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Executives

Don Markley – IR, Lippert/Heilshorn & Associates

John Schulte – President and CEO

Guy Childs – VP and CFO

Will McGuire – COO

Analysts

Amit Bhalla – Citigroup

Charles Chon – Goldman Sachs

Jason Mills – Canaccord Adams

Matt Dolan – Roth Capital

Suraj Kalia – Sanders, Morris, Harris Capital

Spencer Nam – Summer Street Research Partners

John Putnam – Dawson James Securities

Thomas Kouchoukos – Northland Securities

Charley Jones – Barrington Research

Joshua Zable – Natixis Securities

The Spectranetics Corporation (SPNC) Q2 2008 Earnings Call Transcript July 29, 2008 11:00 AM ET

Operator

Welcome to the Spectranetics second quarter conference call. (Operator instructions) As a reminder, this conference is being recorded today, July 29, 2008.

I would now like to turn the conference call over to Mr. Markley. Please go ahead, sir.

Don Markley

Thank you. This is Don Markley with Lippert/Heilshorn & Associates. Thank you for participating in today's call.

Joining me from Spectranetics are President and Chief Executive Officer, John Schulte, Chief Financial Officer, Guy Childs and Chief Operating Officer, Will McGuire.

Earlier today, Spectranetics released financial results for the quarter-ended June 30, 2008. If you have not received this news release or if you would like to be added to the Company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and ask for Amy Higgins.

Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws. These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

For a list and description of those risks and uncertainties, please see the Company's filings with the Securities and Exchange Commission. Spectranetics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether as a result of new information, future events or otherwise.

Furthermore, this conference call contains time sensitive information and is accurate only as of the date of the live broadcast, July 29, 2008.

Now I'll turn the call over to John Schulte. John?

John Schulte

Thanks, Don, and good morning to everyone joining us for today's earnings call. As usual I'm going to begin with some high level comments on our financial performance and then I'll discuss our key initiatives and accomplishments for the second quarter. I'll close with our key goals that we have set for the second half of the year, and then I'll turn the call over to Guy who will review our financial and operating performance in more detail. Following Guy's remarks, we'll open up the call for your questions.

Revenue growth in the second quarter continued a very strong top-line growth trend that we demonstrated last quarter. Revenue for the second quarter reached $26.7 million, up 31% over the same quarter in 2007, and representing a sequential growth of 12% over the first quarter. Importantly, we saw top-line growth across each of our business lines.

Disposable revenues grew 28% on a year-over-year basis and 10% sequentially. Within our disposable products lines, our Vascular Intervention, our VI business, was up 19% on a year-over-year basis and 8% sequentially.

Our lead management business again showed very strong growth, up 52% over the prior year quarter and up 16% sequentially. This was the first full quarter in which we operated with two separate sales organizations, one group of 75 focusing exclusively on VI and a dedicated lead management team of 35 focusing on our lead removal product lines.

Revenue from the endovascular product lines of Kensey Nash that we acquired last quarter was minimal in the quarter as we only began selling the products in June following our sales training. The second quarter was also very strong for lasers. Equipment revenue totaled $2.2 million, up over 100% from the prior year quarter as we sold eight lasers, an unusually high number.

In total, we placed 33 net new lasers, which compared to 24 in the first quarter. Our worldwide installed base of lasers reached a landmark 800 systems. We believe that there is a worldwide potential of approximately 1,500 lasers to 1,600 lasers so we're about half way to our goal and obviously there is still a lot of room to grow.

We saw a strong growth internationally as well, growing 32% on a year-over-year basis and an impressive 42% sequentially. This revenue growth is particularly impressive given that the second quarter last year included a $600,000 order to fulfill a large tender offer in the Middle East.

On an operating basis, we achieved a pretax income of $394,000 excluding the in-process R&D cost expensed as a result of the acquisition of the endovascular products of Kensey Nash.

Guy will discuss the financial impact of the K&C acquisition during his prepared remarks.

On top of a strong revenue performance, I am very pleased that we also accomplished a number of our strategic initiatives and executed tactically on many fronts.

We successfully closed the acquisition of the Kensey Nash endovascular product lines and completed the transition to Spectranetics by June 1st. Our transition team worked beautifully with our counterparts at Kensey Nash to facilitate what I would call almost a seamless handoff.

We trained our sales force on all products at the end of May and began shipping products through our order entry system the 1st of June. We will transition the manufacturing of the QuickCat aspiration catheters to our new facility before the end of the year.

We've also formed an integrated R&D team to drive the development of the next generation ThromCat and Safe-Cross products. And the development programs are proceeding right on schedule.

I am very excited about the potential for these next generation products and continue to believe these products fit extremely well with the sales focus of our newly dedicated VI sales team.

We also strengthened the leadership team of the VI business with the addition of Michael Voss as Vice President and General Manager of the Vascular Intervention business unit. Mike brings a wealth of experience in medical devices in general and interventional products in particular.

Most recently, he was Vice President, Global Marketing at Bard Access Systems, a $500 million division of CR Bard. Prior to that, he had extensive marketing and sales management experience at Cordis Interventional Cardiology Division of Johnson & Johnson and also at Boston Scientific. Mike will manage sales, marketing and product development for VI.

We are also pleased with the sequential growth we experienced with our atherectomy products, particularly in light of this increasingly competitive environment. The TURBO-Booster continues to gain traction as we see physician satisfaction increasing as they gain experience with our new technology.

With the TURBO-Booster, we have the only atherectomy system capable of treating arteries ranging in diameter from 7 millimeters down to 1.5 millimeters or basically from the upper leg all the way down to the small arteries running to the toes.

We are also the only atherectomy technology capable of treating soft thrombus, plaque, and even moderate calcium. Our sales force continues to drive these messages to differentiate laser atherectomy from mechanical atherectomy.

On the lead management side of the business executed an extremely successful symposium at the Heart Rhythm Society Meeting in San Francisco in May. This symposium was actually run by the Cleveland Clinic and featured a world-class faculty. More than 300 physicians attended this symposium entitled "Lead Extraction 2008, a Critical Review and Implementation of the HRS Guidelines."

It covered indications for lead removal, devices and techniques, training and outcomes and quality measures. Our lead extraction technology was prominently featured in many of the presentations. This symposium certainly highlighted the need to reconsider what indications beyond infection should be considered for lead extraction.

On the clinical front, we have three significant studies underway. Two of these studies focus on the treatment of instent re-stenosis or ISR. The first trial called PATENT is being conducted in Germany and is scheduled to enroll 100 patients at up to eight sites. The end point is patency by duplex ultrasound at one year following treatment by the TURBO-Booster and angioplasty. We now have 23 patients enrolled and hope to complete this enrollment within 12 months.

SALVAGE is our second ISR study and this is a multi-center study at up to12 sites also enrolling 100 patients with basically the same end points as PATENT. This treatment protocol is a little different in that it combines the TURBO-Booster with the Gore Viabahn covered stent.

It is being run independently by the VIVA group of physicians and is being jointly sponsored by Spectranetics and W.L. Gore. We now have 9 of 12 sites up and running and have enrolled 14 patients. We also hope to complete enrollment for SALVAGE within one year.

Our third study is called Tammy. This is a randomized trial and is being conducted at five hospitals in Poland and will treat 200 patients with an Acute Myocardial Infarction or AMI. 100 patients will be treated with the laser to first ablate thrombus followed by direct stenting.

The other group will receive standard PTCA and then stenting. End points or resolution of ST elevation, which is the EKG abnormalities, combined with a measure of distal embolization as measured by myocardial blush scores angiographically. We now have five sites enrolling and have 13 patients enrolled.

I'll give an estimate of study completion on the next quarter's call, as we have only recently had all sites eligible to enroll. This past month, our technology was also the subject of a comprehensive review in the Journal of Cardiovascular Surgery. This article was written by Dr. John Layard, a principle investigator of the LACI trial and a participant in our CELLO trial.

This article is entitled "Excimer Laser-Assisted Angioplasty for Complex infrainguinal peripheral arterial disease, a 2008 Update." I believe this is the most comprehensive review of the science behind the Excimer laser, published clinical papers and the pending studies as well as the role that laser plays in the treatment of complex PAD. We will get reprints of this article and try to get a link to our Web site.

Lastly, we are making significant progress in transferring manufacturing to our new facility. We've initiated the manufacturing of 510(k) products in the new building and have started the validation runs for our PMA products. A lot of effort has been expended to complete this goal on time and I'm very encouraged by our progress.

Now let me close with our key goals for the second half of the year. For the endovascular product lines of Kensey Nash, we plan to file 510(k)s for both the next generation ThromCat and the next generation Safe-Cross products. Secondly, we will accelerate enrollment for our three clinical trials, PATENT, SALVAGE and Tammi. Thirdly, we plan to complete the transfer and manufacturing for all 510(k) products and submit the site change notification to the FDA for our PMA products. And lastly, we plan to achieve our financial guidance as articulated in our earnings release.

In closing, I'm extremely pleased with our progress this past quarter. We continue to be one of the top performing medical device companies for top-line growth and have strengthened our foundation on many fronts to ensure success in the coming years as well.

Now let me turn the call over to Guy, who will provide some color on our financial performance in the quarter and provide financial guidance for 2008.

Guy Childs

Thank you, John, and good morning everyone. I am very pleased to report $26.7 million, up 31% compared with the $20.3 million during the year ago quarter. It also represents a 12% increase over the first quarter of 2008. Each product line posted revenue growth on a year-over-year basis as well as a sequential basis with both vascular intervention and lead management posting strong quarters.

Our vascular intervention business increased 19% compared with the prior year quarter and was up 8% sequentially supported by growth in atherectomy and our Quick-Cross support catheters. We also had a small contribution from the endovascular products acquired from Kensey Nash.

Although the sales were nominal in the quarter as the transaction closed on May 30, 2008 we expect a more meaningful contribution from these products driven by the QuickCat aspiration catheter as our sales organization obtains more experience selling the device.

Our lead management team executed another outstanding quarter, posting 52% year-over-year growth and 16% sequential growth. We continue to believe that this business will generate meaningful, sustained revenue growth for the foreseeable future as a result of favorable market dynamics, our market leading position within the market, and a highly capable expanded sales organization we had established in this area.

Laser revenue of $2.2 million increased 103% compared with a year ago quarter and was also up 33% from the first quarter 2008. We're also pleased with net laser placements of 33 during the quarter, which were in line with our expectations and compared with 36 placements in the year ago quarter.

Service and other revenue also posted growth, up 19% compared with the year ago quarter and 10% from the second quarter – from the first quarter of 2008, excuse me.

On a geographic basis U.S. revenue was $23 million, which represents 86% of worldwide revenue, and increased 31% on a year-over-year basis and 8% as compared with the first quarter of '08. Revenue outside the U.S. this quarter totaled $3.6 million, also up 31% compared with last year and delivered very impressive sequential growth of 42%.

The international growth in the quarter was driven by strong sales in Europe as we continue to build out our team and are focusing on countries with atherectomy reimbursement in place, namely Germany and Belgium.

The momentum in our international business is noteworthy in and of itself, however, particularly so when considering that the second quarter of 2007 included $600,000 of Vascular Intervention product sales that were part of a tender offer to an account in the Middle East, which provided for a tough year-over-year comparison.

Gross margin for the second quarter was 72%, which was down from 75% in the year ago quarter and flat on a sequential basis. This decrease was due primarily to previously announced cost increases associated with an expanded lease facility as well as increased quality assurance costs to support the growth in our manufacturing volumes.

It should be noted that the second quarter of 2008 was the first full quarter where lease costs were incurred for both our legacy as well as our new manufacturing facilities. These costs were planned and are in line with our expectations. Costs associated with these dual manufacturing facilities will remain until our move is fully complete.

Operating expenses in the quarter were $23.1 million, up 55% from the prior year quarter, due primarily to in-process research and development costs of $3.8 million recorded as part of the acquisition of the thrombectomy and chronic total occlusion products, recently acquired from Kensey Nash. These costs accounted for 26% of the growth over the prior year.

The remaining 29% is due primarily to an expanded field sales organization, which now totals 110 employees at June 30, up from 83, a year ago, and 104 as of the end of 2007.

Pretax loss for the second quarter of 2008 was $3.455 million inclusive of the $3.849 million IP R&D charge discussed earlier. This compares with pretax income of $1 million for the second quarter of 2008. Our second quarter pretax income, excluding IP R&D costs was $394,000 and is in line with our expectations and consistent with our previously stated goal of returning to profitability in the second quarter.

We continue to believe that pretax income is the most relevant measure of our profitability as income tax expense is a non-cash expense due to historical net operating losses available to offset our taxable income.

I will close with our annual financial guidance for 2008, which is unchanged from guidance provided previously. We expect revenue to be within the range of $104 million to $110 million, representing 25% to 33% growth compared with 2007. Gross margin for 2008 is expected to be within the range of 72% to 74%.

Research development and other technology costs are expected to be approximately 14% to 15% of revenue and SG&A costs are expected to be within the range of 55% to 58% of revenue. Gross margin and operating expense costs may fall outside of the ranges provided above in any given quarter due to factors that include but are not limited to, timing of move related costs associated with the move of our manufacturing operations, product development costs, clinical trial enrollment rates and expansions of field sales organization.

Pretax income for 2008 excluding IP R&D costs is expected to be within the range of $1 million to $5 million. Given our previously state of belief the pretax income is the most relevant measure of our operating performance due to their non-cash nature discussed earlier in the call, we're not providing guidance on net income, consistent with past practice.

In assessing the Company's financial guidance we considered many factors and assumptions including but not limited to current projected sales trend data, status timing progression of the Company's product development projects, current projected spending levels to support sales and marketing, development and administrative activities, anticipated timing and costs associated with the relo and consolidation of its headquarters and manufacturing operation and other risk factors discussed in our publicly filed documents. This concludes our prepared remarks.

Now we will open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Amit Bhalla with Citigroup.

Amit Bhalla – Citigroup

Hi. Thanks for taking the question. The first one in regard to the disposables business, can you give us a little bit more granularity on the pricing and unit changes for disposables within atherectomy and lead management, and also a little bit more detail about the impact from competition, any sort of color you can give us on how its impacting your accounts and your penetration?

John Schulte

Sure, Amit. The first question is simple. It's all unit growth. We've had no price changes whatsoever on either side of the business. The second piece, I'll handle the VI piece and have Will talk about the lead management piece. Obviously, we think that in the atherectomy market there's increased competition. We have one new competitor, which have been on the market for about nine months and a new one that's just received approval. As we stated previously, physicians who use atherectomy are tinkerers, I'll call them. They like to try to get a flavor for each technology to determine where it fits within their practice, particularly, the busier interventionalists and so, we always have expected trialing in these accounts and that, in fact, does occur and has with CSI. It certainly did with Fox Hollow. I think ultimately what will result is kind of how their satisfaction level is achieved with each of these technologies as they look for it in specific niches.

And so for rotational atherectomy, I think it has some benefits in smaller knee, particularly focal calcified lesions. I think Fox Hollow has some advantages in the larger arteries like the SFA and focal centric lesions because I think it can be done fairly quickly. I think Pathway Medical, which we haven't seen in the U.S. yet but we expect probably late this quarter or certainly fourth quarter, I think will have some advantages primarily in the (inaudible) area because of its lumen size that it can create. We track these hospitals very carefully when we understand a new account has taken on a new product. We measure our business and the like and we always do see a slight dip in those accounts as they trial these new products, but then we measure the business coming back and historically, we've seen and we continue to see a rebound in those businesses and it usually takes about six to nine months in our judgment to have this all shake out. And so, the impact that we're seeing from competitive devices is really no different than what we expected at this piece and we do see a rebound in our business in these busier accounts. So we remain convinced that the laser provides significant advantages in terms of treating large and small diameter arteries, has the widest breadth of tissue types that it can treat from soft thrombus to moderate calcium and we think it has the strongest in safety profiles.

So the last comment and I will turn over to Will is and one of the benefits I think of having additional atherectomy competitors is I really do believe that they will expand the market for atherectomy devices. And, obviously the big bear in the treatment of PAD is balloons and stents and atherectomy has to find its role, either in place of or in compliment to ballooning and stenting. And, I think the more physicians that become believers that the tissue removal by either mechanical or laser means adds clinical value, we think that's good for the atherectomy market in general. So with those comments let me turn it over to Will. He can talk about the impact of competition on the lead management side.

Will McGuire

Thanks, John. As you know there's only one competitor in the U.S. on the lead management side of our business and that is Cook. We do know that Cook has been in the process of growing a dedicated sales team as well focused on lead management. We think the sales team is still quite a bit smaller than that of Spectranetics and as far as we can tell, we're definitely not losing share. It's a very fast growing market and very much under penetrated so really no impact or no detrimental impact to Spectranetics from Cook activities in the previous quarter.

Amit Bhalla – Citigroup

Could I just follow up with two quick ones? Just first on the atherectomy market, is there a slowdown in procedures, in this past quarter? And the second question is for Guy. Guy, with your SG&A guidance, if we're at the high end of 58% this implies really no dollar growth in the second half of the year for SG&A. Is that reasonable given that you do have – you are facing new competitors? And I'll jump back. Thanks.

John Schulte

As far as the procedural volume in PAD, no, we really haven't seen – I don't think I've seen it, in our judgment, any meaningful change in atherectomy procedure growth. I would say over the last three or four quarters, Amit, I see it being pretty stable in terms of as we question our physicians and I've seen other surveys would seem to imply that it's in the 10% to 15% procedural growth rate and I haven't seen any meaningful change in that growth rate.

Will McGuire

In regards to your second question, Amit, we have some things within SG&A going in opposite directions. We've had – don't want to get into specific numbers here, but in G&A, we had a relatively high in relation to history legal expense costs and we expect that to diminish in the second half. We do expect the S piece to grow in the second half, but moderate from existing growth rates. We did most of our field sales force expansion early in the year and that will be tempered as the year progresses.

So said in another way, and we do expect our guidance implies revenue growth in the second half versus the first half, so we simply need to be more productive with the dollars that we're spending and we have shown some improving sales force productivity per rep. And in the denominator of that equation we include all of our VI quota carrying reps plus the quota carrying reps in lead management as well as the clinical specialists, and in the second quarter we had posted $206,000 of total disposable revenue per rep. That compares with $199,000 in the first quarter, so we're making some strides there. It's part of our plan in that progress is anticipated to continue.

Amit Bhalla – Citigroup

Thank you.

Operator

Our next question will come from the line of Charles Chon with Goldman Sachs.

Charles Chon – Goldman Sachs

Yes, good morning. Thank you for taking the question.

John Schulte

Hi, Charlie.

Will McGuire

Hi, Charlie.

Charles Chon – Goldman Sachs

Just a follow-up on that SG&A question, can you call out for us how much in litigation expense there was during the quarter just so that we have a frame of reference of how much actually comes out of SG&A in the second half of the year?

Guy Childs

It's in the range of $400,000 to $600,000, Charlie. That's not to say all of that's going to go away but it will certainly decline from that level.

Charles Chon – Goldman Sachs

Okay. That's very helpful. Thank you. You know, I just wanted to also understand the drivers behind vascular a little bit more clearly, so you had some nominal contribution from the Kensey Nash products during the quarter, but just wondering and I know you haven't broken out Quick-Cross revenues in the past, but you did indicate that both Quick-Cross and atherectomy revenues grew in the quarter. Can you characterize for us what the trajectories of those two different line items might be? Was the trajectory for one stronger than the other, both exactly the same?

John Schulte

No, they're both – they're pretty close. The Quick-Cross business remains a really nice business for us and that's shown growth basically every quarter for the last five or six quarters, and it's a very nice product that I think is really gaining popularity as the go to device for wire crossing and the like. I think within the atherectomy piece, we certainly continue to see the TURBO-Booster as our driver going forward. As we look at our accounts I think we had mentioned that we basically had – we – for round numbers, Charlie, we have about 400 atherectomy accounts that I'll call active and within that, virtually all of those have ordered TURBO-Booster. However, about half of them, I would say, are ordering on a regular basis and that was somewhat by design as we talked about in the first quarter when we went back and we made a few modifications. We shortened the hydrophilic coating. We simplified the saline flush technique. What we did was we went back to our more accounts and we re in-serviced those accounts and we're seeing nice re-orders coming out from those accounts. I think the go-forward strategy now that we feel comfortable and we've gotten good feedback from positions with regard to their satisfaction we will now be going to the other half of our accounts, other half of our active atherectomy accounts, and going after them with the new TURBO-Booster product line as well, so proceeding as anticipated and we do see – we know from surveys that we've conducted, physician satisfaction clearly grows with the performance of the TURBO-Booster as they gain experience and it's about – I'll say about five cases when a physician has five cases under his or her belt, the ease of use situation is greatly improved and the results seem to also improve because of their familiarity with the system.

Charles Chon – Goldman Sachs

And just one last set of questions for Guy. Guy, as we think to the third quarter here should we just assume that we're going to see some normal seasonality from as we go into the third quarter, some of the seasonal nature of the summer months, and then for that matter a stronger fourth quarter? Any color along those lines would be great and then also, with respect to share count, can you just tell us where we should expect that number to end up at the end of the year?

Guy Childs

Sure. First of all, on the seasonality history tells us that the third quarter is the toughest in that regards consistent with other companies in the space and magnified more so outside the U.S. but also we see it in the U.S. primarily in the VI business, so I expect that to be relatively consistent with historical trends. Obviously, we're going to be pushing our sales force to overcome that historical seasonality. We certainly don't accept it on the face, but we'll be driving to overcome it, but I think that's a reasonable expectation. I'm sorry, Charlie, can you repeat the second question?

Charles Chon – Goldman Sachs

The second question was just on share count, where can you see that go?

Guy Childs

Yes, assuming profitability, which obviously our guidance implies and we expect in the second half, a reasonable share count is 35.5 million. That's a fully diluted number. The number in the current release was only basic shares outstanding because of the net loss associated with the IP R&D charge.

Charles Chon – Goldman Sachs

So probably share count spikes a little bit more in the fourth quarter. Would that be fair?

Guy Childs

That is fair, and again, it's not because we're issuing meaningfully more shares, it's just the GAAP accounting relative to basic versus fully diluted shares.

Charles Chon – Goldman Sachs

Perfect. Thank you.

Operator

Our next question will come from the line of Jason Mills with Canaccord Adams.

Jason Mills – Canaccord Adams

Hey, John.

John Schulte

Hey, Jason.

Jason Mills – Canaccord Adams

John and Guy, I find it hard to pick at anything on the lead removal business. I'll get back to that in a second, but on the vascular business, John, the revenue productivity, it's good to see that it increased a little bit, but still sub one million per rep, and I'm just wondering do you have to go out and add to this product portfolio as you did with Kensey Nash, and if so, sort of what is the preferred way to go and do that? It seems like with the size of the sales force you have given the split there is a lot of untapped leverage there. Said in another way, you need to leverage the time a bit better given, you know EV3 reporting today, a little bit better productivity, and it's just because they have a lot more products in the bag, but perhaps you could touch on your strategy there a bit.

John Schulte

Sure, well, obviously one of the reasons we split the sales force into dedicated VI and lead management was so that we could increase productivity of each organization. Obviously, the first step in that was the acquisition of the Kensey Nash products, which we certainly believe its hand and glove with the VI sales force. Clearly, we think that, that having those products in the bag will improve productivity in the back half of this year as there was really not a meaningful contribution from Kinsey Nash. We only had it for like 15 days in the quarter. But the QuickCat product, aspiration catheters is we think a wonderful product. The aspiration thrombectomy market is growing very nicely. We think we have a competitive product and we have one of the largest sales forces focusing on that. You know, not so much this year but certainly for next year when the next generation ThromCat product comes out we see some very nice leverage there.

That being said, we're not stopping where we are. We are in active discussions with a number of other companies and product lines for either acquisition or distribution and they would be focused exclusively on the pad space and you can imagine the types of things that fit in there from sheaths to wires to balloons and potentially stents although I'd have to say that that's probably at the lowest end of our priority only because of the significant commitment that it would require to be in the stent game so we are certainly looking at other complementary products that could be sold through the VI sales force to the same customer base.

Jason Mills – Canaccord Adams

Great. Just as a second part to that question, John, are you seeing valuations just speaking broadly, if you will, in this space that you're looking at M&A, are you seeing valuations a bit more moderated versus where it was a couple of years ago? Clearly, the broad small cap med tech multiple has come down to amongst the slowest levels in ten years so it stands to reason you may be seeing better prices out there, but is that true, number one? And number two, with respect to the rep productivity, when will it – can you get to north of $1 million per rep in a reasonable period of time, say 2009, with your current product portfolio? I have one more follow-up and then I'll get back in queue.

John Schulte

With regard to valuations I think from an acquisition perspective, I think there probably would be some more realistic outlooks there, but I think our primary focus, Jason, is on probably distributed products, which really wouldn't have much of an impact on that piece. It's really just market pricing and volumes and those kind of things. The answer to the second part of your question is, yes, we would certainly hope. That's always been our goal to get to the $1 million per rep basis and I think as we continue to execute within our VI product line and add additional products like Kinsey Nash and others, yes, I would hope that we would be in the $1 million per rep range in the 2009 time frame absolutely.

Jason Mills – Canaccord Adams

Okay and last follow-ups here, Guy, on the P&L when do we see a gross margin inflection point again? This is a business that's in the past run at 75% or better. You clearly have some dual costs here with the two facilities and but you're ramping sales and you should see some improvements there. Perhaps you could give us without giving us '09 guidance, give us some sense of how gross margins play out over the next eighteen months and when we see the leverage in the P&L? I happen to be around long enough to remember a time when you crossed into double-digit revenue. Now, you're doing $26 million, $27 million a quarter, which is quite impressive, but we haven't seen the leverage on the P&L and perhaps you could help me get a sense for when we could start to see leverage to your operating margin line or pretax margin line.

And then, John, lastly for you on the TURBO-Booster side, it seems like in our checks we're hearing good things but not great things. I guess perhaps I was overzealous in thinking that, that product could really be a home run right away. What should we expect it from TURBO-Booster and is there a difference in training or proctoring the need to occur to get people comfortable in using it, and are you working on a next generation device that perhaps – to perhaps take that to another level? Thanks, guys.

John Schulte

Let me handle the TURBO-Booster, then Guy will do the expense piece. Yes, with regard to the TURBO-Booster, what we have seen as we made the modifications, slight modifications of the catheter and the saline flush set up, what we've asked our sales force to do is to concentrate on individual physicians and get them to commit to doing five cases because – and we actually ask them to fill out product evaluation forms as to their satisfaction with various performance features of the device. And what we see is as they get to that what we'll call magic number of five cases, their satisfaction level goes up quite a bit to the point where their ability to do TURBO-Booster cases without having to be supported by a Spectranetics rep is certainly enhanced. So, we're going to continue that strategy in the third and fourth quarters taking it out to additional physicians. As I mentioned, we only have about half of our accounts although all have purchased the TURBO-Booster only about half are actually are using it on a regular basis and so that's going to be the focus in the second half is to be expanding the activity base to the other half of the hospitals that have purchased, but aren't using actively with the goal of having those that we have spent our time and energy on in the second quarter and have demonstrated satisfaction be able to use that without our support.

The final answer is, yes, we certainly understand how we can make the TURBO-Booster simpler and, yes, we do have a second generation product development plan underway because the best thing about the TURBO-Booster is that its main goal (inaudible) larger lumen than a concentric catheter could achieve, and in every instance I don't think any physician questions that that isn't done and, in fact, achieves lumens as large as any mechanical atherectomy device can achieve, so the beauty of it is that it performed its function, it's just we need to simplify it and that's exactly what we're doing. Okay?

Jason Mills – Canaccord Adams

That's helpful. Thanks, John.

Guy Childs

On the gross margin and then I'll follow with the leverage question. On the gross margin, Jason, you accurately pointed out we have dual manufacturing facilities. This is really the first quarter we've reflected that. I can quantify that cost as in the neighborhood of $200,000 to $250,000 a quarter and those will, of course, go away once we complete our facility move, but we will continue those costs at least through the end of this year and maybe into early 2009 just depending on regulatory body approvals for the move and what not.

The other point that's relevant here, we've indicated before that the Kinsey Nash products, given their manufactured by them, are not quite as high margin as our overall disposables. Think of those in the mid fifties so that puts a little bit of pressure on margin. However, that – we do not expect that to put pressure on the bottom line this year. We expect the Kinsey Nash revenue and margin and cost to be roughly neutral to the bottom line in 2008, so for those – and that, of course, should be offset by some efficiencies on volume growth in the second half. But for those reasons I would be inclined to keep margin expectations right around the 72% level for the full year '08.

On the leverage question nothing has changed relative to our commitment. We do expect margin expansion in '09 once we get the move behind us. The out of pocket costs I mentioned, that's a half a point – a full point there of margin and there's also a not necessarily out of pocket cost but lost productivity with manufacturing engineers and quality assurance engineers spending time on getting this move behind us versus more value-added activities and I can't really quantify that, but that will unleash productivity, and for those reasons I expect margin expansion in '09, once the move is complete and then, of course, we do expect continued growth to drive some expansion.

Lastly, on the leverage, I want to be very consistent there. $30 million is – continues to be what we believe the inflection point for operating leverage. We continue to move towards that and beyond that point, earnings will grow faster than revenue, and that's unchanged with our previous views and we remain committed to that target.

Jason Mills – Canaccord Adams

That's very helpful. Thank you, guys.

Guy Childs

Sure.

Operator

Our next question will come from the line of Matt Dolan with Roth Capital.

Matt Dolan – Roth Capital

Hi, guys, good morning.

Guy Childs

Hi, Matt

Matt Dolan – Roth Capital

First question maybe for, Will, on the lead removal side, HRS and the bifurcation of the sales force here seemed to give you some momentum through the year, but the second half of '07 I think as we've talked about on the last call was, will be a tougher comp period. How should we think about the lead removal growth rate going into Q3 and Q4 relative to the numbers that you put up here in the first half?

Will McGuire

Good question. I mean we do experience a tough quarter in Q3 from a sequential growth rate, compared to Q2 similar to the VI business so I think our expectations about having a huge sequential growth quarter in Q3 should be tempered, although we would expect historically that Q4 would pick back up, and we would see a sequential growth resume in a meaningful way in Q4. With that being said, even if we are relatively flat in Q3, we're still operating at a level that's probably 30% greater than prior year quarter, but the key points is the market is still very large and very much under penetrated, so the market is growing. We think there's 210,000 leads approximately taken out of service every year, and out of that 210,000, probably 100,000 to 110,000 of those are potential market for us and less than 20,000 of those are being extracted, so still quite a large market, still very much under penetrated, but, as you said, Q3 may be a tough quarter to have meaningful sequential growth, but we certainly will resume that, and very, very bullish about this market space going forward.

Matt Dolan – Roth Capital

Great. And a follow-on to that, 14 new reps in that segment of your business, can you give us an idea of how much they contributed in Q2? How productive were they relative to what you're targeting for them?

Will McGuire

Let's see if I have that. You know most of the – let's see here for Q. We added – you know most of the new reps we added in Q1 were trained in the second half of Q1 and I would say overall we're pretty – we're very much pleased with the productivity of that group and but the people that we're hiring are coming into the company with experience from cardiac surgery or from the CRM field, and have relationships right out of the block, and are able to leverage those relationships, and grow our business, with targeting there so we've been extremely pleased with the productivity, especially with our lead management people that we've hired and look forward to continuing to grow that sales force. I wouldn't expect any growth in Q3. We'll probably take another look at it in Q4 and see if we want to resume some growth there.

Guy Childs

Matt, just some specific numbers there on a sequential basis if you include the clinicals and the lead management reps, the productivity per rep was up 15% compared with Q1 and was right around $200,000 per rep per quarter for just lead management.

Matt Dolan – Roth Capital

Okay, and then I guess a broader sales force question maybe looking a little bit into 2009 as we weigh this push towards leverage and really getting more revenue per rep, how does that denominator play out? What size of an increase could we see here both on the VI side as well as the lead removal force?

John Schulte

I would say on the VI side maybe 10 additional reps in '09 and, Will, on the lead management side?

Will McGuire

It could be a similar number 5 to 10. At this point, we focused on this year. I think in prior calls, we've said we expect to be somewhere around 115 total reps at the end of 2008, and, as Guy said earlier we're sitting at 110 right now.

John Schulte

Yes, we're very close to that so I would say, yes, 10 to 15 more in '09 but we'll give more clear guidance. I think a lot of that will depend on productivity and leverage and those things and as we see that increasing, and we see opportunities to expand we will certainly do that.

Matt Dolan – Roth Capital

Great. Thanks, guys.

Operator

Our next question will come from the line of Suraj Kalia with Sanders, Morris Harris.

Suraj Kalia – Sanders, Morris, Harris Capital

Good morning, John, Good morning, Guy.

John Schulte

Hello, Suraj.

Suraj Kalia – Sanders, Morris, Harris Capital

Hey, John, In terms of the guidance, can you help me understand given for the second half, the contribution from Kensey Nash would be incorporated in your total numbers, but the guidance is pretty much static. So if I look at roughly let's say if my memory serves me right, let's say a 2 million or 2.5 million contribution from the Kensey products in the second half, and a 104 million overall run rate, so can you help me understand why you'll have maintained guidance, and how do you all envision the split between vascular intervention and lead removal for the second half, given Pathway coming on line cardiovascular already selling product? I know it's a pretty broad question, but I am trying to hone in why the guidance is what it is, and what is the thought process in getting to that guidance?

John Schulte

Yes, well, Suraj, it's obvious that we have a fairly wide range from 104 to 110 and obviously doing a little over 50 million in the first half implies somewhere between $4 million and $10 million of incremental revenues right in the second half. And within that, obviously, Kensey Nash will provide some. They were doing about a $5 million run rate, that's what they did in their twelve months kind of a thing. What we've said on the Kensey Nash piece, Suraj, is that we're going to push the QuickCat very aggressively because that product is fine, full indications and the like. We're probably going to be a little less aggressive than Kensey Nash was, on ThromCat and Safe-Cross, primarily because we believe that the next gen products are significantly better, and so rather than put the similar amount of emphasis that they put on those two products, because that's what they had to sell, we're taking a little bit more conservative approach. We'll be supporting that the customers that currently use ThromCat and Safe-Cross but we're not going to be aggressively trying to expand as we will be with QuickCat so we may not, in fact, get the same run rate from Kensey Nash in the second half as they were running at before, specifically, because we see such a great opportunity with the next generation products and that's the one we want to put our big push on for sure. So but that obviously then applies we need to have sequential growth across VI for sure, to get to that range, so it's obviously a fairly broad range, but there are a lot of market factors, as you stated, and at CSI, we probably fairly well understand that company right now because they've been out for nine months and we understand where they're positioning their product and their focus. I think Pathway is a little bit of an unknown, simply because they just haven't released to the market yet, and as we have said with regard to any atherectomy technology, they all get trialing done, and so that will have an impact, I think, on all other atherectomy companies as physicians try, new companies I think – new products excuse me, but I think also that may be somewhat offset by an expansion of the atherectomy segment of the PAD pie, simply because now there would be four companies preaching the benefits of tissue removal and that we would expect that with that additional selling pressure from multiple companies that the atherectomy segment of the PAD pie will grow. Will, any comments on the lead management piece?

Will McGuire

(inaudible).

Suraj Kalia – Sanders, Morris, Harris Capital

John, just in – again, if my numbers are approximately correct, at peak sales, we saw Fox Hollow flocking about, let's say, $200 million or close thereof if you remove the Merck revenues and you–

John Schulte

Yes, $160 range.

Suraj Kalia – Sanders, Morris, Harris Capital

Okay, let's say $160. You saw the EV3 reported this morning, if my numbers again are correct, the atherectomy revenues, they're down on an annualized basis. They are now running at about $100 million and, again, I am just throwing out broad numbers out there.

John Schulte

That's fair. You're right.

Suraj Kalia – Sanders, Morris, Harris Capital

So, John, help me understand that their numbers from peak let's say have gone from 160 to 100, has the pie chart for that remaining $60 million loss, has that been distributed into other atherectomy players? Has it gone, the bulk share has gone to stents given the overall market dynamics? How could you characterize the 60 million or so because it was a pretty bullish call that they did this morning and I am scratching my head trying to understand okay revenues are down, but what's going on in the overall market.

John Schulte

I understand, Suraj. I think one of the unknowns is how much of the – we'll call it 40 million or 42 million quarterly run rate that had been achieved with excisional atherectomy before the acquisition, how much of that was real business or inventory loading. That's– it's hard to know that. Only the other company knows that and obviously there was a sequential drop of a big magnitude that, that happened from Q4 to Q1, and then bit of a rebound. So, it's hard to say. I think it is fair to say that while the PAD market continues to grow, physicians will continue to – you know they're data-driven. It's a data-driven specialty and for atherectomy to meaningfully grow, as a percentage of the PAD pie, better data will be required so, a lot of physicians now are using atherectomy because inherently, they believe that if you can safely remove tissue that you can either improve longer-term outcomes, simplify the procedure, perhaps make it safer and the like, and so right now there's a lot of moving parts, as you know, in the PAD pie.

Our belief is that atherectomy plays a role in the areas where balloon and stents don't work very well and those are long lesions below the knee where you're not going to put multiple stents and balloons have provided pretty poor results, lesions at the knee, which is a so-called no stent zone as much as possible. And I think in the areas above the knee, I think our approach is to look at those areas where perhaps in long lesions with some calcium that perhaps the bulking plus stenting may provide an optimal result, and that represents in those three areas that I just described, that represents about 50% of all the PAD procedures.

So, in my judgment that's where – that's what atherectomy – you know right now it's at 20% or so of the total procedure volume. I think if we can actualize in those areas that I just described atherectomy can grow to as much as 50% of all procedures, but that's going to require more data. That's why we're doing in stent re-stenosis studies that we think are vitally important, and I think that's a beautiful role for atherectomy, where clearly ballooning doesn't work very well. Mechanical atherectomy technologies currently have contra indications. We don't and so we're looking for that segment, so there's areas and this is going to happen over the 18 month to 24 month kind of time frame so a lot of things are shaking out, but I do believe that there's probably a stabilization now in the atherectomy market, and I believe that you're going to see upward growth in all companies for atherectomy.

Suraj Kalia – Sanders, Morris, Harris Capital

And, Guy, care to give a number on the dollar level of sales of TURBO-Booster in the quarter, given that you're at least a couple of quarters into the launch?

Guy Childs

Suraj, I appreciate the question, but consistent with past quarters, we're just not– we don't go into that level of detail within our VI business. Sorry about that.

Suraj Kalia – Sanders, Morris, Harris Capital

Fair enough. Gentlemen, congrats. Thanks.

Guy Childs

Thanks, Suraj.

Operator

Our next question will come from the line of Spencer Nam with Summer Street Partners.

Spencer Nam – Summer Street Research Partners

Couple of questions. First question is in the Vascular Intervention side, are you taking share away from anybody and when I say anybody it could be drug competition as in other atherectomy companies and/or other modalities of treatment like stents and balloons. Are you seeing any shifting in share or are you guys making inroads into any of these territories that are currently being covered by the competitive treatment options or competitor, drug competitors?

John Schulte

Spencer, it's hard to say in terms of share taking because of the moving parts that we talked about because of the situation with inventory, but our belief is that within the atherectomy market, we continue to grow at a very good clip that I believe that you'll start to see atherectomy grow as a percentage of the total PAD procedures in the areas that I mentioned and I believe we're extremely well-positioned within the atherectomy segment because of the advantages that we've described in terms of vessel diameters treated, tissue morphology, safety profile, those things and I think as more data is available, I think our story will get stronger. I think I would encourage you to – I mentioned this article in the Journal of Cardiovascular Surgery. I think it may be available online. I encourage you to really read that carefully. It's the best and most comprehensive look at where laser atherectomy fits within the PAD space that's been published maybe ever.

Spencer Nam – Summer Street Research Partners

Great. I appreciate that. Moving on to lead removal side we saw a lot, very strong growth. Do you have any sense in terms of the clinical community, how they may decide on lead removal as a guideline? Any sense that, that is there is a movement towards making a more formal guideline in terms of removing leads or is it still sort of patient dependent or institution dependent? Some will tend to be more aggressive; others will be less aggressive. What are your thoughts on that right now?

Will McGuire

Sure, I can address that one. This is Will. Yes, there is just overall there is a continued strong awareness and growing awareness of the lead management concept and it's the physician community that's driving this, but we've done our share with four summits and sponsoring an HRS symposium, and some other things like that. There are guidelines right now. The guidelines are, I forget how many years old, I think almost 8 years old that were developed by EP Society, and it's class one, class two and class three, starting with class one being general agreement that the leads should be removed going down to class three, which is general agreement that lead removal is not necessary. And within class one, you have infected leads, so the infected leads are a very clear indication for removal.

Now what happened at HRS this year was there was a panel, as we mentioned earlier, at an HRS symposium that really kicked off a process to evaluate and re-write the extraction guidelines. So this process has started and I think the commitment from the panel at HRS was to have an updated final document no later than next year's meeting in May, so I guess the short answer is there is a formal process underway. It's a panel within HRS that is re-writing these guidelines and we look forward to hearing more news from this panel either later this year or sometime early next year.

Spencer Nam – Summer Street Research Partners

Great. I appreciate it. And the final question is these trials that are ongoing, PATENT and SALVAGE, is there any possibility that we may get some interim look at some of the data points over the next six to twelve months as some of the enrollees who they have hit the one-year anniversary of the follow-up?

John Schulte

Sure. I think, Spencer, the earliest looks we would have, I would say, would be when we have half the patients enrolled for say, a six-month time frame, and then we have to talk with the investigators as to whether or not that makes sense, but that's kind of what I would say would be the earliest look so 50 patients at six months.

Spencer Nam – Summer Street Research Partners

Great. Appreciate that.

John Schulte

Thank you.

Operator

Our next question will come from the line of John Putnam with Dawson James.

John Putnam – Dawson James Securities

Yes, 400 active atherectomy accounts, I guess what I am wondering is what percentage of the total that might be, and do you need to hire more sales reps to penetrate that unpenetrated portion of the market?

John Schulte

Yes, good question. We think – we have 400 active atherectomy accounts. We believe there's probably double that number that could be active atherectomy accounts, some of whom have a laser, but are not yet atherectomy accounts. I think we're in the neighborhood of 600 hospitals with a laser, but our belief is as we look at procedural volume that while there may be 1,500 total hospitals doing peripheral procedures, I would – this is my guess, that 800 to 900 would have enough volume to warrant us calling on them to put capital equipment or sell capital equipment. The other ones I think probably just wouldn't have enough volume, so we think there's a lot of room for growth in terms of new accounts and we've been doing that at a fairly rapid clip, but we do need to balance I guess how many new accounts we go after versus supporting the existing accounts, so we all wanted to do within the realm of looking at our profitability. So we don't think it makes sense to go out and wholesale hire, a whole lot of additional sales people at this point. I think we're going to continue to gain traction in existing accounts, increasing utilization, and then also target additional accounts that have sufficient volume and so we've got a pretty active pipeline of accounts that have interest in our technology as well.

John Putnam – Dawson James Securities

Okay. And you think you can reach those with the existing sales force?

John Schulte

Well, I think we'll need some – clearly we'll need to expand, but I don't think it's unreasonable to think that a sales person can handle 7 to 10 active accounts and I'll call that number maybe 6 to 8 giving your range, and so as you get into the neighborhood of 85 sales people to 100 sales people you do the math, and we don't need to double our sales force to go after these additional accounts. I think there is additional capacity. What we find is that when we get an account that is very comfortable with our technology that's using it in all the right places and all the right ways, the need to support that account on a case by case basis is dramatically reduced and so if a territory has an account doing $0.5 million and three other accounts doing $300,000, that person has got some time to grow those three accounts to higher volumes as well as prospect for some additional accounts, so that's all – that's what sales force productivity is all about. So we do think that we can attack the rest of the market that we're not in right now with certainly an expansion of our sales force, but not a doubling by any stretch.

John Putnam – Dawson James Securities

Yes. Thanks very much.

John Schulte

Thanks.

Operator

Our next question will come from Thomas Kouchoukos with Northland Securities.

Thomas Kouchoukos – Northland Securities

Couple quick questions, one on just looking at your internal R&D I know there's been some mention of a second generation Quick-Cross catheter coming and I was wondering if you could provide the timing for that and then also maybe what benefits that would add? And then also if you could comment on the laser console that you guys have been working on, what sort of time line you see there as well?

John Schulte

No problem. Let me comment on the Quick-Cross and have Will comment on laser. Yes, no at this point for competitive reasons, Tom, we would choose not to provide any more details on the different benefits and the like. We'd rather keep that under wraps until it's out there and we just want to let you know we're working on it. We're optimistic about it and we'll let you know when it happens. I'll let Will talk about the laser.

Will McGuire

For the laser what we've actually had a couple of projects underway. One is more short-term and one is longer-term. From a short-term perspective we've just been doing some updates to the CVX-300 to maintain compliance with things that we know will be enacted over the next 18 months or 24 months, so these are upgrades to the current system. The future system, the next gen, if you will, we have started a project there, and that's – you know you need to look at that as being a more of a 36-month project or time frame before it would be market released because it is a – it would be a PMA product and the development cycle is pretty long as well, so just a reminder for that project we're looking at somewhat smaller size, a big increase in the mobility, a better interface, instant on, improved performance, remote diagnostics and definitely, an overall lower cost of total ownership, but, again, that's more of a 36-month project, it's not something you're going to see in '09 or '010.

Thomas Kouchoukos – Northland Securities

Okay. And then would you – you're doing that all in-house?

Will McGuire

No, we have partners that we're working with in projects like that.

Thomas Kouchoukos – Northland Securities

My next question kind of goes back to what Suraj was asking you about earlier. I guess, John or Guy, if you're looking at kind of $4 million to $10 million in incremental revenue in the second half of the year, I know you don't want to say split everything out, but is there one primary driver that kind of gets you to that number on the upside of it? I mean it seems pretty achievable to hit the low end of the guidance, but if we're going to see upside to kind of where the Street is today, is there one area that – is it lead removal because that has the most momentum behind it or are there plans for another acquisition that helps add some incremental there as well, maybe just get some color with respect to that?

John Schulte

I think, Tom, it's a combination, obviously. We would expect positive contributions from VI atherectomy business, from the Kensey Nash piece and possibly from some additional distribution pieces and as well as we've had really strong growth on the lead management side. Obviously, we're coming against tougher comps because we've grown in excess of 45% I think per quarter for three quarters, but we do see continued growth in the lead management business. It's operating on really all cylinders and some of the things that Will talked about in terms of growth drivers, our expanded indications in those things while they're not here now. There's a physician awareness of the advantages of taking leads out is becoming much more well established so to get to the top up end obviously we need to exceed in all three areas.

Thomas Kouchoukos – Northland Securities

Okay. And maybe I know you don't want to put your finger on it, but looking at the Vascular Intervention revenue, we're looking at 19% growth, I think last year or last quarter you mentioned your goal was to keep it growing at double the market rate. Do we see the eye go back to a 20% growth number in the coming quarters or is this something that is a one quarter hiccup and as the competition kind of settles and every technology finds its place we see a more normalized rhythm here?

John Schulte

Yes, it's a little hard to tell, Tom, obviously because of some uncertainties, but yes we would see it going back to a more double the market growth rate basis. That's certainly our plan.

Thomas Kouchoukos – Northland Securities

Okay. And then finally last one on TURBO-Booster we've heard some physicians talk about it being actually a pretty easy first case for a TURBO-Booster case would be in stent re-stenosis and I am not sure how much you can comment on off label usage but are you seeing – is there enthusiasm for the ISR application out there? How much usage are you seeing for that today?

John Schulte

Sure. Well, obviously, we can't promote it for that because we don't have a label indication although nor does a balloon by the way. Nothing is actually on label for the treatment in stent re-stenosis but we want to be careful in terms of off label promotion and those kind of things. But one of the things that we try to do obviously the reason we started two in stent re-stenosis trials and both of them have very high profile investigators who are on the podium a lot, just talking about the concept of the treatment of the use of atherectomy as an option for the treatment of in stent re-stenosis because simple ballooning just has shown horrible results.

There was a paper published in Europe showing results of balloon angioplasty and I think (inaudible) cutting balloon and I think the re-re-stenosis of in stent re-stenosis was in excess of 75% at six months and that was with shorter ISR lesions, so physicians are grasping at straws for technologies that will help them in the treatment of in stent re-stenosis and we certainly believe that that specific application will grow because stents are growing so quickly and I don't care how strong, how flexible, how drug coated or whatever you have a stent because of the plaque burden and the length of these lesions, stents are going to re-stenose and the fracturing and all that stuff and I think it's very important to have an effective tool in the treatment of ISR and that's why we've got two shots on goal here, one with a booster followed by a balloon and the other one with a booster followed by a Gore Viabahn stent because we know how difficult this lesion subset is and so we're going after this with a vengeance to try to generate some clinical data and then hopefully to generate an indication, a positive indication, for the preventive in stent re-stenosis. As far as off label use it's hard to figure. Physicians obviously could use whatever they want for whatever they want, but I would say it's still a relatively small part of our total procedural volume.

Thomas Kouchoukos – Northland Securities

That's helpful. Thanks a lot, guys.

John Schulte

Thanks, Tom.

Operator

Our next question will come from the line of Charley Jones with Barrington Research.

Charley Jones – Barrington Research

Have you frozen the design of your next generation TURBO-Booster product, John?

John Schulte

We're real close, Charley, yes.

Charley Jones – Barrington Research

Okay, you're close. And can you just give us a sense of how much the design changes, like how much you feel the design changes will improve the ease of use and maybe an estimate of time savings?

John Schulte

Yes, we think it will be fairly significant, Charley, and again, I can't comment on much more than that, but we understand the steps involved in doing a TURBO-Booster procedure and the more of those that we can knock out the better. To say we – no one has been displeased with the lumen gain that they get. It's just sometimes the time that it takes, particularly for longer lesions. Now, that being said, even the current TURBO-Booster is shorter than other atherectomy technologies for long lesions, but we want to make it even better so, yes, we've got a – I think we've made wonderful progress and the like and I'll try to give some more color as this – as we go further down the path, but, yes, we think we know what we need to do.

Charley Jones – Barrington Research

Yes, I wasn't looking for anything more than that. That's very helpful. Can you to push a little bit more there though, any timing at all there and do you think it's a letter or a 510(k) and–?

John Schulte

Well, we certainly believe it will be a 510(k) although obviously the FDA can always change its mind but the first TURBO-Booster was a 510(k). Our peripheral catheters are 510(k). As a system it's a 510(k) so we would expect that the second generation would be a 510(k). It all depends on as we do our say final design freeze and validation of verification 510(k), all that kind of stuff, that all takes time and the like. We don't believe that the clinical data will be required, but that's always an uncertainty.

Charley Jones – Barrington Research

That's answered part of my question, thank you, and then the last question here, Guy, you helped us with the cost savings that you're going to have in your – you know, that you're actually the costs that you're spending right now for the dual facility. When are you going to start to manufacture the 510(k) products in the new facility or at least some of them?

Will McGuire

Hey, this is Will. I'll take that one. We've actually started manufacturing 510(k) products now. We have three physical lines here in the new facility, two atherectomy and one SLS or lead extraction catheter line here now, and product that's being – we're actually going to manufacture some product this week that will be sent to the sterilizer and shipped to customers so that's underway.

Charley Jones – Barrington Research

And what I am really wondering, Guy, is when are you guys going to start to be able to talk about the level of cost savings you're going to have on a per unit basis? I mean you're going to wait six months, a year before you have that under your belt or are you going to start to be able to give us an indication later this year?

Guy Childs

It's going to be difficult later this year, Charley. We just need to get the move done, behind us. As we start framing 2009 guidance we'll try to give as much color as possible to that. It's certainly front of mind for us and as soon as we have good visibility on that and finalize our 2009 plans we'll tell you as much as we can.

Charley Jones – Barrington Research

But you're still feeling comfortable or good about the fact that you will have nice per unit cost savings?

Guy Childs

As soon as we get the move done, there's a point of margin right there and then beyond that, volume growth should drive improvement although I am hesitant to give specifics around that at this point.

Charley Jones – Barrington Research

Sure. I am sorry, last question here, can you remind us the list price of the lead removal line and are there any plans to increase the price there and would the price increase you had for the atherectomy catheters a year and a half ago be a good starting point for that increase? That's it. Thanks, guys.

John Schulte

Will?

Guy Childs

Yes, the actual list for the laser base device is around $2,100 and change and then the lead locking device, the mechanical device is just a little over $500, Charley.

John Schulte

That's ASPs.

Guy Childs

Those are the actuals and in terms of price increases, we're constantly looking at that. I wouldn't rule anything out. I had no specifics to say there, but it's an ongoing evaluation that's just part of our normal business practice.

Operator

Ladies and gentlemen, management has time for one more question and that question will come from the line of Joshua Zable with Natixis.

Joshua Zable – Natixis Securities

Hey guys, congrats on a great quarter. Thanks for taking my questions here. I know it's been a long call so I'll be real quick, just two real quick ones. First of all, just to clarify on the competition on the landscape I guess obviously you're taking into account some new products that have come in and sampling. Have you guys taken into account sort of what we saw this morning from EV3 kind of getting more productivity as that sales organization gets better organized in the latter half of your guidance?

John Schulte

Sure, absolutely, Josh. You know one of the reasons we split the sales force was to give focused sales efforts and we've really only had one quarter now of a separate sales organization and we know we're very pleased with that and as they gain experience in their VI only territory or lead management only territory absolutely we expect productivity to increase.

Joshua Zable – Natixis Securities

Great, and then the second one just related to the manufacturing I know you guys have been very open about working on this and having increased costs. Just can you just give us just real quick as far as relative to your own internal expectations how the move is going and the manufacturing going? Are we coming better or as expected or a little further behind?

Will McGuire

Hey, this is Will. I'd say right now we're as expected, just where we said we'd be over the last six months now. We've, as I just said, we have three lines in the Federal Building here, two atherectomy, one SLS. We'll move a Quick-Cross line and an LLD line this quarter. We're producing 510(k) product this quarter that will be shipped from this facility to customers and we'll be submitting our site change notifications to the FDA and to the TUV later this quarter that we'll initiate movement of PMA and CE market products later in the year. Just a side note, we also have already installed a new fiber draw tower, and it is in place and producing fiber now and being validated, and we also have delivered or have received delivery of a new sterilizer and installation of that has begun as well, so we feel very good about our progress and everything is on track right now.

Operator

And, gentlemen, you may continue with your presentation or any closing remarks.

John Schulte

Well, thanks everybody for listening for today's calls. We remain very optimistic about our business. We think there's really three very nice growth drivers, our vascular intervention business fueled by atherectomy and supplemented by Kensey Nash products. Our lead management business is clearly operating on all cylinders and we remain extremely optimistic by our business growth prospects outside of the United States so look forward to updating you all on next quarter's call. Thanks.

Operator

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

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Source: The Spectranetics Corporation Q2 2008 Earnings Call Transcript
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