Vnus Medical Technologies Inc. Q4 2007 Earnings Call Transcript

Vnus Medical Technologies 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

Presentation

Operator

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

(Operator Instructions)

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

Scott Murcray

Welcome to Vnus Medical Technology’s regular teleconference on cordially financial results. Joining me 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 our financial results for the fourth quarter in the December 31, 2007.

In today’s call, we will discuss our business and financial highlights of the fourth quarter of 2007. We will also provide our business outlook for the first quarter and full year of 2008. After our prepared remarks, we will open the call for questions.

The statements that will be made on this call may contain certain forward-looking statements and involve a number of risks and uncertainties. Word such as ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘estimates’ or variations of such word and similar expressions, are intended to identify such forward-looking statements, and such statements in this conference call will include statements regarding the outlook for Vnus’s revenue and earnings, gross margins, operating expenses, new product development and pending patent litigation. Investors are cautioned that actual events and results may differ maturely from Vnus’s expectations based on various risks and uncertainties. Information concerning risk factors that may affect Vnus’s forward-looking statements can be found in press releases issued by Vnus’s filings with the Securities and Exchange Commission including its annual report on Form 10K filed with the SEC on March 30, 2007 and its quarterly report on Form 10Q filed with the SEC on November the 8, 2007. Copies of Vnus’s press releases and additional information about Vnus are available on our corporate website at www.Vnus.comwww.vnus.com.

Investors are cautioned not to rely on forward looking statements. Vnus is providing this information as of the date of this conference call and expressly disclaims any intent or obligation to update these forward looking statements except as required by law.

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

Brian Farley

I am pleased to be reporting Vnus’s financial and business results for the fourth quarter of 2007 and for the year. Before I get started with results, I want to formally recognize some of the new officers here at Vnus, Kirti Kamdar joined us in December as Senior Vice President of Research and Development, and Peter Osborne 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 been named 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 in at $20.6 million, exceeding our fourth quarter guidance, which was for revenues of $18.0 million to $18.5 million. Essentially, every revenue producing aspect of the business performed better than expected in Q4, including US sales, international sales, catheter unit sales, closure RFS devise sales, and RF Generator Units. In addition, US catheter ASP’s declined only 1% in the prior quarter as expected. The 54% increase in fourth quarter 2007 revenues compared to Q4 of 2006, follows a 47% revenue growth in Q3. This strong back to back quarterly growth in the second half of 2007 is indicative of the continuingly strong market acceptance of our Closure FAST catheter. After adjusting for deferred 2006 revenues fourth quarter revenues increased by 41% year-over-year versus the fourth quarter of 2006. Our net profit in the quarter of $0.05 per share came in better than our guidance of a $0.07 to $0.08 loss, primarily due to the higher revenues and higher margins and significantly decreased litigation cost as a result of the delay of the patent trial.

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

Our Closure FAST catheter represented 91% of our total catheter unit sales in the fourth quarter up from 85% in the third quarter. Production of the Closure FAST catheter in the quarter continues to increase and production costs have declined nicely with cumulative increases in production volume. The gross margins in the fourth quarter of 65.8% represent a major improvement compared to the prior quarter. This emanated from the many cost reduction initiatives implemented in the third quarter. Reductions in catheter and devise unit production costs were also due to increased amortization of fixed cost over the increased production volume, supply chain, and labor efficiencies.

In fact our cost reduction and issues where successful for both the Closure FAST catheter and the closure RFS devise for perforator vein treatment. We expect to see a continuation of manufacturing cost reductions in the coming quarters as we continue to focus engineering resources on tooling and process improvements and on our supply chain became further economies of scale. Most importantly, our manufacturing quality organizations have shown that we can consistently produce very high quality products that produce terrific experiences for doctors and patients, all the while driving down costs while significantly ramping up production volume.

We are also happy to report that unit volumes continue to grow dramatically. Disposable catheter and devise units grew 53% in the fourth quarter, compared to the fourth quarter of 2006. For the past three quarters since we launched the Closure FAST catheter, we have generated annual unit growth for these proprietary products of 35% in Q2, 51% in Q3, and 53% in the most recent fourth quarter. When we look further into where the quarterly unit growth is coming from, we see that in the fourth quarter, approximately 40% of the year-over-year growth is from increases in utilization rates amongst our existing costumer base, and 60% of the growth is from costumers who did not order from us in the prior Q4 of 2006. Our unit growth in our generators was also very solid with 122 of our generators sold in the fourth quarter doubled the number of generators sold in the one year ago quarter, and that number is a quantity that it is the second number of generators ever sold by Vnus in a single quarter.

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

As a point of reference, we have historically seen good growth rates in the fourth quarter periods. Continuing this high growth rate is a challenge and as you will soon hear from Peter Osborne when we discuss our business outlook, we expect Q1 seasonality effects to slow our rate of growth. We help facilitate market growth in many ways. Our staff provides tools and assistance to doctors who want to grow their vein practice, whether if it is by reaching out directly to educate patients through advertising, PR, patient screening events, or the internet. We also help doctors to educate referral physicians and recently released a new tool to facilitate that process. In the past, we have discussed our television advertising that occurred during the second quarter of 2007 when we ran approximately 1100 TV spots.

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

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

Another way we are attempting to grow the market is through scientific channels. We are sponsoring two multi-center of perspective clinical trials with the Closure FAST catheter. The most recent Closure FAST clinical trial results were presented in November at the Vnus Catheter Surgery Symposium and showed a 96.2% vein occlusion rate one year after treatment. This result was observed form the population of 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 where the most recent data on approximately 200 limbs at one year follow up from the Closure FAST clinical trial will be presented, and where the preliminary results from the recovery trial will also be presented.

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

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

Therefore, as part of the commercial use of the product, we place a significant priority on clinical training and then trying to create the best possible experience for doctors and patients. As we have previously reported, we issued a letter to doctors in August advising costumers to place the catheter tip two centimeters below the saphenal-femoral terminal junction versus the previous 1.5 to 2 centimeter recommendation. We also informed FDA of this action which they subsequently classified at the recall for administrative reasons. However, I want to emphasize that no product was ever returned nor needed to be returned as part of our field action to notify costumers of the change in procedure technique.

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

The last new development I would like to cover is an update to the 2008 National Medicare rates for our procedure. In early January, Congress intervened to prevent CMS from instituting an across the board 10% reduction in physician fees and instead Congress increased doctor’s fees by 0.5% until June 30 of this year. The effect of the fee change is that office-based procedures utilizing our radio frequency vein ablation product 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 level of reimbursement for our vein ablation than with laser. The previously reported rates for hospital outpatient in the Ambulatory Surgery Center treatments did not change with recent Congressional intervention. As a result, we continue to receive that the Medicare facility fee for our vein ablation in 2008 is $2714.00 in the outpatient hospital setting which is $1068.00 more than for laser ablation.

Before turning this over to Peter, I would like to point out that not only were we able to over achieve essentially all of our financial goals during the fourth quarter and for the year, but that our management team executed very well this year and at all essential aspects of the organization. This is very notable given the amount of senior management turnover we experienced in 2007 and speaks volumes for the depth and the strength at every level. Our strong execution was evident with US sales and marketing, international sales, product development, clinical research and education, our finance and HR staff, as we grew to approximately 310 employees, and in our quality and manufacturing staff who delivered numerous cost improvements in the second half of 2007, while maintaining high product quality levels and ramping production.

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

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

Peter Osborne

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

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

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

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

US costumers performing the closure procedure in the office represented approximately 64% of the unit volume of catheters for the fourth quarter, compared to 68% in the third quarter. Excluding upgrades and trade-ins, we sold 122 RF generators worldwide in the fourth quarter of 2007, compared to 61 in the fourth quarter of 2006 and 80 sequentially. The significant increase in the fourth quarter was mainly in our international business and was driven by broad acceptance of the Closure FAST catheter along with expiring yearend capital expenditure budgets. The number of US costumers ordering catheters in 2007 were 1376 versus 1121 in 2006, an increase of 22.8%.

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

Gross margins for the fourth quarter were 65.8%, an increase of 1.5 percentage points from the 64.3% for the fourth quarter of 2006 primarily due to improvements and overall supply chain and in production cost for the Closure FAST catheters.

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

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

Sales and marketing expenses were $6.9 million, up 20% from a year ago and 26% sequentially, primarily due to higher sales commission expenses and yearend sales bonus and awards. Research and development expenses were $2.3 million flat from a year earlier and 5.1% sequentially. General and administrative expenses were $4.3 million, an increase of 22% from $3.5 million for the fourth quarter of last year, primarily due to increase starting and consulting fees in a decrease of 50% sequentially primarily due to $2.2 million lower patent litigation expenses. Patent litigation expenses in the quarter were $600,000.00 substantially lower than the $1.1 million to $1.3 million expected for the quarter. This decrease was due to the delay of the trial.

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

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

On the balance sheet of December the 31, 2007, we had cash and cash equivalent and short term investments totaling $63.3 million, a decrease of approximately $4.6 million from a year ago, primarily due to operating losses and a decrease of $651,000.00 sequentially, primarily due to increases in; accounts receivable and inventory. Accounts receivable days sales outstanding at the end of December were 52 compared with 57 days year-over-year and 67 days sequentially.

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

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

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

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

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

We estimate full year 2008 net revenues will range from approximately $82 million to $86 million. This assumes a growth rate in 2008 over 2007 of up to 25% of the upper range after adjusting for the $1.9 million of net revenue that was previously deferred and recognized in 2007. The strong growth rate reflects the high level of customer demand we have seen for the closure. Gross margin is expected to range from 66% to 67.5%. Operating expenses are expected to range from $54 million to $55.5 million including estimated charges for stock-based compensation expenses of $3.4 million to $3.8 million and patent litigation expenses of $1.5 million to $2 million. We expect adjusted EBITDA for the full year to range from $5.3 million to $7.6 million. Full year 2008 net income is expected to range from approximately $3.3 million 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 million weighted average diluted shares outstanding for the full year.

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

Now, we will open the call for your questions.

Question and Answer Session

Operator

(Operator Instructions)

We will go first to Matt Dolan with Roth Capital.

Matt Dolan – Roth Capital

On the international front, Brian, can you give us an idea here of the sales force and potential additions there. I know in the US, it looks like you are going to remain pretty consistent here in the low 60’s, but is there a need there and could you be expanding in terms of international distribution?

Brian Farley

We are direct in the UK, Germany and France outside the United States and we are adding an additional two staff people to those organizations to help grow the sales there and that is really in reflection essentially of the strong performance that they have had. Did that answer your question?

Matt Dolan – Roth Capital

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

Brian Farley

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

Matt Dolan – Roth Capital

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

Brian Farley

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

Operator

We will go next to Tom Gunderson with Piper Jaffray.

Tom Gunderson - Piper Jaffray

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

Brian Farley

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

Tom Gunderson - Piper Jaffray

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

Brian Farley

The international sales of generators was a little bit over half as probably closer to maybe 60% of the total generators sold in the quarter and then for the US units sold, we saw the vast majority of these going to 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 a second generator because of increased volume of procedures that they are doing, which is all a great news for us obviously, it directly translates into more catheter volume just as much if not even more so than when we get a new customer entering the field. Also, I should point out that what is not reported in that 122 generator sales are the upgrades that we do when we upgrade our customer from our old generator to a new generator and sometimes when we do that upgrade, it might be on a customer of the past who had maybe been a very early user of RF switched to laser and now is back and so in that case even though it is not reflected in the 122 number we gave that is actually a net new customer.

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

Tom Gunderson - Piper Jaffray

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

Brian Farley

That is correct.

Peter Osborne

Because it is not sold as a generator.

Tom Gunderson - Piper Jaffray

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

Brian Farley

Yes.

Tom Gunderson - Piper Jaffray

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

Brian Farley

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

Tom Gunderson - Piper Jaffray

Am I right in assuming that if that line closes down that there will be greater efficiencies than if we go into late 2008 or early 2009 that gross margin could improve just from that?

Brian Farley

I do not think so. The Closure FAST catheter is manufactured now after essentially seven and a half years, eight years of learning how to make that. It is made of very high level efficiency even if we have fewer staff allocated to that particular line these days, so there are still able to be quite efficient and we are now at a point where the Closure FAST catheter manufacturing efficiencies are located about where we would like them to be and caught up to where we had been historically with Closure FAST or close to that and with the continuing improvements, at some point, what you are suggesting may become more true as the Closure FAST cost reductions continue, but right now, it is not much of a differential, so there would be much of a cost benefit from shining down Closure FAST manufacturing.

Tom Gunderson - Piper Jaffray

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

Brian Farley

We really have not and for those doctors who have dedicated vein clinics and vein practices, even if their aesthetic volume declines, I think prior to that they always placed the priority on intravenous vein ablation because it was not only therapeutically beneficial but it was beneficial to their practice to do so, so emphasizing it even more, I suppose is a possibility, but we have not really seen any kind of commentary from the field in our customer base about that, but it is early in the year and the 2008 reimbursement numbers have only had 30-plus days of traction with individuals and as the economy changes further and there is more time that has lapsed with doctors seeing what their 2008 payment rates are, there could be some shift, but I think all in all, we take a lot of comfort in knowing that the reimbursement levels are still healthy the physicians are reimbursed at a level that still makes us a very good decision for them economically as well as for the therapeutic results that they gain from 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 am a little behind the curve on the details. But I was curious, if you talked about kind of reorder rates by existing customers, something you still talk a lot about the rates of new customers and you are seeing a dramatic shift in the volumes because when that was done at SGS, we were surprised to see you guys there. But as you mentioned that there is a fair number of newer doctors coming in. So, how does that work, that mix working 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 is best as I can, and then sell follow-up if did not. The way we look at it is. how is the utilization rate tract with the existing installed base and the number of catheters purchased in a given period has been increasing with our installed base of existing customers and this has been true throughout the yearend and results have driven fourth quarter. And I think that is reflected in some of the numbers we have shared this call and in the past, in which when you characterize where is the growth and units coming from. And in the past, there was 50% from the installed based customers and 50% from new customers in this current quarter 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 sort of a same store sale – look at it. The other way I look at it is how is the customer based and how stable is it and it is very stable. We have seen with I think, the product line launch and improvement that, we are seeing, great reorder rates and great consistency of the customers sticking with our ass and ramping up the views.

Benjamin Andrew – William Blair & Company, LLC

And turning briefly to the litigation and I know that this is always a hard one to talk about but I think it was vascular solutions the other day that call made common date – bumping at a work around with the new catheter. Have you seen anything relative to that? Because – if they are delivering energy to the 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 the work around, we are aware that they have been talking about this and some regulatory process and things, they moved forward into there. But without having seen it, it is not possible for them to see me to comment much other than speculating much, I would prefer not to do. And by the way I did not talk about and we did not talk about that litigation on this call because there is frankly nothing new. The trial schedule for June 23 and we will basically just wait on that and Peter outlined the interstate expense for the year as we complete the trial and go to the normal post trial motions 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 obviously the growth in the last few quarters has really taken off. How far are your into that process in terms of 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 two or three years down the road, is international really going to be 25% or more of the company?

Brian Farley

It is a good question and I think we asked some of that of ourselves, for example, 2007 was the first year that we had direct operations in the UK. That business has grown very nicely for us. And coincident with that is that we have been now, selling products into the British National Health Service Hospital so as you made all that, it is quite accrue from the standpoint of the NHS, has typically been very cost conscious and they are aware of very much of their cost structures. They are very well aware of the decisions they make off therapeutically and we have been approved by the nice committee the National Institute for Prophylaxis in Britain. Several years ago but now, we have really crossed that major threshold and we are in numerous major NHS hospital. So there is still a lot of penetration left to occur there as in the case is Germany and France. The French reimbursement process for national health coverage is rather opaque. But there are some decisions that are coming through our head. We have seen some action on that indirectly and we would have said this before so, Peter regarded in his comments but we have been told that there maybe some public announcements by the French National reimbursement in a matter of the next quarter or two.

Again, that may not turn out to be meaningful for our business if the reimbursement levels are too low to be financially viable. With other countries around the world, we are seeing I think such a tremendous positive clinical response and clinic outcomes result from the catheter that it is just becoming more and more clear that this is a therapy of choice and it will be harder and harder for National Health Services to say that this is not covered or a reimbursed procedure or technology and that is really where I think the next leg of growth will occur internationally and we will be continuing work with some of those strategic initiatives in Europe and elsewhere.

Benjamin Andrew - William Blair & Company, LLC

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

Brian Farley

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

Benjamin Andrew - William Blair & Company, LLC

And today, vein stripping is really dominant and obviously quite a bit bigger over there than this year, so the potential market in procedures is probably actually bigger in Europe in 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 vein stripping surgeries that happen each year in the European countries is quite a big target to go after when you think about the opportunity for intravenous ablation. I do not think we should all be assuming that that is going to come in rapid penetration fashion because of the Natural Health Services interest in essentially still promoting and paying for 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 four randomized trials versus vein stripping that show the closure procedure is beneficial for patients and we know that there are multiple randomized comparative trials that are started already as well as about to get started in comparing our catheter, our Closure FAST catheter to laser and vein stripping and in some cases even to some sclerotherapy. As those data gets generated on fairly large trials, 500 patients and so on, I think it will become more and more pressure or at least evidence for the National Health Services in the managed care environment of Europe to step up and pay for the procedure and that is assuming of course that our procedure and/or intravenous vein ablation comes out successful in those trials and I am confident 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 - Richmark Capital

Congratulations on a fantastic quarter. So I just have a question, you mentioned the appeal in the court case, I am assuming there will be an appeal probably either ways, could you just give me 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 to complete the current trial and there is a process of post trial motions that will typically take a couple of months to settle out and then the appeal process normally kicks off after that. It takes about a year, so the times in the end of the trial to the completion of the appeal process and these are using historical numbers and of course our results may vary, is in the neighborhood of about 14 to 15 months. What we hear is that that is typically the cost of an appeal process, runs in the neighborhood of about a half a million dollars plus or minus and it depends somewhat on the number of post trial motions as well.

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

After the appeal you would probably expect very little litigations done. Well I think this all is another shoe that has not yet dropped. We do not know exactly what else is going to happen. If other companies who are in the intravenous vein ablation space, we will essentially see what we believe will be a successful ruling in our favor and abide by the court’s decision with more education litigation, once we will be part of that process. We do not know what will happen with workarounds that have been discussed or announced from some of the dependent companies. And so, until we have more information and see what occurs cannot really totally hurt that where this course will take.

Operator

(Operator Instructions)

We will take our next question from Sean Boyd with Westcliff Capital.

Sean Boyd - Westcliff Capital

Peter I am going to give you the easiest question of the day, your school year guidance for 2008, does that imply a tax rate in the back half of the year where you are profitable and what would that be?

Peter Osborne

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

Sean Boyd - Westcliff Capital

And is others in the world big enough to lock this a while in 2009 or how far out for any to worry about that?

Peter Osborne

They are comfortable all the way through 2008 and it depends on our profitability as we get into 2009. So, I do not want to particularly with any specific routine, also a question beyond 2008.

Sean Boyd - Westcliff Capital

Just to follow up on that last issue on the cost of the trials, Brian. It seems like you just sort of flushed out about $1.5 million. Main litigation expenses 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 your Mr. Murcray.

Brian Farley

In summary we are pleased with our Fourth Quarter results that cam in so strongly 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 FAST and our operational improvements introducing production costs as well as leveraging our operating expenses. if they do not see that we are really poised after the first quarters, seasonality will become a consistently profitable operation especially after excluding litigation related expenses. We look forward to continuing to take market share and place the Closure FAST catheter into the hands of more and more customers so that patients can benefit and so our company can continue to grow financially. We also look forward to moving into the trial phase of our patent litigation case scheduled to begin June 23 against three of our competitors and remain constant in our positions.

This concludes being Vnus’s Teleconference on Fourth Quarter 2007 results. We look forward to speaking with 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, we thank you for your participation and ask that you will have a wonderful day.

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

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

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!