Micrus Endovascular Corporation (MEND)

F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

November 6, 2008, 10:30 am ET

Executives

Jody Cain – IR, Lippert Heilshorn & Associates

John Kilcoyne – Chairman and CEO

Gordon Sangster – CFO

Bob Stern – President and COO

Analysts

Amit Hazan – Oppenheimer

Dave Turkaly – SIG

Brooks West – Craig-Hallum Capital

Samir Harish – Needham & Company

Spencer Nam – Summer Street

Suraj Kalia – Sanders Morris Harris Group

Presentation

Operator

Welcome to the Micrus Endovascular fiscal 2009 second quarter financial results conference call. At this time al participants are in a listen-only mode. Following managements prepared remarks we will hold a Q-and-A session. (Operator instructions) As a reminder, this conference is being recorded today, November 6, 2008. I would now like to turn the conference over to Jody Cain. Please go ahead, ma’am.

Jody Cain

This is Jody Cain with Lippert/Heilshorn & Associates. Thank you for participating in today’s call. Joining me from Micrus Endovascular are John Kilcoyne, Chairman and Chief Executive Officer; Bob Stern, the Company’s President and Chief Operating Officer; and Gordon Sangster, Chief Financial Officer.

This morning Micrus released financial results for the fiscal 2009 second quarter. If you’ve not received this news release or if you’d like to be added to the company’s distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with Amy Higgins. This call is also being broadcast live over the internet at www.micruscorp.com and a replay of the call will be available on the Investor Relations section of the company’s website for the next 30 days.

We ask that during the Q-and-A portion of today’s call you limit yourself to one question plus a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask questions within the one hour we have allotted for this call.

Before we begin, I’d like to caution listeners the comments made by management during this conference call will contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review Micrus Endovascular’s annual report on Form 10-K for the fiscal year ended March 31, 2008, and subsequent filings made with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, November 6, 2008. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I’d like to turn the call over to John Kilcoyne. John.

John Kilcoyne

Thank you Jody and thank you everyone for joining us this morning. I am very pleased to report record revenues of $20.8 million for the second quarter of fiscal 2009. Our revenues are up 45% over the comparable quarter last year. This record revenue performance is especially gratifying as it came in historically our most challenging quarter.

Additionally, as stated in our Q1 fiscal ‘09 earnings call, our goal is to become profitable exclusive of non-routine charges by the March quarter 2009. This quarter we took a major step towards achieving this goal by significantly reducing our sequential quarter-over-quarter net loss. In reviewing our second quarter growth, nearly one-quarter of our revenues came from products we introduced in the last 24 months, underscoring the importance of our ongoing product development and robust product launch schedule.

We conducted beta evaluations for the Neuropath and power detachment system, Ascent balloon catheter and DeltaPaq coils during the second quarter. These beta evaluations enabled us access to procedures which allowed us to leverage incremental revenues from our other products. As of the second week of October, three of these products have been launched worldwide and are expected to be significant contributors to our second half revenues. The fourth ascent is expected to be launched early next year.

Our increase in second quarter revenues was across all geographic regions. Revenues from the Americas increased 35% versus last year’s second quarter and 8% sequentially. Revenues from Europe were up 9% compared to the second quarter fiscal 2008 and up 7% sequentially reflecting a return to a more normal procedural volume in the United Kingdom and increased shipments to our European distributors.

We also recently promoted a very talented and energized individual to direct our sales and marketing for Europe, Middle Eastern and Africa. It is our pleasure to say that we have seen an immediate impact. We also reported $3 million in sales to our Japanese distributor, Goodman & Company. This follows MHLW approvals in Japan for our stretch-resistant coils in December of last year and Cerecyte approval this past July. We continue to see strong acceptance of our softer Cashmere and UltiPaq in this market.

In anticipation of your questions about the competitive landscape, we believe that we continue to gain share from Boston Scientific, particularly with our Cashmere and have seen early acceptance of our DeltaPaq coils in competitive MicroVention accounts.

Additionally, in a recent British Society of Neuroradiology Meeting in the UK, investigators presented initial results of the MicroVention health trial comparing its hydrocoil to bare platinum coils. It appears that retreatment rates in the first dataset indicate there is no statistical difference between high gel filled coils and bare platinum.

Interestingly, recently published single center study experiences comparing Cerecyte to bare platinum coils reported that Cerecyte does appear to lead to improved clinical outcomes over bare platinum.

While still early, with a greater than 35% reorder rate, there is no doubt that our Neuropath guide catheter is making inroads on the Cordis envoy. With Cashmere and DeltaPaq as examples, we continue to raise the bar with respect to coil technologies, which has allowed us to regain business where EV3 has discounted the Axium in an effort to gain share.

We expect a number of factors to continue to positively impact revenues in the coming quarters. Not surprisingly, the largest drive will be our continued rollout of new products. For fiscal 2009, we have planned for eight new product launches. As previously mentioned during the first two weeks of October, we launched on a worldwide basis our DeltaPaq, Neuropath and the power detachment system.

We have five more new products scheduled to be rolled out between now and March. They will include more wires, more coils, more catheters and launch of our Ascent balloon catheter family. Not only will these new products provide us incremental revenue opportunities, they will provide us procedural and lab access, thus improving our opportunity to leverage additional revenues from complementary products.

In addition to generating European revenues from Pharos Vitesse, we also expect to receive additional IRB approvals for our visit prospective randomized IBE clinical trial for the treatment of intracranial atherosclerosis.

Finally, we expect an enrollment will be completed in the Cerecyte prospective randomized trial by the end of the first quarter of 2009. Given this timeline, we expect the study results will be submitted to a peer review journal the first half of 2010.

I am also pleased to announce that we have finalized a settlement and release agreement with Boston Scientific and the UC Regents for patent cross-licenses between Micrus and Boston Scientific. Under this agreement we have made a payment of $1.65 million to the UC Regents. We believe this is a positive development for all of the parties.

With those comments, I would like to turn the call over to Gordon Sangster for a financial review.

Gordon Sangster

Thanks, John. I’d like to review our fiscal 2009 second quarter and affirm our 2009 financial guidance. As John mentioned, we reported record revenues of $20.8 million for the second quarter of fiscal 2009, an increase of 45% compared with revenues of $14.4 million for the second quarter of fiscal 2008.

Revenues from the Americas increased 35% to $11.4 million and revenues from Europe were up 9% to $6 million, both compared with the second quarter of fiscal 2008. Included in this revenues from Latin America increased to $729,000 in the second quarter of fiscal 2009 from $354,000 in the second quarter of fiscal 2008. Revenues from Asia Pacific increased to $3.4 million, up from $0.4 million in the comparable quarter of the prior year primarily due to sales of $3 million to our distributor in Japan.

For the quarter, gross margin was 73%, which compares with 78% in the prior year second quarter. The gross margin decrease was primarily due to higher sales to distributors at lower margins primarily in Japan and Latin America. Additionally, margins were negatively impacted by our medical corporation OEM business, which is in its final stage. We expect our gross margin to fluctuate in future periods based on the mix of our product sales and the level of distributor sales.

R&D expense for the first quarter of fiscal 2009 increased to $2.9 million versus $2.6 million for the second quarter of fiscal 2008. The increase was mainly due to higher personnel costs related to an increase in headcount. We expect R&D expense to fluctuate as we continue to work on product improvement, expand product lines and explore new product opportunities and technologies in both the hemorrhagic and ischemic markets.

Sales and marketing expense for the quarter increased to $8 million, up from $7.1 million last year. The increase was mainly the result of higher personnel costs due to an increase in sales and marketing personnel in North America, Europe and Asia and an increase in sales incentives resulting from the higher level of sales and changes in the sales compensation structure in the current year.

In terms of our field sales force and clinical team for the quarter, we had a North American direct force of 42, a European direct force of 18, and an Asia Pacific direct force of 3. We will continue to monitor our field force level and will staff appropriately.

In particular, we may add to our clinical and sales support personnel at both the direct and distributor level in Europe and Asia to ensure a high level of global physician support for all Micrus products. As we continue to increase the size of our direct sales force, increased spending on additional sales and marketing programs and expanding to new geographies, we anticipate that sales and marketing expense will continue to increase, but at a lower rate than revenues.

G&A expense for the second quarter of fiscal 2009 was $6.4 million versus $5.6 million in the second quarter of fiscal 2008. The increase is primarily due to higher personnel costs due to increased headcount over the prior year.

We are reviewing our operating expenses and realigning headcount to increase efficiencies and reduce costs. We reported Other Expenses of $681,000 for the three months September 30, 2008, compared to Other Income of $282,000 in the year-ago quarter due primarily to movement in foreign exchange rates.

Looking at our bottom line, the net loss for the second quarter was $2.7 million or $0.17 per share on $15.7 million weighted average shares outstanding, which includes $1.6 million in stock-based compensation expense or $0.10 per share. This compares to the second quarter of fiscal 2008 a net loss of $3 million or $0.20 per share on a 15.4 million weighted average shares outstanding, which includes $1.1 million in stock-based compensation expense or $0.07 a share.

Reviewing our financial results for the six months of fiscal 2009, revenues increased 26% to $39.1 million, up from $31.2 million in the comparable year ago period. Gross margin for the six months ended September 30, 2008 was 74% compared to 78% in the comparable prior year period.

Total operating expenses for the first half of fiscal 2009 were $37.9 million, compared to $30.1 million in the first six months of fiscal 2008. The increase in operating expense was primarily due to the settlement cost of approximately $1.7 million in connection with the patent litigation with Boston Scientific and the Regents and legal fees of approximately $1.9 million primarily related to the DOJ monitorship and patent litigation, each of which is now concluded.

We reported Other Expense of $683,000 for the six months ended September 30, 2008, compared to Other Income for the first six months of the prior fiscal year of $360,000, which was due primarily to movement in foreign currency rates.

For the first six months of fiscal 2009, we reported a net loss of $9.3 million or $0.60 per share on 15.7 million weighted average shares outstanding, which included stock-based compensation expense of $3.1 million or $0.10 per share. This compares with a net loss for the first six months of fiscal 2008 of $4.4 million or $0.29 per share on 15.3 million weighted average shares outstanding including $2.2 million or $0.14 per share in stock-based compensation expense.

Turning to our balance sheet as of September 30, 2008, we had cash and cash equivalents of $12.7 million, working capital was $22.2 million, and stockholders’ equity at the quarter end was $43.2 million. We have no long-term debt.

Our cash equivalents are invested in the money market fund with Wells Fargo Bank and we have no exposure to option rate securities. We’ve entered into a $15 million line of credit with Wells Fargo Bank and are focused on managing and controlling our discretionary spending as well as hiring in the second half of the year to ensure we meet our stated goal of profitability excluding longer term expenses in the fourth quarter.

Lastly today we are reiterating our fiscal year 2009 revenue guidance. We expect revenue for fiscal 2009 to be between $78 million and $85 million, representing growth of 13% to 23% compared with fiscal 2008; no revenues from China and only contractual minimums from our distributor in Japan.

I’d now like to turn the call over to Bob Stern.

Bob Stern

Thanks Gordon. Good morning everyone. As John mentioned, products introduced during the last 24 months, represented 24% of our total revenue for the second quarter and are an important component of our overall growth strategy. I’m pleased to say nonembolic sales reached record levels during the quarter, representing 6% of revenues.

The continued expansion of our nonembolic products, such as Neuropath, EnPower, Pharos Vitesse, Ascent balloons and additional products expected later this fiscal year give us confidence that our nonembolic revenue contribution will continue to grow.

I want to spend a minute discussing the value added attributes of these products. We are currently in a full launch of our Neuropath guide catheter line. The Neuropath is designed with a flexible and visible tip that allows for ready vascular access while maintaining good stability. With this launch we now have a product that provides us 100% incremental revenues and offers us advantages in the market with only one major competitor.

Also during the second quarter we launched our DeltaPaq microcoil system. The DeltaPaq represents an advance in coil design with potential to improve packing density by a 10% to 20% margin compared with existing coils due to its innovative primary line. We believe that greater packing density may reduce recanalization rates and therefore retreatment. We believe that DeltaPaq materially improves our competitive position in the filling market and over time DeltaPaq will become our frontline filling microcoil.

Neuropath and DeltaPaq are already opening doors for our sales force in key accounts and allowing us to pull through other sales. We plan to launch additional products in the coming months. In the second half of this fiscal year we expect to introduce the Ascent balloon catheter, which represents our entry into new product category in the treatment of hemorrhagic stroke.

Ascent balloon is designed to help an interventionalist deliver coils efficiently and safely while treating wide-neck cerebral aneurysm. The Ascent balloon incorporates a coaxial dual lumen that is easily tracked and a balloon that readily can form to a patient’s vasculature.

We face a single competitor in the balloon market and we believe the Ascent offers several advantages over the currently marketed products, such as superior stability and the ability to use any .014 wire, a feature requested by most interventionalists. The Ascent, like the Neuropath, represents 100% incremental revenue opportunity for us.

We also plan to broaden our line of guide wires through the introduction of a family of high performance direct torque wires, as well as expand our Courier microcatheter line later this year.

We are continuing to work on our collaboration signed last April with Chemence Medical Products to jointly develop a liquid embolic product for neurovascular indications. We’re using Chemence’s cyanoacrylate technology, development capabilities and intellectual property.

Micrus is responsible for overseeing the regulatory and clinical process of these neurovascular products and will be the exclusive worldwide distributor for such products developed based on this collaborative agreement. We also continue to assess and invest in new technologies, such as flow diversion and covered stent technologies, which may in the future be used to treat aneurysms.

To complement our products in the hemorrhagic stroke market, we’re developing a broad range of products for the treatment of ischemic stroke. As we stated before, stroke is the leading cause of disability in the world, and 80% of all strokes are caused by an ischemic event. The Pharos Vitesse will be our first entry into the US ischemic market. We’ve already obtained CE market authorization for the Pharos Vitesse and the European Union, and all other countries recognizing the CE market for the treatment of wide-neck aneurysms and to treat cerebral ischemia.

With the VISSIT trial, we will extend the Pharos Vitesse’s reach into the United States. The VISSIT trial is an investigational device exemption or ID study designed to compare clinical outcomes between patients treated with our Pharos Vitesse balloon expandable stent and the current best medical practices.

The VISSIT trial has a secondary objective of evaluating the impact of stenting in the neurovasculature to treat cerebral ischemia on other outcomes such as hospital stays and other costs. This is the first global industry sponsored prospective randomized clinical trial to evaluate the safety and effectiveness of any intracranial stent for this significant medical condition. The Pharos Vitesse enables the intracranial delivery and deployment of stent in one step eliminating the need for predilatation of the stenosis.

The Pharos stent also incorporates proprietary carbon silica coating that we believe may reduce the need for retreatment due to restenosis. We will enroll up to 125 patients in HR at a total of 30 sites in the United States, Europe and China. Patients will be evaluated during a 12 month post-treatment follow-up period. The VITESSE is the first of our ischemic platforms which we expect to be followed by both our ReVasc and Genesis FAST funnel catheter devices.

As an update on our ReVasc development, we continue to make progress and we anticipate moving into human clinical studies by mid 2009. We’re also making rapid advances in the development of our FAST funnel catheter and clot retrieval business. Our investment in ischemic technologies represents one of the keys to Micrus’s future. We look forward to delivering a variety of thrombectomy and/or revascularization systems and reporting to you our progress on future calls.

We’re also expanding our geographic reach. Since the beginning of the year, usage of Micrus microcoils per procedure in Japan has increased. While we first shipped the Cerecyte microcoils to Goodman in July, by September Cerecyte microcoils represented more than half of our microcoil usage in Japan. We continue to work diligently towards regulatory approval in China as well.

We’re also announcing progress in the Cerecyte trial. Investigators have currently enrolled approximately 462 patients in this 500 patient study. This is a prospective randomized trial led by the University of Oxford neurologist, Dr. Andrew J. Molyneux. This trial which compares Cerecyte bioactive coils to bare platinum coils should have completed enrollment in the first quarter of calendar 2009, resulting in potential submission of clinical study results to a peer review journal in early 2010.

And, finally, we’re working to improve our manufacturing cost absorption at our facility in Florida and as we sell more access products, our gross margin should continue to improve. The expansion of our Florida facility, though initially raising our costs to allow for the implementation of lean manufacturing processes and a rollout of design efficiencies, which should improve our margins as we ramp up production.

We also anticipate that during fiscal 2009 and 2010, we should begin to gain margin support from the implementation of our DPU automated manufacturing program. We will continue to invest in our Florida operation, which should allow us to gain further cost advantages over the long term.

With those comments, I’ll turn the call back to John.

John Kilcoyne

Thanks Bob. We continue to drive top line growth by building on our established core portfolio with complementary products that allow us to compete for increased hemorrhagic and ischemic procedure revenues. We are enthusiastic about our continued new product introductions that we expect will further establish our leadership role in these markets. We will continue to drive revenues through an aggressive new product launch schedule and through the licensing or acquisition complementary or synergistic technologies.

We continue to pursue development of technologies such as liquid embolics, covered stents, flow diverters that we believe will be part of the neurointerventionalist’s armaterium for the treatment of aneurysms in the coming years. We will continue to pursue cutting edge products for the treatment of ischemic stroke such as advanced stent designs like the Pharos Vitesse, and through development of our ReVasc technology and Genesis FAST catheter.

We will continue to focus on becoming profitable, excluding nonroutine charges by the fourth quarter and finally, year-over-year through the first six months we have increased revenues by 26%, putting us on track to achieve our revenue guidance.

In summary, unlike many of our competitors, we are free from the tumultuous nature of the coronary and peripheral markets. We believe that our singular focus on the neurointerventionalist market uniquely positions Micrus for long-term success and will assist us in our drive to become the world’s premier neurointerventional company.

Thank you very much for your attention and at this time we’ll open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And your first question is from Amit Hazan from Oppenheimer.

Amit Hazan – Oppenheimer

Hey, good morning, guys. Just maybe starting just with actually just kind of a broad question, I guess. Your guidance, we know you guys are conservative, you like to be conservative. You didn’t change it. It’s a wide range. We got a couple of quarters left; any comments at all as to why to keep the wide range?

Gordon Sangster

No, I think we were factoring in the effective foreign currencies as well there, Amit. So, we’re comfortable with that range and not knowing what’s going to happen to the dollar versus the pound or the Swiss franc, we’re comfortable with that range of $78 million to $85 million. At the same time remembering that more than half of our revenue typically comes in the third and fourth quarters, so I think the range of $7 million, we’re comfortable with that.

Amit Hazan – Oppenheimer

Okay, that’s fair and then just one more on guidance or if you can on gross margin and how we should think about that. I know there’s a lot of moving parts there, but I imagine some of the geographies where you use a distributor are going to be growing faster and that will offset some of the manufacturing improvements that you’re working on as well. Any help on how we should think about it in terms of kind of how to model margins going forward?

Gordon Sangster

Our goal is still to maintain margins in the mid to high 70s and I think we’ll see the offset with the manufacturing efficiencies in Florida and in San Jose, offsetting the growing distributor sales. At the same time, I think we’re growing in countries where we go direct, the US, UK, France and Germany and Austria. So, overall our goal is to maintain margins in the 70s. Also, Merit, we’re coming to the end of that project, so that also will be effective in improving our margins.

Amit Hazan – Oppenheimer

Okay, great guys. I’ll keep to my two questions and jump back in line.

Operator

Your next question is from Dave Turkaly from SIG.

Dave Turkaly – SIG

Hey, thanks a lot. I apologize; I was kind of on and off this one, so I apologize upfront if I ask anything that you talked about specifically. In the UK, can you remind us what percent of your European business that is and I can’t remember if that’s distributor base or direct, how many people you have there?

John Kilcoyne

David, hi, it’s John. We are direct in the UK. We don’t break down the UK individually. It’s part of our European number, if you will or SA number. Just to give you some color on the UK, it is the highest market share percentage that Micrus enjoys worldwide. So, that’s why in the first fiscal quarter, when we had a downturn in the UK revenues, it was a material impact. Historically, we see the UK to be very steady and consistent in not only their market share position, but their ability to gain new business as we add complementary products.

Dave Turkaly – SIG

And everywhere else in Europe are you using distributors, is that how that works?

John Kilcoyne

The breakdown as the UK, France, Germany, and Austria are direct. The rest of EMEA is distributor, as is Japan and China will be.

Dave Turkaly – SIG

And given the trend you’ve seen here, you kind of feel like that first quarter was just an aberration and now you’re back on track?

Bob Stern

Yes, that’s correct and Dave, if you do look in the Q, we do break out the UK.

Dave Turkaly – SIG

Yes, I think I have that; yes I can get that out of the Q.

Bob Stern

Yes. So, if you take a look, Europe excluding the UK was about $3.8 million, UK was $2.2 million.

Dave Turkaly – SIG

Great. Thanks a lot.

Operator

Your next question is from Brooks West from Craig-Hallum Capital.

Brooks West – Craig-Hallum Capital

Good morning guys. Congratulations on a nice quarter here. I had a question, John on North American sales, which I think was a concern for some people coming out of last quarter. Can you comment on – and it looks like you had a good quarter in North America this year, or this quarter. Can you comment on dynamics there? Is it additional customers coming on? Is it increase in procedures? Is it pull-through on new products? Give us some flavor there?

John Kilcoyne

If you want to break it down, there are multiple reasons for our growth. One, we have I think in the past year improved the quality of our sales organization. The hiring of Jim Bertrand as a Director of Sales in North America I think has made a difference for us.

Second the number of new products that we’ve introduced to the market. The Cashmere, the Presidio, DeltaPaq, the Neuropath, have clearly given us access to the lab and with the additional fact that these products have clinical advantages over the competitive products.

We’ve been able to make inroads and gain share, as I mentioned in my prepared remarks from Boston Scientific as well as we believe the DeltaPaq is already starting to make some inroads with the MicroVention customers and so I think we’ve seen penetration of new product technologies aid our growth.

The third area is the seasonal procedural volume swings. We did see in the latter part of the second quarter, September time frame procedural volume return and upswing that I think benefited us in the second fiscal quarter. So, it’s a combination of three.

One, I think we have improved our field sales force as far as the quality of representative and the training we’ve provided them; two, new product introductions that enable us to gain access to labs to leverage either the new products or complementary products and gain penetration and share; three, we have seen a procedural rebound and I might add as well, October 1 we did take a price increase of 6% that will be factored into the third and fourth quarters.

Brooks West – Craig-Hallum Capital

Great and then follow-up question just on the sales force. Do you feel like you’re getting to the right size or how much might you need to add in various geographies to support the sales growth?

John Kilcoyne

North America, we finished the quarter at 42. I think we’re comfortable with that number, as we expand and the ischemic platform begins to take hold and to blossom. I think we may be in a position where we would want to add sales representatives in territories and as we grow, but I think at this point at 42 in North America, we are comfortable.

Brooks West – Craig-Hallum

And in the rest of the world?

John Kilcoyne

Rest of the world, similarly; our direct force in the UK, France, and Germany I think is adequately staffed, so I don’t see any major changes in those dynamics over the next 12 months.

Brooks West – Craig-Hallum Capital

Great. Thanks, guys.

Operator

Your next question is from Ed Shenkan from Needham & Company.

Samir Harish – Needham & Company

Good morning, guys. This is Samir Harish for Ed Shenkan. Can you hear me?

John Kilcoyne

We can.

Samir Harish – Needham & Company

I just wanted to follow-up on Japan. Revenues were up nicely. Do you expect to see sequential revenue growth continue through the year and how is Japan tracking currently against the minimums as you look at the first half already completed?

John Kilcoyne

Currently Japan is $5 million into a $7 million minimum purchase requirement, and it extends through 3/31. As we said Japan and our other distributors, they will be choppy at times. As we bring new products to the marketplace, they will need to place orders, and that’s what we saw in the latter half of the second quarter. We announced in our first quarter call that we had received orders from Goodman of $1.9 million.

We received a subsequent order after the call of an additional $1 million, which in large part was the Cerecyte order directly reflecting approval of those products in Japan. So, as we introduce new products into Japan, you will see that lumpiness. We do anticipate Goodman meeting their contractual minimums.

Samir Harish – Needham & Company

Okay and can you give us any insights into initial physician feedback on DeltaPaq, maybe what types of aneurysms they are using in particular?

John Kilcoyne

The DeltaPaq has been a fun product so far. Again, I’ll comment that we are still early on it, but it is a coil design to go right at the filling market. The filling market is an area that Micrus has not been as proprietary, not that it’s overly proprietary in the past. If you look at our portfolio, we are very strong in framing, very strong in finishing.

The DeltaPaq really gives us a competitive and proprietary edge advantage in the filling aspect of the market. Through this quarter, just to give you some color on DeltaPaq, through this quarter 6% of our revenues, Q3 to date are DeltaPaq.

So, we have had a rather strong introduction. It is early, we are being very targeted and very selective in the accounts we go after and that is by design. So, DeltaPaq reception has been good. We continue to be excited about its continued acceptance.

Samir Harish – Needham & Company

And just to follow-up on DeltaPaq, are you seeking approval in Japan and do you have a timeline?

John Kilcoyne

We don’t have a timeline yet. We’ll continue to move all of our coils into the approval process in Japan, along with our other products as well.

Samir Harish – Needham & Company

Thank you. I’ll get back in the queue.

Operator

Your next question is from Spencer Nam from Summer Street.

Spencer Nam – Summer Street

Thanks for taking my questions. Just had a couple of question First of all on China, any update from those guys at this point?

John Kilcoyne

Go ahead.

Bob Stern

We are working with the regulatory bodies in China on a continuous basis. We’ve not had any guidance for China in our current fiscal year. Again, because it still remains somewhat cloudy, but we would expect towards the end of our fiscal year to have a lot more clarity in where we stand and what the timeline looks like.

Spencer Nam – Summer Street

Bob, when you use the word cloudy, are you referring to the cloudiness of whether you get the approval or is it the timing of the approval?

Bob Stern

No, it’s just timing, and it’s seemingly one small fire or one bonfire after another that the SFDA is faced with. The melanin issue right now is top of mind. They are trying to protect their food supply, they’re trying to protect their healthcare system and they’re really dealing with one emergency after another over there and my hats off to them.

They’re trying to really work as effectively as they can with undoubtedly limited resources. I will say the FDA last week opened up an office in Beijing for the first time, and that group working in conjunction with the SFDA will help clear things out.

Spencer Nam – Summer Street

Second question is, so you guys pre-announced there would be top line results about two or three weeks ago, which was very positive obviously given that you had a very strong quarter, but I was kind of wondering whether this sort of a pattern creates an expectation going forward in that when you have a very positive quarter you preannounce, when you have in line quarter, if you will you don’t preannounce.

I know that historically this happened at least once before when you had a very strong quarter you pre-announced. I was curious how you guys think about pre-announcing going forward and what sort of motivation would lead to pre-announcing in the future, and how should we read into this particular preannouncement?

John Kilcoyne

I think the consensus on the street was 18/9, knowing that we are going to put up a number that was significantly greater than the 18/9, we felt it was appropriate to provide some visibility and clarity to our second quarter revenue. So, internally it was a decision through management and discussion with the board members as well, as a decision to pre-release the revenues in the second quarter.

Spencer Nam – Summer Street

Great. Thanks.

Operator

(Operator instructions) And your next question is from Suraj Kalia from Sanders Morris Harris Group.

Suraj Kalia – Sanders Morris Harris Group

Hey, guys, how are you?

John Kilcoyne

Suraj, how are you doing?

Suraj Kalia – Sanders Morris Harris Group

I’m doing good, thanks. Good quarter, John this claim about 10% to 20% increase in packing density using the DeltaPaq. When we go sniffing around we get pretty good feedback on the DeltaPaq, but just consider me paranoid given the FDA’s clamping down on a lot of claims. Is this 10% to 20% backed up by anecdotal evidence, any pilot trials head-to-head? When you go and pitch, where does the 10% to 20% come out from and also, is there a price differential?

John Kilcoyne

On the assessment of the improved packing density, what we do in a bench-top model, glass model, what we do is we took our traditional helical coil and advanced the helical coil until physically we could not advance any additional coil into that aneurysm, an then we measured the total weight of the coil in that aneurysm.

We subsequently in the same glass aneurysm advanced as much DeltaPaq coil as we could until similarly we could not physically advance any more without the catheter being pushed out of the aneurysm, and then we measured. That range of 10% to 20% was the average that we found for increased length of coil that we were able to place in that glass aneurysm.

We’ve also seen an ability to place more DeltaPaq coils in pre-human live models that were conducted. We’ve also seen in the early stages of our beta launch to a greater amount of coil being able to be placed in the aneurysm and so, we have three data points, Suraj in which to make that statement. One would be a bench-top model. Two would be a preclinical live model. Three is the initial beta launch that was conducted with DeltaPaq.

With regard to pricing, the DeltaPaq, depending upon which size, takes a premium over our helical coils, which as Bob mentioned we think this will replace over time to become our frontline filling coil. The price range of the DeltaPaq is in the range of our framing coils in the $1100, $1200 to $1600 range.

Suraj Kalia – Sanders Morris Harris Group

Fair enough.

John Kilcoyne

And we have both, just to note both Cerecyte and bare platinum in the DeltaPaq.

Bob Stern

And this is the first of a line of coils coming down the road with this evolutionary wind. If we continue to see good results, we’ll have more and more coils designed with this primary wind, because it does seemingly make a difference.

Suraj Kalia – Sanders Morris Harris Group

And again, John when we go around to hospitals and maybe I’m extrapolating too much here, but this is sort of a rumbling we are hearing and more than one and two hospitals. What we’re hearing is that the Enterprise neuron-stent and the Neuroform stent, there are some issues. Physicians are expressing concern of using stents and leaving them intracranially inside, and they wondered about second thrombosis and when you extrapolate that, they are saying that Cordis is sort of backing off in a number of accounts.

Have you seen Cordis start retreating now? Is this a market that they’re eventually going to remain in? That’s the first part and the second part; sort of tangentially given that we have seen a blow-up in the secondary thrombosis in the coronaries, does it make sense to pursue a stent-based strategy intracranially, which is a lot more sensitive?

John Kilcoyne

Well, on your first question with regard to Cordis, I think I’d be a little bit reaching in suggesting what Cordis’s strategy would be. So, Seth Fisher I think would be the right person to speak with there at J&J, but you do give me a great opportunity to discuss the potential impact of our Ascent balloon catheter.

We have seen a leveling of the playing field as it relates to the Neuroform and Enterprise. As that market started to mature a little bit, the initial glow and appeal like any product, we start to see some of the long-term results and no product, as I have said many times is perfect. So, I think there is a balancing, if you will.

The U.S. market tends to be a little bit more stent aggressive than our colleagues in Europe, so I think there is probably a leveling and coming back in the U.S. to more European utilization, somewhere in the 20% range, 25% range, but clearly our timing here is perfect with the Ascent balloon catheter and family of balloons to give the physicians an alternative to coiling if they do have these in-stent thrombosis concerns as it relates to leaving stents behind.

Stents and flow diversion I think will continue, Suraj to play a role in our marketplace. They do provide clinical benefit. So I don’t see them going away in any fashion. I think you’ll see next generation stents and flow diversion and covered stents continue to move forward in development and over the next couple of years, two, three years you’ll see them roll out into the clinics and be used in the treatment of aneurysms.

Suraj Kalia – Sanders Morris Harris Group

Final questions, guys I’ll cheat, since I’m last in line. In terms of pricing, what we are hearing specifically let’s say that Midwest, we’re hearing that private payers are squeezing the hospitals and the companies and coils. In particular one of the companies you mention, they are obviously responding with price cuts and bundled products, and again I put “bundled” because some of these companies with embolic protection, whether its coronary stents or others, the hospitals are squeezing them through bundling.

Have you seen this sort of directly or indirectly affect you, and what are you plans moving forward? I’ll stop here and thanks for taking my questions.

John Kilcoyne

No problem Suraj and thanks for being on. There’s always price sensitivity in any and all markets. That being said, we just took a 6% price increase and we did not receive really any pushback on that price increase. So, while there is sensitivity, I think people and physicians particularly, who are still the decision-makers in our space. When it comes down to it, they look for best of grade and the look for products that provide clinical advantages to them and their patients.

One of the endpoints of our Cerecyte trial is to look at – well the endpoint is for the superiority of our Cerecyte versus bare platinum. If we can achieve that, the secondary objective of this will be to utilize that data to attempt to move to a higher reimbursement for our Cerecyte coils.

So, we are continually looking for opportunities and development efforts to move the ball forward, continue to provide clinical data, continue to provide products that deliver better outcomes and I think as long as we can do that, we will be in safe harbor. So, I don’t see that as a serious onset to our business in the near term.

Suraj Kalia – Sanders Morris Harris Group

Thanks, guys.

John Kilcoyne

I didn’t get a chance to announce. We will be at the Rodman & Renshaw Tenth Annual Health Care Conference on Monday, December 10, and presenting at 11:10 Eastern Time. We’ll also be presenting at the Stephens Fall Investment Conference, Tuesday, November 18, at 9:00 a.m. Eastern Time and at the Piper Jaffray 20th Annual Health Care Conference Tuesday, December 2, at 12:30 Eastern Time.

I would also like to take a moment just to announce Micrus is recognized among the fastest growing companies in Silicon Valley by the Silicon Valley Technology Fast 50 this past month. Operator is there additional questions.

Operator

There is a follow-up question from Brooks West.

Brooks West – Craig-Hallum Capital

Couple of quick ones here; just on the timing of the launches John and Bob, specifically DeltaPaq but also Neuropath, you did beta launches I think kind of earlier in the summer, but when did those really go into full launch?

John Kilcoyne

We went worldwide launch on Neuropath and Power and DeltaPaq the first two weeks of October we did US, and then OUS launch.

Brooks West – Craig-Hallum Capital

So, we are really not going to see the impact of those products until second half.

John Kilcoyne

I would suggest that DeltaPaq this quarter is 60% of our revenue quarter to date, so I think we will see impact from these products in the third quarter, but I would give you that the power curve of the introductions probably will start to really take hold in the fourth quarter.

That’s why we’re excited about the second half of the year. We have these three products. We also have a number of additional products that we’ll introduce over the next six months, five or six months. Again, some may gain immediate traction, like the DeltaPaq has, but what we’re able to do David, is to leverage these new product introductions to gain us access to the lab and gain us mindshare of the physician.

If they don’t have a direct financial impact immediate, we do have a financial opportunity that they bring us and so much as they get us into the lab, they’ll also talk about certainly that product and leverage our other products.

Brooks West – Craig-Hallum Capital

That’s a good lead in for the final question. In terms of thinking about the path to profitability, how much of the Q4 profitability is dependent on revenue upside versus cost control, any other incremental guidance there?

Gordon Sangster

It’s really a combination of both factors. The second half of the year our revenues tend to be higher than the first half that’s one thing, at the same time, we’re definitely looking at managing our discretionary spending so that we can reach by goal. So a combination of both

Brooks West – Craig-Hallum Capital

Okay, great. Thanks, guys.

Operator

(Operator instructions) And at this time there are no further questions in queue. Will there be any closing remarks?

John Kilcoyne

I’d like to thank everybody again for your support and participating on today’s call. As I just mentioned, we are very excited about our prospects at Micrus and steadfast at becoming the premier company in the neurointerventional market. We’ll continue to build our business and move forward towards profitability and we look forward to keeping you posted on our progress during next quarter’s call. Thanks, everybody.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Other Articles on MEND AtriCure, Micrus Endovascular, BioSphere: Strong Outlook with New Technologies Apr 15, 2008 Stocks With the Highest Five-Year Growth Rates Oct 23, 2007 Hansen Medical, Micrus Endovascular: Capitalize on the Laparoscopic Trend Jul 26, 2007 Previous MEND Transcript: Micrus Endovascular Corporation F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

• Was this positive or negative for the company? Why?
• What is the most important quote from this transcript?