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Edited Transcript of CSII earnings conference call or presentation 7-Feb-18 9:45pm GMT

Q2 2018 Cardiovascular Systems Inc Earnings Call

ST. PAUL Feb 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Cardiovascular Systems Inc earnings conference call or presentation Wednesday, February 7, 2018 at 9:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jack E. Nielsen

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

* Jeffrey Points

* Rhonda J. Robb

Cardiovascular Systems, Inc. - COO

* Scott Raymond Ward

Cardiovascular Systems, Inc. - Chairman, CEO and President

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Conference Call Participants

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* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Danielle Joy Antalffy

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

* 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

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good afternoon. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cardiovascular Systems, Inc. Fiscal 2018 Second Quarter Earnings Conference Call. (Operator Instructions) Thank you.

Jack Nielsen, Senior Director Investor Relations, Corporate Communications, you may begin your conference.

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

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Thank you, Krista. Good afternoon, and welcome to our fiscal 2018 second quarter conference call. With me on today's call are CSI executives, Scott Ward; Rhonda Robb, Larry Betterley and Jeff Points. 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'll now turn the call over to Scott Ward.

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

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Thank you, Jack. Good afternoon, everyone, and thank you for joining us today. During today's call, we will discuss our second quarter performance and several recent developments that establish a foundation for growth -- sustainable growth going forward. Second quarter revenues of $52.6 million, increased 5% compared to the year ago period for a full revenue of $39.2 million, increased 6% versus last year and was up 3% versus last quarter. Coronary revenue of $13.4 million increased 3% versus last year and rebounded nicely from first quarter, increasing 17% quarter-over-quarter.

It is still early, but we are encouraged that our decision to dedicate about 20 of our sales reps to our coronary franchise has resulted in improved performance. In Q2, we added $1.9 million in coronary revenue compared to Q1, with an increase in new accounts and a nice rebound in same-store sales. We are also pleased with the resurgence of growth in same-store sales in the in-hospital segment of our peripheral business. However, our revenue in the office-based lab or OBL segment, fell short of expectations and are not likely to rebound as quickly as the hospital segment of the peripheral business. We operate in an increasingly competitive environment, particularly in the price-sensitive office-based lab side of service.

On a unit basis, our OBL business grew 7.5% over last year, but price declined 7% and revenue was flat for the quarter. The OBL segment represents about 20% of our peripheral sales. Given the utility and effectiveness of orbital atherectomy, we don't intend to compete on price. But going forward, we will be more competitive on price if we can secure higher volumes or long-term contracts. Our unit structure has -- our unit cost structure has significant volume efficiency that will accommodate this approach.

As I have said for some time, case coverage and procedure support differentiate CSI from other companies and is a key success factor as we strive to grow our business and increase the adoption of orbital atherectomy. This bolus of customer support continues to gain momentum, and early results indicate that they are having a positive impact on sales productivity. However, as we gain more experience with the use of clinical specialists, we recognize that it may take 3 to 4 quarters for a new clinical specialist to reach full productivity. As a result, we anticipate attractive sequential quarterly revenue growth throughout the back half of fiscal 2018 as these clinical specialists mature in their respective territories.

So I am pleased that we are gaining traction on many of the key initiatives that we implemented to restore growth in the coronary and peripheral franchises. We are also keenly focused on building the strength of our leadership team here at CSI.

So before we discuss the financial results in more detail, I would like to comment on some recent organizational changes. In November, Dr. Ryan Egeland joined our senior leadership team as our Vice President of Medical Affairs. Dr. Egeland has extensive medical, technical and business leadership experience. He joined us from Covidien and Medtronic, where he held positions in business development, medical and scientific affairs. Dr. Egeland will lead our global medical education function, and he will drive strategies throughout our company to improve the quality of care for our patients. Ryan has an MD from Harvard and a Ph.D. and MBA from the University of Oxford, where he was a Rhodes Scholar.

In January, we announced that Rhonda Robb was appointed to become our new Chief Operating Officer. Rhonda joined CSI following a highly successful 30-year career with Medtronic, where she was most recently the Vice President and General Manager of the Heart Valve Therapies Business, which included the transcatheter valve business. Many of you on the call today know that Rhonda has significant experience in leading and scaling complex, high-growth med tech businesses. She is a dynamic and customer-focused executive with a strong track record of successfully driving commercial execution, developing new markets and building product portfolios that improve -- have improved the quality of care for patients with cardiovascular disease. Rhonda has the ability and experience to guide the expansion of our company, and I look forward to partnering with her as we continue to build CSI's leadership position.

During my tenure at Medtronic, I had the opportunity to work with Rhonda, and I know that she is highly motivated to deliver on our CSI mission to save limbs and save lives every day. She is the ideal fit for CSI as we continue to build this company for growth.

And today, we are also announcing that after 10 years of service as Chief Financial Officer, Larry Betterley has announced his plans to retire in August of 2018. As part of a planned succession, Jeff Points will lead -- will succeed Larry as our new Chief Financial Officer. We are very grateful to Larry for his many years of service to our company. Clearly, Larry's leadership has been fundamental to the success of CSI. He helped develop this company from an early stage startup to a financially sound market leader, poised for long-term growth and profitability. So on behalf of the Board of Directors, our CSI employees and over 350,000 patients treated with orbital atherectomy, I want to thank Larry for his dedication to our mission.

Effective today, Larry is taking on a new role as Vice President of Administration. In this newly created role, Larry will serve as an executive leader within the company, and he will assist in the orderly transition of the CFO office.

I would now like to introduce our new Chief Financial Officer, Jeff Points. Many of you have had the opportunity to meet Jeff, and you know that he brings more than 20 years of accounting and finance leadership to our organization. Jeff has been with CSI for over 10 years, most recently serving as Vice President, Corporate Controller and Treasurer. He is a proven financial leader within our organization, and we welcome him to the senior leadership team.

Jeff will now provide details on our Q2 results as well as our Q3 and fiscal year guidance. Jeff?

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Jeffrey Points, [4]

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Thank you for the kind introduction, Scott. Good afternoon, everyone. I look forward to working with many of you going forward. Second quarter revenue of $52.6 million represented a 5% increase compared to last year and a 6% sequential increase compared to first quarter. We sold over 16,000 devices during the quarter, generating 92% of revenues. Peripheral revenues increased 6% to $39.2 million. Coronary revenue increased 3% to $13.4 million. Below the knee product mix was about 58% of peripheral revenue. Reorder revenues were 98% of total revenue.

Gross profit margin was 81.9% in the quarter compared to 81.7% last year driven by unit cost reductions. Operating expenses of $43.4 million increased $3.6 million or about 9%. Operating expenses were lower than guidance primarily due to lower incentive compensation and lower payroll expenses. Second quarter net loss of $0.4 million or $0.01 per share was favorable to the guidance range. Adjusted EBITDA remain positive at $3.4 million. At quarter-end, our cash balance was strong at $107 million, an increase of approximately $2.6 million during the quarter.

I will now discuss our financial outlook. Looking at Q3, we do anticipate continued improvement in sales rep productivity, albeit at a lower level than we initially forecasted. We expect that Q3 revenue should benefit from the initial stocking order of approximately $800,000 for the commercial launch in Japan. To a lesser extent, the recently announced agreements to distribute OrbusNeich coronary angioplasty balloons and our ZILIENT guidewires will be available to select accounts and are not expected to generate material revenue in the current quarter. Taking these factors into consideration for the third quarter of fiscal 2018, we anticipate revenues in the range of $55 million to $56.5 million, representing year-over-year growth of 5% to 8%, gross margin of about 81%, operating expenses of $45.5 million and net loss in the range of $0.9 million to break even. This equates to a loss per share of $0.03 to $0.00 based on approximately 33.2 million average shares outstanding. Also, adjusted EBITDA is expected to remain positive in the third quarter.

For the full year, we now forecast fiscal year 2018 revenue to be in the range of $215 million to $219 million. Although we are pleased with our growth in Q2 and our revenue was within the guidance range, we did not achieve the growth acceleration in our base business that was required to overcome the slow start we experienced in Q1. Absent our Q1 results, the quarterly trajectory of our revenue growth remains consistent with our original expectations. It's just pushed out by about 1 quarter. We now believe the sequential revenue growth of approximately 5% to 7% is reasonable during the back half of fiscal '18. In addition to improved sales rep productivity, in the second half of the year, we expect approximately $1.7 million in revenue from the Japan launch and about $0.5 million from the limited market release of the procedure support products.

I'll now turn the call back to Scott for additional commentary.

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [5]

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Thank you, Jeff. Although we have tempered our guidance for the full year, CSI is a stable company. And there are several important catalysts that will drive growth in the months ahead. We are forecasting attractive sequential revenue growth in Q3 and Q4 due to improving sales productivity, the limited market release of procedure support products and our commercial launch in Japan. The primary driver of revenue growth in the back half of the year will come from higher sales productivity in our coronary and peripheral franchises.

In coronary, we will leverage our dedicated coronary sales representatives and our clinical specialists to focus on large, high-volume accounts. With increased selling time, we expect new account growth and increased case coverage should translate into stronger growth at our current coronary accounts. I should also note that we continue to achieve our key milestones for the ECLIPSE clinical trial, and we currently have 155 patients and 55 sites enrolled in the study. In our peripheral business, we also focus -- we will also focus our clinical specialists on increasing case coverage at high-volume accounts, and we will begin to increase our focus on the OBL segment of the market.

As I described last quarter, the OBL market continues to grow at a rapid pace. We are transforming our business model to meet the needs of this side of service and to increase our penetration of the OBL market segment. As you know, we are broadening our product offering, and we have increased case coverage to support physicians that are performing more complex cases. In addition, we are adjusting our inventory management practices and securing long-term supply contracts with high-volume centers.

So even though productivity improvements in the peripheral, in-hospital and coronary segments of our business still have the largest influence on our performance, the OBL segment of our market has become an important area of focus for our business, and we will keep you updated on our progress with these initiatives. Adding new products to support orbital atherectomy procedures will also be a key component of improved sales productivity. We intend to build on our market-leading position in atherectomy by offering physicians high-quality products that complement their use of our core technology in coronary and peripheral interventions.

Our recently announced balloon and peripheral guidewire offering are the first step in this direction, and we are excited about the impact these products will have on our procedures. As many as 4 or 5 of these support devices can be used during our procedures, so offering these products to our customers represents a meaningful opportunity to increase our level of service and the revenue we receive per procedure.

We recently announced that CSI is now the exclusive U.S. distributor of OrbusNeich coronary and peripheral angioplasty balloons. Over the years, physicians in Asia and Europe have come to rely on the differentiated design, quality and performance of these balloons. This has earned OrbusNeich leading market share positions in these geographic markets where competition and demand for best-in-class balloons is fierce. For example, OrbusNeich is the market leader in the highly competitive Japanese coronary balloon catheter market and their Sapphire II PRO balloon is the first and only 1.0-millimeter coronary balloon in the market. These very small balloons are uniquely suited to cross very tight occlusions and improve access to complex coronary lesions. We anticipate FDA clearance of the Sapphire II PRO balloon during Q3, and we are currently conducting a limited market release of the other coronary balloons. We anticipate a broader commercial launch in fiscal -- in FY '19.

CSI has also partnered with Integer Holdings Corporation to produce CSI-branded ZILIENT peripheral guidewires. These guidewires have been designed to provide tip resistance and crossability to physicians working on challenging peripheral lesions. We have recently initiated a limited market release of our ZILIENT peripheral guidewires, and we expect to launch additional guidewires for coronary and radial peripheral applications in fiscal 2019. We are finding that combining our orbital atherectomy technology with a full kit of procedure support products may be attractive to our customers, and we will continue to pursue additional opportunities to broaden our product offering in the future.

Last week, we announced the commercial launch of our business in Japan. And as we have indicated, we expect about $1.7 million in revenue in the second half of the year, mainly from initial stocking orders. We are working closely with our distribution partner, Medikit, to ensure the smooth introduction of our coronary micro crown technology. The training of physicians and the enrollment of new centers in Japan will require peer-to-peer training, and this will result in a more gradual rate of adoption over time. There are currently 6 centers using our technology, and we plan to have about 15 onboard by the end of June.

In closing, last year, we demonstrated that we could rightsize our expenses, stabilize the sales force, grow revenue and solidify our balance sheet. With this solid foundation in place, I began to articulate our intention of broadening our product offering while expanding the use of orbital atherectomy. The recent announcements regarding our organization, new products and international expansion are the next steps in the evolution of CSI and demonstrate that we are building a broader cardiovascular company capable of delivering strong growth, while we improve the quality of care for our patients.

We are unique. For a small cap med tech company, CSI is in an enviable and rare position. Our orbital atherectomy technology is firmly regarded as the therapy of choice for treating calcified plaque. The patient populations we serve are large and growing. We have a large clinically focused sales channel. Our base business is generating over $200 million in revenue annually. We are essentially cash flow breakeven with over $100 million in cash on our balance sheet and we have no long-term debt.

Finally, as I have said before, our greatest asset is our people. We have an outstanding team here at CSI, and we look to the future with confidence and a focus on our mission to save limbs and save lives every day. We certainly appreciate your continued support and interest in CSI, and we will now take your questions.

Krista, could you please repeat the instructions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Danielle Antalffy with Leerink Partners.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [2]

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Scott, I just wanted to get a little bit more color on what got incrementally worse between the call back and I guess, it was late October? And today, that's prompting you to lower guidance. It sounds like you're saying part of it is pricing in office-based labs. Is there anything else going on that we need to be aware of? Is there anything to do with sort of the sales force restructuring and disruption that could be happening? And what gives you the confidence that it is going to improve from here?

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

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Thanks, Danielle. So first of all, I think that what we have seen is that our -- the acceleration in sales that we anticipated seeing from the addition of our clinical specialists has not been as fast as we anticipated. When we put about 45 clinical specialists into the market in our first and second quarter, most of those were hired by the end of first quarter, we had anticipated that they would come online fairly quickly and accelerate our growth in Q2 and then in Q3 and Q4. The impact of that team has been slower than we expected. And so that is principally what we -- what has influenced our forecast for Q3 and Q4. But I really should point out, as Jeff said in his remarks, that we had a very slow start in Q1. Really, our Q -- our performance in Q2, Q3 and what we're forecasting for Q3 and Q4 is actually right about on track. It's just that in this -- in our current forecast, what we're saying is that we had poor performance in Q1, and we're now pushing out what we expected to be strong performance in Q4 out into the future. So I think those are the -- those are really the key factors that are influencing our business at this time. I feel very comfortable with the nature of our sales structure and our current sales focus. I think we're doing exactly the right thing with the addition of these clinical specialists. And I believe that our continued focus in coronary will pay dividends with stronger revenue growth moving forward. So I continue to have very strong confidence now in the second half, and I think we'll continue to see strong sequential growth quarter-over-quarter as we go forward. Jeff, did you have anything to add to that?

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Jeffrey Points, [4]

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Just to add on to that, Danielle. We had 240 sales professionals in Q1, and really our guidance really gets back to that same productivity level by Q4 of 285 professionals, about $205,000 per sales professional.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [5]

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Okay, that's helpful. And then just a quick follow-up, and then if I could throw in a question for Rhonda. So just on the clinical sales specialists not ramping as quickly, is there one business that's more affected because you did have a strong coronary quarter, but it looks like peripheral came in a little bit weaker. And what's going on? Is it just -- is the trainings taking longer? It's taking them longer to develop relationships at the account? Like what's sort of delaying their progress there? And do you think you're where you want to be now today?

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

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Yes, I think we really did make a very concerted effort to hire clinical specialists that came right out of cath labs. So most of our clinical specialists have deep clinical acumen. We are seeing that it just takes time for them to develop relationships to get into these accounts, and it takes time for the availability of that clinical specialist to do case coverage, to actually then drive increased volume at an account. So that is -- we're kind of learning as we go here for this particular business. I think historically, in med tech, where we know we have high-volume accounts, we know that adding clinical specialists can allow us to drive growth at that account while freeing up our sales rep to go spend time opening up new accounts or spending time training and educating other physicians at current accounts. So this is a tried-and-true strategy. What we don't know at CSI is just how long will it take for these clinical specialists to get up to full productivity. And quite honestly, we expected that, that could happen very quickly. But we're finding that it just -- it's going to take some time. And I do think that we'll see sequential growth quarter-over-quarter because of the addition of these specialists, but it's just going to happen a little bit more slowly than what we anticipated.

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Danielle Joy Antalffy, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices [7]

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Okay, that's fair. And then -- oh, sorry, go ahead.

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [8]

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Did you have -- did I answer -- did you have another question in that? I don't recall.

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

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I think -- no, I think you covered it. And then I just wanted to say, well, first of all, Jeff, congrats on the promotion. And then also, Rhonda, so excited to be able to keep working with you. And I was just wondering if I could ask you, what you saw in CSI that brought you to this from what was a very big job at Medtronic as well? So anything you can say there?

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

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Thanks, Danielle, and I'm excited to keep working with you as well. And I think as I talked to Scott about the role in CSI, I just thought this was a very unique and distinct opportunity. And the team has laid out very compelling strategic plan and vision for the future that I thought was very exciting. There is tremendous opportunity for growth here through the building of this company, and that was a key reason. And just more, I guess, down to basics, I came from a company that was a very mission-driven company, and I think you know that through your work with Medtronic. And what really impressed me is that CSI is also an incredibly mission and patient-focused company, and that was really important to me. And there's just an incredibly strong leadership team and employee base here that I really saw myself being a part of. So those were the key drivers, and excited to have my feet on the ground here and get started.

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Operator [11]

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The next question comes from the line of Margaret Kaczor with William Blair.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [12]

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First of all, for me, I was hoping to dig down deeper into the office-based lab sales. Can you give us any more color in terms of what caused that shortfall? What is, in fact, share? Was it underlying demand in the space? Was it hurricanes, pricing, your contracts expiring? Anything in addition beyond what you said on the comments earlier?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [13]

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Thanks for that. One thing I can tell you most certainly is it was not hurricanes, weather or any other extraneous factors. I think as I said in my commentary, our OBL -- the unit volume in our -- in the OBL segment of our peripheral business actually grew 7%. So we had strong unit volume growth there, but we do see significant pricing pressure in that particular segment. And we had about a 7% reduction in ASP. And as a result, revenue was flat. So our OBL business is strong. We're -- right now, only about 25% of our peripheral businesses is in OBLs. And we have an opportunity to grow our -- that segment and to play a larger role in the OBLs. We're going to try to do that, as I said in my remarks, by engaging a lot of these larger -- the higher volume OBLs with long-term contracts and with increased case coverage and support. So I -- we feel pretty good that we've got some good strategies in place to continue to access the OBLs, and we're optimistic about our position there in the future.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [14]

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Got it. And then, Rhonda, since you're on the phone, I'll follow-up with you as well. In terms of kind of your target, where you're going to be spending your time over the next 6, 12, 18 months, do you have anything in place yet? Is it sales structure, is it referral networks, market development, coronary peripheral? What do you see as the largest opportunity? And one of the first things you'll focus on?

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [15]

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Yes. I'm in -- so I'm in week number 2, and so I'm spending a lot of time just learning the business and the company but clearly, diving into the opportunity we have in front of us in Q3 and Q4, sales execution, ensuring that this large and clinically focused sales channel continues to grow and develop and get up to speed. That executional component is really a top priority.

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Malgorzata Maria Kaczor, William Blair & Company L.L.C., Research Division - Research Analyst [16]

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Okay, that's helpful. And then in terms of -- I'll sneak one more in. But in terms of the Japanese reimbursement approval. On the top line, how do you guys expect to go through a hospital -- the hospital approval process? Is it hospital by hospital? Or can you ramp up a little bit faster? And then on the bottom line, what was the reimbursement impact and how does that affect your gross margins going out further?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [17]

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Good question on the Japan centers. It is peer-to-peer training, hospital to hospital there. And so they're really -- we really cannot influence that. We currently have about 6 accounts that are trained. And what we'll see as kind of this geometric expansion as we leverage Saito-san's -- Professor Saito in Japan, he will begin training and educating other physicians. He'll train the trainers. Those physicians will then train additional accounts, and we'll see that kind of geometric expansion. But because sales reps are not allowed in cath labs in Japan, we're really subject to this peer-to-peer training model. And as a result, we'll be going -- we'll be expanding kind of hospital to hospital over time. The reimbursement rate that we received was roughly USD 2,000. And you do want to comment on the impact of that?

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Jeffrey Points, [18]

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Yes. So our price, Margaret, to -- on selling these devices to Medikit is around $1,000. To follow-up on your question on gross margin, we don't expect a significant effect. It's about a 50-50 transfer price. But because it's a controlled launch, the -- it'll be a slower-growth item that won't affect margins significantly in the first 12 months.

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Operator [19]

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Your next question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [20]

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Scott, I was hoping you might just amplify a little bit on what you're seeing in the overall markets you're addressing and competitively, whether there's any changes going on out there? And I guess, coming straight to the chase, is 3% growth in the coronary side of the business sort of what we should expect over time? Or is there more juice in that orange?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [21]

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All right. So let's start with the market. I -- we continue to obviously operate in a high-growth marketplace. The -- with the continuing crises that we're seeing with obesity and metabolic diseases, diabetes and other things, there is an epidemic looming of complex peripheral -- or complex coronary and peripheral arterial disease. And we're very well positioned to take advantage of that and to be an important player in improving the quality of care for these patients. Now I do think that they have seen some changes in the competitive marketplace. Certainly, there's been some consolidation, Philips having acquired Spectranetics last August, obviously, brought yet another large company into our sphere. We compete against large, well-established companies. Medtronic, Philips, Boston Scientific, these are amongst the top names in medical technology. And they have large and well-established distribution channels, and they have capacity. We compete against them because we have the best core technology, we have the strongest medical evidence in the market and we have the best distribution channel. So our -- the nature of our competition really hasn't changed. We continue to compete because we just have the best solution for the treatment of calcified coronary and peripheral arterial disease. As we look at coronary, no, I don't think we're not at all satisfied with 3% growth year-over-year and I would expect to see that continue to grow going forward. The coronary business historically, has grown, as you know, much more quickly than that. I was really pleased to see that we had a very strong rebound quarter-over-quarter. So we had almost 17% growth from Q1 to Q2. So we saw some nice rebound there. We have seen -- although it's early, we've seen improved performance now from our focused coronary channel. We do expect, and we're seeing ECLIPSE continuing to have a positive impact in coronary. With now 55 sites enrolled in that study, we -- it is achieving our goal of getting out into the market and conducting a really meaningful and clinically relevant clinical trial that will fundamentally change the practice of medicine going forward. And I think we're seeing increasing interest from interventional cardiologists as the amount of evidence that we have available continues to increase. A lot of this is focused on the treatment of these complex, high-risk indicated patients or what Abiomed calls CHIP patients. We participate in that exact same marketplace in coronary. And unfortunately, this is a patient population that continues to grow and the utilization of our technology to treat patients that have calcified and sometimes multi-vessel disease, is really an important technology for these physicians to use. So hopefully, that addresses your question, Brooks. I think I covered all the topics. So in summary -- in quick summary, still has a little bit of juice in that orange.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [22]

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That's good. I appreciate that.

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

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And a lot of juice, yes.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [24]

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That's good. I noticed the spending on R&D is creeping up as you have indicated it would. And I'm just curious, I'm sure you're not willing to talk a lot about what you're working on there. But is it more of a focus on improving your existing products? Or are you thinking about opportunities to get into some new products?

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

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Yes. So R&D is ramping up. And for a few reasons, and you've captured most of them. But first, it -- we do see increasing R&D expense related to the execution of the ECLIPSE clinical trial. So as patient enrollment continues to accelerate there, obviously, the spending in our -- in clinical will also ramp concurrent with that. We are investing, as we have been, for some time in product line extensions in our orbital atherectomy systems, continuing to improve our orbital atherectomy system as well as continuing to expand its use -- its usefulness and to improve its ease-of-use. So I think we'll -- you can see us continuing to do that. And then we are also making investments in organic R&D now to broaden our product offering and to expand our business going forward in the future. Some of that you are seeing already with the launch of, for example, our ZILIENT peripheral guidewires, and then, of course, in a distribution agreement, which doesn't impact our R&D. But then in a distribution agreement, we'll be bringing forward the balloon angioplasty catheters from OrbusNeich. So we're very excited about that. That's the first expansion of our product offering. And I think with organic R&D and other activities, we'll continue to expand that going forward.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [26]

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That's great. Just one more. Obviously excited about the opportunity in Japan, and I know we're right at the cusp of getting that going. Would you comment at all about opportunities in other international markets?

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

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We do. Japan is -- as I've said before, Japan is our first international market. It's a great market for us. We're very well-positioned there because the Japanese physicians interventional cardiologists use a lot more IVUS, they use a lot more imaging, they're much more discerning in vessel preparation. The utilization of orbital atherectomy is very consistent with their care model. So we'll focus on that, and really try to take advantage of that here in the near term. But the other important aspect of Japan is now that we have an international revenue stream coming into our company, that will give us the opportunity to leverage the resources coming from Japan to build the infrastructure that's necessary to expand globally. And certainly, as we look forward, we will -- we do intend to expand our business to take CSI global and we're just now in the process of defining where we're going to go next. But certainly, we're focused on Japan for now, and we'll keep you informed as we develop additional plans for other geographic expansion.

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Operator [28]

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And your next question comes from the line of Bob Hopkins with Bank of America.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [29]

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And I guess, congratulations to everybody. A lot of changes announced in this call. But again, I appreciate the chance to talk here for a quick second. I just wanted to hit a few things, Scott, if okay. First, I just want to clarify what I heard on the guidance for this year in terms of both Japan and the guidewires and balloon catheters. Did you say you expect total revenue to be about $1.7 million from Japan and about $500,000 from the guidewires and balloon catheters? Did I hear that correctly?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [30]

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Yes, that's correct. Yes.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [31]

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And then what percentage of that did you say was stocking?

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

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For Japan, the majority of that is stocking -- is initial stocking orders in Japan.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [33]

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Okay. Is there a reason why there wouldn't be much procedure revenue and you're only halfway through the year and are launching? Is that just conservatism on your part or...

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [34]

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No, we're launching it. I think, Bob, as I said, I mean, we're somewhat limited in our launch because it's peer-to-peer training. We'll start with 6 accounts. We expect that by the time we get to June, we'll have about 15 accounts up and running. But as I had indicated, this is kind of a geometric expansion model in the sense that we'll start with the physicians that participated in our COAST clinical trial who have been trained on the utility of this technology. They then will train the trainer who will train the trainer who will train the trainer. So there is a kind of a geometric expansion that will result in perhaps, a more gradual growth over time. I do expect that as we head into our FY 2019, we should see nice growth coming out of our Japan business.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [35]

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Okay. Just want to make sure I got the numbers right. And then one other topic I wanted to hit was just on the price declines in the OBL business. I think I understand that dynamic and you laid out the percentages nicely. But could you just talk to why we shouldn't be a little bit nervous about -- maybe about price -- more price pressure in the other 75% of the business? Why you're not seeing the price pressure there? And just what gives us conviction that we won't see incremental price pressure there?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [36]

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Well, we have projected, Bob, that we do expect to see price erosion over time. And we have typically said that we expect price reduction to be in that 1% -- I'm sorry, overall, to be in the range of the low single-digits for pricing. Now we have historically, as you know, over the past 3 or 4 years, we've performed much better than that. But I think we will see continued price erosion in our core markets. As I've said, it probably will be in that low to mid-single-digit range. Now we've said that before and it hasn't materialized, but we do expect that we can see that. Now if we look at the pricing differential between in-hospital peripheral and the OBL market, it's kind of important to consider the types of patients that are treated in OBLs. The patients that are treated in-hospital oftentimes are more complex patients. They have comorbidities and they have other challenges that will cause them to be treated in an environment where there's backup. A lot of these office-based labs are physician-owned. Cost containment is really a core focus for them in these practice settings. The resources that are available to them, they are limited in comparison to hospitals. I mean, for example, office-based labs really would lack surgical backup. And so the types of patients, that influences their patient selection. Now we do expect that over time, office-based labs, the types of patients that they treat will evolve towards perhaps more complex cases. And we want to partner with them and train and educate them on really how to use our technology and also on how to treat these more complex cases. So in kind of quick summary, on the one hand, in peripheral, you've got an environment where you're known to be treating more complex cases with important comorbidities. In the OBL segment, generally, at least up until now, patients that have been treated there, let's say, are not as severe and are perhaps more traditional in the sense of their peripheral lesions. And as a result, that's what drives the pricing pressure, I think -- or the differential on pricing pressure between those 2 segments.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [37]

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That's very helpful. Scott. And then, lastly, I just wanted to get your kind of updated views on coronary. And I know you've talked about it on the call a little bit already. But that business had a nice growth spurt, and now it's been kind of a little bit stuck in sort of the, call it, $11.5 million to $13.5 million range. So what would you point to that would help give us some conviction that you could see -- that we'll see better growth ahead? Like what gives you that conviction and when do you think that happens? Just trying to get a sense for what the real drivers are of incremental growth of coronary from here in light of the slowdown we've seen.

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [38]

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Yes, I -- Bob, as I've kind of said over the course of the past couple of quarters, I think it's mainly focus. And so by having these roughly 20 now dedicated coronary reps, I think we'll get much more consistent and stable growth in our coronary business. And by then, feathering in these really well-trained clinical specialists in our high-volume accounts, we'll be well positioned to take advantage of the opportunity that is there. There is no doubt that this marketplace, these patients that have highly calcified and complex coronary lesions, that particular market is growing very quickly, and we're well positioned to take advantage of that. We have to be focused. We've got to have that clinical support. Case coverage is important. And so as a result, continuing to partner really closely with these physicians who are now dedicating their practices to treating these more complex patients really is the key, I think, to driving growth. We also, over time, we'll see the continued benefit of our ECLIPSE clinical trial. And we'll be continuing to roll new products into that coronary segment. We've talked about the 1.0-millimeter balloon coming from OrbusNeich and some other products that I think can really make a difference in improving the quality of care for these patients. So we're dedicated to that particular group, and I think just having a real focus on it will make a difference here.

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Operator [39]

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

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [40]

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I guess, Scott, I just wanted to start with the hiring of Rhonda. Rhonda, congratulations, by the way. So I know when you originally stepped in as interim CEO, you went through a CEO search, and you ended up taking that role -- taking the permanent role. But I guess what I'm wondering, is the plan here really to have Rhonda take over as CEO within a certain time frame? Is that the succession plan?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [41]

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Well, hey, wait a minute. I'm still kind of a young guy, so let's not move too quickly on this. How long have you been here, 2 weeks so far?

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [42]

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Not even.

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [43]

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Not even. So no, no, no. That isn't the case. I think as you may have seen, Kevin Kenny, who was our Chief Operating Officer until the end of November, left the organization at that time by -- for various reasons. And Rhonda now comes in as our new Chief Operating Officer and really fills that very same role. I think what's critically important to me is, as I've said, is that Rhonda has deep commercial experience. She knows how to operate a business that's larger than this. And frankly, Rhonda and I have partnered together in the past to drive growth businesses. We worked together in Medtronic coronary, where we launched our drug-eluting stent business. And then, of course, when I was running the cardiovascular business, and we had completed the acquisition of CoreValve, I brought Rhonda on there to lead the transcatheter valve business at the time. And so we have partnered closely together in the past to scale businesses, to drive growth and really to create innovative powerhouses that I think you can tell have really made -- have been real success in med tech. So we look forward to doing that again, and I kind of plan to be around here for a little while as long as you'll have me.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [44]

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Okay, understand. And then I know you had a FDA clearance for your radial peripheral device. So I know when I've spoken with you about that, it was kind of on hold pending some radial products being launched by another company, some access product, I guess. So can you give us an update on that? And is that something that you think has potential to drive the peripheral business at all?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [45]

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Yes, first -- thanks for that question, Mike. And certainly, the use of the radial site of access in our peripheral business is going to be an important growth driver going -- coming forward. And you are right, we have been waiting for some of the other commercial partners to complete the development and launch of the guidewires and catheters and other support products that are necessary to facilitate radial access for our peripheral procedures. And in particular, at the SFA level, as you can imagine is very simply, these all have to be smaller but also very longer -- very much longer. So we're right on the cusp now of launching that, and I think that you can expect to see our peripheral radial launch coming soon.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [46]

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Okay. Just one more on the OBLs. So just out of curiosity, if there -- if they have a patient with calcified lesion, they're not using Diamondback because of cost reasons or whatnot. I mean, do they just not do an atherectomy or they're using a competitor's product like Rotablator or something?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [47]

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No, they're using -- they -- like I said, about 25% of our peripheral business currently is in the OBL. And the OBLs do use Diamondback for the treatment of severely calcified lesions. I think the point I was trying to make when I was addressing Bob's question is that because of the nature of these office-based labs, because they don't have surgical backup, oftentimes, they wind up treating patients that are perhaps not quite as a severe. And as a result, the prevalence of severely calcified lesions in OBLs has historically been lower. Now that -- we're seeing that evolve and change, and we may see that increase over time. So it's more the nature of patient selection criteria at the OBL level than it is the -- their selection of products. I think when severe calcium is present, physicians know to use Diamondback.

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Operator [48]

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And your final question comes from the line of Jayson Bedford with Raymond James.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [49]

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Just a couple of questions. I guess, in terms of the number of new customers added in the quarter was lower than our estimate, and I think it's the lowest it's been in quite some time. So I'm just wondering, is this a reflection of reps trying to dig deeper into accounts? Or is this -- I hate to suggest it, but is this a sign of market saturation? And I'd love your thoughts in terms of new customer adds going forward.

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [50]

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Okay. So a great, great question, and I want to point to 2 things. I mean, first of all, recall that in peripheral, we have a lot of accounts. So our new account activity there, generally, isn't that great. The second thing that I'll -- but coronary, it is. The second thing I'll point out is, and hopefully -- and this is more of a personal problem or selfish on my part. But hopefully, this is one of the last times I'll refer to our recall from last summer. But when we initiated that recall in Q4 of last year and Q1 of this year, we had indicated that, that recall, because we didn't have pumps available, created a gap in our new account pipeline. We did not have pumps to bring on new accounts. As we -- as new accounts became available, we shipped new accounts -- or we shipped our pumps to our current accounts, and we did not bring on that many new accounts. So there was a gap in our pipeline for new accounts. Now remember that we count a new account -- we call a new account a center that has now used greater than 6 units. So that means that if accounts haven't used any yet, we bring them on, we ship them a pump, we have to train them, educate them, bring them onboard. And then when they get to 6, we count them in this accounting as a new account. So there's a gap in our new account pipeline, and that did influence our performance in Q2. I -- we're working hard to make sure that we address that going forward.

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Jeffrey Points, [51]

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Jayson, just add to that, we've always talked about 30 to 40 accounts being reasonable. And that would be a reasonable expectation moving forward. We are focused on driving adoption in our existing accounts as well, so just to follow-up on that.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [52]

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Okay. And Jeff, just that to be clear, that's 30 to 40 in peripheral and coronary?

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Jeffrey Points, [53]

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Yes.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [54]

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Yes? Okay.

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

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And I think just -- sorry, Jayson. Just one final comment on that. I mean, really, as we've said on numerous occasions, we really do drive growth from our current accounts. I mean, the real opportunity here is to go deeper in our current accounts where we have the opportunity to train and educate more physicians at our current accounts on how to use our technology and increase the adoption of our technology for both coronary and peripheral procedures. So that continues to be our focus.

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Jeffrey Points, [56]

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And our reorder revenue remains at 98%, which it has been in the previous quarters as well.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [57]

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Right. Okay, that's helpful. You may have mentioned it but in the quarter, did you see better growth from those centers on the coronary side, from those centers who are being serviced by the dedicated coronary reps?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [58]

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Yes. Well, we did see strong growth from that group. We've seen improved growth there. And that group of reps, that group of 20, really roughly 20, are really focused on large accounts. And as I've described before, what's happening in the marketplace in coronary, is we're seeing this concentration now of patients where patients are aggregating at these more specialized accounts who are focused on treating complex coronary lesions. Drug-eluting stents have become so good and so easy to use that community hospitals and, let's say, the broader health care community can be very effective at placing these products. But when a patient shows up that has a more complex coronary lesion or has a low ejection fraction or some other comorbidity that makes their case more complicated, those patients are being referred to almost like tertiary centers now. And so we're taking this more focused coronary group of reps and really focusing them on those large accounts, and that's where we're going to see a real opportunity going forward and in leveraging that focused channel. So yes, we did see an uplift in Q2, and I think we'll see sequential growth from that group in Q3 and Q4.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [59]

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Okay. And just last -- just on that topic. Did you see any drop-off in peripheral accounts or usage from the accounts that the coronary reps used to cover? Has there been a disruption there?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [60]

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I don't -- I can't answer that quantitatively. I can tell you qualitatively, I really don't think so. We don't see that in our data. And I -- we -- as I said on our last call, this was more of an evolution than a revolution. I mean, we had already -- we have always managed, I mean -- since I came onboard here, I've always made it possible for our regional managers to focus their resources in places where they felt they could get the best return on their investment. And if that meant that they wanted to have a dedicated peripheral rep because they had a particular peripheral account that was doing $2 million or something, they could do it. If on the other hand, they had a great coronary opportunity or they had a few coronary sites that were co-located and they can cover those sites with a dedicated coronary rep, we allow them to do that. And over time, we saw that evolve into a larger number of dedicated coronary reps and what we decided to do in Q1 was just to really take that group and say, "All right, now we're going to go back to having this dedicated focus in coronary and really begin to target that group at these high volume accounts." So more of an evolution than a revolution. And as a result, I think our peripheral accounts over time there were adequately covered by our hybrid sales reps as well as clinical specialists that were present in those territories.

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Jeffrey Points, [61]

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And Jayson, just to follow-up on that. In Q1 and Q2, we did see disruption in the devices per account. On the peripheral side, it was actually flat, but we did see an increase in coronary. So I think the answer to that would be that it was not a big disruption.

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [62]

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Krista, are there any other questions?

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Operator [63]

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We have no further questions in this queue. I'll turn the call over to Scott.

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, CEO and President [64]

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Okay. Thank you very much. Thank you everyone for your continued interest in CSI. We look forward to updating you on our progress in the future, and this concludes our conference call for today. Thanks, everyone.

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Operator [65]

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And this concludes today's conference call. You may now disconnect your lines.