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Executives

Marty Joyce – EVP of Finance and Administration, and CFO

Rick Faleschini – President and CEO

Joel Weinstein – VP of Global Marketing and Sales

Analysts

Tom Gunderson – Piper Jaffray

Drew Jones [ph] – Stephens Inc.

Matt Dolan – Roth Capital Partners

Stephen Handley – JM Dutton Associates

BioSphere Medical Inc. (BSMD) Q2 2008 Earnings Call Transcript July 24, 2008 8:30 AM ET

Operator

Good day, everyone, and welcome to the BioSphere Medical second quarter 2008 conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I will now turn the conference over to Mr. Marty Joyce, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Marty Joyce

Thank you, Dennis. Good morning, everyone, and welcome to BioSphere Medical's 2008 second quarter financial results conference call. I'm joined on today's call by Rick Faleschini, BioSphere Medical's President and Chief Executive Officer, and Joel Weinstein, Corporate Vice President of Marketing and Sales.

Before I read our Safe Harbor statement, I want to remind everyone that this webcast is available at the Investor section of our company website at www.biospheremed.com. This webcast will be available on our website until August 24, 2008.

We will begin by cautioning you that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including statements regarding our sales and marketing plans and strategies and our expectations regarding future growth in sales of our products, both domestically and internationally, in UFE, interventional oncology and other procedures. These forward-looking statements involve risks and uncertainties. Our actual results may differ because of various important factors, including risks related to our ability to develop and commercialize and achieve widespread market acceptance of our products; our ability to obtain and maintain proprietary protection for our products and product candidates; competitive pressures and favorable reimbursement for our products; operational, financial, and legal challenges in the U.S. and abroad; general economic and market conditions; our inability to raise additional funds to finance our operations; and those risk factors detailed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, and other periodic reports we file with the Securities and Exchange Commission from time to time. We caution you that we may not update any of these statements, even if events and developments subsequent to the date of this call cause these estimates and expectations to change.

Now I will turn the call over to Rick Faleschini.

Rick Faleschini

Thank you, Marty. Good morning, everyone, and thank you for participating on our call today. On our call today, I will make a few introductory remarks to frame our quarterly results, turn the call back over to Marty Joyce to review the details of our financial results, and then for those with greater interest in details, I'll follow up with additional comments and then open the call to questions.

This quarter, we continued to execute the strategies we have developed for our embolic platform technologies that we believe over time will grow the company and diversify its revenue. These global strategies include growing the uterine fibroid embolization business, advancing our position in interventional oncology, further penetrating the market with our new products, and selectively expanding our reach outside the United States. We believe we have made progress with each in Q2.

From a revenue perspective, our total revenue for the second quarter reached a record $7.61 million, even though at the same time we are eliminating our gastric products business in our Europe-Middle East-Africa, or EMEA, region. We are very pleased with rest-of-the-world, or ROW, sales performance for the quarter. Revenue increased 95%, due primarily to shipments to China and Brazil. Although our average selling prices in these countries are lower, our operating margin in ROW is attractive. Worldwide sales of embolics and delivery systems increased 16% compared to the same quarter last year, with a 12% sequential growth over the first quarter. Worldwide, oncology embolic sales were up 27% this quarter compared to the same period a year ago.

In the U.S., quarterly growth again accelerated sequentially. Our average weekly sales increased almost 10% from the first quarter and are now up nearly 16% from our nadir in sales in the fourth quarter of 2007. We're very encouraged by this progress. Approximately half of our U.S. sales territories this quarter grew near or above 20% over the same period a year ago. Also, our six expansion territories contributed meaningful revenue this quarter and are performing approximately as we expected, although, in fact, we still have a few territories that are not contributing to our overall growth in the U.S. We have corrective actions in place and expect the performance of those territories to improve in the second half of the year. We believe the general economic turbulence in the U.S. may be attenuating our growth in some metropolitan areas of the country, but it is somewhat difficult to quantify, because interventional radiologists run complex referral practices and do not always have the granularity to determine what is affecting their procedure volumes.

Based on our experience the last few quarters, we do believe our prescripted U.S. sales activities can create a sustainable and growing sales pipeline, so we continue to strive to manage and compensate our U.S. sales organization to execute a territory plan of action that is informed by local market conditions and constrained to these prescripted activities. As described in detail in past conference calls and other investor-related communications, these activities include interventional radiology and C-level hospital opportunity presentations, OB/GYN outreach and recruitment, new product evaluations, competitive conversions, and co-marketing direct to patients. Going forward, we will continue these activities, and in addition we are launching a targeted awareness campaign to women featuring supermodel Beverly Johnson, which I will highlight in a little more detail later in the call.

Outside the U.S., we continue to work to exploit select opportunities in targeted geographies. As a result, this quarter our EMEA business for embolics and delivery systems increased 17%, and our ROW business, as noted earlier, increased 95% compared to the same quarter in 2007. The market dynamics and economics in some countries outside the U.S., such as Brazil and China, can be complex and challenging. However, in these countries we believe there are a large number of patients who can benefit from embolotherapy procedures performed using Embosphere's physician-preference embolics and accessory products. In addition, BioSphere has global brand equity that can be leveraged. We continue to view our business outside the U.S. as a growth driver and a means to diversify our sources of revenue.

On the new product development front, we continue to advance our Bio Resorbable Microsphere project and our magnetic resonance imaging visible microsphere, or MR-ES project. At the upcoming CIRSE meeting in September, we will feature a new product for interventional oncology, a 30-micron to 60-micron HepaSphere QuadraSphere. This product may offer distinct advantages with respect to tumor penetration for both the U.S. and the EU markets and a rapidly loading in allusion of doxorubicin in the EU, where we have a HepaSphere with doxorubicin indication. This product is currently scheduled for launch into both the U.S. and Europe in Q4 2008.

In addition, there are other new embolotherapy technology concepts and therapeutic applications that we are evaluating and intend to advance as appropriate. We believe our results in Q2 show continued progress in each growth driver of our business. Where performance gaps exist, we are, of course, striving to take corrective action and close the gaps. We expect increasingly better results as we progress through the second half of the year.

I'll now turn the call over to Marty Joyce to review the details of our financial results.

Marty Joyce

Thanks, Rick. Total revenue for the second quarter of 2008 increased 9% to $7.61 million, from total revenue of $6.97 million for the second quarter of 2007. As previously announced, the gastric product line in Europe is being phased out. Gastric products revenue in Europe declined $0.38 million to $0.20 million from $0.58 million in Q2 2007, a reduction of 66%. Worldwide revenue of embolics and delivery systems rose 16% to $7.41 million, from $6.39 million compared to the same period last year. In the second quarter of 2008, revenue in the U.S. for embolics and delivery systems was $5.56 million, an increase of 11% compared to the second quarter of 2007. Revenue in Europe, Mideast and Africa for embolics and delivery systems rose by 17% to $1.25 million for the second quarter of 2008, compared to the same period in 2007. In markets outside of the United States and EMEA, rest-of-world revenues, driven by robust sales of embolics to China and Brazil, increased 95% to $0.60 million for the second quarter of 2008, compared to the same period in 2007.

By therapeutic area, second quarter 2008 worldwide sales of embolics used in interventional gynecology, or UFE, rose 15%, to $5.48 million, compared to the second quarter of 2007, which includes U.S. sales of $4.36 million, an increase of 9%; EMEA sales of $0.85 million, an increase of 29%; and rest-of-world sales of $0.27 million, an increase of 127%.

Second quarter 2008 worldwide sales of embolics used in interventional oncology rose 27% to $1.43 million, compared to the second quarter of 2007, which includes U.S. sales of $0.93 million, an increase of 20%; EMEA sales of $0.32 million, unchanged from the same quarter last year; and rest-of-world sales of $0.18 million, an increase of 347%.

Second quarter 2008 worldwide sales of delivery systems rose 6% to $0.39 million, compared to the second quarter of 2007, which includes U.S. sales of $0.17 million, an increase of 29%; EMEA sales of $0.09 million, a decrease of 9%; and rest-of-world of $0.13 million, a decrease of 5%.

Gross margin rose to $5.62 million or 73.9% of revenue for the second quarter of 2008, compared to gross margin of $5.05 million or 72.4% of revenue for the second quarter of 2007. Operating expense for the second quarter of 2008 was $6.89 million, compared to $5.55 million in the second quarter of 2007. The reasons for the expense increase are the addition of senior-level executives in R&D, the expansion of the U.S. sales force, and increased marketing spending in the UFE programs.

Operating loss for the second quarter of 2008 was $1.26 million, compared to $0.50 million for the second quarter of 2007. Other income expense and preferred dividends in Q2 2008 were an expense of $0.04 million, compared to $0.09 million in Q2 2007, reflecting lower interest rates on invested cash.

The net loss applicable to common stock holders for the second quarter of 2008 was $1.30 million or $0.07 per basic and diluted share, compared to a loss of $0.41 million or $0.02 per basic and diluted share, for the same period last year.

For the six months ended June 30, 2008, revenue was $14.83 million, an increase of 9% compared to the second quarter of 2007. The net loss for the six months ended June 30, 2008 was $2.85 million or $0.16 per share, compared to a net loss of $1.58 million or $0.09 per share for the comparable period in 2007. At June 30, 2008, BioSphere had cash, cash equivalents, and marketable securities of $20.3 million.

That concludes my review of the financial results. Now I'll turn the call back over to Rick.

Rick Faleschini

Thanks, Marty. I'll now expand on my introductory remarks by providing new details about the initiatives that we believe are driving the growth of our company.

The first initiative and key building block of our growth is the expansion of the U.S. sales organization and their respective sales activities. In Q2, all of the sales professionals in the previously announced six planned expansion territories were onboard and working in their territories. They contributed incremental revenue in the second quarter. Their Q2 annualized sales were approximately only one-half of the current annualized sales of the total U.S. organization. So there is, as we originally planned, considerable room for growth in these new territories in the quarters ahead. We plan for annualized average sales of approximately $1.1 million per U.S. sales territory at maturity, and it has typically taken roughly four quarters for our territories, on average, to reach that level of productivity following an expansion.

Our U.S. sales professionals orchestrate a complex set of tactics to drive the growth of their business in their territories. As outlined on previous conference calls, these tactics are clustered into initiatives focused on our four interdependent principal constituencies – interventional radiologists, service line and hospital administrators, gynecologists in the case of UFE, and patients. I'll take each of these in turn.

IRs perform embolotherapy procedures. Thus, they are our primary customer. Embolics are physician-preference products, because clinical results can be affected by the choice of embolic. A quality clinical outcome is one basis for an IR's successful referral in clinical practice. Therefore, we seek to support well-designed clinical studies and, where appropriate, differentiate our embolics from competitive product based on the results of those studies. The body of evidence confirming the clinical effectiveness of Embosphere Microspheres for UFE continues to grow. In January, we announced the publication of a randomized trial comparing Embosphere to Contour SE, which concluded that trisacryl gelatin microspheres, or Embosphere Microspheres, should be the preferred agent for UAE or UFE at this time. The most recent study comparing the outcomes of various embolic agents used for UFE was published in the May-June 2008 issue of the Journal of Computer-Assisted Tomography. This group of researchers from Yale University School of Medicine found that about 80% of cases achieved complete infarction of all fibroids using Embosphere Microspheres, while only 25% of cases achieved complete infarction of all fibroids using the spherical PVA or Contour SE embolic. The researchers also found that patients embolized with spherical PVA had a higher incidence of having residual enhancement in follow-up MRI than those embolized either with Embosphere Microspheres or particle PVA. The authors concluded that spherical PVA, or Contour SE, may not qualify as a particularly effective embolic agent for UFE. The results of these and nearly all other studies show that Embosphere continues to outperform spherical PVA embolics and remains the most studied spherical embolic with over 100 manuscripts published to date.

Consequently, we will continue to strive to increase our global market share position for Embosphere, and, based upon studies such as the one cited here today, believe we will be able to do so. In addition, to continue to grow our market share, we also seek to grow the size of the overall embolotherapy market. Hospitals and IRs are key partners in accomplishing this, and thus service line and hospital administrators are our customers, as well. The minimally invasive image-guided therapy and the associated procedures performed by interventional radiologists has been a fast-rising clinical and financial star in the hospital world. Consequently, it is receiving new attention and increasingly greater support from hospital administrators. We have made detailed reference to this in our two prior conference calls. We believe that informed and motivated hospital administrators influence the service lines and the procedures that are promoted to their hospital system employees and targeted patient demographic. In addition, we believe they make decisions in their hospitals that can affect the utilization of our products, such as decisions that determine physicians' admitting privileges and allocate space and personnel to see and manage patients, apportion cath lab time between competing specialties, and assign discretionary marketing resources to promote favored service lines and procedures.

We believe BioSphere is well positioned to benefit from this influence and intend to continue to exploit the rising tide of interventional radiology in the hospital. Our first and primary strategy with the hospitals is to focus on prequalified, high-potential UFE accounts, and to engage these accounts as active partners in seeking to develop their women's health service line and increase UFE procedures as a product within that service line. During the quarter, we distributed information to U.S. hospital chief executive officers and chief financial officers, or C-level officers, that communicate the recent positive changes in hospital outpatient reimbursement coverage for UFE procedures and provided these executives with an overview of the advantages associated with offering and promoting this service and product line. Subsequently, an email blast with this information was distributed to these hospital executives. Further, we have now made over 100 presentations to C-level executives in key accounts. Based on the large volume of eligible fibroid patients, the excellent clinical track record of UFE and the favored economics associated with UFE procedures, we believe that these presentations have been well received by hospital executives, and in fact, we have not yet experienced a single case where a hospital management team has not expressed support developing a UFE partnership with us.

In response to this interest, during the quarter, we initiated larger scale, co-funded, direct-to-patient pilot outreach campaigns with hospital partners employing radio, print, and other media. We continue to evaluate and seek to improve the effectiveness of our presentations to hospitals. We feel the sales activity has the potential to increase the pipeline of UFE procedures, lead to future revenues and increase U.S. sales growth in the coming quarters.

Our second strategy with hospitals is to seek to favorably position BioSphere within the cancer market. Over the last decade, hospital-based cancer programs have changed dramatically. Imaging has taken on a more pivotal role in diagnosis and treatment. Patients have taken a more active role selecting their treatment program and a more active role in their own care. Hospital competition has greatly intensified, and service-line administrators have become more accountable for overall program performance, clinical as well as financial. Embolotherapy is now more frequently at the table, as various treatment options are considered and planned by the tumor board, and thus we seek to increase first, the awareness of the role that embolotherapy can play in cancer treatment, second, our market share of embolic sales, and third, the penetration of our new products, HepaSphere and QuadraSphere, as a new platform technology.

I'll segue now to our third constituency, referring physicians, and in the case of UFE, OB/GYNs. Messaging and educating OB/GYNs is a key component of BioSphere's marketing strategy. OB/GYNs represent a major potential source of patient referrals for UFE, and thus the rate of referral growth could affect the overall size of the UFE market. As described in detail in our conference call last quarter, two sponsored supplements in major OB/GYN journals were recently published. The first describes the value of a team approach to fibroid management when OB/GYNs work collaboratively with interventional radiologists, and the second supplement illustrates the importance of physicians fully informing patients about their treatment options and the potential link between patient practice loyalty and positive practice economics. A readership survey conducted recently by one of these journals following the publication of the supplement confirmed that over one-third of respondents read the supplement in part or in whole, and almost all who read it determined the information to be valuable to highly valuable. In addition, a market research study of OB/GYNs we contracted to be conducted during the ACOG meeting in May found, among other things, that one-third of respondents expected utilization of UFE to increase in the next three years. Based on these and other market research data, we intend to continue to expand our OB/GYN outreach activities, which will include clinical and economic elements and involve IRs, service line and hospital administrators and our own direct efforts.

In concert with our stepped up outreach to patients, we also intend to expand our outreach directly to women with symptomatic fibroids. Last month, an article in the widely read lay publication Prevention, entitled "Treatments Your Doctor Won't Tell You About," identified uterine artery embolization as a smart option for treating uterine fibroids, noting that 90% of women who choose UFE have their symptoms relieved, retain their uterus, spend less time in the hospital for the procedure, and return to work faster. In the July issue of Prevention, there was an article entitled Operation ZIP Code, which said in part, "to an alarming degree, where you live determines the quality of your healthcare." It showed recent data from the Centers of Disease Control that the per capita rate of hysterectomy to treat problems like fibroids in the Southeast is nearly twice the per capita rate of women in the Northeast. In the article, Dr. Michael Broder, an assistant clinical professor of Obstetrics & Gynecology at UCLA, said, "When a woman here, she needs a hysterectomy, she must get more information, wherever she lives. It's such a commonly overdone operation." Also cited in the article was a 2000 study by Dr. Broder and colleagues which found that 70% of hysterectomies at nine medical centers in Southern California were recommended inappropriately. Either the patients weren't adequately evaluated or they weren't offered less-invasive options to treat their condition.

As a result of the widespread dissemination of these kinds of findings in the general media and on the Internet, which we have described in detail on past conference calls, women appear to be increasingly more proactive about seeking information regarding minimally invasive treatment options for uterine fibroids. To capitalize on this trend, we are initiating a targeted campaign directed to women with fibroids. This campaign will feature Beverly Johnson and is intended to further expand women consumers' awareness and access to information about fibroids and to channel these women to a qualified healthcare professional.

Beverly Johnson has been distinguished in several important roles, as a supermodel and the first African-American woman on the cover of Vogue Magazine, entrepreneur, actress, and especially mother. She is now a star of the new hit modeling reality TV show, She's Got the Look, on TVLand. Several years ago she added activist to that list when the National Women's Health Resource Center asked her to be a spokesperson for its campaign to educate women about alternatives to hysterectomy. In 1999 she was one of the more than 600,000 women each year in America who have a hysterectomy. As with so many women before her, the surgery was prompted by her rapidly growing uterine fibroids. And like many other women she had no idea there was any option other than surgery to treat her fibroids. Ms. Johnson subsequently learned just how uninformed she was about managing fibroids and the alternative treatments she might have considered. She also experienced firsthand the complications that can follow surgery. Now she's on a mission to educate women, especially those of her daughter's generation, that they have choices. We recently formalized a working relationship with Ms. Johnson to do, we believe, just that. We look forward to the good she will do to increase women's awareness about fibroids and to motivate them to seek the care of a healthcare professional that will help them understand all their treatment options and act on their preferences and choices, including having surgery, if that's what is best for them.

As this and our previously announced direct-to-patient initiatives get fully implemented, we expect to see many more women seeking physician consults, and, as a result, more UFE procedures performed. We believe the U.S. pull-push strategies I briefly highlighted resonate with our key constituents – interventional radiologists, service line and hospital administrators, gynecologists, and patients. And our goal is to execute these strategies successfully through our marketing and sales organization. Like other companies that have faced challenging market and physician referral dynamics and subsequently successfully worked through them, we believe that our tactics are becoming more effective. Our results this quarter show positive trends, and we look forward to progressively stronger results as we proceed through this year and next year.

Another strategic initiative that drives our growth is advancing our position in interventional oncology. In recent years, image-guided interventions in cancer treatment have experienced very rapid growth. It is one of the highest growth procedures IRs perform. The key role diagnostic and interventional radiology plays in the diagnosis and treatment of cancer is one reason why interventional radiology is a rising star in the hospital world. Several innovative techniques and devices for direct tumor ablation and transarterial therapy have been introduced. Sophisticated imaging methods which improve tumor targeting and treatment monitoring have also been developed and employed. A number of clinical trials related to the therapeutic options in interventional oncology have been completed or are in the formative stages. Some of these studies involve or will involve BioSphere embolics.

Six major interventional radiology-centric scientific meetings are behind held in 2008, with a major portion of each dedicated to interventional oncology. We have an appropriate presence at each one of these meetings. Many interventionalists throughout the world are now using BioSphere embolics when embolotherapy is selected as an alternative or complementary treatment for a variety of cancers. Physicians eagerly seek opportunities to learn what works at how-to-do-it courses sponsored by the industry's manufacturers. We recently sponsored one at the recent Global Embolization Symposium and Technologies, or GEST meeting in Barcelona, featuring HepaSphere and QuadraSphere. Dr. John Kaufman, the current President of the SIR and regular user of QuadraSphere, was the session leader.

While this is still an emerging and rapidly evolving field, at BioSphere our interventional oncology business grew 27% in the second quarter and now comprises almost 19% of total revenues, up from approximately 16% in the same period last year. We continue to seek opportunities to further grow this business. For example, we are exploring an opportunity to partner in Japan to gain regulatory approval for HepaSphere and Embosphere in Japan, where there are already thousands of interventional oncology procedures performed each year. We are also considering reinitiating the process for seeking regulatory approval for Embosphere in Korea and evaluating the potential to expand our embolic offering in China. Further, we believe that our embolics are in demand in Latin America, which will require additional but fairly straightforward product registrations. We are also further assessing the need for additional clinical studies in oncology. There are the usual risks associated with our attempt to advance our position in interventional oncology. However, based on internal and external assessments of the market opportunity, we continue to strive to cultivate it.

The last strategic objective I'll discuss today is selectively expanding our reach outside the U.S. As reported, our OUS business grew again in the second quarter. Both EMEA and ROW contributed to our OUS growth. EMEA embolic and delivery system revenue grew 17% this quarter, compared to the same quarter a year ago, which was significantly better than the first quarter's growth. Sequential growth in the quarter for EMEA was up approximately 4%. Although the third quarter in EMEA typically shows substantial seasonality, we are encouraged by recent progress in EMEA. The rest-of-world business was up significantly, primarily due to shipments to China and Brazil.

In China, there are approximately 5,000 interventional radiologists, which is about 25% more than in the U.S. There appears to be a high level of interest in Embosphere by them. Many interventional radiologists in China have been trained abroad and typically have learned about their embolics during their training. They maintain close personal and professional relationships with those with whom they have trained. Not infrequently, Canadian, Latin American, European and U.S. physicians travel to China to perform procedures, demonstrate product use and train on the latest treatment methods. Originally, we thought interventional oncology would account for the principal use of our products in China. We have since determined and believe that UFE could also drive product use. It seems many women in the fast-growing middle class in China are now seeking minimally invasive alternatives to surgery to treat their fibroids. They cannot afford to take six to eight weeks off work to recover from a hysterectomy, because someone else will eagerly take their job while they are out recovering from a hysterectomy. So a clinically effective, minimally invasive alternative to hysterectomy, like UFE, is very appealing. We believe we have excellent technical and language support for our emerging business in China and believe we are at the initial stage of this business opportunity. We hope to have continued growth in China in the future.

We are also experiencing better success in Brazil. Like China, we believe the relevant patient populations are very large. Our in-country partners actively promote embolotherapy as an important therapeutic innovation. We believe we have excellent working relationships with the country's key physicians, and many of them have two-way collaborative relationships with their colleagues around the world. Also, a major scientific meeting held each year in Sao Paulo attracts physicians from all the major Latin American markets, and the case demonstrations largely feature Embosphere Microspheres and HepaSphere.

While China and Brazil, like the other BRIC countries, are complex and challenging countries in which to do business, we continue to view our OUS business, as a whole, as a growth driver and as a way to diversify the company's sources of revenue. Our OUS revenues are still only 27% of our total revenues, and we believe we can continue to increase the percentage of total revenue that is generated from outside the United States, particularly from Brazil and China.

In conclusion, we believe our results in the second quarter show continued progress in each strategic growth driver of our business. The UFE business has continued to improve in the U.S., and we feel sufficiently confident in the strategies that we are executing to increase our investments in initiatives we believe will drive the growth of that business in the last half of this year and into 2009. We have advanced our position in interventional oncology, and later this year, we will make further decisions about how we can further develop that opportunity. We believe that our new products, for the most part, have been favorably received, and we are learning how to be more effective selling them and thus increasing our revenue per procedure. And, finally, we hope to continue to grow our business outside the U.S., and we are looking to further develop that opportunity, as well, for the company.

This concludes my prepared remarks, and I'll now open this call for questions, and our operator, Dennis, will instruct us on that procedure. Dennis?

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Tom Gunderson with Piper Jaffray.

Tom Gunderson – Piper Jaffray

Hi. Good morning. Can you hear me okay?

Rick Faleschini

Sure can, Tom.

Tom Gunderson – Piper Jaffray

Okay. I just have two quick lines of questions, one on sales territories and one on the economy. On the sales territories, two parts to that, Rick. Could you remind us how many – other than the new territories, how many of your salesmen through recent hire or turnover, etc., have less than a year of experience?

Rick Faleschini

That is a good question. I think about eight are under a year.

Tom Gunderson – Piper Jaffray

And does that include the six or not?

Rick Faleschini

Yes.

Tom Gunderson – Piper Jaffray

Okay. So just a couple. And then you also mentioned some territories did extraordinarily well, some did well, some didn't do as well as you wanted. Is that all on the salesperson's shoulders? You said that those things were going to be addressed, but are there marketing types of things; are there a dearth of competent IRs? What kinds of things contribute to a non-performing territory?

Rick Faleschini

You actually mentioned three really good ones. First of all, the rep has to be effective. And, I think as you appreciate and as we have described in last conference calls, this is not a trivial sales process. The rep has a lot of things to have to do and to balance on a daily basis to be effective. So the first is

they have got to be good and optimize what they are doing. The second is

there is a marketing component to what we are doing, and we find in some of these territories that are a drag right now that there is more we can do from a marketing standpoint to improve the number of patient referrals and to do better targeting and to execute our marketing strategies better and to, frankly, even find better ways to do it. The third is

we do have to have receptive IRs and hospitals on the other end of that, and, of course, at some point we need GYNs who are willing to buy into the story, as well. So it is a multiplicity of factors. We don't put it all on the back of the sales rep.

Tom Gunderson – Piper Jaffray

Thanks. And then on the economy, you touched on this in your opening remarks, and I wonder if you could give some more color. Specifically, I understand the complexity of IR referral chain. Not too many people go to an interventional radiologist and say, "Gee, I have pain in some part of my body. Can you take care of this?" It is a referral business. But I'm wondering if there's any color you can add, granularity, things you've picked up out in the field, and particularly between a gynecology referral, where we are hearing less traffic in the gynecologist's office because of the economy, as opposed to maybe an oncology referral, where postponing cancer treatment is probably not the best thing to do no matter what the economy?

Rick Faleschini

I'll take those, and then if I don't give you enough detail, come back at me with a further question. There are territories where one would expect you are going to get some softness just simply because of the number of women who may be unemployed, no longer have access to insurance. And we find that in various pockets around the country, places that one would expect that there would be some softness in the economy as a result of the turbulence we've seen recently, but that is happening. This is an elective procedure. It is well covered by insurance when they have insurance, but if that insurance for some reason lapses, there is going to be less ability to pay, either because they can't pay the deductible or they don't have the coverage.

We suspect that in some places, as well, gynecologists are harboring their patients more closely for the reasons that you indicated. They see a general, again, this is in different places where we see this, there is a slowdown in patients who are coming to the office, and therefore they will be perhaps less likely to refer these patients on. So it is a multiplicity of factors that relate to the economy, but I think that because this is an elective procedure, it does require a certain deductible. They do – it is not a cheap procedure, and therefore insurance coverage is desirable. Those are the factors that can play into it in the various geographies around the country that would be so affected.

Tom Gunderson – Piper Jaffray

That was good, thanks. What about the oncology side of it?

Rick Faleschini

On the oncology side, in general, the procedure volumes are high, and so if it is turned down, we don't generally see that, although there is tremendous economic pressure in the hospital in the whole oncology area now. There is a lot of pressure to make it financially viable as well as volume viable, and that is why in my comments I mentioned that these service line administrators are so critical in our – in the proposals that we make to hospitals, because we need to make sure we are on the same page with them as they are not only trying to optimize their volumes, they are looking at reimbursement, they are looking at coding and billing, and they are trying to evaluate what's the best thing to do economically as well as clinically. So it is a really – it's a balancing act that they do, and we've got to stay in sync. But in general, we've seen oncology procedures. They tend to be high volume. And IRs continue to report that it has been and they believe it will continue to be one of the highest rising procedures that they do.

Tom Gunderson – Piper Jaffray

Great. Thank you.

Rick Faleschini

Thanks, Tom.

Operator

Our next question will come from the line of Shawn Fitz, with Stephens.

Drew Jones – Stephens Inc.

Good morning, guys. This is actually Drew Jones [ph] for Shawn.

Rick Faleschini

Hi, Drew.

Marty Joyce

Hi, Drew.

Drew Jones – Stephens Inc.

I had a couple of questions for you on the hospital marketing efforts. It sounds like you guys continue to make some headway there. First of all, how do you budget for your marketing spend by per hospital? And, secondly, what is your timeline from that initial touch, where you get in there and pitch the benefits to some – to an administrator to an impact on procedure volumes?

Rick Faleschini

I'm going to answer part of this and then I'll turf the balance of your question to Joel, who's got – who's right on the frontier on this, and so he can give you direct impact on that. In terms of the marketing budget, there are certainly materials that we need to be able to go into a hospital and present to them what their opportunity is. So there is some data warehousing and manipulation capability that we have to have and provide for the territory so that when the rep walks into those accounts the presentation they are making is directly customized to their particular three-ZIP area. So we don't – although we will go in and there will be generalized principles that we'll talk about, when we sit down with an administrator, we can show them exactly what their demographic and ethnographic is in their targeted patient area. We can tell them how many hysterectomies are being done, what the penetration of UFE of that is, exactly what the opportunity would be if there was case mix shift, what the contribution margin will be. So this is a very well-honed tool that we use, and there is some expense that's associated with the development and ongoing support of that. To the timeline, I'll have Joel address that part of the question, because he's probably made 30 or 40 of these calls directly and has a pretty good feel for that. Joel?

Joel Weinstein

Thanks, Rick. The question is a great question, and the honest answer is that it varies considerably from account to account. In some situations, as part of the presentation Rick described, the accountants will want to go off and validate their own reimbursement and their own coding practices and their own payment practices to basically check it out against the basic model that we give them. By the way, in just about – in most of these cases, the hospitals find out that our models, which are based on national averages, tend to be more right than wrong, recognizing that there is local variability. That takes a process, and then depending on how much consensus is needed, typically what'll happen is a larger program that might involve media outreach and so on, to get that to happen could take anywhere from three to six months.

However, the other point that I think is very, very important to point out is that our goal in partnering with hospitals is not to get every one of them signed up to do a multimedia program. Not every account needs or in fact is justified based on what's going on in that account to basically provide that kind of a program out of the gate. There are many other basic things that can be done with an account in terms of outreach to OB/GYN, outreach activities to patients, open houses, information sessions, community-oriented events; that can generate volumes and do not require a huge expense in terms of the marketing. And therefore, as part of our sales program, what we encourage our territory managers to do and what we compensate our territory managers to do is to, number one, carefully target each and every account that they're spending time with; number two, develop and complete a planning form that outlines all of the marketing activities, some of which will not involve the multimedia campaigns. When we're looking at it on a broad level, particularly with some of the earlier activities that seed the market, those will happen usually more in the three-month time frame. When you get involved in the multimedia programs and the setup of those programs, it's probably at least three months, maybe as long as six months, to make it happen. Does that answer the question fully?

Drew Jones – Stephens Inc.

That gets it. Thank you.

Rick Faleschini

Thanks, Drew.

Operator

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

Matt Dolan – Roth Capital Partners

Hey, guys. Good morning.

Rick Faleschini

Good morning, Matt.

Marty Joyce

Good morning, Matt.

Matt Dolan – Roth Capital Partners

Follow-up on the sales dynamic, Rick, in terms of your third constituency, the hospital – the referral pattern set, are you able to identify success there in one way or the other in both the UFE and the oncology side? And, secondly, a follow-on to that, are you finding that certain sales reps are finding a home either on one side or the other, meaning is there any chance where they may need to specialize in an area that they're having more success in?

Rick Faleschini

I'm going to answer the last one first. Like every salesperson, there are people who favor one thing more than another. Their compensation is structured in a way that they can't abandon one application completely for the other, but we definitely see a bias. At some point, we may have to, as this business grows more and gets more fully developed, we may have to think about having some specialists that just focus in oncology, for example.

To your other question that relates to what I think is what you asked with respect to the referral success; in oncology, because interventional radiology is so frequently at the table at the tumor board because of the imaging that's required to diagnose and plan treatment – and I think this is one of the reasons why this is such a rapidly growing area for interventional radiologists – because they're already at the table at the tumor board working on the planning of these patients, their options become very evident to those around the table. So depending, again, as we've talked about before, what the phasing of these patients are, what stage they're in, how many lesions they have, how big they are, what the residual liver function will be, will determine where they fit on the treatment continuum. But I think that for the most part IR is seen as a partner at the table, and it's not as much of a dog fight. I do believe that what is required, though, is oncology is very, very data driven. And if people are going to bring up options, they want to know, and patients want to know – as I mentioned, they're more involved in their treatment now – they want to know what the data is. And so it's not enough as we move into the future for people to just say they have an opinion about something. That's going to have to be backed up.

We do see interventional oncology moving more from the anecdotal practice to the data-driven practice. That's on everybody's mind in interventional radiology who's involved in oncology, and it's certainly on the mind of the surgical and the medical oncologists. But in terms of a working partnership, I think that's a slightly easier working partnership than has been obvious in the past between IRs and gynecologists. We certainly continue to work on using all of the methods we have at our disposal in terms of IRs reaching out directly to gynecologists to talk to them about data, hospital administrators engaging the gynecologists in the overall marketing that they're trying to do to their demographic, and I'll just give you a very brief example of it.

If a hospital is trying to establish themselves in the community as a minimally invasive, women-friendly institution, and that's very important, because women make 70% to 80% of the healthcare decisions in the United States, therefore, when they go to an institution, it's very important for them to have a good experience. That has a halo effect on all the decisions that are made for their family. Hospital administrators understand that strategic construct, and so when they're working with gynecologists this is not to beat the gynecologist over the head with just the economic story. It is a broader strategic discussion. And we see more and more department heads and department players in gynecology engaging actively in this dynamic. They are taking broader strategic roles and thinking about how their hospitals establish brand equity in their communities. And of course we become, then, a part of that whole strategic process. I hope that answers your question, Matt.

Matt Dolan – Roth Capital Partners

Oh, it does. Thanks. And then with respect to China and Brazil, I think in Q1 you had your initial launch to China and initial shipments to Brazil. How do you expect that business from a revenue standpoint to play out over the next couple of quarters? Was there any stocking in Q2, or is this a good run rate and you expect it to continue to grow?

Rick Faleschini

We believe that what we are sending them – well, in Brazil, what we're sending them is going on the shelf and it's being used, and we are – I'm very confident that this is very close to a one on one, in terms if you ship it they use it. In China, there's a little bit more market development that needs to be done, because these products – this is the first time these products of this kind of quality have ever been in the country. And so there is a little bit more of a market development activity, and I found that when I was over there in May and visiting with the institutions, that they need a little bit more hand-holding, and this will require more development, which is why we've got some good technical resource on the ground there to assist with that. But we do believe that there is a high degree of interest, and that this should be a progressively building business over time.

Matt Dolan – Roth Capital Partners

Okay. And then two for Marty, do you have any idea of what revenue per procedure was and your capability of bundling here, maybe in the context of a comparison year over year?

Marty Joyce

We haven't thought about bundling that, but the revenue per procedure, we don't have it that tightly wound. We don't have metrics that are – we get them, but there's not a systematic way to collect them, and we're working on that now. But generally our delivery systems, especially the catheters, are gaining some traction. It will continue to be a more important part of the product portfolio going forward.

Matt Dolan – Roth Capital Partners

Okay, great. And then on the gross margin, Marty, a nice bump up here even with higher OUS revenue. Is this a sustainable level, or how should we look at this in terms of our models for the second half?

Marty Joyce

Over time, Matt, it should be going up. We thing it is driven by the mix, but I think we're at a reasonably good steady state at the moment. The potential drag, which would be temporary, is higher FX cost, because we produced it in France. But that won't be over time. Filling out the capacity of the plant should overrun that even under this FX environment. So we're pretty comfortable where we are now.

Matt Dolan – Roth Capital Partners

Okay, great. Thanks, guys.

Rick Faleschini

Thanks, Matt.

Operator

Our next question will come from the line of Stephen Handley, with J.M. Dutton Associates.

Stephen Handley – JM Dutton Associates

Good morning.

Rick Faleschini

Good morning.

Marty Joyce

Hi, Steve.

Stephen Handley – JM Dutton Associates

Here's just a question if I've got these numbers straight. Sales of embolics outside the U.S. are doing very well, up 40%-plus. I would have thought there would be a linkage with the sales of delivery systems. They are down 6% outside the U.S. Is there some temporary anomaly or inventory, or can you explain that lack of liquidity?

Rick Faleschini

I can. I can shed a little light on that, Steve. It's a little bit of a lapse as we move from previous-generation products to new-generation products and the regulatory cycle of those products. So in some countries, and China is one of them, because of the slowdown in the regulatory cycle there, we've had a lapse that we didn't originally want, of course. So as we close that gap, we should see that pick up in these other countries, and that's largely where it's coming from.

Stephen Handley – JM Dutton Associates

Okay. In the U.S., you're doing – you're gaining some share, I guess.

Rick Faleschini

Yes.

Stephen Handley – JM Dutton Associates

It doesn't have that problem, but you were up 29 versus the embolics were up single digits.

Rick Faleschini

Right.

Stephen Handley – JM Dutton Associates

So you're gaining share, and you have a much smaller market share in that, yes.

Rick Faleschini

Yes. And, I mean, it's still a small number, but you know – there is no question we've got a great catheter. The wires, I think, as you know, is a little bit more variable, because there is more individual preference in wires, meaning that people have a lot of opinions about what a good wire is. And so, while we think our wire is a credible wire, it doesn't serve the entire market like the catheter does. So we'll do much better now on the catheter going forward until we bring out additional wire offerings. We think we have some good ones that are in the pipeline, so we're looking to bolster that area. But that's the dynamic in the U.S. at this point.

Stephen Handley – JM Dutton Associates

Okay. Well, just the obvious point is that related to the total presentation I've heard, I mean, you had some great numbers, many great numbers, I should say, and very positive trends. It'd be wonderful to see all cylinders out there going together. And the delivery thing is just a small part of the total, but really we want to get the U.S. UFE embolic sales accelerated. I would just, based on what I've heard today, I would think that there's – it's got to really happen very soon.

Rick Faleschini

Yes, no, I'm very encouraged by what we see happening now.

Stephen Handley – JM Dutton Associates

Okay, thank you.

Rick Faleschini

And we share your urgency about that.

Stephen Handley – JM Dutton Associates

Yes, right.

Rick Faleschini

Thanks, Steve.

Operator

And there are no further questions. I will now turn the conference back to management.

Rick Faleschini

Thank you very much for joining us on our call today. We look forward to updating you next quarter, and have a good day.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.

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Source: BioSphere Medical Inc. Q2 2008 Earnings Call Transcript
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