing installed base and the number ofcatheters purchased in a given period has been increasing with our installed baseof existing customers and this has been true throughout the yearend and resultshave driven fourth quarter. And I thinkthat is reflected in some of the numbers we have shared this call and in thepast, in which when you characterize where is the growth and units comingfrom. And in the past, there was 50%from the installed based customers and 50% from new customers in this currentquarter it was 40% from existing cuts from based on 60% from new customers.

But we are still seeing nice growth in the existing customer based. And in terms of source of things, that sortof a same store sale – look at it. Theother way I look at it is how is the customer based and how stable is it and itis very stable. We have seen with Ithink, the product line launch and improvement that, we are seeing, greatreorder rates and great consistency of the customers sticking with our ass andramping up the views.

Benjamin Andrew – William Blair &Company, LLC

And turning briefly to the litigation and I know that this is always a hardone to talk about but I think it was vascular solutions the other day that callmade common date – bumping at a work around with the new catheter. Have you seen anything relative to that? Because – if they are delivering energy tothe vessel and your patent holds up, that might be rather difficult to do.

Brian Farley

We have not seen the catheter or device that they are talking about in thework around, we are aware that they have been talking about this and someregulatory process and things, they moved forward into there. But withouthaving seen it, it is not possible for them to see me to comment much otherthan speculating much, I would prefer not to do. And by the way I did not talk about and wedid not talk about that litigation on this call because there is franklynothing new. The trial schedule for June23 and we will basically just wait on that and Peter outlined the interstateexpense for the year as we complete the trial and go to the normal post trialmotions and anticipated appeal across that might ensue.

Benjamin Andrew – William Blair &Company, LLC

And then finally, as you look at the international market, I mean obviouslythe growth in the last few quarters has really taken off. How far are your into that process in termsof the reach of your distribution whether direct or through distributors and,are we 10% of the way into that process or are we 60% such that, if we look twoor three years down the road, is international really going to be 25% or moreof the company?

Brian Farley

It is a good question and I thinkwe asked some of that of ourselves, for example, 2007 was the first year thatwe had direct operations in the UK. That business has grown very nicely forus. And coincident with that is that wehave been now, selling products into the British National Health ServiceHospital so as you made all that, it is quite accrue from the standpoint of theNHS, has typically been very cost conscious and they are aware of very much oftheir cost structures. They are verywell aware of the decisions they make off therapeutically and we have beenapproved by the nice committee the National Institute for Prophylaxis in Britain. Several years ago but now, we have reallycrossed that major threshold and we are in numerous major NHS hospital. So there is still a lot of penetration leftto occur there as in the case is Germanyand France. The French reimbursement process for nationalhealth coverage is rather opaque. Butthere are some decisions that are coming through our head. We have seen some action on that indirectlyand we would have said this before so, Peter regarded in his comments but wehave been told that there maybe some public announcements by the FrenchNational reimbursement in a matter of the next quarter or two.

Again, that may not turn out to bemeaningful for our business if the reimbursement levels are too low to befinancially viable. With other countriesaround the world, we are seeing I think such a tremendous positive clinicalresponse and clinic outcomes result from the catheter that it is just becomingmore and more clear that this is a therapy of choice and it will be harder andharder for National Health Services to say that this is not covered or areimbursed procedure or technology and that is really where I think the nextleg of growth will occur internationally and we will be continuing work withsome of those strategic initiatives in Europe and elsewhere.

Benjamin Andrew - William Blair &Company, LLC

Did find easier position as strongin those international markets as it is in the US generally?

Brian Farley

Our patents in the US are bothmethods and apparatus and as you probably know, methods patents are not allowedin the European countries, so we feel very strong about the catheter patentsthat we have, but they are not the analogous methods patents which are thesubject of the current litigation in the US, so although we are in a verystrong position, we are not going to be able to be quite as broad outside theUnited States.

Benjamin Andrew - William Blair &Company, LLC

And today, vein stripping is reallydominant and obviously quite a bit bigger over there than this year, so thepotential market in procedures is probably actually bigger in Europein the shorter term versus converting some compression cycles, is that fair?

Brian Farley

Absolutely, the nice culture of treating vein patients that exist over in Europe and always has and 700,000 or so historical veinstripping surgeries that happen each year in the European countries is quite abig target to go after when you think about the opportunity for intravenousablation. I do not think we should allbe assuming that that is going to come in rapid penetration fashion because ofthe Natural Health Services interest in essentially still promoting and payingfor a surgery which does not have an associated device cost, but from the last,as the procedures become more and more accepted, as you know, we have fourrandomized trials versus vein stripping that show the closure procedure isbeneficial for patients and we know that there are multiple randomizedcomparative trials that are started already as well as about to get started incomparing our catheter, our Closure FAST catheter to laser and vein strippingand in some cases even to some sclerotherapy. As those data gets generated on fairly large trials, 500 patients and soon, I think it will become more and more pressure or at least evidence for theNational Health Services in the managed care environment of Europe to step upand pay for the procedure and that is assuming of course that our procedureand/or intravenous vein ablation comes out successful in those trials and I amconfident our procedure would.

Operator

We will take our next question from Matthew O’Brien with William Blair.

William O’Brien –William Blair & Company, LLC

My question has all been answered, thank you.

Operator

(Operator Instructions)

We will now go to Max Jacobs with Richmark Capital.

Max Jacobs - RichmarkCapital

Congratulations on a fantastic quarter. So I just have a question, you mentioned the appeal in the court case, Iam assuming there will be an appeal probably either ways, could you just giveme a feel about like what kind of expense that might be. I know it is kind of a longer term.

Brian Farley

We estimate that it costs in the neighborhood of about a million dollars tocomplete the current trial and there is a process of post trial motions thatwill typically take a couple of months to settle out and then the appealprocess normally kicks off after that. It takes about a year, so the times in the end of the trial to thecompletion of the appeal process and these are using historical numbers and ofcourse our results may vary, is in the neighborhood of about 14 to 15months. What we hear is that that istypically the cost of an appeal process, runs in the neighborhood of about ahalf a million dollars plus or minus and it depends somewhat on the number ofpost trial motions as well.

That isreally just to litigate the primary trial and is there such thing better thanour guidance. I should say, the primary,trial one would be expected appeal.

After theappeal you would probably expect very little litigations done. Well I think this all is another shoe thathas not yet dropped. We do not knowexactly what else is going to happen. Ifother companies who are in the intravenous vein ablation space, we willessentially see what we believe will be a successful ruling in our favor andabide by the court’s decision with more education litigation, once we will bepart of that process. We do not knowwhat will happen with workarounds that have been discussed or announced fromsome of the dependent companies. And so,until we have more information and see what occurs cannot really totally hurtthat where this course will take.

Operator

(Operator Instructions)

We willtake our next question from Sean Boyd with Westcliff Capital.

Sean Boyd - Westcliff Capital

Peter Iam going to give you the easiest question of the day, your school year guidancefor 2008, does that imply a tax rate in the back half of the year where you areprofitable and what would that be?

Peter Osborne

It seems,we will move that out because we have accumulated net operating losses and wedo not have a consistent history of profitability yet that 2008 guidance doesnot include any new tax rates.

Sean Boyd - Westcliff Capital

And isothers in the world big enough to lock this a while in 2009 or how far out forany to worry about that?

Peter Osborne

They arecomfortable all the way through 2008 and it depends on our profitability as weget into 2009. So, I do not want toparticularly with any specific routine, also a question beyond 2008.

Sean Boyd - Westcliff Capital

Just tofollow up on that last issue on the cost of the trials, Brian. It seems like you just sort of flushed outabout $1.5 million. Main litigationexpenses and we are building in a million up to ten million.

Operator

With no further questions I would like to turn the call back over to yourMr. Murcray.

Brian Farley

In summary we are pleased with our Fourth Quarter results that cam in sostrongly and that it demonstrates that the Closure FAST catheter demand,catheters becoming the preferred treatment for venous reflux. The success in the market with Closure FASTand our operational improvements introducing production costs as well asleveraging our operating expenses. if they do not see that we are really poisedafter the first quarters, seasonality will become a consistently profitableoperation especially after excluding litigation related expenses. We look forward to continuing to take marketshare and place the Closure FAST catheter into the hands of more and morecustomers so that patients can benefit and so our company can continue to growfinancially. We also look forward tomoving into the trial phase of our patent litigation case scheduled to beginJune 23 against three of our competitors and remain constant in our positions.

This concludes being Vnus’s Teleconference on Fourth Quarter 2007results. We look forward to speakingwith you again, when we will record our first quarter 2008 results. Thanks again for jointing us today.

Operator

And that does conclude today’s Vnus Medical Technologies Conference Call, wethank you for your participation and ask that you will have a wonderful day.

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