Feb 18, 2010
AtriCure Inc. (NASDAQ
ATRC):
Q4 2009 Earnings Call
Executives
David J. Drachman - President, Chief Executive Officer, Director Julie A.
Piton - Vice President of Finance and Administration, Chief Financial Officer
Analysts
Matt Dolan - Roth Capital Partners Jason Mills - Canaccord Adams Larry Haimovitch – HMTC Tim Lee - Piper Jaffray Erica (Leighton) - Noble Financial Charley Jones - Barrington Research Associates
Operator
Good morning and welcome to AtriCure's Fourth Quarter and Full Year 2009 Earnings Conference Call. My name is Caitlin and I will be your coordinator for the call today.
(Operator Instructions). And I would now like to turn the call over to Mr.
David Drachman, President and Chief Executive Officer of AtriCure. Mr.
Drachman, please proceed.
David Drachman
Thank you. First of all, consistent with seasonality, I would like to apologize for a stubborn cold and my voice in advance.
Thank you operator. Good morning and welcome to the fourth quarter and full year 2009 earnings call.
Joining me on the call today is Julie Piton, Vice President of Finance and Administration and Chief Financial Officer. At this time, I would like to turn the call over to Julie for a few introductory comments.
Julie Piton
Thank you Dave and good morning everyone. By now you should have received a copy of the earnings press release.
If you have not received a copy please call Sarah Wickman at 513-755-4136 and she will fax or email you a copy. Before we begin today, let me remind you that the Company’s remarks may include forward-looking statements.
These statements include, but are not limited to those that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as revenue and earnings estimates, other predictions of financial performance, launches of new products and market acceptance of new products. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure’s control including, but not limited to the rate and degree of market acceptance of AtriCure’s products, governmental approval and other 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 and AtriCure undertakes no obligation to publicly update any forward-looking statement, whether it is as a result of new information, future events or otherwise. Additionally, we will refer to non-GAAP financial metrics.
A reconciliation of these non-GAAP measure is included in our press release, which is available on our website. I would like remind everyone on the call today that the Food and Drug Administration, or the FDA, has not cleared our products for the treatment of atrial fibrillation or AF.
A majority of our products have been cleared for the ablation of cardiac tissue. The Company and others acting on its behalf may not promote any of its products for the surgical treatment of AF or train doctors to use the products for the surgical treatment of AF.
These restrictions do not prevent doctors from choosing to use the products for the treatment of AF or prevent AtriCure from engaging in sales and marketing efforts that focus only on the general attributes of the products for the current cleared uses and not for the treatment of AF. AtriCure educates and trains doctors in the proper use of its products and related technologies and does not educate or train doctors to use its products for the treatment of AF.
AtriCure has provided research grants to institutions for the purpose of conducting certain studies that may be referred to on this call. The primary offers of the papers referred to on this call may also be consultants to AtriCure.
With that, I would like to turn the call back to Dave.
David Drachman
Thank you Julie, and welcome to members of the investment community who have joined us today. we will begin with a brief summary of our fourth quarter revenue results and then review our 2009 results in comparison to our strategic priorities.
Next, we will highlight our performance and the ongoing opportunities for each of our three business sectors followed by a regulatory clinical and product pipeline update. Then we will comment on our Department of Justice Settlement and our 2010 strategic priorities.
Following my remarks, Julie will present a detailed review of our financial performance. Then I will provide comments concerning our outlook.
We will then open the call for your questions. This morning we reported fourth quarter revenues of $13.8 million, which represents a 14.4% increase over the prior year.
Although, our fourth quarter 2008 comparables were less challenging in comparison to prior quarters, we are encouraged by our performance. Turning to 2009, due primarily to factors outside of our company's control, 2009 was the most difficult year of our company's history and a year that challenged large and small companies across all sectors.
In response to these challenges, we implemented a series of decisive actions and reset our 2009 strategic priorities. In rank order, our 2009 strategic priorities were to accelerate profitability, advance atrial fibrillation approvals, expand our market share and leadership position through new innovative growth platforms including the Cryo1 and AtriClip systems along with the development of a totally thoracoscopic ET hybrid procedure.
In addition, the management was focused on the resolution of our Department of Justice Investigation and related qui tam case in a manner that would not impede our current capital or ongoing revenue opportunities. As we measure our performance against our strategic priorities, we were successful in executing our 2009 plan.
Beginning with profitability trends, 2009 adjusted EBITDA was $1.6 million, or $7.2 million improvement. Moreover, we generated $420,000 from operations, which represents a $6.1 million improvement.
In terms of atrial fibrillation approvals, we plan to submit our ablate PMA in support of an atrial fibrillation approval during the first quarter of 2010 as previously communicated. In assessing our current market share position, we estimate that our U.S market share is approximately 50%, which is consistent with prior years and we believe that we increased our market share in regions outside the U.S.
In terms of generating new innovative growth platforms, we released our Cryo1 system in the U.S during the second quarter of 2009 and in Europe during the third quarter of 2009 as planned. Furthermore, we realized the AtriClip System in Europe during the fourth quarter on schedule.
In addition, we are in the process of working with key surgeons and electrophysiologists to pioneer a novel promising procedure, which combines the advantages of surgical ablation and cathode ablation into a single procedure. Along with the execution of our operational milestones, we settled our Department Of Justice investigation and related qui tam case in a timeline and manner consistent with our internal plan.
As we move forward into 2010, it is important that we acknowledge the men and women of AtriCure for meeting our challenges with rapid well executed solutions and for their stedfast courage, commitment and resolve. Turning to our fourth quarter sales performance by business sector, fourth quarter revenues from open-heart products were $6.7 million, a 12% increase as compared to the same period a year ago, a sequential increase of 4%.
Open-heart product revenues benefited from the second quarter launch of our Cryo1 system. Going forward, we intend to leverage our competitive advantages, which includes superior products and the widest range of technologies and products in the cardiac surgical ablation space.
AtriCure is the only surgical ablation company marketing a portfolio of radio frequency and cyrothermy assistance. In the open-heart setting depending on the patient's presentation and the primary surgical procedure, physicians performing concomitant maze procedure may chose to use our radio-frequency clamp with our reusable or disposable Cryo probe.
Moreover, there are situations where surgeons may elect to repair or replace a micro valve from our minimally invasive incision, for this surgical approach our long disposable Cryo1 Pro maybe the preferred product. In brief, our market leading position, extending product portfolio, and focused sales organization are competitive advantages which we believe will lead to market share gains.
In addition we believe that our ablate clinical trail results and the receipt of an FDA atrial fibrillation approval will support broader market expansion and new growth opportunities. Now, turning to our minimally invasive business.
Revenues from domestic minimally invasive products were $4.1 million, a 3% increase compared to the same period a year ago, and consistent with the previous quarter. Furthermore despite our 2009 focus on profitable market share, on a year-over-year comparative basis we estimate that minimally invasive procedures increased in the high single digits.
Importantly there is a rapid trend towards the development and investigation of a new novel hybrid ablation procedure. This hybrid procedure is now being performed routinely in a limited but steadily growing number of key European and U.S.
centers. The procedure combines the use of our minimally invasive totally thorcoscopic products with catheter ablation technologies.
This integrated or hybrid approach strengthens the partnership between electrophysiologist and cardiac surgeons, facilitates a coordinated referral developed process in the interest of patient care. And most importantly it provides patients with a comprehensive mapping and ablation procedure, which we believe will become a standard of care for specific patients and patients that have failed single or multiple catheter ablation attempts.
Several high volume and prestigious centers are in the process of adding the hybrid procedure as a primary alternative for persistent patients, for those patients that have failed single or multiple catheter ablation attempts, a growing population. In support of this physician trend, we submitted an IDE and are in the process of working with FDA in order to receive approval to move forward with a feasibility trial.
The name of the trial is the dual Epicardial, Endocardial Persistent AF or Deep AF trial. The study design allows for patients to be treated in either a hybrid suite, operating room or the electric physiology lab.
Notably, approximately 20% of our U.S customers have a hybrid room, are currently in a process of building a hybrid suite or plan to build a hybrid suite in the next 24 months. Moreover, many of the largest centers are in the process of building a second hybrid suite.
We believe strongly that the potential of our deep AF approach is one of the most promising new patient alternatives and largest growth opportunities in the atrial fibrillation space. Turning to our international performance, international revenues of $3 million were in new high representing a 46% increase compared to the same period a year ago and a 15% sequential increase.
We anticipate high international growth trends will continue as we move further into full commercialization of our AtriClip and Cryo systems and importantly, as we begin implementing plans to expand our integrated or hybrid ablation procedure throughout Europe during the course of this year. Because of the growing opportunity in Europe and other key international markets, we're in the process of adding additional direct resources to support our international expansion and growth prospects.
As a result, we expect growth from the international markets to remain strong. Now, a review over investments in clinical science and FDA approvals.
First, a review of our ABLATE pivotal trial. The ABLATE clinical trial is designed to treat patients undergoing elective open heart surgical procedures that present with a documented history of permanent atrial fibrillation.
As communicated, we anticipate submitting the fourth and final module of our PMA, the clinical module, during the current quarter. At this point, all available patients have reached their six month endpoint and we believe that the primary safety and efficacy endpoints of the ablate trial have been achieved.
As a reminder, the ablate FDA sanction protocol utilizes a Bayesian statistical plan and requires enrollment of between 50 and 100 patients. The fundamental concept with a Bayesian statistical plan is that the better the results the fewer the patients that are required to demonstrate safety and efficacy.
The preliminary analyses suggest that we reached our primary endpoints at the lower range of patient enrollment. However based on discussions with FDA we believe a larger cohort of patients will be reassuring to FDA and their advisory panel.
In conjunction with FDA, it has been decided that in parallel with submitting our final PMA module, the clinical module, that we would initiate a continued access protocol to augment the number of subjects for presentation at the FDA advisory panel meeting. Ablate continued access has been approved by FDA and utilizes a consistent clinical trial design as ablate.
We anticipate initiating enrollment in ablate, the continued access, during April of this year. We believe that an atrial fibrillation approval will be a major growth catalyst and we have continued commitment to working with the FDA and our investigators to achieve FDA approvals for atrial fibrillation.
We anticipate receiving an atrial fibrillation approval during the second half of 2011. Turning to our EXCLUDE clinical trial and support of U.S.
clearance of our AtriClip System. The path to clearance for the AtriClip System remains a 510(k) process with supporting clinical evidence.
In line with previous communications, during November of 2009 we submitted our clinical report to FDA summarizing the results of our 70-patient U.S. clinical trail.
The final results from the EXCLUDE clinical trail were exceptionally strong and met the study end points. We anticipate that the EXCLUDE clinical results will be presented at major meeting during the course of this year.
In terms of FDA clearance for AtriClip System, we have recently been assigned a new FDA reviewer. We are in the process of working with FDA to discuss the details of our correspondences and submissions which date back to 2006.
Independent of the strength of the human data generated from the EXCLUDE clinical trail, we have received questions primarily concerning our March 2007 510(k) submission, and certain GLP requirements associated with our preclinical studies. We are in the process of working with our preclinical sites to prepare responses.
As a result of these recent circumstances, the timing of our FDA clearance has become delayed. However, this project is heavily resourced and internally we are planning for product clearance and launch during the second half of this year.
In terms of Deep AF, we submitted our IDE in support of our feasibility study in December of 2009. FDA responded to our submission requesting additional information.
The primary request is related to performance data for the ablation catheter referenced in our clinical protocol. We have obtained authorization from Biosense Webster for FDA to reference performance data provided in certain FDA submissions relative to the Navastore clinical product line.
As a result, we plan to submit our responses to FDA during March and pending FDA approval, we anticipate commencing enrollment during the summer of this year. Now turning to our pipeline and product development initiatives.
In order to further strengthen our market leadership position and stimulate growth, we have a serious of sustaining innovations that we’re planning to release during the year. The innovations include a new Isolator Synergy platform.
The new Isolator Synergy access is pending FDA clearance during the second quarter of this year. In terms of the expansion of our cryo platform, we plan to release an enhanced cryo probe in the U.S.
and Europe during the second half of this year and a new automated cryo generator during the first quarter of 2011. Our new automated generator is designed to set with ORLab system, simplifying the process of toggling back and forth between radio frequency and cryo thermia ablation devices.
In terms of our AtriClip system, it is important to note that left atrial appendage excision or exclusion is a standard procedure for patients undergoing open-heart surgical ablation procedures. In addition to left atrial appendage exclusion during ablation procedures the ACC/AHA/ESC 2006 Atrial Fibrillation guidelines recommend removing the left atrial appendage in patients undergoing open-heart surgery that are at risk of developing postoperative atrial fibrillation.
The main problem is that the currently available techniques and technologies for the surgical closure of the left atrial appendage are inadequate. There was a key publication in the September 2008 addition of the Journal of the American College of Cardiology authored by physicians at the Cleveland clinic.
The study concluded that there is a high occurrence of unsuccessful surgical left atrial appendage closure. This publication suggests that 60% of the subjects studied had inadequate left atrial appendage closure using the currently available techniques and technologies.
This represents an immediate opportunity for the AtriClip system. Following the U.S release of our AtriClip system, we will be ready to launch a complementary version of our AtriClip system that is more specifically designed for open sternotomy procedures.
We believe that these new products and sustaining innovations will further distinguish AtriCure as the market innovator and lead to expanded to market penetration share gains and new growth opportunities. With respect to the Department of Justice Settlement, we have executed a definitive agreement with the Department of Justice in the office as the Inspector General of the Department of Health and Human Services to resolve the issues raised in the DOJ investigation and related qui tam complaint regarding the marketing of the company's surgical ablation devices.
The terms of the agreement are substantially identical to those previously disclosed and specifically state that AtriCure and its employees admit no wrongdoing or illegal activity. Although, we believe that meritorious defenses to the legal issues raised in the qui tam complaint; the cost of litigation would have likely exceed the settlement amount.
Moreover, we are an emerging growth orientated company with a lean management structure. The discovery and litigation process would have distracted management from focusing on our strategic plan.
Given the circumstances, we believe the resolution of this matter is in the best interest of our shareholders and allows management to further focus on the execution of our plan. Turning to our 2010 strategic priorities.
As we transition into 2010 in rank order, our strategic priorities are growth, the execution of our regulatory and clinical milestones and customer-valued innovation. To capitalize on our new product platforms and market opportunities we began to incrementally expand our U.S and international sales and marketing organizations during the fourth quarter of 2009.
At this point in our call, I would like to turn the call over the Julie for a detailed review of our financial performance.
Julie Piton
Thank you, Dave. I will begin by providing information related to revenues.
For the fourth quarter of 2009, revenues from domestic open-heart products were $6.7 million, minimally invasive domestic revenues were $4.1 million, and international revenues were a record $3 million. Total revenues grew 14.4% to $13.8 million as compared to $12.1 million for the fourth quarter of 2008.
International revenues grew 45.8% on a GAAP basis and 38.1% neutralizing currency fluctuation. On a consolidated basis, fourth quarter 2009 revenue growth benefitted approximately 1% from currency fluctuation.
For 2009 full year, our revenues were $54.5 million as compared with 2008 revenues of $55.3 million. Revenues from domestic open-heart products grew 1.6% to $27.5 million and revenues from minimally invasive products were $16.6 million as compared with $19.8 million for 2008.
2008, minimally invasive revenues benefited from the introduction in placement of our OR Lab system into a large majority camps that purchased minimally invasive products, this resulted in substantial reduction in OR Lab sales during 2009. 2009, international revenues grew 24.9% or 28.2% on a currency neutral basis to a record $10.4 million driven primarily by market share gains.
As a reminder revenues from our multi-functional pen, which is used in both open and minimally invasive procedures are allocated between open and minimally invasive product revenues based on our best estimate of the pens actual usage. Now turning to gross margins.
Gross margin for the fourth quarter of 2009 was 75.2% as compared with 74.3% for the fourth quarter of 2008. For the year gross margin expanded 50 basis points to 76.6%.
The quarter-over-quarter and year-over-year improvement in gross margin was primarily due to a reduction on capital equipment sales such as our OR Lab system, partially offset by an increased mix of international revenues and new products. Next, an update on operating expense.
Operating expense excluding settlement reserve for the fourth quarter of 2009 were $12.3 million, consistent with fourth quarter of 2008 operating expense of $12.4 million. Note that during the fourth quarter of 2009, we recorded a one-time non-recurring share based compensation charge of approximately $500,000 or $0.03 per share.
Also consistent with our communications during the third quarter conference call, sequentially you'll note that operating expenses excluding the settlement reserve and the non-recurring compensation expense charge increased $1.1 million or approximately 10.7%. The increase was driven by an increase in spending related to clinical activity and an increase in SG&A of approximately $900,000.
The increase in SG&A was primarily due to an increase in sale of headcount related expense to capitalize on our growth platforms as well as an increase in sales and marketing expenses and activities. For 2009, neutralizing the impact of goodwill in the DOJ settlement operating expenses decreased $6.5 million or 12.3% to $46.5 million as compared with $53 million for 2008.
Adjusted EBITDA for the fourth quarter of 2009 was a loss of approximately $150,000 as compared with a loss of $2 million for the fourth quarter of 2008. For 2009, our adjusted EBITDA was a record positive $1.6 million as compared to an EBITDA loss of $5.6 million for 2008, representing a $7.2 million improvement.
Turning to earnings per share, fourth quarter 2009 earnings per share on a GAAP basis was a loss of $0.16. Adjusting for the impact of the non-recurring share based compensation charge of $500,000 and the DOJ settlement reserve of $200,000; our adjusted EPS loss was a $0.11 per share.
For 2009, adjusted EPS loss was a record low of $0.39. In terms of the balance sheet in cash, we ended the year with $15.7 million in cash, cash equivalents and investments and we had $5.1 million in gross debt outstanding under our credit facility.
Year-to-date, we generated cash from operating activities of approximately $420,000 as compared with the use of $5.7 million last year. This represents the first time we have generated positive cash from operations on an annual basis.
The 2009 improvement in cash from operations was driven by an improvement in non-GAAP net loss and a reduction in cash use and supportive working capital needs. At this point, I would like to turn the call back to Dave.
David Drachman
Thank you, Julie. In terms of the outlook, we anticipate restoring and accelerating growth during 2010 and '11, and we plan to incrementally and strategically reinvest resources to achieve our internal growth targets and capitalize on our new growth platforms.
Primarily as a result of our investments in growth we anticipate a leveling of profitability trends during 2010. Importantly we believe that the physician adoption of integrated or hybrid ablation approaches, our AtriClip platform, atrial fibrillation approvals, our expanding international presence along with new product innovations will lead to significant new growth opportunities.
We remain confident in the power of our strategic plan and believe that AtriCure is well positioned to further deliver results for patient's, customers and shareholders. We will now open the call for your questions.
Operator
(Operator Instructions). Your first question comes from Matt Dolan - Roth Capital Partners.
Matt Dolan - Roth Capital Partners
Can we start with the international business, which had a pretty strong finish to the year? Can you maybe help us with how much of that came from AtriClip and Cryo1 versus just executing and taking share over there?
I’m basically trying to get how much of that momentum to continue in the 2010?
David Drachman
Good question Matt. First of all the Cryo1 was released in Europe in the third quarter and really launched in the fourth quarter and the Clip was released in Europe in the fourth quarter and is really being launched in the current quarter.
And in the stocking distributor model it certainly takes time to educate and get products to the distribution channels. So, the main increment in our European and international markets, first of all we now have a VP of Sales & Marketing, who heads international and is based in Europe.
So the training and education of our stocking distributors has enhanced considerably. In addition, in certain regions we had underperforming distributors.
Management has replaced those underperforming distributors with higher performing distributors. Moreover we put more direct resources in Germany, you may know Germany represents 60% of the open-heart procedures in Western Europe and Germany is a focus of the company going forward.
In terms of Japan, we have high market share of approximately 50% and that’s relatively consistent year-over-year share and China is a strong growth opportunity for us this fall. We've developed building momentum in the major cities of Beijing, Shanghai, and Guangzhou and we continue to look at investing additional resources into the market in the China.
In addition we're picking up new markets along the pacific rim smaller markets but markets that we anticipate will have an impact, a positive impact on revenue during 2010.
Matt Dolan - Roth Capital Partners
Dave you mentioned you are expanding your U.S. and international sales organization and you kind of touched on international there.
Just maybe give us some numbers in the U.S. where you are, where you plan to go?
David Drachman
Well, we're currently at 55 sales headcount, during midyear we dipped as low as just under 50. So during the fourth quarter, particularly we began to reinstate sales positions, we believe there are new momentum in the marketplace with our new growth platforms and with more stable and more expanded sales and marketing platform, we intend to restore growth trend as move further into the year.
Matt Dolan - Roth Capital Partners
Shifting to the hybrid technique, it sounds like that is gaining some interest from some of the higher end centers out there. Can you give us little bit more into your strategic plan this year, how many centers are you looking to get on board and get active with hybrid this year and when can we see some actual data out of maybe single center experience type of data?
David Drachman
Well I think you will see single open center experience presented at (inaudible) symposia. In terms of number of centers, our physicians have adopted the hybrid approach in approximately 7 centers during the quarter.
And the company is primarily focused on the execution of our Deep AF clinical trial, which will include up to 5 centers. So this effort, we believe that in parallel with running our FDA clinical trials, that key physicians at key centers will also adopt this procedure as a new alternative for the more persistent patients, and once again those patients that have failed single or multiple attempts to catheter ablation.
Matt Dolan - Roth Capital Partners
Okay, great and then last question just looking at your 2010 outlook, it looks like you're clearly having some momentum on the sales line at least into 2010. Last year you had a priority for a profitability, so maybe can you give us a feel for how we should think about operating leverage this year as you return to growth?
Thanks.
David Drachman
Well, we’ve consistently said that we anticipate positive EBITDA on the range of $57 million to $60 million revenue run rate. I think we continue to view our business that way.
We've exceeded some of our own internal expectations in terms of EBITDA. So moving forward, we now – with $16 million of cash and cash equivalence on the balance sheet, we believe that based on the growth opportunities that we’re facing in 2010, that’s important to reinvest for both stability, strength and the numbers of U.S.
sales headcount as well as you pointed out earlier in the opportunities outside the U.S.
Operator
Your next question comes from Jason Mills - Canaccord Adams.
Jason Mills - Canaccord Adams
Just following on the last question and your commentary David, about sales force head count. It is encouraging to see adding reps back again.
I'm wondering if you could give us some target in terms of where you think your U.S sales force should be exiting 2010 in terms of direct sales head count?
David Drachman
Well, our plan is to look at this in a measured and strategically, incrementally invest in sales head count. But we want to continue to look at revenues and compare revenues to cost and expense and make sure that the alignment is following our internal plan.
But to more directly answer your question, we anticipate in the range of between 57 and 60 direct sales people exiting 2010 in the U.S.
Jason Mills - Canaccord Adams
And then, just more of a 20,000 foot view Dave, as it relates to the domestic atrial fibrillation or ablation markets. We obviously saw some degradation in overall market growth during 2009 and some postulated that perhaps, is due to the recession and some of the minimally basic procedures specifically being more discretionary than (inaudible) procedures.
We'd love your thoughts on that and what you think, over the course of the next 18 to 24 months will be a driver to re-acceleration in market growth. And then as it relates to your company specifically, what gives you the confidence that relative to that accelerating market growth perhaps you would expect to see in terms of your growth in market share?
David Drachman
First of all, in the open business, we agree that the market has leveled. We continue to believe that the number one catalyst for market expansion is atrial fibrillation approvals.
That will give us the ability to market directly to referring doctors, cardiologist, and it will make this product and procedure a standard of care. Currently it is about 30% to 35% penetration into the open markets.
We think that open markets are under penetrated and a major catalyst is in AF approval. In terms of the minimally invasive and integrated hybrid approaches, if you look at catheter ablation in 2009, there are estimates that in the U.S there are 85,000 catheter ablation procedures performed and in outside U.S that there were approximately 35,000 catheter ablation procedures performed.
So, we believe that there is plenty of catheter ablation procedures being performed, the growth is about 15% in the catheter market and we anticipate that this growth will continue for catheter and that while the catheter market continues to develop, it’s going to create more and more opportunities for patients that have long standing persistent atrial fibrillation, that are not good candidates for catheter ablation as well as for failed catheter ablation. We are now seeing patients come back and have two, three, four and sometimes five failed catheter ablation procedures.
That’s not uncommon. So we certainly believe that there is a growing market opportunity for a minimally invasive or integrated hybrid approach and we believe that this integrated hybrid approach really brings the EPs and the surgeons together to offer the patient the most compressive ablation and mapping procedure.
I hope that was your question Jason.
Jason Mills - Canaccord Adams
As it relates to the AtriClip, I am sure you are somewhat disappointed with respect to the delay, although it sounds like it is a function of where the FDA is in sort of the composition environment of that organization and perhaps less. So a result of the data that you have seen so far as it relates to the trial encompassing that device.
Perhaps you could comment a bit about what you are seeing from a macro basis at FDA and I’m sure you’ve seen or heard about the general article today that comments about sort of the environment and stance that I think we’ve all been privy to that FDA has become much more cautious as it relates to 510(k) approvals and shorter regulatory pathways. Perhaps you could give us your insight senses to what’s going on and what we should expect to see from the FDA as we move forward, not just in your area, but just as it relates to their stance in general on shorter regulatory approvals?
David Drachman
I think for the foreseeable future 510(k) will certainly be a more tortuous process, require more data. So if the 510(k) requires more data then the submission to 510(k) would be delayed.
So it will require companies to almost have a ready for human use product to file their 510(k) because of the amount of increased data that will be required for 510(k) approval. But in general I do believe that the FDA is more cautious, I think in terms of the PMA process and what FDA is looking for in terms of clinical trails is going to be more rigorous and probably lengthen the time for PMAs as well.
Operator
Your next question comes from Larry Haimovitch – HMTC.
Larry Haimovitch – HMTC
Couple of questions. One on your cryo business, my understanding is that you did quite well in the cryo business and I understand you gained some share back that you had lost in the open market to ATS.
I was told by somebody however that they think that the gains you made in cryo may have come a little of expense of your RF business. And I'm wondering did you see any cannibalization of RF as you gained cryo share Dave?
David Drachman
It's hard to characterize any significant cannibalization. Could there be some modest cannibalization?
That’s possible. But as a general rule of thumb, it's been hard for us to identify any cannibalization.
We've been very targeted with our cyro product and in fact since our launch, our full launch in the second quarter of 2009, 100 centers have purchased our Cryo 1 probe. So we've been very targeted.
The intention with our Cryo 1 probe was to go out and increase market share and we've been very cautious not to cannibalize our radio frequency products, which generally carry a higher ASP per procedure. So again we’re not able to identify any cannibalization but it's possible that there’s modest cannibalization in certain accounts.
Larry Haimovitch – HMTC
Okay, my next question is you mentioned in your prepared remarks, I think you said that 20% of your customers now have hybrid labs and more are adding. Could you give us a number, approximate number but how many hybrid labs you think are actually out there and how many could be added over the next year or two?
David Drachman
Well, we have about 700 customers that we looked at on an annual basis. And in general we think that about 10% of the overall open-heart centers currently have a hybrid room and another 10% have one, either in the works for this year or in the next 24 months.
Larry Haimovitch – HMTC
Okay, so there's roughly 70 out there now and that numbers going to grow probably this year or to be over a 100 places that will be hybrid labs. And that will be your target audience initially for the feasibility trial, the full PMA trial, then obviously when you get full FDA approval that will be the target market for that opportunity.
David Drachman
Well, it's 20% of the 700, just to be clear. You said 20% of the 700 that either have a hybrid room or building one, one is being build in process or one will be build over the next 24 months.
Our hybrid procedure in Europe is mostly performed in the EP lab. And so this is a bit of a workflow issue in different centers.
Some centers may choose to perform the procedure in the hybrid room, some centers may choose to perform the procedure in the EP lab or in OR. And our EPA protocol allows either of those three locations.
I think the key issue though, is hybrid is a very hot topic. Percutaneous and (trans-atrical) valves are certainly a part of that drive toward hospitals investing resources in hybrid rooms.
So, we think that hybrid procedures in general are a very dynamic area and certainly with the capacity, growing capacity of hybrid rooms, it should only help our effort in the Deep AF approach.
Larry Haimovitch – HMTC
It sounds like what you are saying is that your ability to grow the hybrid procedure is not going to be limited by the availability of hybrid rooms. Is that a fair statement?
That there are enough now and there will be more coming such that you can grow that business very nicely and not be constrained by a shortage of hybrid rooms?
David Drachman
That’s exactly right. In fact currently the majority of centers that have either started or are anticipating starting, are not starting in a hybrid room.
Operator
.
Tim Lee - Piper Jaffray
Just in terms of the hybrid procedure, what does reimbursement look like? Are docs billing for one procedure and the patient is spending the physician fee or are they getting reimbursed for two procedures?
Just any details on that?
David Drachman
Sure, there are standards for hybrid procedures obviously since there are other forms of hybrid procedures. In this case the electrophysiologist gets paid and compensated under CPT codes which are consistent with AF ablation procedures and the surgeon the same.
So there's compensation for the surgeon and EP they are comfortable to their standalone procedures and depending upon where the procedure is being performed but generally speaking if it's an outpatient setting then the hospital reimbursement is consistent with the surgical procedure.
Tim Lee - Piper Jaffray
Couple of follow up on ablate study, any sense of when you could expect to see a panel on that and with the, I think this was asked last time. Is the data -- that the first data we'll see via panel rounds and any type of the meetings that are coming up here in the next coming months?
David Drachman
You asked the question Tim last time and appreciated that. Well we are aiming to have a panel meeting in the first half of 2011.
In terms of the data, we would anticipate that the ablate data will be presented at national meetings during the course of the second half of this year and in the beginning of next year. So we are planning for presentations that they've had on the panel meet.
Tim Lee - Piper Jaffray
The final module is getting submitted here shortly, why so long until the panel gets convened on this.
David Drachman
Well there is a six month window for FDA to come back with responses. So the PMA process, you submit your PMA the FDA has six months to respond and then based on their questions we'll have a need to rally with our investigators and respond to their questions and then the panel meeting will need to be planned.
Tim Lee - Piper Jaffray
Got it and just a couple of more quick ones here. In terms of the cap regarding ABLATE, any sense of – or how many patients are you requesting on that?
David Drachman
We've been allowed 50 patients.
Tim Lee - Piper Jaffray
Okay, and two more quick ones. In terms of – 2010, you talked about some of your strategic goals, would you care to quantify or put some numbers around what type of revenue growth are we looking for – are you targeting double-digit top line, are you looking for something stronger than that, low double digit?
How should we think about 2010 going forward?
David Drachman
I think you should look at 2010 as increasing revenue trends, increasing revenue growth trends in the second half of the year. In terms of qualitative information or guidance, we haven't set a point in time at this point to reinstate guidance.
Tim Lee - Piper Jaffray
Got it and then just one last one. What was the $500,000 non-recurring stock comp during the quarter, just any details on that front?
Thank you.
Julie Piton
Sure, so we use a well known system called Equity Edge and they had a software upgrade that provided for essentially their calculation of the forfeiture process, was resulting in inappropriate timing of stock compensation within period not over the life of the grant but with an individual period. So of the $500,000 that we reported it related to this upgrade and essentially went back to 2006, so most of the expense, and then some actually belonged in earlier period conceptually.
And so that’s what it relates to, and so it's a non-recurring, will actually get a benefit prospectively.
Operator
Your next question comes from Erica (Leighton) - Noble Financial.
Erica (Leighton) - Noble Financial
I was actually hoping that you could breakout the AtriClip revenues even if not for the quarter, if you could give us some sense of if you'd be able to do that for us in coming quarters?
Julie Piton
We haven't taken a decision yet on whether or no we will segregate AtriClip revenues prospectively. As Dave commented we really just got through our initial clinical milestones during the fourth quarter.
And in Europe with respect to our initial launch there's a process we go through. So, it was not a large or significant contributor to the fourth quarter and we're still evaluating whether or not we'll breakout that revenue and we'll probably reach a decision on that at or near the time we launch it in the United States.
Erica (Leighton)- Noble Financial
Thank you, that definitely would be helpful to have if you can get that to us. The other question is about the hybrid procedures.
This looks like a very good opportunity for you. I know that that there's not many people in the space that are participating in this yet and it looks like you could be a leader.
Do you know how many of the centers that are interested in hybrid procedures you're talking to? Pretty much an idea of prospective market share?
David Drachman
We are primarily focused on the FDA deep AF clinical trial. However, we are getting a lot of buzz around the hybrid approach and there are physicians that are requesting opportunities to go and see hybrid procedures and participate in our clinical trial.
So, I can't give you any qualitative information in terms of the size of the market but in terms of the level of enthusiasm, that we've experienced over the last six months has increased significantly. The best example is always an example.
I got a call from one of the major catheter ablation centers just about a week ago. The call was unplanned asking for a meeting on March 3rd to be convened to discuss the possibility of participating in trials and how they would go about opening up a hybrid program at their center.
In addition, if you look at the speakers that we’ve had at our CME programs that have spoken about an opportunity for hybrid procedures. If you look at positive atrial fibrillation, it was Frank Marchlinski from the University of Pennsylvania and Andrea Natalie, who we know are some of the top catheter ablation people.
And the same is true for STS. We had catheter ablationists as well as top cardiac surgeons speaking at Symposia about this novel new approach being one that needs to be further investigated, but holds great promise.
Erica (Leighton) - Noble Financial
Thank you. I guess that shows that you have some good mind share, which I guess is the more appropriate term versus market share at this point.
And then, the other thing is, I missed how many of the centers that already have hybrid labs that are looking to build a second, that would be helpful.
David Drachman
What we said was that 20% of our customers, our customer base that we look is about 700 customers on an annual basis, that we surveyed either have a hybrid room or developing one this year or have one in the plans for the next 24 months.
Operator
Your next question comes from Charley Jones - Barrington Research Associates.
Charley Jones - Barrington Research Associates
I believe the end point of the ablate travel was 6-month follow up for you from antiarrhythmics. Do you think the FDA will be looking at 12-month data as well or even longer data, now that they have discontinued access protocol and they are like, this time they might extend a little bit?
David Drachman
It's possible but we are taking measures to continuously follow these patients for a longer duration of time since that’s affordable to us. So we will be following the ablate patients for a longer periods than six months.
Charley Jones - Barrington Research Associates
Does that create any additional risk in your mind?
David Drachman
We believe in our procedure and our technology and we believe in the long-term outcomes, we've been at this since really 2002. So we have a pretty good understanding of what to expect and certainly believe that our outcomes will hold up.
Charley Jones - Barrington Research Associates
Speaking of outcomes, what is the closure rate of your clip in 78 patients you studied in your out or in some segment of that?
David Drachman
There were 34 patients that were published on – in a European trail and at three-month CT scan, the rate of closure was 100%.
Charley Jones - Barrington Research Associates
And what kind of efficacy rates have some of the single have centers been demonstrating with the hybrid procedure?
David Drachman
These are initial results but initial results again for primarily long staying persistent patients many of them which itself a single or second attempt atrail fibrillation is been in the mid 80s.
Charley Jones - Barrington Research Associates
Is there any consensus with among the thought laid to us about how previous catheter ablation affected or whether or not they make it more difficult to achieve a good outcome or whether or not it’s just small touch ups and as you do more, you actually see the rate of atrial fibrillation returning decrease?
David Drachman
Excellent question Charley, excellent question. We’re aware of a publication that’s coming out looking at the minimally invasive procedure and comparing results to patients, their de novo patients versus patients that have failed one or more catheter ablation procedures.
And from our experience, what we've seen, in terms of the minimally invasive results falling a failed catheter ablation, it's very comparable to a de novo minimally invasive procedure.
Charley Jones - Barrington Research Associates
Okay, that’s helpful and then would you characterize your minimally invasive revenue growth as primarily being impacted by ASP, can you give us any sense there? Trying to understand the volume trends here obviously hybrid is going to change that but the volume trends we have and how much - it seems like you’re being impacted by ASPs, any color would be helpful.
David Drachman
Sure well, as you know, in 2009 the focus was to focus on our existing centers. So in doing that, we didn't go out expand centers.
So there was some stocking order variance on a year-over-year comparative basis, and this as we discussed in several of the larger centers for a combination of reasons did move to a single clan, which did have a fairly significant impact on our blended revenue per procedure. And I think to a lesser degree, some of the inventory tightening controls and purchasing controls have also had some modest impact on the revenue on a year-over-year comparative basis.
And lastly, as you know, the ORLab was a significant contributor to minimally invasive revenue in 2008 and 2009, particularly in 2009. And so, on the year-over-year comparative basis we're working again at very significant capital equipment performance of the year-over-year basis.
Julie Piton
We haven't seen any real pressure with individual products. It's more this blended procedural ASP where we saw a little bit of pressure during the year.
Charley Jones - Barrington Research Associates
Right, I thought that's where you were going to go with it actually. And so, I have a followup question.
I think last a couple of quarters ago we talked about maybe 30% of your doctors are using a single clamp method. And, I guess I assumed that maybe we'd move further down the curve there.
Can you give us an update on that?
David Drachman
Right now, from what we're seeing, the single clamp usage has normalized. We don't see any trends, any significant trends toward further movement from centers to a single clamp approach.
Operator
(Operator Instructions). Your next question comes from Larry Haimovitch – HMTC.
Larry Haimovitch – HMTC
Dave, question on the minimal invasive market. It's grown some, but I think overall we would all agree that it hasn't grown as well as we might have all hoped.
Is the combination procedure that will be kicked off with deep (inaudible) really the key to get that market growing, to get the EPs and the cardiac surgeon working were closely together in overtime really develop a collaboration that results in that market really becoming as far in growth market?
David Drachman
Good question Larry. I think that is the key catalyst and a very large opportunity.
However, just stepping back, remember we started off with pulmonary vein isolation and GP ablation and left atrial appendage exclusion was our primary procedure for minimally invasive. The first publication that really came out and demonstrated results for a full left atrial compartmentalization procedure by Jimmy Edgerton, for example was fairly recent.
So, it’s really through 2009 when we released products like Coolrail’s and ORLab Systems that physicians began to adopt a more comprehensive ablation approach that would be more indicated to where patients with persistent and long standing persistent atrial fibrillation. So our minimally invasive thesis is depended upon (inaudible) segmentation.
And we really haven’t had the tools and the procedures to execute that strategy until fairly recently. And now with the hybrid procedure, we think that’s the most comprehensive ablation and mapping procedure and should yield the best results in the more chronic long standing persistent patients.
And again those growing number of patients that have failed catheter ablation procedures.
Operator
Your next question comes from Charley Jones - Barrington Research Associates.
Charley Jones - Barrington Research Associates
You talked about referencing the Biosense Webster data, which I believe generated efficacy rates above 59% globally and 40% in the U.S relative to drugs of about 17. Can you discuss what data from that trail are you planning to reference?
And then a follow-up question on your hybrid procedures, will doctors kind of globally be using an SMS line, that's similar to what Natalie was doing or is this going to be freedom for them to do what they want?
David Drachman
Charley I apologize with you, could you repeat the first part of you question please.
Charley Jones - Barrington Research Associates
You talked about referencing Biosense Webster data and which I believe generated 59% efficacy globally, 40% in the U.S. relative to 17% efficacy.
Could you discuss what type of data you've planned to reference from that trail? Then the second question was related to whether or not the doctors will be doing an SMS line similar to what Natalie did in Biosense Webster trail and your hybrid deep trail.
David Drachman
The Biosense Webster data that we have got no consent for FDA to reference filled with their ThermaCool NaviStar product and FDA basically wants to reference bench and pre-clinical data as part of the approval process of our IDE because the ThermaCool is one of the products that is called out in the clinical procedure. So we've gotten a consensus from Biosense Webster for FDA to reference certain files because they've requested bench and animal testing on the ThermaCool Navistar product as a part of our submission.
Charley Jones - Barrington Research Associates
A correction there, the question is relating to the (Paponi), not Natalie.
David Drachman
Well, in terms of the SMS lesion we have plans in our hybrid procedure, the Deep AF protocol calls for both a left atrial mitral valve lesion as well as a right atrial SMS lesion. So we do plan to have both left atrial SMS and right atrial SMS ablation and a Deep AF clinical procedure.
Operator
There are no further questions at this time. I would now like to turn the call over to Mr.
David Drachman for closing remarks.
David Drachman
Thank you once again for joining us on the call today. We look forward to talking with you in the near future.
Thank you very much.
Operator
Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a great day.