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Edited Transcript of CSII earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q4 2019 Cardiovascular Systems Inc Earnings Call

ST. PAUL Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Cardiovascular Systems Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

* Ryan D. Egeland

Cardiovascular Systems, Inc. - Chief Medical Officer

* Scott Raymond Ward

Cardiovascular Systems, Inc. - Chairman, President & CEO

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Conference Call Participants

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* 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

* 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

* Mathew Justin Blackman

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

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cardiovascular Systems, Inc. Fiscal Year 2019 Fourth Quarter Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Jack Nielsen, Vice President, Investor Relations and Corporate Communications. Please go ahead.

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John E. Nielsen, Cardiovascular Systems, Inc. - VP of IR & Corporate Communications [2]

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Thank you, Kelly. Good afternoon, and welcome to our fiscal 2019 fourth quarter conference call. With me today are Scott Ward, CSI Chairman, President and Chief Executive Officer; Rhonda Robb, Chief Operating Officer; Jeff Points, Chief Financial Officer; and Dr. Ryan Egeland, Vice President of Medical Affairs. Hopefully you have had an opportunity to briefly review today's press release. We will discuss our fourth quarter results in detail on today's call.

During this call, we will make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding CSI's future financial and operating results or other statements that are not historical facts. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. We will also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results.

I will now turn the call over to Scott Ward.

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

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Thank you, Jack. Good afternoon, everyone, and thank you for joining us today. I am pleased to report that CSI produced double-digit growth for the fifth consecutive quarter with revenue of $68.2 million representing a 15% increase compared to last year. This marks our strongest quarterly revenue growth in several years. Our performance in fourth quarter and throughout FY '19 demonstrates that our strategies to accelerate top line growth are delivering the desired results. And we continued to successfully execute on the key growth drivers that we shared with you during our analyst day 1 year ago.

Revenue growth in Q4 was again driven by ongoing strength in our domestic atherectomy businesses. Similar to last quarter, we achieved double-digit units growth in both our peripheral and coronary franchises. Sales of our new procedure support products such as the 1-millimeter Sapphire balloon, the Teleport Microcatheter and our radio support products continue to gain momentum. The commercial launch of orbital atherectomy in international markets continues to produce solid results. We achieved $2.5 million in international revenue in Q4 driven by strong adoption in Japan and continued market expansion in Asia, the Middle East and Europe.

In addition to achieving our revenue objectives, we are also executing on our other key financial goals. We were profitable again in Q4 and gross profit margin remained above 80%. Our manufacturing operations continue to perform exceptionally well, delivering important cost reductions as we drive increased unit volumes.

Our Q4 results represent the commitment of our organization to reach more patients and broaden our revenue streams. Consistent with that commitment, last night we announced acquisition of the WIRION Embolic Protection System from Gardia Medical . Acquiring the WIRION system complements our strategy to broaden our portfolio for physicians that treat complex peripheral arterial disease. It is the only distal embolic protection filter that can be used with any commercially available peripheral atherectomy system to capture all forms of embolic debris including thrombus. The device can also be used with any 014 wire making it an incredibly versatile system that can provide assurance for physicians and their patients undergoing peripheral interventions in more complex cases, where the risk of distilled embolization could be higher.

Physicians typically use embolic protection devices in vessels located above the knee with long lesions, high plaque burden and poor runoff. Each year, approximately 160,000 above-the-knee atherectomy procedures are performed in the U.S. and we estimate EPDs are used in about 1/3 of those cases.

The WIRION system received CE Mark in June 2015 and FDA clearance in March 2018. CSI plans to begin U.S. sales of the device in approximately 12 to 15 months following the transfer of manufacturing from Gardia to CSI. During this time, we intend to improve and scale the manufacturing process as required to support commercial launch.

In sum, we are very excited to add an embolic protection system to our portfolio. The acquisition of the WIRION system is consistent with our strategy to broaden our product offering, leverage our presence in the cath lab and increase our revenue per procedure. In a moment Rhonda will discuss our key growth drivers and commercial progress. But first, Jeff will now provide you with details on our Q4 and fiscal '19 results and discuss the outlook for fiscal 20.

Jeff?

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

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Thanks, and good afternoon, everybody. As Scott mentioned, fourth quarter revenue of $68.2 million represented a 15% increase compared to last year. It also represents sequential revenue growth of 8% compared to third quarter. In total, we sold nearly 23,000 orbital atherectomy devices during the quarter representing a 22% increase compared to last year.

Worldwide peripheral increased 12% to $48.3 million. Domestically, peripheral unit volumes increased 16% as our strategies are driving growth in both the OBL and the hospital sites of service. As anticipated, we experienced a mid-single-digit ASP decline in peripheral, consistent with our expectations in recent periods.

Worldwide coronary revenue increased 24% to approximately $20 million. Domestic coronary revenues grew 16% primarily driven by increased unit volumes. Coronary ASPs declined modestly as anticipated. The revenue generated in the U.S. and international markets was as follows: Total U.S. revenue increased 13% to $65.7 million; Domestic peripheral revenue increased 12% to $48.2 million; and domestic coronary revenue increased 16% to $17.5 million. International revenue totaled $2.5 million.

In Q4, gross profit margin remained strong at 80.3%. Operating expenses of $53.5 million increased about $9 million or 20% compared to last year. R&D expenses associated with investments in new product development and enrollment in the ECLIPSE clinical trial increased 42%. We are accelerating our investment in R&D to broaden our product offering, expand the use of orbital atherectomy and drive long-term value.

SG&A increased 16% due to increased investments in clinical specialists along with physician training and medical education investments to support our international expansion. We were profitable in fourth quarter with net income of $1.5 million or $0.04 per share and adjusted EBITDA of $4.7 million We ended the year with $123 million in cash and marketable securities.

That concludes my comments on our Q4 financial results. Before I discuss our fiscal '20 guidance, I will now provide financial details surrounding the acquisition of the WIRION Embolic Protection System from Gardia Medical.

Consideration related to the asset purchase is $17 million, $7 million of which was paid at closing in the form of 80% cash and 20% CSI stock. The balance of $10 million, up to which 50% can be paid in CSI stock at our election, is to be paid upon successful completion of manufacturing transfer, which we expect to occur at approximately 12 to 15 months.

There is no WIRION revenue in our fiscal '20 plan, however, we anticipate expenses related to intangible asset amortization along with some direct expenses in anticipation of a full launch in the first half of fiscal '21. I plan to provide an update on the timing and amount of these expenses on our Q1 earnings call.

I'll now comment on our fiscal '20 annual guidance. We anticipate revenues in the range of $278 million to $283 million representing annual revenue growth of 12% to 14%; gross profit margin of 79% to 80%; net income or loss of approximately breakeven, excluding intangible asset amortization and direct expenses associated with the WIRION asset acquisition; and positive adjusted EBITDA.

Consistent with our fiscal '19 results, fiscal '20 revenue growth will come from a combination of 3 drivers: double-digit growth in our core atherectomy business; Second, growth in procedure support product revenue is expected to come from increase in adoption of our emerging coronary toolkit and radio support devices; and finally, the continued commercialization of orbital atherectomy outside the U.S, which is forecasted to grow at 27% to, 39% increasing to $10 million to $11 million in revenue in fiscal '20. Combined, these 3 revenue streams drive attractive overall revenue growth in fiscal '20 and position the company for continued growth in fiscal '21 and beyond.

Our breakeven net income guidance reflects the continued investment into our key growth drivers. The composition of these investments will continue to shift in fiscal '20 as we leverage SG&A spend as a percentage of revenue in favor of increased investments in R&D.

As you refine your quarterly models, please note that Q1 is our seasonally lowest quarter of the year. If you look at the last 2 years, our first quarter revenue was 5% to 6% lower in Q4 of the prior year. Also, due to timing of our national training, meeting and key conferences, such as AMP and TCT, our expenses will be higher. As a result, Q1 typically represents our lowest revenue and largest net loss period for the fiscal year. We anticipate both revenue and profitability to improve sequentially throughout fiscal '20 similar to our experience in fiscal 2019.

Rhonda will now discuss our commercial developments. Rhonda?

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

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Thank you, Jeff. Throughout fiscal '19, our core domestic orbital atherectomy franchise has been strong and stable. And in Q4, our core device revenue grew 11%. The stability of our atherectomy business is the result of combination of factors that together establish CSI as a partner of choice for physicians treating complex coronary and peripheral disease.

First, in peripheral, our worldwide business grew over 12% in Q4 driven by 16% unit growth in the core domestic peripheral atherectomy business. We continue to drive above-market growth through the successful execution of a number of key initiatives. We provide exceptional case support with deep clinical acumen. We focus on market development and drive continued success in the office-based lab market. We continue to execute on long-term volume-based contracts with pricing stability. And we're driving continuous innovation on our core technology, including products that offer novel access sites like radial and the recently launched exchangeable device with GlideAssist. And our dual mode of action provides a sustainable competitive advantage.

Our medical education programs generate new accounts and new users. And finally, we Liberty 360, ECLIPSE and most recently, the launch of the REACH radial study, we continue to expand the medical evidence and publications in peer-reviewed journals to support the increased use of our products.

Sustained growth in orbital atherectomy in both OBLs and hospitals is particularly encouraging as we continue to compete in a dynamic and increasingly competitive environment. As we have shared previously, OBLs are accelerating patient access to care and we now believe they account for over 50% of peripheral atherectomy procedures. For nearly 2 years, we have successfully targeted high-volume OBL sites offering long-term volume-based contracts combined with increased procedure support. And now for the third quarter in a row, CSI revenue from OBL has increased over 25%.

In addition, we continue to see increased utilization of novel access sites like radial and pedal; and with the unique competitive advantage with our 5 French system, we generated 22% sequential revenue growth in accounts that have adopted radial access. And finally, we are seeing some incremental growth due to the controversy surrounding paclitaxel-coated balloons and stents.

On the medical education front, we trained over 3,000 medical providers in fiscal '19. Providing strong medical education differentiates CSI from competitors, and physicians appreciate our dedication to training and procedure support to ensure improved patient outcomes.

We follow up over robust medical education programs with a large and clinically focused sales channel. We now have over 300 sales representatives and clinical support personnel that can educate and introduce our technology to physicians by discussing our vast clinical studies. And we have the strongest medical evidence in the market. The expansiveness of our peripheral clinical evidence for orbital atherectomy, including duration of follow-up to 3 years, is exclusive to CSI and an area where we will continue to invest and differentiate versus our competitors.

Turning to coronary. Our worldwide business grew 24% in Q4 consistent with Q3 results. Continued strength in coronary was the result of several strategies we implemented over the past year, including increased sales focus and the number of dedicated coronary sales representative; the commercial launch of our complex coronary toolkit, including the Teleport Microcatheter and the 1-millimeter Sapphire balloon; investment in medical education programs to train new users and international growth.

The demand for orbital atherectomy outside the U.S. remains strong. We now launched -- have now launched orbital atherectomy in 10 countries across Asia, Europe and the Middle East. And we surpassed our new account goals. In FY '19, we certified 120 physicians outside the U.S. to use orbital atherectomy, and we are now about 18 months into the coronary launch in Japan. And we are encouraged by the strong sequential growth in this market.

Since introducing Coronary Classic and ViperWire Advance with Flex Tip products in Q3, we have seen an acceleration in new and existing users. We've remained on track to capture 20% or more of the Japan market in fiscal '20.

Transitioning now to our R&D initiatives. In June, we announced the first enrollment in the REACH peripheral radial study. This study will prospectively evaluate acute clinical outcomes of orbital atherectomy using radial access for the treatment of peripheral arterial disease. 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.

In June, we also conducted our second presubmission meeting with the FDA to discuss the preclinical and clinical requirements for our percutaneous ventricular assist device. We continue to target fiscal '21 for first in human. Enrollment in our ECLIPSE, our 2,000-patient randomized, controlled coronary trial, has now topped 950 enrollments; and we are targeting completion of enrollment in fiscal '21.

And finally, we look forward to a late breaking presentation at AMP next week, where this 3-year data for our landmark Liberty 360 study will be presented. Recall that last year, the 2-year data from this study showed that endovascular interventions resulted in high freedom for major amputation patients across all Rutherford classes.

Looking ahead to fiscal '20. CSI growth drivers will include continued expansion of domestic core atherectomy business. Our peripheral franchise will be driven by continued growth and success in the hospitals and the OBL markets with continued adoption of emerging radial access toolkit; the full market launch of our exchangeable platform with GlideAssist; full market launch of our next-generation Diamondback and Stealth peripheral platforms, which will include the addition of the GlideAssist feature on select models; and the launch of additional peripheral procedure support products, including the JADE angioplasty platform of balloons in late fiscal '20.

In coronary, we will continue to allocate field resources to target high-volume coronary centers focusing on complex coronary artery disease. In FY '20, we plan to double the number of dedicated coronary reps to focus on high-volume complex PCI accounts.

Broad case coverage, clinical acumen and innovative tools provide CSI reps with a unique competitive advantage in the coronary cath lab. We also look to build on our coronary toolkit with the anticipated approval of the Nitinol ViperWire Advance with Flex Tip. Combined with Diamondback with GlideAssist with the Teleport Microcatheter and the Sapphire 1.0-millimeter balloon, we will offer a compelling and effective coronary toolkit for treating the most complex, challenging coronary lesions.

And finally, with the recently announced in-patient final and outpatient proposed rules for 2020 payments, we also anticipate continued stability in reimbursement. Internationally, we will look to increase adoption of OAS in our current markets and plan to launch our products in up to 10 new countries in FY '20.

Our portfolio will also continue to evolve and change as we optimize our position in the complex coronary and peripheral spaces and identifying new opportunities for growth. And we're excited to provide an update to our product portfolio at TCT on Thursday, September 26. That concludes my prepared remarks.

I'll be happy to address your questions after Scott provides his closing thoughts.

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

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Thank you, Rhonda. Q4 was another outstanding quarter for CSI, and we exit fiscal '19 now with real strong momentum.

Before I close, I want to thank our more than 800 CSI employees for their extraordinary dedication and commitment to our mission and the patients that we serve. CSI is a patient-centric and customer-focused company. In fiscal '19, our 800 employees made a positive difference in the lives of over 80,000 patients and the families and friends that care for them. As I have discussed in the past, we have assembled a strong management team here at CSI with significant experience in leading and scaling complex high-growth med tech businesses. And about 1 year ago, we presented our 5-year strategic plan to build and grow this company.

As you have just heard, we concluded the first year of that plan with solid results from each of our key growth initiatives. In fiscal '19, we achieved strong progress in core orbital atherectomy growth with the introduction of new products and with international expansion.

Our core atherectomy business grew 11% in fiscal '19, and we generated $12 million in revenue from new products and new geographic markets. We began selling procedure support products to produce more revenue per procedure, including the 1-millimeter Sapphire coronary balloon, the Teleport Microcatheter and the ZILIENT peripheral wire. We generated nearly $4 million in new revenue as these products gained traction throughout the year. Internationally, we certified 120 new physicians, conducted nearly 2,000 orbital atherectomy cases and generated nearly $8 million in revenue.

Growth from our core atherectomy business and new revenue streams like support products and international expansion combined to accelerate our total fiscal '19 revenue growth rate to over 14%. Gross margins remained above 80% for the full year, and we believe our manufacturing quality and supply chain teams represent an important competitive advantage for CSI.

Operational and quality excellence initiatives are part of our long-term strategy and future success. In fiscal '19, we delivered on commitments to improve productivity, control spend and implement raw material savings. As a result, we reduced our cost of goods sold at a rate faster than our ASP erosion. As planned, in fiscal '19, we leveraged our SG&A spend and reinvested in research and development. R&D expenses, which include new products and clinical investments, increased by 25% year-over-year. We remain committed to investing $250 million through fiscal '23 to develop new products and the medical evidence necessary to expand our market in the treatment of patients with complex coronary and peripheral artery disease.

In addition to delivering solid financial results, we are also executing on our key development milestones. As we continue to build CSI, we are transforming from a single product, single geography company into a multiproduct company with worldwide reach. Our Q4 and fiscal '19 financial results highlight the early successes that we have achieved as we broaden our product offering, expand internationally and deliver attractive sustainable revenue growth. we are well positioned to achieve our strategic growth goals. We look to the future with confidence and a clear focus on our mission to save limbs and save lives every day. Thank you for your continued interest in CSI. We look forward to updating you on our progress, and we will now take your questions.

Kelly, would you please repeat the instructions at this time? Thanks.

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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 Brooks O'Neil from Lake Street Capital.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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Congratulations on a terrific year, and I thought the overview you just gave us was outstanding and comprehensive. But I do you have a couple of questions. So first, Scott, I'm curious. Historically, I've kind of sensed you strongly favor internal development to ramp up your sales growth and expand your product line. Would you say the acquisition you announced this morning represents a change in philosophy, an evolution of philosophy? Or how exactly do you think about it yourself?

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

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Yes, thanks, Brooks, for those kind comments. In terms of the WIRION acquisition from Gardia, we have said that we will pursue transactions where we can add products that will complement our current product line and allow us to increase our revenue per procedure. I think in that context, the addition of an embolic protection device really fits those requirements quite well. And we're very excited to add this product because, as I said, this is a product that is used really not only during atherectomy devices but during any peripheral vascular intervention and has the potential to add meaningful revenue to our business. This would fall into our focus on the addition of support products, so you can consider this to be an addition to our product line, where we're currently selling, let's say, wires. We'll ultimately be selling balloons. And we're selling, of course, catheters as well. So this is a good addition to our support product line.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Great. Let me ask 1 or 2 more quick ones. First, you mentioned over many calls in many years maintaining gross margins above 80%, which I applaud. I know you're investing heavily in all areas of the business, but I think the guidance for the new fiscal year does include the possibility of a slip below 80%. Could you just talk about how significant you think -- you feel 80% is or sort of how you view the gross margin outlook now?

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

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Well, I can tell you I -- your observation is correct. But we intend to continue to operate this company with very strong gross margins. And as we look to the future, we'll be adding revenue streams from clearly lower-margin international markets as well as some of these lower-margin support products. But we are continuing to make every effort across our full product line to reduce our cost of goods sold and to do so in a manner that allows us to respond to pricing pressures in the market and yet still retain really strong gross margins. So we are -- we're continuing to work hard to do that. And as I said in my commentary, I believe that our manufacturing operations is a real competitive strength for CSI, and I have great confidence in our ability to continue to reduce our cost of goods sold as we address these market challenges.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Congratulations again.

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Operator [7]

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Your next question comes from the line of Mathew Blackman from Stifel.

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Mathew Justin Blackman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [8]

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Let me just start. Rhonda, you mentioned I think an uplift in peripheral volumes from the paclitaxel-related controversy. First of all, did I hear that correctly? And then just follow-on to that, I know it's challenging. But is there a way to quantify that? It feels maybe like in the back half of '19 that could have added 1 point or 2 of growth. Do you think that's reasonable? And the last piece of that multi-part question, would you expect that type of tailwind to sustain in your F '20 outlook? And then I've got one follow-up.

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [9]

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Sure. Yes, you did hear me correctly. I did mention that we believe our hospital business in particular is benefiting from the paclitaxel controversies. Our hospital atherectomy business in Q4 increased 7.4% -- 5%, excuse me. And it's just in doing a lot of market checks, we're hearing a lot about with the absence of a restenosis -- anti-restenosis option, physicians are placing increased focus on vessel preparation and increasing lumen area. So piece of this, we think year-over-year, is some share gain, but a piece of it is also what we think, particularly in the last quarter, positive market forces for atherectomy.

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Mathew Justin Blackman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [10]

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Okay. And the way to sort of frame it, you gave a little bit of color there. But do you think 1 point or 2 points is too much to think that it's adding as we think about the peripheral business as a whole?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [11]

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Yes, Mat, I think -- this is Scott. I think it's difficult to quantify that. We have so many different initiatives underway in the flywheel that it's hard to tease that out and say that the DCB controversy is influencing our business by X amount. Naturally, we're seeing real strong growth in radial, where we see 22% growth and strong growth in our OBLs, where, frankly, the drug-coated balloons typically have not been used.

I would just remind you that the drug-coated balloon business influences really only a small segment of our market overall, and that is because we focus -- 60% of our revenue typically comes from below-the-knee cases in peripheral and about, let's say, 25% of our peripheral revenue comes from OBLs, where drug-coated balloons have typically not been used due to reimbursement issues. So that means that roughly, let's say, 15% to 20% of our business is open to influence.

Now in that segment, let's say that physicians are using 1 or 2 more of our devices per month to treat their patients, as Rhonda said, really focusing on opening that lumen, assuring good patency, getting a good broad lumen to start obviously achieves better outcomes in the long run. But if it was at that rate, it would be hard for us to tease it out. I think that's probably the best color I can give you on it at this point.

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Mathew Justin Blackman, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [12]

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No, Scott, that's really helpful. I appreciate that. And then just my follow-up question, more of a bigger picture. Just want to go back to the strategy of adding revenue per procedure whether it's M&A like last night or adding to the procedure support portfolio. Is there a way to frame how much more revenue per procedure is left for you to capture? Is there a way to quantify that, how far along you are in that process, how much more opportunity there is down the line?

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

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I think it's a little bit hard for us to quantify how much opportunity is remaining. I can tell you that in coronary where we have our full -- well, just about the full product line out, we've got the coronary balloons out. We now have our Teleport Microcatheter. There, we are seeing really strong progress with almost half of our coroner accounts now using at least one of our support devices during a procedure. There probably is on the order of $1,000 per case available in coronary, and I would say right now we don't have a wire out in that market. So theoretically, our max there is probably somewhere on the order of $700 or $800. So right now we're providing a good line of products in coronary.

Staying on coronary for a moment though, Mat. We compete obviously with companies that have much larger offerings than we do, and that complicates our ability to access this marketplace because a lot of these companies will have large contracts with hospitals that include their support products, balloons, wires and catheters, and maybe that's bundled with stents or other products. Sometimes it's difficult for us to crack those accounts. So I don't think I would expect to see 100% of our accounts using our support devices. We do want to see our support devices used in the majority of our cases, and that's what we're striving to achieve. So in coronary, we've made good progress.

In peripheral, we haven't yet launched our balloons in peripheral. We anticipate launching our PTA balloon line, as Rhonda said, late in fiscal year '20. And at that point in time, I think we'll see our fiscal -- our peripheral support products continue to really take off and grow. In the meantime, our ZILIENT wire is our offering there. And so we're really only scratching the surface on procedure support product revenue that could be generated in peripheral.

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Operator [14]

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

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [15]

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So I guess just starting with the WIRION acquisition. I thought that you guys have kind of positioned your orbital products as not meeting the kind of downstream protection that this thing provides. So are you going to have to change your messaging there? Or is this really just to go after kind of a subset of the cases that you talked about and maybe some of the competitive new products that are being used out there?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [16]

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I'm going to ask our Vice President of Medical Affairs, Ryan Egeland, to respond to that. But just before I do, I'll tell you that not all of our orbital atherectomy devices are used in really simple cases. And our orbital atherectomy devices are used in relatively complex cases; and under those circumstances, it just makes intuitive sense at times for physicians who want to use embolic protection. So Ryan, do you want to add to that?

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Ryan D. Egeland, Cardiovascular Systems, Inc. - Chief Medical Officer [17]

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Yes, I think just as Scott said, the concept of trapping debris, preventing distal embolization is mechanistically and clinically appealing both for complex disease but of course, in particular with large disease burden and significant atherosclerotic disease and in combination with compromised distal runoff, embolic protection just makes intuitive sense to our intravascular specialists. And of course, that occurs not only with atherectomy but as Scott said, with both stenting, balloon angioplasty and even simple guidewire exchanges.

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [18]

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And I would just maybe add on to that, Ryan, I think it gives us an opportunity for CSI to compete further in the ATK market in particular. And what's unique about this device is that it is truly universal and can be used with any atherectomy system in any plaque morphology. So that's an important strategic advantage along with any wire.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [19]

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And then just there -- I guess there was something in the Medicare proposal around potentially covering PCIs in the ASC setting, so just wanted to see if you could maybe comment on that. If that happens and they do or they don't cover atherectomy, what does that mean for CSI? I guess if they start doing more procedures there and they're not covering atherectomy in that setting, is there a risk that, that leads to just decreased use of atherectomy? Or are they really just saving those cases for use in more of a hospital inpatient setting?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [20]

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Yes, these are really complex cases that are typically performed in a hospital setting where there's surgical backup. So we'll continue to monitor that, but we don't anticipate that, that will influence our market at this time.

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [21]

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Yes. And maybe just to add though, in our early analysis of the final inpatient and proposed outpatient, we're looking at potential coronary procedures for CSI being up 3%. So reimbursement continues to move in a favorable direction at least with the early assessment.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [22]

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Yes. And I guess just as a follow-up, I mean it did look like the OBL reimbursement was down a little, but I guess it didn't seem like it would be big enough to really move the needle there in terms of using atherectomy in that setting. But I just wanted to get your thoughts on that as well.

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

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Yes. Just a comment on the OBL setting. Remember those are -- the inpatient is final rule. The OBL setting is still in a proposed rule. And even with those reductions, it'll be higher than where it was last year at this time. So I think we're cautiously optimistic about where that stands at this point.

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [24]

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Yes. The proposed hospital was also positive and so kind of on balance with where our procedures are taking place. We expect it to be flat to positive for CSI as well in the peripheral setting. But we won't know that until the proposed rule becomes final.

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Operator [25]

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Your next question comes from the line of Danielle Antalffy from SVB Leerink.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [26]

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Congrats on a really excellent year. Just a question on the OBL setting. That's becoming a bigger percentage of your revenue. And just wondering if you can comment on what you've seen so far as to how sticky is that customer? Is that a relatively stickier, less sticky customer? What are they most focused on? I assume you're going to say price, but just trying to get a sense of whether the competitive dynamics change as OBL becomes a bigger piece of your revenue.

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

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Danielle, we have really -- well, first of all, Danielle, thank you for the comments on the full year. We appreciate that. As you recall, we have pursued a strategy in the OBL setting, which is very deliberate. And we did so in a manner where we were trying to assure that we would maintain consistent use of our products in the OBL setting over time. So recall that we focus in the OBL setting on the physicians that treat complex cases, complex to really calcified cases. And so as physicians may have normally been performing those more complex cases in hospital settings, as they begin to move to in the OBL, we would move with them. And in doing so, we would offer them long-term contracts with obviously some preferential pricing. And we would also provide clinical support.

So as you know, we now have over 100 clinical specialists in the marketplace, and much of that field force is focused on providing support in the OBL setting. So we have really tried to surround that customer with, first, really the best product in the market and then with the best service and support that they can find and then have that extended out over a longer period of time with favorable pricing that's contained in a long-term contract. In that the way, we think that, that becomes fairly sticky business.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [28]

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Got it. And is it safe to say that you think you're larger -- I think you guys had comments on this before, but your larger competitors aren't actually providing that clinical support. Do you actually have a leg up not just from a technology perspective but also from a case coverage perspective in the OBL? Is that a safe characterization?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [29]

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Yes, I think we have a meaningful competitive advantage based on the extent of clinical support that we provide to the marketplace. And in particular in the OBL, not only do we have the capacity, but we have a really strong core competency. I'm really pleased with the clinical acumen of our field support. I think we get -- we frequently obtain or get very positive feedback from customers on the clinical acumen of our field support organization.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [30]

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And then, Rhonda, just a question for you on the radial clinical study that you just announced. What -- is this going to be something -- like I guess the question is why conduct the study. Is this going to be something that expands the number of physicians that adopt the radial access? Is it something that could change guidelines? What's the strategy and rationale for the study?

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [31]

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Yes. I'll start and then maybe ask Ryan Egeland to help augment this. I mean really there's never been a radial study done in peripheral before, and so it was really an opportunity for us to take this unique differentiated competitive advantage and learn more about it. We've seen clinical benefits clearly outlined in the coronary space and in coronary clinical trials, and our feeling is that the similar types of benefits, whether it's low complications, increased ambulation, we'll see that in radial. But in true CSI spirit, we really want to collect the evidence to prove it. And so that's really kind of the strategy behind it. Ryan, maybe you can add some additional commentary as well.

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Ryan D. Egeland, Cardiovascular Systems, Inc. - Chief Medical Officer [32]

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No, I think that's spot on. Just as Rhonda stated, the coronary experience in radial is well studied, and of course the benefits to the patient both in terms of complications and early ambulation time are intuitive there, but we just haven't validated that. The community hasn't studied this in the peripheral setting. So we're taking some leadership role and generating that evidence and validating that value proposition as well in the peripheral space. So that's what we intend to do.

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Rhonda J. Robb, Cardiovascular Systems, Inc. - COO [33]

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And I'll say, the investigators that we've engaged to participate in that, they're really excited to bring forward evidence that's never been shown before. So it's a way for us to innovate in the medical evidence field.

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Operator [34]

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

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [35]

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So just a few questions. I realize that you don't have full information, and the market is quite dynamic right now. But can you comment on peripheral atherectomy market growth? And then secondly, as you look to your guidance for next year, the double-digit core atherectomy growth, what are you assuming for peripheral?

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

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Yes. Thanks, Jayson. Thanks for those comments. So we think that the peripheral marketplace continues to grow in that high single-digit range. We haven't really seen any change in that. It just has continued to remain pretty stable and strong. I'm sorry, what was the second part of your question?

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [37]

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Well, I'll ask kind of a follow-up to that, and then I'll ask the second part. Just, Scott, the high single digit, that's on a dollar basis or a unit basis? Because there is...

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

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The high single digit is on a unit basis, so that tracks back to the epidemic that we're facing in peripheral vascular disease and just the continued large number of patients that are presenting with this disorder.

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

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Okay. And then I ask just in terms of when you -- the comment on guidance was double-digit core atherectomy, and I was just trying to break out what are you assuming for peripheral versus coronary.

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

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Yes. Similar to what we've talked about before, Jayson, high single-digit growth in peripheral and kind of that mid-teen growth in coronary lands you at a double digit, around a 10% growth rate in the core business. We talked about $10 million to $11 million in international revenue and then the balance being our interventional support products. And so that's how we got to the guidance number.

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

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Okay. And just in that $10 million to $11 million international, what's the plan for new countries? I think you mentioned 10 right now. When we look through to fiscal '20, how many more countries do you think you'll enter?

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

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Yes, that's correct. There's really kind of 2 pieces that go into that number. There's continued adoption where we've already launched. So really looking at deeper penetration and then adoption within the 10 countries that we've already accessed in this past year, and then we will add up to 10 new countries in FY '20 as well.

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

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Will add 10 new countries. Okay. And just finally, just on the international, you mentioned you think you've captured 20% plus of the market in Japan in fiscal '20. What is the denominator? What's the size of that market?

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Scott Raymond Ward, Cardiovascular Systems, Inc. - Chairman, President & CEO [44]

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The size of the market in Japan is about 10,000 units, so we would anticipate getting to above that 2,000-unit level in this coming fiscal year.

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Operator [45]

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(Operator Instructions) Your next question comes from the line of Margaret Kaczor from William Blair.

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Brandon Vazquez, William Blair & Company L.L.C., Research Division - Associate [46]

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This is actually Brandon in for Margaret. I want to go back first to the WIRION discussion we were having earlier and maybe approach it a little bit different. I was curious if you think the acquisition is something that maybe can enable more orbital atherectomy procedures as maybe some doctors get more comfortable with having a filter. Or do you think the real benefit of it is just having another kind of differentiated support product to capture more of the procedure revenue?

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

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Thanks, Brandon. We definitely do think that this is going to expand the use of orbital atherectomy for many patients. There are circumstances when you're using radial access as well as when you're treating, as Dr. Egeland referred to, really complex cases, where physicians are concerned about emboli. And in those cases, the physicians may choose to do different types of procedures. Under these circumstances now, we think that we can provide a full product offering that will enable their use of orbital atherectomy. So we do anticipate that this acquisition will increase the utilization of orbital atherectomy as well.

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Brandon Vazquez, William Blair & Company L.L.C., Research Division - Associate [48]

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Okay. That makes sense. And then just one other one. As we look to fiscal 2020 especially specifically in the peripheral side, what kind of ASP declines are factored into guidance? Is it just kind of continued mid-single digits? And I guess part of the reason I ask is as you get deeper into some of these OBL accounts, maybe some of the ASP headwinds maybe would annualize and is that -- would that offset some of the headwinds you see in 2020?

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Jeffrey S. Points, Cardiovascular Systems, Inc. - CFO [49]

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Yes, Brandon. Thanks for the questions. On the peripheral side, we're forecasting continued kind of that low to mid-single-digit price erosion. Of course, a little bit higher erosion on the OBL space but offset by very sticky ASPs in the hospital space. If we look at the coronary side, those have been more consistent. We've had lower erosion in the coronary space, and we would expect that to continue as well. And of course, we stay focused on producing costs, as Scott mentioned, really -- to really outpace ASP erosion that we're seeing in the marketplace.

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Operator [50]

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And there are no further questions at this time. I will now turn the call back to Scott Ward for closing remarks.

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

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Great. Thank you, Kelly. Thanks, everyone, for your continued interest in CSI. We look forward to seeing you all and providing an update on our product portfolio at TCT. Once again, that'll be on Thursday, September 26. And thank you for dialing in today. That'll conclude our call. Thank you.

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Operator [52]

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