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Edited Transcript of CSII earnings conference call or presentation 5-May-20 8:30pm GMT

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Q3 2020 Cardiovascular Systems Inc Earnings Call ST. PAUL May 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Cardiovascular Systems Inc earnings conference call or presentation Tuesday, May 5, 2020 at 8:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jeffrey S. Points Cardiovascular Systems, Inc. - CFO * John E. Nielsen Cardiovascular Systems, Inc. - VP of IR & Corporate Communications * Rhonda J. Robb Cardiovascular Systems, Inc. - COO * Scott Raymond Ward Cardiovascular Systems, Inc. - Chairman, President & CEO ================================================================================ Conference Call Participants ================================================================================ * Brandon Vazquez William Blair & Company L.L.C., Research Division - Associate * Brooks Gregory O'Neil Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst * Christopher Thomas Pasquale Guggenheim Securities, LLC, Research Division - Director and Senior Analyst * Danielle Joy Antalffy SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst * Jayson Tyler Bedford Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst * Suraj Kalia Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Cardiovascular Systems, Inc. Fiscal Year 2020 Third Quarter Earnings Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to your speaker today, Jack Nielsen, Vice President, Investor Relations and Corporate Communications. Please go ahead, sir. -------------------------------------------------------------------------------- John E. Nielsen, Cardiovascular Systems, Inc. - VP of IR & Corporate Communications [2] -------------------------------------------------------------------------------- Thank you, Ian. Good afternoon and welcome to our fiscal 2020 third 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, Chief Medical Officer. Approximately 30 minutes ago, we issued a press release announcing our fiscal 2020 third quarter results. You may find a copy of this release on the Investor Relations section of our corporate website. Here, you may also find an earnings presentation that includes additional details on our performance and outlook. In a few moments, CSI management will discuss our third quarter, which ended on March 31, 2020. After our prepared remarks, we will entertain your questions. During today's 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. In particular, the COVID-19 pandemic has created risks and uncertainties for our business, results of operations, financial condition and prospects, which we will discuss on this call. 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 a useful information for our investors. Today's press 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 hope that you and your families are healthy and that you are successfully navigating through this pandemic. As we have previously disclosed, our financial results in the third quarter were negatively impacted by COVID-19. In January and February, our business was performing in accordance with our plan. However, beginning the week of March 9, our coronary and peripheral cases began to trend downward as hospitals stopped performing elective procedures, personal protective equipment became scarce, patients became reluctant to keep their appointments, and social restrictions increased absenteeism in OBLs and hospital cath labs. During the period from March 9 to March 31, our average daily caseload decreased approximately 25% versus the prior period. The impact was also amplified due to the timing of the outbreak, which coincided with the end of our quarter, and some of our high-volume customers declined to replenish their inventories at the end of March. As a result, our U.S. revenue was negatively impacted by $10 million to $11 million in Q3, and we finished the quarter with revenue of $61.2 million, representing a 3.4% decrease compared to last year. Worldwide peripheral revenue decreased 6% to $42.6 million and coronary revenue increased 2% to $18.5 million. International revenue increased 26% to $3.1 million, with steady growth in Japan. Our gross profit margin remained strong at 80%. Due to the current uncertainty and volatility, we have withdrawn our guidance for FY '20. But I do want to take a few minutes to frame up the impact of the pandemic on our cases during the month of April and our expectations for the remainder of Q4. Despite COVID-19, our cases have steadily continued during the month of April, while at a much slower pace. Although our April caseload declined 53% compared to last year, we have seen a modest increase in our daily cases throughout the month mainly in the treatment of critical limb ischemia. As we have stated, peripheral is over 70% of our revenue, split approximately equally between patients with critical limb ischemia and those with claudication. Our patients with CLI typically have long calcified lesions below the knee. The most severe of those wounds could include wet gangrene, and intervention typically would not be postponed due to imminent risk of amputation, sepsis and sometimes, death. We expect these cases will continue to be performed but at a slightly reduced rate from our normal pace. Claudicants typically have less extensive arterial disease, which may be more limited to proximal above-the-knee lesions, and these patients experience pain on exertion. Generally, these are elective procedures that can be postponed a few months. As a result, the treatment of claudicants has declined significantly and may not recover much during Q4. However, we do expect that some of these patients will return for care, and this will gradually occur over a 4 to 6-month time frame. Coronary cases contribute about 30% of our revenue, and nearly all of these patients have unstable or refractory angina and are at high-risk to develop acute coronary syndrome. Under normal circumstances, these cases should not be postponed. But clinical decision-making and resource allocation have been altered during the COVID-19 pandemic. It has been widely reported that cardiac catheterization has declined significantly and STEMI activations are down approximately 40%. As a result, coronary cases have declined and have remained depressed throughout the month of April. Although we expect the treatment of severely ill patients with coronary artery disease to resume fairly quickly, we do not expect a rapid recovery in the broader coronary segment in Q4. Rather, we think it is appropriate to assume that our coronary business will gradually recover over the next 6 months. There are many factors that may increase our caseload and revenue in Q4, including the easing of social and government restrictions on elective and semi-elective cases, reduced patient anxiety, increased availability of PPE, sustained cath lab and workforce capacity and improving sales rep access to hospitals to support cases. We expect that hospitals and OBLs will continue to preserve their cash and they will not immediately replenish their inventories. Rather, we expect that our average daily sales will correlate more consistently with procedure volumes throughout our fourth quarter, without larger stocking or replenishment orders that often occur at the end of each fiscal quarter. We have been very proactive in preparing for this crisis, and we are focused on 3 overarching goals: first, to assure our continued ability to serve our customers and support our patients during the outbreak; second, to protect the health and financial security of our employees; and finally, to ensure business continuity. I am very proud of our CSI employees as we have continued to manufacture product and support cases throughout the C-19 outbreak. We have faithfully fulfilled our mission and partnered with physicians to save limbs and save lives despite this terrible pandemic. We are committed to protecting the health and safety of our employees. We are complying with stay-at-home orders and our office-based employees are telecommuting. We have safeguarded our facilities and deployed additional screening and testing protocols to protect our manufacturing and other employees. Our field employees who continue to support cases and work in clinical settings are provided access to personal protective equipment, and they abide by the local requirements stipulated by the health care facilities they serve. We have implemented business continuity plans. We reduced variable spending. I have voluntarily reduced my salary during this uncertain time. And we have taken other actions to assure that the strength and capacity of our business remains intact. We have secured our supply chain and have been running our manufacturing operations at or near full capacity as we have continued to ship product and to assure that we have the inventory required to support the anticipated rebound in procedures during the expected recovery period. We are continuing to invest in R&D, and we have retained all of our employees to assure that we have the strength and capacity required to achieve a rapid and sustained recovery. In a moment, Rhonda will provide additional information regarding our R&D pipeline and commercial progress. But first, I will ask Jeff to provide you with additional details regarding our third quarter financial results and our business continuity plans. Jeff? -------------------------------------------------------------------------------- Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Scott, and good afternoon, everyone. Given the unprecedented nature of current events, during my remarks today, I plan to provide my normal review of our third quarter financial results, outline how we are thinking about Q4 and address our ongoing business continuity plans to make sure that you understand the steps we have taken to assure the financial stability of our business. So looking at Q3, as Scott mentioned, third quarter revenue of $61.2 million represented a 3% decrease compared to last year. In total, we sold over 20,000 atherectomy devices during the quarter, representing a 3% decrease compared to last year. Worldwide peripheral revenue decreased 6% to $42.6 million. Worldwide coronary revenue increased 2% to $18.5 million. The revenue generated in the U.S. and international markets was as follows: Total U.S. revenue decreased 5% to $58.1 million. Domestically, peripheral unit volumes decreased 6%. Domestic coronary revenues declined 2% from last year primarily driven by lower atherectomy unit volumes, partially offset by an increase in revenue from coronary support devices. International revenue increased 27% to $3.1 million. In Q3, gross profit margin remained strong at 80%. Operating expenses of $51.7 million increased $1 million compared to last year and were $6.3 million lower than Q2. SG&A was flat with the year ago period and declined $5.5 million compared to Q2. The decline in SG&A spending versus Q2 was primarily due to lower sales and other incentive compensation as well as actions we began to take to reduce spending late in the quarter. R&D expenses increased approximately $800,000 versus last year. Second quarter net loss was $2.9 million. Adjusted EBITDA was a positive $1.6 million. On the balance sheet, we ended the quarter with over $107 million in cash and marketable securities and no long-term debt. Finally, at the end of March, we announced an amended loan agreement with Silicon Valley Bank. The amendment extends the maturity date by 2 years to March 2022 and increases the maximum borrowings available under the revolving credit facility from $40 million to $50 million at very favorable terms. There are no amounts outstanding on this revolver. And during the first 3 years of this agreement, we did not tap this resource. I should note that our capital allocation priorities are unchanged. We will continue to invest in our business to assure that we are able to support our customers and patients. We are investing to retain our employees and the strength of our business to assure a rapid and sustained recovery. That concludes my remarks on our Q3 financial results. And now I will provide some commentary on what to expect for Q4. As we discuss our expectations for Q4, please note that we are trying to find the right balance between supporting confidence while not providing false assurances. Along with the rest of the country, we are monitoring the many models that predict various scenarios for the severity and duration of the COVID-19 outbreak. This is a very dynamic environment that is changing every day. But at least you will know our perspective regarding our near-term outlook. As a reminder, we issued an 8-K in March, noting that we were experiencing a disruption in procedures using our products as a result of the COVID-19 outbreak. And on April 1, we issued an 8-K withdrawing our financial guidance for fiscal '20. As Scott described, our caseload in the U.S. in April has declined 53% compared to last year. And while we have seen a modest increase in our daily cases over the past month, we do expect this trend to continue throughout Q4. In addition, we expect that hospitals and OBLs will continue to preserve cash and run with lean inventories. As a consequence, we anticipate that our Q4 results will not benefit from large end-of-quarter orders, which typically drive higher revenues, particularly in June. Turning to international. Most of our revenue is in coronary and specifically in Japan, where the impact of the outbreak has had only a modest impact on procedure volumes thus far. In other international markets, we have seen a dramatic decrease in procedure volumes. As a result, we now believe our international revenue for Q4 will be approximately $2 million. The anticipated reduction in production volumes in Q4 will have a negative impact on gross margin. Recall that a significant portion of our cost of goods sold is related to burden, so fewer devices manufactured is expected to result in gross margins in the mid-70% range. As we begin to experience -- as we began to experience lower procedure volumes in March, we implemented business continuity plans and reduced operating expenses and capital expenditures across the business. For example, we implemented a hiring freeze across the organization; we eliminated noncritical consultants and contractors; we reduced variable compensation as a result of lower anticipated volumes; enrollments in our ECLIPSE clinical trial were suspended; travel and entertainment restrictions were implemented across the organization; conferences, professional education and sales training events have been canceled; and a significant amount of other discretionary spend has been cut or deferred. Overall, we expect operating expenses in Q4 to range between $44 million to $46 million. This level of operating expenses represents a decline of approximately 15% from the prior year and more than 20% from Q1 and Q2 of this fiscal year. Ongoing management of operating expenses, combined with a strong balance sheet, positions CSI to manage through this difficult time and be prepared to succeed as elective and nonurgent procedures return to normal. Throughout the recovery period and into the future, we plan to continue to invest and drive growth in our core business, innovate through our product pipeline, generate medical evidence, increase our commitment to medical education and expand our commercialization efforts internationally. Rhonda will now discuss our commercial developments. Rhonda? -------------------------------------------------------------------------------- Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [5] -------------------------------------------------------------------------------- Thank you, Jeff, and good afternoon, everyone. I will focus my comments today on a few key areas, including how CSI has responded to the COVID pandemic, why we think our product offering is attractive in the post COVID-19 era and update on the status of our product pipeline. And I will conclude with our thoughts on the CPT code process. As you heard from Scott, protecting our employees and our ability to serve our patients are 2 of the key goals at CSI as we adjust to the COVID-19 environment. We began making adjustments to our business early in Q3 and elevated our response throughout the quarter. As the virus began to impact Asia and Europe, we pulled our employees out of these markets. In early March, we restricted domestic travel. And at our facilities in Minnesota and Texas, we elevated restricted access to ensure our employees remained safe. We followed stay-at-home recommendations and quickly pivoted to telecommuting arrangements for virtually all of our nonmanufacturing employees. In the field, we successfully sourced PPE to ensure that our field sales representatives were prepared to safely support cases in facilities in which they were allowed. In hospitals' restricting access, our sales representatives are doing what they can to support cases through virtual interactions with our customers. Our customers have embraced new educational delivery models to access high-value CSI medical education programs. During the quarter, CSI's education team conducted 4 distance proctoring sessions for new and advanced users; launched an extensive learning management system, which includes extensive case-based education modules; and enabled virtual support to train new users and new accounts. Examples like these fill us with hope and may provide a glimpse of how we will continue to provide high-touch clinical and educational support wherever we are needed in a post COVID-19 environment. And we are needed. The incidence of peripheral and coronary artery disease has not slowed down during the pandemic. In fact, the steady ease of -- the steady use of our products during the outbreak demonstrates the importance of orbital atherectomy, especially in the treatment of critical limb ischemia. And we believe our product offering provides CSI with competitive advantage, especially as sites of service begin prioritizing patients in need of treatment during COVID recovery. Orbital atherectomy provides a dual mode of action that combines differential sanding and pulsatile forces to treat all calcium modalities, including nodular, eccentric and concentric. We believe our distinct ease of use and efficiency, matched with differentiated clinical performance in complex patients, will be even more valued as patients in waiting begin to return for treatment. While COVID-19 is in the community, we believe the importance of products that decrease procedure time and prevent the patient from needing to return following treatment has increased considerably. In peripheral, we believe that offering low profile devices that allow for a variety of access points will be increasingly attractive as physicians seek to treat peripheral lesions, while reducing procedure time and bleeding complications related to traditional femoral access. As a result, we expect that the use of radial access and other alternate sites of access that reduce bleeding complications and accelerate time to ambulation will be further adopted to enhance the consistent flow of patients from intake to discharge. We believe this value proposition will be an important CSI differentiator in a post COVID era. At the New Cardiovascular Horizons, or NCVH Conference, which we expect will be held in July, we will share new data from the REACH peripheral radial study. If you recall, this study will prospectively evaluate acute clinical outcomes of orbital atherectomy using radial access for the treatment of PAD. We believe this study will demonstrate many of the known benefits of radial access such as low complication rates, high cost effectiveness and shortened time to ambulation. The readout of this study will dovetail nicely as we plan to begin introducing radial support products in fiscal '21, which I will discuss in a few moments. Products like our new Exchangeable platforms that allow physicians to perform full revascularization during a single episode of care will also be adopted to limit the frequency that patients must visit hospitals and OBLs. As a reminder, our Exchangeable platform with GlideAssist offers a low profile device designed to access the vasculature through multiple access points. This platform is designed to serve up to 50% of the peripheral patients that have multivessel disease throughout the leg. The system enables the use of up to 3 crowns so that a physician can treat lesions above and below the knee and provide full leg revascularization in an efficient, single procedure. We think that this will be very well received by physicians and their patients who will be motivated to complete treatment in a single session as opposed to scheduling multiple interventions. We think our entire peripheral offering will continue to benefit from the ongoing data coming from our LIBERTY 360 study. As we continue to disseminate the information from this all-comer study, we are able to demonstrate how using orbital atherectomy provides high freedom from major amputation at 3 years with OAS, even in the most complex patients, in Rutherford 6 patients at 88.6% with no additional amputations reported after the 2-year visit. We have no peers when it comes to developing long-term economic and patient outcome data. And we were very pleased to learn that the 1-year data from our LIBERTY 360 study is in the top 10 downloads over the past 5 years from the Journal of Endovascular Therapy. Importantly, we have recently submitted our LIBERTY 2-year economic data and are awaiting publication of the manuscript. Turning to coronary. Third quarter was the first full quarter after the launch of our new nitinol coronary ViperWire. Similar to the products response in Japan, feedback from physicians in the U.S. has been exceptionally strong and how it enables access to more complex patients with treatment effectiveness, particularly in patients with tortuous anatomies. Combined with the Sapphire angioplasty balloons and Teleport microcatheters and Diamondback with GlideAssist, we offer physicians a compelling set of tools to treat their most challenging coronary patients. As a result, we expect our strategy to drive increased revenue per procedure will continue to gain traction in the post COVID-19 era. In Q3, we sold over $2.2 million of procedure support products, including nearly $2 million of coronary products, such as the Sapphire angioplasty balloons and Teleport microcatheters. Now not all of these products are used exclusively in our coronary atherectomy procedures. However, we sold over $530 of support products for every coronary OAS device sold during Q3. This marks the seventh consecutive quarter of increased coronary revenue per procedure. And we have significant opportunity to further increase penetration in accounts performing complex coronary procedures. And recall, we believe our support products could yield between $800 to $1,000 per coronary OAS procedure. In international, we had another strong quarter of growth, particularly in Japan, where despite COVID, case volumes continue to grow with a greater than 2x increase over case volumes just a year ago. As Jeff noted, case volumes in Asia and Europe were more impacted by the pandemic, and our ability to access markets and open accounts will be tempered in the near term. Our CE mark for coronary remains under active review, and we achieved a number of regulatory approvals throughout the quarter. We will have a more detailed update next quarter as we learn about case resumption in the markets that we had targeted for launch. Turning now to our product and evidence pipeline. With respect to our pipeline, we had targeted introducing a radial toolkit at a broad line of over-the-wire peripheral balloons in FY '21. However, R&D delays, incurred in part due to COVID, have pushed out the anticipated timing of the launch dates for these products. We now anticipate introducing these products in the second half of fiscal '21. The WIRION Embolic Protection System, which we acquired last summer, remains on track for a Q1 launch. WIRION is a wire agnostic device and works with any 014 guidewire. Embolic protection systems are used about 1/3 of the time in above-the-knee atherectomy procedures and typically sells for about $1,000 per device. The launch of this product will be an important component of driving higher revenue per peripheral procedure in fiscal '21. Finally, we are meeting regularly with the FDA on the development of our mechanical circulatory support device. We continue to target first-in-human experience in fiscal '21. However, data presented at AHA last fall in the high-risk PCI support space may increase the number of patients and lengthened follow-up requirements in our pivotal IDE study. If so, this could impact commercial timing, but we will provide additional updates as we collaborate with the FDA to determine the clinical trial requirements. Please recognize that the timing of these product development and launch milestones represent our best estimates at this time. Naturally, COVID-19 and other factors could cause additional changes in timing. On the clinical side, we suspended enrollments in the ECLIPSE trial in March due to COVID-19. We recognize that most hospitals were suspending elective procedures and nonessential functions. So after careful consultations with our PIs, we decided to pause enrollment. We don't have a set date to start -- restart enrollments. We will be watching for the renewal of research activities and semi-urgent procedures across the country, and we'll engage with our principal investigators later in the quarter on planning. This will certainly push out the timing of the readouts on ECLIPSE. But with 1,364 patients enrolled to date in this important study, we will remain patient and make sure we can answer the question of how best to treat severely calcified coronary lesions. Finally, just a quick update regarding the possibility that AMA may review the lower extremity endovascular procedure code set. This is not an agenda item for the May CPT Editorial panel meeting. The next meeting is scheduled for October, and the agenda for that meeting is expected to be available on July 31. We continue to believe that once initiated, this could be a 2- to 4-year process before new codes are implemented. That concludes my prepared remarks. I'll be happy to answer any of your questions in a few moments. I'll turn it back to Scott. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [6] -------------------------------------------------------------------------------- Thanks, Rhonda. Well, I will close out our prepared remarks today by sharing some thoughts regarding how the recovery may unfold. We look to the future with a sense of confidence, coupled with the readiness for the challenges that lie ahead. We expect that COVID-19 will continue to have an acute short-term impact on our business in Q4. We expect the recovery to begin in earnest in June and July, with steady improvement continuing through December. At this time, we expect that Q1 FY '21 procedure volumes will be below normal, and that Q2 could return to a more normal pace, assuming that procedure volumes normalize, patient confidence improves, referral pipelines are restored and cath lab capacity returns to normal. In the near term, we expect that the below-the-knee CLI segment of our peripheral business will recover the quickest, followed by the above-the-knee patients with claudication and a slow gradual recovery in the coronary market. Coronary cases may be slow to recover to a steady run rate due to patient anxiety, competition for cath lab time, reduced hospital-to-hospital referrals and physician reluctance to fully revascularize difficult cases under these circumstances. We do not anticipate a large backlog of coronary or CLI patients. Many of these patients have either been treated, suffered death, or in the case of CLI patients, they may have had an amputation. We expect that many of the postponed claudicant procedures may still be performed over the next 4 to 6 months. The recovery may be asymmetric across the U.S., with the Northeast progressing much more slowly than the Midwest or the South. Generally, we think hospitals in the hardest-hit areas will be cautious about easing restricted access. But these restrictions will ease over time, and our sales reps will be routinely invited back in to most cath labs as the crisis subsides. We expect that patient referral channels will be restored. And over the next few months, patients will once again move from clinics to diagnostic catheterization to intervention. OBLs that are limb salvage clinics focusing on the treatment of CLI have generally remained open throughout the crisis, and they will most likely lead the way in the recovery. We believe COVID-19 may become a catalyst to accelerate patient migration to OBLs, reflecting a patient preference to avoid the hospital setting. As a result, OBLs may come back faster than hospitals and are likely to play an important role in fulfilling capacity requirements for CLI and claudicant patients. We do not expect a vaccine or other therapeutic options will be available in 2020. So some disruption will continue for the foreseeable future. We also do not expect that the virus will return in the fall with the same intensity we experienced over the past few months. These assumptions are our best estimates at this time. In closing, our confidence is rooted in the resilience of our employees, CSI's culture and our collective dedication to our mission. Through the first 2/3 of this fiscal year, we reached nearly 60,000 patients in need and achieved double-digit revenue growth. Although the pandemic will have a negative effect in our short-term financial performance, the long-term fundamentals of our business remained strong. We serve large and growing markets in peripheral and coronary artery disease. We derive significant competitive advantage from the safety and efficacy profile of orbital atherectomy. We have a large and robust sales organization with deep clinical acumen. We have stayed close to our customers throughout this crisis. And we are well prepared to support the rebound during the expected recovery period. With a solid balance sheet, access to capital, no long-term debt and strong gross margins, we will persevere through this pandemic and resume our double-digit growth trajectory when COVID-19 subsides and the health care system recovers. Thank you for your attention this afternoon. We will now be happy to take any questions you may have. So Ian, if you would please repeat the instructions for the Q&A, that would be great. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Danielle Antalffy of SVB Leerink. -------------------------------------------------------------------------------- Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [2] -------------------------------------------------------------------------------- Thank you so much for the color that you provided on the recovery, Scott and Rhonda. As we think about Q4, however, you guys talk about not having the benefit of these large end-of-quarter orders. Can -- I guess my first question is, can you help quantify that a little bit? How much of that is normally -- or what percentage of Q4 revenue was normally these end-of-quarter bulk orders? And then I have one follow-up. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Sure, Danielle. I think the way that I would look at Q4 is that we are most likely to see organic revenues throughout the quarter. So in other words, our device sales will probably correlate quite well with the cases that are performed. And as Jeff said, so far, through the month of April, we've seen about a -- just over a 50% reduction in case volume. And we pretty much expect that, that's going to continue through the quarter. Now as I indicated, there are factors that could accelerate our growth, and those are, as I described, a number of the environmental factors that may improve over time. But right now, I think that, that's a reasonable estimate for how we will -- what you can expect us to do. -------------------------------------------------------------------------------- Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [4] -------------------------------------------------------------------------------- Okay. That's helpful. And then my next question is on the backlog. And first part of this, is it right to interpret that April is the bottom, the nadir? And while you expect a significant reduction, you're seeing improvement from here? And then the second piece of the question, where does the CL -- I'm sorry, the claudication patient that could be made up, that backlog of patients that could be made up, where does that fall in the priority of procedure backlog work down for a cath lab that's trying to make up procedures against -- across a bunch of service lines? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Yes. Thanks, Danielle. I think actually, as I said, it -- the majority of the impact on our claudicant patients, it principally comes from their anxiety to present at the clinic. So the patient population, as you've seen, not just in CAD or PAD, but kind of across medicine, has demonstrated some reluctance to come to the hospital or to come to clinics. And that's really the major impact on the treatment of claudicants. I think for most of the sites that we interact with -- that are either hospital-based centers or OBLs who treat claudicant patients, I believe that for those sites, the treatment of these patients is relatively a high priority. The difficult challenges, convincing the patients to come back into the system and really to replenish that referral channel network. So that's the major impact that we will feel. And like I said, the restoration of that will probably occur over a 4- to 6-month time frame. So we think that's going to take some time. What was the first question? -------------------------------------------------------------------------------- Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [6] -------------------------------------------------------------------------------- Backlog. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [7] -------------------------------------------------------------------------------- Backlog on? -------------------------------------------------------------------------------- Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [8] -------------------------------------------------------------------------------- Patients. -------------------------------------------------------------------------------- Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [9] -------------------------------------------------------------------------------- Sorry, I think -- I couldn't even remember. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [10] -------------------------------------------------------------------------------- Danielle, what was your first question? I missed it. -------------------------------------------------------------------------------- Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [11] -------------------------------------------------------------------------------- Yes. I think -- just is it right to -- I couldn't even remember, Scott. Is it right to interpret April as the nadir, and it's stable to improving from here? Do you think it could get incrementally worse from here? I guess that's what -- I'm just trying to get an... -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [12] -------------------------------------------------------------------------------- Yes. I think that, that's fair. And as we indicated, although it's early, as we indicated, we have seen a modest increase in cases as we came to the end of the month of April. So I think right now, it's fair to assume that, that would be the nadir for the quarter. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from the line of Suraj Kalia of Oppenheimer. -------------------------------------------------------------------------------- Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [14] -------------------------------------------------------------------------------- Hope everyone is safe and healthy. Scott, forgive me, just hopping on in between multiple calls, so in case you mentioned this. And I just briefly heard Danielle talk about quarter end inventory. I guess, more broadly speaking, what is the average level of inventory in the field that you guys think about? And could you help thread the needle as you talk about coronary volumes returning to normal within 6 months or so? Just kind of help us tie both of those together. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [15] -------------------------------------------------------------------------------- Yes. I think it's difficult to do that as we talk about inventories. We normally wouldn't disclose what we think our inventory is in the marketplace, mainly because we don't always have perfect visibility to that number. I think as we think about coronary, the impact on our coronary business really is not related to inventories. Most of our -- the hospitals that we interact with in coronary don't keep actually very large inventory of our product. The challenge that we have in coronary is something that's now being seen across the entire market, and that is this rather remarkable reduction in patients presenting to ERs. There's been a large reduction in STEMI activations. And honestly, we've seen a large reduction in diagnostic catheterizations. So as a result, the pipeline of patients in coronary is depleted. Honestly, we're perplexed by this. We don't understand exactly right now what has -- what is happening in the coronary marketplace. This is something that we'll just have to watch over the next couple of months as more states resume and return to more elective procedures, as patients develop increased confidence and are willing to come back to hospitals, and finally, as cath lab capacity continues to improve. So this is just something we're going to monitor here in May and June. And we'll give you further updates on that the next time we meet. -------------------------------------------------------------------------------- Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [16] -------------------------------------------------------------------------------- Got it. And Scott, I'll finally -- my final question. You guys have your own atherectomy stand-alone reimbursement codes on the PAD and the CAD side. Help us understand how -- when you see procedures returning to normal within, let's say, PAD or CAD, do you all see the same level of return for your competitors also? If you could compare and contrast how CSI is positioned versus others in these 2 segments. Also more longer term, how do you see the pricing power as hospitals come out of this financial devastation? What is the impact on pricing power vis-à-vis, let's say, you guys' devices and others more broadly? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [17] -------------------------------------------------------------------------------- Yes. I would -- so in terms of the pricing power that we may see in the marketplace, it's difficult to predict at this time because we generally focus on patients that have more severe disease. I mean our CLI patient population, our CAD patient population, is a group of patients that have a high degree of unmet medical need. And we expect that these procedures will continue to be performed and will be -- will continue to be paid for. We have enjoyed a very stable reimbursement environment over the course of the past 6 years. And we do anticipate that, that will continue for the foreseeable future. As we think about the competitive environment, quite frankly, I'm a bit hesitant to comment only because we are so focused right now on managing our own business through this COVID-19 pandemic. I can say that I think it's an important competitive advantage for us, that we have products that can improve the efficiency of care. I think that most physicians will be seeking products that allow them to reduce the length of stay for their patients and reduce the likelihood of rehospitalization. So as Rhonda mentioned, the ability of our product to be used for radial access and through other access sites will accelerate patient throughput in a lot of these clinics by speeding time to ambulation, reducing bleeding complications. We also expect that our Exchangeable device will be very important as physicians are more likely to treat patients fully -- to fully revascularize their patients and not bring them back for multiple episodes of care. So those factors -- the fact that our product really lends itself to that more efficient type of care, combined with the fact that we have very stable, consistent and well-known reimbursement, I think, positions us quite well. Our competition has those same characteristics to varying degrees. But I can't really comment on how they'll come through this at this time. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Your next question comes from the line of Chris Pasquale of Guggenheim. -------------------------------------------------------------------------------- Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [19] -------------------------------------------------------------------------------- Scott, can you split that down 53% number in April between the peripheral and coronary segments of the business, just to give us a sense of how they each fared? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [20] -------------------------------------------------------------------------------- Yes. I can't give you the exact numbers, Chris. But generally, the way I would look at it is that our CLI business, the critical limb ischemia patient population remained quite steady throughout the month of April. These patients, when they present, don't provide the option for postponement. So that is -- that remained quite steady. The coronary patient population dropped fairly significantly. And the claudicants dropped the most. I mean I think our claudicant patient population subsided quite substantially. So I would give you kind of those 3 ranges, with CLI being fairly steady, coronary being somewhat in the middle and then claudicant being the lowest. -------------------------------------------------------------------------------- Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [21] -------------------------------------------------------------------------------- Okay. And then I'm curious how your reps are finding the new environment with restricted access to cath labs. And yours is a procedure set, in particular, that requires a fair amount of support for many physicians. How difficult has that been to achieve in the current environment? And have you been able to do some of that virtually? And is that a potential risk in terms of utilization where doctors are perhaps not picking up your devices because they don't feel as comfortable maybe with some of that support in place? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [22] -------------------------------------------------------------------------------- Yes. It's a great question, Chris. First of all, it's been absolutely remarkable and quite rewarding to see our sales reps respond to this challenge. Our sales organization has rapidly adopted virtual training tools. We have successfully now supported cases remotely. We have conducted education programs remotely and frankly, have responded quite quickly to this. It's interesting, when faced with this type of challenge, I've also seen that our customers have been much more willing to adopt these tools. And it strikes me that perhaps some of the challenge we've had with this over time is that physicians have not been as willing to adopt remote education tools. And now in an environment where sales reps and other support are not present in the cath lab, they're very willing to adopt that and to contact our people and stay in close contact throughout a procedure. So I think it's -- I think we're getting -- we're doing pretty well with it. As we look at how this might affect us going forward, 2 comments. Number one, as states are coming back online and allowing elective procedures to continue, we are seeing hospitals establish procedures for sales reps to reenter the hospitals. They're varying. They differ in various places. Some hospitals are requiring sales reps to bring all the PPE they need, others have other requirements, but we are seeing that open. Now in cases where there have been -- where the virus has more severely affected the population, let's say in the Northeast, we do expect that restrictions will stay in place for a while. But in other places, like the Midwest and the South, the restrictions either never were put on or now have been eased. So I think we're going to see that ease probably over the course of the next several months. And as we get into that September-October time frame, I think the vast majority of hospitals will be allowing sales rep access once again. The last point I would make is that what we have found during this crisis is that, for the most part, our procedures have continued. Many of our sites have continued to perform procedures when required. And they've done so mainly because they're strong believers in our technology. I mean it's remarkable that our CLI business really sustained itself throughout this crisis. And what that tells me is we treat a very important unmet medical need. Our customers are very comfortable using our product, and our product is really important in providing care for these patients. So I hope that answers your question. I can't get a whole lot more specific than that, Chris, I'm sorry. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Brooks O'Neil of Lake Street Capital. -------------------------------------------------------------------------------- Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [24] -------------------------------------------------------------------------------- So I was curious what you're seeing in terms of response from the physicians in terms of, has there been any transition from kind of a panic mode in March to some kind of more aggressive and offensive approach to patients in the business beginning in May? And if not, or if so, do you anticipate any fundamental change in the landscape as it relates to location of procedures, the way procedures are handled, et cetera? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [25] -------------------------------------------------------------------------------- Yes. Thanks, Brooks. So yes, we have seen a response from physicians. I think at this point, most of our customers are beginning to transition to the recovery phase. We are through a variety of surveys and other tools, staying in very close contact with our customers. And I think that there is a rising amount of expectation now that they will resume procedures here in the May, June and July time frame. So as I said in my comments, we do expect this recovery to really begin in earnest in June and July. And I think a lot of that is driven right now by a rising level of confidence amongst the medical community. Regarding to any fundamental change, I don't know that I would refer to it as a fundamental change. But we do think that this COVID-19 crisis could serve as a catalyst to increase the number of patients treated at office-based labs. I do think that the OBLs can provide a significant source of patient care to off-load capacity from hospitals. And I think it may be a site of service where patients feel more comfortable presenting for intervention, knowing that they're there only for a short period of time, and they're not having to expose themselves to the hospital environment. Not -- in our view, that isn't necessarily a negative thing, but I think patients may perceive an OBL environment as being safer for their intervention. So we may -- I don't think it would be a fundamental change, but we may see an increased number of patients treated in OBLs, and the OBLs may play a really important role in providing this capacity, especially during this recovery period. So that's that. So what do you -- any other questions? -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from the line of Jayson Bedford of Raymond James. -------------------------------------------------------------------------------- Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [27] -------------------------------------------------------------------------------- I had a few quick questions. Can you talk about new center adds? And is it safe to assume that you've seen a bit of a slowdown in new center adds? And when do you see folks coming off the sidelines? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [28] -------------------------------------------------------------------------------- Actually, our new center additions, Jayson, we're doing quite well up until about March 9. So we were on track with new center enrollment. I mean clearly, since then, new center enrollment has nearly stopped. In fact, I would say that it has. We simply haven't been enrolling new sites since then. And I would expect that we would not see a resurgence of new center enrollment until we see the restrictions lifted on sales rep access so that we can get into sites and train and educate sites. I do think that there is a demand for training and education that is out there. And we've witnessed that as we have run our virtual training programs for new customers. We've had very large attendance on these programs and have a large backlog, frankly, of accounts that we'll be training and educating when we can get back into sites. So no, I think at this time, new center enrollment has stopped, but we would expect that it would resume as we can get access to sites again. -------------------------------------------------------------------------------- Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [29] -------------------------------------------------------------------------------- Jayson, I can actually provide the actual new accounts for the quarter, if you wish? -------------------------------------------------------------------------------- Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [30] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [31] -------------------------------------------------------------------------------- Peripheral, we opened up 37 new accounts and 21 on the coronary side. Both of those are not too far off from normal numbers, so... -------------------------------------------------------------------------------- Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [32] -------------------------------------------------------------------------------- Okay. I had another one. Just in terms of the cadence here, I think in response to trends in April, it sounded like CLI was steady, coronary dropped fairly significantly, but claudicants or above-the-knee, let's call it, the most. But then I thought in your earlier comments from a ramp perspective, CLI steady, I thought above-the-knee would ramp a little quicker than coronary. Is that a fair characterization of what you expect? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [33] -------------------------------------------------------------------------------- That is correct. Yes. Yes, you have stated that correctly. -------------------------------------------------------------------------------- Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [34] -------------------------------------------------------------------------------- So why that the lag in coronary going forward relative to above-the-knee versus what you saw in April? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [35] -------------------------------------------------------------------------------- Yes. I think what we're saying is that what we saw in April was a -- that CLI remained fairly steady. The claudicants dropped off, mainly because the treatment of that patient population is a more elective procedure because patients are basically experiencing pain on exertion. Physicians can't postpone the interaction with that patient for a little longer period of time. So as a result, many of those patients are known, they're identified, they're waiting to come back in. And when procedures start, we expect that some of those patients will come back. Now over a period of 4 to 6 months, we think that the medical -- well, the cath labs will be able to address that full capacity backlog. In the case of coronary, in this circumstance, a lot of these patients, with the reduction in STEMI activations and a reduction in the diagnostic caths out there, it's rather stunning that these patients are not coming to the hospital when they have an MI. But this is being observed across the country. So as a result, the referral pathway or the referral of these patients seems to really have been depleted. And as a result, it's going to take time to build that back up. And that is -- we expect will take about 4 to 6 months. So there's an underlying -- I think what might be the source of confusion here, Jayson, is that there's an underlying population in the coronary segment of our market that presents with STEMI or unstable angina and must be treated quickly. That is kind of a baseline that always is going to be there. But when you think about trying to restore that patient pipeline over time, when we think about restoring that referral pipeline, that will take longer. So that's why when you think about the reduction in April, it went CLI, coronary, claudicant. When we think about the recovery, it's going to go CLI, claudicant, coronary. Makes sense? -------------------------------------------------------------------------------- Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [36] -------------------------------------------------------------------------------- Yes, it does. I'm guessing there's -- there may be a site of service dynamic going on as well, meaning OBLs opening up a bit earlier than hospitals? -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [37] -------------------------------------------------------------------------------- Yes, and there could be. And there also will be competition for cath lab time and hospitals. And there'll be other factors that will favor the OBLs over the hospitals, probably early on as well. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Your final question comes from the line of Margaret Kaczor of William Blair. -------------------------------------------------------------------------------- Brandon Vazquez, William Blair & Company L.L.C., Research Division - Associate [39] -------------------------------------------------------------------------------- This is Brandon on for Margaret. Kind of following up on the last discussion there, do you have any idea of what kind of the treatment pathway or the diagnostic pathway is for some of these delayed peripheral procedures? And by that, I guess, I specifically mean the length of -- from diagnosis to treatment. Just trying to understand are we -- with centers closed right now, are we kind of building maybe like an air pocket that we might see going forward in the next few months, given the lack of patient pipeline being built? So any color around that would be helpful. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [40] -------------------------------------------------------------------------------- Yes, Brandon, I think what you're going to expect to see in CLI is that those patients are rapidly moved through the system. Many times, they may present at the ER and other places and they're rapidly moved forward for care. In the case of claudicant patients, we're probably talking about months. I think you can think about this as 2 to 3 months from the time a patient is first seen as they move through clinics, diagnostics, monitoring, other tests and then onto an intervention for their claudications. So probably that 2- to 3-month time frame for that population. -------------------------------------------------------------------------------- Brandon Vazquez, William Blair & Company L.L.C., Research Division - Associate [41] -------------------------------------------------------------------------------- Okay. That's helpful. And then just one other one for me. As we look at -- you guys are obviously uniquely positioned kind of in the OBL outpatient setting. I guess, just as you -- with your kind of sense in the field, does the OBL market have the capacity to kind of take on meaningfully more cases? So if we take 2 to 3 months of cases and push them forward, will they be able to take that capacity? Does it have to be spread out over elongated period of time? Any details around that would be helpful as well. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [42] -------------------------------------------------------------------------------- We do believe that there is adequate capacity in the OBL segment to contribute to the recovery. So yes, I think that there is adequate capacity in the OBL segment. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- There are no further questions over the phone lines at this time. I turn the call back over to Scott Ward for final comments. -------------------------------------------------------------------------------- Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [44] -------------------------------------------------------------------------------- All right. Very good, Ian. Thank you. Well, since there are no further questions, we'll conclude today's call. Thank you, everybody, for joining us, and please stay safe. We look forward to updating you again next quarter. Thank you. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect.