AtriCure's (ATRC) CEO Mike Carrel on Q2 2016 Results - Earnings Call Transcript

| About: AtriCure, Inc. (ATRC)
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AtriCure, Inc. (NASDAQ:ATRC) Q2 2016 Earnings Conference Call August 4, 2016 4:30 PM ET


Lynn Lewis - IR Westwicke Partners

Mike Carrel - President and CEO

Andy Wade - VP & CFO


Danielle Antalffy - Leerink Partners

Rick Wise - Stifel

Jason Mills - Canaccord Genuity

Brooks West - Piper Jaffray

Suraj Kalia - Northland Securities

John Gillings - JMP Securities

Matt Miksic - UBS


Good afternoon and welcome to AtriCure's Second Quarter 2016 Conference Call.

My name is [Ronny] and I'll be your coordinator for the call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this cal is being recorded for replay purposes.

I would now like to turn the call over to Ms. Lynn Lewis from the Gilmartin Group for a few introductory comments. Lynn Lewis?

Lynn Lewis

Thank you. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call 513-755-4136 to have one emailed to you.

Before we begin today, let me remind you that the company’s remarks include forward-looking statements. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including risks and uncertainties described from time-to-time in AtriCure's SEC filings. AtriCure’s results may differ materially from those projected. AtriCure undertakes no obligation to publicly update any forward-looking statements.

Additionally, we refer to non-GAAP financial metrics, specifically adjusted EBITDA. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in our press release, which is available on our website.

With that, I’d like to turn the call over to Mike Carrel, President and Chief Executive Officer. Mike?

Mike Carrel

Thanks Lynn. Good afternoon, everyone and thank you for joining us. Revenue in the second quarter reached $39.7 million up 22% over last year. Sales in the U.S. were up 20%, International revenues were up 29% and gross margins continue to be strong at approximately 73%.

Additionally during the second quarter we launched two important products, made progress on our clinical trials and made significant strides in positioning the company for long-term success. We've also refined and expanded our commercial organization to continue to facilitate our growth. So with these changes, we also brought about a temporary disruption.

As a result we are updating our revenue guidance to growth in the range of 20% to 22% for full year 2016. So while our revised expectations are quite strong, they are downward revision from our prior thinking. Yet our underlying business remains strong.

Turning to the second quarter results, put simply the U.S. business was not as strong as we had expected, which limited our upside in the quarter and has impacted our outlook for the remainder of 2016.

Growth in MIS was solid, while growth in opening Clip was slower than expected. Momentum build throughout the quarter with lower than expected growth in April, accelerating through June. While I’m excited about our progress throughout the quarter, our expanded team is still gaining experience and consistency.

Driving our second quarter results and our expectations for the second half of 2016 are two distinct but related factors. First, as I’ve just briefly mentioned, we made some changes to fully optimize our commercial structure and team to position AtriCure for long-term growth and success.

This culminated in some of our high performing reps moving into management roles. This is a positive in the long-run and we are beginning to see an encouraging impact of the expanded leadership. At a rough level however, these changes less then holds the fill.

As of now we have added new reps to these areas and they are in the process of ramping up. Based on the accelerated momentum we are seeing, we are highly confident that we have made the right moves and added the right people and we expect to work through these over the coming three to six months.

Secondly, we continue to expect the acquisition of nContact to be a game changer for our business over the next five years. And there has been a groundswell of excitement from our customers. While sales of nContact product EPi-Sense were up over 45% sequentially in the second quarter, this excitement also caused our team not to spend as much time on our open Clip and CRYO business.

We have since refocused our efforts on what we do best which is building, steady and sticky option but not as quickly enough to see the second quarter result exceed expectations and we expect some carryover in the second half of the year.

We have build our sales models that we can get significant leverage across all areas of our business, but it will take just a little bit longer than we initially expected. Meanwhile our product and clinical pipeline are healthy. We remain confident in the market opportunity and our positioning and we expect growth will be strong for several reasons.

One, first, I know and trust our team across the Board. Our commercial team is second to none and we have made the right adjustments necessary to capitalize on all the opportunities in front of us for the long-term.

Second, the new products that just rolled out, the cryoFORM Probe and AtriClip PRO2 system are receiving great reviews and have already picked up traction in the second quarter and in the beginning of the third quarter.

AtriClip PRO2 expands our overall market and the cryoFORM Probe helps us access more cases and gain market share. We expect these two products to ramp in contribution in the back half of the year with more meaningful revenue in 2017. On top of this our world-class engineering and R&D teams are continuing to innovate and we have additional new product slated to launch at the beginning of next year.

Third, we are increasingly confident that the strategic acquisition of nContact will enable AtriCure to grow our MIS business and change cardiac surgery and EP collaboration for the next 10 years. We have added over 25 new accounts since the acquisition closed and have completed over 40 new account trainings on the EPi-Sense product line.

We expect EPi-Sense to more meaningfully contribute to the revenue as we enter in these new sites, continue expansion on the West Coast and leverage our fully optimized sales force. And finally, we believe the open or contentment portion of our business still has many more years of double-digit growth.

We are the only company that has positioned to address the many patients who are still not treated at all or are undertreated in all categories MVR, AVR, or a CABG. There is an increasing activity at the society level with AATS, STS and DX set to upgrade guidelines and generate more clinical data ensuring surgeons and cardiologist are aware of the benefits of treatment and the downside of leaving Afib alone. The open market still remains vastly underpenetrated with meaningful opportunity.

I also want to take a minute to talk about our International performance which was 29% for the quarter. Both Europe and Asia markets including Japan and China have seen a resurgence and growth over 20% in each. Additionally, in Asia we have hired a new Vice President who has already made an impact in a short-term he has been here.

So while our confidence is intact, I know many of you are disappointed, so are we. While growth in this quarter was less than we had anticipated in the U.S. with some carryover into our expectations in the back half of 2016 we remain confident that the fundamentals and business outlook remain strong.

With our expanded relationship with EPs and strong performance in the CONVERGE Trial, the nContact acquisition has proven to be strategic and we are confident they will drive accelerated growth for the long-term.

Turning to CONVERGE, which is the first head-to-head study to evaluate the conversion procedure versus the catheter ablation in patients with persistence and long standing persistent Afib. We expect the trial result to support FDA approval of the EPi-Sense devices specifically for the treatment of persistent Afib.

We have made solid progress on enrolment with 49 patients enrolled to date. In order to accelerate enrolment, we just received approval from the FDA for up to 30 sites almost double the number of original sites. We expect to continue adding new sites and accelerating enrolment throughout the rest of this year and into next.

Moving to DEEP, our trial for the stage Dual Epicardial and Endocardial Procedure for the treatment of Afib, we're currently in a temporary pause in this trial, specifically after one event we voluntarily suspended enrolment to make some protocol changes. This is the first adverse event of its kind in a trial and we continue to expect the trial to conclude with safety rates well within the protocol women’s.

We're working collaboratively with the FDA to incorporate risk mitigation protocols for the trial and after a series of meeting with the agency in the past month pending FDA's final approval we expect to back on track in the back half of the year. When we suspend enrolment, we are up to 41 patients enrolled. As a reminder, the target enrolment is 220 patients for DEEP AF. We now expect to reach this milestone in 2018.

We're also making progress on our non-IDE Trial in Europe, CEASE-AF which compares DEEP like procedure to standard catheter ablation. We have 25 patient enrolled, additionally our ATLAS trial we now have 47 patients enrolled, which evaluates the prophylactic treatment of a left atrial appendage for patients at risk of preoperative Afib.

Finally, we've began enrolment in the FROST trial to evaluate the effectiveness of cryoanalgesia for pain management and cardiac procedures involving thoracotomy. We expect all this sound clinical data to further differentiate us as a company and expand our leadership position in the treatment of Afib, for many years to come.

I'll now turn the call over to Andy Wade, our Chief Financial Officer.

Andy Wade

Thanks Mike. For the second quarter of 2016, revenue increased 22% on a GAAP basis to $39.7 million. Revenue from product sales in the U.S. was $30.9 million, an increase of 20% from the second quarter of 2015.

Revenue from open chest ablation related product sales in the U.S. increased by approximately $1.1 million to $14.7 million representing growth of 8%.

The open growth was slower than in prior quarters for the reasons Mike described. We expect the open growth rate to ramp up with more meaningful contribution in the second half of this year, based on our recently announced 510-K clearance for our CryoFORM Probe and a more focused effort by our commercial team.

U.S. sales of products used in minimally invasive procedures increased approximately $2.9 million to $8 million up 58% and influenced significantly by the nContact acquisition. While we are pleased with the solid impact of the nContact acquisition in the first and second quarter, we continue to believe that this business will only see modest organic growth during 2016.

Development of clinical data in support of MIS ablation for the treatment of Afib through trials such as our DEEP AF and CONVERGE is critical to growing this market and the business over the longer term. As Mike mentioned, efforts to move the EPi-Sense and related products into our existing customers will continue to ramp through the year as the training of our combined commercial team takes hold.

Conversations with physicians in both the EP and surgical communities continue to be extremely positive. U.S. sales of the AtriClip system during the second quarter of 2016 were $7.3 million as compared to $6.3 million for the second quarter of 2015, an increase of 17%.

International revenue grew 29% on a GAAP basis and 27% on a constant currency basis as compared to the second quarter of 2015 to $8.8 million. Performance was solid across both Europe and Asia and we were very pleased to see such a strong quarter from our International business.

Valve tool sales were approximately $950,000 worldwide including approximately $800,000 in the U.S. and $150,000 in international markets.

Gross margin for the second quarter of 2016 was 72.6% as compared with 70.9% for the second quarter of 2015. Positive impacts on gross margin included the suspended medical device tax and the impact of EPi-Sense products.

Additionally, the prior year included some scrap and obsolesce charges related to non-core and Estech products. Pressure on gross margin included moving into a larger and more modern facility to support our growth along with uptick and depreciation related to continued generate replacement also to support growth.

Operating expenses increased 31% or approximately $8.6 million from $27.9 million for the second quarter of 2015 to $36.5 million for the second quarter of 2016.

Research and development expenses, which include clinical and regulatory activities, were $9.1 million for the second quarter of 2016 or 23% of sales, an increase of $3.3 million over the second quarter of 2015.

The increase was driven primarily by product development efforts and a ramp in spending for our MIS related trials including the CONVERGE trial absorbed as part of the nContact acquisition.

SG&A increased approximately $5.3 million from the second quarter of 2015 to a total of $27.4 million or 69% of sales. The increase was primarily due to the changes in our sales, marketing and training organizations to both support the nContact acquisition and our general level of growth and procedures. In addition, we have made some investments in administrative areas to support our business.

Our adjusted EBITDA loss was approximately $2.4 million this quarter compared to a $1.0 million adjusted EBITDA loss for the second quarter of 2015. Our net loss per share was $0.26 for the second quarter of 2016 compared to $0.18 for the second quarter of 2015.

We ended the quarter with approximately $48 million in cash, cash equivalents and investments. We continue to believe that our balance sheet is strong and that we have more than enough cash to reach cash flow generation.

Lastly we are updating our guidance for 2016. We anticipate constant currency top line growth of approximately 20% to 22%. At current exchange rates, this represents approximately $156 million to $158 million in annual worldwide revenue.

We anticipate gross margin to be 71% to 72% for the year based on current trends and investments to support our progress and expansion. This represents a slight increase from the 2015 reported gross margin.

Items with a positive effect on gross margin include volume leverage and programs to increase efficiency, the positive impact of nContact products, and the suspended medical device tax. Headwinds on gross margin include moving into a larger and more modern facility along with continued heavy capital placement particularly as we penetrate worldwide minimally invasive markets.

We still believe that gross margins of 75% are achievable within the next few years due to increased volumes and efficiency. We expect R&D to be 23% to 24% of sales with the largest driver of the increase over prior year due to the absorption of the CONVERGE Trial from the nContact acquisition along with the continued R&D pipeline development.

We expect SG&A to be roughly 70% to 71% of sales in 2016, which is slightly under the 2015 rate. The overall increase in SG&A expense is driven by continued investment in our worldwide sales team as well as training and education expenses.

We continue to expect adjusted EBITDA for 2016 to be a loss of approximately $14 million to $15 million. The heavier loss compared to 2015 is driven primarily by the acquisition of nContact in late 2015 including PMA clinical trial expenses and enhancements to the sales and education teams to support the MIS portion of our business.

In terms of EPS, this adjusted EBITDA range translate into a loss of between $1.12 and $1.22. At this point I would like to turn the call back to Mike for closing comments.

Mike Carrel

Thank you, Andy. In summary despite some growing things in the second quarter that are modestly tempering our expectations for 2016, our foundation is strong and the excitement in our business continues. We expect 20% to 22% growth for 2016 while momentum built and accelerate into 2017.

With our commercial infrastructure gaining leverage new products starting to contribute and nContact building momentum, we're well positioned to execute on delivering and expanding our portfolio of products for Afib. I continue to be excited about our growth prospectus and we remain confident in our path to adjusted EBITDA profitability in 2018.

With that I will open up to questions.

Question-and-Answer Session


Thank you. [Operator Instructions] And our first question comes from the line of Danielle Antalffy from Leerink Partners. Your line is now open.

Danielle Antalffy

Good afternoon guys. Thanks so much for taking the question. Mike if I could ask on the sales performance and you explained it, but I guess I’m just wondering first of all what prompted the sales force move? If I understand correctly, you took some people out of the fields and put them in management positions, but were you expecting this disruption clearly not that it wasn’t included in guidance.

So, I guess I’m just trying to understand did you know you guys were doing this, was there some catalyst that prompted you to make these moves and so the disruption in the quarter with unexpected I’m just trying to understand what was known by you guys, what was not known and…

Mike Carrel

It’s a great and very fair question Danielle, so I appreciate it to kind of dive into more detail about it. So basically what happened was, what we, we actually started the process back in October of last year where we, one in October and then two at the beginning of the year where we basically promoted some of our top reps, so we want from eight regions or areas in the countries to 11.

When we had done this historically, we had actually backfilled them. So we’d actually done it a year and half ago as well and we had seamlessly backfilled with people from internal promotions that had gone into those territories and been able to perform day one and actually continue to see growth in those in those areas.

What was happening here that was a little bit of a surprise to us and we were tempering and watching obviously throughout Q1 and Q2 was that we promoted these fantastic people who are going to be great, but it left when we were backfilling, people weren’t internally able to go.

There were different parts of the country, different regions and these were people that were $3 million to $4 million reps for us and so what happened is we split the territories into two, which historically had worked really well and we think we did that right, but we want to bring on new people and so what we saw was a softening because the person that was in the territory was not managing, hiring and bringing on and training some new people.

And so instead of actually seeing growth in those territories that we have seen historically, we actually saw a softness and in the most territories there was more pressure than we thought and in particular on the open business and actually all across the business and the people got excited about nContact was the second piece.

So, when we did that management change, we didn’t think it going to be as big of a deal because it wasn’t like we were -- we didn’t restructure anything necessarily. We just basically expanded so that we could handle not only the acquisition but also long term as we started to see things getting closure to '17 and '18 that we’ve got really experienced team ready and getting ready for all the approvals that are going to be coming down the pipeline for us long term to help us achieve the longer term growth rate as well.

So that’s really what happens, unfortunately it was little disappointing for us because we just miscalculated may be doing three at once in that period of time and maybe we could staged a little bit longer but right now we’re actually putting up because these people are getting up and running fast now and we think that it will take a little bit longer to kind of get through this third and fourth quarter which is why we brought the guidance down little bit, but as we enter next year, we are going to be really incredibly strong.

Danielle Antalffy

Okay. So is it fair to say, you feel like at this point you’ve right sized the issue, you corrected the issue and now you're at what would be underlying grow expectation previously really the guidance lower like you said some bleed into Q3 but the underlying growth rate is still there, still unchanged, 18% long term is that fair to say?

Mike Carrel

I didn’t look at this specific growth rate for next year per se. We're really focused on making sure we have this right and that we're set up for being able to really grow in that mid teen area for the foreseeable future and into the next decade.

Danielle Antalffy

Okay. Great. And last question for you Andy, I was hoping just on the cash situation if you give some color on the cash burn and why you're confident that you're in a position to get to a cash flow breakeven?

Andy Wade

Sure, the cash burn was fairly heavy in the first quarter. Some of which be the EBITDA loss, but you also had some working capital changes, so for example year end payouts of variable comps things like that.

Little bit heavy on the CapEx as we finished moving into the building, but nothing out of the ordinary or nothing we didn't concentrate in our business plans and our discussions that we've had before on getting the EBITDA profitability and cash flow positive.

Mike Carrel

And we raised the debt back in the April timeframe. We’ve raised more than enough and we got a lot of feedback obviously. We felt like we could -- we've got more than enough cushion between the cash position and where we needed to be relative to where we're going to on breakeven.

We feel very comfortable. As you saw, we're a little better than expected on the bottom line this quarter. We continue to manage our expenses very closely, so that we are very confident that EBTIDA breakeven will happen in 2018 and we'll do everything we can do accelerate some of those as well.


Thank you. Our next question comes from the line of Rick Wise from Stifel. Your line is now open.

Rick Wise

Hi good afternoon. Let me start with some of the issues that happened and then look ahead Mike, again you were explaining with the sales changes, management changes and the focus EPi-Sense that open clipping crowd got neglected and obviously you're refocusing on that.

Can you help us understand the refocusing process and what time creeps that you're taking? Is it incentive, is it just -- is it more focused on quotas and why would it take so long and I’m trying to separate that from the new reps starting in territory issue?

Mike Carrel

And they are a little bit combined. But it's again another good question to dig down into a bit more detail Rick. So what happened with the EPi-Sense, people got really excited about it, like I think you said it really well, we took our eye on and I wouldn’t say off the ball. They just got excited about all the activity what was going on. It was a lot of customer demand that calling on our team.

And two things really happened. One was they were getting pulled into learning the new product and as a result, they were bringing people to training because I mentioned we've done over 40 trainings and our team was flying around the country getting those training set up and actually moving into those areas.

And what we found out was we didn't have as much support coming in from the acquisition on that side and so that as we were expanding the demand was picking up, our team really had to kind of backfill and do a lot of that heavy lifting and working more than we had expected which took them away from being available and in the hospital walking around, making sure they were in front of their surgeons on a regular basis, which is really what drives and has always driven open and that concomitant growth force is to make sure that we're there. And so that was definitely the distraction quite frankly that occurred.

Some of the efforts that we've done to refocus and we may have paused but that was that we did have some focus in terms of commissions in some other areas relative to that. We've actually adjusted it so that it's on an overall basis, and so we made some minor modifications to that as we kind of went through.

We also got the training going if you recall in early April where we got people focused on that. We got a whole education team really taking on the brunt of that load in terms of being able to take on the -- helping set up a site, the new site as they were coming online. And we expanded that education team internally, so they could basically handle that and take that off of the reps hands for being able to get on planes etcetera.

And there's many other activities that we've got going on within the business relative to that as well. We're also setting up sites on the West Coast because one of the issues was that on the West Coast you got people flying to the East Coast, and so that would take two or so days out of the field, and so we had to basically take care of that by getting sites that we can train people on closer to the West Coast.

And some of that just took a little bit longer to get set up and ready to go. Then we had maybe expected. And as I said it's going come up in three to six month piece there. But overall we feel like everything is coming together really well and then in addition to that some of the new reps they came onboard as well that I’ve talked about.

Rick Wise

Yes, just and thinking about the numbers a little bit and maybe this is for Andy more, but Andy if I think about that 22% guidance, let’s say at the midpoint that might suggest something like $81 million in second half revenues.

It may be to both of you, there is always a seasonal pattern third quarter a little slower understandably because there is vacation summer etcetera is the seasonality if a number like $81.5 million revenues is right. Do we see a little more pronounced sequential decline in the third quarter than usual because of all these issues or no, the second quarter will slower and now just as we focus it could be more sequentially flat. Just directionally how do we think about it?

Mike Carrel

I think directionally you will see in the second quarter, the third quarter you will see the seasonality, you would typically see what it's going to be little bit lower in the third quarter and then picking back up in the fourth quarter like you’ve seen for the past four years, that’s kind of been the traditional trends because of the seasonality you’ve talked about.

Rick Wise

Yeah, thinking about your comments Mike about adding new accounts and obviously that of this well, with the as nContact gets integrated and the sales force is cross trained, added 25 new accounts this quarter.

May be just talk to us a little bit and help us understand is that the kind of rate you would hope to be adding new accounts in coming quarters and just talk about the logistics and how quickly you, as you add these new accounts and you can penetrate them and just as I think about building confidence in our minds as we approach '17.

Mike Carrel

Yeah, so I think there when you think about bringing on these new accounts, brining 25 new accounts means they ordered something from us and that’s typically what they do, they do a trial.

It takes about three or so months to get somebody to get through a training course, get themselves to do their first order and their first case. They’ve expressed interest. You got to coordinate the schedules to get that up and running and going.

Then you typically will see anywhere from another one to three months, to do their first case. They will do how it goes. They’ll do a second case may be a month or so later and then that six to nine month period is you when you start to see some acceleration into an account with really what I call kind of sticky revenue where they start to really see the result about 12 month out.

So the 25 new accounts are beginning to drive revenue for us but you'll really start to see it near the back half of this year and definitely into 2017 and you’ve already seen a little bit of that which is the sequential growth quarter-over-quarter some of that was because Q1 was incredibly light because there were some staffing that have been done in the channel prior to around the time of the acquisition and so we had to bleed through some of that in the first part of the year.

But I think we’re pretty much through all of that now and so we saw some of that come to fruition in the second quarter but we'll see, I think more sequential growth from Q3, from Q2 to the Q3 in that area as well.

Rick Wise

Got you. Thank you very much.


And our next question comes from the line of Jason Mills from Canaccord Genuity. Your line is now open.

Jason Mills

Close enough. Thank you very much. Mike can you hear me okay.

Mike Carrel

Yeah, hear you just fine.

Jason Mills

So I've a multipart question build towards 2017 to be frank, you didn’t break out nContact but in the United States correct if I’m way off but if we assume somewhere in the $2.5 million to $3 million contribution from the nContact acquisition it lands your organic growth in the U.S. at least in the low teens which is where it was last quarter down from where it was last year and that’s been one of the narratives in the stock market, you had talked about in the past.

What you're seemingly talking about is these disruptions have caused some of that degradation and grow through low teens but from what I’m hearing correct if I’m wrong, is you're expecting that organic growth to accelerate in the second half of the year.

And then you saw build storage 2017 because clearly what we hear from investors is some concern about you hitting 18% growth guidance which is what you put out there.

And I think it’s important to communicate what you're thinking. So that there is not a surprise come end of year at JPMorgan Conference or and we decide this year to give guidance when it comes that we're on the same page now as opposed to wondering for the rest of the year where you might land.

Mike Carrel

Our thoughts are obviously we’ve gone through for this year. We brought down the guidance. We do believe that the Core Open and good growth is going to come back because of these disruptions like I think you described that actually fairly well.

We also think we'll get organic growth coming into next year coming off of the nContact acquisition. And we still feel really comfortable with the mid teens growth. I know we gave the 18% for the long-term. Do I believe that longer term we are going to be able to hit really good growth share but I'm not committing to a specific guidance number for 2017 at this point in time.

I really want to make sure that we can execute towards the numbers we have got here, show you guys the accelerated growth, we're going to see here and then really kind of build up towards 2017.

These are really big markets that we're going after, the nContact fees is going to play and contribute quite a bit and we still do feel very good about the open portion of our business and the clip portions of our business but unfortunately didn’t get the attention they deserve in the first half of this year. And that’s not execution on that side of our business because the market is there and we've just got to continue to execute on it.

Jason Mills

Okay. That’s helpful. So let me follow-up on that, so second half of the year, I'm hearing we should see some acceleration in your organic growth, correct me if I'm wrong but that is what I'm hearing and would it be fair to characterize that 18% at this point in time as growth rate you think you can hit maybe characterize it as scratch call.

I'm hearing mid teens so it sounds like you feel more comfortable with street models landings like it's somewhere in the 14% to 16% range if we are looking at putting some numbers into our models for '17 and maybe '18, do you disagree with any of that?

Mike Carrel

I'm not going to disagree that. I feel good about the mid-teens number for the business overall. Do I think we can have 18%, I absolutely believe that’s possible or even better, but I'm not ready to sit here on the call today and say that we're talking about the next three years, I'm really focused on the next two quarters to make sure we're really set up to accelerate and be ready for the approvals.

Because as I mentioned we've got these CONVERGE rolling very fast. We really believe that we are going to be able to get that fully enrolled sometime next year and then move that forward. It's going incredibly, incredibly well. We're able to add more sites with the FDA right now and the excitement there in terms of just for demand coming from customers for that is palpable.

And so from my standpoint we're really focused on making sure that we are ready and prepared that when that comes about, that our team is prepared to be able to handle that.

Jason Mills

Okay. That’s very helpful. Just a few thoughts. I will get back in queue. One for Andy on gross margins, really strong gross margins again. It looks like you have very good line of sight of your 75% goal. But your guidance for the year didn’t change though.

It implies that you're towards the bottom end of your range for the back half of the year. I wondered if I'm reading that incorrectly and I wonder what drives that modest degradation to keep you frankly in that 71% to 72% range and then Mike, sorry if I missed it but I didn’t hear an update on ATLAS, if I missed it I can check the transcript. Thanks.

Mike Carrel

I'll just say ATLAS real quick and I will handle the gross margin. ATLAS were up to 47 patients on ATLAS. We've got sites coming online. We're allowed to get up to 20 sites. We got six sites now beginning to enroll and a very strong pipeline of sites quite frankly competing to get into that trial and so that trial is continuing to go incredibly well.

Andy Wade

And then on the margin front, Jason we held the guidance just part of it was due to the strengthening of the international business which as you know carries a heavier, a lower gross margin than the U.S. business and again some of it is just as we leverage our building and get better and better visibility. So nothing overly complicated or driving some systematic decrease in margins.


Thank you. And our next question comes from the line of Brooks West from Piper Jaffray. Your line is now open.

Brooks West

Hi thanks, can you hear me?

Mike Carrel


Brooks West

Great, so Mike I apologize I have been juggling calls, I wanted to make sure I got the clinical trial updates, so you have been lot of double the sites on CONVERGE and that should finish enrolment by next year. So play out the rest of the timeline there, can we basically extrapolate the early enrolment finish in terms of the readout of the trial. Just the timing on when that might happen?

Mike Carrel

Yes if we were able to complete enrolment let's say December of next year, it's one year follow-up from that last patient which would be end of '18 then we would be obviously going and looking for some approval in the 2019 timeframe and that hasn’t changed from that standpoint.

Brooks West

Okay. And then on the DEEP study, what was the issue again that caused the pause, is it device, is it procedure?

Mike Carrel

It's definitely not the device. Unfortunately there was an esophageal official up that happened which is an incredibly, incredibly rare adverse event that you may -- now we've actually had three out of 12,000 and so it was definitely not device related in any way, shape or form. It's common -- it's more common to happen on the catheter ablation side because basically less than 0.05% of an event type rate.

Unfortunately what happened happen in the trial and so as a result of that what we decided to do is put a pause, because obviously surgeons and hospitals that kind of do that part aren't used to dealing with the esophageal officials.

From that standpoint we wanted to make sure that we had all the patient education wrapped up and in the protocol and we're able to tell patients when they start feeling a certain way what to do.

So we put it on pause, talk to the FDA about it, put together some materials that we can educate patients relative to that and get ourselves back up and running, but patient safety is the most important thing here.

It's really the only event that we've had of significance in the trial. It's a really unfortunate event and so that's why we wanted to basically put the pause button on it, talk to our -- basically talk to our investigators and make sure that everybody understood what to do when something like this happens and basically have to kind of walk through it.

Brooks West

Okay, okay. And then just following-up on the discussion on open procedures, everything makes sense when you talk about in terms of sales force and coverage and everything, but for some reason I want to say how this is the slow down and open chest with the penetration of mitral and thoughts about CABG and Aortic that's whole kind of conversation, I wonder if you could just address that and maybe I don't you can talk about Next or you can talk about what you're seeing in the field, but I just wanted to have you address that thought process on it.

Mike Carrel

It's a very fair question and in some ways I think it would have been easier for me just to come on and say that was what that’s it was and you're going to start to slow down, that's actually not what's happened. We've talked to our entire sales force and that we're not seeing any slowdown in AVRs CABG or on the mitral valve and that standpoint, it was purely an execution game on our side.

All you have to do is look externally but don't even listen to what we have to say and the information I'm getting from our team and everything, but look at what you're seeing on the Edwards calls and Vivi Nova call where you're actually seeing that there's surgical valve growth rates are actually going up. And what we hear from them in the field is are seeing 5% plus growth in that area.

So we're not -- it's not that crazy growth but it's a very underpenetrated area and they're actually seeing growth in that area and if you just listen to those other calls they're kind of confirming the fact that's not happening right now or for the foreseeable future. And so while might it be easy to look to that as a reason, that's really not what happened and that's not anything.

And I spent three days with our sales team after this quarter to make sure we had locked down and understood exactly what was going on in every category within our business and we went region by region and not once was procedure volume in that category brought up. It was all about the shifting of some of the resources and not being at the hospital and not getting the right coverage on that.

And then as I mentioned the piece on the nContact is having all the way for a little bit of time in getting themselves back up and running. So again I've on my commentary on it, I feel strongly about it, but at the same time I think there's external data that actually supports that as well.

Brooks West

Very helpful Mike, appreciate it.


And our next question comes from the line of Suraj Kalia from Northland Securities. Your line is now open.

Suraj Kalia

Good afternoon folks. So Mike, just juggling in between calls forgive me if you or Andy highlighted this in your prepared commentary. But did you quantify the impact of this temporary shift or attention shift to nContact sales and the impact on the open and minimally invasive side?

Mike Carrel

No, it's impossible to say exactly which one it was, and what we did do Suraj as I was briefly mentioning in the answer to Brooks was we went to each territory within the country. So we've got 53 regions that we basically support covering the hospitals we went region by region to look where there where growth that was happening, and then kind of what the back half of the year looks like in each one of those different categories.

But it's tough to say when you go into that territory how much of it is the in nContact attraction versus the new rep it's next to impossible to pinpoint a specific number on that. That's always -- it's a combination of the two.

Suraj Kalia

Well let me rephrase the question then Mike is there a pricing difference and a commission difference to the rep between nContact and Open and minimally invasive I guess I am just more than just on the commission side of the equation.

Mike Carrel

Yeah. There is not now. The way our commission plan works is that, we pay for over-performance people that actually get through their quarters and it’s their annual quota -- they have quarterly quotas and then annual quota and they get basically bonuses for getting through those quota and then the commission rate goes up substantially and all the products that they sell, once they get through their quota number and the quarter end for the year.

Suraj Kalia

Fair enough. And on the staged DEEP AF Trial Mike, I presume this was a voluntary pause that you guys initiated for the esophageal fistula. So Mike when we’ve experience this in other companies, you have an event a safety event there is voluntary stoppage or a temporary stoppage a new protocol is formed and then there is a whole process that needs to be reinitiated, the IRV process and all.

It just kind of drags the whole thing out, is that -- are we going to see something like that on the staged AF study here also or can you give us the next steps in terms of protocol?

Mike Carrel

A little bit of that, which is why I pushed up a date 2018, so it occurred in March, we were having conversations, we learned about it in late March timeframe had conversations with the FDA back in April and then we an Advisory Board Meeting back in May, put the pause on the trial at that time and notified all the IRB of the pause and so we met with the FDA in the last month.

So there is a couple of month to kind of get back to the FDA and there is a very positive in terms of our next steps and going forward and the protocol changes that we have now submitted after having several meetings with them and so then our next step is like you said to get their final approval on that and we'll have to kind of then reinstitute or kind of go through that IRV process.

Again it should go reasonably quickly, but that’s why we pushed it out about six to 12 months overall in terms of what we had originally anticipated it.

Suraj Kalia

And Mike are in a position to tell us what that protocol modification -- if it’s not device related, is it technique related, is it patients selection related or something else?

Mike Carrel

It is actually mostly patient awareness related. So it’s primarily focused on both educating the surgeon in terms of how to just make sure that, it’s not getting hot or that they're avoiding and making sure they are not near, obviously the esophagus they shouldn’t be, but just to make sure that they are thinking about it so it's more awareness from that standpoint.

And then it is also for the patient that when they leave the hospital that if they start feeling these several symptoms, then they should go directly to a carry this package with them to say, I have an ablation and therefore they can be corrective very quickly, at that time get a CT scan, see that is it shown actually and try to correct it very quickly.

Unfortunately in this particular case that’s not exact what happened and it took a little bit longer to diagnose the issue that it occurred. That’s why we are so focused on the patient being aware of it. So it’s much more focused on that. That’s why I think we can get through some of IRBs at a reasonable pace.

Suraj Kalia

Fair enough and finally Mike. If I heard those correctly for the CONVERGE Trial you doubled the number of sites to 30. So I guess multi-part question how do you all factor in the number of patients enrolled per center, per month for this trial or at least what’s the thought process and do all of these sites have their requisite expertise and logistics to handle these procedures in an efficient manner? Thank you for taking my questions.

Mike Carrel

Suraj if you remember, we were originally allotted the 15 sites and when we acquired nContact, what occurred was about half of those sites if not more were just not enrolling in the trials. So that was the biggest issue. We asked to get up to 30 sites. I am not sure why actually utilize or actually get up the 30 sites as you can tell we’re hoping that conclude this by the end of next year in terms of the enrolment relative to it.

We've seen some good enrolment for the couple of new sites that we’ve added since we acquired them and so now our focus is really on getting several new sites over the course of back half of the year and early part of next year.

But we need to make sure as you mentioned they lever requisite skill sets. We don’t need to get up to 30, to hit the milestones that we are talking about. We just need to get several more over the course of the next six plus months to make sure that we are really enrolling at a brisk pace beginning in next year.


Thank you. Our next question comes from the line of John Gillings from JMP Securities. Your line is now open.

John Gillings

Hey, can you guys hear me okay......

Mike Carrel

Yeah, John.

John Gillings

Okay, great. Thanks for taking the questions. First I just want to kind of back to guidance just relatively high level looking through the different numbers you guys gave if I caught everything correctly, it seems like most of the P&L numbers, EPS, EBITDA all stayed roughly the same with sales being taken down.

Can you walk us through how that works given that it sounds like you have hired some additional people, sales are going to be little bit lower but it seems like there hasn’t been much going impact in the P&L?

Mike Carrel

We didn’t really hire that many additional people more than what the plan was originally and we actually have been doing better than expected on the overall operating expense and little better than expected on the gross margin.

And so you saw in this quarter where are close to 73% on a gross margin line and then you also saw us beating the bottom line by over $1 million and so that basically is what helps contribute towards is it, is that we’re actually spending less and we’re being more efficient with dollars relative to that.

And we’re not going back on spending necessarily. Just that the way cadence of our business is coming together and where we're putting the dollars and resources that’s what happens.

John Gillings

Okay that makes sense and then looking at some of the new people that you’ve hired, the new reps are there any non-compete agreements or anything like that or is it just training and getting up to speed and if so, how long does it take roughly for a new rep to really get up to speed and get productive?

Mike Carrel

It's just training, we’ve got -- the people we've hired have been great and you’re finding the right people, our team does a wonderful job at interviewing and bringing them on the board typically it takes about two types of people that are really on coming board primarily now or that have come on board.

They're the direct reps that are selling, we call them regional sales managers. They own the territory. They manage that territory, those take -- typically takes about six months to get up the speed and understand everything clinically and then takes about a year to be really incredibly productive.

And so part of the issue that we had this quarter was that we're doing the hiring so the people that we're covering the territory didn’t back along. We're the hiring people. Some of those managers that were in the territory before and now those that team is actually able to be come on be out in the field with them a lot more than just doing some of the hiring and that’s why we’ve got confidence we’ll start to see some of that come back in terms of being out there and helping train them.

The other team are the MIM team or the minimally invasive managers. This was the former team that we had from nContact and when we acquired them there were around 11 then we came down to about five and we're back up to about 10 right now through hiring and we're hiring aggressively there and we think we'll be add about 14 by the end of the year.

They're really bringing a completely different skill set. They understand the Cath lab, the EP space and so they're getting up the speed is they need to get the speed on our products, they are in fact on revenue right away is actually not right away its really more of the future as we look into 2017.

John Gillings

Okay, that makes sense and then going back to kind of the spending side and keeping things under control to trying to balance that with growth, you’ve mentioned in the past for some of the training events that you see as much as of the 40% increase in procedure volumes on those training but has those trends changed and if not what are sort of the fact as you look at in terms of doing more those, less of those going forward.

Mike Carrel

We do about 10 to 12 advance course every year that the trends you are talking about really haven’t changed. We constantly have to look at that, that’s only a portion of what we do form a training standpoint now and because that ongoing training as really kind getting out there and but the trends we're seeing now are from sites we would have trained last year.

So, you don’t see the trend within a three month period of time. We really look at six months and 12 months out and then 18 months out what’s happened to it because it actually got a go back into their side, they got to start using and that’s been pretty typical in terms of how we've looked at it over that period of time.

We’re doing a lot on training relative to other types of courses that were doing. We're are supporting these fellowship programs with the AATS. We’re working with various different groups on some of those and we think those are the impact as well.

John Gillings

Okay and then just last one for me on the Converge trial, last quarter you talked about the centers that what weren’t enrolling as much as you wanted and you mentioned that had to do with the fact that they were, they were getting some good results, such good results you are having trouble getting to enroll.

So with the additional centers, is that something you would still consider to potentially be an issue as those people start to see the results that they might maybe not want randomized or those quickly and on the other side of that given that people are seeing such good results, could you comment on the trial design if there is any an interim look and if there is any potential that that could result in early efficacy?

Mike Carrel

So I will try to answer your first question, the sites that we're -- and you characterized it very well, we acquired nContact they did have a bunch of sites that had been historically getting great results with it, therefore they were having difficulty on the randomization side.

We've done several things on that front. I don’t anticipate that any of those sites will be contributing many patients towards the trial because they still feel that way. I have visited every one of those sites and it's difficult to make them move.

However most of the new sites are sites that we're being very critical about making sure that when they go into the trial that they are not going to be one of those sites, that they are going to be a site that is going to be capable and willing to randomize and after they get their 10 to 20 patients in, in terms of ramp up into the trial until they can do the procedure safely and effectively and so from our standpoint we're being very critical on that making sure we are having those conversation early and advanced most of those we inherited really a lot of the other ones that will kind of come forward from that standpoint.

So we didn’t have a lot of influence. They are great sites and they are great customers for us. So it is really not an knock from that standpoint. The second thing that we are doing is that we will be doing some patient recruitment specifically for the trial in those very specific areas that we've been working on and it will be very specific towards the trial and so they have got, if something comes through that, it actually has to go under the trial.

John Gillings

Okay. That’s helpful and then just the second part, if there is going to be some kind of interim look?

Mike Carrel

Thank you for reminding me that. At this point, we don’t have a plan to have an interim look into it, the safety profile looks like it's good. Obviously we know the data on that but we have not had a chance to do an interim look at the advocacy data at this time,

I'm not going to say that we wouldn’t try to do this at some point but right now the plan is that we're not going to try to get through the full enrollment by the end of next year.

John Gillings

Okay. Thanks a lot guys.


And our next question comes from the line of Matt Miksic from UBS. Your line is now open.

Matt Miksic

Hi guys, thanks for taking the questions. So most of the subjects have been covered, I think at this point. But I did want to follow up on John's questions around EPi-Sense and the CONVERGE trial. As we talked about at HRS we have also as I think many folks have picked up really positive feedback about EPi-Sense and the feel is focusing to really believing that and beginning to see the result as you have talked about.

You just make sure I understand the timing right, you're looking at end of '17 enrolment still is sort of the goal or the expectation, which puts you on the market sometime in with follow up and filing '19 or early '20, is that approximately right?

Mike Carrel

Yes sure in '19 sometime that will have one-year follow up by the end of '18, early '19 and depending on how long it takes and what the data looks like, hopefully we can get through reasonably quickly with the data.

Matt Miksic

Okay. And then….

Mike Carrel

At that point, it will in the hands of the FDA to work through it, but I think that’s a fair timeline, we got to get the enrolment done, due to follow-up and that will be at the end of 2018 a follow-up.

Matt Miksic

Sure. And I guess where I am thinking it started in your comments early in the call almost started to sound like between extra sites and potentially not that you're looking at this way, but the pause in the DEEP trial, those factors could need to make an argument that you might be able to get through this enrolment little faster, but for the point you just made about the difficulty in getting folks to randomize once they started to see great results from the device.

Is that a possibility, should we start thinking about things moving a little faster with the new sites or should we just say these sites keep you on track for the end of '17?

Mike Carrel

Sites keep us on track for the end of 2017, I can promise you we are doing everything we can to pull that in, but I don’t want to commit to anything before the end of '17. We are going to -- obviously our team is working diligently to get as many as patients into this as possibly can as quickly as possible.

And we obviously as early as we can better we would love to surprise people, but I don’t want to set that expectation too early until we actually have some of these heads come up and running and actually see how they're actually able to enroll.

They say they can enroll, these are heavy enrolment sites that we believe that we can get online here in the next couple of months, a couple of them along with those that we’re seeing and we're seeing good traction, but I don’t want to commit to it yet.

Matt Miksic

That’s fair and then just to follow up on of the questions earlier, there was someone had asked about, I think Brooks I think had asked about penetration or where you are with mitral, you had given us some numbers about year ago and then an update I guess around the beginning of the year, can you run down best guess as to where you are in terms of penetration, is just the Core Open business?

Mike Carrel

In terms of …

Matt Miksic

Penetration of those segments, so I guess the way you look at it as mitral, other or something like that.

Mike Carrel

There hasn’t been a material change per se. We think that the procedures are growing actually in each one of those areas I believe mitral AVRs and CABG is actually stay a little bit of an uptake in 2000, when the data comes out in '17 and '16, I think you wind up seeing that those have all come up a little bit overall and the penetration I think has come up slightly.

We are making progress on AVRs and CABGs. The big -- one of the key things here as I mentioned in the scripts is we're really focused on working with the societies funding different clinical trials and data that they're putting together for showing that people actually live longer. They do better when you actually treat the Afib at the time of surgery and they're looking at changing guidelines and so it's a hot topic at every one of the ones I talked about STSA, ATS and EX have all looked at, and they have all got the puzzles to upgrade the level of guidance.

That’s going to have the biggest next step of impact on it in addition to us just making sure that we can cover as the market grows.

Matt Miksic

And timing on that…

Mike Carrel

Usually they do at that after meetings. So there is -- I know there is a presentation going on at EX this year relative to some of the upgrades that they're oppose and then I anticipate you'll probably see some things come out at STS and the beginning part of next year and ATS middle part of next year, abstracts and things like that.

I’m sure that they would love to get in at AHA and ACC, I’m just not sure that that’s the case but we’re also spending time with ACC and AHA in other areas and working on guidelines there. We're obviously not driving it, but we’re working with them on various different things and registry etcetera to make sure they got the data to show that yes in fact you do live longer lives and better lives, you reduce the amount of readmits back into hospitals when you actually treat the Afib.

Matt Miksic

I sure it’s a big unmet need for sure. I’m sorry if I got Andy were you say something that I interrupt?

Andy Wade


Matt Miksic

No, okay alright listen thanks so much for taking the questions.

Andy Wade

Thank you.

Mike Carrel



And that does conclude our question-and-answer session. I would now like to turn the call back to Mr. Mike Carrel for any further remarks.

Mike Carrel

No, just thank you everyone for joining us today and look forward to talking to you over the course of next several months. Have a great day.


Ladies and gentlemen, thank you participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a wonderful day.

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