May 2, 2013
Executives
Lynn Pieper – IR Mike Carrel – President and CEO Andy Wade – VP and CFO
Analysts
Chris Lewis – ROTH Capital Tom Gunderson – Piper Jaffray Robert Marcus – Leerink Swann Larry Haimovitch – HMTC
Operator
Good afternoon, ladies and gentlemen, and welcome to AtriCure’s First Quarter 2013 Earnings Conference Call. My name is Derek, and I’ll be your coordinator for today.
At this time, all participants are in a listen-only mode. We’ll facilitate a question-and-answer session towards the end of the conference.
As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lynn Pieper, AtriCure’s Investor Relations Consultant from Westwicke Partners, for a few introductory comments.
Lynn Pieper
Thank you, Derek. By now, you should have received a copy of the earnings press release.
If you’ve not received a copy, please call 513-755-4136 to have one e-mailed 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 on today’s call.
AtriCure undertakes no obligation to publicly update any forward-looking statement. Additionally, we may refer to non-GAAP financial metrics.
A reconciliation of those non-GAAP measures is included in our press release, which is available on our website. I’d like to remind everyone on the call today that the Food and Drug Administration, or FDA, has not approved certain AtriCure products for the treatment of atrial fibrillation, or AF, or for stroke reduction.
The company and others acting on its behalf may not promote these non-approved products to train doctors for the surgical treatment of AF or stroke reduction, unless the product is so indicated. These restrictions do not prevent doctors from choosing to use the products for the treatment of AF or stroke reduction or prevent AtriCure from engaging in sales and marketing efforts to focus only on the general attributes of the products for the current cleared usage.
AtriCure educates and trains doctors in the proper use of its products and related technologies, including for the treatment of AF in accordance with the product-specified indication. With that, I’d like to turn the call over to Mike Carrel, President and Chief Executive Officer of AtriCure.
Mike?
Mike Carrel
Thank you, Lynn. We had a good start to the year with strong sales results, a successful financing and continued progress in building our commercial, clinical and education focus team.
This includes adding several new accounts and hiring some critical people in each of these areas. Based upon these accomplishments and our year-to-date results, we are reiterating our full year financial guidance of 9 to 11% top line growth.
I will start today’s call with a quick overview of our results for the quarter, followed by an update on the business and our strategy of capitalizing on our AF approval, new product developments and an update on our clinical trial progress. Then, I will turn the call over to our CFO, Andy Wade, who will provide an overview of our financial results.
After that, I’ll come back on to review our key goals, and then we’ll open it up for questions. We are pleased to announce record revenues of $19.4 million, which is growth of 11% over last year.
There was a good balance across the U.S. and international regions in our various products and solution areas.
Our management is strong and we are starting to see the results of our commercial and training focus. Strengths for the quarter were Asia, MIS and especially AtriCure.
Open in the U.S. and Europe and Europe were a little softer than expected but overall still very strong.
In particular we are pleased with the growth in the left atrial appendage or LAA market. There is a lot of positive in this reactivity including the first ever international symposium on the left atrial appendage and the recent acquisition of competing technology developments in combination with our strong results, we believe this is proof of concept and proof of our vision.
AtriCure is in the right place with a great product. Over the next few years we expect LAA management to grow meaningfully and begin more ubiquitous and eventually we consider the standard of care.
We anticipate the following. The big LAA market will expand all strategies, containment and endovascular like.
As the LAA market grows, the AtriCure grow. Patients will get increasingly better care, patients and their families will lead better and more productive lives and healthcare system will save by improved care and superior offerings.
In terms of our commitment to improving our team, a key highlight in the quarter was the addition of Bob White to our Board of Directors. Bob has a strong experience of standing operations business development, sales and marketing within the medical device industry and I believe he will bring significant value to AtriCure and its Board of Directors and our shareholders.
His experience managing and growing several hundred million dollar divisions within Medtronic and as the CEO of TYRX will be incredibly valuable as we seek to further penetrate the AF market. We are thrilled to have him on board.
Before turning to the business trends, I want to highlight another strong trend we are seeing, which is our continued progress in establishing AtriCure as the education leader in the treatment of atrial fibrillation. In addition to Dr.
Cox’s significant impact on the quality of the course, centers are beginning to reach out AtriCure to partner with us for training and education. A great example is Dr Barnes, who will be featured in EP Lab Digest reading EP magazine describing the benefits of heart games where surgeon and EP are working together to realize the best potential patient benefit.
Other recent examples of conversions to our FDA required training include ULC or industry luminary Dr. Barnes attended the course led by Dr.
Francis and came back to his practice and began using products. At both Duke and Francis we have trained the cardiology staff on AtriCure products and both groups are now carrying our products.
All of this is evidenced that we are starting to gain traction. Turning to business trends.
In the first quarter U.S. open heart revenue including AtriCure was up 12.3% compared to the same period a year ago.
Our investments and strategic priorities continue to build momentum and result in substantial growth opportunities. As mentioned earlier, open was a little more disappointing in Q1 as we have seen a drop off in Pen use in some of our open cases for testing.
That said, we are still bullish on our conversion rates and the medium term growth rate and prospects of the open market as we continue to train more and more surgeons. In the U.S.
procedure trends remained generally stable through the first quarter and we continue to experience strong growth trends from international markets particularly Japan which were up 12% versus prior year and as reported in constant currency basis. We are continuing to capitalize on our investments in support of our AF approval to education activities, designed to increase awareness and improved patient outcomes.
To-date we have trained nearly 1,000 cardiac surgeons up from about 800 that we reported last quarter. We are successfully expanding this program which as anticipated is resulting in increased utilization, competitive share gains and cross-selling opportunities.
Training levels and the conversion of comparative accounts is providing in-roads into new hospitals as well. We expect to continue our forecast – our focused efforts on education, marketing and the development of a strong referral base.
Clip sales in the U.S. posted growth of 36% and reached 2.4 million in revenue in the first quarter.
As I mentioned earlier we are seeing a growing belief in the management of LAA as a viable treatment option and what we’re seeing is as cardiologist accept LAA management surgeons become more comfortable. Additionally, we saw substantial increase in demand of our next generation articulating robot friendly Cliper Player the AtriClip PRO and this momentum is continuing.
As expected it is capturing a meaningful price increase. MIS sales were up in the U.S.
6% in the first quarter which was better than expected. While we’re encouraged by the Q1 results we do not anticipate there were surgeons in growth throughout 2013 rather we are optimistic we will experience stabilization in MIS as our efforts to get a clinical trial underway begin to take some stake hold.
Internationally, we saw particularly strong growth from Asia in the quarter. In Europe, we continue to invest in any head count and business development and international market.
We are expanding our international sales coverage but we have direct sales in particular in Germany. Operationally, we completed the financing in January have broadened our shareholder base and we closed with $36 million in cash on our balance sheet.
With a stronger capital structure we are able to turn more of our intention to execute – executing our commercial strategy. Moving to a quick update on our clinical programs.
We continue to invest in clinical science and FDA approvals. We now have enrolled 125 patients in our ABLATE post-approval study.
Importantly, we have 25 sites enrolling and several others in a final stages of approval. We anticipate having 40 sites up and running by the end of Q2 and expect to accelerate enrollment in the back half of the year.
This landmark three year, 350 patient study is intended to build additional evidence on the safety, efficacy and long-term durability of the AtriCure Maze IV concomitant treatment for AF using AtriCure’s proprietary surgical devices and supports our goal of increased penetration and market share in the concomitant AF market. Moving to the Staged DEEP AF feasibility study.
We now have all six enrolling patients in our DEEP AF feasibility study and have enrolled 20 of the 30 patients required. This study supports our goal of accelerating our growth for sole-therapy and working closely with EPs as it is a staged hybrid procedure.
While we do not yet have results to report, we’re pleased with the progress and look forward to providing an update as we have more data. In the meantime, we are putting together a scientific advisory board at the AHRS meeting on May 9th to 11th in Denver, made up of cardiac surgeons and EPs to evaluate our protocol and ensure that we’re on track.
We continue to evaluate and define what we will pursue regarding the AtriCure franchise and a stroke trial and will likely have something to announce about our strategy and intentions towards the end of the year. Importantly, in Europe we expect to initiate a randomized multi-center trial comparing multiple catheter ablations to TT plus a catheter ablation.
The primary focus of this study is to use the data to support reimbursement and relationships of EPs and ultimately improve patient care. In summary, 2013 is off to a strong start.
We are investing in clinical and education endeavors, while we strengthen our team globally, which we believe will fuel long-term growth. I’ll now turn the call over to Andy Wade, our Chief Financial Officer to provide more detail on the first quarter results.
Andy Wade
Thank you, Mike. For the first quarter of 2013, revenue increased 11.2% to a record $19.4 million.
Revenue from product sales in the U.S. was $14.6 million, an increase of 11% from the first quarter of 2012.
Revenue from open chest ablation related product sales in the U.S increased by approximately $600,000 to 9.1 million. And U.S.
sales of products used in minimally invasive procedures increased approximately $200,000 to $3.1 million. US sales of the AtriClip system during the fourth quarter of 2013 were $2.4 million as compared to 1.8 million in the first quarter of 2012.
International revenue grew 11.9% on a GAAP basis and 11.7% on a constant currency basis as compared to the first quarter of 2012 to $4.8 million. The increase in international revenue, as Mike mentioned, was driven primarily by growth in Asia.
Gross margin for the first quarter of 2013 was 72.5% as compared with 73% for the first quarter of 2012 and 70.8% for the fourth quarter of 2012. Note that the medical device excise tax expense for the first quarter was approximately $120,000 or approximately 60 basis points.
So after removing the impact of the MDET, gross margin would have been roughly 73% in the first. As a reminder, the fourth quarter of 2012 included a $225,000 or 125 basis point charge related to the inventory reserve.
Pricing reminded relatively steady and we had a small – had so small realized decreases in product cost. For the remainder of 2013, we anticipate modest pressure on pricing in the US.
Operating expenses increased 11.5% or approximately $1.6 million from $14.2 million for the first quarter of 2012 to $15.9 million for the first quarter of 2012. Research and development expenses, which include clinical activities, were $3.5 million for the first quarter of 2013, or 18% of sales, an increase of $117,000 over the first quarter of 2012.
As we discussed previously, we expect clinical cost to increase modestly in support of our key clinical initiatives, mainly the post-approval study in DEEP AF along with continued investment in our product pipeline. SG&A increased approximately $1.5 million from the first quarter of 2012 to a total of $12.4 or 64% of sales, due primarily to increases in selling, marketing and training costs.
Our operating loss for the quarter was $1.8 million as compared with approximately $1.5 million for the first quarter of 2012. Our adjusted EBITDA loss was approximately $820,000 compared to $329,000 for the first quarter of 2012.
Without the impact of the device tax, EBITDA for first quarter of 2013 would have been a loss of $700,000. Our net loss per share was $0.10 for the first quarter of 2013 compared to $0.10 for the first quarter of 2012 and $0.12 for the fourth quarter of 2012.
Now, turning to a few balance sheet items, we ended the quarter with $36 million in cash, cash equivalents and investments. Additionally, we had approximately $8 million of borrowing capacity under the revolving portion of our credit facility.
As a reminder, in mid-January, we completed a stock offering of approximately 4 million shares which generated net proceeds of approximately $27 million. Lastly, we are reaffirming our guidance for 2013.
We continue to anticipate top line growth of approximately 9% to 11% year-over-year on a GAAP basis, or revenues of 76.5 million to 78 million. We anticipate gross margin to be in the 70% to 72% range for the year, which implies a modest price decline consistent with what we have been seeing.
We expect R&D expenses to be 17% to 18% of sales and SG&A to be roughly 64% to 66% of sales in 2013, a slight increase in spending levels versus 2012. We anticipate increased spending related to previously described commercial activities including clinical science, training and education as well as international expansion.
We expect adjusted EBITDA for 2013 to be in a loss in the range of $3 million to $5 million. This includes the impact of the Medical Device Tax which we anticipate to be in the range of $800,000 to $1 million for 2013 and which will be reflected in cost of goods sold.
Finally, we continue to anticipate an increase in net cash burn for 2013 versus 2012 due to additional investments in operating expense to fund commercial development and product development activities and international expansion, along with working capital and CapEx needs to support our growth strategy. At this point, I would like to turn the call back to Mike for closing comments.
Mike Carrel
Thank you, Andy. We are pleased with our sales performance and other accomplishments in the first quarter, following our key goals for the remainder of 2013.
Achieve revenue guidance and continue to gain market share in the U.S. by driving training and education initiatives, which are driving conversion of competitive accounts at an accelerating pace.
We also plan to make progress investing in our clinical and commercial efforts to further accelerate this growth sustainably. As the only company in the world with an FDA approval to treat the most serious forms of atrial fibrillation, we are committed to advancing the field.
We are transforming AtriCure into a commercially-focused organization with a clear eye towards accelerating revenue growth. By achieving these goals we will continue on our path towards becoming a leading innovator in atrial fibrillation and the left atrial appendage management.
We look forward to keeping you posted on our progress and we’ll now turn the call over to questions.
Operator
(Operator Instructions). And also to allow others time for question, please limit yourself to one question and one follow-up.
Your first question is from the line of Matt Dolan, ROTH Capital.
Chris Lewis – ROTH Capital
Hey, guys. This is Chris Lewis on line for Matt.
Thanks for taking the questions.
Mike Carrel
Hi, Chris.
Chris Lewis – ROTH Capital
First question is just on AtriCure – AtriClip, obviously a strong quarter there. Can you talk a bit more about where that growth came from during the quarter?
And then any other – any additional color you can provide there. And going forward, is this a sustainable revenue run rate for AtriClip that we can expect for the future?
Mike Carrel
Now the first one many of you’ve always talked on the phone before or you’ve asked the question about our batting average relative to AtriClip on the open procedures and what we’re really seeing most of this growth is coming from significant growth on kind of that batting average going up considerably in terms of the number of accounts that are doing open Maze procedures that are now also including the Clip as part of it. A lot of that has to do with market awareness with a lot going on with the WATCHMAN device and others that are out there Bellevue and now Tiger Paw coming into the market that actually creates more awareness.
In our mind that’s a good thing, the surgeons get more comfortable with it. As they get more comfortable they are putting it on more when they are actually doing their cases.
And that’s really where we are seeing most of that growth.
Chris Lewis – ROTH Capital
Okay. And then in terms of revenue run rate going forward for that is this is a sustainable level?
Mike Carrel
The guidance that we basically given around revenue is that we do continue to see even though open was down just slightly this quarter from what our expectations were it was up and we anticipate that open will continue to grow at a nice pace and that the Clip will be those are the two areas that will continue to grow at a nice pace. And then MAS while we did have growth this quarter we’re just cautious about whether or not that’s going to kind of stabilize and be at a modest growth versus considerable growth rate.
So on a Clip side we feel really good about that being a growth engine for us.
Chris Lewis – ROTH Capital
Okay. Great.
And then turning to the gross margins here it came in above the high end of the guidance for the year. I know you’ve talked a little bit about some pricing pressures but can you just walk us through the gross margin and how should we expect that the trend throughout this year given the gross margin for this quarter was above the high end of the range you laid out for the full year?
Andy Wade
Sure. Chris, this is Andy.
As Mike mentioned and some of the areas we are cautiously optimistic here. Obviously the device tax was the big driver in terms of the change year-over-year, pricing continues the whole continue to whole fairly well for us in the first quarter.
So we’re still going to stay with the 70%, 72% just and take a look at that kind of as the year goes on, but as far as where we are. I mean this is a pretty good quarter.
We are happy with that and we’re starting to see the fruits of our investments in the operations area.
Mike Carrel
And the other thing to add to that is we obviously want to make sure that we’re balancing any mix change that with the year. International was a little bit lower than expected on some of the growth this quarter and so that also contributed a little bit because we get lower gross margins out of Europe and so if Europe begins to pick up it will hop our top line but it also may put some pressure on that as well.
So we’re trying to play the balancing act with that for you.
Operator
Your next question will be coming from the line of Tom Gunderson, Piper Jaffray.
Tom Gunderson – Piper Jaffray
Hi, good afternoon. Just a two questions on revenues, Mike.
One is on the U.S. side predominantly, you notice – you noted that you went from trained institutions of 800 to trained institutions of something over a thousand.
As we apply that to revenues, are you seeing more of the growth coming from existing trend accounts from six, nine months ago, in other words, same store growth, or are you seeing new accounts or newly trained accounts providing more of that growth?
Mike Carrel
So, just – Tom, making sure I clarify, if it came across on the numbers, it’s 1,000 surgeons that have been trained in about 525 specific sites, just to kind of give – just to kind of clarify that. But to answer your question specifically in terms of the growth that we’re seeing.
We’re actually seeing within the cases and one of the reasons the revenue was little bit softer was people replacing the pen with our Cryo, which we get more for the Cryo, so that’s growing at a really nice pace for us. And so we’re actually seeing more going on within a case versus necessarily many more cases going on.
But we do see most of that revenue coming from existing account at this point in time. This was the first quarter where I believe, we actually started to see some growth coming out of some of those conversions, where it was beginning to become meaningful, Duke is a good example.
We didn’t do a lot of business with Duke before, and they used to use the same jute product quite extensively and they are now converting over to us and we’re getting some significant growth from that account in particular. But I’d say on a global basis, it’s still more coming from existing account and then using more products within their accounts.
Tom Gunderson – Piper Jaffray
Got it. Thanks.
And then the second question is, can you give us a little bit more color on international growth coming predominantly from Asia, it’s kind of large market, maybe you could tell us are these new accounts, new distributors you mentioned something about Japan. Just a little bit more granularity?
Andy Wade
Yeah. We’ve got great distributor in Japan with CMI.
We’ve been working with them for many years and they are just really up and running and taking market share quite frankly from Medtronic and we just got really good presence, and so they’re really just getting much more comfortable selling the product, and so you’re starting to see the fruit of some of that labor in the Japanese market. In China, we saw some nice growth and continue – there is a such a huge market there that it’s education, education, education in the Chinese market, and getting more surgeons comfortable there as well, and as more get comfortable with it, more actually practicing it and sourcing growth there.
So, that’s what we’re seeing on the Asia side.
Tom Gunderson – Piper Jaffray
Great. Thank you.
Operator
(Operator Instructions). Your next question is from the line of Danielle Antalffy, Leerink Swann.
Robert Marcus – Leerink Swann
Hi, thanks. This is actually Robert Marcus in for Danielle.
Thanks, for taking the question. So Mike since you started, can you talk about how you feel you’ve been – the company is been executing on the goals you initially set.
Are there somewhere you’re doing better or worse and maybe just give us a little color?
Mike Carrel
I mean, overall I think the company has actually responded very well and sitting on all cylinders relative to the goals. And as I think I’ve talked in this call, I don’t think you want to grow too fast, too soon.
We kind of want to do there nice measured pace. I feel like we’re hitting those numbers.
We’re making investments which enable to prove and attract some incredible people from many of the major medical device companies that you’re aware of. We’ve got – from education, to bringing on Dr.
Cox, to bringing on people from St. Jude and other manufacturers.
This had a lot of success in hiring some significant talent across all aspects of our business. People want to come work.
We’re getting a lot of calls and incoming calls in and multiple peoples for positions that we’re posting. And so, I’d say that’s really been one of the key critical components is building some of that out and that’s really coming together real nicely and I’d say that’s going to play some big evidence for us.
On the clinical side, we’ve really seen some nice progress as well. Now we’ve got some focus on the post approval study.
We’re actually getting people through the pipeline. I think before I joined we had kind of lost our way a little bit in terms of getting enrollment on that.
So you’re starting to see some significant enrollment come in and getting those sites up and running. And the same to be said with the DEEP trial.
We’ve got a lot of activity in terms of excitement around that going to a pivotal trial and getting the results from the feasibility to make sure we can go forward with that. So I’d say that we’re hitting on all cylinders and most of those front end now and at the right pace so that we can sustain it for the long-term.
Robert Marcus – Leerink Swann
Great. Thanks and maybe just one follow-up.
I know you mentioned it briefly in the prepare remarks. But are you seeing any kind of impact on the business from the soft hospital volumes we’ve heard from, some of the larger manufacturers, is that impacting you at all?
Mike Carrel
We’ve seen a little bit but I wouldn’t say that it’s been substantial because we’re also seeing – and we’re little bit smaller, so and because of our net – we’re nimble and we’re still taking some share, we don’t see it as much, but you do see a little bit softness.
Robert Marcus – Leerink Swann
Okay. Great.
Thanks a lot.
Operator
Your next question is from the line of Larry Haimovitch, HMTC.
Larry Haimovitch – HMTC
Good afternoon, Andy and Mike.
Mike Carrel
Hi, Larry.
Larry Haimovitch – HMTC
Mike, I know that you’ve had some interest in developing a better initiative to address the turf issues and the fact that EPs are the ones that control the patients and to try to get some sales and marketing effort to bridge that gap. Could you talk about that a little bit, my understanding is you maybe hiring some people to do that?
Mike Carrel
We have, we’ve hired – we’ve actually build out a team that’s really going to try to build and bridge those relationships quite extensively. So we’ve got three or four people that we’ve already hired and brought on.
I’ve been spending all of my time visiting many of the leading sites that are already doing that and creating these hired teams together. As an example, I mentioned earlier where you have a combination of surgeon working with the EP in consultation and also with the cardiologist, specifically, around how to form things together in talking to the patient and treating them.
And that’s actually worked out really well. And so we’re seeing that actually progress as a business, and we’re hiring some key people from some companies that you’d be – St.
Jude, Medtronic, etcetera.
Larry Haimovitch – HMTC
How big do you anticipate that effort to become?
Mike Carrel
Big in terms of?
Larry Haimovitch – HMTC
People, number of sales reps or number of territories or things like that.
Mike Carrel
Well, what we talked about when we raised the money is that we’re going to continue to assess, and we’re bringing on a couple of people. As I mentioned, we’ve got three to four right now.
We’ll probably stay at that level for a while, as we kind of build out the program, and make sure we better understand the market and get that up and running. But we haven’t set a specific target on the number that we’re going to have by the end of the year.
Operator
And at this time, I’m showing no further questions in queue. I would like to turn the call back over to Mr.
Mike Carrel for any closing remarks.
Mike Carrel
Well, thank you, everyone, for joining the call today, and have a wonderful evening. We look forward to catching up next quarter.
Operator
Ladies and gentlemen that concludes today’s conference. We thank you for your participation, and you may now disconnect.
Have a great day.