U.S. Markets closed

Edited Transcript of CSII earnings conference call or presentation 30-Oct-18 8:45pm GMT

Q1 2019 Cardiovascular Systems Inc Earnings Call

ST. PAUL Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Cardiovascular Systems Inc earnings conference call or presentation Tuesday, October 30, 2018 at 8:45:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jack E. Nielsen

Cardiovascular Systems, Inc. - Senior Director of Corporate Communications & IR

* Jeffrey S. Points

Cardiovascular Systems, Inc. - CFO

* Rhonda J. Robb

Cardiovascular Systems, Inc. - COO

* Scott Raymond Ward

Cardiovascular Systems, Inc. - Chairman, President & CEO

================================================================================

Conference Call Participants

================================================================================

* Danielle Joy Antalffy

Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices

* David Joshua Saxon

Needham & Company, LLC, Research Division - Associate

* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

* Malgorzata Maria Kaczor

William Blair & Company L.L.C., Research Division - Research Analyst

* Mathew Justin Blackman

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to Cardiovascular Systems Fiscal 2019 First Quarter Earnings Conference Call. (Operator Instructions)

Jack Nielsen, Vice President, Investor Relations and Corporate Communications, you may begin your conference.

--------------------------------------------------------------------------------

Jack E. Nielsen, Cardiovascular Systems, Inc. - Senior Director of Corporate Communications & IR [2]

--------------------------------------------------------------------------------

Thank you, Christine. Good afternoon, and welcome to our fiscal 2019 first quarter conference call. With me today are Scott Ward, CSI Chairman, President and Chief Executive Officer; Rhonda Robb, Chief Operating Officer; Jeff Points, Chief Financial Officer; and Dr. Ryan Egeland, Vice President of Medical Affairs.

During this call, we will make forward-looking statements. These forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding CSI's future financial and operating results or other statements that are not historical facts. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise.

We will also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results.

I will now turn the call over to Scott Ward.

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Jack. Good afternoon, everyone, and thank you for joining us today. I am very pleased to report that CSI delivered a strong first quarter. Year-over-year revenue growth of 13% is the strongest we have experienced in the past 6 quarters and is consistent with our fiscal year 2019 annual guidance.

We are driving market-leading performance with orbital atherectomy, and we are executing on many of the key initiatives that will accelerate our growth over the next several years.

Our first quarter reflects continued success in our core atherectomy franchises, incremental growth from international sales of orbital atherectomy devices and new revenue contributions from our emerging product pipeline. Our domestic revenue grew 11% in Q1, consistent with our expectations. Peripheral grew in the upper single digits, and coronary grew approximately 20%.

We completed the full-market launches of OrbusNeich coronary balloons and ZILIENT guidewires in August, and we are encouraged by the early response from the market. The 1.0-millimeter Sapphire II coronary balloon is the smallest approved angioplasty balloon in the U.S., and we are experiencing strong demand for this product and the other OrbusNeich balloons as well as our ZILIENT guidewires. In fact, the Sapphire II represented about 33% of our first quarter angioplasty balloon sales. Finally, our recently announced international distribution agreement with OrbusNeich is progressing well. We are making solid progress in our efforts to introduce orbital atherectomy worldwide.

In September, we announced the first peripheral orbital atherectomy procedure outside the United States. And in the coming weeks, we anticipate announcing the first peripheral atherectomy procedures performed in Europe as well as the first international coronary atherectomy procedures performed in collaboration with OrbusNeich.

In summary, we begin fiscal 2019 with a solid performance, and we enter Q2 with momentum and confidence. CSI delivered double-digit revenue growth, supported by continued strength in peripheral and coronary atherectomy and supplemented with revenue from international markets and new products. In addition, we continue to make strong progress on the execution of key operating objectives in manufacturing, product development and clinical research. Rhonda will address some of these achievements in a few moments.

I will now ask Jeff Points to discuss our Q1 financial results. Jeff?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Scott, and good afternoon, everyone. I will now discuss our first quarter financial results in more detail. First quarter revenue of $56.3 million represented a 13% increase compared to last year. In total, we sold over 18,000 devices during the quarter, generating 90% of revenues. Worldwide Coronary revenue increased over 30% to $15 million. Worldwide coronary revenue includes revenue from our OUS distribution partners and the full-market launch of OrbusNeich coronary balloons. In the U.S., coronary units sold increased nearly 19%, partially offset by a low single-digit ASP decline. Worldwide peripheral revenue increased 8% to $41.2 million. Worldwide peripheral revenue includes revenue from an initial stocking order with OrbusNeich and the full-market launch of ZILIENT peripheral guidewires. U.S. revenues in our hospital side of service grew 8%, while office-based lab revenue increased 7%. We continued to secure attractive long-term contracts that include volume-based discounts, particularly in the office-based lab setting.

Similar to previous quarters, our domestic peripheral business experienced a mid-single-digit ASP decline. As we've demonstrated the last several quarters, we continue to maintain strong gross margins, even as we offer more competitive pricing to select high-volume accounts.

International revenues for the quarter totaled $1.3 million as we continued to expand our launch in Japan and also completed a stocking order with OrbusNeich.

Gross profit margin remained very strong at 81.2%. Compared to the prior year, manufacturing efficiencies and product cost reductions more than offset the impact of lower domestic ASPs. However, increased international revenues and the full-market launch of coronary balloons and peripheral guidewires led to a minor decline in overall gross margin.

Operating expenses of $48.7 million increased $6.4 million or about 15%. R&D expenses associated with planned new product development and enrollment in the ECLIPSE clinical trial increased 18%. As we indicated at our Analyst Meeting in July, we plan to continue to significantly invest in product and clinical initiatives to broaden our product offering, expand the use of orbital atherectomy and drive long-term value.

SG&A increased about 15%. Higher Q1 SG&A expenses were anticipated and increased due to several factors. Q1 expenses reflect the full cost of our 85 clinical specialists, only about half of which were onboard in the first quarter of last year; the timing of certain items, such as the TCT conference, which was held in September this year; and initial investments for our international expansion. For the remainder of fiscal 2019, we plan to grow revenue at a faster rate than SG&A.

First quarter net loss was $2.9 million or a loss of $0.09 per share.

Adjusted EBITDA remained positive at $1 million.

With a cash balance of $113 million, no long-term debt and a line of credit in place for borrowings up to $40 million, we continue to maintain financial flexibility.

I will now discuss our annual guidance and provide some color on our fiscal second quarter. First quarter financial results were in line with our expectations. So today, we are reiterating the fiscal year guidance we introduced in July. Specifically, we forecast the following for fiscal year 2019: revenues in the range of $240 million to $250 million, representing growth of 11% to 15%; gross profit of about 80%; net loss equal to 1% to 2% of revenues; and positive adjusted EBITDA. For our second quarter, we anticipate a year-over-year growth rate -- revenue growth rate similar to what we experienced in Q1. I will also note that SG&A expenses are expected to decline as a percent of revenue in Q2. As I mentioned previously, we anticipate revenue growth to outpace SG&A growth for the remainder of fiscal 2019. Also keep in mind that due to the seasonality in our business cycle, profitability is typically lowest in first quarter and tends to improve throughout the year. We would anticipate a similar progression in the current fiscal year.

That completes my prepared remarks. I'll be happy to answer questions during Q&A.

Rhonda will now provide commentary on our commercial and clinical developments. Rhonda?

--------------------------------------------------------------------------------

Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [5]

--------------------------------------------------------------------------------

Thank you, Jeff. I would just like to echo Scott and Jeff's comments regarding our revenue growth in Q1. It is so exciting and motivating for our entire CSI team to demonstrate that we are achieving our key milestones and that our strategy is producing early success. This afternoon, I'll share some additional details on our progress in peripheral and coronary franchises.

And in peripheral, we enjoyed continued growth. During the quarter, we recorded over $1 million in sales of our new Diamondback 360 extended length, otherwise known as our radial device. This is a terrific example of our commitment to innovation in our core atherectomy business. As you recall, this product allows the physicians the ability to treat above-the-knee lesions using a radial access point to access the vasculature through the wrist. When using Diamondback, physicians now may use tibial, pedal, radial or traditional femoral access routes for treating peripheral lesions. As you might assume, accessing the vasculature through the blood vessels in the wrist requires a very small device. And due to Diamondback's low 5-French profile and unique orbital mechanism of action, we have a significant competitive advantage here. Longer term, we remain optimistic about the value proposition to enable greater efficiencies and patient workflows given the ability to ambulate and discharge patients faster and potentially reduce length of stay. The introduction of new radial support products from CSI and others is expected to help with the adoption of this product. In coronary, for example, radial access is now used in 40% of PCIs in the United States. So we're optimistic that peripheral procedures could reach this level of adoption as additional support products become widely available.

To that end, we plan to launch our radial-length exchange catheter in December. Today, the longest exchange catheters are about 150 centimeters. Our 200-centimeter VIPERCATH XC will enable easier wire exchanges and should provide access for more radial cases.

Also in peripheral, I'm pleased to share that we've submitted our 510(k) application to the FDA for the exchangeable peripheral platform. This new platform is designed to serve up to 50% of peripheral patients that suffer from multivessel disease throughout their legs. This important innovation is unique in that it facilitates the utilization of multiple crowns during a single case, where today, an operator would need to pull an entirely new device to treat a second lesion in a different part of the anatomy. The exchangeable platform will enable both patients and economic benefits, enabling potentially more patients to be effectively treated in a single setting as well as a more cost-effective solution for the practice. We're planning to commercialize this product in late fiscal 2019.

In coronary, we achieved strong domestic atherectomy growth due to continued recognition in the field on the value of vessel preparation for complete revascularization, from CSI product innovation and from continued improved sales execution. We continue to find that our dedicated coronary reps and clinical specialists are succeeding by focusing on high-volume coronary centers of excellence. We pride ourselves on the clinical expertise of every CSI employee in the field by leveraging our dedicated coronary reps and specialists who are leveraging this competitive advantage to our benefit. We remain uniquely qualified to provide procedural support to physicians treating high-risk coronary patients.

On the product front, we continue to gain market share due to the increased adoption of the Diamondback 360 with the new GlideAssist feature. GlideAssist provides a slower speed of 5,000 revolutions per minute, making a significant difference in maneuvering around tortuous and angulated anatomy and improves lesion access in complex PCI patients. The result is smoother tracking with the ability to remove and reposition the crown of the device. And the feedback we're receiving from our physicians is uniformly positive, and we look to further build on our leadership position in coronary atherectomy with this important product innovation.

Turning now to our investments in medical evidence. Our ECLIPSE study, with a targeted enrollment of 2,000 patients, is designed to evaluate vessel preparation with the Diamondback 360 compared to conventional balloon angioplasty technique prior stent implantation for the treatment of severely calcified coronary artery lesions. We currently have over 550 patients enrolled and remain on track to complete enrollment in the study on schedule in 2020.

On the peripheral side, Dr. Jihad Mustapha shared 2-year outcomes of our LIBERTY 360° study at the 2018 Amputation Prevention Symposium in August. Patient study continued to show high freedom from major amputation in all Rutherford classifications at 2 years. In addition, primary amputation may not be necessary for the most complex Rutherford 6 patients as evidenced by -- at 2 years by high freedom from major amputation, improvement in quality of life and improvement in overall Rutherford classification. He also noted that a sub-analysis of LIBERTY 360° patients treated specifically with CSI orbital atherectomy did even better with a higher freedom from major amputation across all Rutherford classes, including a freedom from major amputation of 88.5% in the most complex patients. Until now, physicians have had limited evidence regarding the broader use of endovascular devices for peripheral arterial disease, and data from our LIBERTY 360° really does provide compelling evidence that peripheral interventions have a positive impact on patients suffering from mild to severe peripheral arterial disease and even in critical limb ischemia.

The looming epidemic of peripheral arterial disease is attracting more and more attention, and we believe that a broad coalition of policymakers, patient advocacy groups, medical societies and industry initiative will further the progress to build awareness over the benefits of revascularization to help prevent unnecessary amputations. So it's encouraging to see that the CLI Global Society recently published a manuscript in the Journal of the American Heart Association illustrating both the clinical and economic benefit of revascularization of peripheral arterial disease patients versus amputation. The manuscript reviewed over 72,000 real-world Medicare patients and found that revascularization-first strategies led to better outcomes versus the amputation-first approach. Compared to revascularization, primary major amputation resulted in shorter survival, higher risk of subsequent major amputation and higher health care cost. Overall, the study conclusions underscore our belief that revascularization-first approaches for CLI patients lead to better and -- better clinical and economic outcomes.

And in September, which was Peripheral Arterial Disease Awareness Month, Congressman Payne from New Jersey and Congressman Paulsen from Minnesota sponsored a briefing on Capitol Hill with the CardioVascular Coalition, or CVC, with the objective of raising awareness regarding the economic and human toll of peripheral vascular disease. We are collaborating with CVC to advance to the next step: establishing an intergovernmental working group on PAD, and ultimately, proposing legislation to minimize unnecessary amputations. We are very optimistic that the momentum from these coalitions will ultimately translate into increased awareness and treatment for peripheral arterial disease patients with critical limb ischemia.

Turning to international. As Jeff and Scott indicated, we made significant progress in Q1 on our international expansion. As you recall, we launched in Japan last February, and we continue to train physicians and gain market share in Japan. The training of physicians and the enrollment of new centers in Japan requires physician peer-to-peer training and will result in a geometric rate of adoption over time. In mid-July, we announced an exclusive international distribution agreement with OrbusNeich that enables us access now to over 60 countries outside the United States and Japan. In September, we announced our first international peripheral case in Hong Kong, only 2 months after signing the agreement. OrbusNeich shares our passion, customer focus and pace to expand the therapy to patients with peripheral and coronary artery disease. Internally, we continue to develop a scalable medical education infrastructure for our international expansion. Our plan is to replicate the high-quality physician training that we provide to U.S. physicians to our future international partners. Essentially, we will export our training expertise to physicians worldwide. We can do this in the same way we have succeeded domestically leveraging exceptionally qualified proctors to share their expertise with their peers. By the end of Q2, we expect to have approximately 40 international physicians trained on the suborbital atherectomy.

Supporting these international expansion plans, in September, we received positive news from our European notified body that it would renew our CE Mark certification for peripheral orbital atherectomy for another 3 years. We expect commercial peripheral cases eminently. Next up, we will pursue CE Mark for our coronary product line and look to approval in the back half of this fiscal year.

That concludes my remarks. And before we open up the call for your questions, Scott will now provide his closing thoughts.

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [6]

--------------------------------------------------------------------------------

Thank you, Rhonda. Well, as many of you know, on July 31, we hosted our first Analyst Day. And during this meeting, we introduced our strategies to build on our strengths and broaden our value streams with growth drivers from new products, new markets and new geographies. We highlighted our investments in research and development, provided an overview on our new product pipeline and we outlined our international expansion plans.

Following the Analyst Meeting, we have been actively sharing our strategic vision with many of our key stakeholders. Since August 1, we have met with over 100 of our key physicians, and we are pleased that our focus on complete revascularization for complex coronary and peripheral artery disease is really resonating with our customers. We felt that it was vital for our customers to understand the level of commitment we have to their practices and to the patients that they serve, and we want them to know how they can partner with us over the next several years to improve patient outcomes. Most importantly, our physicians were impressed by our commitment to invest approximately $250 million over the next 5 years as we strive to develop 20 new products for the treatment of complex cardiovascular disease. Our level of commitment extends to our continued focus on quality, medical education, providing superior clinical support in the cath lab and an investment in robust medical evidence, supporting the safety, efficacy and economic benefits of orbital atherectomy. We have come away from these initial meetings, both humbled and energized, by the enthusiasm our physicians have for our plans, and we look forward to building and expanding our physician relationships as we execute our strategy and reach more patients.

As I hope you can tell, we are very proud of the meaningful progress we are achieving across our company. Financially, we begin the year on plan and well positioned to achieve our annual guidance. We have a strong management team that is capable of running a much larger company. With the addition of OrbusNeich, we have rapidly executed on our plans to expand our business to new geographic markets. Our new product launches are progressing well, including radial access for peripheral atherectomy, the introduction of GlideAssist to enhance coronary atherectomy, the full commercial launch of our coronary angioplasty balloons and our ZILIENT peripheral guidewires. In addition, our R&D teams are working to fill out our product pipeline with exciting new solutions for the treatment of complex cardiovascular disease. Our clinical programs are ahead of schedule, and our sales team is delivering solid growth built upon a strong foundation of exceptional procedure support and clinical expertise. And perhaps, most importantly, our entire organization has remained focused on our mission: to save limbs and save lives every day with purpose and great success. The CSI team is motivated and determined to begin this next chapter as we begin to transform this company from a single-product, single-geography company to being a multiproduct, multinational company focused on the most compelling unmet medical needs in interventional cardiology.

Thank you for your continued support and your interest in CSI. We will now take your questions. So for our operator, Christine, if you would please repeat the instructions. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Mathew Blackman from Stifel.

--------------------------------------------------------------------------------

Mathew Justin Blackman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2]

--------------------------------------------------------------------------------

If I could start, just thinking about the 2Q revenue growth guidance. I think you've said roughly 13% from what you posted here in the first quarter. That does imply a sequential uptick in growth, if you adjust for year-over-year comparison. So can you just remind us of the potential drivers of that implied growth ramp? I assume it's increasing contribution from distributed products and international. But is there anything else you would highlight?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Well, it is actually continued strength from our core business. We do anticipate seeing continued growth in both coronary and peripheral. We will also continue to have incremental revenue coming in now from our international launches as well as the launch of our new products, our wires and balloons in the United States. So, Mat, it really -- our growth in Q2 is really going to continue to come from those primary drivers, making it -- probably not that unlike what we saw in Q1.

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [4]

--------------------------------------------------------------------------------

Yes. And just to add to that, Mat, with the guidance I've provided in July, peripheral, you can plan on kind of that high single-digit growth. Domestic -- peripheral on the domestic coronary side, mid-teens is kind of what we plan on. And then we did guide to $7 million to $8 million for international and OEM products, so all that's still on track with what we guided to back in July.

--------------------------------------------------------------------------------

Mathew Justin Blackman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [5]

--------------------------------------------------------------------------------

Okay, great. I appreciate that, Jeff. And just sort of following on that, acknowledging it's still early days, but can you provide any metrics, qualitative or quantitative, that can help us frame how adoption of the distributed balloon and guidewire products are tracking so far?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [6]

--------------------------------------------------------------------------------

Yes. We did about $0.5 million in the second quarter. That was up from -- I'm sorry, in the first quarter. That was up from fourth quarter where we did about $350,000. With just launching that, I guess international sales meeting back in August, we're a little uncertain how that will continue to ramp, but it has gone well in the first couple of months here. So we're off to a great start.

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [7]

--------------------------------------------------------------------------------

Yes. I suppose, Mat, qualitatively, I would add to that, that as we launch these products, there is kind of 2 categories where we'll see success. The first is just day-to-day use of the product in our procedures where we have opportunity to introduce, let's say, our guidewires and our balloons. The second is as we go back and we begin working through contracting with both -- some of our larger providers as well as some of these very large institutions, that can take a little bit of time. But we're seeing good progress there, and it's progressing about on plan. So we're seeing good adoption of these products across the country. And right now, we feel pretty good about it. The 1.0-millimeter balloon, our Sapphire II balloon, has really achieved pretty strong adoption. I mean, it is the smallest balloon in the marketplace, and a lot of physicians have really appreciated that they can use that balloon in coronaries to almost to use it like a CTO device itself. So the crossability of that device, the ability of physicians to access really difficult lesions using that small balloon has really been great. I would say as well that having access to that device has also probably opened up some cases for orbital atherectomy that we might not have seen in the past. So we're feeling pretty good about how this launch is progressing. We're feeling good about the synergy with the rest of our pipeline and I think the support of our sales channel now on the marketplace.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from the line of Danielle Antalaffy (sic) [Antalffy] from Leerink Partners.

--------------------------------------------------------------------------------

Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [9]

--------------------------------------------------------------------------------

Just to follow up on Mat's question there, so taking an even broader look at the rest of the year. I mean, you guys are facing increasingly difficult comps as we move through the year. And I was just wondering if you could highlight, and sorry to make you rehash some of this. But what are the drivers that are going to essentially have to drive -- if you're comp adjusting, drive pretty significant growth acceleration as we move through the year? Maybe remind us sort of when new product launches are hitting? Or is there something we need to consider as we look back at the latter half of last year that makes it a more difficult comp for whatever reason? Can you maybe walk us through the math there a little bit? That would be helpful.

--------------------------------------------------------------------------------

Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [10]

--------------------------------------------------------------------------------

Yes. Danielle, thanks for the question. I can take it. Several factors are going to continue to drive growth, and we're going to continue to see strong sales management and execution and leveraging our clinical specialists. They're showing anticipated return. We're continuing to leverage training and education investments that are building physician-user confidence and interest in orbital atherectomy. ECLIPSE is continuing to enroll and building interest at very large academic medical centers, and international will continue to contribute as well as we continue to launch throughout Asia, and in particular, in the near term in Western Europe. So we're looking forward to those things. We are going to continue to launch additional OrbusNeich products, in particular. A new microcatheter is expected over the course of the next several months. And as I said in my comment, the ViperWire Flex as well as exchangeable peripheral platforms will be coming as well. So it's really a multifactorial program. It is going to continue to support that growth, but those are just a few of the things that I would highlight there.

--------------------------------------------------------------------------------

Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [11]

--------------------------------------------------------------------------------

Okay. And all of those things are -- should drive growth acceleration? So like if I think about the clinical specialists, they're going to continue to ramp as we move through the year, international, and new products from OrbusNeich?

--------------------------------------------------------------------------------

Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [12]

--------------------------------------------------------------------------------

Yes, absolutely.

--------------------------------------------------------------------------------

Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [13]

--------------------------------------------------------------------------------

Got it, got it. Okay. One...

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [14]

--------------------------------------------------------------------------------

Danielle, and maybe just to -- sorry, just to kind of address that maybe just a little bit more quantitatively and quickly is if -- as we've talked about before as we look at this year, we expect to add from international sales as well as our new products something on the order of $7 million to $8 million of new revenue, and then we continue to expect coronary growth in that -- the mid-teen level and our peripheral business to grow in those high single digits. So I think when you talk about the math, I mean, that, I think, is the -- that's how the addition -- that's how the math works, I guess.

--------------------------------------------------------------------------------

Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [15]

--------------------------------------------------------------------------------

Yes, got it. Okay. And then one quick follow-up on the peripheral side of things. And Rhonda, you touched on LIBERTY 360°, and I thought the data that we saw in August was really compelling. I mean, are we at a point yet where some of this LIBERTY 360° data could be guideline changing?

--------------------------------------------------------------------------------

Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [16]

--------------------------------------------------------------------------------

Yes. I think we've already seen it have an impact on guidelines. And what you saw in the 2016 ACC/AHA guidelines was really kind of the first call for a multidisciplinary assessment of amputations before they occur, so I think we've seen some early signs of that. SCAI published updated guidelines recently as well that I think were more favorable. And then as I said in my comments, the paper coming from the Amputation Prevention Summit as well as the paper that was just published in the American Heart Journal both also support. And then we're going to be having economic data from LIBERTY 360° coming in about the Q3 time frame as well. So there's a lot of building evidence around this, and we would expect that the guidelines would continue to follow suit in terms of stronger recommendation for revascularization strategies.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Your next question comes from the line of Bob Hopkins from Bank of America.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [18]

--------------------------------------------------------------------------------

Oh, great. Can you hear me okay?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [19]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [20]

--------------------------------------------------------------------------------

Great. So a couple of quick things. First, just to be clear on the guidance for the second quarter. I know you gave a growth rate, but the consensus estimate, I think, is about $59.6 million or $7 million, which is a little over 13% growth. So should I read your comments about growth guidance in Q2 to say that you're basically comfortable with where consensus is today?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [21]

--------------------------------------------------------------------------------

Yes. We've given guidance for the year, Bob, of 11% to 15%. We just finished at 13.3% growth, and the comment that I made was that we expect second quarter growth to be very similar to that. So I think you're right on track.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [22]

--------------------------------------------------------------------------------

Okay. And then also, just want to make sure -- you guys have a lot going on. Of all the things you talked about at the Analyst Day in terms of new products and launches and time lines and relationships and all that, is everything on track? Or is there -- any of those time lines that are different from what you talked about in July?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [23]

--------------------------------------------------------------------------------

All right. Now I think everything is on track, and thank heavens for that. It's only been a few months, so things are going pretty well right now, Bob. I think we feel pretty good about it.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [24]

--------------------------------------------------------------------------------

And then the last question is a little bit bigger picture. But obviously sometime soon, you're going to have a new drug-coated balloon entering the -- or the first-ever drug-coated balloon entering the below-the-knee market with Becton, Dickinson advancing the Bard program. The last time we had drug-coated balloons done at the SFA, it was a little bit disruptive, at least temporarily. So Scott, can you maybe, or Rhonda, comment on how you see the below-the-knee launch from Becton potentially unpacking your -- kind of your core peripheral business, both short term and long term, especially in light of what we saw with the last launch when it was in the SFA?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [25]

--------------------------------------------------------------------------------

Yes. I think it's a good question, Bob. And you're right. I think anytime a new product comes into the market like that, we do see some disruption because of trialing. We haven't -- we don't really anticipate that to occur below the knee, mainly because there's such a high prevalence of severely calcified lesions below the knee. The vast majority of these patients, unfortunately, have fairly severely calcified lesions. So most of our business, as you know, we're very strong below the knee, and that's largely because physicians use our product as an atherectomy device to not only prepare those vessels but also just to restore the lumen and the outflow. So we anticipate that, that will continue. I believe actually that this time around, we might see a bit of a tailwind coming from the launch of drug-coated balloons in the segment, mainly because one of the things we did see above the knee was a lot more patients being referred for intervention, principally because podiatrists and other primary care physicians were encouraged by the fact that there may be nothing left behind, that indeed their patients could be treated with a drug-coated balloon or atherectomy plus a drug-coated balloon and would not receive a stent. And as a result, we saw probably a little bit of an uptick in the total number of patients coming to cath labs. If that same thing happens and we see more below-the-knee patients being driven to cath labs, we're certainly going to get our share of those patients that have severely calcified lesions. So it remains to be seen, and we're still kind of uncertain of the timing, and we haven't seen the data yet. So it's a little bit hard to comment on the specifics, but we'll probably know more at our next call and be able to give you a little bit more specifics on it at that time.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [26]

--------------------------------------------------------------------------------

How about with Eluvia launching into the marketplace, is that something that could help or maybe be a short-term headwind to the business because that's obviously now, at least initially, in the marketplace?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [27]

--------------------------------------------------------------------------------

I mean, I think -- once again, I mean, Eluvia is another drug-coated stent there. It isn't a new category like a drug-coated balloon below the knee would be. So I think that that's relevant in the DES segment for peripheral, but don't I think it really changes parameters much for us. I think the patients that are candidates for our drug-eluting stent will receive a drug-eluting stent today, and I'm not sure that the presence of Eluvia would significantly change practice. Eluvia may gain share, but I don't think it's going to change practice and that we're going to see more patients receive a stent than what had in the past.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from the line of Mike Matson from Needham & Company.

--------------------------------------------------------------------------------

David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [29]

--------------------------------------------------------------------------------

This is David Saxon on for Mike. Just looking at gross margin, it was higher than we were modeling. And I hear your comments around manufacturing efficiencies and kind of lowering production costs. But I guess just since guidance kind of implied the slight decrease in gross margin, what kind of factors should we be thinking about, I guess, through the remainder of the year?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [30]

--------------------------------------------------------------------------------

As I stated in the guidance, we do expect margins of about 80% for the year. I also mentioned that we do have mid-single-digit price erosion in our peripheral market, largely because of the contracting process that we've gone through in the OBL space. So I think you'll continue to see mid-single-digit price erosion in the peripheral market. That's something we plan on and we forecast. So I think you will see some impact on that as we move throughout the year, but I do think margins will remain very effective -- very attractive throughout the rest of the year, and we've maintained a focus on continuing to reduce cost at a faster rate than we see ASP erosion. So I think you will see the margin stay fairly consistent, might come down slightly throughout the year, but 80% for the year is still reasonable.

--------------------------------------------------------------------------------

David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [31]

--------------------------------------------------------------------------------

Okay. That's helpful.

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [32]

--------------------------------------------------------------------------------

As we've -- yes, Mat (sic) [David], this is Scott. As we've talked about before, just a reminder that as we think about our cost of goods sold or as you do, looking at our labor, burden and materials, our COGS is dominated by burden. And so more than half of our cost of goods sold is related to burden. And as a result, as we continue to drive volumes, we continue to benefit from that directly in terms of margin. Now our teams are also very focused on reducing material cost and doing a great job at that, but we are in a rather unique position to see continued improvement in COGS as we drive volume.

--------------------------------------------------------------------------------

David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [33]

--------------------------------------------------------------------------------

Okay. That's helpful. And then I guess just for the radial device, are you getting some sort of price premium for that? And I guess how has that been received by the market?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [34]

--------------------------------------------------------------------------------

We are getting a small price premium for that. It's been very well accepted in the marketplace. And like Rhonda talked about, it's been a great success so far.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

Your next question comes from the line of Jayson Bedford from Raymond James.

--------------------------------------------------------------------------------

Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [36]

--------------------------------------------------------------------------------

Just a couple quick ones. Is there any way you could quantify the size of the stocking order to OrbusNeich? And also, I'm just kind of curious as to the revenue contribution from Japan.

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [37]

--------------------------------------------------------------------------------

No. We won't -- we wouldn't be providing information on the stocking order at OrbusNeich. And in terms of the -- of Japan, Jeff?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [38]

--------------------------------------------------------------------------------

No. We talked about $1.3 million in international revenue, Jayson. About $250,000 of that was deferred revenue related to Japan. And we did -- like we said, we did do a stocking order to OrbusNeich to get started for the year, but $7 million to $8 million is still reasonable for the OEM products and international, and we're -- that's still a good estimate to go on. That's -- we're still on track for that.

--------------------------------------------------------------------------------

Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [39]

--------------------------------------------------------------------------------

Okay. And just in that -- of that $7 million to $8 million, basically you recognized $1.8 million of it this quarter. Is that fair? If I just add the...

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [40]

--------------------------------------------------------------------------------

Yes. $1.8 million or $1.9 million, of course with international revenue, it may not be completely linear. It could be a little bit lumpy throughout the quarters, but we are off to a good start with that.

--------------------------------------------------------------------------------

Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [41]

--------------------------------------------------------------------------------

Okay. And just internationally, you mentioned the case in Korea, the upcoming cases in Europe, wondering if you could just comment on the reimbursement environment in those geographies.

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [42]

--------------------------------------------------------------------------------

Yes, sure. I think to really address our strategy as we look at these markets outside the United States is we're really focusing on taking market share. So we're going to existing institutions that are already using atherectomy for the treatment of their coronary and peripheral disease patients, and we're really targeting those. And so we're addressing markets where reimbursement is not an issue, and we're addressing patient populations and accounts that have already addressed reimbursement and where basically where we can sustain good pricing. The pricing is different, and there is, obviously, different reimbursement schemes and methods around the world. But really, by focusing on existing accounts and those that have already adopted the technology, we can rapidly get into those markets and drive growth.

--------------------------------------------------------------------------------

Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [43]

--------------------------------------------------------------------------------

Okay. Just a couple others. In terms of the accounts added, can I assume that it was kind of similar in trend to the last couple of quarters? Was there any material deviation, either up or down, in the number of new accounts added?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [44]

--------------------------------------------------------------------------------

Yes. Normally, Jayson, and historically, you've seen between 30 and 40 accounts with both franchises. This quarter was a little bit different. On the coronary side, we had 26; and on the peripheral side, we had 53. Keep in mind, when we consider a new account, we count a new account when they cross over and do 6 cases. So some of this could be dependent on timing as well, if somebody had done 4 or 5 cases, but we did have a little bit of a switch in how many new accounts we had. Keep in mind that reorder revenue in total remained at about 99%, so we are going deep into our existing accounts as well as opening new accounts as well. So hopefully, that provides some more color for you.

--------------------------------------------------------------------------------

Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [45]

--------------------------------------------------------------------------------

Yes. That was very helpful. And just lastly, the bump in SG&A, I think you explained it well. Did you add any to the sales team? Or do you anticipate any kind of material adds in fiscal '19?

--------------------------------------------------------------------------------

Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [46]

--------------------------------------------------------------------------------

Yes. We're still at 200 direct sales people, 85 clinical specialists. The biggest part of the increase quarter-over-quarter was the clinical specialists we added at this time last year, but we -- that number has remained consistent.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Our last question comes from the line of Margaret Kaczor from William Blair.

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

So the first one for me is just to follow up on some of the commentary on the OBL volume peripheral. I think I heard in there 7% growth. So maybe can you compare that to what you've seen over the last few quarters because it seems like it's accelerating or maybe stabilized? And then can you just give us context sort of whether that's revenue diminished?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [49]

--------------------------------------------------------------------------------

The OBL growth has been consistent in terms of its percentage of our overall peripheral business, so we've seen that continue to be really quite consistent. And the strategies that we've deployed there in terms of our clinical support, our contracting, and frankly, the -- providing access, radial access, have proven to be very successful. And so we're seeing actually quite consistent performance in the OBLs at this point, Margaret.

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

Okay. And then since you've mentioned the radial access product right there, can you give us any kind of metrics on how that new access route or the product helped -- has helped wrap maybe push deeper within accounts? And I don't know if that’s relative to the value proposition as that may add to those accounts or even kind of more specifics of how it helps impact sales?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [51]

--------------------------------------------------------------------------------

Yes. So that's really a great question because it does help us go deeper into peripheral accounts, both in OBLs and in hospital settings, and because we have a very unique mode of action and our device has such a low profile, really the only device that can reach the above-the-knee lesions and where we can perform atherectomy through the radial access. And so what that really does is it changes the patient flow in a lot of these cath labs. Because it's much safer and because patients can ambulate more quickly, a lot of times both OBLs and hospitals find that they can be more efficient, and it allows them, perhaps, to do or to treat more patients every day and to do so in a safer and effective manner. So it does certainly -- it is a very important form of competitive advantage for us, and it does help us to go deeper. I think what we're also seeing is that as coronary accounts, these being large institutions that had heavily adopted the radial approach for coronary indications, are rapid adopters now of using the radial approach for their peripheral procedures. So it's a real competitive advantage for us. I think we have a limitation here in that we don't -- the support devices have not yet fully come through, and we're somewhat dependent on others in the marketplace, Terumo and other companies, to be supplying sheets and the longer wires and even longer balloons that can support peripheral procedures from the radial site of access. As those support products -- as more of those support products become available, I think we'll continue to see increased adoption of the radial route of access across the peripheral market. I should point out as well that we're not standing still on that. And as we talked about at the end of July, we, too, are going to start developing and launching some of these support products that can facilitate that radial site of access.

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [52]

--------------------------------------------------------------------------------

Okay. And just kind of a last question to wrap up. As we look at the other new products that you guys have focused on and referenced, is it right or wrong to maybe think about it from a quarterly run rate perspective how much it can contribute individually? And how should we think about this progressing over the next year, 2 years, 3 years, pick your time frame?

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [53]

--------------------------------------------------------------------------------

Margaret, I -- we -- I couldn't quite understand the very beginning of your question. Is your question related to radial access?

--------------------------------------------------------------------------------

Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [54]

--------------------------------------------------------------------------------

No. So just all of the -- all the other products that you guys had referenced. So the microcatheter, the ViperWires, et cetera as those kind of layer on over the next several quarters.

--------------------------------------------------------------------------------

Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [55]

--------------------------------------------------------------------------------

Yes. And I think as Rhonda addressed in her commentary, we certainly do expect as those products roll out into the field that we'll see growth related to those, and I think a good example of that is the GlideAssist feature, which was rolled out into our coronary segment. We saw some rather quick adoption of that actually in Q3 and Q4, and now we see GlideAssist really as an innovative feature that's driving our growth in coronary. So as we roll out ViperWire, I think ViperWire will be another example of an improvement in the coronary space as well that will continue to make our device easier to use, and it'll enhance the ability to access some of these more difficult lesions. But I think what all of these improvements do is they help us to go deeper in our existing accounts, so these are really for physicians who have already been trained and educated. By now providing them with these product enhancements, they can immediately see that this helps them access lesions more effectively, and it allows them to do procedures faster. So yes, I think as each of these come out, we're going to continue to see synergy, and we'll continue to see orbital atherectomy adoption increase. I hope that addresses your question.

Okay. All right. Well, that was pretty good. Okay. Thank you, Christine. And with that, we will conclude today's call. So thank you, everyone, for your continued interest in CSI. And as always, we look forward to updating you on our progress next quarter. Thank you.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.