Micrus Endovascular Corporation F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

Micrus Endovascular Corporation (MEND)

F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

August 7, 2008 10:30 am ET

Executives

Jody Cain – IR, Lippert/Heilshorn & Associates, Inc.

John Kilcoyne – Chairman and CEO

Gordon Sangster – CFO

Bob Stern – President and COO

Analysts

Shawn Fitz – Stephens Inc.

Amit Hazan – Oppenheimer & Co.

Shawn Bevec – Susquehanna International Group

Suraj Kalia – Sanders Morris Harris Capital

Spencer Nam – Summer Street Research Partners

Eli Kammerman – Cowen and Company

Erica Selin – Stanford Group

Brooks West – Craig-Hallum Capital

Juan Sanchez – Ladenburg Thalmann & Co.

Presentation

Operator

Welcome to Micrus Fiscal Year 2009 First Quarter 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, August 7, 2008.

I would now like to turn the conference over to Jody Cain. Please go ahead, ma’am.

Jody Cain

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 2009 first quarter. If you’ve not received this news release or 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 accurate only as of the date of the live broadcast, August 7, 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

Thank you, Jody, and my thanks to everybody for joining us this morning. Today, in addition to reporting our first quarter fiscal 2009 financial results, I am very pleased to announce that we are in the progress of negotiating settlement terms with Boston Scientific and the U.C. Regents with regard to our longstanding litigation. I will address this later in the call.

First, we are reporting revenues of $18.3 million, representing a 9% increase versus the first quarter of fiscal 2008. Revenues from the Americas increased 11% to $10.5 million and revenues from Europe exclusive of the United Kingdom increased 2% to $3.7 million, both compared to fiscal 2008.

Our first quarter was impacted by an apparent temporary slowdown in procedural volumes in the U.K. and the timing of our revenues associated with our agreement with Merit Medical. These two events combined were approximately $1 million in revenue. To add more clarity to those factors affecting the first quarter, as mentioned, we believe procedural volumes temporarily slowed down in the United Kingdom, resulting in a 14% year-over-year revenue decline. Our coil market share in the U.K. is greater than 50%, so procedural fluctuations in this market can have significant revenue implications. That being said, we saw a rebound the in the U.K. procedural volumes and their associated revenues in July.

We were also impacted by the timing of our distributor orders in continental Europe. We expect our European revenues to rebound this quarter due to shipment of existing orders and new product introductions.

With regard to our OEM revenues, these were affected by the timing of orders from Merit Medical. I would like to confirm that we will ship to Merit in excess of $500,000 this quarter. I know that you will ask about the impact of our competitors, so let me address those now. We believe that we continue to gain share from Boston Scientific, particularly with our Cashmere coil. As we anticipated, Cordis (inaudible) back for approximately one year with this coil and has reclaimed some of its loyal customers. However, we have more than held our own and grown our coil franchise again with Cashmere.

ev3 has a more competitive coil with the Axium, but we have yet to see a broad based acceptance of this coil. ev3 continues to (inaudible) with under HDE status, the use of (inaudible) in aneurysms, and this did have an impact on us in a small number of cases particularly with larger aneurysms. We have not observed a material change in Terumo’s position since the last quarter.

Revenues were also affected to a lesser extent from a number of no-charge beta evaluations related to our innovative DeltaPaq microcoil system approved last quarter.

To support domestic sales, we are undertaking field sales force initiatives and aggressively building our product portfolio. We expect a number of factors to positively impact revenues in the coming quarters. These include MHLW approval in Japan for our Cerecyte products, which comes on the heels of our stretch-resistant approval only six months ago, which provides with a tremendous opportunity to grow our business in Japan.

The impact of our stretch-resisting Cashmere and UltiPaq coils has been dramatic. In June alone, more than 1200 coils were implanted in Japanese procedures. This is another record for Micrus.

In North America, we are currently in beta evaluations with three new products and this past week we launched our Neuropath guiding catheter, which is a 100% incremental dollar opportunity. We are in beta with our new EnPower detachment system. We are in beta with our new Ascent balloon catheter, which again is a 100% incremental dollar opportunity. And we are in beta on our new DeltaPaq coils, which we believe will allow us to compete more aggressively in the filling market.

It is our expectation that all of these beta launches will move to full launch in the fall, capitalizing on the seasonal upswing in procedural volumes.

Complementing our hemorrhagic platform is the recent IDE approval for our VISSIT study with the Pharos Vitesse stent for the treatment of intracranial atherosclerosis. The Vitesse is the first of our ischemic platforms, which we expect to be followed by both our ReVasc revascularization and Genesis F.A.S.T. Funnel Catheter devices in the first half of the next calendar year.

As previously mentioned, we are in the process of negotiating settlement terms with Boston Scientific and the U.C. Regents, which licensed some of the patents-in-suit to Boston Scientific but are not party to the lawsuit. And as a result of these negotiations, we tentatively expect to payment of $1.65 million in stock that would accompany patent cross-licenses between Micrus and Boston Scientific. This issuance of stock, together with a payment of $950,000 by Boston Scientific to the U.C. Regents, would be made to the U.C. Regents to satisfy the Regents' claim for royalties related to these patents. We believe this is a positive development for all parties, and hope that final and definitive agreement can be reached in the next two weeks.

For the sake of clarity, I want to emphasize the settlement terms are not binding at the present time and the litigation will continue unless and until we sign the definitive agreement.

I am also pleased to announce that on July 22, the Department of Justice confirmed to us the monitorship associated with our deferred prosecution agreement is over and the cost associated with the monitorship will come to a close. We remain committed to ensure that we have strong compliance program.

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

Gordon Sangster

Thanks, John. I’d like to review our fiscal 2009 first quarter and affirm our 2009 financial guidance. As John mentioned, we reported revenues of $18.3 million for the first quarter of fiscal 2009, an increase of 9% compared with revenues of $16.8 million for the first quarter of fiscal 2008.

Revenues from the Americas increased 11% to $10.5 million. Included in this, revenues from Latin America increased to $1.3 million in the first quarter of fiscal ’09 from $374,000 in the first quarter fiscal 2008, primarily due to the recognition of $668,000 resulting from a change in revenue recognition for sales made to our Latin American distributors from a cash basis to per shipment basis.

Revenues from Europe decreased by 4% to $5.7 million both compared with the first quarter of fiscal 2008. Revenues from Asia Pacific increased 48% to $2.1 million and included sales of $1.9 million to our distributor in Japan, compared with revenues of $1.4 million for the comparable quarter in fiscal 2008, which included sales of $1.1 million to our distributor in Japan.

For the quarter, gross margin was 75%, which compares with 78% in the prior year first quarter. The decrease in gross margin in the first quarter of fiscal 2009 was mainly due to higher sales to distributors at lower margins primarily in Japan and Latin America. Our objective is to sustain gross margins in the mid-to-high 70s but we do expect to experience quarterly fluctuations due to product mix and the level of distributor sales.

R&D expense for the quarter of fiscal 2009 increased to $3.0 million versus $2.0 million for the first quarter of fiscal 2008. The increase was mainly due to an increased headcount, product testing, and outside services. We expect R&D expense to fluctuate as we continue to work on product improvements, expand product lines, and explore new product opportunities and technology in both the hemorrhagic and ischemic market.

Sales and marketing expense for the quarter increased to $8.1 million, up from $6.5 million last year. The increase was mainly due to higher personnel and travel costs related to increased headcount and an increase in sales incentives resulting from higher sales. In terms of our field sales force and clinical team, we currently have a North America direct force of 42, a European direct force of 18, and an Asia Pacific direct force of 3.

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 distributor level in Europe and Asia to ensure a high level of global physician support for all Micrus products. As we continue to increase the size of our Europe – direct U.S. 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 first quarter of fiscal 2009 was $9.6 million versus $6.3 million for the first quarter of fiscal 2008. The increase is primarily due to the accrued settlement costs in connection with the patent litigation with Boston Scientific, an increase in headcount, and legal fees mainly in connection with the United States Department of Justice monitorship, which has now concluded.

Looking at our bottom line, the net loss for the first quarter was $6.6 million, or $0.42 per share on 15.6 million weighted average shares outstanding, which included $1.5 million in stock-based compensation expense, or $0.10 per share. This compares with the first quarter of 2008 net loss of $1.4 million, or $0.09 per share on 15.3 million weighted average shares outstanding, which include $1.1 million in stock-based compensation expense, or $0.07 per share.

Turning to our balance sheet, as of June 30, 2008, we had cash and cash equivalents of $16.9 million. Stockholders’ equity at fiscal quarter-end was $43.4 million. Working capital was $22.6 million and we have no long-term debt.

And lastly today, we are reiterating our fiscal year 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 Japanese distributor purchase only the contract at minimum and includes no revenue contribution from sales in China as we continue to lack clarity on the timing of product approval in this country.

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

Bob Stern

Thanks, Gordon. Good morning, everyone. Product introductions continue to be an important aspect of our growth strategy. Last quarter we did not introduce any new products and our plate is full as move forward into this quarter. In fact, though, products introduced during the past 24 months represented 22% of total revenues for the first quarter.

Our Cashmere coils continue to be well received, comprising 15% of total first quarter revenues with Presidio coils making up another 6%. We also benefited from contributions from the ENZO microcatheter and the EnPower, our more efficient green detachment system. We have a number of new products slated for introduction this year in our hemorrhagic business, and both John and I will talk about them in the next couple of minutes.

We expect to introduce several new microcoils. Notably among these is our DeltaPaq microcoil system that John mentioned earlier. The DeltaPaq truly represents an evolutionary design in coils. It has the potential to improve packing densities by 10% to 20% when you compare it to existing coil technology due to its innovative primary wire. We believe that the greater packing density may reduce recanalization rates and therefore retreatment rates.

Additionally, we have already received 5010(k) clearance in the U.S. and CE mark authorization for commercial distribution from the European Union for Cerecyte and stretch-resistant versions of the DeltaPaq.

To drive use of our DeltaPaq beta valuations were run primarily at no charge last quarter, allowing neurointerventionalist first hand experience with this novel technology and providing us with the opportunity to gather additional data on the product and its performance. Today, DeltaPaq are being sold and we believe this coil will become our front line selling coil.

Additionally, we will continue to broaden our line of guide wires through the introduction of a family of high performance direct to work guide wires. We also plan to expand our Courier microcatheter lien and introduce enhancements to the ENZO deflectable catheter system. As John mentioned, we are currently in full North American launch of our Neuropath guide catheter line, which will provide for better stability, more flexibility at the tip, and give softer tips to the interventionalist with the added advantage of facing significantly less competition in these product categories.

In addition to bolstering our product offering in the hemorrhagic space, we continue to assess and invest in flow diversion and covered stent technologies that may in the future be used to treat aneurysm.

We are also developing a broad range of products for the treatment of ischemic stroke. As we stated before, stroke is a leading cause of disability in the world and 80% of all strokes are caused by an ischemic event. Last month, we received CE mark or authorization for the Pharos Vitesse Stent. The Pharos Vitesse is our second generation stent and is specifically designed with a series of technical advances for improved handling, navigability, for more precise placement of intracranial ischemic stenosis and wide-neck aneurysm treatment. The Pharos Vitesse enables the intracranial delivery and deployment of the stent in one step. It eliminates the need for pre-dilation of constricted vasculature. Among the Pharos Vitesse features are new distal tip that is longer and softer, a newly designed thinner balloon and the Micrus’ rapid exchange delivery system. Additionally, the Vitesse incorporates a proprietary coating, which we believe may reduce the need for retreatment due to restenosis.

Last month, we announced the Vitesse Intracranial Stent Study for Ischemic Therapy, or VISSIT, clinical trial application has been conditionally approved by the FDA. The VISSIT trial will compares clinical outcomes of patients treated for intracranial ischemic stenosis with the Pharos Vitesse intracranial stent to current best medical practices. This is the first global, industry-sponsored prospective, randomized clinical trial to evaluate the safety and effectiveness of an intracranial stent for this significant medical condition. We are in the process of initiating study sites in the U.S., Europe, and China.

Review our other ischemic products, we continue development of our revascularization technology acquired from ReVasc and we anticipate beginning beta valuations for (inaudible) next year. We are making rapid advances in development of our F.A.S.T. Funnel Catheter and clot-retrieval system and as well we are currently fine tuning the system and believe we’ll be in the process of beta testing in the first half of next year.

We are also expanding our geographic reach. We saw strong acceptance of our stretch-resistant coil usage in Japan following the introduction last December. In fact in June we surpassed the 1200 mark in coils sold in hospitals in Japan, the first time in a single month. We have already received an order from our distributor in Japan following receipt last month of approval of our Cerecyte microcoil line. This quarter we have also opened new markets through distributors in India, Thailand, Vietnam, and the Philippines. And we continue to work diligently towards approval in China. As Gordon stated, we have not included any contribution from sales in China in our 2009 annual revenue guidance.

Finally, we are working to improve our manufacturing cost absorption at our facility in Florida. And as we sell more active products, our margins should continue to improve. We also anticipate during fiscal 2009 we should begin to gain margin support from the implementation of the DPU manufacturing program. We continue to invest in our Florida operations, which should allow further cost advantages over the long term.

With those comments I will turn the call back over to John.

John Kilcoyne

Thanks Bob. We continue to drive top line growth by building upon our established core portfolio with complementary products that allow us to compete in the increased hemorrhagic procedural revenues. We are enthusiastic about the product introductions expected this year that will further establish our presence in the hemorrhagic market and are particularly excited about the anticipated full (inaudible) launch in both North America and Europe this fall.

As an update to our Cerecyte prospective randomized trial led by Dr. Andy Molyneux, at present we have approximately 425 patients enrolled and are on track to complete enrollment of the 500 patients by the first quarter of calendar year 2009. Given this timeline, we expect to submit study results to a peer review journal in the second half of 2009.

We are taking measures to continuously improve our sales force and management performance through improved education and training. We continue to pursue development of technology such as liquid embolics, covered stents, and flow diverters that we believe we partner neurointerventionist's armamentarium for the aneurysm treatment in the coming years.

We are taking the same proactive posture in the ischemic market. We believe that no one clot device will be effective in all clinical scenarios, prompting us pursue revascularization with our ReVasc technology and proximal protection and aspiration with a Genesis F.A.S.T. Catheter, which can also provide us with a platform to deliver a variety of thrombectomy or revascularization systems.

In summary, we have a bolus of new products such as DeltaPaq, Neuropath, and Ascent, which we rolled out this fall coinciding with the historical increase in procedural volumes. Complementing this effort, we are initiating our Vitesse VISSIT study for intracranial stenosis, and as we move into the new calendar year, we will begin to roll out our new ischemic products.

Within the next 24 months, we believe that Micrus will have the broadest product offering in the hemorrhagic and ischemic stroke market. We remain steadfast in our commitment to becoming the premier company for the treatment of stroke and are committed to continued growth as demonstrated by the 12% to 13% -- 13% to 23% growth we expect in fiscal 2009. we are also focused on achieving our goal of becoming profitable by the end of this fiscal year, which will be helped by the absence of legal fees related to the DOJ monitorship and the class action lawsuit, and hopefully the settlement with Boston Scientific.

I’d like to thank you for your attention and at this time we will open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions)

John Kilcoyne

While we are waiting for the first question, I’d like to inform you all that we will be presenting at the 2008 UBS Global Life Sciences Conference beginning September 22 through 25 in New York City. Should we attending this conference we’d like to meet with you in person. A webcast of our investor presentations will also be available at our website, www.micruscorp.com.

Operator, why don’t you be ready with the first question?

Operator

Thank you, sir. Our first question comes from Shawn Fitz with Stephens Incorporated.

John Kilcoyne

Good morning, Shawn.

Shawn Fitz -- Stephens Inc.

John, I wonder if you could talk a little more about the ancillary equipment opportunity. First, what was the contribution in the quarter and what are your expectations for the rest of this fiscal year, kind of what have you included in guidance?

John Kilcoyne

Do you mean non-embolics?

Shawn Fitz -- Stephens Inc.

Non-embolics, yes.

John Kilcoyne

Okay. The non-embolic was – the contribution this quarter was roughly 3% to 4% of our total revenues. So, as we go forward, Shawn, I think the important thing that Micrus has to accomplish is a broadening of that portfolio and also penetrations of the market. As Bob had mentioned we are adding new wires. We’ve just launched the Neuropath guide catheter. The Ascent balloon catheter also complement these products for a further broadening of our operating outside of the coil line in particular. So for us, I mean if we look at the procedural volume, roughly 50% of the procedural opportunity – revenue opportunity is in coils. The other, roughly 50% is in wires, microcatheters such as the Courier, which will also have line extensions, guide catheters, balloon catheters, et cetera. So, as we move forward through this year, we will be adding to each one of those products. Some will be product improvements and upgrades and line extensions. Others such as the Neuropath and the Ascent will be new products. And in those two last products that I mentioned, the Neuropath and Ascent balloon catheter, which assist with coiling. This is a 100% incremental opportunity for us. the competitive landscape there is – the Neuropath guide catheter, we have really one competitor that’s the ENVOY from Cordis. Similarly in the balloon market, we have competitor that’s ev3 with the HyperGlide and HyperForm. So I won't suggest that it will be easy penetrating either of those two market segments, but I would say that it’s going to be much more focused and our talk points would be much more direct than they are in the coil market.

Bob Stern

Interesting, the other small piece of that is we are getting into a lot of new accounts where we don’t have coil business with the Neuropath, for instance. And that’s a critical piece of this because we are using these products not only as on entree but again to supplant our overall business and it’s early days but it really is making a difference.

Shawn Fitz -- Stephens Inc.

Okay, thank you.

John Kilcoyne

Thanks, Shawn.

Operator

Our next question comes from Amit Hazan with Oppenheimer.

Amit Hazan -- Oppenheimer & Co.

Good morning. Can you hear me okay?

John Kilcoyne

Hey Amit, how are you?

Bob Stern

Good morning.

Amit Hazan -- Oppenheimer & Co.

Very good. I am wondering if you can help us out a little bi more with the U.K. and Europe because the decline you were talking about, the 14% in a one quarter period just seems pretty substantial, so I am wondering if you have your hands around what really happened out there. It sounds like you said it bounced back. And then also in Europe, just maybe give us a sense of whether – where we are with coil penetration or what you thoughts are on the market, if you will in general in western Europe and how it should grow in terms procedures over the next year or so.

John Kilcoyne

Yes, on the U.K. front, we did see a rather dramatic decline and we were just on line yesterday with our sales people in the U.K. reviewing this before the call, and they liken to it to a procedural decline that they saw in the October – third fiscal quarter 2006. They typically are fairly steady in the U.K., but this was a rather normal downturn. We have seen a rebound in the U.K. in procedural volume and associated revenues, obviously. Our market share in the U.K. is greater than 50%, so these procedural downturns had a more pronounced effect on us than in other geographies. The group in the U.K. is quite confident that procedures have rebounded. We saw that in July, and with the market share that we maintain in the U.K., we should see a strong – we believe a strong second quarter in the U.K. and through July we have seen that exactly occur. They are right on track and performing quite well. And we are very pleased with the rebound if you will in the U.K. On the continent and Europe, a lot of our sales revenues, obviously, as you know, come from distributors. So the timing of orders from distributors do have an impact as well on our quarterly revenue numbers. Spain, Italy, some of the smaller distributors in the eastern European countries did not order in this first fiscal year quarter as strong as we had anticipated. We do see again a rebound in procedural orders. Our expectation is that we will catch up if you will on order patterns in the second quarter on our baseline products. In addition, we do anticipate, as I mentioned, rolling out a number of new products in the second quarter and third quarter, which will be incremental opportunities for us to drive products into those distributors. They will be – and I don’t want to suggest that there will be loading going on – but there will be stocking orders at a number of distributors across Europe. As you know, on the continent, we are direct really in three countries – Austria, Germany, and France. All the other countries we are represented by distributors. So we should see a nice opportunity as we roll out new products for -- incremental opportunity complementing our existing business.

Amit Hazan -- Oppenheimer & Co.

Okay, well that’s a very complete answer. And then in terms of Japan, I am just hoping you can remind us of the contract size that you have with your distributor there and just in terms of minimums what’s been fulfilled so far and then what’s left for the rest of the year and how you see that playing out.

John Kilcoyne

Okay, so we – in Japan, I mean we had a – we have a $7 million minimum purchase from Japan and that is what is in our guidance. I will share in the first quarter we have – in the second quarter, we have confirmed orders for $2 million from Japan today. So that is comprised mainly of order for our Cerecyte products. So we have a great start if you will with our Cerecyte and a strong order in our second quarter from Japan.

Gordon Sangster

And again, in the guidance, Amit, there is – we used the minimum, which was $7 million.

Amit Hazan -- Oppenheimer & Co.

And the $7 million is for your fiscal year or for the calendar year?

Gordon Sangster

Fiscal.

Amit Hazan -- Oppenheimer & Co.

Okay, great. Thanks very much guys.

Operator

Our next question comes from David Turkaly with SIG.

Shawn Bevec – Susquehanna International Group

Good morning guys. This is Shawn in for Dave.

John Kilcoyne

Hi, Shawn in for Dave.

Shawn Bevec – Susquehanna International Group

Regarding the $1.65 million for the settlement with Boston Sci, is there already in the result – the G&A result today?

John Kilcoyne

Yes.

Bob Stern

Yes, it’s in it. That’s an ugly bloated G&A number that you see where both the 1.65 plus DOJ legal plus Boston legal is kind of all wrapped up in there. But the 1.65 flow through G&A. It will be paid in equity if we are successful in putting it together. And it’s not going to be a long course. We would expect to be in a definitive place in the next two weeks.

Shawn Bevec – Susquehanna International Group

And how – I am sorry, go ahead.

Gordon Sangster

Legal fees were $1.5 million, of which $1.2 million related to the wrapping up the FCPA compliance. So, as Bob said, a good chunk of legal fees plus the Boston in that G&A number.

Bob Stern

So about half of the G&A number is literally one-time and goes away and this again points to our commitment to drive the Company to profitability in the fourth quarter. We are knocking down these fees that allow us to do that and have been trying to hang in out there and stacking up over the last four years.

Shawn Bevec – Susquehanna International Group

Okay. Looking at your cash position, do you guys think you are going to need to raise some more capital?

Gordon Sangster

No we don’t. In fact we re tracking according to our operating plan for the year so far and we don’t expect to need to go out for more cash. At the same time, we are talking to a couple of banks about a line of credit, potentially, but we don’t see a need for that at the moment.

Shawn Bevec – Susquehanna International Group

Okay. And any more clarity on the China front, are we (inaudible) just sort of a waiting game?

Bob Stern

The Olympics starts Friday. They are all in holiday. Nobody is picking up a phone.

Gordon Sangster

The – as we said, we don’t have any Chinese revenue in the fiscal 2009. We continue to have discussions with our counterparts in China but no real new news that would give us any change of course. When we get to that point where we do believe that we have an opportunity to be specific on a timeline we will be more than happy to share that with you. We are anxiously awaiting that opportunity.

Shawn Bevec – Susquehanna International Group

Okay. Thanks guys.

Gordon Sangster

I’d like to just go back, just a quick comment on Amit’s question. In the first quarter, we shipped $1.9 million to Japan, in the second quarter, the current quarter, which we are in, we have orders for $2 million that we’ll be shipping, so of that $7 million minimum purchase we have orders either shipped or will be shipping shortly for $4 million.

Operator

Thank you. Our next question comes from Suraj Kalia with Sanders Morris Harris.

John Kilcoyne

Good morning, Suraj.

Suraj Kalia – Sanders Morris Harris Capital

Good morning guys.

Bob Stern

Good morning, Suraj.

Suraj Kalia – Sanders Morris Harris Capital

Okay, where do I start? Pardon me, if I hopped on a little late on the call. John, when you say your products materially improve your competitive position in the market with the DeltaPaq, can you help us understand what was the competitive disadvantage in the first place that was being attempted to be overcome?

John Kilcoyne

Absolutely. Great question. If you look at Micrus’ coil portfolio, we have historically been extremely strong in both the framing and the finishing business with our MicruSphere, our Presidio – our Presidio 18, Cashmere, our UltiPaq. That is where the majority of Micrus’ strength and brand name power comes from. We have less – been less proprietary in the filling market with our helical coils. So as we go forward, when we say that DeltaPaq provides us with a material opportunity, what we are signaling and suggesting is that DeltaPaq is a filling coil. This is a coil that allow us to more aggressively go after in a proprietary and novel approach of filling aneurysms. This has historically been the domain as I think those of you who have been following Micrus and this market for a while, of MicroVention and hydrogel coils. So with the DeltaPaq, we anticipate based on testing in-house early clinical data that we can increase packing density 20% or more. This is fundamental change in our opportunity to gain business. It puts us in a different spot. The technology – the DeltaPaq was rolled out at the SNIS meeting in Tahoe last week. We had a significant amount of interest at the booth and we have a number of requests for evaluation based on just the SNIS. If I can liken it to – you are filling the aneurysm, it’s a sac if you will, we frame with a Presidio or frame with a Cashmere and then you want to fill as much of that internal space as you possibly can. Dave Watson has a very good example, I think, of the difference between a helical coil and the DeltaPaq. If you want to fill that space in the middle, you either fill it with rocks or sand, and I am using a metaphor, obviously, but you can fill it with rocks or sand. If you want to fill it more thoroughly the choice would be sand. And I am equating DeltaPaq with that sand and the reason for that is that DeltaPaq breaks when it goes into the aneurysm. It holds like a chain link if you will, a bicycle chain. It changes directions and breaks into the nooks and crannies that typical helical coils can't get to because of their design, the radius of that helical curve. So we have positioned DeltaPaq as a filling coil. We believe that marketplace over the past several years has been the domain of MicroVention. We intend to focus on that market, an area that we have not been fundamentally strong in the past. So this will really provide a full line of proprietary products in the front end with Cashmere, Presidio, and the back end with UltiPaq, but in the filling segment now we clearly have a competitive opportunity, very competitive opportunity with DeltaPaq. Long answer but I hope that satisfied.

Suraj Kalia – Sanders Morris Harris Capital

John, in Japan, what – given the contractual minimums from Goodman, what gives the confidence level for increased contribution from Cerecyte? I guess the reason I ask, my understanding is reimbursement is the same. So far there is no head-to-head randomized data between Cerecyte or bioactive versus platinum. So can you help us understand how are you all factoring Cerecyte in Japan? Is procedure volume expected to increase? Is – ASPs are going to be around the same because of reimbursement, so where is the additional contribution going to come from?

John Kilcoyne

Yes, just to clarify, the minimum of $7 million in Japan is the total. It will come from a combination of Cerecyte or bare platinum. We don’t have specific minimum on Cerecyte with Goodman. So, in our guidance $7 million is what we have put into the revenue line for Japan. I agree, Suraj, there is no prospective randomized trial that has been published delineating the advantage of Cerecyte over bare platinum at this point. However, as you know, there have been a number of recent publication in peer review journal articles in the April-May time and there are surgery and neuroradiology, which clearly demonstrates a trend towards Cerecyte, improving or reducing recanalization rates and the need for retreatment. Historical trends and recan rates are anywhere between 20% and 30%, retreat between 10% and 15% on both the studies that were published we had recanalization rates either just over – just under 10% or right around 10%, not between 9% and 12%, with retreatment rates under 10% in both categories. That is not lost on our friends in Japan. We don’t have a specific indication for bioactive coils in Japan, and I’ll add that we don’t have a specific claim or indication anywhere else in the world. So, we are going to take the same message to Japan as we have taken elsewhere. In Japan, the physicians in my travels clearly realize that for the most part everywhere else in the world bioactive coils or Cerecyte coils I should say are available. There is a strong desire to try Cerecyte. This combines with the fact that we have delivered into Japan and recent approvals with Cashmere and UltiPaq soft coils, which meets the Japanese mindset of treating aneurysms in a more suitable fashion than say our MicruSphere did on our first launch. So, the message has not been lost, Cerecyte message has not been lost on our Japanese colleagues. We have soft coils in Japan, which meet their clinical need more acutely than I would say MicruSphere. We used and implanted over 1200 coils in July, which is a record for Micrus. We have headcount on the ground now in Japan for Micrus. So there is a major opportunity for us based on newness of products, products that meet the needs a little more directly and more horsepower on the ground in Japan. There is no difference in the reimbursement for Cerecycte or bare platinum. That is true, which I would suggest probably plays to our advantage that there is really no downside for clinician or the hospital to use Cerecyte over bare platinum. So, again, it puts us in a much more proprietary position.

Suraj Kalia – Sanders Morris Harris Capital

Okay. John, if I could followup and one last question. And at least from what we are seeing that ev3 is discounting a number of products in the field. Question being, have you all seen the same especially on coils and accessory products and the followup to that is if there is discounting and based on the numbers that they have reported, the 36% year-over-year increase, including discounting, that means they are gaining market share. Am I – what am I reading wrong in this picture?

John Kilcoyne

No, I think, Suraj, I think what we have said is the Axium coil is a better coil than the Nexus (inaudible) so they have made advance and we are very respectable of that. That being said, we continue to push the envelope with DeltaPaq, Cashmere, Presidio. We believe that we can compete and out-perform anybody in the world on coil technology. They have shown a propensity to discount. They do not have a bioactive or a Cerecyte line, so they are discounting their bare platinum, in particular accounts, in specific accounts. If we believe that it makes sense and it’s strategic for us, we will price accordingly to maintain our business on our bare platinum. We still are holding the Cerecyte brand as our flagship brand and we are taking premium pricing, continue to take premium pricing on Cerecyte. If it makes sense for us from a tactical or strategic standpoint, we will go after and be aggressive in our pricing of platinum coils to offset, if you will, or compete with the Axium coil.

Operator

Our next question will come from Spencer Nam with Summer Street Research.

Spencer Nam – Summer Street Research Partners

Thanks for taking my questions. Couple of questions for you – for management. You know this European I would call a surprise I guess. This hasn’t happened before over the last several quarters going back to as far as 2006 timeframe. Why suddenly the sudden slowdown in the volume in U.K. and why the variability in the continental European market? Is there a – do you have some specific data points you can point to that could be attributed to this? Is this just a one-time thing that this seems like it was kind of caught everyone by surprise.

Bob Stern

I don’t – I wouldn’t disagree that this caught us a little bit surprise. Two things, one, I think most of our distributors clearly know we are coming out with a number of new products this quarter and as a consequence some of the ordering may have artificially been held up. So the timing of those orders didn’t help. In the U.K. though, very specifically, we saw in the last quarter, we saw a falloff in procedure volumes. And that was clear and unequivocal. Now, as we have suggested, through July, we have seen that rebound and we are right on track. So it was seemingly an anomaly in the last quarter which then was restricted to the last quarter at least through July we have clearly seen that not be the case. And there – and we will be launching a number of new products in Europe as we have suggested that more than help us this quarter. I hope that answers the question. I think that if you take a look at on country-by-country scenario literally there was probably on the timing side somewhere round about $0.5 million that we had as a shortfall from distributors in Europe and we would expect to make that up this quarter.

John Kilcoyne

Spencer, just a quick note as well I mean our head of sales in the U.K. has been selling coils into that market for greater than 15 years. So he is very if you will skilled and aware of the trends and the procedure volume and activity in the U.K. There is 26 hospitals. It’s a very finite group and much more easy to get your arms around than say the U.S. market. He was surprised at the level of slowdown in the first fiscal quarter. He likened it to the third quarter of 2006. His comment yesterday was this happens every once in a while, we see these slowdowns. But his sense and feel for the market -- and again, he has been there plus 15 years, selling coils – is that procedures have started to rebound in July and we are obviously witnessed that so -- and we do think that it was likely a one-time – but it will happen again at some point in the future. But it was a slowdown that was deeper than what he anticipated.

Spencer Nam – Summer Street Research Partners

Appreciate those – the details. I guess one follow-up question. The – with new products coming to the market, you are expecting obviously the pretty strong reception or solid reception from the customers. What sort of – besides the advantages that – clinical advantages that new products exhibit, what are some of the other data points that you may have at this time based on your conversations with hospitals or your accounts? Any thoughts on how excited they are and whether the adoption would pick up rather quickly versus more of a slower ramp up?

John Kilcoyne

We have had – as mentioned -- we will start with DeltaPaq, we have had numbers of evaluation of DeltaPaq. We had presentations at both the Jackson Hole meeting and one-on-one conversations at the meeting is Tahoe. The clinical capabilities of DeltaPaq are right on what our design objective was. We are seeing improved filling capacity. We have – the accounts that have evaluated the product all have asked for shipment of product. They want it added to their shelf. They do see it as the filling coil that they will use predominantly. So, the DeltaPaq evaluations have been extremely strong for us. We are still in a measured roll out. We want to make sure that we understand it in its entirety before we launch to the rest of North America or in a large fashion into Europe as well.

With the Neuropath, as Bob mentioned, we have conducted over 50 evaluations of Neuropath all with quite positive results. So we have one competitor in that market that’s ENVOY. It’s all incremental opportunity for us. The designers of our Neuropath guide catheter historically had worked at Cordis Endovascular, so they are very familiar with the ENVOY and many of them actually participated on the development of the ENVOY from Cordis. So we believe that we know the ENVOY well and we have used that as our benchmark but we have surpassed it in tip visibility, tip softness, and proximal support. So we – again, the evaluations have suggested that same answer that we have hit – we hit our design goal. So we see an opportunity with Neuropath, which again leads us into evaluations to move DeltaPaq. It serves as a lead product that allows us to put our new wires, our stent balloon, our DeltaPaq coils, et cetera. So—

Bob Stern

Let me give you a little nuance of where we are. We have had a lot of experience now with wires and wires are kind of an innocuous too. But they are used in every procedure and they are not just used in neuro procedures that we participate in but others as well. And the standard has been pretty much one-to-one torque. Our wires coming out we believe will have a better torque response than anything else in the marketplace. That’s critical. We are setting a bar that we believe is very high and as a consequence with the types of response we are getting from our innovation, we are trying to have the best product in every market segment. And when you strive for that and you succeed it becomes the device of first choice. And that’s what we are hoping to do with these incremental revenue opportunities that are non-embolic.

Operator

Our next question will come from Eli Kammerman with Cowen.

Eli Kammerman – Cowen and Company

Thanks and good morning.

John Kilcoyne

Good morning, Eli.

Eli Kammerman – Cowen and Company

First question is last year if you exclude Asia from the June quarter the September quarter there was a quarter-to-quarter decrease in total sales for Americas and Europe on a combined basis. Do you expect to see that same kind of seasonal decrease in that combined total this year?

Bob Stern

You mean in the July quarter, not the June quarter.

Gordon Sangster

Yes, Eli, to be accurate (inaudible).

Eli Kammerman – Cowen and Company

Fiscal first to fiscal second quarter last year, revenues went down. Do you expect to see the same phenomenon this year?

Bob Stern

No.

John Kilcoyne

That I mean that was in part as well from Cordis’ return to the market. We had Cordis (inaudible) returned to the market in the second fiscal quarter, which had along with introduction of other new coils in the marketplace, it had an adverse consequence for us. Cordis is back, they are stabilized. We have maintained a large – a good percentage of the business we picked due to Cordis’ departure. And in the balance I think we clearly came out ahead on that score. We do anticipate with the new products DeltaPaq, the EnPower, Neuropath, that we should see continued growth in our second quarter based upon results from July, exclusive of Japan, Asia as you suggest, we do see positive growth for North America, Europe, and rest of world, exclusive of Asia.

Eli Kammerman – Cowen and Company

Alright. And next question is have you noticed that you have lost share in the hospitals which are contracted with the Novation group purchasing contracts because of that deal they have with ev3?

John Kilcoyne

I have been waiting for this question. The answer – the short answer is no. This is still a product specific physician choice market. I know much was said about the Novation contract. I am on the price committee at Micrus, so I see all pricing requests. I can't say that I recall any that was specifically in response to the Novation contract. So, Eli, we haven’t seen that the Novation contract has in any way adversely affected our business.

Operator

Our next question is from Erica Selin with Stanford Group.

John Kilcoyne

Hey, Erica.

Erica Selin – Stanford Group

Hi, thanks for taking my call.

John Kilcoyne

How are you?

Erica Selin – Stanford Group

I am doing well, how about you?

John Kilcoyne

Just fine.

Erica Selin – Stanford Group

I was hoping you could remind us all of the seasonality of aneurysms and if there is any variation internationally if this correlates with these periodic drop offs. Sorry to beat a dead horse, but we are trying to understand what’s happening here.

John Kilcoyne

Sorry, ask me that question again?

Erica Selin – Stanford Group

Okay. If there – could you remind us of the seasonality of aneurysms?

John Kilcoyne

Yes.

Erica Selin – Stanford Group

(inaudible) and if there is any variation to that internationally?

John Kilcoyne

I mean it really follow the same pattern. We see an increase in the late September-October time period in the number of aneurysms treated that continues to grow until the May-April time frame and then we start to see a deceleration of aneurysm. It really is the same in Europe as it is here in the States. And interestingly enough, we had a neurosurgeon here from China a short time ago and we were just chatting about China and the procedural opportunity for aneurysms in China, and she said well the northern part of China sees more aneurysms than the southern part. And we all looked around at each other around the table and asked the question why. She said that, she said well it’s colder in the north. So we do see a seasonality in the colder weather and the colder climates when it gets into the winter months. The reason for that there are a lot of theories but nobody really can tell you exactly why that occurs.

Bob Stern

And if I can add one piece to that, the reason we are launching so many products as we speak and the reason we were in so many betas last quarter was exactly because of this. We are launching new incremental revenue opportunities globally in a quarter that historically has less embolizations but we believe we can take much more incremental revenue and right now we are on track to do that because of these new products.

Erica Selin – Stanford Group

Okay. And with that you’d also probably have more attention of these doctors.

John Kilcoyne

Well we – we also get attention from doctors that they may be staunch Boston coil users, staunch Cordis coil users, but they really want to see the new non-embolic products that we bring to the market. And it gives us a great opportunity.

Erica Selin – Stanford Group

And with those opportunities, do you think capturing any of the coil business in the accounts that you have (inaudible) Neuropath or other products?

John Kilcoyne

We have. We have been in some competitive accounts recently with Neuropath. Again, we are just rolling that out now, so it is still early. However, it has given us entree to a north of 20 new accounts that we have not had access in before. In those cases, we – that (inaudible) we are also using our coils. A little bit early to say, but we have the opportunity, we have been given the opportunity to come in and use our coil technology. I think the combination of Neuropath along with Delta will give us a very strong franchise as we go forward in the second quarter.

Bob Stern

One of the things, Erica, I just want to add as well is, as John said, we have done over 50 cases on the beta side with Neuropath, for instance. But prior to that there were over 200 cases where we iterated. As we moved through beta, we iterated and iterated to the point where we have the design that we set upon and now we have done 50 betas with those cases. That gives you a sense then of the amount of work that’s been done prior to this, and again, it’s mostly no charge, or it is no charge. But it gives you an idea. Once we are out of beta, which we are, then as we launch, we are pretty well set on what the product needs to be.

Operator

Our next question is from Brooks West with Craig-Hallum Capital.

John Kilcoyne

Good morning, Brooks.

Brooks West – Craig-Hallum Capital

Good morning guys, how are you?

John Kilcoyne

Good. How are you?

Brooks West – Craig-Hallum Capital

Good. A couple of questions. I wanted to start on the cost side, Gordon and Bob, you mentioned $1.6 million for the Boston Scientific settlement and about $1.2 million in kind of one-time legal. Does that encompass the one-time stuff in G&A this quarter?

Gordon Sangster

It does, it’s actually closer to $1.5 million for legal. Of that $1.2 million will be FCPA compliance, but there is another couple of hundred thousand for patent litigation. So, 1.5 plus 1.65 is really the one-time non-recurring stuff.

Brooks West – Craig-Hallum Capital

So, Gordon, if you looked at the impact of that on the earnings per share, taking that out as one-time events, where would you EPS come out?

Gordon Sangster

Well you (inaudible) effectively just over $3 million from the loss of $6.6 million, so roughly it’s about half of the $0.42 a share that we reported.

Brooks West – Craig-Hallum Capital

Okay, okay. And just to be clear, that should not be reoccurring going forward?

Gordon Sangster

Well certainly not the accrued settlement and the FCPA compliance. The monitor has filed his report. The monitorship has concluded. So we wouldn’t expect to be seeing those legal fees reoccur.

Brooks West – Craig-Hallum Capital

Okay. And then I wanted to circle back to the Merit deal. Can you – John, can you just give a little bit of detail on revenue expectations and I am sure this is all spelled out in one of your SEC filings, the revenue expectations and kind of timing of that as that deal winds down?

Bob Stern

Yes, we will be – I am sorry, it’s Bob – we will be delivering somewhere between 500,000 and 700,000 in incremental and these are tech transfer builds and then they have to make a decision as to whether they can do that in-house, at which point they pay us the backend of the Merit transaction, which is the million five as you know. There are other opportunities that Merit has brought to us and they have asked us to help them with. To the extent that we have excess capacity In Miami we will address those as they come through.

Operator

Our next question is from Juan Sanchez with Ladenburg Thalmann.

Juan Sanchez – Ladenburg Thalmann & Co.

Good morning guys.

John Kilcoyne

Good morning, Juan.

Gordon Sangster

Good morning.

Juan Sanchez – Ladenburg Thalmann & Co.

I have a question about Boston Scientific. I think I understood from their conference call that they are already ready to launch a new set of coils. If this is true I mean how much do you know about their plans and how much do you think that will affect your business?

John Kilcoyne

Yes, okay. We have heard that Boston is looking at and evaluation new coil, we believe the name of the coil is Galaxy. I don’t have a lot of specific information on it. We have heard from a couple of people who have either seen it or been apprised of it that they see it more as a catch-up coil than any new breaking technology. So, we have heard about it for quite some time. We have not seen it. So it’s a little bit difficult and I think presumptuous to speak in any detail of it, but from what we have heard it is not necessarily game-changing technology, it will be more incremental technology.

Juan Sanchez – Ladenburg Thalmann & Co.

And the second question is specific to the Americas market. I mean you have been saying that the market is going up 15% year-over-year and I think you current rate in the last nine months since Cordis came back to the market and ev3 came back with Axium has been 12% and you just said in the beginning of this conference call that you are seeing you are gaining more market share. So I just want to understand these numbers a little bit better.

John Kilcoyne

Yes, I think what we said is we are taking share from Boston Scientific specifically. And we do believe that to be true that we are – Boston, if you look at their numbers were down. When you take the exchange rate, they had a very small increase, so we believe we are taking share from Boston particularly with the Cashmere coil. Probably the largest share gain for us over Boston is in Japan. We are having very significant success with Cashmere compared to their coil technologies, 3D or the 360 in Japan. So that’s where we are gaining significant opportunity for us. We are also leveraging that. It’s been very successful for us in the U.K. as well. So when I mentioned taking share, it is from Boston and it’s been primarily through the introduction and adoption of Cashmere.

Operator

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

John Kilcoyne

Thank you again everybody for joining the call today and your participation. We are truly excited about our prospects at Micrus and are steadfast again on our folks becoming the premier neurointerventional company in this market and we continue to build our business and look forward to reporting our progress to you on next quarter’s call. Thank you everybody.

Operator

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

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