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Spectranetics Corp. (NASDAQ:SPNC)

Q1 2008 Earnings Call

April 23, 2008

Executives

Don Markley - Lippert/Heilshorn & Associates

John Schulte - Chief Executive Officer

Guy Childs - Chief Financial Officer

Will McGuire – Chief Operating Officer

Analysts

Amit Bhalla - Citigroup

Jason Mills - Canaccord Adams

Matt Dolan - Roth Capital

Charles Chon – Goldman Sachs

John Putnam - Dawson James Securities

Christopher Warren - Friedman, Billings, Ramsey & Co.

Spencer Nam - Summer Street Research Partners

David DeGiralamo - Pacific Growth Equities

Peter Bye - Jeffries & Co

Tom Kouchoukis - Northland Securities

Assim Adnand - Natixis Bleichroeder

Don Markley

These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated. For a list of description of those risks and uncertainties, please see the company's filings with the Securities Exchange Commission.

Spectranetics disclaims any intention or obligation to update or revise any financial projections or forward looking statements whether as a result of new information future events or otherwise. Furthermore this conference call contains time sensitive information and is accurate only as of the date of the live broadcast, April 23, 2008. I'll now turn the call over to John Schulte. John?

John Schulte

Thanks Don. And good morning to everyone joining us for today's earnings call. As usual I am going to open up the call with some comments on our financial performance. And then focus on the key accomplishments in the first quarter. I will highlight some of our goals for the second quarter so you can measure our performance for the next call. The, Guy will review our financial operating performance in more detail for this past quarter. And then we will open up the call to your questions.

I have to say I am very pleased with both our top and bottom line performance in the first quarter of 2008. Our total revenue was 23.8 million this quarter, up 37% from the prior year quarter. Importantly, we saw strong revenue growth in every product line across our business. Total disposable product revenue grew 39% over the prior year.

Our vascular intervention business grew 36%. And our lead management revenue increased 48%. This strong performance on both sides of our business validates our decision to separate our sales force into two groups. One focused on vascular intervention, and the other on lead management.

I believe we now have the second largest sales force in the U.S. concentrated on peripheral vascular intervention and we have by far the largest team addressing lead management.

Equipment revenue was up 56% from the prior year and as expected, down 22% from a very strong fourth quarter. Importantly, we placed 24 new lasers last quarter, bringing our worldwide install base to 767 systems with 607 of these in the United States. I believe we are now about half way to our potential of approximately 1,500 laser systems worldwide. So while we have experienced a lot of growth in laser systems over the past three years, we still have plenty of room to grow.

In addition to strong growth in the United States, we also continue to see very nice growth internationally. Revenue outside the U.S. grew 35% and represented 11% of our total revenue. I am optimistic about the growth prospects outside the U.S. And expect a strong growth internationally will continue throughout the year.

On the bottom line, while we experience the pre-tax loss of $685,000, we expected a loss and in fact came in ahead of our plan. As usual, the year is front loaded with certain extensions such as the global sale meeting, so were pleased with a loss which was smaller than expected.

Although some of the savings in relation to our expectations was timing related and will likely be spent later in the year, we do expect to return a profitability in the second quarter. I am particularly pleased with our strong top line performance given our strategic decision during the fourth quarter to split our sales force into two separate groups, which was accomplished and executed seamlessly in January this year.

Following our fourth quarter call, many investors and analysts expressed concern that we were diverting resources away from atherectomy and toward lead management and it was perceived that we had lost confidence in the growth potential of our atherectomy business. In fact, quite the opposite is true.

To illustrate prior to the split, we head 90 full line sales people which included 14 managers and we estimate that they spent approximately 70% of their time on vascular intervention sales. That affectively implies a 63 people sale organization supporting the vascular intervention business.

In addition, we have 14 sales professionals dedicated to the lead management business. Plus an implied 27 sales professionals within the full line sales team, which gave us a total of 41 professionals selling lead management products prior to the split. So in summary we had effectively 63 individuals selling vascular intervention, and 41 individuals selling lead management products prior to the split.

As of March 31st, we had a total sales organization of 111 professionals. That's and add of seven. This included 76 supporting vascular intervention which was made up of quota carry reps and 12 sales managers. We also have 35 professionals supporting lead management of which 16 are quota carrying and 15 clinical support specialist and four sales managers.

This team managed to grow our disposable products revenue significantly on both a year over year and sequential basis during the same quarter that the sales force split was implemented. My hats off to the sales leadership team who did and excellent job executing the split of the sales organization. I am extremely proud of their accomplishment.

The most important initiative to the vascular intervention sales force is a successful expansion of the TURBO Booster. While the initial experience with a broad base of users demonstrated significant looming gains over our standard 2.3 and 2.5 millimeter laser catheters, some physicians felt that the technique was a bit cumbersome. They felt that the saline flush was more complicated than the standard setup and that in challenging lesions it was difficult to keep the laser catheter properly positioned on the TURBO Booster guiding sheet requiring repositioning with lengthen procedure time.

We were able to simplify the saline flush technique greatly shortening procedure time setup. We also determined that are what called the splitage issue was caused by the hyrdofilling coating on the laser catheter. We found there was a simple fix. We simply shortened the coating on the laser catheters so that the TURBO Booster was always locked down on an uncoated portion of the catheter. This solved the slippage issue.

Once these changes were implemented, case times drop significantly and user satisfaction increased as indicated by our strongest sales month of the quarter in March. We also made nice progress on the two clinical trials focused on the treatment of instent restenosis or ISR.

We have now enrolled 15 patients in Payton the ISR trial in Germany, which will evaluate the TURBO Booster plus PTA. There are now five hospitals enrolling in that trial. The salvage trial which is being done in the United States is also getting started very nicely. We have five patients enrolled in salvage and have four sites capable of enrolling. We expect to add six new sites in the second quarter.

Salvage is an ISR trial combining laser atherectomy with the TURBO Booster followed by a gore of viabon coverage stint. This is a 100 patient physician sponsored IDE trial jointly sponsored by Spectranetics and W.L. Gore. We certainly feel that scientifically based clinical trials evaluating the safety and ethicacy of laser atherectomy with the TURBO Booster will be very important to establish the clinical benefits of this treatment strategy.

This quarter we also initiated our first coronary trial in many years. The Tammy trial is a 200 patient randomized in five hospitals in Poland. The principle investigator in Tammy is Darius Dudek a world renowned intervention cardiologist in the treatment of acute myocardial infarction, or AMI.

Tammy will treat AMI patients with large thrombus burtons. One group will receive laser plus direct tinting and the other will get balloon androplasty instinting. The in point will be a combination of SP resolution. Which is resolution of EKG abnormalities and the amount of distal embolization as measured by myocardial blush scores. Tammy will focus on the most complex AMI patients and represent a very nice new opportunity in the coronary market.

As we currently have very little business in this segment at the present time. We enrolled our first two patients in the first quarter. We are excited about the prospects of the Tammy trial and our excitement was fueled by a recent publication of and article of International Journal of Cardiology entitled "XMER laser in acute myocardial infarction single center experience on 66 patients."

This paper describes the laser experience of a hospital in Italy. The authors noted significant improvement in timmy flow, excellent ST resolution, a very low rate of distal embolization as measured by very high blush scores. A low complication rate and event free survival of 95% at six months follow-up.

The clinical in points documented in this paper are consistent with the clinicals of the Tammy trial. I am very excited about the progress we have mad in advancing our strategic initiatives in growing our vascular intervention business and building business in the future with these new trials.

We also made very good progress toward achieving our goals to accelerate the goal of lead management. In addition to completing the sales force split, we held two very successful master summits focusing on lead management. More than 40 physicians attended these live case training sessions with leading physicians as operators and moderators.

The goals of these master summits is to demonstrate best practices for removing pace maker and defibrillator leads as well as open up a dialogue regarding which types of leads should be removed in which types of patients.

This quarter we are also co-sponsoring a symposium at the heard rhythm society meeting entitled "Lead Extraction 2008: A critical review and implementation of heart rhythm guidelines." This symposium was developed under the offices of the Cleveland clinic and will feature a world class faculty. You can log into the heart rhythm society website for details of this very important symposium.

One goal of our lead management team is to demonstrate that the complication rate of lead extraction in centers using our lead extraction and system is very low in a broad variety of situations, including infection, malfunctions, and system upgrades. This month a paper published in the heart rhythm society medical journal based on the experience of the Bringham and Women's Hospital in Boston described their single center experience.

This consisted of 498 patients with 975 leads removed over seven years all using our clear system consisting of our laser sheet and lead locking device. The major complication rate was .4%. That's two major complications in 500 patients with no death and a success rate of 97.5% complete lead removal was achieved.

This landmark paper certainly demonstrated the safety and efficacy of removing pacing and defibrillator leads with our laser extraction system. This paper certainly supports the hypothesis of our lead management story.

In closing, I am very pleased with the progress we have made this quarter. We grew our top line and all of our products lines. We successfully completed the sales force split giving us significant market power and advanced our key clinical initiatives.

Our goals for the rest of this half are to accelerate enrollment in our three clinical trials, including Payton, Salvage and Tammy. We'd like to complete as least one business development deal that will either be a distribution arrangement or a bolt on acquisition using our existing cash resources and continue to execute as two separate sales organizations to grow the top line in both our vascular intervention and lead management businesses. I am very confident that we are well positioned to achieve our key goals for 2008 and beyond.

Now I will turn the call over to Guy who is going to provide some more color in our financial performance in the first quarter and will provide our financial guidance for 2008, and then we will open up the call.

Guy Childs

Thank you John. I am very pleased to report revenue of $23.8 million, up 37% compared with the 17.4 million during the year ago quarter. In flack compared with the fourth quarter of 2007 as expected.

Disposable product revenue was the most meaningful contributor to the growth and was up 39% on the strength of both vascular intervention and lead management sales, which grew 36% and 48% respectively.

On a sequential basis vascular intervention sales up $13.7 million were up $1 million or 8%. In lead management sales up of $6.4 million were down approximately $500,000 as expected and consisted with historical seasonality in this business. Within vascular intervention sales, our arethectomy business which includes laser arthectomy devices and the TURBO Booster products combined with our quick cross support catheters both contributed to the growth during the quarter.

Laser revenue was 1.7 million and an increase 56% compared with a year ago quarter and was down 22% from a very strong fourth quarter 2007. We are also pleased with laser placements of 24 during the quarter, which were in line with our expectation in compared with 34 placements in the year ago quarter.

On a geographic basis, U.S. revenue was $21.3 million, which represents 89% of worldwide revenue, an increase 38% on a year over year basis in 1% as compared to the fourth quarter of 2007.

Revenue outside the U.S. this quarter totaled $2.6 million which was up 35% compared to last year and down 10% on a sequential basis primarily on laser sales which was anticipated.

Gross margin for the fourth quarter was 72%, which was down from 73% in the year ago quarter and flack on a sequential basis. Operating expenses in the quarter were 18.5 million up 40% from the prior year quarter, due primarily to an expanded field organization, which now totals 111 employees as of March 31st, 2008 up from 79 a year ago, and 104 as of the end of 2007.

Within the 111, we have a total of 76 dedicated to our vascular intervention business and 35 to lead management business. We continue to expect in the year with the field sales organization of the range of 115 to 120 employees.

Of that total, approximately two-thirds will be supporting our vascular intervention business and one-third our lead management business. We also intend on expanding our sale organization outside of the U.S. primarily in Europe by 8 to 10 professionals in 2008 of which four were hired during the first quarter of 2008.

Pre-tax loss for fourth quarter - pre-tax loss for the first quarter of 2008 was $685,000 compared with pre-tax income of $165,000 for the first quarter of 2007 and pre-tax income of $628,000 in the fourth quarter of 2007.

I will close with some commentary on our annual financial guidance for 2008, which is unchanged form the guidelines provided on our fourth quarter call. We expect revenue for 2008 to be within the range of 104 million to 110 million. Representing 25 to 33% growth compared to 2007.

Gross margin is expected to be with in the range of 72 to 74%, research development and other technology costs are expected to be approximately 14 to 15% of revenue and SG&A costs are expect to be in the range of 55 to 58% of revenue.

Gross margin and operating expense cost may fall outside the ranges provided above at any given quarter due to factors that include, but are not limited to, timing and move related costs associated with the move of our manufacturing operations to an expanded facility, product development costs, clinical trial enrollment rates, and expansion of field sales organization.

Pre-tax income for 2008 is expected to be in the range of $1 million to $5 million. The company believes that pre-tax income is the most relevant measure of its operating performance. Given the income taxes are a non-cash expenses, due to historical net operating losses available to off set future taxable income.

For that reason and the fact that significant fluctuations in the effective tax rate are expected from quarter to quarter, the company is not providing guidance on net income. In assessing the company's financial guidance, Spectranetics management consider many factors and assumptions including but not limiting to current projected sales trend data, status timing progression of companies product development projects, current projected spending levels to support sales development, marketing, and administrative activities, anticipated timing and cost associated with the relocation and consolidation of its headquarters and manufacturing operations and other risk factors discussed in Spectranetics publicly filed documents.

This concludes our prepared remarks. Now I will open up the call for questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from the line of Amit Bhalla of Citi.

Amit Bhalla - Citigroup

Thanks for taking the question I wanted to start with the atherectomy business. John can you help us maybe understand how much of the growth is coming from the dedicated sales reps and how much is coming from TURBO Booster contribution. Any kind of granularity you can give there. And just comment on what you are seeing in the competitive landscape. Because you did mention trialing last quarter.

John Schulte

I think it is difficult, you know we are very pleased with the growth in the quarter and the fact that we effectively reorganization of sales force. I am not sure a whole lot of the growth in this quarter was due to that, you know simply because there was territory reshuffling and those kinds of things.

I am very pleased with the fact that we completed this successfully and we now have a very large team that is doing nothing but vascular intervention. I can not help but believe that the productivity of the dedicated team on both sides will increase simply because they can go deep and wide in one particular area. So I think that is - I am glad that we affected that very successfully.

Also as I mentioned as the TURBO Booster, basically by the middle of the quarter we were able to really understand what the procedural issues were with the TURBO Booster. As I mentioned the saline flush set up was more complex than it needed to be. So we simplified that and that satisfied the cath lab technicians who were responsible for that piece.

But probably the bigger issue was, as you know the, TURBO Booster system works by having a laser catheter slide through a deflecting sheet and you have to keep it in specific spot in order to get maximal oblation. When you have cuff lesions the catheter would tend to push back off the ramp and therefore the physician would have to stop and reposition it back onto the marker band and then start again and that was somewhat frustrating.

We determined the reason for that was the hemastatic valve which locked the catheter and the booster together was slipping on the hydrophilic coating on the catheter. And so by simply shortening the length of hydrophilic coating to the length of the TURBO Booster we always knew that the TURBO Booster would be locked down on the dry part of the catheter that effectively eliminated the slippage.

In fact, we confirmed that because in March we did a survey with the sales force we ask them to fill out case report forms on approximately 200 cases and we measured things like set up time, slippage, loom and gain, and overall satisfaction. So very nice and I think very thorough market research and frankly 85 to 90% of all cases had either good to excellent responses on all of those categories.

So while we were always pleased with the loom and gain with the TURBO Booster, now we think we simplified it. So we saw actually in March a very nice acceleration in our atherectomy business and that was fueled primarily by TURBO Booster.

Lastly with regard to competition, there is one new player out there, CSI that has rotational arethectomy. They have obviously going and taking a similar approach that was used by Fox Hollow in their early market launch and focusing on significant - on a small amount of hospitals that have high volume.

And clearly as I mentioned last call, physicians that use arethectomy are device junkies and they like to try things as any new device will get trialing and that happened. We believe that the rep and strength of our technology in treating lesions below the knee, particularly long lesions with the smallest catheters available gives us an advantage over any technology and the versatility to go up into the SFA now with the TURBO Booster, gives us a broader range of RB diameters and tissues morphologies and case time than any other product.

So I think ultimately the true place of any device will be determined by its effectiveness, its safety, and its cost and I think we have got some nice – a nice story to tell on each of those parameters.

Amit Bhalla - Citigroup

John if I could just follow-up on that, the trialing piece. Are you seeing any initial vendors that may have been trialing coming back to using the laser? And then if I could follow-up on business development. In the past, you have said that you wanted to do two business development deals in 2008, now you are shooting for one, what has kind of changed in the-

John Schulte

I said one in the quarter Amit. Just let me get a handle on the business development. I said I want to do one this quarter. Just for clarification. So with that and I am sorry. On the trialing piece, yes we certainly know - we have systems set-up to measure kind of what is going on in the larger hospitals and we know whose where.

Yes I would say in general that a very high level, without going into more specifics, yes we kind of seen kind of an initial case reduction in some of the larger hospitals and yes we have seen a resurgence in business in those specific hospitals.

Amit Bhalla - Citigroup

Great, thanks.

Operator

Your next questions comes from the line of Jason Mills of Canaccord Adams.

Jason Mills - Canaccord Adams

Guys congratulations on a good quarter.

John Schulte

Thanks Jason.

Guy Childs

Thanks Jason.

Jason Mills - Canaccord Adams

Sticking with the vascular intervention business for a second John and Guy. You know it seems obvious that last quarters stocks are down 35% about this time of day, because folks were a little worried about vascular business. It is up 92 today, about half of what it was down last quarter on, what did you report, on 36% growth in vascular intervention business.

So it seems that you know the market is sort of dipping its toe back in to believing that the vascular intervention business is more like it was prior to fourth quarter, as opposed to what the fourth quarter results would have suggested.

So my question is what specifically would you sort of like to tell investors with respect to your long term expectations for gross net business? I guess what is in the 2008 guidance in terms of what you expect the vascular intervention business to do?

What does that imply in terms of, John, you mentioned productivity increases via your direct your focus sales force unit where is it now, and where does it need to go. And then if you break out TURBO Booster, would really like to get a sense for what sort of growth in the base laser atherectomy disposable business, your guidance would imply because it seems like frankly implies relatively conservative growth which I think is a great place to start. But I wonder if there is upside there. Thanks. Sorry for all the questions, but I can repeat them if it is too many.

John Schulte

A difficult eight part question from you Jason. But we will see what we can do here. Let me talk on a high level and will probably try to answer as most of what you asked and if it gets a jump back in.

As far as the long term growth of the vascular intervention business, we remained in the first quarter we remained in the fourth extremely optimistic about the intravascular pad markets so make it very clear about that. We see procedural growth in the 10 to 15% range using all technologies, which is three times at least faster than in the coronary markets.

So we see the pad market in the vascular pad market as a growth market. The segments of that market are obviously balloons and stints is the biggest bucket and arethectomy is about 20% of the total. We certainly believe arethectomy as a percent will not shrink as a total and our goal is take share in the arethectomy market.

So that implies we want to grow faster than the pad market and we want to grow faster than arethectomy segment of the pad market. And I mentioned in a previously that growing at double the rate of the pad market, which implies a 20 to 30% growth rate we think is achievable for us.

And that includes new competition in all of those kind of things. So we remain very optimistic and I think over the rest of the year, the fact that we will have a dedicated sales force of 75 people including managers that we’ll be nothing but vascular intervention I think will allow us to capitalize on that opportunity. That is one of the reasons why we made the sales force split. I think in fact that in many respects it was more to help the vascular intervention business then it was to exploit the opportunity than lead management business.

But I do think the productivity of both of our sales organizations will improve because of a much more focused call point. Our training is going to be much more rigorous because we can go a lot deeper on vascular intervention to one group and deeper on lead management to the other group, whereas in the past we had to try to train an entire sales force on two very different applications of our technology.

And so I think that greatly simplifies our sales training piece. With regard to the productivity of each group let me have Guy answer that one.

Guy Childs

Thanks John. On a - just a split this is the first opportunity where we can specifically split productivity based on the feet on the street if you will, which includes the quota carrying reps in clinicals in the case of lead management business. So in the quarter our VI annualized productivity per rep was $800,000 and on the lead management side of the business, it was $683,000 per rep. And that's on an annualized basis.

Now given that we were not entirely, but substantially complete with our sales organization hires in the U.S. for the year. And the fact that we expect revenue growth for the remained of the year. We do expect that to increase and that is a key part of the operating model for us going forward.

Secondly another metric that we closely watch relative to the productivity is relative product count. In the U.S. on an annualized basis, based on fourth quarter results we had annual revenue per account of $120,000. That compares with $115,000 per account for the full year 2007. And $106,000 per account for the full year 2006. So we have seen some nice improvements in that area as well.

Jason Mills - Canaccord Adams

Just think what I have got, it is interesting. Your clearly focused now on - on laser net laser placements given, John you mentioned the opportunity. But in the past couple quarters you have talked about really driving the productivity at sites you already have a laser installed.

So it - I am wondering if I am hearing given that now that you have split your sales force. That you could perhaps maybe biting off a little bit more in terms of feeling like you could really try to drive growth out of both of those buckets. Maybe focus again a little bit more back on driving new laser placements and as well as sort of keeping the foot on the gas with respect to try and increase the revenue per account. Am I hearing that correctly?

John Schulte

Sure, well I think - absolutely. The reason that we split the sales force and if you spend a day with our team you would understand how complex the selling process was when it was a full line group you know the vascular intervention business is performed in the CATH lab or in the surgery suite or in the radiology suite. And that is in many cases a completely different locations from where pacemaker and defibrillators are taken out, either in the EP suite or in the operating room, so very different locations in the hospital.

Secondly, a very different selling process, you know in pad market, it is fairly straight forward. It is an elective procedure that are done every day and every hospital is in the lead management market a very different. These procedures are done you know one or two or three times a week even at busy hospitals. They require a lot more support.

So you know there will be times the full line team would be pulled over. You know they would like to do vascular intervention, but there was a case that had to be supported for lead management. And that certainly, I think affected productivity. Now that we have a complete split, I think that is going to help.

The other thing that I mentioned sitting in our sales meeting, pre in past years in order to really dig deep and understand the technologies and applications, you get an appreciation for how different lead management is from vascular intervention. You know it goes into a vein, where vascular intervention goes into an artery. Just a completely different anatomy.

The complication risks are very different in the two businesses and being able to go very deep in training, I think is very helpful. So our goal would be to drive toward activity in existing accounts. In fact we saw some of that in Q4, frankly by having the 14 dedicated lead management people. We had a number of hospitals who had a laser doing arethectomy, but had not being doing lead management order SLS catheters, because now they already have the laser and just using it for different applications. So let me ask Will to make a couple of comments, because he has been deeply involved in this as well in terms of the sales force productivity.

Will McGuire

Just one additional comment there Jason on the lead management productivity number that guy quoted. The $680,000 includes 15 clinical specialists in that number. So there is 15 people there who do not have a quota, and they are providing clinical and case coverage. And also keep in mind that during Q1, we hired 13 people into the lead management team from outside of the company. So we were integrating 13 people into that number during Q1. So we obviously expect the productivity to go up as we go forward.

Jason Mills - Canaccord Adams

Right, a little bit diluted, in other words in the quarter. So just the last question and I will hop back in queue. With respect to that lead removal business and given that the productivity is a little diluted we should see that pick up. I am also wondering what if any impact you have yet to realize from the Fidleis lead recall and remind us of the opportunity in terms of the number of expired leads that are just capped and left in.

And then last to again to Amit's question. I am not sure I heard the answer to what TURBO Booster's run rate was in the quarter, so I could get a little better sense for base atherectomy growth. Thanks guys, great quarter.

Will McGuire

This is Will. I will take the lead management questions there. Fidelis portion of our business remains fairly consistent. I think we said it was between somewhere between 5% and 10% of total leads removed in Q3 and Q4. And it remained in that same 5% to 10% of the case volume during Q1.

So far I would say that in the last nine months, we have not seen an uptake in our business that has been tied directly to Fidelis. Other than the attention to lead management growing because of the Fidelis recall, but the actual number of Fidelis leads was pretty consistent.

As far as the market potential, there is approximately 225,000 leads that are removed from service every year in the U.S. And we think out of that 225,000 about 125,000 are kind of off the table due to patient mortality and it leaves close to 100,000 leads that are taken out of service every year that we think- that represents the market potential for our business.

Out of that 100,000 right now less 20,000 are actually removed. The rest are capped. And if you have 100,000 it is roughly broken into say around 18,000 are infected, about 43,000 somewhere mid 40's around malfunction. Say mid 30,000 around upgrade, and the remainder would be in seclusion.

Jason Mills - Canaccord Adams

Perfect.

John Schulte

And lastly regarding the -- regarding the atherectomy growth acceleration we do not break out the specifics of the TURBO Booster. But I will say that on a day rate basis, our atherectomy sales in March were the strongest in our history and that was really driven by a real focus of the sales force on TURBO Booster.

And in some cases reengaging physicians who had tried it earlier and while they liked the loom and gain, they were concerned with the complexity and time of the procedure. And so going back into those accounts and showing them the new saline flush technique with shorter coated hydrophilic catheters.

As they say, we did a lot. This market research study and you know saw really great marks overall satisfaction, loom and gain, slippage, and set-up, all those things, so very positive. And I have to say the acceleration in March was you know definitely associated with the TURBO Booster.

Jason Mills - Canaccord Adams

Thanks guys.

Operator

Your next question comes from the line of Matt Dolan of Roth Capital.

Matt Dolan - Roth Capital

Good Morning. Follow-up on the atherectomy side with your results coming in essentially ahead of what we were looking for and a number of factors of Q1 with the realignment that TURBO Booster strengthening in March and then the full launch from CSI.

John can you give us a break down of between above and below the knee procedures and in terms how that came into your expectations in the quarter and then maybe update us from a timing standpoint and how that weighs into your '08 revenue guidance.

John Schulte

Sure. Well with regard - it is Matt somewhat difficult to know specifically of what is happening above and below the knee and the reason for that is that 1.7 of the 2.0 ml catheters which are the only two used inside the TURBO Booster can also be used in the lower leg.

In summary, what we saw was, we saw growth in our small catheters, which was the .9 and 1.4, which are used, essentially always, in the lower leg. We saw the greatest growth in the 1.7 and the 2.0, which can be used either below the knee or in the TURBO-Booster. And we saw a slight decline in our 2.3 and 2.5 millimeter catheters, which are used almost exclusively above the knee.

But the growth in the 1.7 and the 2.0 substantially exceeded the decline in the 2.3 and the 2.5. That’s exactly what we expected. And so I’d have to say that we are seeing a case-mixed shift towards the upper leg, although it’s difficult to pinpoint exactly what that is because of the reasons I mentioned.

Matt Dolan - Roth Capital

Okay, great, that’s helpful. And then secondly I think in the past we’ve talked about the reorder rates on the TURBO-Booster. Can you give us an idea of how many of your accounts have reordered to date?

John Schulte

Well, I think we have a significant – well, I would say we are – the TURBO-Booster is in virtually all of our atherectomy accounts now. Which is in the 375 to 380 range, something like that. And significantly more than half have reordered.

You know, the challenge – we sell a seven Fr and an eight Fr and they’re in a box of three, and so more than half have reordered. So we’ve penetrated virtually all our accounts and are starting to see a very nice reorder rate. But what really drives our growth is laser catheters, and that’s where we saw the acceleration, in fiber catheters.

Matt Dolan - Roth Capital

Okay. Sure. And then, one more for Guy, can you give us the facility move cost that you saw in Q1?

Guy Childs

Yeah, as I mentioned on the last call, the incremental costs in 2008 versus 2007 are going to be in the range of 2 to 2.5 million and approximately half of those will be non-recurring. A pretty small percentage as we prepare for the moves we’ll commence in a significant effort in the second quarter. So only, probably 150 or 200,000 incurred in the first quarter.

Matt Dolan - Roth Capital

Okay, great. Thanks, guys. Good quarter.

John Schulte

Thank you.

Operator

The next question comes from the line of Charles Chon of Goldman Sachs.

Charles Chon – Goldman Sachs

Hi everybody.

John Schulte

Hi Charles.

Guy Child

Good morning.

Charles Chon – Goldman Sachs

Thanks for taking the question. Just wanted to follow up on the facility move question there, first. Turning to the income statement, you know there were some – were there any spending items that had been scheduled for the quarter that did not occur? So it sounds as if some of the costs that we had thought would flow through in the first quarter really didn’t happen, so maybe we might see them show up in the second quarter with respect to the manufacturing move.

Guy Childs

I would say that predicting costs relative to the move on a quarterized basis is a little difficult. We always anticipated that most of the costs will begin in the second quarter, so there’s really no change there. However, there’s some product development and clinical research costs, just timing related, that weren’t incurred in the first quarter that will be later this year.

And also, on the facilities cost, clearly we are only starting that effort, and most of the costs are cost estimates for the year, are unchanged, will be incurred for the remainder of the year. I don’t expect it to be concentrated all in the second quarter, and would reiterate that even with all of those costs we expect operating expense growth to slow through the rest of the year and also do expect a return to profitability in the second quarter.

John Schulte

Right. So maybe – maybe Will could comment on the – just the timing of the process throughout the rest of the year in terms of what we are trying to accomplish.

Will McGuire

Yes, just a quick – couple of quick notes, there, Charlie. The construction is complete; we have our certificate of occupancy; the clean room itself is operating within the prescribed parameters, and the really only major system that’s left to be validated is our compressed air system. So we are pretty close to the finish line, there, as having a facility and a clean room that we can move into.

I think as Guy said, we’ll probably start moving our T&K products in Q2, so we’ll start transferring a number of those lines from our other facility into the new clean room. So this would include peripheral atherectomy catheters, our Quick-Cross line of support catheters, and our LLD products.

Then as we said in the past, the PMA products be transferred closer to the end of the year, and this date is going to be most forward depending on the FDA, how they respond to our submission, when they schedule a site inspection, and things like that. So, very much on track and look forward to begin some of the lines up to the new facility this quarter and getting them up and running and producing product here.

Charles Chon – Goldman Sachs

Right. So as I am thinking about the gross margin, when you bracketed the gross margin for the full year you retained 72% to 74%, and there could be some variation outside that range. I am just trying to figure out when we should dial that into our model, so it doesn’t come up as a surprise for us.

Guy Childs

Well, to be clear, Charlie, based on what we know today, we don’t expect margins to decrease from the 72 that we reported this quarter. I would caution against getting too aggressive on the upside either, particularly in the second quarter, because as I’ve mentioned, the move costs are going to come in. those will be certainly offset by efficiencies that we expect due to increased volumes as well. So I am comfortable with the range; I at this point do not see variation below that range.

Charles Chon – Goldman Sachs

Okay. That’s very helpful. Thank you. The second question I had was just – John, you indicated that procedural growth for endovascular procedures was 10 to 15%, and the tone of your comments are very supportive of the growth prospects there, but, not to split hairs but I believe on the last quarter call you indicated that growth was more around the 15% number. So could you just tell us if anything has changed there in your understanding around the growth rate, or is it just a matter of semantics, here?

John Schulte

It’s just semantics, Charlie. I try to- trying to get super precise on these things is very difficult. You know, we are using market research reports, we are using field reports, all of those kind of things to estimate. But no, I think 10 to 15 is, I think, reasonable and whether it’s 10 or 15 I think it’s hard for me to be more precise to that. I just know that it’s growing significantly faster than the coronary market.

Charles Chon – Goldman Sachs

Okay. Very good. And the last question I just had was, I was surprised by the updated enrollment for the Patent and Salvage trials. What is taking the enrollment so long, there, and-

John Schulte

Charlie, that’s a good question

Charles Chon – Goldman Sachs

...is it the inclusion criteria or?

John Schulte

No. What it is, and I have seen this in every clinical study I’ve ever been involved with over a long time, is that it’s an incredibly painful process, once the protocol is approved, to get through the hospital IRB, get all the contracts signed, all of those kind of things? As much as we try to be super aggressive and all this kind of stuff, hospitals move at their own pace.

And when I expect to see the acceleration is when we have a reasonable number of hospitals who have jumped over all the hurdles and are now eligible to enroll. On the Salvage trial, the challenge there is that we are not managing that trial. That’s being handled by the physicians, by the VIVA Group of physicians. And theoretically- I mean, it’s a hands-off trial.

You know, the only thing that Gore and Spectranetics did was approve the protocol and the sites, and everything else, the contact with the hospitals, the IRB, the contracts, all those kinds of things are done by the VIVA physicians. And so, we are trying to work with them to jump through these hurdles.

I think regarding Salvage, you know, as you say, we are only up and running in four out of ten so far, but we’ve jumped over- there’s like five hurdles you need to jump over before you can start enrolling patients, and we’ve jumped over most of the hurdles in six more hospitals. So that by the end of the quarter, I would expect we’ll have ten hospitals that are eligible to enroll.

And then it is just a matter of just working the process, to make sure that eligible patients are in fact consented and then enrolled. I don’t think that the enrollment criteria is particularly difficult, although obviously- I would say that on average we probably get to enroll one out of every 2.5 patients that presents because of exclusion criteria, either lesion length or don’t have a vessel below the knee. You know, those kinds of things.

So we measure and we will be measuring on a monthly basis how many patients are screened at each hospital, because that tells me they’re actively engaged. And then obviously the enrollment will flow from there. So, a lot of it is, it is the start up time which is very frustrating, but then once you get a number of hospitals enrolling, then we have got to expect to see an acceleration.

So I guess I’d be able to say in the next quarter, I’ll have a better handle on what the enrollment rate probably could be on each of those sites.

Charles Chon - Goldman Sachs

Okay, great. Thanks.

Operator

The next question comes from the line of John Putnam of Dawson James Securities.

John Putnam - Dawson James Securities

Thank you very much, and I just wanted to return to the lead management business, and I thought that was great granularity you gave us. My question is, will it always require as many clinical specialists to run that business, or is there a learning curve that will go on so that the physicians can do the procedures without the clinical specialist being present?

Will McGuire

I think that’s a good question. I’d say at least in the foreseeable future, we would probably expect to make adds on both sides of the business, so forth, we call them business development managers as well as clinical specialists. And at some point, if we do get additional large centers up and running that are doing a larger case volume, then it is foreseeable that we could have a higher percentage of business development managers that are carrying a quota of clinical specialists.

But I would not expect it this year, and right now, with the majority of our customers being electrophysiologists, they do have a general expectation that they’ll have case support from us during cases, because they get that with the CRM industry. And certainly, this year I would say no, but as we are going forward, as we get more centers up and running, we get them more self-sufficient, you could see the mix change somewhat then.

John Schulte

And I think I’ll just add the comment, I think Will’s absolutely on target there as it relates to this year. One of the things we are doing to try to change that equation is by educating the cath lab staff. And in fact coming up this week, we have got 40 cath lab technicians coming in to Colorado Springs, in our major hospitals, and we are going to train them.

Because frequently, as Will mentioned, physicians expect support on each case; they’ve been attuned to that by the CRM business. But I think if we can get what I’ll call a cath lab champion, who is extremely familiar with the laser, and whom we can train almost like a sales person, then they can provide that clinical support, right in the hospital. So that’s a new initiative that we have begun.

We are doing that on both sides of our business, this year. We have got a higher percentage of our training dollars being allocated to cath lab and to support people to help get some of the hospitals and institutions more self-sufficient.

And that’s a great point, because frequently on the VI side, if our sales person isn’t there, it is difficult for us to get that case, because the cath lab staff may not be as familiar with our technology as we would like. So it is a super-good point.

John Putnam - Dawson James Securities

Great. Thanks very much.

Operator

The next question comes form the line of Christopher Warren of Friedman, Billings, Ramsey.

Christopher Warren - Friedman, Billings, Ramsey & Co.

Thanks so much. Two questions for you. I know you expressed a growth rate for the market in peripheral atherectomy. Could you please do the same for the lead removal market?

John Schulte

I don’t know that we have a good handle on the overall growth rate. I think we just go back to what we have perceived the market potential to be, and right now we think that there are less than 20,000 leads that are removed every year, and we think the potential number of leads that could be removed every year is close to 100,000.

So if you look at our business, it is probably been reflective of the growth rate over the past two or three years, which has been this 18 to 20% range, I would say. But that’s not to say that’s reflective of what it is going to be going forward.

Christopher Warren - Friedman, Billings, Ramsey & Co.

As a follow-up to that, you’ve produced 45% plus year on year growth for two consecutive quarters. What rationale can you give us for not assuming you continue to do that for 2008?

John Schulte

I guess if you look at the way the business grew last year, we had tremendous growth in Q3 and Q4 in 2007, when we started adding some dedicated business development managers. So just looking at the pure numbers, the comparisons in Q3 and certainly in Q4 are going to get much tougher than Q1 and Q2.

And we believe that was because we started having dedicated resources, we saw the impact of those resources, and we made a decision to do a full split. So certainly the comparisons get much tougher because we do have the dedicated resources in the latter half of 2007.

Christopher Warren - Friedman, Billings, Ramsey & Co.

And then as a follow-up, I know you have a symposium scheduled for the second quarter, focused on lead removal. How many other master summits do you have on the calendar for the year, and in which quarters will those occur?

John Schulte

Right now, as you said, we have the symposium that’s being ruin by the Cleveland Clinic is happening at HRS, and at this point we have one additional master training summit. The date is not finalized, but I would expect it to happen probably some time in early Q3.

That’s not to say that we won’t do additional ones, but that’s the only one that has been formalized. And we are finalizing the date right now.

Christopher Warren - Friedman, Billings, Ramsey & Co.

Okay. Thanks so much.

John Schulte

Thank you, Chris.

Operator

The next question comes from the line of Spencer Nam of Summer Street Research Partners.

Spencer Nam - Summer Street Research Partners

I just have a couple of quick questions for you guys. First question is, when should we expect some of the data from Salvage, and also Patent to be available in the market, out on the street?

John Schulte

Yeah, that’s a good question. It is a little hard to judge it at this point. I would expect the first time that we would hear anything is when we would have say half the patients which have reached half the time points. So just to refresh, both Salvage and Patent are 100 patient trials, and the primary end point is 12 month patency. However, I would expect possibly some interim stuff when we see 50 patients with 6 months.

And I think- let me update it on the next call. I think I’ll have a better idea of the enrollment rate, and then you can take six months from when we get to our 50th patient is when you’ll hear something.

Spencer Nam - Summer Street Research Partners

Okay, that’s helpful. Second question is the- when we look at the number of lasers that are placed, we’ll be looking into, high 700’s almost 800. What are we thinking in terms of the full potential there? Is that- can I think of it as doubling that number, or is that- how many hospitals can we-

John Schulte

Yeah, that’s a great question. Matter of fact I mentioned that I believe we are about half way to our goal of about 1500 laser systems worldwide.

Spencer Nam - Summer Street Research Partners

Yes?

John Schulte

So we are at about 760; something like that. So we have experienced clearly significant growth, 120 to 130 per year, that kind of a thing. And so I am not sure we are going to take off at that rate, because we have to make sure that we can support the existing lasers and whatever.

But I think as we look worldwide, I could see us in the neighborhood of having 11 or 1200 in the U.S. and the rest outside the U.S. as being- and when I say that, that’s a realistic potential. That’s not putting a laser in every hospital that’s doing procedures, it is putting them in hospitals that have significant enough volume to justify having a laser there.

Spencer Nam - Summer Street Research Partners

Right. I appreciate that. And the final question is, you know one of the things we had heard about lead removal was that no matter what you use- we heard that the laser is one of the gold standards, but there’s still a material risk of death associated with the removal.

And then it seems like the Brigham study actually suggests that it is much safer than that. How much of the data is - how substantial is that data? Is this breakthrough data, or - how much more data do you need to really educate the physicians that the laser is a quite safe, relatively very safe method to remove leads?

Guy Childs

Well, we think Dr. Epstein’s data is great data. I’m not sure if it is breakthrough data, but it is really the data that demonstrates how safe this procedure can be in the hands of someone who does quite a few cases and is trained. And I think an imperative for us going forward would be to produce more data like this.

I can’t say yet how we are going to do that. It could be some sort of retrospective analysis of data or we could make a decision to have a prospective study going forward to provide this data. But I think it is very important to get Dr. Epstein’s data out there. We also think it is very important to the business going forward to produce additional data that supports the safety of this technology and this procedure.

And to just reiterate what John had said, I mean, this was not a small number of patients. It was almost 500 patients with 975 leads over 7 years with no deaths, and of all those leads that were removed, I think 78% were removed with laser assistance. The other 22% were manual retractions. So these were probably just leads that they pulled on or tugged and they were removed that way without laser assistance.

So we think it is great data. We know that we need to produce additional data like this to support the business, and we will one way or the other.

John Schulte

And also, there’s a couple of other sources that you can access. One is the Cleveland Clinic website, which is a world class website, and they look at all their interventions form head to toe, all those kinds of things, and they have a specific EP section, and they have an extraordinary number of leads that have been removed, and they have their complication rate in their data base. And they use all technologies, including manual sheaths and the like. However, the majority of their usage is our stuff.

So, again, that’s another data point. I think there’s another hospital in Vancouver that’s got 200 or 300 patients also showing similarly low complication rates. So historically, the industry, highlighted in the Fidelis stuff, was that it was a 2 to 7% major complication rate. We think that with the latest technology, in particular our technology, that that complication rate in good centers is very low.

That being said, there is always the risk of a perforation. There’s always risk of requiring an open heart procedure or a death. It can certainly happen. So we are spending enormous resources on training and education to ensure proper techniques. And that’s what these master summits do.

I was at the last one, Will and I were both there, and it was magnificent. They did two live cases and great dialogue and they saw how to diagnose it, what kind of views to look at, all those kind of things. What kind of training you should have in case a complication occurs- those things are all super important.

And the fact that we are now trying to partner the cardiac surgeon with the EP doc, and- because if there is a complication, having a heart surgeon is very enabling, and in many cases EPs are staring to say, hey, why don’t I have the heart surgeon do this and I’ll do the re-implant.

Spencer Nam - Summer Street Research Partners

Right, thanks very much.

John Schulte

Thank you.

Operator

The next question comes from the line of David DeGiralamo of Pacific Growth Equities.

David DeGiralamo - Pacific Growth Equities

Hello?

John Schulte

Hello, David, you’ve got a question?

David DeGiralamo - Pacific Growth Equities

Yes, can you hear me?

John Schulte

Yes.

David DeGiralamo - Pacific Growth Equities

Okay, sorry about that. Thanks for taking my questions. I have two questions. One, the first is on guidance. Just to build on Jason’s question from before, your top line neat the street, certainly beat our numbers. I know you didn’t give 1Q guidance. And you’re keeping 2008 guidance intact.

Just so that I can understand this, does this suggest that the street simply was off on its quarterly bucketing for 1Q, or does it reflect, I think as Jason said, added conservatism on your part?

Guy Childs

I am not exactly sure how to answer that. I’ll say that, obviously we are pleased with the first quarter. Our annual guidance is- we still believe that it is the best estimate of what we expect in the business. Our outlook is positive for both atherectomy and lead management, and we are not going to- we have consistently given just the annual guidance and we are going to stay away from quarterly guidance, but we are comfortable with the annual guidance that’s out there.

David DeGiralamo - Pacific Growth Equities

Got it. And then my second question is just, as it relates to the atherectomy business, I understood you guys to say three things regarding endovascular growth rates, and please tell me if I am not getting this correctly. First is that, I think you mentioned endovascular procedure growth is about 10 to 15%. And that atherectomy-

John Schulte

That’s correct.

David DeGiralamo - Pacific Growth Equities

-as a percentage of procedures would not shrink, I think you said, John.

John Schulte

I did.

David DeGiralamo - Pacific Growth Equities

And then third is that I think you said you were comfortable that your particular laser atherectomy business could grow 2x the endovascular procedure market.

John Schulte

That’s correct.

David DeGiralamo - Pacific Growth Equities

My question is, how much of that growth, let’s call it 15 to 30, how much of your growth relative to endovascular procedure growth will be due to atherectomy market growth versus how much you might be able to gain in market share?

John Schulte

That’s a hard one to pinpoint. My guess is probably more market share gain than atherectomy growth within the market. I think until there’s better data available on the benefits of atherectomy, that’s one thing that physicians are looking for. So they’re- now it is based on things where they look at certain lesions that just don’t work very well with balloons and stents, and those are below the knee lesions, for example.

If they’re longer than 3 centimeters, most physicians realize that ballooning it doesn’t provide very good results. You don’t want to put in multiple stents; there haven’t been results there, and so tissue removal makes sense. And that’s anecdotal stuff, we have good LACI data showing great things in really difficult long lesions below the knee, and so I think that that’s an area where- below the knee lesions, long lesions, are growing. And therefore that’s an area where we are focusing.

A second area is the treatment of in-stent re-stenosis, as we have stated many times today, there is no device indicated for the treatment of in-stent re-stenosis, and that includes an angioplasty balloon. However, if you talk to physicians, when you ask them how they treat in-stent re-stenosis, most of them will say, “Well, I use balloon.” And you ask them, “Well, how’s that working out for you?” and they’ll say, “Well, not very well.”

And so the concept of tissue removal prior to balloon or putting in a second stent seems to make a lot of sense, because you can’t over-expand a nitinol stent. So that’s an area. And I think in-stent re-stenosis will be growing as a percentage of procedures done in the lower leg. So those are important.

So we believe that our form of atherectomy because it has the ability to go right down into the foot, because it has the ability to treat thrombus, plaque and moderately hard calcium. And the fact that it can now treat vessels as large as 6 millimeters to 7 millimeters in diameter gives them great flexibility.

So those are all the things that we are trying to promote. Obviously we are also trying to grow the market because there’s an unmet need in terms of patients who have these symptoms and they’re not properly diagnosed and I think as we get the word out through symposiums and public relations activities we are continuing to try to grow the pie. So it is really a confluence of things.

David DeGiralamo - Pacific Growth Equities

That’s really helpful, John. Thank you for taking my questions and nice quarter, guys.

John Schulte

Sure. Thank you.

Operator

The next question comes from the line of Peter Bye of Jeffries & Co.

Peter Bye - Jeffries & Co.

Yeah, hey guys, just a quick follow-up. I appreciate you squeezing us in, here. Just on the account data, you talk about depth and breadth, and I appreciate the data you’ve got there, but 120,000 revenue per account. How deep do you think that is.

I.e., how much is up for grabs in those accounts, i.e., today? Are you capturing a third of their total revenue, the competitors? Half? Twenty percent?

John Schulte

Yes, that’s a good question and it is hard to give a specific answer because that 120,000 is obviously costing some $700,000 accounts and some $25,000 accounts. You know, it is the average of 120.

But I think that the way we look at it, take on the VI side, you’re trying to take a look at the number of procedures that they would do, and if you use an example and say 500 leg procedures, right now, atherectomy today in an accepted hospital would be 20% of those. So that would be 100 procedures. And that would be $200,000 value. If you captured the athectomy share.

Now there are a number of hospitals- the atherectomy share of 20 percent, again is a significant average. There are some physicians who are using atherectomy in 50 to 60% of their cases. Basically, everywhere where they think atherectomy can add value, they use it. Others use it only in the train wreck cases where nothing else works.

And so, our focus is- now, I call it “one lesion, one physician at a time.” So first thing you have to do is get the laser, and then we have to get them comfortable with the technique, and then we go after specific lesion subsets where they don’t have a good answer.

And hopefully we can show them that laser atherectomy adds value, either by improving clinical results, reducing procedure time, enhancing safety. All those kinds of things. It is a great question, it is really difficult to give you a pinpoint answer, however.

Peter Bye - Jeffries & Co.

Right. I appreciate the effort, though. I just- on the flip side, you’re pretty much done with the sales force build out. You mentioned the figures. What’s the capacity utilization, if you will, for sales rate?

Is it a million five on a run rate, where you’re going to have to expand out again, or is it a million two, two million? Where’s the bogey where the full capacity utilization, in your opinion?

Will McGuire

Now I think for us a target number has been about 1.5 million, to get our productivity up to 1.5 million per year. And it could go higher than that; I think a lot of it would depend upon what the product mix looks like, and what kind of products are in the bag right there. You could take a look at the coronary business, it could be more like 5 to $7 million or maybe more than that, now, and some other peripheral companies are probably operating above 1.5 million and at 2 or 2.5. So, so 1.5 is a reasonable target and we think achievable at some point in the future.

John Schulte

We think we certainly have territories that are doing significantly above that right now, and it is also dependent on the mix. If a territory had three hospitals doing $500,000 each, you know, they could go more than a million and a half. If you have 5 hospitals doing 300,000 each, or 10 hospitals doing $150,000, it is different. So it is a combination of things, but I think that 1.5 million would be a great target on an average and would provide significant leverage to our P&L.

Peter Bye - Jeffries & Co.

All right, great, just two more. Now if you look at going from 100 million plus this year to 200 million down the road, a maturing medical devices company generating roughly 40% or so of revenue to OUS, can you talk a little bit about- I mean, you’re showing some nice growth internationally, but also relatively small end. What’s the outlook there?

John Schulte

Yeah, I know, great question. We have a plan that over the next three to five years we’d like to have about 25% of our revenues OUS, so double where it is right now, which obviously implies that the OUS growth rate’s got to double what the U.S. growth rate is. And we have a super-capable vice president and general manager of international, who is leading that charge, based in Europe and now has responsibility for Japan and the rest of Asia.

And the first thing we need to do to accelerate OUS growth is to facilitate reimbursement. One of the reasons why it is a small fraction is because reimbursement outside the U.S. isn’t as good as it is in the U.S. Now we are starting to make headway. We have reimbursement in Germany for both lead retraction and atherectomy. We have it in, basically Benelux countries, and we have programs underway in France and Italy and the U.K., in that area, as well as Japan.

And so a lot of it is related to it, but the faster we can rationalize reimbursement, the faster the growth outside of the U.S. So we are making some investments right now. We have direct sales force in Germany, and we are going to be growing that. A direct sales force in France, we are going to be growing that. And a direct sales force in Benelux.

So, it is a combination of growing our direct organization in areas where we have direct reimbursement, and then accelerating reimbursement in countries that currently do not have good reimbursement. So we are- for the first, we are very optimistic, historically we have kept our investment outside the U.S. very low because of the reimbursement issue. But now we have taken the mind set that we are not necessarily looking to make money outside the U.S.

We don’t want to lose money. But we want to reinvest incremental gross margins for OUS business back into the business.

Peter Bye - Jeffries & Co.

Okay. Great. Now just a fast one: the key to the balance sheet, with the growth in non-current investment securities, are those auction rate securities? And then, from a muni market? Or what is that sort of- the bump there on that front, and does that have any implications on your business development plan?

Guy Childs

Peter, this is Guy. There are some auction rate securities in that line. They are not munis. They are backed by student loans, AAA rated, over-collateralized, and on all of them, part of the Phelps program which means that they’re guaranteed by the federal government.

And so we are very comfortable with the credit quality, obviously, of the market, and it is frozen up there, and it has no impact whatsoever on our ability to fund the operations of the business. And it also has no impact whatsoever relative to our business development activities. So we have the ability to hang on to those and look forward to some normality returning to these markets.

Peter Bye - Jeffries & Co.

All right. Great. I appreciate it. Thanks a lot, guys.

Operator

The next question comes from the line of Tom Kouchoukis of Northland Securities

Tom Kouchoukis - Northland Securities

Good morning, guys. I think most stuff has been asked already, but I did want to turn back to TURBO-Booster. I know you don’t want to give the number and I understand that, of what sales were, but I am trying to get a sense as we model this going forward. If you could provide some color on maybe the proportion of TURBO-Booster sheaths that are used on a stand-alone basis, purely for the sake of using a TURBO-Booster versus one that’s maybe an add-on for a fiber that’s already been opened, maybe for below the leg use.

Will McGuire

I would say the majority; they’re used as a system, in a plant system, and in some cases it is more the reverse, where they would treat the upper lesion first, and then if they would have a lesion below the leg, below the knee, they would just use the bare laser catheter in that. So it is more often that they see the lesion in the upper leg and so they want to get more debulking, and then we have the unique advantage of being able to use the laser catheter by itself in the smaller vessel.

Tom Kouchoukis - Northland Securities

Okay. So right now, I know it is early, also, but it would trend from the upper and then you get the benefit of having that fiber open to do lower leg touch-up if you need to.

Will McGuire

Exactly.

Tom Kouchoukis - Northland Securities

Okay. Again, this question’s a little bit early as well, but in the master summit sessions that you’ve had since TURBO-Booster got released, have you seen docs who were loyal to the competitive product showing up at these meetings? Now that TURBO-Booster’s out?

John Schulte

I am sorry, say that again, Tom?

Tom Kouchoukis - Northland Securities

Have you seen doctors at your master summits who may have been loyal Fox Hollow users show up at your summits because of TURBO-Booster?

John Schulte

Oh, sure. Yeah. Absolutely. I think there’s a broader array, absolutely. In fact, I think some of the times atherectomy believers that used excisional atherectomy primarily for the upper leg used us in the lower leg. But you know now they seem more open-minded with the TURBO-Booster.

So the fact that we can demonstrate greater versatility I think is helping draw broader range of physicians to those summits.

Tom Kouchoukis - Northland Securities

Okay. Great. And then Guy, one question for you on the rep additions. It looks like it was pretty heavily weighted towards Q1. Should we expect the remainder of those reps you have planned out for the year would come in Q2? Or will it be spread more evenly during the year?

Guy Childs

I would say during the next couple quarters, Tom.

Tom Kouchoukis - Northland Securities

Okay. So really Q4 is where you see that trickle off and maybe the most leverage comes.

Guy Childs

That’s right.

Tom Kouchoukis - Northland Securities

Okay. And then, last question, I know you can’t discuss the details, but I am curious on the settlement that you guys put the 8-K out for, with Medtronic, really specifically relating to the patent, is this a patent that could tie in to your coronary initiatives, or is it more something that you just have in your back pocket that you’ve used a little bit offensively?

Guy Childs

Tom, this is Guy. Just to clarify, we did not issue an 8-K. a reporter picked up on a filing that we made with the court staying the proceedings with Medtronic given that we had reached an agreement in principle. The documents have not yet been signed, so at the time of the documents being executed, we’ll publicly announce that.

Relative to your other question, the related question, that the patent is of strategic importance to us in the future and hence our action with Medtronic and it is a good addition to our already strong IP portfolio.

Tom Kouchoukis - Northland Securities

Okay. Great. Thanks, guys.

John Schulte

Thanks, Tom.

Guy Childs

Thanks, Tom.

Operator

Your final question comes from the line of Assim Anand [ph] of Natixis Bleichroeder.

Assim Adnand - Natixis Bleichroeder

Hi guys, thanks for taking my call. Most of my questions were answered. If you can comment on two things. You mentioned something about business development, if you can give more details, and if that would be dilutive. And other, inventory has been down, which is more surprising to you guys or this is a welcome downturn in inventory levels?

John Schulte

Sure. Let me answer that first one, Guy will answer the second. With respect to the business development activities, I mentioned we’d like to do a deal this quarter. Our focus is on the VI side, in products that are complementary to our technology sold to the same physicians, either for use in the same procedure or in procedure where the laser may not make as much sense.

These will be either distribution deals or bolt-on acquisitions using only existing cash resources. We would never do a stock deal at these prices. So we want to do it out of existing funds, and one that we think will help increase the leverage of our vascular intervention sales force.

Guy Childs

Relative to the inventory question, net inventories were down approximately 200 to $250,000 relative to the year end numbers. I don’t think there’s much to read into that, I think it is encouraging. It does tend to bounce around, primarily on laser system revenue, which is often difficult to forecast and predict sales levels there so encouraging trend, I wouldn’t extrapolate much more beyond that.

Assim Adnand - Natixis Bleichroeder

Thank you, Guy.

John Schulte

Thank you everyone for listening in to today’s call. I remain very pleased with our progress this quarter and very excited about our prospects for the future and look forward to speaking to you on next quarter’s call.

Operator

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

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