Micrus Endovascular Q4 2008, Earnings Call Transcript

Micrus Endovascular Corporation (MEND)

Q4 2008 Conference Call

May 8, 2008 10:30 ET

Executives

Jody Cain - Lippert/Heilshorn & Associates, Investor Relations

John Kilcoyne - Chairman and Chief Executive Officer

Bob Stern - President and Chief Operating Officer

Gordon Sangster - Chief Financial Officer

Analysts

Angela Woodall - Oppenheimer.

Eli Kammerman - Cowen & Co

Shaun Bevick - SIG

Juan Sanchez - Ladenburg Thalmann

Spencer Nam - Summer Street Research Partners

Suraj Kalia - SMH

Presentation

Operator

Welcome to Micrus fourth quarter fiscal year 2008 financial results conference call. At this time all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, May 8, 2008.

I would now like to turn the conference over to Ms. Jody Cain. Please go ahead.

Jody Cain - Lippert/Heilshorn & Associates, Investor Relations

This is Jody Cain with Lippert/Heilshorn & Associates. Thank you for participating in today’s call. Joining me from Micrus Endovascular are John Kilcoyne, Chairman and Chief Executive Officer; Bob Stern, the Company’s President and Chief Operating Officer; and Gordon Sangster, Chief Financial Officer.

This morning, Micrus released financial results for the fiscal 2008 fourth quarter and year end. If you’ve not received this news release or if you’d like to be added to the Company’s distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with Amy Higgins. This call is also being broadcast live over the Internet at www.micruscorp.com and a replay of the call will be available on the Investor Relations section of the website for the next 30 days.

We ask that, during the Q&A portion of today’s call, you limit yourself to one question plus a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask questions within the one hour we have allotted for this call.

Before we begin, I’d like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal Securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review Micrus Endovascular’s annual report on Form 10-K for the fiscal year ended March 31, 2007 and subsequent filings made with the Securities and Exchange Commission. Furthermore, the contents of this conference call contain time-sensitive information that is only accurate as of the date of the live broadcast, May 8, 2008. The Company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of the conference call.

With that said, I’d like to turn the call over to John Kilcoyne. John?

John Kilcoyne - Chairman and Chief Executive Officer

Thank you, Jody. Thank you, everyone, for joining us this morning. I’m pleased to report another quarter of record revenues and a solid finish to the year with many accomplishments. Our revenues for the quarter were $19.7 million, up 23% versus the prior year and up 7% from the third quarter of fiscal 2008, which included nearly $1 million more in sales to our distributor in Japan.

For the year, our revenues totaled $69.2 million, up 18% over fiscal 2007. I’m also pleased to report a continuation of the rebound in procedural volume in North America. Our fourth quarter revenues from North America totaled $10.2 million, which is up from $8.5 million year ago and up from $8.6 million in the previous quarter. This represents an increase of 19% year-over-year and 18% sequentially.

Additionally, we are reporting another strong quarter in Europe where our revenues totaled $6.7 million, representing an increase of 21% year-over-year and 11% sequentially.

New products continue to be major contributors to our growth. In fact, products introduced during the past 24 months represented 27% of total revenue for the quarter.

Most notably, our Cashmere coils comprise 17% of total revenues. Importantly throughout the year, we took significant steps to support our continued growth. I’d like to review some of our accomplishments. We strengthened our hemorrhagic business by commercializing important new products, including the ENZO microcatheter, which serves an entry to new accounts. We introduced the Empower, a more efficient green detachment system; and we launched our Cashmere Platinum and Cashmere cerecyte microcoil systems which continue to gain share.

We also advanced our research and development on a number of new products for introduction this fiscal year, which Bob will discuss in a moment. Last month we entered a partnership with Chemence Medical Products to jointly develop a liquid embolic for the treatment of aneurysms. We invested in revascularization through our acquisition of ReVasc Technologies and in clot removal through our partnership with Genesis that will enable our expansion in the ischemic stroke market.

In March, we filed for an IDE to initiate a US clinical trial for our PHAROS B test balloon expandable stent for the treatment of stenosis and neurovascular arteries. We anticipate beginning US enrollment once we receive approval from the FDA, which could be as early as this summer with European and Asian sites to start in the early fall.

At present we have approximately 375 patients enrolled in the Cerecyte prospective randomized trial led by Dr. Andy Molyneux. With the recent addition of several high-volume U.S. centers, Dr. Molyneux believes enrollment will be completed this calendar year, resulting in the potential submission of study results to a peer review journal in the latter half of 2009.

To better support our growth, we have invested in areas such as clinical affairs, marketing, fuel service management quality and research and development, as well as expanded our manufacturing capabilities at our Florida facility to reduce our manufacturing costs over the long run. We also divested non-core cardiac and peripheral assets we acquired with the purchase of Vascon. Complementing our Asian efforts, we have expanded our geographic reach into five additional countries in the Middle East and Eastern Europe.

We have also achieved a significant milestone in Japan with the regulatory approval for our stretch-resistant coils. This approval allowed us to expand our product offering, resulting in a 180% quarter-over-quarter increase in coil usage and a record number of coils used per case. These accomplishments position us well to continue our strategy to increase our geographic footprint, enhance our quest for leadership position in the hemorrhagic market and to further expand into the ischemic stroke market.

With those comments, I would like to turn the call over to Gordon Sangster for a financial review. Gordon Sangster?

Gordon Sangster - Chief Financial Officer

Thanks, John. I’d like to review our fiscal 2008 fourth quarter full year financial result. For the fourth quarter, as John mentioned, we reported record quarterly revenue of $19.7 million, up 23% from $16 million reported in the fourth quarter fiscal 2007 and up 7% from our previous record revenues of $18.3 million reported in the third quarter of fiscal 2008. This increase was primarily the result of higher revenues in the Americas and Europe with strong contributions from new product introductions.

For the quarter, gross margin was 73%, which compares with 75% in the prior year fourth quarter. Gross margin in the fourth quarter of fiscal 2008 was primarily impacted by manufacturing inefficiencies at our MDT facility as we transition from manufacturing cardiac products, which were recently sold to Merit Medical, to a neurovascular focus.

Our objective is to sustain margins in the mid to high 70s, but we do expect quarterly fluctuations due to product mix and the level of distributor sales. R&D expense for the fourth quarter of fiscal 2008 increased to $3.6 million versus $1.9 billion for the fourth quarter of fiscal 2007. The increase was mainly due to $900,000 in expense related to our acquisition of technology from Genesis Medical Interventional.

R&D expenses for the fourth quarter of fiscal 2008 included $154,000 in stock-based competition expense, up from $87,000 in the fourth quarter of the prior year. We expect R&D expense to increase as we continue to work on product improvements, expand product lines and explore new product opportunities and technologies in both the hemorrhagic and ischemic markets.

Sales and marketing expense for the quarter increased to $8.8 million, up from $6.9 million last year. The increase is attributable mainly to an increase in personnel and travel costs due to higher headcount and an increase in sales incentives resulting from higher sales. Sales and marketing expenses included stock-based competition expense of $382,000 in the current quarter, up from $224,000 last year.

In terms of our field sales force and clinical team, we currently have a North American direct force of 40, a European direct force of 20, and an Asia-Pacific direct force of 3. We also added a new Director of Latin American Sales in February, we will continue to monitor our field force levels and will staff appropriately. In particular we may add to our clinical and sales support personnel at both the direct and the distributor level in Asia and Europe to ensure a high level of global physician support for all Micrus products.

As we continue to increase the size of our US sales force increase spending on additional sales and marketing programs and expand into new geographies, we anticipate that sales and marketing expense will continue to increase.

G&A expense for the fourth quarter of fiscal 2008 was $8.4 million versus $5.1 million in the fourth quarter of fiscal 2007. The increase was mainly due to legal fees of $3.2 million compared to $758,000 for the same quarter last year. This current quarter included fees of $2.2 million for the services of attorneys and a third party accountant in connection with the US Department of Justice monitorship established under the Company’s 2005 deferred prosecution agreement. The monitor’s final report was submitted to the DOJ on May 1, 2008. Stock based competition included in G&A was $774,000 up from $561,000 last year.

Looking at our bottom line, the net loss for the fourth quarter was $6.2 million or $0.40 per share, on $15.6 million weighted average shares outstanding, which includes $1.5 million in stock based competition expense or $0.09 per share. The quarterly net loss also includes $3.9 million or $0.25 per share in non-routine charges, including technology acquisition costs and legal fees. This compares with the fourth quarter of fiscal 2007 net loss of $1.4 million or $0.09 per share on $15.1 million weighted average shares outstanding, which includes $945,000 in stock-based competition expense or $0.06 per share.

Reviewing our fiscal year 2008 financial results, revenues increased 18% to $69.2 million and the gross margin was 75% up from 74% in fiscal 2007. Operating expenses for fiscal 2008 were $70.1 million up from $51.3 million for fiscal 2007.

We reported a net loss for fiscal 2008 of $16.3 million or $1.05 per share on $15.4 million weighted average shares outstanding, which included stock based competition expense of $5 million or $0.32 per share. The fiscal 2008 net loss also included $9.7 million or $0.63 per share on non-routine charges, including technology acquisition costs and legal fees. This compares with a net loss in fiscal 2007 of $5.5 million or $0.38 per share on $14.6 million weighted average shares outstanding, including $2.6 million or $0.18 per share in stock-based competition expense.

Turning to our balance sheet, as of March 31, 2008, we had cash and cash equivalents of $25.5 million. Stockholders equity at fiscal year end was $48.2 million, working capital was $28.8 million, and we have no long term debt.

And lastly, today, we are introducing fiscal 2009 revenue guidance. We expect revenue for fiscal 2009 to be between $78 million and $85 million, representing growth of 13% to 23% compared with fiscal 2008. This revenue guidance presumes that our distributor in Japan purchases only the contractual minimum and it includes no revenue contribution from China.

I’d now like to turn the call over to Bob Stern.

Bob Stern - President and Chief Operating Officer

Thanks, Gordon. Good morning, everyone. We continue to drive top line growth by building upon our established core portfolio with complementary products that allow us to compete for increased hemorrhagic procedural revenues. We also are pursuing initiatives that support our entry into the ischemic marketplace and expand our geographic reach.

I’d like to take a minute to discuss some of the products that we plan to introduce in the current fiscal year. As John noted, new product introductions are important to Micrus as evidenced by the fact that products introduced in the past 24 months represent 27% of fourth quarter revenues.

Starting with our hemorrhagic business this year, we expect to introduce new microcoils, including a novel technology that we believe has the potential to improve packing density compared with existing coils. We will continue to broaden our line of guide wires and catheters, including expanding the courier line and introducing enhancements to the ENZO deflectable catheter. Additionally, this summer we will launch our neuropath guide catheter line.

Turning to balloons, we anticipate approval and beta launch of our first balloon this summer. We look to introduce additional balloons in a staged fashion later this year. Last month, we announced a joint collaborative agreement with Chemence Medical to develop a liquid embolic product for the treatment of aneurysms based on Chemence’s cyanoacrylate technology. Micrus will be responsible for clinical and regulatory activities. We will have an exclusive, worldwide distribution right for any products developed under this agreement.

As discussed in past calls, we see liquid embolic agents as a technology that could potentially be used to treat cerebral aneurysm either in conjunction with embolic coils or by themselves if the safety and efficacy can be established. Additionally, in the hemorrhagic space, we continue assessing flow diversion and covered stent technologies, both internally and externally, which might supplant the safe and effective coil technologies that exist today.

We are also making progress on our expansion into the ischemic market. Stroke is a leading cause of disability in the world, and 80% of all strokes are costs by an ischemic event. We are advancing development of the F.A.S.T. Funnel Catheter and clot retrieval system for the treatment of ischemic stroke. We licensed rights to this system from Genesis Medical Interventional in January. We’re currently downsizing the device for use in the brain. Once the device is optimized, we will proceed to beta testing later this fiscal year. To review the status of the ReVasc device, we’re developing two sizes of the device which will be deployed through a micro catheter through the center of a clot. Upon retraction of the micro catheter, the device expands to its original shape thereby compressing the clot against the vessel walls.

This action immediately restores blood flow through the central channel of the bypass component. As the blood flows pass the compressed clot, either with thrombolytics on board or with just natural thrombolytic blood components alone, the clot is dissolved. Once the clot has been dissolved completely, the device is retrieved.

In March, we filed an IDE to initiate a US clinical trial for our PHAROS Vitesse balloon expandable stent for the treatment of stenosis in neurovascular artery. We are enthusiastic about introducing stents in the United States market as they could have a major impact on our ability to penetrate more accounts.

On the operational front, we saw a reduction in our overall gross margin this quarter, which as Gordon discussed is partially attributable to manufacturing efficiencies at our Florida operation, MDT. We’re working to improve our manufacturing costs absorption and at this facility, and as we sell more access products, our margin should improve.

Moving forward, our DPU automation and cost reduction program is underway. We anticipate that during fiscal 2009 we should begin to gain margin support from the implementation of this program. We will continue to invest in our Florida operation, which should allow us further cost advantages over the long run.

Complementing our Cerecyte randomized trial, I’d like to share with you the results from a single center prospective study from Thomas Jefferson Hospital in Philadelphia assessing the safety, durability and effect on reconciliation rates of our Cerecyte bioactive coils. The study of 81 patients with 89 aneurysms treated with 100% Cerecyte coils was published in the April 2008 issue of Neurosurgery and conducted by Doctors Veznedaroglu, Koebbe, Siddiqui, and Rosenwasser.

According to the office follow up angiography at a mean of 11 month post treatment demonstrated to a lower recurrence rate of aneurysms at 11% than that reported for other bioactive or bare platinum coils. A re-treatment rate of only 6.7% was reported in the article. These results continue to confirm our belief that Cerecyte bioactive coils may lead to improve outcomes when compared to bare platinum coils.

With those comments, I’ll turn the call back to John.

John Kilcoyne - Chairman and Chief Executing Officer

Thanks, Bob. Our intentions are clear. Our goal is to be the premier neurointerventional company in the world, and we are building our product portfolio to enable us to achieve this goal. With the launch of multiple new coils designed to meet specific clinical requirements, novel catheter designs and our prospective randomized Cerecyte trial, we are clearly establishing ourselves in the hemorrhagic market.

With the wave of new product introductions slated for this fiscal year, we believe that we will continue to gain share and advance towards our goal. In addition to coils, we believe that, over the next three to five years, technologies such as a liquid embolic, covered stents under our flow diverters will become part of the neurointerventionalist’s are material for the treatment of aneurysms. Therefore, we are actively taking steps now, evidenced by our agreement with Chemence as well as our aggressive internal development and external assessment of novel stent technologies to position Micrus as a significant long term participant and leader in the treatment of hemorrhagic stroke.

Complementing our hemorrhagic platform is our drive to build and commercialize our ischemic product offering. As mentioned earlier, we intend to initiate our F.A.S.T. re-test IDE trial for the treatment of stenosis in neurovascular arteries and with regard to treatment of neurovascular clots, our belief that no one device will be effective in all clinical scenarios. To that end, we are aggressively pursuing revascularization with our ReVasc technology, and proximal protection and aspiration with our Genesis F.A.S.T. catheter which could also provide us with a platform to deliver a variety of thrombectomy or revascularization systems.

Unlike many of our competitors, we are free from the tumultuous nature of the coronary market. We believe that our singular focus on the neurointerventional market uniquely positions Micrus for long-term success and will drive us in our quest to become the world’s premiere neurointerventional company. We’re dedicated to developing value-added products and are committed to demonstrating that our products add clinical value.

As examples, Micrus is the first company to initiate a prospective randomized clinical trial comparing bare platinum coils to bioactive coils, Cerecyte, and we’re the first to initiate an industry sponsored prospective randomized clinical trial designed to compare the benefits of intercranial stenting versus best medical practice for the treatment of intercranial atherosclerosis.

In conclusion, with revenues of $78 million to $85 million in fiscal 2009, we remain steadfast in our commitment to continue growth. We will be keenly focused on becoming profitable by the end of the fiscal year excluding nonrecurring or one-time charges.

Thank you for your attention. At this time, we will open the call to questions. Operator?

Operator

Thank you. (Operator instruction).

John Kilcoyne - Chairman and Chief Executive Officer

While we’re waiting for the first question, I would like to share with you that May is National Stroke Awareness Month and the Stroke Association has focused its efforts on educating the public to recognize stroke symptoms and to act fast. In this campaign, fast isn’t an acronym and if you’ll indulge me for one moment for this public service announcement.

‘F’ stands for face ask the person to smile, if one side of their face droops. ‘A’ stands for arm ask the person to raise both arms. Does one arm drift downward? ‘S’ stands for speech ask the person to repeat a simple phrase. Is their speech slurred? And ‘T’ stands for time. If you observe any of these signs, it’s time to call 911.

Also, I want to alert you to a company presentation we will be making over the next several weeks. We will be presenting at the Citigroup Healthcare conference on Wednesday, May 21 at 8:00 AM Eastern time. The Conference will be held at the New York Hilton hotel; at the Barrington Research Healthcare Conference on Wednesday, May 28 which will be held in Chicago at the Hilton hotel; at the Friedman Billings Ramsey 12th Annual Spring Investor Conference on Thursday, May 29 at 1:30 PM Eastern Time, this Conference will be held at the Grand Hyatt hotel in New York and at the Seventh Annual Needham & Co. LLC Biotechnology and Medical Technology Conference, which is being held June 11 and 12 at the New York Palace hotel. Should you be attending any of these events, we would like to meet with you in person. A webcast of our investor presentation will also be available at our website www.micruscorp.com. Operator, we are ready for the first question.

Question-and-Answer Session

Operator

Thank you. Your first question comes from the line of Amit Hazan, Oppenheimer.

John Kilcoyne

Good morning, Amit.

Operator

Mr. Hazan your line is now open.

Angela Woodall

Can you hear me?

John Kilcoyne

Yeah.

Angela Woodall

Okay. My question is actually on competition first. Could you give us an update on the J&J launch, re-launch in the market and how your accounts that were previously held before their reentry are doing? And also, on ev3’s Axium coil launch and how that’s progressing in the US?

John Kilcoyne

Just for clarification, I know this isn’t Amit.

Angela Woodall

Oh, you know what? I don’t know what happened. I said this before, but it’s Angela Woodall calling in on Amit’s behalf. I’m sorry.

John Kilcoyne

Well, how are you this morning?

Angela Woodall

Good. How are you?

John Kilcoyne

Yeah, good. Okay, so J&J, stressed on previous calls, they re-launched last summer their Orbit coil along with and in conjunction with their Enterprise stent. We had suggested on previous calls that we picked up about 20 accounts with J&J’s departure from the market in the spring of 2006 through the beginning of 2007. Of those 20 accounts that we picked up, in some accounts we had the majority of the business, in other accounts we had some of the business. Since their return, I would suggest -- well, let me back up. Our goal was to keep about 50% when they came back. Since their return of those roughly 20 accounts, I do believe in the majority that we have kept a continued presence and utilization of Micrus coils. If you look at the bell curve on the left hand side, we’ve probably lost the majority of coils used in probably three to four accounts. On the other end of the bell curve, we’ve probably kept 75% to 80% of the coil utilization in three or four accounts. So on the ends of the bell curve we’ve gained and lost about the same number, but in the middle, we continue to get utilization of coils combined with Cordis coils being used in those accounts.

Angela Woodall

Great, thanks a lot. Also, just a follow-up, could you give us update on your Chinese applications, and how the SFDA process is going?

John Kilcoyne

Just a minute. You had also asked about ev3 on the Axium coil. So, with regard to the Axium, it was launched last summer, in the latter part of last summer. A full rollout I don’t think occurred until the fall period. We are seeing some activity of the Axium coil we believe that we are clearly holding our own with the Axium and have weathered the introduction quite well.

Angela Woodall

All right, thanks a lot. And then just on China?

John Kilcoyne

With regards to China, as we said in the prepared remarks, we don’t anticipate any revenues from China this fiscal year. The SFDA now does fall under the domain of the Ministry of Health in China; that was a recent announcement out of China. We know that the SFDA is processing and responding to filings. We have received our file number for capital. We’ve received our final number for our wires. We do anticipate, though, there is going to be continued delays through this fiscal year. At this point, we just do not have the visibility to suggest that we would expect revenue during this fiscal 2009. As we learn more, we will certainly share that with you, but at this point, I think it’s prudent to discount China’s revenue for the year.

Angela Woodall

All right, thanks a lot.

Operator

Your next question comes from the line of Eli Kammerman of Cowen.

Eli Kammerman

Thanks and good morning

Gordon Sangster

Hello Eli.

Eli Kammerman

The first question is what is unique and special about this new coil technology that you’re planning to launch? At roughly what point in the year do you expect that launch to happen?

Gordon Sangster

We equally believe that this technology, which is truly an evolutionary technology, will allow for a greater packing density than any of the existing platinum coils or bioactive coils that are available in the marketplace today. We will be beta testing these coils here in the early summer and I expect a launch later this year. It really is a technology that, if proven out will provide a uniquely new coil into the marketplace.

Eli Kammerman

Okay, thank you for that. My other question is how likely are we to see the approval of the Cerecyte coil in Japan in the current quarter?

John Kilcoyne

Eli, this is John. I will take that. We have as you know, we had our panel review meeting on December 20. We received questions from the PMDA. We have responded to those questions in the latter part of January. We are awaiting response on our answers. We have not received any further questions. I can’t speculate any more than that. We are awaiting the response from the PMDA either with more questions or an approval.

Eli Kammerman

Okay.

John Kilcoyne

We will give you, as soon as we hear something, you’ll know.

Eli Kammerman

All right. It sounds great. Thanks very much.

Operator

Your next question comes from the line of Dave Turkaly of SIG

John Kilcoyne

Hi Dave.

Shaun Bevick

This is actually Shaun Bevick in for Dave this morning.

John Kilcoyne

All right Shaun. How are you

Shaun Bevick

I am doing pretty good. The US was really strong this last quarter. I was just wondering. Given the competition, can you provide a little more color on why it was so strong?

John Kilcoyne

Yes, I think, if you look at our quarter versus, compared to maybe a Boston, Boston was at 2%. We were at 23% for the quarter. So I agree, we had a very solid fourth quarter and a nice rebound to Q3, although Q3 was a good quarter for us as well. The procedural momentum in the fourth quarter, as we stated in January was strong. We have a large pull-through of coil utilization, there were a lot of procedures being for performed. We had the Cashmere Cerecyte coil which was introduced in the late fall of 2007, which was gaining momentum and making its effects known. So, as we moved into the fourth fiscal quarter, Cashmere was starting to hit the ground in a strong fashion. We have procedural volumes picking up. I will also comment on the fact that, over the past year, we have made some changes to our field sales organization in North America that I do also believe played a role in our ability to penetrate more effectively in North America. So, procedural low-volume, new products, and I believe some changes in the North American field force were the drivers for our fourth-quarter revenue.

Sean Bevick

Good. Do you guys believe that that’s going to be sustainable going through the rest of the fiscal year?

John Kilcoyne

The seasonal fluctuations in our market are fairly well established. We continue to see conversion from clipping to coiling in the US growing from somewhere between 12% and 15% per year. We have 3% to 5% top line growth in an aging population. Baby Boomers will suffer the consequences of stroke, so we will see uplift, unfortunately we will see in uplift there. Fortunately or unfortunately, we will see an uplift there.

There’s also a new trial or study that was just released last Monday in Chicago at the AAS meeting coming out of Barrow Neurological Institute. It was a prospective randomized trial comparing clips to coils. Barrow, as many of you know, is one of the leading centers in North America and arguably in the world for the treatment of aneurysms or neurovascular cerebral vascular disease. This trial out of Barrow called BRAT comparing clips to coils again demonstrated the advantage of coiling. So, I think we are going to continue, and it was largely, the institution is largely driven by neurosurgeons. So, I think we are going to continue to see the conversion from clips to coils as we moved forward. So, we’re confident that the market is robust and continuing to grow.

Sean Bevick

Okay. Then one last quickly on the DOJ monitorship are we going to see more charges and legal expenses coming out later or was that like a one time thing?

John Kilcoyne

Just a quick comment, the report is on the Department of Justice desk right now. We are going to continue to cooperate with both the DOJ and the monitor. The term of the monitorship extends through the end of this month of May. At this point from a disclosure standpoint, we believe it’s appropriate not to comment any further on that. Well the term of the monitorship is underway through the end of this month. With regard to the financial aspects, it will depend to a certain degree as to what the response from the Department of Justice is. So at this point, I believe it’s probably not appropriate to comment further on that. We are awaiting and fully cooperative with the Department and the monitor and will work with them to see this to its natural conclusion.

Sean Bevick

Okay. Great thanks guys

Operator

Your next question comes from the line of Juan Sanchez of Ladenburg Thalmann

Juan Sanchez

Good morning, guys.

John Kilcoyne

Good morning Juan

Juan Sanchez

A couple of questions, the first one is the PHAROS trial. I know that you have a couple of competing trials. What do you expect enrollment to be? The second question is about do you have any estimates of growth in Europe by unit as opposed to dollars? I’m just wondering what the impact of the exchange rate is. Thirdly will be if the sales incentives that you put in place, are those new sales incentives that are likely to stay, or those are all sales incentives and you happen to sales force to meet their new goals?

John Kilcoyne

I will take the IDE and just quickly, there were no unique sales incentives. I will just put that out there really quickly. These were I think in the discussion in the press release. Any increase there was because sales increased. With respect to the IDE, we have gone through one round of questions with the FDA. We are currently addressing the questions that came out of that first round after the first 30 days. We are addressing those we will be sending the answers back within a few days and then we will weigh. We are clearly dating and ramping this up as quickly and efficiently as we can. We do have a couple of trials out there that are looking at stenting for sclerotic disease, but clearly we hope to get out there in an efficient manner. Our trial should be as focused as any other. If we can get out very quickly, we should have a number of cases and procedures under our belt fairly quickly.

John Kilcoyne

Just to add on that on the, one on the Sents trial, Micrus, it will be an industry sponsored trial. It will be a US IDE protocol. That being said, we will be recruiting in Europe as well as Asia. We do believe, from a recruitment standpoint, there is a -- certainly if you look worldwide, there is a surplus of cases that we can enroll or patients we can enroll into the PHAROS trial. So we don’t believe there’s going to be significant impact by Sampras on that front. As Bob mentioned, we hope to be out this summer in the U.S. and in an efficient manner recruiting patients in both Europe and Asia by the fall.

European growth, from a unit standpoint, we do continue to see unit growth. We expanded into five new countries in EMEA, Eastern Europe and the Middle East, so we continue to see growth there with geographic expansion. We continue to gain tenders in France, so we are seeing continued penetrations in France. Procedural volume, the conversion from clipping to coiling in the European theatre is somewhere between the 10% to 15%, and it really depends upon geography. If you’re in the UK where penetration is 75% to 80% coil, you are going to have a different unit and procedural growth rate than, say, Italy where your penetration of coiling is about 40% to 45%. So, it depends on which geography you are in. We do anticipate continued unit growth in Europe, however. To Bob’s comment, we had no special incentives on in the fourth quarter with regard to sales programs.

Juan Sanchez

One last question for Bob, are the minimal contractual orders that you should receive from Goodman in Japan for this year?

Bob Stern

It’s $7 million.

Juan Sanchez

Okay, thank you. Thank you very much.

Operator

Your next question comes from the line of Spencer Nam of Summer Street Research partners.

Spencer Nam

Thanks for taking my questions. Let’s start with this announcement about the new coil introduction the second half of this year that is going to be -- it sounds like going to better than Cerecyte. Is that a fair generalization? Could you give us a little more details on what this coil could be all about?

John Kilcoyne

Spencer, good morning. This is John. On the new coil technology, as Bob mentioned, we do believe it has the ability to improve packing density over existing platinum coils. I will put platinum and Cerecyte kind of in the same ballpark for answering it right at this point. It is a different approach to building a platinum coil, so it is very novel and it will be very unique upon its introduction. We do believe based upon studies here at Micrus, that it clearly will provide us improvement in packing density.

Spencer Nam

So the follow up question to that is if you have that coming out, I mean how do you position Cerecyte particularly in the Asian market? What’s the, when you have something, shouldn’t we be thinking about getting this new product out there into the European market and Asian market?

John Kilcoyne

Yes. The new coil will be available in both bare platinum as well as Cerecyte.

Spencer Nam

Oh, I see.

John Kilcoyne

So, it will carry the same had, if you will, as all of our other platinum available in bare platinum or bioactive.

Spencer Nam

So I guess I’m not a scientist, so I guess my natural question is, is that a new material, then? I mean, what is the new coil? If it’s not coating, if it’s not metal, I’m just curious what this new coil technology may entail?

John Kilcoyne

It will be a platinum coil. I won’t go into any more details on the specifics of the design, but it is platinum based. But it is a different way of it’s a different design to the underlying approach of coils. It’s a different design.

Spencer Nam

I see. Okay, that’s helpful. A couple more questions on guidance, if I look at the $78 million, you know the guidance that you are providing, implied growth is going to be somewhere in the 13% to 15% range for the year. Just based on all of the comments, that you’ve given, it seems like that seems very conservative in my mind. You know, everything is the case volume has been flowing. You know, you are looking at the potential approvals, additional approvals in Asia coming through. You’re going to launch new product in the second half. In fact, you have not grown 13% in the past ever. So I’m just curious. Is there something else that makes you guys concerned? Increasing competition or some sort of some secondary factor that could keep you guys being more positive, or is this just the way you guys are trying to take a conservative approach to these numbers?

Gordon Sangster

Well, if you look at the consensus, the consensus has about $84 billion, so we are bracketed or we are inclusive in the consensus of the $78 million to $85 million. We are forecasting revenue from Japan at the contractual minimum. As well, China we are not anticipating any revenue. So, from an overall guidance standpoint, I think we are well within an acceptable range. If you look at the analyst reports that have been published or the updates, all for the most part include China in their number and the consensus is at $84 million. So, I think we are well within reason with the $78 million to $85 million. If we have a robust acceptance of the new coil or some other factors go our way during the course of the year, we might see a potential uplift. At this point, however, I think again, it’s prudent to take our business and be practical about our approach, $78 million to $85 million we believe it is a solid number with good growth.

Spencer Nam

So, just dwelling on that a little more, just to get, because we got a lot of questions on this last quarter with your Q4 guidance. But if we look at the US, this quarter, you grew 17%. You’re not expecting a repeat of that based on your guidance? You’re not really expecting a repeat of that or anything similar to that in fiscal year ’09. Is that fair?

John Kilcoyne

Yes. This is why we give annual guidance versus quarterly guidance. I think what you’ll see as the year progresses that you’ll have a balance over the course of the year. We know that Q1, procedural volume starts to wind down a little bit from Q4. We know that Q2 tends to be the softest quarter. So, our expectation is that $78 million to $85 million is an appropriate guidance. Knowing the cyclical nature of our marketplace, we believe that the back half of the year will be as Spencer you had mentioned, probably a stronger, potentially a stronger time period for us. As we get to that time period, if we see a solid acceptance of the balloon technologies that we’re launching, a solid acceptance of the new coil that we’re launching, continued progress from our North American field sales force, if we have an approval in Japan of Cerecyte at that point, we will be in a different spot and we can make an assessment at that time.

Spencer Nam

I appreciate that and related to that final question, you know previously I felt that your position on China and Japan was it would be a matter of time before the approvals come on these applications. Today after listening to some of the comments that were made, I’m actually beginning to wonder whether, in Japan for example, whether there are some additional questions that could be raised, so it’s maybe on Cerecyte, so maybe there’s a little bit of a bigger question mark if you will in China, it’s based on, you are kind of telling us do not expect any revenue out of China this year, this fiscal year. I am again beginning to wonder whether there is a bigger hurdle to jump in China. Am I missing something or am I getting the right message from you guys on this?

John Kilcoyne

A two-part answer, one, we have no questions in either geography that are giving us pause or question at this point. So, in our responses or in the questions that were received both from the regulatory authorities in China and the regulatory authorities in Japan, we have answered fully their questions and feel extremely comfortable with our responses. We do not see at this point any clinical reason or regulatory reason for delay. That being said, we have been chastised historically for being more optimistic in Japan and chastised at times for being more optimistic maybe than we should have in China. So we believe that we will have approvals in both geographies based upon our products. We don’t see that there’s going to be, at this point, any long-term delay due to product technology. The burden falls mainly on the regulatory authorities in both geographies to move our products through the process.

In Japan, as all of you know, it is relatively a black box. In China, the major upheaval we don’t have any more visibility to suggest that this fiscal year is a reality. We may get approval in China in September or October; I can’t tell you that I know that right now, though. So, at this point the hurdle for us is getting through the regulatory process and the logistics of the regulatory process not on the technical or clinical front of our product.

Spencer Nam

I appreciate the clarification. Thank you.

John Kilcoyne

Thank you Spence.

Operator

(Operator instruction). Your next question comes from the line of Suraj Kalia of SMH Capital.

Suraj Kalia

Good morning, gentlemen. Congratulations on a nice quarter.

(Multiple Speakers)

Suraj Kalia

I promise, it’s not Angela! Where should I start? Pardon me if I missed this, Bob, but what was the overall contribution from accessory products in the quarter?

Gordon Sangster

That was about 5% of total revenues, Suraj.

Suraj Kalia

5%? Great. And John, I agree with the approach being adopted for FY ’09 guidance, especially with what happened last year or the last fiscal year. But can you give us little more specifics on the components of growth for the US and Europe? What do you anticipate as being the growth drivers? More importantly, Americans -- bare platinum, Cerecyte, accessories? How do you see those playing out, especially with the Novation contract for ev3, potentially a regulatory approval of the cPAX coil from Neurovasx? How do you see all of that playing out?

John Kilcoyne

Okay, first on Novation, I’ve said this before and I will say it again. We have not seen an impact on a Novation contract, and I can’t be more clear on that. So, we don’t see that as a major impact to our business and we certainly haven’t seen it historically. I don’t anticipate it on a going-forward basis. This is still a physician preference market, so drivers for is in North American at this point are not price. We are expecting the launch of our new coil, which will be a driver. We are expecting the launch of a new balloon, which will be a driver. We are expecting initiation of our PHAROS re-test IDE trial which will be a driver for all of our products. We are expecting the launch of a neuropath guide catheter which will be a driver getting us into the lab.

So, there is a plethora, if you will, of new technologies and new products that we will be introducing over the course of this fiscal year. This is both in North America as well as Europe; I speak for both. With regard to the cPAX, yes, we are aware of the cPAX, the Neurovasx product. We know they’ve done some cases in Brazil. We await further clarification on their regulatory status. We know that they filed a number of months ago. As of this day, we do not believe they have an approval yet. I believe that the new coil that we will be introducing that Bob referred to and as I’ve spoken will compete very well with the cPAX technology. We feel that we are amply covered with new product technologies this year to assist us in driving growth. We had to see continued conversions from clips to coils. I think this BRAT trial, as more data comes out and this is published, the results are published in peer review journal articles, this will have an impact not only in the US but around the world. So you have new technologies from Micrus still physician preference not necessarily a price sensitive market and you have an overall top line growth in procedural conversion from equipment to coiling. This is still a market that is moving forward. We haven’t even talked about ischemic.

Suraj Kalia

John, when you look at, there are two as far as I know, competing clinical trials ongoing, the MAPS trial in the Cerecyte trial both bare platinum to bioactive coils. How would you perceive a split decision between the trials like the Indiana and North Carolina thing? Let’s say that MAPS goes positive or Cerecyte goes positive and MAPS goes negative, how would the clinical community view sort of a split outcome between the two trials?

John Kilcoyne

It may depend on the super delegates. I think with this marketplace is looking for is clinical data. I think that was clearly evidenced by the ISAT trial and what the impact the ISAT trial had on the conversion from clipping to coiling. I think this BRAT trial will continue along that vein. I think an outcome of our Cerecyte trial to a positive it will be of further catalyst to moving doctors and physician selection to bioactive coils. There was just a publication that Bob referred to coming out of Thomas Jefferson in neurosurgery in April Journal, the neurosurgery journal, which demonstrated a 11% re-cannibalization rate and a mean at 11 months and 6.7% retreat rate. This is extremely positive data. Now it’s a single center study.

We have also seen essentially complementary results coming out of Ankara, Turkey with [Dr. Shekerjian]. You’re likely to see another peer reviewed journal article published sometime this year which will demonstrate again similar results with extremely solid re-cannibalization rates and very low retreat rates. We are guardedly optimistic that Dr. Molyneux in the Cerecyte trial will end up delivering similar types of results with 375 patients into it. From a safety profile standpoint, it is exceptional. I think that, when the studies are laid side-by-side, I think it will clearly demonstrate that one company took the scientific approach with a prospective randomized trial and the data will be viewed in a much more robust fashion.

Bob Stern

Did we miss part of your question or did we answer all pieces of it?

Suraj Kalia

No, that’s a fair assessment. You know, last question and I will hop back in the queue, the nature of the manufacturing inefficiencies, so to speak in your plant and hence the depression in gross margins, can you be a little more specific as to the sudden jump in costs, and how do you address to resolve that?

Gordon Sangster

We have the fixed overhead down there in Florida. We’ve actually been adding to it but as soon as we get more product moving through that facility, then we expect margins to rebound. But they have been going through this quarter, the last three or four months, the conversion from the Merit product line to the neurovascular product line exclusively. So, we do expect that to improve as the year goes on.

Bob Stern

It’s unabsorbed overhead that hits us because of the Miami facility, and the long range plans because of the DPU project which will permit us to carve a lot of costs off of each individual coil -- that as it rolls forward requires an expansion. We expect to be initiating the DPU savings program sometime later this fiscal year. So, its the front end of that, that will hit you for a while.

Suraj Kalia

Fair enough. Gentlemen, nice quarter. Congrats.

Bob Stern

Thanks, Suraj.

Operator

That is all the time we have for today. Please proceed with your presentation or any closing remarks.

John Kilcoyne

Again, thanks all very much for your support and participation on the call today, we are excited about our prospects at Micrus and are steadfastly focused on becoming a premier company in the neurointerventional market. We plan to continue building our business and look forward to reporting our progress on next quarter’s call. Thanks, everybody. Have a great week.

Operator

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

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