ev3, Inc. Q1 2008 Earnings Call Transcript

May. 2.08 | About: ev3, Inc. (EVVV)

ev3 Inc. (EVVV) Q1 2008 Earnings Call May 2, 2008 8:30 AM ET

Executives

Julie Tracy - Senior Vice President and Chief Communications Officer

Bob Palmisano - President and Chief Executive Officer

Pat Spangler - Chief Financial Officer

Stacy Enxing Seng - President of Peripheral Vascular and FoxHollow Technologies Division

Analysts

Jason Mills - Canaccord Adams

Tom Gunderson - Piper Jaffray

David Lewis - Morgan Stanley

Mike Weinstein - JP Morgan

Rick Wise - Bear Stearns

Charles Chon - Goldman Sachs

Joshua Zable - Natixis

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 ev3 Incorporated Earnings Conference Call. My name is Catina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the presentation over to our host for today’s call, Ms. Julie Tracy. Please proceed.

Julie Tracy - Senior Vice President and Chief Communications Officer

Thank you and good morning everyone. Welcome to ev3's first quarter 2008 conference call. We appreciate you joining us. I'm Julie Tracy, ev3's Chief Communications Officer. With me on the call today are Bob Palmisano, ev3's President and Chief Executive Officer; Pat Spangler, ev3's Chief Financial Officer; and Stacy Enxing Seng, ev3's Peripheral Vascular and FoxHollow Technologies Division President.

We issued a press release this morning regarding our first quarter 2008 results and revised 2008 guidance. A copy of that press release is available on our website at www.ev3.net.

The agenda for this call will include a business update from Bob, a review of our first quarter financial results from Pat, and closing comments from Bob, followed by a question-and-answer session.

Before we begin, I'd like to remind you that during the course of this conference call, we will make forward-looking statements that involve risks and uncertainties relating to future financial and business performance.

The forward-looking statements we will make on this call are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and ev3 desires to avail itself for the protections of the Safe Harbor for these forward-looking statements.

Forward-looking statements that will made on this call include statements regarding ev3's future financial and operating results, the potential synergies, cost savings and other benefits of the acquisition or integration of FoxHollow, and timing thereof, effects of ev3's US peripheral vascular sales force restructuring activities, new product benefits and market acceptance, future potential market sizes and annual growth rate, ev3's plans, objectives, expectations and intentions with respect to future operations, products and services and other statements that are not historical facts.

Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our annual report on Form 10-K for the year ended December 31, 2007.

We suggest that you read this report and other future filings that we may make with the Securities and Exchange Commission. ev3 disclaims any duty to update or revise our forward-looking statements as a result of new information, future events or developments or otherwise.

And, with that, I will now turn the call over to Bob for business update. Bob?

Bob Palmisano - President and Chief Executive Officer

Thanks, Julie and welcome to everyone that has joined us on the call today. Let me begin by reiterating how pleased I'm to have joined ev3 team. I took on this opportunity because I have great respect for ev3's history of technology development and innovation and the potential that we have to build a great company.

Now that I've spent my first month on the job, let me share some of my initial thoughts about the business. First, I come to ev3 with a core purpose; that is to build a great and sustainable company that source our customers and employees and creates value for shareholders. While we have many strengths, we have much work to do to realize the full potential that I believe this company is capable of producing.

I spent a great deal of time over the last four weeks with our employees and customers and working with our management team to understand ev3's markets and our current operational plans and business segment strategies.

From whatever I've learned so far, I'm confident that we're in the right markets with a broad and technologically advanced portfolio of products to serve our customers. I also believe we've the largest group of sales professionals that are 100% focused in these markets. No other company can make this claim.

However, going forward, I do expect that business is usual. We do plan on narrowing our program focus and we'll go through a disciplined process in the second quarter to figure out the projects in our Peripheral Vascular and Neurovascular businesses that have the most leverage.

This process will include a thorough review of business areas of strength and competitive positions as well as a critical and open-minded assessment of our strategies. You can also expect us to make appropriate adjustments to those strategies to better allocate our resources to drive operational effectiveness.

At the same time, we will place significant emphasis on improving our execution particularly in the short-term with regard to R&D and clinical progress to ensure that we are investing in those that can have the most positive immediate effect on our business.

Second, I'm optimistic about our growth prospects in the Peripheral Vascular and Neurovascular markets in which we compete and our ability to deliver compelling value to our customers.

Just last week, I had the opportunity to attend a physician training course in Orlando, Florida that was focused on below-the-knee atherectomy treatment for peripheral artery disease. Approximately 250 endovascular specialists were in attendance at the meeting, the first ever ev3 sponsored course of this type. This meeting included an expert physician faculty to provide product training to new endovascular fellows and experienced international specialist in an interactive peer-to-peer environment that included live case presentations and hand-on demonstrations. I personally had the opportunity to meet with 19 leading physicians in one-on-one meetings during this time. Based on the physician response, I came away from the meeting convinced that our strategy is providing a full compliment of innovative products in the large and underserved Peripheral Vascular market has tremendous potential.

What was also evident at the meeting was the need for us to broaden our base of physicians of peripheral vascular therapies including the SilverHawk atherectomy system and increase the amount of case support we provide to physicians using our products to realize the full sales potential of this business.

Third, I am confident that we have properly identified the integration issues related to our FoxHollow integration and have solutions in place to improve US peripheral vascular sales force productivity. Those solutions include a restructuring of our sales force and hiring new senior sales leadership, which is now completed.

Hiring a new top field sales talent with background that we believe will allow for rapid integration and effectiveness of an execution, providing additional product training to our sales team to enhance our ability to sell both side of our peripheral vascular product lines, developing programs to reach sustainable referral pass between primary care physicians and endovascular specialist and developing focused clinical programs that support the science behind atherectomy. Although, we are seeing signs that these actions are beginning to produce results and have stabilized our average daily sales rate, we still have work to do to improve our sales execution and cross-selling effectiveness.

Keep in mind that we continue to expect an elevated customer inventory levels of SilverHawk will adversely affect our net sales into the second half of 2008. However, we also believe that customer inventory levels in certain accounts are beginning to return to more normal levels as evidenced by the fact that some of our large SilverHawk accounts have started to reorder product.

Fourth, we are being very aggressive in terms of projecting our cash position and have already taken steps to control expenses, reduce inventories and capital expenditures. As part of our strategy to continue to improve our product integration and increase operational effectiveness, we have decided to consolidate our FoxHollow manufacturing operations located in Redwood City, California into our existing operations in Plymouth, Minnesota and Irvine, California. As a result of this consolidation and related staffing reductions, we anticipate annual cost savings of approximately 10 to $12 million beginning in 2009 and a streamlined operations that will better support the needs of our business.

Finally, although on a GAAP basis we now expect to generate a net loss in fiscal 2008, we are targeting positive EBITDA including charges for non-cash stock-based compensation for the year. Let me be clear that achieving sustained profitability remains a top priority of the company.

Before I discuss our business performance in more detail, I would like to highlight some excellent progress that we have made in our international business.

First quarter 2008 international net sales grew to 34.8 million, representing an increase of 32% over the prior year quarter and 24% sequential increase over a strong fourth quarter 2007 results. We continue to see positive momentum in our international business as evidenced by the strong market acceptance of our new Axium coil particularly in Korea, Australia and throughout Europe.

We also continued our launch activities for the SilverHawk system during the first quarter and just received European CE Mark approval for the RockHawk device on April 24. This approval gives us the ability to market the device in the European Union for both surgical and endovascular indications.

Currently our focus internationally is on training physicians, establishing key opinion leaders, conducting European clinical research, and developing specific product and procedure reimbursement strategies to support the broad dissemination of the atherectomy procedure and our products. We continue to expect international sales to grow at approximately 30% to at least $140 million in 2008 when compared to 2007.

Turning to our global neurovascular business. First quarter of 2008 neurovascular net sales grew to 30.9 million, representing an increase of 24% over the prior year quarter. Sales of our embolic products, which include our Axium coil and the Onyx Liquid Embolic System were up an impressive 38% over prior year quarter and 15% sequentially over the fourth quarter 2007. We estimate that ev3 is currently the #2 player overall in the worldwide neurovascular market, which we believe has the potential to grow approximately 15 to 20% per year over the next three years.

We are also optimistic about our opportunity to improve our position with the embolic coil segment of the neuro market given the positive response to the launch of the Axium coil.

In the first quarter, we saw an approximate 20% increase in both the number of accounts and revenue from new accounts ordering net Axium coils as compared to the fourth quarter of '07. Given this early launch progress, we expect the Axium coil to be a primary growth engine for our neurovascular segment in 2008. In addition, we also believe that our success with the Axium coil has a potential to generate positive pull-through of our neurovascular access and delivery products.

Now, I'd like to provide additional detail on our Peripheral Vascular business. Peripheral Vascular segment net sales in the first quarter of 2008 increased 76% to $64.1 million versus $36.5 million in the first quarter of 2007 primarily as a result of our FoxHollow acquisition. Excluding atherectomy revenues of $22.7 million, Peripheral Vascular sales increased 13% versus Q1 2007.

We're also pleased that stent product sales are up 21% over the same period. Although our first quarter results for legacy ev3 Peripheral Vascular products showed good growth, our atherectomy sales fell short of our expectations. This was due primarily to ongoing challenges related to US sales force integration as a result of our FoxHollow acquisition and elevated customer inventory levels of SilverHawk products, which we expect to continue to adversely affect our net sales into the second half of 2008.

Moving on to our product development and clinical programs, as we reported in our last call, we received 510(k) clearance from the US FDA for our RockHawk atherectomy use. This new addition to the FoxHollow atherectomy product platform provides the vascular surgeon with a new option to treat complex hard calcified lesions in peripheral vascular using a surgical cutdown technique.

We have several US centers that were taking part in our RockHawk physician preference test prior to full market launch and we've completed our first case. Initial physician response indicates that the new RockHawk cutter design is markedly better in cutting and engaging calcified lesions and offers a new treatment option to treat patients with severe disease.

You will recall that we also submitted an IDE application to the FDA in early February for the study of RockHawk System in combination with the SpiderFX Embolic Protection Device for endovascular use. Assuming FDA approval of the IDE, we expect to initiate this trial in the second half of 2008.

In summary, we continue to be focused on expanding our position in the large and underpenetrated Peripheral Vascular market of approximately $1 billion in the US. We believe our new sales organization and leadership now in place will improve our productivity in the US and grow atherectomy into markets around the world.

We will develop and implant referral programs to raise awareness and create sustainable referral pass. We are uniquely positioned in this market as the only company that can provide a full complement of interventional technologies including stents, balloons, and plaque excision device to treat peripheral artery disease depending on a patient's condition and physician preference.

And now we're investing in developing the next generation atherectomy products such as our recently launched SilverHawk with microefficient compression technology, which we refer to as MEC Tech and the RockHawk system to reduce procedure time and expand product usage. We will also support the necessary clinical trial programs to bring new products to market and support broader procedure adoption.

Before I turn the call over to Pat to discuss the first quarter financial results, I want to address the guidance that we provided in our press release this morning. As you saw in that release, we have issued new guidance for full-year 2008 of 425 million to $430 million of revenues and adjusted earnings per share of approximately 0 to $0.05.

In establishing this guidance, we took into account the factors that could affect our business in 2008 including the performance of our US atherectomy business, which continues to be adversely affected by the elevated customer inventory levels of SilverHawk, the ability of our US peripheral vascular sales force to take advantage of cross-selling opportunities, and the impact of competition and new competitive entrants into the marketplace.

Pat will provide additional detail in his financial review. But let me say that based on my review of the business, the strategy that we have underway and those currently evolving, I believe this guidance is appropriate. I am confident that we will achieve -- that this guidance is achievable.

With that business update, I'd now like to turn the call over to Pat for a discussion of our first quarter financial results and further discussion of the guidance. Pat?

Pat Spangler – Chief Financial Officer

Thanks Bob. I'd like to begin by covering consolidated first quarter net sales results. Consolidated sales increased 65% to $101.3 million in the first quarter of 2008 compared to $61.5 million for the first quarter of 2007. First quarter sales included $28.9 million of our total product sales and research collaboration. This net sales growth was driven by consistent growth across several of our major product groups including the pre-FoxHollow acquisition peripheral vascular business segment and the neurovascular business segment.

On a geographic basis, US and international first quarter 2008 net sales increased 89% and 32% respectively over the first quarter of 2007. In the US, our sales increased to $66.5 million in Q1 of '08 compared with $35.1 million in Q1 of '07 and this sales growth was driven mainly by our acquisition of FoxHollow.

Our international sales grew to $34.8 million in Q1 of '08, up from $26.1 million in Q1 of '07 and this growth was primarily due to continued market penetration of the EverFlex family of stents and the launch of the Axium coil. Changes in currency rates had a positive impact of approximately of $2.6 million on the first quarter 2008 net sales compared to Q1 of '07.

On a business segment basis, net sales of peripheral vascular products increased 76% to $64.1 million for Q1 of '08 compared with $36.5 million in Q1 of '07. First quarter net sales included $22.7 million of our total products.

Stent sales increased 21% to $24 million in Q1 of '08 compared to $19.8 million in Q1 of '07 primarily due to the increased market penetration of our EverFlex family of stents. Thrombectomy and embolic protection sales declined slightly in Q1 of '08 to $6 million compared to $6.2 million in Q1 of '07 mainly as a result of weaker sales of the Spider Embolic Protection Device. Procedural support and other net sales increased to $11.4 million, up 9% from Q1 of '07.

In the neurovascular business segment, net sales of neurovascular products increased 24% to $31 million for Q1 of '08, up from $25 million in Q1 of '07. Within the neurovascular segment, embolic product sales increased 38% to $17.9 million compared to $12.9 million in Q1 of '07 driven by the launch of the Axium coil and the continued market penetration of the Onyx Liquid Embolic System for the treatment of arteriovenous malformations of the brain or AVMs.

Sales of neuro access and delivery products increased 8% to $13.1 million in Q1 of '08 compared to $12.1 million in Q1 of '07 and strong sales of guidewires, catheters, and neuro-balloons. Research collaboration revenue resulting from our agreement with Merck & Company was $6.2 million for the first quarter of 2008.

In Q1 of '08, we achieved an overall consolidated gross margin of 66.8%. Excluding research collaboration, our product gross margin was 66.4%. When comparing Q1 of '08 to Q1 of '07, product gross margin decreased by three-tenths of a percentage point. This slight decrease in product gross margin was primarily due to additional excess and obsolete inventory reserves recorded as a result of the introduction of the SilverHawk LSM and MSM atherectomy devices with microefficient compression technology and retention costs associated with the employees of the FoxHollow operation in Redwood City partially offset by increased sales volumes.

On a sequential quarter basis, product gross margins increased by 5.8 percentage points. As a reminder, in the fourth quarter of 2007, we recorded an adjustment to our excess and obsolete inventory reserves for the planned discontinuation of the Primus balloon expandable stents and the SAILOR 0.035 balloon due to our strategic marketing focus on new product introductions and we also recorded additional charges for the write-up of the FoxHollow inventory as required under purchase accounting. These two items have approximately a 5 percentage point impact on the margin in Q4 and were not repeated in Q1. Q1 2008 margins were also favorably impacted by increased sales volume and improvements in manufacturing operations.

Operating expenses in the first quarter of ’08 increased in absolute dollars when compared to the first quarter of ’07 primarily as a result of the acquisition of FoxHollow. However, SG&A expenses as a percentage of net sales declined by 5 percentage points to 59% of sales in Q1 of ’08 as compared with 64% of sales in Q1 of ’07 as a result of cost synergies implemented in Q4 of ’07.

Amortization of intangibles increased approximately $4.1 million to 8% of net sales in Q1 of ’08 compared to 7% of net sales in Q1 of ’07 and was primarily due to the additional intangible assets recorded as a result of our acquisition of FoxHollow.

Our research and development expenses increased in Q1 of ’08 in absolute dollar terms. But as a percentage of net sales, R&D expenses were 12% of sales in both the first quarter of ’08 and the first quarter of ’07.

Ev3’s net loss for the first quarter of 2008 increased to $9.8 million or $0.09 per common share compared to a net loss of $9.5 million or $0.17 per common share for the first quarter of 2007.

Our first quarter 2008 EBITDA excluding charges for non-cash stock-based compensation was a positive $6.2 million compared to a negative $1.2 million in Q1 of ’07. A reconciliation of our EBITDA excluding charges for non-cash stock-based compensation to our net losses reported under GAAP, please see our press release issued earlier this morning. This reconciliation is also available on our website at www.ev3.net.

Our cash and short-term investment balance at March 30 of 2008 was $57 million. We have an existing undrawn credit facility and we believe that this credit facility along with our existing cash and short-term investments will provide sufficient liquidity and financial flexibility to meet our anticipated operating and strategic needs for the foreseeable future.

As Bob mentioned earlier, we have reset our guidance. We now expect our full year 2008 net sales to be in the range of 425 to $430 million consisting of 400 to $405 million of product net sales and $25 million of research collaboration revenue. For second quarter of 2008, we expect net sales to be in the range of 101 to $103 million consisting of 95 to $97 million of product net sales and $6 million of research collaboration revenue.

As a reminder, with the resignation of Dr. Simpson from our Board of Directors in early February, Merck has the right to terminate the collaboration and license agreement and they may exercise this right at any time within six months of Dr. Simpson’s resignation.

We expect a full year 2008 adjusted earnings per share to be in the range of 0 to $0.05 per diluted share based on approximately 104 million of outstanding shares. Adjusted EPS does not include pretax charges for amortization expense of approximately $33 million and non-cash stock-based compensation of approximately $19 million.

For Q2 of ’08, we expect adjusted net loss per share to be in the range of $0.06 to $0.09 per diluted share based on approximately 104 million of outstanding shares. On a quarterly basis, adjusted net loss per share does not include pretax charges or amortization expense of approximately $8.3 million and non-cash stock-based compensation of approximately $6 million.

Our Q2 earnings will be negatively impacted by expenses related to the consolidation of our manufacturing facility in Redwood City and our recent CEO transition. As a result of our revised revenue guidance, we will be undertaking an expense reduction program beginning in the second half of 2008 to reduce our expected annual net operating loss and increase our quarterly cash flow.

With that, I would like to turn the call back over to Bob for closing comments.

Bob Palmisano - President and Chief Executive Officer

Thanks Pat. Let me close by reiterating that my top priority will be to expand our global position in the Peripheral Vascular and Neurovascular markets by increasing procedural penetration, driving growth and the expansion in international markets, investing in the development of our next generation of products and pursuing a broad clinical trial agenda to bring new products to market and further validate the scientific foundation of our endovascular procedures.

With a real sense of urgency, we will focus on improving sales execution and operational efficiency to deliver outstanding products to our customers and create value for our shareholders. There is no doubt that we have work to do over the next several quarters. However, I am confident that we will be able to capitalize on the market opportunities in front of us and build a leading global endovascular business.

Finally, I want to thank the entire ev3 worldwide team for their efforts during the quarter. Your continued support and dedication will be vital as we continue to drive our business forward and work towards fulfilling our mission of improving the lives people with vascular disease through endovascular therapies.

With that, I want to thank you for listening today and for your interest in ev3 and look forward to reporting on our progress throughout the year.

Operator, with that, I would like to open up the call to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Jason Mills representing Canaccord Adams. Please proceed.

Jason Mills

Hi guys. Thanks for taking the question.

Bob Palmisano

Good morning.

Jason Mills

So the first question is, with respect to guidance, I wondered if you could give us a bit more granularity Bob, with respect to the guidance. I commend you for finally seemingly taking a hatchet to the previous guidance and perhaps giving folks some comfort that you can actually hit guidance for once here? But I wondered, sort of, you give us the research collaboration revenue, which just sounds like you are feeling could possibly go away, perhaps you could give us some anecdotal feedback or sort of risk adjust that or risk weight that as far as the possibility that Merck decides to eliminate that contract, number one. And number two, within the revenue portion perhaps more granularity with respect to your expectations at least by division for neurovascular and peripheral vascular? And then I will ask a few follow-ups.

Bob Palmisano

Okay, thank you. When I first -- my first day on the job here I think I have reached out, spoke to a lot of people that are shareholders and analysts that follow the company. And I was asked about guidance and I said that when we plan to have to redo our guidance on our May 2nd call is that most likely we will do that. And I also said that, if I was not comfortable giving guidance at that point, I wouldn’t give it because I didn’t want to put something out there that I didn’t have confidence in. So we spent a lot of time over the last four weeks looking into this and getting our arms around this. So the number that we have given 425 to 430, I feel very very good about, very confident about. So that’s -- I wouldn’t put it out there given I think that you guys will probably give me a pass, if I had asked for it, this early in my tenure.

Secondly, regarding the research collaboration, it’s 25 million for the year. So if you look at the back half of the year, it's about 12.5 out in front of us. We have considered that in our guidance whatever risks may be there, whether -- in the whole guidance, there are risks and opportunities mixed in there. So we have taken that into consideration that there is several things that could go on there. But I will also say is that, it’s not our expectations that this research collaboration will be canceled. So, we've considered a lot of risks and opportunities. I think that number that’s out in front of us is a very good number.

Jason Mills

Okay. And then just part of the question that you didn’t address was, within the 400 to 405 million of product related revenue, could you give us an expectation with respect to the breakdown between neurovascular and peripheral vascular? And I will just ask my follow-up on that. With respect to adjusted earnings per shares Pat, you said that it included expenses associating with the consolidation of the FoxHollow Redwood City, manufacturing facility. My guess is that those expenses when we look at this business over one or two year period of time will not recurring. So when we look at sort of a recurring adjusted earnings number for the year excluding those and excluding the expenses associated with the former CEO, what sort of guidance range would that imply for earnings? And then I'll just throw in the line from here, what are you seeing out there in the marketplace with respect to growth in the atherectomy market itself understanding you are seeing some pressures on your own business, but once you get back to sort of square one with the sales force what sort of market growth do you feel like you will be participating with the SilverHawk business? Thanks guys.

Bob Palmisano

A lot there, Jason.

Jason Mills

Fair enough.

Bob Palmisano

Let me talk about the business, because I don’t think we break it down specifically as to what we expect growth in each one of them. I can give you a general view though. If you look at four areas, look at peripheral vascular, look at that in two ways, the legacy ev3 products and then separate from that atherectomy, look at neurovascular and then look at international, is that three of those four areas are performing well. International has really rocked the charts and is growing. Neurovascular is in terrific shape and growing. The legacy ev3 business is in good shape and growing. It’s the atherectomy business that for the remainder of this year is challenged. But we really have confidence in this business. I really want to make that point.

I learned more as I said in the text, I met with 19 endovascular specialists last weekend and this product in the future I think is going to be a shining star of ev3. There is work to do. In this year, we are challenged by the fact that we have lot of inventory out there, we've disrupted the sales flow as somewhat by merging the sales forces and we have disrupted the referral networks, all of which we are working very diligently on. Now on getting back to really a good spot on it, we feel confident that we will. So if you look at the company ahead of those four areas, three of them are performing pretty well. One is currently challenged and we have spoken a lot about that, the company has spoken a lot of that, but it's still going to be a great business for us in the future. So that’s how I would breakdown those businesses. And then Pat you want to address the other part of the question?

Pat Spangler

Yeah. Jason with regard to the actual expenses, I will give you a range kind of what we expect in Q2 for those charges. The plant consolidation expenses will be somewhere in the neighborhood of 2 to $3 million that we will incur in Q2. And the expenses associated with the CEO transition were kind of all-in fixed about $3.2 million.

Jason Mills

And that all falls by in the second quarter?

Pat Spangler

Yeah, pretty much. The majority of that -- there might be a slight spillover for Q3 on the plant consolidation, but it won't be material.

Jason Mills

Okay. So when we look at your adjusted EPS as it was defined both previously and now, but excluding those we would take out approximately 5 to $6 million or I guess add back 5 to $6 million to get to that?

Pat Spangler

That’s correct.

Jason Mills

Okay. And then the last question was sort of what you are seeing Bob in terms of atherectomy growth, market growth or peripheral artery disease market growth, I think there has been somewhat of a – a bit of consternation on the part of investors, FoxHollow was sort of the growth leader and these were hot stocks at one point and I think there is some consternation about growth in the market slowing and perhaps it isn’t growing much, I tend to think there is some growth, what are you seeing?

Rob Palmisano

Well, I think there is -- on the two pieces, and certainly the stent and balloon side of the business is growing and that’s been well documented and we are growing as well. Atherectomy is not growing as much as we would like and perhaps it's flat right now. And what drove that business to a great extent was the referral system that was in place. There was a -- and that had a big effect the on the business. And so we are reestablishing in two ways what we think we will be an effective, sustainable and scalable referral system for the company. Part of that is collaboration we have with the company called BioMedix, as we have recently partnered with them to develop a -- basically a medical provider communities in the US that are focused on increasing the diagnosis and treatment of peripheral vascular disease. And that the BioMedix and that we will sell this through -- we won't sell this, the BioMedix sales professionals were responsible replacing these units of that in offices of referring physicians and we will help them with lead and getting them in this office. We think that has some effect.

Secondly is that we have reestablished a group of people in the US called Referral Marketing Managers and currently there is about 10 of those that are kind of like the old, what they call the PVC, Peripheral Vascular Consultants, but are more in strategic areas. So we have reestablished that to some extent. Thirdly is that we have launched SilverHawk internationally. And we now have also the approval for RockHawk, we just got that CE Mark approval a week or so ago. So I think that in total that the business will grow. The procedures are from what we understand flat and I think that that is driven by more in the US. The referral networks need to be really gotten – really get some traction behind those and I think we have taken some actions in there, and in the future we will probably do better in that area and we will attempt to do that.

Jason Mills

Great. Thanks guys. Good luck, Bob.

Bob Palmisano

Thanks.

Operator

Your next question comes from the line of Tom Gunderson representing Piper Jaffray. Please proceed.

Tom Gunderson

Hi. Good morning. In the press release and in your prepared remarks, you talk about one of the issues being difficulties with cross-selling of the integrated sales force. It seem pretty simple on paper. You take a salesman that had been selling stents into an account and sell more atherectomy and take somebody that's been selling FoxHollow into an account and get him to sell more stents simply because he is there and has those products in his bag. What was unanticipated in that cross-selling opportunity that was outlined back in October?

Bob Palmisano

Yeah, first of all, I think that our sales force today is made up of -- our field sales force is made of about 60% of the previous FoxHollow reps and about 40% of ev3 reps. And what we have found is that the legacy FoxHollow reps are having an easier time selling balloons and stents than the legacy ev3 reps are having selling atherectomy, and we are getting a lot better at this. Progress is being made. I think we underestimated initially the amount of training that needs to take place. This is a much more technical device. Doctors like to have a lot of guidance in the OR when they are doing these procedures with reps present. That was where things that were a little bit different than what was going on in ev3. But I think that we realize this, we are taking the steps. The majority of our sales force are FoxHollow reps. So we expect that to change as time goes on, but that was what I think underestimated, Tom, was the amount of technical systems that is needed by a physician or desired by a physician from the sales force to do these procedures.

Tom Gunderson

Okay. And then last quarter call, there was a lot of detail on Novation and the increases that you were seeing in some of the product lines because of the recently instituted Novation contract. I think the assumption out there is that that's an accelerating benefit to your revenues as more hospitals get comfortable and get into the volume pricing. Can you give us a little bit more color on how that’s going now in Q1 and into April?

Bob Palmisano

I think that we had, from what I understand we had some early successes in gaining product evaluations at Novation account. I think there is a lot more to do. It's just the keys to the kingdom, probably not, I think it's one of the pieces that we have in front of us then I think that where we are today, I think we are satisfied, but this is just one of the things that we need to keep on working on.

Tom Gunderson

Okay. And then Invatec, there is some things in the K talking about Invatec this year. Does your guidance assume steady supply of the current Invatec products through the end of the year?

Rob Palmisano

Yeah. We will keep on getting product from Invatec throughout the end of the year. I think we can keep on selling until mid 2009. We certainly have an internal development process going on that will provide us with product that will be as good as better than that product so we don't think there will be any disruption there at all.

Tom Gunderson

And then last question and I'll get back in line is kind of a reformulation of one that Jason asked, but you said that you are comfortable with guidance relative to all parts, but including Merck. Dr. Simpson resigned in February. It's now May. What kinds of conversations, what kind of indications have you gotten from Merck that everything is still fine?

Rob Palmisano

Well, I think that the six months period is up in August. Yeah, so we have not gotten any indication from them that they plan on canceling this collaboration. We have taken into consideration in our guidance that a bunch of things including that there may be some adjustments in that, but we don’t know any thing and if we do something more than we tell you, but I just don't know anything more than that. I will tell you this is that we do know that the relationship is a lot better than it has been. We are getting a lot of feedback that they are happy with what the way this thing is going. How that pans out I really don’t know, but it's considered in our guidance.

Tom Gunderson

Okay. Thanks.

Operator

Your next question comes from the line of David Lewis representing Morgan Stanley. Please proceed.

David Lewis

Hi guys. It's Ryan shooting for David Lewis. My first question has to do with the FoxHollow inventory, after the quarter is gone by, just curious if you have better visibility into the inventory? I mean if you have been able to identify the number of accounts with more than normal inventory that you can give us that's been like the percentage of those accounts?

Rob Palmisano

I think I don't think we can get really specific, because we didn’t -- there's no way of knowing exactly but we do know from sampling that there is enough out there that's going to affect us into the second half of the year. I would also say that the issue of having a lot of inventory out there is also not just related to having a lot of inventory, it's the ability of getting patients in to do the procedures. And I think as our referral programs pick up is that we will burn through that inventory faster than not, and I think that's what really happened is that there was lot of inventory was bought and sold and there wasn't really the same mechanisms in place to move that inventory through that had been there in the past, so I think that's where we have the focus.

David Lewis

Okay. And second question has to do with the neurovascular division and the competitive environments and there were some comments made by Boston that J&J is back in the market in embolic protection. Just curios as to what your comments are and what you are seeing there?

Rob Palmisano

Well, we think our neurovascular business is a real growth engine for the company. I understand that you are right is that they are back in the business, but I think that our product offerings particularly the new coil, the Axium coil has been so well received. I think that we are going to be in great shape there. We have received just great physician feedback on our Axium product. It’s the way it loops, the way it packs, the detachment device, I think that we are going to be in good shape and I think that this is going to a major growth engine for ev3 in our neuro business.

David Lewis

Okay. And the last one is I think last call you gave some more detail on the economics of the Merck agreement and there is two portions to that, I mean one is the exclusivity portion and then is another portion. Can that be canceled in part and a whole and what percentages is the exclusivity portion?

Rob Palmisano

The agreement can be canceled totally or it can be or the two pieces of it, the exclusive part or the collaboration part can be canceled or kept independent of one another.

David Lewis

Okay. Can you just breakdown the percentage of how much is each?

Rob Palmisano

No, I can't. I'm sorry. I don’t know it.

David Lewis

And then just the final question just kind of a housekeeping thing. What was another income this quarter, was it FX…?

Bob Palmisano

Yeah, it was mainly FX.

Pat Spangler

Yeah, improved FX on our foreign receivables.

Operator

Your next question comes from the line of Mike Weinstein representing JP Morgan. Please proceed.

Mike Weinstein

Thank you. Good morning. Can you here me?

Bob Palmisano

Yes, good morning.

Mike Weinstein

Okay, thanks. I've got a lot of different questions or some good topics raised. Let me start this on the sales force side. You seemed to highlight that one of the principal challenge has been getting the ev3 reps to sell the SilverHawk and atherectomy, which is a more missionary sale, but it still seems on flip side, it's pretty big challenge to get a former SilverHawk rep, which is now you said 60% percent of your sales force to sell whole bag of products to go from doing a missionary, sale to a bag of products and that has been -- both sides have been really a central challenge for the company since the integration and all the turnover in the sales force. So, I guess a couple of things, one, can you tell me how you are going about doing that with the reps? Can you give us an update on the number of reps you have and give us your view at the point on the stability and quality of the sales force? Thanks.

Bob Palmisano

Yeah sure. I think, what I said was that the current field sales forces made up of about 60% of FoxHollow, about 40% of the ev3 reps. And what we have found is that the reps, the former FoxHollow reps are having an easier time selling Balloons and Stents then vis-à-vis. And what we -- the reason for that probably is you know, they are more familiar with it and doctors lots of time use multiple products in one procedure and they are used to doing that. On the atherectomy side, this is a very, very different kind of product that former ev3 reps have to learn a lot about or still in the process of learning about. Now this will all come together we think in a good fashion, it's just that we are there yet. And you have to combine that with the fact that we are not -- is that the referral patterns that formally had have are different. So there's not that automatic referral system that would help the rep with that sale, but we're addressing that, and I think we'll get a lot better at that. There are, I think, about 145 reps in the field, so it gives us the largest sales force that is dedicated to endovascular. I think this is a real advantage for us. We have changed our senior management and have I think in my opinion a great leadership in the commercial end of peripheral vascular, but this takes -- this isn’t, you don’t flip a light switched on and it goes on and off automatically. We are seeing progress. We will keep on upgrading our filed sales force and looking at it and upgrading it, making it better and giving more training and giving more support in terms of referrals, clinical date and all that stuff that where we will make that business -- that’s really where we will make that business go.

Mike Weinstein

Okay. And then on the referrals sales force, one of the early steps that was taken that may have been a mistake was the dramatic reduction in the size of referral sales force, which is obviously squeezing off some of the life blood of the atherectomy business. You intend to rebuild that base -- it does sound like the strategy for reintegrate and that is different from what FoxHollow management has. So can you just spend a minute that?

Bob Palmisano

Yeah, there was two pieces to it. The system that was in place with FoxHollow was really terrific, but it wasn’t sustainable or scalable. It was just wasn’t going to work long-term that way. So what we are developing is kind of hybrid of that in which we have -- as I mentioned before this agreement with BioMedix that will help -- it’s a diagnostic device that will help get patients diagnose and into endovascular specialist for treatment. And secondly, is that we now have what we call a referral marketing manager to a group that will help drive that. So we think both these aspects are sustainable. This will continue to revolve. I mean this is an important issue, in this business as to how to get referrals. I mean this is very under penetrated market. I mean we have -- there are great opportunities. We have -- there are -- so I heard at this meeting last week there are 17 and 19 million people in the US walking around peripheral artery dieses and about a million and half get treated. So there are lot of opportunities out there to do that and there needs to be education on our part and education on primary -- and deploy a primary care physicians and a method of valuating them and getting them to physician, endovascular physician that can treat them. So I think this is big issue from the company, when that is evolving and when that we are focused on and when we get it right, we will continue to make progress. So once we get it right, we will have a greater positive effect on that business.

Mike Weinstein

Okay. Two final questions and I will jump back in the queue. The R&D spend in the quarter was down pretty dramatically, it really takes you back to a level where ev3 was prior to the acquisition of FoxHollow. So can you give us a visibility on what’s going on there, what programs at this point have been flashed? And then the discussion you had about cutting expenses in trying to improve the profitability of the company, ev3 has been focused on for a while. So given how much time has been spent on that and where the company is today, where do you see opportunities to improve the profitability on this revenue basis? Thanks.

Pat Spangler

I don’t know, I don’t think we have cut spending much in R&D, particularly during the first quarter. I think that we are running 13 to 14% of revenues in R&D and I think in that area, I think that’s pretty similar to where the businesses before and its certainly on our largest sales basis, there are more absolute dollars being spent in the R&D area.

Mike Weinstein

If our numbers are right or maybe you have some numbers that are wrong, the 11.7 million R&D in the first quarter, and just give me a sense that second and third quarters last year with 11.3 million and 10.7 million and that’s when revenue worth 65, maybe we have some numbers around that, that’s not fair about the …?

Pat Spangler

Yeah, you know, Mike, I think comparison quarter-on-quarter for first quarter they were more than 12%. But in terms of the overall absolute spend, basically what we spend every year is that we look at research and development and clinical spending. And obviously some of the clinical programs that we’ve initiated, the timing on those and the ramping on those have a difference in terms of when the spends fall on a quarterly basis.

Mike Weinstein

Okay.

Bob Palmisano

Just in the other part of your question, I would say that most of the clinical work and R&D programs have been geared more towards the Balloon and Stent side of the business and I think that we will probably move more of those dollars, not less dollars, but just switch those dollars to support some really good signs driven clinical work in the atherectomy business.

Mike Weinstein

Okay. That’s helpful. Thank you. I will jump back in the queue.

Operator

Your next question will come from the line of Rick Wise representing Bear Stearns. Please proceed.

Rick Wise

Can you hear me clearly?

Bob Palmisano

Yes.

Rick Wise

Okay, great. Good morning Bob. Can you expand on your comment a little bit more, early in your comment, your initial commentary you talked about narrowing the business focus, and secondly, looking for products was the most leverage. I just want to make sure I understood what you are talking about, is this suggest we could actually see some additional divestiture, are you talking about targeting sales and R&D resources with existing products and markets. Just to clarify that a little more?

Bob Palmisano

Yeah, thanks Rick. They’re just piggybacks on what I just said is I think that what we want to do is focus more of our R&D and clinical work on the atherectomy business. This is a great potential and where we want this business we have a very dedicated loyal almost cult-like following of a group of physicians that do these procedures. We have to get that broader. And, I think one of the key ways of getting that broader into the more -- the mast majority of endovascular surgeon is to provide them with the kind of data, the kind of sign that would be compelling to them. So what we want to do is focus a lot of our clinical, our future clinical work on getting those studies done. So on a good scientific basis, doctor who don’t do atherectomy will now feel more comfortable doing atherectomy. Secondly, in product development is that there are a lot of projects underway in the company and we have to really focused on the one that have the most upside leverage, things like the RockHawk device and neck tech and things like that that we think will drive the business forward. But I would say that we don’t anticipate -- nothing that we are looking at all in terms of divestitures, it's just a matter of focusing on our company and our resources and the things that we think that have the most upside leverage.

Rick Wise

Okay. Again going back to your comment about hiring new top sales talents, if I am quoting you correctly, maybe again a little additional prospective, is this going to be incremental over and above your existing sales force and maybe if you could and I know its early to ask this question, but maybe to help us think about SG&A longer term whether in dollars or is a percentage of sales. I mean would it be your hope that might be end of this year your as specific dollar are up or we are not going to see much change in that as we look out to '09 or my be is there percentage of sales your thinking about once you get a normalized sales level any kind of color will be great.

Bob Palmisano

Regarding the sales organization, I think that’s behind us. I don’t think we tend on adding any other organization -- making any organizational changes there. We have a guys name Rich there who heads our commercial part of the business in the US that is doing the terrific job. He has brought in some new VPs and we have also some new Regional Managers. So I think that’s pretty much behind us. Maybe Pat can comment on the SG&A line. I don’t think we are ready to give 2009 guidance on this, but we can tell you where we are.

Pat Spangler

Yeah Rick, I mean, I think in the past what we have done is we set our kind of longer term target than SG&A we are kind of in that 42 to 44% kind of range and we are still about shooting for that as we get towards to end of '08 and into '09. So I think they are just, on a relative basis that’s what I would use in terms of by modeling, I guess.

Rick Wise

Okay. Two other follow-ups real quick, on SilverHawk was there any acceleration of accounts reordering and can you quantify at either first quarter versus fourth quarter or maybe as you went through the January, February, March and now we are done with April. Have you seen an acceleration, in the number of accounts where you are ordering SilverHawk or to get any perspective would be welcome

Bob Palmisano

I think that we see in some of the larger accounts a slight tick up recently there, but let me be clear, I mean there is still inventory out there that we are working through and this is going to be with us through the second half of the year at least partially through the course.

Rick Wise

Alright, just time to get better sense, so April might have been better than March and March might have been better than February?

Pat Spangler

Yeah I think that we see our daily sales trends ticking up slightly.

Rick Wise

That’s great. And last just sort of finishing, expectation kind of question for you Bob. Is there a month or so as you walk through the door maybe just giving your perspective in running other companies, what are your general thoughts back systems and information flow, and maybe just you know what's the biggest positive surprise, I know you will say people how great they are, but the biggest positive size that maybe your biggest incremental concerned or negative that you did might nor have appreciated, say walked in the door? Thanks.

Bob Palmisano

On the, I wouldn't say its negative surprise, but its something that from running other medical devise companies, I found a little bit strange was really the lack of hardcore clinical data to support the atherectomy business. Then I think this is very, very critical of getting from a cult-like early adopter phase into a mass majority phase. So we are going to do that, so I think that was a surprise and I think that -- the other negative surprise is the companies make acronyms, they can hardly understand what people are talking around here, so I need to translate her most of the time. On the positive side it was just great to hear customers, doctor's talk about ev3, the relationship with the ev3 they level of the products, the potential for atherectomy if we get all our ducks in a row. So I think that obviously, the people are great. But I think that getting out and meeting customers and hearing them first hand and understanding the bear enthusiasm that this is the market, it's untapped, it has re-potential and that we have the opportunity to really take this. That was really great here. So that’s my early take on them.

Rick Wise

Great. And the systems question?

Bob Palmisano

Well, I don’t have really much add there, I think internally our systems are pretty good. You could get a lot of information, there is not a lack of information around this company I mean we had every bit of data internally that we need so we don’t need any other infrastructure and I think that is tremendous amount of information going on in the company.

Rick Wise

Great. Thank you.

Bob Palmisano

Thank you.

Operator

Your next question comes from the line of Charles Chon representing Goldman Sachs. Please proceed.

Charles Chon

Hi, good morning everyone.

Bob Palmisano

Good morning Charles.

Charles Chon

Thanks for taking the call. First of all, were there any revenue of procedural change you saw during the quarter, was it pretty steady throughout or was there an acceleration as we move through the quarter. I am just trying to understand what the momentum was as we exit the quarter going into the second quarter?

Bob Palmisano

Maybe Pat could take that. I wasn’t really here in the first quarter? So I don’t know what the momentum was throughout the quarter.

Pat Spangler

Yeah Charlie, I don’t think that I mean we really haven’t been kind of down at the street level measuring procedures. We have seen pretty much of a what I would call a constant procedure amounts and maybe a slight increase in procedures in certain of our talents. But universally, I think what we are seeing right now is pretty stay state of procedures overall.

Charles Chon

Okay. So then just looking at the full year guidance here, the revenue guidance will suggest a meaningful acceleration at back half of the year and that’s based on what was reported here in the first quarter and then the guidance for the second quarter which calls for flat to 2% sequential growth. It just seems that there needs to be a sequential acceleration of 5% or rather sequential step up at least $6 million from the second quarter and third quarter and fourth quarter just to achieve the low end of your full year revenue guidance. So can you tell me what exactly you are seeing just to see that acceleration in the second half of the year, does the revenue acceleration reflect a SilverHawk franchise coming up form all these inventory issues?

Bob Palmisano

Well we think that will get better as the years go on, but I think when you look at the company in total, the real growth drivers are going to be international in neurovascular and the legacy ev3 peripheral vascular business. I think that the atherectomy business as we said still has inventory out there. We still have to do better in terms of the referral programs. So, I think that you are saying in those numbers is coming from those other areas.

Charles Chon

Okay. We haven’t seen those sorts sequential increases before, so I am just kind of wondering, how much margin there is for error or cushion to the down side?

Bob Palmisano

Well, I think that -- as I tried to say -- I didn’t feel obligated to give guidance in this call. Since getting into the business and understanding it best I can and asking a lot of questions and spending a lot of time on this, we feel very confident about this guidance.

Charles Chon

Okay. Alright understand. And just a quick follow-up, can you speak to what happened to procedural support and other revenues they were down sequentially pretty significantly and I am just kind of wondering what happened there? Thank you.

Pat Spangler

Yeah, I guess Charles, I mean nothing severe within the context of it. We've talked a little bit about that our Spider products were up a little bit. But in general, I mean no main big drivers in the category itself.

Operator

Your next question will come from the line of Joshua Zable representing Natixis. Please proceed.

Joshua Zable

Everyone thanks for taking my call. A lot of my questions have been asked, but just some quick clarification. Just first, on the atherectomy market, I know Jason asked earlier, you said you guys were looking at flat growth. And I just want a clarification if you are looking out there in terms of your own growth or the market in general that sort of the first question?

Bob Palmisano

I think we look at them pretty similarly. I think that there are some competitors placed, we know that will get into the market or in the market, and that’s not a significant factor to us here at all. You have take competition seriously. We still think that from a technological point of view and from an operational point of view as we have big advantages there. So we just see it’s more of what we said previously, Joshua, in terms of what we think the market is pretty flat, will be pretty flat in atherectomy for the remainder of this year, not in terms of procedure, but in terms of our sales. We think procedure will outstrip our sales because of the inventory issue.

Joshua Zable

Okay. And then just in terms of the competitive landscape, I know you touched on that just briefly there, obviously some competitor did some stocking out there. I know previous comments were that you know, obviously, they need to be taken seriously, but you hadn’t seen an adverse effect, you sort of reiterated that. Are there any anecdotes of sort of people trialing competitive products and coming back to your products that gives you confidence or just protecting your accounts or just some commentary or color?

Rob Palmisano

Yeah, I mean, at this meeting I was to last week, most doctors there have tried all the competitive devices, either in a trial, being a part of a trial or actually using it in procedures. And what I heard time and time again is that the SilverHawk product is advantageous from a technological point of view or anything that they have tried.

Joshua Zable

That’s good to hear. And then just in terms of trends, I know we spoke about this on your first day here that trends seem to be pretty good when you last reported sort of saying that guidance was online, I realize this wasn’t you necessarily, but then it seem like trend sort of changed or somewhat obviously the guidance changed. Can you just kind of give us any sort of idea in terms of trends, how they started the year, how they ended the quarter and sort of where you see them now?

Rob Palmisano

I think that what we said is that the second quarter we see that it's – it looks like a slight tick up in our daily sales rates. Hopefully that will continue, but I think that the real trends that we see are in the – that we can really kind of bank on, continuing our growth in our international markets are that’s just humming along and under great management and a great team. Our neuro business is very very strong, and our peripheral vascular business, particularly the balloon stent side is a very very solid growth. The atherectomy business that, if we look is flat right now and we have – that’s up to us to fix and we will do that.

Joshua Zable

Okay. And then just one final housekeeping question here. I know a number of people sort of asked about the Merck collaboration and sort of risk there. Can you give us, I don’t know if you have it handy, the expiration date of sort of when it passes that we know we are locked in for the rest of the year?

Rob Palmisano

Well I think the date is somewhere in the beginning of August. I am not sure whether it’s a 6, 7, 8, something along those lines of August that Merck, according to the agreement, could cancel it. As I said we have not heard that that they -- and we don’t expect them to cancel it.

Joshua Zable

Great. Thanks so much, guys.

Operator

Ladies and gentlemen, this concludes our question and answer session. I will now like to turn the call back to Mr. Bob Palmisano for closing remarks.

Bob Palmisano

Yeah, thank you, operator, and I would like to thank everybody for joining us today, and I look forward to talking to you further and reporting on our progress in future calls. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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