Vascular Solutions' (VASC) CEO Howard Root on Q1 2016 Results - Earnings Call Transcript

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Vascular Solutions, Inc. (NASDAQ:VASC) Q1 2016 Earnings Conference Call April 25, 2016 4:30 PM ET


Phil Nalbone - Vice President, Corporate Development

Howard Root - Chief Executive Officer

James Hennen - Chief Financial Officer


Jeff Chu - Canaccord Genuity

Tom Bakas - Piper Jaffray

Larry Haimovitch - HMTC

Ben Haynor - Feltl and Company

Jim Sidoti - Sidoti & Company


Good afternoon and welcome to Vascular Solutions’ First Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Monday, April 25, 2016.

I would now like to turn the conference over to Mr. Phil Nalbone, Vice President of Corporate Development at Vascular Solutions. Mr. Nalbone, you may begin.

Phil Nalbone

Thank you, Tom. Good afternoon, everyone. Thank you for joining us for Vascular Solutions’ first quarter 2016 conference call. You will be hearing presentations today from our Chief Executive Officer, Howard Root and our Chief Financial Officer, James Hennen, and all three of us will be available later during the Q&A portion of this call.

But first, the necessary preamble. This conference call is being webcast to the public and is completely open to members of the media, Vascular Solutions’ shareholders and other interested parties. Today’s conference call is a proprietary Vascular Solutions presentation and is being recorded by Vascular Solutions. No other recording, reproduction, transmission or distribution of today’s call is permitted without Vascular Solutions’ consent. This call is being audio simulcast on the Internet via our company website at A replay of the conference call will be available on the Internet shortly after this call is concluded through Monday, May 2. To listen to the replay, visit the Investor Relations section of our website.

Forward-looking statements made in the course of this conference call and webcast are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words used such as may, will, expect, continue or other similar expressions. There are certain important factors that could cause the company’s actual results to differ materially from those anticipated by the forward-looking statements as described in our Annual Report on Form 10-K and other recent filings with the Securities and Exchange Commission. Forward-looking statements are made based on our analysis as of today’s date and we undertake no duty to update the information provided on this call.

I will now turn the call over to Howard Root.

Howard Root

Thank you, Phil and good afternoon everyone. Vascular Solutions is off to a great start in 2016, and our long term outlook for sustained growth and increasing profitability remains outstanding. We are well positioned to continue our track record of stellar execution by bringing to market multiple clinically important devices that meet the demands of our physician customers to treat their patients with vascular disease. And now with the Short Kit litigation finally over and done, we'll be able to devote all of our focus and all of our resources on much more productive activities.

As is evident from our excellent first quarter financial performance, we are well on our way to achieving our 13th consecutive year of double-digit percentage growth in product sales. When you consider all of the events and challenges that have occurred in the worldwide health care and financial markets since 2004, not to mention the distractions to us associated with our five-year long Short Kit litigation, the consistency of our superior revenue growth is simply exceptional.

As everyone associated with Vascular Solutions already knows, the most dramatic development in the first quarter was our victory against the malicious and misguided criminal prosecution of the company and me over false allegations of off-label promotion of our Vari-Lase Short Kit products.

On February 26, the jury in San Antonio, Texas returned not guilty verdicts on all 10 charges without us calling even a single witness in our defense. Instead it was the witnesses that the government chose to call that proved our innocence which underscores that this case never should have been brought in the first place.

Shortly after our victory, the Department of Justice finally dismissed with prejudice the remaining obstruction of justice criminal charges against one of our field sales employees. That dismissal puts a complete end to this prosecution. The prosecution that was driven by malice, poor judgment, improper tactics and abusive conduct by the prosecutors that ignored both the facts and the law.

After our victory, our legal team researched for potential remedies for this malicious prosecution but found that there is no legal mechanism in place for the company or for me to recover our legal costs spent defending against these patently false charges. The only legal provision for waiver of prosecutorial immunity to allow recovery of expenses spent defending against a malicious prosecution applies only to defendants who have a financial net worth below a maximum level and both the company and I exceed that level.

So in a perfect Catch 22 situation, the only defendants who can sue to recover legal expenses after winning against a malicious prosecution are those defendants who couldn't even mount a defense in the first place, because they don't have the necessary financial net-worth to do so.

Now even though we cannot recover our legal expenses, we are pursuing administrative remedies within the Department of Justice and the Office of Inspector General in an attempt to prevent what happened to us from happening to others at the hands of these prosecutors. We do not expect these administrative actions to be lengthy or costly, and starting in the second quarter we expect they will simply be part of our normal level of G&A spending. Therefore we expect there will be no further material expenditures related to the now completed Short Kit litigation and the guidance that James will provide for earnings starting in the second quarter will be on a GAAP basis.

The one bright side to this whole ordeal is that I believe Vascular Solutions has emerged a stronger company than ever before. Our employees have become even more committed. Our customers have supported us. Our investors have maintained their confidence in our ethics and our ability to manage this company through adversity. Our R&D programs remain productive with a full pipeline of more than 40 new product ideas at various stages of development and our balance sheet remains strong even after the $25 million in legal expenses we incurred.

Most exciting for me -- I can now get more involved in our longer term development projects, especially our top priority RePlas freeze-dried plasma development program in collaboration with the United States Army. Remember that at the same time one department of the federal government, that is the Department of Justice was essentially trying to destroy Vascular Solutions. Another department, that is the US Army, was encouraging us and assisting us in the development of their top priority project to make freeze dried plasma for the treatment of battlefield hemorrhage to save the lives of our wounded soldiers.

I'm very pleased to report that during the first quarter the Army completed its pre-IND package and submitted it to the FDA. The FDA responded very favorably to the Army's proposed clinical protocol and we expect the Investigational New Drug application will be submitted in July. We now expect Phase 1 clinical studies to begin in the October-November timeframe and based on the Army's current plan, we continue to target US launch of RePlas around 2019, but that timeline could be accelerated depending on FDA responses and US Army initiatives.

As a reminder, the US Army is paying for all of the expenses of the clinical study for RePlas. Vascular Solutions’ role in this process is the manufacturing. And we made a lot of progress in that area during the first quarter. We expect that by the end of April we'll have completed the qualification of all of the equipment necessary for clinical scale manufacture and testing.

We recently started construction of our commercial scale manufacturing facility and we expect that buildout will be completed by July 1 and equipment installation will be done by September 1. We obviously continue to be very excited about the outlook for our freeze-dried plasma product.

Turning to our financial results for the first quarter. We grew our revenue by 14% to a record quarterly level of $39.4 million. Our revenues exceeded the top end of our guidance range which was for between $38 million and $39 million. Our adjusted earnings of $0.25 per share also came in above our guidance, which was $0.22 to $0.24.

Our geographic mix of product sales was 80% US and 20% international. Our US revenue increased 17% to $31.6 million. International sales grew by 3% to $7.8 million. The relatively low rate of international sales growth was due to the very tough comparable for GuideLiner which we talked about in great deal on our fourth quarter conference call.

Sales of GuideLiner in Japan were down on both a sequential and year-over-year basis during the first quarter, because of Japan Lifeline’s purchase of a substantial launch inventory quantities in the first quarter of 2015 to fill their extensive distribution network. Without the effect of Japanese sales of GuideLiner, our first quarter international sales grew by 22% and our worldwide revenue increased by 18%. So the underlying trends in all of our businesses remain very healthy.

In today's press release, we provided details on the sales performance of our top eight products. These eight products combined represent nearly 80% of our total worldwide revenue and grew by 15% on a year-over-year basis during the first quarter. As is obvious from the wide disparity in sales growth rates among these products, there is substantial variation in the life cycles among our top selling products. That is exactly what we expect to see at all times with our clinical niche strategy. We focus our sales and marketing efforts on actively promoting the products that are in the growth phase while we continue to harvest without substantial additional promotion, our products that are in the mature phase.

Our top-selling product during the first quarter once again was our GuideLiner catheter which had worldwide sales of $11.7 million, representing an increase of 13% from the first quarter of 2015. In the US, GuideLiner, which is now in its seventh year on the market, grew by 29%.

International sales of GuideLiner declined at 9% on a year-over-year basis due to the tough comparison in Japan. Excluding sales to Japan, first quarter sales of GuideLiner in international markets grew by an impressive 25% and our worldwide GuideLiner sales grew by 28%. GuideLiner sales growth continued to be driven by increasing utilization rates as more and more physicians rely on its ability to perform challenging cases, and as an increasing number of interventional physicians elected to take on more complex cases.

Our second biggest source of revenue during the first quarter was micro-introducer kits, with sales of $3.6 million representing growth of 25%. Micro-introducer kits are one of the most widely used devices in the interventional suite. And during the past couple of years we have focused on transitioning to internal manufacturing, cost reductions and product line expansion. Our strategy has worked very well resulting in the combination of lower prices for our customers and increased market share at higher gross margins for Vascular Solutions.

Our third largest product during the first quarter was our Pronto extraction catheters, which had sales of $3.4 million, representing a decline of 22%, which was consistent with our expectations given market and clinical practice trends. We launched Pronto back in 2003 and the market for extraction catheters has been mature for a few years.

On the positive side, at the end of the first quarter, one of our competitors removed their aspiration catheters from the market. And we have already begun to see our Pronto sales stabilize and slightly increase on a sequential basis.

Our number four revenue source was our reprocessing service for the ClosureFAST radiofrequency varicose vein ablation catheter with revenue of $3 million, representing year-over-year growth of 10%. We view our ClosureFAST reprocessing service as potentially a $20 million annual revenue opportunity and now in our fifth year on the market, we are moving gradually toward that level.

Our fifth largest product line was our hemostatic patches, with first quarter sales of $2.8 million, representing a decline of 6%. We launched our D-Stat Dry hemostatic patch in 2003 and the market for femoral artery hemostatic patches has been mature for some time now. The competitive and pricing pressures are compounded by the rapid shift from femoral access to radial access for performing catheterization procedures. Therefore we are focusing our growth efforts on our newer products that address the rapidly growing radial artery access market in the US.

Our Turnpike catheters moved into the number six revenue position during the first quarter with sales of $2.3 million. This represents a big jump sequentially from sales of $1.4 million during the fourth quarter when Turnpike was our eighth largest selling product. We launched our first configuration of Turnpike in the first quarter of 2015 and then we launched three additional configurations throughout 2015. Already Turnpike is our most successful internally developed new product launch since we introduced GuideLiner. And like GuideLiner, Turnpike fits into the growing segment for complex coronary interventions. Already at a run rate approaching $10 million annually, we believe Turnpike can become at least a $30 million product family and we expect Turnpike to be one of our major growth drivers over the next several years.

Our collection of radial artery products represented our seventh largest sales category during the first quarter, with revenues growing 28% to $2.1 million. Vascular Solutions was early to identify the trend in the US toward radial artery access, and our strategy of developing and assembling a variety of products to serve this market has paid off very well. We expect this product line to be a significant source of growth during the next several years.

The Langston dual lumen catheter was our eighth largest selling product during the first quarter with revenues of $1.9 million, representing growth of 19%. We expect sales of Langston to continue to grow, because it is an increasingly important tool to measure aortic stenosis in percutaneous aortic valve replacement or TAVR procedures, a cath lab procedure that is growing substantially worldwide.

Overall, our clinical-based and niche-focused product strategy has clearly been paying off, especially in the area of complex interventions. Interventional physicians are spending more time to treat patients effectively with minimally invasive catheter based procedures in order to prevent those patients from having to undergo open heart bypass surgery.

We have talked a lot about how GuideLiner and Turnpike are important tools in allowing this shift in treatment patterns to happen. But this complex intervention phenomenon also is giving a nice boost to several other products in our catalog -- products that in the past we haven't talked a lot about but that we have taken on renewed clinical relevance as physicians attempt more and more complex cases. For example, our SuperCross micro-catheters grew 27% in the first quarter. Our Venture catheter also grew 27% and our Twin-Pass catheter grew 52%.

It's an exciting time for Vascular Solutions. With the Short Kit litigation now over and with essentially everything intact and running very well, we look forward to delivering our 13th consecutive year of double-digit top-line growth. And from there we believe our business model will allow us to continue to deliver a superior financial performance for the foreseeable future while maintaining our number one focus on the clinical results of delivering useful medical devices for doctors to improve the lives of their patients with vascular disease.

With that, I'll turn the call over to James for the financial details.

James Hennen

Thank you, Howard. Our gross margin in the first quarter was 65.5% compared to 67.4% in the year ago quarter. Our gross margin is subject of variability from quarter to quarter based on the mix of products sold and the mix between US sales through our direct sales force and international sales to our independent distributors at lower transfer prices.

The decrease in gross margin during the first quarter was primarily due to an increase in sales of lower margin products, such as micro-introducer kits and vein catheter reprocessing, combined with inefficiencies incurred during the renovation of our manufacturing facility and introduction of a new version of the Turnpike.

For the full year 2016, given the expected product and geographic mix of sales and improved manufacturing efficiencies for our new products, we expect our gross margin to return to that 66% to 67% range, consistent with our gross margin levels during the past four years.

Our operating earnings in the first quarter on an adjusted basis, excluding the expenses incurred in the Short Kit litigation, were $6 million representing an operating margin of 15% compared to an adjusted operating income in the year ago first quarter of $5.9 million or 17%. The decrease in operating margin was due to the decrease in gross margin of 1.9% I just discussed.

General and administrative expenses in the first quarter were $9.6 million or 25% of revenue compared to $4.8 million or 14% of revenue in the first quarter of 2015. Expenses related to the Short Kit litigation totaled $6.9 million in the most recent first quarter compared to $2.4 million in the year earlier first quarter. Excluding the Short Kit litigation expenses, G&A expenses would have been 7% of revenue in both periods. Beginning in the second quarter with the Short Kit good expenses over, we expect to return to normal levels of G&A spending and be approximately 5.5% to 6.5% of revenue in each of the three remaining quarters of this year.

Sales and marking expenses were $9.6 million or 24% of revenue compared to $8.7 million or 25% of revenue in the year ago first quarter. For the full year consistent with the guidance we provided on our Q4 conference call, we expect our sales and marketing expenses to be in the range of 22% to 23% of revenue. We continue to expect sales and marketing to be the primary leverage point for improving our operating margin on an annual basis going forward as more products are added each year to the relatively fixed cost structure of our US direct sales force and international distributor network.

Research and development expenses were $5 million or 13% of revenue, compared to $4.1 million or approximately 12% in the year ago first quarter. The increase in R&D spending in the first quarter reflects headcount additions to support our pipeline initiatives as well as additional project testing required to meet increasing regulatory requirements for new products. For the full year, we expect R&D expense to be between 12% and 13% of revenue.

Clinical and regulatory expenses were just under $2 million or 5% of revenue during the first quarter, compared to $1.5 million or 4% in the year ago quarter. The increase on a percentage basis reflects additional headcount being added to ensure compliance with the increasingly stringent quality and regulatory acquirements for manufacturing medical devices. For 2016, we continue to expect our clinical and regulatory expenses to be between 4.5% and 5.5% of revenue.

Amortization expense for the first quarter was $404,000 compared to $405,000 in the first quarter of last year. We expect our amortization expense to be approximately $400,000 in each remaining quarter of 2016.

During the first quarter we had a tax benefit of $619,000 due to incurring a pre-tax loss of $874,000 in additional to a benefit of $326,000 from a new accounting pronouncement that requires the excess tax benefits from restricted share vesting and stock option exercise deduction to be recognized in earnings. We are expecting an effective income tax rate of approximately 28% in the second quarter due to the positive impacts from this new tax accounting pronouncement. We are modeling an effective income tax rate of approximately 33.5% for the third and fourth quarters of 2016, subject to variations as a result of tax benefits recognized from stock option exercise.

On an adjusted basis, our first quarter net income was $4.3 million and EPS was $0.25, which came in above our guidance range of $0.22 to $0.24. This compares to adjusted net income of $3.8 million and EPS of $0.21 in the first quarter of last year.

On a GAAP basis, we reported a net loss for the quarter of $255,000 corresponding to a GAAP loss of $0.01 per share. In the year ago first quarter, we reported GAAP net income of $2.2 million or $0.12 per share. The total number of shares used in calculating the adjusted fully diluted earnings per share of 17.6 million in the first quarter of 2016 compared to 17.9 million in the first quarter of 2015, a reduction caused by share repurchases under our stock repurchase plan.

Turning to the balance sheet and cash flows. We ended the first quarter with $31 million in cash and equivalents compared to $41.5 million at the end of December quarter. We continue to have no long term debt. During the first quarter we used cash of $4.3 million for operations due solely to the Short Kit litigation. We also used $2.9 million for capital expenditures relating to building improvements and to purchase computer and manufacturing equipment. We used $3.3 million for financing activities, which included $1.5 million to repurchase shares of common stock to satisfy income tax withholding on restricted stock, stock option exercises.

Financing activities also included the use of $1.8 million to repurchase 64,199 shares of our common stock, part of our current $20 million share repurchase authorization that runs through September 30, 2016. The average repurchase price for shares purchased under the buyback program during the first quarter was $28.18. To date we have used $2.6 million to repurchase 97,600 shares at an average price of $26.93 per share. This leaves $17.4 million remaining under the existing share repurchase program.

Our days inventory on hand at March 31 was 152 compared to 157 at the end of December. We expect our days inventory on hand to remain at approximately 160 days as we maintain high levels of finished goods inventories through the completion of our facility renovation. These renovations are expected to be completed by the end of 2016.

Accounts receivable days sales outstanding were 50 days at March 31 compared to 46 days at the end of December quarter. The increase in days sales outstanding is due to a few international distributors paying slower than normal. We continue to expect days sales outstanding to remain around the 45 to 50 day level.

Finally, I’ll turn to our financial guidance. For the full year 2016, we are raising our revenue guidance to a range of $163 million to $166 million, which represents growth of 12% at the midpoint compared to 2015 revenue of $147.2 million. Our previous guidance called for 2016 revenue in the range of $161 million to $165 million.

We are also raising our adjusted earnings guidance for 2016 to a range of $1.19 to $1.23 which compares to 2015 adjusted earnings of $1.11 per share. Our previous 2016 adjusted earnings guidance was $1.17 to $1.21 per share. The adjusted EPS figure for 2016 excludes expenses incurred during the first quarter for the Short Kit litigation. Included in the 2016 adjusted earnings guidance for the year are $4.8 million in non-cash stock based compensation, $1.6 million in amortization of intangibles and an assumed tax rate of approximately 30%, reflecting the benefits of a new tax accounting pronouncement that I discussed earlier.

For the second quarter of 2016, we are providing revenue guidance of between $40.5 million and $41.5 million. The midpoint of this range represents growth of approximately 9% from the $37.6 million in the second quarter of 2015. Excluding the effects of the sales of GuideLiner to our Japanese distributor partner in the year ago second quarter, our guidance at the midpoint represents growth of approximately 18%.

Our EPS guidance for the second quarter of 2016 is between $0.29 and $0.31. Please note this is a GAAP number. With the Short Kit litigation expenses behind us, we will revert to giving earnings guidance on a GAAP basis. Our EPS outlook for the second quarter of 2016 includes $1.1 million in non-cash stock based compensation, $400,000 in amortization of intangibles and an assumed effective income tax rate of approximately 28% due to the impacts from the new accounting pronouncement.

With that, I'll turn the call back to the operator for the question and answer portion of our call.

Question-and-Answer Session


[Operator Instructions] And we'll take our first question from Jason Mills with Canaccord Genuity.

Jeff Chu

Hi, good afternoon. This is actually Jeff filling in for Jason. Howard, congratulations on the good quarter and the legal victory. Turning to your commentary about more productive activities going forward, so, in years past, you expect to launch about 10 to 12 new products from your internal development pipeline. Can you talk about -- a little bit about the cadence of new product launches for the balance of this year? And how much time do you expect to spend on market development efforts?

Howard Root

Yes, so I think the number of launch products has been relatively constant the last couple of years and I think it will be constant in 2016. I think last year we did around 11 new products and this year we're targeting around 10. Now we could add one and that's all internally developed in, or partnership with manufacturing partners. But it's Vascular Solutions products, not counting for anything that we could acquire, whether acquiring a product or acquiring distribution rights.

A couple years ago we stopped giving a lot of information about the products in development, which I think is a good idea. We will give you the general area, we're focusing in the same areas that we have talked about before. That is complex coronary interventions which leverages GuideLiner and Turnpike and then Venture and SuperCross and Twin-Pass are all in that area, so we have a nice portfolio of products that we're interested in adding to and probably a third to almost a half of the new products we look at launching this year are in that area. Then there is a radial access which we've done a lot of work in filling that out. We've got some improvements still to make I think in the introducer sheath area and pushing that, that has a potential of being a big growth driver for us if we get everything locked in place. And then the embolization area which is kind of more in the development area with Gel-Blocks and Gel-Beads and the resorbable embolic materials. We've got a lot of products there and we're just figuring out where we're going to push hard on that area. We're kind of getting our market development together on that before we make a big push.

So if you look at where we are, most of our development – marketing development is going to be around the chronic complex intervention area which is ongoing now with Turnpike following -- that's kind of following behind the radial which we did a lot of push on that a year or two ago. And the next one coming up is going to be embolization. That's about as much detail as we want to really go into on the new products.

Jeff Chu

Okay, thanks for the color, Howard. James, can you talk about the trends from gross margins going into the second quarter and through the remainder of the year?

James Hennen

Yes so, as we reported our gross margin did decline at 65.5% from that 64.4% in the year ago quarter. And mix had a lot to do with that. Our micros, as Howard stated, grew 25%. That’s one of our lower gross margin products right around 50%. And also the mix with the D-Stat Dry and Pronto declining are some of our highest gross margin products and those two metrics accounted for most of that decline. We also saw some inefficiencies with the new product in the Turnpike line which we launched in Q1. Generally when we launch new products, we see lower inefficiencies and that improves as the quarters go out. So in Q2 we do expect a rebound to greater than a 66% gross margin with the increasing efficiencies due to that Turnpike LP and then facility renovations will be progressing throughout the year and be done by the end of this year. So Q2 we expect to be greater than 66% and then increasing a little bit each quarter Q3 and Q4 after that.

Jeff Chu

Great. And lastly for me, just thinking here on the cash flow side, what are your targets in terms of cash flow at the end of the year?

James Hennen

So we expect to have $20 million in cash flow from operations, that include all the Short Kit litigation expenses that we paid in the first quarter. And we also expect about $10 million of CapEx during the year. So free cash flow we're expecting about $10 million in 2016 as far as free cash flow but $20 million from cash flow from operations.


And we'll take our next question from Tom Bakas with Piper Jaffray.

Tom Bakas

Hey guys, thanks for taking my questions and congrats on a nice quarter. I want to just start with radial. And if you could just maybe help us with -- are there any major gating factors to broader adoption here? And is this something where we are going to see a step function where there is a milestone that hits that accelerates? Or is this more likely to be a longer ramp over time?

Howard Root

So kind of two parts to that, one is the market and then there's the products. So on the market, the US is the slowest to adopt radial access. Five years ago, it was at 3%, 4% penetration. Now it’s at 25%. And I think it's still going up pretty rapidly. I think it will get toward 50% but it's going to take several years to get there. So it's one of the fastest growing areas within the interventional coronary space. And the product side of it though is, if something is growing that fast, why aren’t the big companies into it? And the reason is there aren't a lot of products to fit that specific variation of a coronary cath procedure. So you've got an introducer sheath, you've got a wrist splint, you've got a hemostasis band, you’ve got a arm board. And we're in all those areas but you're using generally the same stent, the same diagnostic catheters, the same guide catheter, and guide wire. So the big companies don't get excited about it because it's relatively small dollars.

But there are some important advances we can make in the sheaths, there’s already important advances we made in the hemostasis area and the arm boards. The big area for us left -- it's incremental for us on all the products with the exception of the introducer sheaths, and that's, we've partnered with LePu Medical out of china. Now we’ve partnered with them on the radial hemostasis band several years ago. And we've got the VSI Radial sheaths out there now. We've had it in evaluations for the last year and a couple of months. We continue to make improvements on it. We want to get it as good as it can possibly be in order to really make a big push, still in the evaluation stage and that's why you see the continued incremental progress. But once that got it through -- once we get confidence with that product and push it hard, that could easily be a $10 million product all by itself. So something that's annualizing around $10 million in revenue right now, could double with the addition of that one more product that radial introducer sheaths. You don't know you've got it until you've got it. And so we're still at the point of getting confidence to go and push that hard and that's why, really this is the year of the Turnpike and maybe toward the end of this year it might be the year of the VSI Radial sheaths or by 2017 it certainly should be.

Tom Bakas

Great, thank you and I guess just on that last point, Turnpike has very strong growth. And I noticed an uptick in your guidance from about a $30 million annual run rate to at least $30 million. I'm just wondering how big can that ultimately get?

Howard Root

Well, if you remember me guessing the market size for GuideLiner, I think I was wrong consistently about three years in a row, thinking it was a $20 million market, then $30 million and now we're up to $70 million market. So take my prediction with a grain of salt. But we've done an assessment on the US and international. We look at percentage rates and we have a competitor in these markets. We are not looking at the whole entire market for us, we're looking at us maybe getting toward a 50% share of that market. But with the percentages that we run, we think this is about a $60 million market. And that's why we're pretty comfortable with $30 million. But if you'd asked me five years ago, I would have said this might be a $20 million market and we'd be lucky to get to $10 million with the product. So -- that market is growing. Where it stops depends on international factors as well as penetration within the US. But it's all looking good right now.


And we'll take your next question from Larry Haimovitch with HMTC.

Larry Haimovitch

Good afternoon everyone and congrats on all the progress. And, Howard, it was just such a wonderful thing to see you beat the government. I loved it.

Howard Root

Thanks Larry.

Larry Haimovitch

I'm happy for that. I'm sure you were much happier than I am. And I'm sorry I missed your party. It sounded like it was a lot of fun.

Howard Root

We had a stock [ph] for you, but you didn't make it out.

Larry Haimovitch

I know, I know. I don't come to Minneapolis in the winter time, though. I don't come to Minneapolis in winter time, you know that right?

Howard Root


Larry Haimovitch

Yes, I know. Summer's here. So, Howard, actually the last questioner raised the Turnpike question, and I was going to kind of tweak you a little bit about your previous forecast about GuideLiner. Do you see a lot of parallels between Turnpike and GuideLiner in that it's pretty unique product [indiscernible] have one competitor but it sounds like a pretty unique product. Are the same or similar dynamics in that marketplace, such that it will -- I'm not saying it will be a GuideLiner obviously, but does it have that -- the same kind of market dynamics?

Howard Root

Well, let me give you a similar and then give you what's different. And then kind of conclude at what we see for it. So in a similar area they're both used primarily in the same procedure, although GuideLiner can be used in a more standard coronary cath and it can be used in peripheral as well. Turnpike can be used in peripheral. But it's used more often in the complex coronary intervention. So that's in the same procedural area.

Within that area, the entire world is increasing in the penetration. Where it used to be that they would send these patients with triple vessel disease to open heart surgery on a routine basis, now the cardiologists are looking at it whether it's in the US or in Germany or in developing nations even, and saying we can treat that case, we can treat that disease. We can put stents in and avoid the open heart surgery. And that's continuing to increase and it's a growth driver within interventional cardiology. So that's similar.

The different thing is, GuideLiner, we were the pioneers. We created rapid exchange guide extension. So we had to convince physicians that it was a useful tool, what it would be used for, how to use it and then once we did that, we had really first mover advantage. So that's a plus and a minus. It's a minus because you've got to convince and educate the doctors on a new tool. It's a plus that once you do that you don't have competition. Now we do have a competitor in Boston Scientific in that area but we’re the dominating share of that market. Turnpike, we came behind a very reputable Japanese company, that has a good product out there. So we had to make it better. I think we have done that. We've done that by adding different versions. We have four different versions of the Turnpike that address different specific unique niches within a niche, and Vascular Solutions is only -- one of the only companies that like to develop niches within niches. But doing that gives the physician exactly what they want for the case they're treating. And that's given us the ability to really position it as an advance over an existing product. So the market is already there. It's growing fastly but it's already there before we got here. But we're taking share away from a very reputable company to get to where we are.

So it's gone up quickly. GuideLiner took a little bit longer to take off. But we're fighting a competitive game as we get going. Either way that’s a 1a and it's a 1b. I mean both of these are the products that you love to have in a portfolio. Because they're clinically based, they justify the costs. It's clearly an improved clinical outcome for the patient and that's what the physicians want, that's why they want to see our sales rep show up. So it's kind of the prototypical Vascular Solutions product whether it's Turnpike or GuideLiner.

Larry Haimovitch

That's a great answer. The second question follows on your comments. Would you estimate approximately what the market shares are between you and your two competitors in those two different markets? Obviously, in GuideLiner, you dominate. In the other market, you are second. I'm just curious how those market shares might shake out right now.

Howard Root

Yeah. GuideLiner, there is -- Boston Scientific has Guidezilla product out there. I would roughly estimate it's 90:10, 90% us, 10% them. It’s certainly a dominating share on our side. On Turnpike we're still the small player. Maybe we’re 10%, 20% -- 80% to 90% on the other side but that's from nothing a year ago. So we're doing a good job and the Turnpike obviously accelerated greatly in the first quarter sequentially from the fourth quarter. So we see good things for that product already annualizing, at that $10 million level.

Larry Haimovitch

And the competitor you have in Turnpike, they are US approved, I'm quite sure?

Howard Root

Yes, yes –

Larry Haimovitch

And who are they again? I didn't catch the name.

Howard Root

They have – Well, I didn't give you the name but it's Asahi, a Japanese company –

Larry Haimovitch

Oh, Asahi, sure. They make some very good products. They are a very good company.

Howard Root

Right. And they have the one version of the Corsair as their product. We have the four versions of the Turnpike that address kind of a wide ranging situations where it can be used.

Larry Haimovitch

And your sales force, I'm thinking in terms of feet on the street, is considerably larger than theirs in the US, isn't it?

Howard Root

In the US, it is. Obviously we don't sell Turnpike in Japan. They have a dominating presence in Japan. In Europe they probably have a better more established organization than we do in that specific product but it's relatively close. But in the US we probably have I would guess around five times the number of sales people that Asahi has.

Larry Haimovitch

And are you selling anything outside the US in Turnpike at this point?

Howard Root

Yeah. The international sales of Turnpike, it's probably our number two product international right now. And it’s focused largely on Europe.

Larry Haimovitch

And Japan, I suppose, at a later date, right? And you have to go through the regulatory process there.

Howard Root

Right. Japan is such a specialized case, we really work with our partner for them to tell us what products work and what products don't work in that country. And we're years away from having Turnpike in Japan if that fits for our Japanese partner.


[Operator Instructions] We'll go next to Ben Haynor with Feltl and Company.

Ben Haynor

Congrats on the great legal win. That was fun to watch. I was just wondering if we could get an update on the overseas device company that you signed the agreement, the distribution agreement with later last year?

Howard Root

Well, we've got -- we work with a couple – we work with a number of different companies and I stumble because I really don't want to get into naming names on development agreements in that area. We do have a pretty substantial product that we expect to launch this year that we're working with a company outside the US on the development. We think it's the second half of 2016 launch product. And again there will be a clinical evaluation, then expansion of sales. But the nice thing about partnering up with someone in this area is that they’ve got years if not decades of expertise in the technology behind the product. And so we don't have to try to build it and stumble our own until a second or third generation comes out that meets the market requirements. So we're excited about it but I'm just not going to give you the name or even the product that it’s in. Because otherwise you'll ask another question next quarter. And we'll continue to have to disclose that. And also obviously for competitive reasons -- we don't want to say where we're coming until the product is launched but as soon as the product is launched we will do a press release on it. And then you'll know who we're partnered up with, what the product is and what we see as the potential.

The other thing is – about all these things I am not trying to play cute but we do not include revenue of these new products, any material revenue from these new products in our forecast. I mean there is some modest amount in our expectations but it’s not the revenue driver for us in 2016 from our projection standpoint.

Ben Haynor

Okay. But could that be a product that, come 2017, could be a substantial driver to growth?

Howard Root

Yeah, it could be a top eight product in 2017.

Ben Haynor

Okay. So, looking out a few years, and just kind of hopefully being able to continue the nice double-digit growth trajectory that you've been on for so long now, obviously Turnpike is going to generate a decent chunk of that growth over time. It sounds like this other product has a chance to contribute pretty strongly there as well. Can you talk -- not specifically -- about individual products, but kind of the handful -- you have a handful of products that could wind up seeing markets sizes similar to Turnpike or GuideLiner within the pipeline?

Howard Root

Yeah, I guess we look at what we have right now and where we're going. I mean, the Turnpike is about a $10 million addition to our revenue this year from the forecast as you look at it. It could be more than that. GuideLiner has been a consistent $10 plus million contributor to our growth. And micro-introducer is a consistent -- smaller but consistent year after year contributor to our growth, and then radial is kind of right behind that -- was a big contributor and now on a percentage basis, not as large but still adding materially and with the VSI Radial introducer sheaths, that could be another $10 million addition to our growth. So those are the ones we've talked about. And then there's a lot of smaller ones in that SuperCross and Twin-Pass and Venture which all have nice incremental additive sales based on being sold at the same call point of this complex coronary intervention.

So that's kind of what we have right now. As far as longer term I don't want to get into specific products but again I go back to the three main buckets within our strategy that we're looking at. Complex coronary interventions which we’ve talked a lot about already, the radial introducer sheaths which is the VSI introducer sheaths and then the third one, which we don't talk a lot about, because it's a little bit further out there, is the embolization – the resorbable embolic materials. And that's we have a lot of products in that area already, Gel-Block, Gel-Beads already approved and on the market. But we're looking at putting together our marketing strategy around that to add to it. So I like it -- I like to think of it as we have a lot of shots on that. I don't want to talk about any specific one. Because they're all kind of part of that same percentage chance and they're all in that same grouping. There's a couple of things that are bigger than that. That's the freeze dried plasma which is further out. We also have one other product in that area, that's further out, that's a big opportunity of $50 million to $100 million opportunity. But that's looking out 2018-2019.

So right now it's GuideLiner established, Turnpike adding to it, VSI Radial -- a couple of these other things coming on in 2016, for 2017, 2018, and then RePlas freeze dried plasma and there’s other large opportunity 2019, 2020 and that's kind of laying out our whole strategy as to how we go from a $150 million company to a $300 million, $400 million company over several years.


We’ll take your next question from Jim Sidoti with Sidoti & Company.

Jim Sidoti

Great. Just wanted to get an update on the size of the sales force today and where you think that sales force will be at by the end of the year?

Howard Root

We are right at that 100 level, 103 and 104, 105 somewhere in that range and that's relatively constant. We add maybe a couple each year but as you've seen that's where we really gather the efficiencies and leverage on our financial model, selling essentially more products and deeper into the cath lab with the same number of sales force. So we don't see fundamentally changing that. Our sales force sells all the products, that's where we get the huge efficiency by only having one sales force covering the US. And we have international, we have independent distributors. We see no change in that, we're not having any plans to go direct in any market outside the US. And so I think you're going to pretty much see that consistency with just only incremental increases in compensation due to competitions going up. We added some management at the beginning of last year. We see that consistent this year. And we don't forecast any major changes. So I think you'll still see that continued dropping in the sales and marketing expenses as a percentage of sales each quarter going forward.

Jim Sidoti

And then do you have any long-term goals for gross margin? I realize the new products you are bringing out tend to be higher-margin than the products you have in the bag right now. Do you have a longer range target for that?

James Hennen

We look out, we have a slide in our investor presentation of $250 million plus, what does that look like at Vascular Solutions. We think 66% to 68% on a gross margin basis, so right in the range of where we've been the last four years. And that's due to mix, some of the larger opportunities we've talked about, some of them have lower margin, some of them have higher margin. So we model that all together, we get look at 66% to 68%.

Howard Root

And if you look at our company, the problem with that is we're not really a slave to the margin, because we have independent distributors outside the US, we sell at roughly a 50% gross margin there. But by doing that we don't have sales and marketing expenses, so on the net on the bottom line, that's about the same as our 70% margin on our US sales. And we like that, doesn't have the currency exchange risk as well. We don't have essentially any of that. The other part of it is some of our products have 50% margin, some are 80% margins, and we don't exclude a product because we can't get 70%. We’ll sell 50% margin products and we look at every product independently and whether it makes sense financially, after the first thing which is whether it works clinically. So with that the margin kind of floats based on growth products or declining products and also growing international sales versus growing US sales.

End of Q&A


And at this time, I'm showing no further questions in the queue. Mr. Root, I'd like to turn the call back over to you for any closing remarks.

Howard Root

Well, I just want to thank everyone for your support and assistance and staying with the company. I mean, over the last five years, the Short Kit litigation and certainly the last year plus since we got indicted, I’ve been very humbled and impressed by the response from our shareholders. We have our shareholder meeting coming up on Friday. So anyone who is in Minneapolis, welcome to attend that. But for those of you who can’t, I just want to say another big thank you for assisting us as we went through the Short Kit. And now we're off undivided attention on productive activities, launching and selling our needed medical devices. Thank you once again.


Ladies and gentlemen that concludes our conference for today. Thank you for participating in Vascular Solutions first quarter conference call. You may now disconnect.

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