Stereotaxis, Inc.
Q3 2007 Earnings Call Transcript

Published: 8 Nov 2007

[Operator:]

Good morning, ladies and gentlemen, and thank you forstanding by. Welcome to the Stereotaxis Third Quarter 2007 Results ConferenceCall. During today's presentation, all parties will be in a listen-only mode.Following the presentation, the conference will be open for questions.(Operator Instructions). As a reminder, this conference is being recordedtoday, November 8th, 2007. I would now like to turn the presentation over to Doug Sherk.Please go ahead.

[Doug Sherk:]

Thank you, operator, and good morning, everyone. Thank youfor joining us for the Stereotaxis conference call and webcast to reviewfinancial results for the third quarter of 2007. Before we get started, we'd like to remind you that duringthe course of this conference call, the company may make projections and otherforward-looking statements regarding future events of the future financialperformance of the company, including without limitation statements regardingoperating results in calendar 2007 and 2008, growth opportunities and otherstatements that refer to Stereotaxis' plans, prospects, expectations,strategies, intentions and beliefs. These statements are subject to many risks and uncertaintiesthat could cause actual results to differ materially from expectations. For adetailed discussion of the risks and uncertainties that affect the company'sbusiness and qualify the forward-looking statements made in this call, we referyou to the company's recent public filings filed with the SEC, specifically theForm 10-Qs and the annual report on Form 10-K. The company's projections and forward-looking statements arebased on factors that are subject to change, and therefore, these statementsspeak only as of the date they are given. The company assumes no obligation toupdate any projections or forward-looking statements. During the course of this morning's call, we'd like to askeach questioner during the Q&A to limit their first round of questions tothree, and then re-queue if they have additional questions. With that, I'd like to turn the call over to Bevil Hogg, Presidentand Chief Executive Officer of Stereotaxis.

[Bevil Hogg:]

Thank you, Doug, and good morning, everyone. Joining me thismorning is Jim Stolze, our CFO. Today, I will start with the review of thesignificant progress we've made since we spoke to you in August. Then, Jim willoffer additional details on our third quarter financial performance, and we'lltake your questions. As we reported earlier this week, the launch of thelong-awaited and transformational irrigated catheter in Europehas begun. I call this device transformational because there are clearindications that when combined with our currently available NaviLine 3Dautomated modeling software, Stereotaxis is now providing a definitivesuccessful treatment solution for atrial fibrillation. As you know, atrialfibrillation is a condition that impacts more than 6 million people worldwide. Our confidence in our solution is based on our extensivescientific work in this area over many years and a significant number ofcomplex cases already done, now translated into the highly successful casesthat have been performed with our partnered irrigated catheter since its first usein Europe last week. We continue to expect FDA approval for the irrigatedcatheter in the USby yearend. Importantly, no further questions have been received about theirrigated catheter from the FDA. Our results for the third quarter reflected the delayedEuropean launch of the irrigated catheter to the very last day of our earlierguidance and the lack of the USapproval by the end of the period. These delays also make our ability toachieve our full year 2007 goals more challenging. However, we continued to build momentum during the thirdquarter, generating nearly 60% year-over-year revenue growth to $12 million. Atthe same time, our disposable service and accessories revenue grew by more than100%. Additionally, we set another backlog record of $58 million. In a fewmoments, I'll review our sales pipeline, which now stands at well over 600institutions. The successful treatment of atrial fibrillation is not a newconcept to Stereotaxis. Using existing 4-millimeter and 8-millimeter magnetic ablationcatheters, physicians around the world have completed more than 2,300 complexleft-sided procedures with positive results at exemplary safety. However, both of these catheters have certain limitationswith regard to the treatment of atrial fibrillation, and consequently, many ofour clinicians as well as the large number of our potential customers have beenwaiting patiently for our partnered magnetic irrigated catheter. The first phase of the irrigated catheter launch began lastweek in Europe, and the results thus far havebeen outstanding. The irrigated catheter is even softer at its tip than ourother catheter, and as a result it's proving to be easier to navigate in hard-to-reachanatomy. Additionally, NaviLine offers the potential to raise the barsignificantly in terms of procedure automation. Physicians can quickly planttheir linear lesion set on the integrated contour image, and then the computernavigates along the path and optimizes catheter contact. The path can then bestored and precisely repeated in order to retrace areas of interest. The irrigated catheter was first used last week at SanRaffaele Hospital in Milanby Professor Carlo Pappone, who has a consulting and research arrangement withStereotaxis. To quote Professor Pappone, "This magnetic irrigated catheterwith the Stereotaxis System is fantastic". In each of the cases we performed, electrograms were veryclear and localized. We saw no significant far field effects. Electrogramreduction during ablation was very fast, on average 10 seconds to 15 seconds.And overall procedure time was significantly reduced for manual techniques. Its stability is exceptional, even with the high motion ofthe left atrium, and it performs extremely well in the right inferior sectionof the left atrium, typically the most challenging anatomy to reach. Professor Pappone guided the irrigated catheters with the Stereotaxis' magnetic navigation system that featured NaviLine. With NaviLine, thesystem was able to guide the catheter along complex aerial anatomy defined inadvance by professor Pappone. In one case NaviLine guided the irrigatedcatheter to perform the left circumferential ablation, navigating suchcomplex areas as the appendage ridge, mitral isthmus,atrial roof and posterior wall entirely withoutmanual intervention. The automated nature of the navigation also allowedprofessor Pappone to verify the therapeutic result by accurately retracing thepreviously ablated pathways in the heart to verify isolation. To further quote Professor Pappone, "this irrigatedcatheter is an extremely effective tool for performing AF ablations, andcombined with the Stereotaxis' magnetic navigations system and NaviLine, this is a singularly important advance inelectrophysiology". Professor Karl-Heinz Kuck of St. Georg in Hamburg, who also has an advisoryrelationship with Stereotaxis, is doing his first magnetic irrigated cathetercases this week. And the irrigated catheter rollout will include our Centers ofExcellence in Lasso and Bodo next week, and other centers in the weeks to come. We believe that based on the very favorable initial irrigatedcatheter experience and also based on prior work done at the number ofworldwide sites with non-irrigated catheters, we will be able to define a newstandard of care for the treatment of atrial fibrillation and to report onactual results at the 2008 Boston Atrial Fibrillation Conference. As we understand it, the current state-of-the-art both forcompeting technologies and for the manual treatment of paroxysmal atrialfibrillation without using a Stereotaxis system is procedure time of over 4hours for physicians with average experience, 50 minutes or more of X-ray/Fluoroscopytime, a complication rate of 1% or more for perforation and up to 7% forvascular complications. Variable results depending on clinician experience anddexterity, leading to a redo rate of over 30% and a long-term success of about65%, a very expensive array of devices, and requirement for the clinician towear lead throughout the long procedure. This compares with the performance framework that Stereotaxisis pursuing in the near-term with the irrigated catheter in Europe.Procedure time of less than 2.5 hours, enabling labs to schedule 2 to 3 AFcases a day, 10 minutes or less of X-ray/Fluoroscopy time, maintaining ourexemplary safety record of 0.1% of major complications, greater than 95% acutesuccess with proof of TV isolation, more predictable results leading tolong-term reduction redo rates and therefore improved long-term efficacy, significantreductions in device costs and other procedure costs, and no requirements forphysicians to wear lead. Again, we expect to report on our progress and delivering onthis promise by reporting the results from several sites at a special symposiumat the Boston AF Meeting and expect to be issuing invitations by the end of themonth so that you can hear the results first hand. We will then build on thisinitial data at HRS 2008 and beyond. We currently expect to see asubstantial increase in production output of irrigated catheters in 2008 so asto meet anticipated robust market demand. The increasing utilization of thesecatheters will be a very significant catalyst for order and revenue growth forStereotaxis in 2008. There are other important newbuilding blocks to our platform, all contributing to make complex procedureseasier and safer to perform, and all expected to contribute to revenues in2008. First, I will update you on Odyssey. Odyssey at its simplestis a powerful user interface that consolidates the multiple information sourcesand systems within a traditional electrophysiology lab into a single largescreen with single mouse control. It has the potential to contributesignificantly to procedure room simplification and workflow productivity. Andas such, has elicited tremendous interest from our clinician customers, and wehave already issued over 100 beds to hospitals. At over $200,000 each, thisrepresents a healthy potential incremental component to revenue, beginning withits commercial launch this month but principally impacting 2008 and beyond. However, Odyssey is also a fully networked product, whichuses a private fiber optic connection provided through our partnership withGlobal Crossing, a worldwide telecommunications company, and it can connectmultiple EP labs to one another and to our networked call service center in St. Louis for real timeeducation, clinical support, and counsel during procedures. We expect to provide and charge for network contentovertime. Our basic objective is to use Odyssey to improve thephysician-patient interface while un-cluttering the cath lab and allowing forgreater levels of clinical workflow and information management efficiency. Another revenue building block that is additive to ourplatform is its potential to address additional markets for coronary andperipheral vascular applications. The expanded benefits and capabilities thatthe Stereotaxis system can bring to vascular navigation were readily apparentdoing demonstrations at the recent TCT symposium. During the symposium, the Niobe system was used to performthree live percutaneous coronary and peripheral procedures, including acoronary CTO. Our system produced excellent patient results and demonstratedthat Stereotaxis' 3D vessel roadmaps, and distal tip control of magneticguide-wires can be employed very successfully in a variety of complex vascularinterventions, where crossing of an occlusion or stenosis is required for thedelivery of therapy. We have recently finished the development work on our steerableRF guidewire, as well as our [Pegasys] family of advanced coronary deliverguidewires, and we expect to submit 510k's for these products to the FDA in thevery near future. These will fuel additional revenue growth in 2008 and beyond. We are confident that no one in our industry comes close tooffering the clinician, the administrator and the patient, the benefits thatSterotaxis's does. And we are enthusiastic about our prospects for substantialgrowth in 2008. The delays that we have experienced at commercializing ourpartnered irrigated catheter have made achievement of our fourth quarter goalsmore challenging. However, it is important to note that we believe this is theonly relevant factor behind this issue. Competitive systems remain a very highminor factor in our current EP lab market, which has been waiting forSterotaxis's irrigated catheter AF solution, and they offer no capabilities inour emerging peripheral vascular and interventional cardiology markets. We recently completed a review of our pipeline. At the endof October, our mid to late stage accounts stood at 275 and we now have roughly350 accounts in the early stages of development. These are healthy increasesfrom when we talked to you last in August. And the competitive impact on ourmid to late stage pipeline remains as it did in August at about 1%. In short, the distraction of the delayed irrigated cathetershould be behind us fully by the second quarter of 2008, and we currently seeno competitive threat to achieving substantial 2008 and beyond growth. Now, I will ask Jim Stolze to provide a more detaileddiscussion of the third quarter results. Jim?

[Jim Stolze:]

Thank you, Bevil. Stereotaxis reported total revenue of $12million in the third quarter, compared with $7.6 million in the third quarterlast year. Included in the total was the system's revenue of $9.5 million inthe recent third quarter, compared with $6.4 million in the 2006 third quarter. We sold nine systems during the quarter. Of these, eightwere placed in the USand one was international. Our disposable service and accessories revenue was arecord $2.5 million this quarter, compared with $1.3 million last year,reflecting growth in the installed base and continued improvement inutilization. The gross profit margin was $8 million in the third quarter,or 67% of revenue. This compares with a gross profit margin last year of 52%.The year-over-year improvement reflects growth in the number of systemsinstalled compared to a year ago. An increase in our average selling price of approximately16%, and improvement in our average system cost of approximately 9% and anincrease in contribution of disposables in royalty drive recurring revenuetotals. Operating expenses in the third quarter were $18.7 million,19% above the third quarter a year ago. The operating expenditure increaseswere principally due to increased sales and marketing expense as we expand tosupport the growth in our business, as well as higher research and developmentexpense. The higher R&D was the result of incremental spendingfor Odyssey platform improvement and device development. We generated a netloss of $10.4 million or $0.29 per share. This compares with a net loss of$11.4 million, or $0.34 per share in the 2006 third quarter. In the recent third quarter, average shares outstanding were36.3 million compared with 33.5 million in the same period last year. Theincrease primarily reflects the issuance of 1.9 million shares of stock in aregistered direct offering completed in March. We used approximately $3 million in cash from operationsduring the quarter. The cash used in the third quarter is down significantlyfrom the $16 million reported in the second quarter, reflecting approximately$5 million of international receivables, which were uncollected at June 30, butcollected during this third quarter. Cash and investments at September 30, 2007 totaled $28.6million. Total equivalent debt at the end of the quarter was $2.2 million, withno funds drawn against the company's $25 million working capital facility. As Bevil has indicated, our backlog net of systems taken torevenue grew to $58 million currently from $55 million at the beginning of thequarter. As a reminder, we do not include orders for disposable service oraccessories in this data. Now Bevil and I would be happy to answer any of yourquestions. Operator? Hello.

[Operator:]

Yes, thank you sir. We will now begin thequestion-and-answer session. (Operator Instructions). And our first questioncomes from Tao Levy with Deutsche Bank. Please go ahead.

[Tao Levy:]

Hi, good morning.

[Bevil Hogg:]

Hi Tao.

[Tao Levy:]

How are you doing?

[Bevil Hogg:]

Quite good.

[Tao Levy:]

Good. So, couple of questions; congratulations on the firstuse of the irrigated catheter outside of the US, and I'm just wondering, ifmaybe, you did touch on, sort of efficacy side of that. I was wondering, if youcan also touch on the safety side, any issues there and how many times has Dr. Papponenow used irrigated catheter?

[Bevil Hogg:]

I don't know, in terms of how many times he has used thecatheter, because he has done substantial number of cases and is doing themdaily.

[Tao Levy:]

Okay, it isn’t just one.

[Bevil Hogg:]

Absolutely lots, a significant number of cases, materialnumber of cases. And I could get back to you on the exact number, but he isdoing more than one case a day, over a period of several days.

[Bevil Hogg:]

Certainly more than 10.

[Tao Levy:]

Okay. And then on the safety side again, we're notnecessarily concerned, but there are some questions surrounding the high poweruse or the use of a high power irrigated catheter. And what that could do whenyou had better contact, and whether you would have to tone down the energy, beingdelivered?

[Bevil Hogg:]

Obviously, that's why we are going for a phased release ofour catheter, because we want to make sure that we set the training andappropriate approaches to its use. But we've experienced so far, a 100% successrate and the performance of this catheter has being exemplary in every regards.And you will note that our intent is a near term objective for Stereotaxis, tomaintain its existing safety record of 0.1% major complications, which is afifty-fold improvement over manual experience.

[Tao Levy:]

Great. And then, my last question, on the US approval, you're stillmaintaining your potential by yearend '07? And I was just wondering in the pasthad you gone additional questions from the FDA, with regards to 8 millimeterand the 4 millimeter and that's why without any questions from the FDA you'refeeling that you might be able to hit this yearend milestone?

[Bevil Hogg:]

I think in every instance we have had question regarding ourcatheter submissions or rather our partnered catheter submissions. And we didhave questions regarding the irrigated catheter, again, our partners hadquestions regarding partnered irrigated catheter, a few months ago, which wereresponded too. And normally with these types of questions, they are either fallinto a category of being, sort of, easy or difficult to respond to. These wereeasy questions and also typically with these submissions silence from the FDAis golden.

[Tao Levy:]

Okay. Great. Thanks a lot.

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. Our next question comes from Rick Wise with BearStearns. Please go ahead.

[James Fran:]

Hi. Good morning, guys. This is [James Fran] just filling infor Rick.

[Bevil Hogg:]

Hi.

[James Fran:]

First question is more of a big picture. I am trying to getan idea of we should be concerned with the overall economy's impact on hospitalspending and, kind of, what your expectation here is? And the impact likelygoing into '08?

[Bevil Hogg:]

In our view, hospitals will continue to need treat patients.And there are a very large number of untreated AF patients. Some say that thepenetration of treatment of catheter based interventional treatment for atrialfibrillation is only approaching about 1%. It is very expensive to treat thesepatients with alternative approaches and unsatisfactory. So hospitals find thatthis is a fruitful area for growth. It's an area where in terms of overallablations they can be quite profitable. And we expect that the ability of our systemto reduce procedure times so that they can do more procedures a day will bevery compelling in a march towards AF profitability.

[James Fran:]

Okay. Just one other question, kind of more into the detailson ASP. I know year-over-year-year it looks like increased, but sequentially itlooks like, if I'm calculating correctly, it might be down around the $100,000,and just kind of what's owing to the decline quarter-over-quarter?

[Jim Stolze:]

I didn't hear the first part of your question.

[Bevil Hogg:]

Sequential ASP. It's actually just about flat. I'll have togo in and dig up James and come back to you on that.

[James Fran:]

Okay. That will be great. I appreciate it.

[Bevil Hogg:]

Yeah.

[Operator:]

Thank you. Our next question comes from Mimi Pham with HSBC.Please go ahead.

[Mimi Pham:]

Hi. Good morning.

[Jim Stolze:]

Hi, Mimi.

[Mimi Pham:]

On your mid to late stage pipeline, are any of thesehospitals waiting for the US [regulatory] approval before taking the final stepsuch that we'd expect a bump up in the orders sometime in the first quarter ofnext year?

[Bevil Hogg:]

I think that, Mimi, it's fair to say that there is a certainamount of stickiness in mid to late stage pipeline. And if we consider theirrigated catheter to be a lubricant, it could certainly overcome thatstickiness. It's not that anyone is saying, absolutely, I won't take deliveryor I won't place an order. But let's just say that we expect the impact of theirrigated catheter on our pipeline and on our backlog to be very substantial.

[Mimi Pham:]

Okay. And then for the training involved, you're talkingabout that kind of rolling out the irrigated catheter. Does someone have to bethere for the first handful of cases?

[Bevil Hogg:]

Typically, yes. And we have prepared for this irrigatedcatheter launch like no other launch in the history of our company. We havevery substantial resources committed to seeing that every clinician is properlytrained and has a very satisfactory experience with this device.

[Mimi Pham:]

But in the US,would we expect the USlaunch to be sort of gradual similar to what you're doing in Europeor...

[Bevil Hogg:]

Less gradual than Europe, because we're not looking at theperformance criteria for the catheter, but rather looking at training criteriafor clinicians. But indeed, it will require some training time, but we wouldnot expect this to be as gradual as in Europe.

[Mimi Pham:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Charles Chon with Goldman Sachs. Please go ahead.

[Charles Chon:]

Good morning.

[Bevil Hogg:]

Hi.

[Charles Chon:]

Thank you for taking my questions.First of all, I guess focusing on system installations during the quarter, can youtalk a little bit more about the trends there? Considering there has beenchallenges in the second quarter where three system installations had slippedinto the third quarter, (inaudible) what we have been expecting, so seems nowthere have been some challenges during the past two quarters in terms of systemplacements. Can you share with us what is the basis of your confidence inachieving the implied fourth quarter guidance of $23 million to $25 million?

[Bevil Hogg:]

I didn't think that I implied confidencein the fourth quarter guidance. I said the fourth quarter guidance ischallenging. So please don't read any confidence into my earningscommentary. We look at our pipeline backlog and revenue generation as acontinuer, and we track progress through the pipeline, we track evolution intobacklog and we track our backlog into revenues. There is a component that can accelerate all of this, andthese are orders for immediate shipment to distributors or to customers who areanxious to get the product right away. And it is this component of our businessthat has become stickier. In other words, there is no rush to get a system ifthe principle use of that system is to be a treatment of atrial fibrillationwith the irrigated catheter. This is the stickiness that I referred to. However, given what we believe to be truly outstandingperformance for this catheter, and what we expect to be very, very favorablereviews of its performance by most of the top thought leaders in Europe at Boston AF, we expect that this stickiness willrapidly be overcome.

[Charles Chon:]

Okay. If I may ask a follow-up to the fourth quarter revenueoutlook, what needs to happen to achieve the original goal for 2007 revenueguidance? And maybe you could speak to, is there going to be a significantcontribution from the Odyssey system and how many system sales are you thinkingof for the fourth quarter there?

[Jim Stolze:]

Well, I don't want to make specific predictions for thefourth quarter, because I simply don't know yet what the outcome will be aseach of our quarters tends to be back-end loaded. However, I can talk to theoverall behavior of our sales processes last year at a similar time. Ourachievement of fourth quarter results last year was a mix of conversion of backlogto revenues and a fairly substantial number of new orders for immediateshipment. It is the latter category, the new orders for immediate shipment,which are not driving our revenues affect this year proportionately as they didlast year. With regard to the contribution from Odyssey, Odyssey webelieve will make a significant a contribution to revenues in 2008 and we havealready put out more than a 100 quotes to hospitals that are interested inacquiring Odyssey. However, Odyssey is only being commercially launched in the United Statesthis month. So, it's unlikely to make a significant impression on our 2007results. I would be optimistic about Odyssey in 2008, but regard thecontribution in 2007 is relatively minor, but it will be a contribution

[Charles Chon:]

Great. And just one final question on selling and marketingexpenses during the quarter. It came in at fair amount higher than what we havebeen expecting. Jim, should this be the new level of quarterly expense goingforward?

[Jim Stolze:]

Sales and marketing probably had a small blip in the currentquarter, but it's near the baseline spend in sales and marketing, yes.

[Charles Chon:]

Okay. Great. Thank you very much.

[Operator:]

Thank you. Your next question comes from the Keay Nakae withCollins Stewart. And please go ahead.

[Keay Nakae:]

Yes, good morning

[Bevil Hogg:]

Yeah, hi.

[Keay Nakae:]

Bevil, can you give us an idea of how many centers ordoctors, J&J and yourself are going to be targeting in the initial launchof the irrigated catheter in Europe?

[Bevil Hogg:]

We believe the number to be approximately 9 or 10. So, thatwhen we report at the Boston AFib Conference, hopefully, we will have asignificant proportion of those sites reporting.

[Keay Nakae:]

And can you give us a little more color on what exactlywe're going to see at this presentation. I mean, obviously, you'll talk aboutearly experience, but any color there would be helpful.

[Bevil Hogg:]

Well, the critical issue in the treatment of atrialfibrillation in Europe, using a system likeours is not so much the navigability of the catheter, because our cathetersnavigate extraordinarily well and safely. But, the ability of the catheters toachieve complete block, in other words, for completely transmural lesions to beachieved in short order, meaning in a timely fashion throughout the leftatrium. And it is this component of our irrigated catheter, sort of, inaddition to its maneuverability that we think will define that success. I meanafter all, if you can provide a system that can map automatically, that candrive a liner pathway automatically, that can knockdown the potentials orachieve transmural lesions reliably, let's say, better than 95%, close to a100% acute success rate. This is a solution that is going to be verysuccessful. And it doesn't take a long time to be able to gauge these acuteresults. Obviously, follow-up in long-term outcomes are important, but so areacute results. And the reality is that manually with traditional approachesthese acute results are not that great in terms of time and complexity. If wecan resolve these issues it will become readily apparent at the Boston AFibConference. In fact, it is already readily apparent to us. We believe we have awinner on our hands.

[Keay Nakae:]

And Bevil, based on your description from Pappone, it soundslike he is doing more then just isolating the pulmonary veins, but perhapsapproaching a Cox-Maze III. Can you confirm that or what's your understandingon that?

[Bevil Hogg:]

He is doing his typical approach, which is not justpulmonary vein isolation, although he is doing that and he is using Lassocatheter, which he doesn't usually use to verify the results. But, we havenoted ability to perform his standard procedure, which involves fairly complexlesions set extremely successfully.

[Keay Nakae:]

Okay. And finally, in Europeis your expectation that these 9 to 10 docs are going to be using NaviLine consistentlywith these procedures as well?

[Bevil Hogg:]

Most of them yes, but each center has its own approach todoing atrial fibrillation. And for example, Professor [Hasegawa] in Bodo,typically doesn't use three-dimensional approaches, but addresses atrialfibrillation in a way that is unique to his center. The beauty of the Stereotaxis System is that it doesn'timpose a particular protocol on clinicians. It can be adapted to individualpreferences. And I just want to go back to something I had said earlier aboutProfessor Pappone and the Lasso. I may have misstated there. His tendency is to use a virtuallasso meaning the ability to retrace his steps using our system to verify ablock. Not necessarily a real lasso.

[Keay Nakae:]

Okay. Very good, we'll look forward to that meeting,obviously an important milestone for you.

[Bevil Hogg:]

Absolutely.

[Operator:]

Thank you. Your next question comes from [Ed Shenkan] withNeedham & Company. Please go ahead.

[Ed Shenkan:]

Thanks, Bevil. Wondering if you could walk us…

[Bevil Hogg:]

Hi

[Ed Shenkan:]

Hi, wondering if you could walk us through some pricingexpectations for the CTO catheter when that comes and what could we expect?

[Bevil Hogg:]

We haven't set pricing for the RF guidewire, which is ourperipheral CTO solution. But when that device is commercialized, let's say atthe midpoint or slightly beyond next year, we would expect the retail price ofthis device to be linked to the value it brings to the procedure. In otherwords the ability to avoid surgical treatment, and this might be on the orderof $2,000.

[Ed Shenkan:]

You said mid '08 is when you would like to commercialize it.Is that in the US or is thatEurope, just give us both sides of the globe?

[Bevil Hogg:]

We would expect it to be both. This is not an overly complexregulatory pathway, given that it's a 5K, 10K approach for peripheral years.

[Ed Shenkan:]

Okay. And we have recently surveyed 39 physicians and wefound the number one reason that the doctors are so interested in this robotictechnology, is they want to be outside the radiation field and they want toavoid workplace injuries, which are very common in the lab. You talked about fluoroscopyreductions, which is certainly very advantageous for the patient as well asreduced procedure time. Is that data going to be published and is it importantto be published to increase adoption?

[Bevil Hogg:]

I think that's a very relevant question. First of all, Stereotaxisas a reminder removes the clinician entirely from the x-ray field and theclinician does the procedure from the control room. This contrasts with ourcompetition as we have noted our competition is doing procedures in the labitself, because their control unit is typically too large to place in thecontrol room, consequently clinicians are exposed to radiation and have to wearlead throughout the procedure. We see this as a significant problem for the competition.But more importantly is exposure to patients. Stereotaxis already has doneseveral hundred cases where we have demonstrated the ability to treat atrialfibrillation successfully, and by successfully I mean acute success rates onthe order of 93% or better and this is published data, with x-ray [floor] timesof around 10 minutes or less. Manual approaches and our competition have demonstratedaround 50 minutes to 60 minutes of radiation time or more. We believe that,this is a very, very compelling advantage to our system.

[Ed Shenkan:]

So, do you expect also to do some studies, to show thatcomplication rates are diminished when you are using the robotic and that wouldbe extremely compelling, I would think?

[Bevil Hogg:]

The answer is yes, however the complications are reportable,at least they should be. We are very careful to report all our complicationsand anyone who wants to verify our complications, can simply refer to the FDAwebsite set up for that purpose. We assume that other companies are alsoreporting complications and like wise, for manual cases. So this data isreadily available, but we are also creating a safety registry, which we hope,we will be able to publicize at an appropriate time in the future.

[Ed Shenkan:]

And the reduction in procedure time, could you give thatagain and then give parameters, is that AFib-only or give any more detailsaround the reduction of procedure time?

[Bevil Hogg:]

I'm talking here about for paroxysmal atrial fibrillation,not chronic or persistent. Chronic or persistent is harder to treat and webelieve that Stereotaxis has a very, very strong solutions in that area, butjust confining ourselves to paroxysmal atrial fibrillation. The problem is thatmost clinicians do not have a tremendous amount of experience in treating AFib,because they don't do many cases. Consequently, depending on their manual skillset, their experience level they get variable results. This is a problem forthe treatment of paroxysmal atrial fibrillation and it results in cases that arevery long, typically, more than four hours. If you have a case that last longerthan four hours, you're only going to do one a day. Again, we have published data to say that we are doing casesor without the irrigated catheter in nearly half that time. But with theirrigated catheter, things will go much faster, because the irrigated cathetercan ablate much faster than the non-irrigated devices. So, we expect to be ableto deliver very substantial reductions in case times. And again, this iscomparable to competition and manual, which are hovering at four hours orabove, we expect to be able to do cases in roughly half that time. We havepublished data that points to this already.

[Ed Shenkan:]

Thanks, Bevil

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. Your next question comes from the [Charlie Jones]with Barrington Research. Please go ahead.

[Charlie Jones:]

Good morning. Thank you for taking my questions.

[Bevil Hogg:]

Hi, Charlie.

[Charlie Jones:]

I was wondering if you could talk a little bit more aboutlead times, are they improving, Bevil and do you expect them to improve much in2008, do you have any visibility there?

[Bevil Hogg:]

Lead times.

[Charlie Jones:]

The order times that you guys have.

[Bevil Hogg:]

We are not seeing an improvement in order lead times, somehistoric experience. And we don't expect this to change substantially. The waywe generate more orders is by having a larger backlog and a larger pipeline,and obviously willingness or desire on the part of clinicians who are theprincipal drivers for adoption to take delivery sooner rather then later.Overtime, we expect that the impact of the irrigated catheter will, as I saidearlier, acts as a lubricant to our pipeline and backlog. But we are notlooking for substantial reductions in lead times.

[Charlie Jones:]

Alright. Thank you. Could you give us a little bit moredetail about the timing of our CTO launch do you have any more visibilitythere?

[Bevil Hogg:]

Well we expect to file 510k very shortly and we expect CTOsolution therefore in the peripheral vascular to be commercialized by mid-2008,probably in the third quarter.

[Charlie Jones:]

I wanted to make sure I understood some of your commentsabout NaviLine, does the physician follow the NaviLine the automated ablationline with a manual catheter, basically right behind it improving time or dothey wait until the ablation is done and then they use your catheter to dothat?

[Bevil Hogg:]

There is no manual catheter involved in non-atrialfibrillation cases in Europe. The NaviLine isa designated linear lesion, which the clinicians draws on a contour map. Ourablation catheter then follows that line automatically. And the clinician justhas to apply energy to ablate, obviously the system doesn't treat, theclinician treats. But the system defines the pathway with instruction from theclinician and then drives the pathway allowing the clinician with our ablationcatheter to deliver therapy.

[Charlie Jones:]

And I was actually talking about the verification of thatyou have transmural lesion.

[Bevil Hogg:]

There are two ways to achieve this. One would be the use ofLasso catheter, which some clinicians like Professor Hasegawa do, and the otherapproach is to then tell our catheter to retrace its steps reading thepotentials along the way, because our system is automated, it can redial. So,it is relatively simple and this has been done on a number of occasions, verysuccessfully by Professor Pappone. Our system retraces its steps reading thepotentials and identifying any gaps. We call this virtual Lasso.

[Charlie Jones:]

Alright, thank you. Will the USlaunch of ThermaCool be as measured as Europehas been or likely be much faster, and how many physicians do you think you'llinitially train, need to be trained in Q1 or Q2?

[Bevil Hogg:]

Now, first of all of our clinicians who are using our systemtoday in the US,and we've done many thousands of cases, have been trained. So, they know how touse the system. They don't necessarily have the various elements of irrigatedcatheter usage in mind. So, this would require a relatively short amount ofretraining. Consequently we expect the launch of the irrigated catheter in the United States to proceed much faster than in Europe. In Europe, we'relooking at catheter performance and other attributes of the cases not justtraining clinicians to treat patients. In the United States we expect it to bemuch more straightforward much faster. But of course, there are more cliniciansin the United States involved and more sites involved than in Europe, but Iwould remind everyone that we have well over 30 clinical support staff for thispurpose.

[Charlie Jones:]

So is it fair to say you could train the current installedbase in approximately a quarter once it's launched? Not trained, but just helpthem with the new attributes of the ThermaCool system?

[Bevil Hogg:]

I think we can get most of our installed base up and runningin the quarter, but I would prefer to say two quarters is being reasonable.

[Charlie Jones:]

All right. I think that's it. Thank you very much.Congratulations.

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. Our next question comes from [Ray Tang] with[E-Tech Advisors.] Please go ahead.

[Ray Tang:]

Good morning, Bevil.

[Bevil Hogg:]

Hi, Ray.

[Ray Tang:]

My first two questions have to do with NaviLine. By yourcomments, I think you imply that its going to be only use of the irrigated cathetercannot be use of other catheters?

[Bevil Hogg:]

It can be used with any localized catheter, meaning any catheterthat has positional feedback using a contour system. So any catheter will workwith NaviLine.

[Ray Tang:]

Okay. And are there any manufacturing issues right now at theirrigated catheter?

[Bevil Hogg:]

We don't think that manufacturing will be an issue in therollout of our irrigated catheter in the United States or in Europe.

[Ray Tang:]

Okay. And at the TCT, there are some pretty impressiveresults on the alcohol septal ablation using your system. And I was wonderingif you're going to pursue that further with some centers and how big the marketis going to be if that proves successful?

[Bevil Hogg:]

We're pursuing a number of what we consider to be veryelegant solutions outside of electrophysiology in interventional cardiology andperipheral radiology. These would include what you just referred to alsoaddressing CTOs. We're beginning some interesting work in a structural heartrepair, valve repair, although I doubt it will need to involve an acquisitionin that area. And through partnerships and collaborative efforts in all ofthese very, very interesting and promising areas, we expect to reach a criticalmass of interest by interventional cardiologists, so as to trigger acquisitionof our systems. There has to be enough there to make them want to spend onacquiring a system, and we think that we will approach that critical mass bythe second half of next year.

[Ray Tang:]

Okay. And on the RF guidewire, I assume it's under testingalready by clinicians, when will the data be released on that?

[Bevil Hogg:]

Because we are doing a 510(k), we don't expect this toinvolve human clinical study. And consequently, the first use of this systemwill be when it is approved, and that should be by the midpoint of the year.But we expect to generate the results very shortly thereafter, but this wouldbe a post-market studies.

[Ray Tang:]

Okay. That's all I have. Thanks a lot.

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. Our next question comes from Larry Haimovitchwith HMTC. Please go ahead.

[Larry Haimovitch:]

Good morning, Bevil.

[Bevil Hogg:]

Hi.

[Larry Haimovitch -HMTC:]

I wanted to ask couple of questions. One is when you look atthe cases Dr. Pappone is doing so far, it would seem like most of these wouldbe the paroxysmal variety of AFib. I am assuming he is not doing any chronic orpersistent.

[Bevil Hogg:]

He is. He is doing persistent cases as well.

[Larry Haimovitch -HMTC:]

When his data is reported, do you think we'll see abreakdown of the results by different types of AFib category or will it be alllumped together as one group?

[Bevil Hogg:]

No, they will be broken down. He has done chronic,persistent, paroxysmal. He doesn't shy away from difficult cases and we thinkthat the more complicated cases will really illustrate the advantages of oursystem.

[Larry Haimovitch -HMTC:]

Do you think in US we'll see that too, we'll see physiciansdoing all types of cases not only paroxysmal, which obviously are the easiestfor catheter ablation?

[Bevil Hogg:]

Yes. I think this is particularly so because, for example,we have seen a tremendous amount of work done in VT using the Stereotaxissystem in US, and then some site Stereotaxis is already sort of standard ofcare for VT ablations. This is not a huge, huge application, but it points tothe desire for clinicians to expand the range of their practice by undertakingmore complex cases using our system. And we don't doubt that our system willbecome a standard of care for the treatment of persistent and chronic AFib.

[Larry Haimovitch -HMTC:]

Great. And the second question is, in the competitiveenvironment where you are winning case, where are you winning in hospitalsversus Hansen. And what are the features that you think are most attractive tothe hospitals? And in cases where you think you may have lost the sale, whatwould you think would be their competitive advantage over you?

[Bevil Hogg:]

Well, of course, it depends on who we are talking to at thehospitals. From the clinician standpoint they look at Hansen publicized lifecases and they see for our procedures with massive amounts of radiation. Andlet's say we call this initial clinical data that is not very compelling. Theyare also, obviously, concerned about safety first and foremost. From the hospital's perspective their interest tends tocentre on economics. And most hospitals look at the lifetime ownership andoperating cost of the system. And when you yourself throw in the use of theHansen sheet, which adds $1,600 or so to the case, plus the requirement to useultrasound, which then adds maybe another $1,000 to the case, plus therequirement to use Lasso catheters, which can then add another $1,000 to thecase, it doesn't take a lot of arithmetic to figure out that it's a losingproposition. Of course, we are not experts on our competition and all ofthis information is to the best of our belief. But, we think that this is whywe have seen an impact by the competition on our mid-to-late stage pipeline ofno more then 1%, in spite of the fact that they have add access to theirrigated catheter for several months.

[Larry Haimovitch -HMTC:]

Great, thank you very much.

[Operator:]

Thank you. (Operator Instructions). Okay. Our next questioncomes from line of Vivian Wohl with Federated Kaufman Fund. Please go ahead.

[Vivian Wohl -Federated Kaufman Fund:]

Hi, Bevil. I am wondering if atthis point in the United States most of the hospitals are up anddoing atrial fibrillation cases with one of the catheters that are availabletoday on your system, or are some still waiting for the irrigated to belaunched?

[Bevil Hogg:]

Vivian, I think there is a definite dichotomy betweencertain clinicians who are very comfortable with doing atrial fibrillationcases on a worldwide basis. I don't want to talk to the United States, because in the United States atrial fibrillation is not alabeled procedure, and we do not have regulatory approval to treat atrialfibrillation in the United States. But, talking on a worldwide basis, there are a number ofclinicians who are very comfortable in using our 4 millimeter and 8 millimetercatheters and are getting excellent results. For example, we recently reportedon a publication by Dr. Chan, in Copenhagen,which pointed to some very favorable results using these non-irrigatedcatheters. However, there is a different group of clinicians, who arevery desperately waiting for the irrigated catheter and will not do complexcases without it.

[Vivian Wohl -Federated Kaufman Funds:]

So, is the majority, do you think waiting or not waiting?

[Bevil Hogg:]

I think the majority is waiting.I think there is no question that if you look at our 11,000 or so cases that wehave done so far with our system, you just look at the distribution of thosecases, there are only 2,300 cases or so that could be defined as complexleft-sided cases. And this I think illustrates the fact that the vast majorityof our clinicians who have acquired systems have done so in anticipation oftreating of atrial fibrillation, and that's why we are confident that with therelease of the irrigated catheter we will see a dramatic upswing in the usagerates worldwide and also in the lubricity of our pipelines.

[Vivian Wohl:]

So, do you want to give us anythoughts on next year? What that might do for total procedures done? You gotthe wide range?

[Bevil Hogg:]

Well, if we look at our current procedure rates, which arenot bad when compared with comparable equipment. I won't go into specifics, butour current procedure rates on a weekly basis per site or per training site arenot bad. We expect those procedure rates to increase substantially, perhapsdoubled, perhaps triple. And this will occur over the next year or two. So, wesee the irrigated catheter as a transformative device for Stereotaxis. It'swhat the world is been waiting for. If you put the catheter in the context ofthe system that can safely deliver it and provide tremendously stable and safecontact, you have a winning proposition and we believe, we are going to deliverthat. So, we feel very good about 2008, in terms of utilization rates andimpact on clinicians who have been waiting patiently for this device.

[Vivian Wohl -Federated Kaufman Funds:]

Well, then the AFib meetings next year should be an excitingplace to be?

[Bevil Hogg:]

I think, that you won't want to miss either HRS or Boston AFib.Obviously, it will time generate outcomes data, but intend to do. But theinitial reports, we trust, will be very favorable.

[Vivian Wohl -Federated Kaufman Funds:]

Thanks

[Bevil Hogg:]

Thank you

[Operator:]

Thank you, our next question comes from Dr. Paul Goldbergwith Abacus Asset Management. Please go ahead.

[Paul Goldberg -Abacus Asset Management:]

Good morning. Thanks you for taking my call. Just a coupleof questions, in reference to your current machine with the structural roomthat might be required, etcetera, is there any consideration because of thesize, and what has to be design for an existing hospital to have this machine.Is there anything in the works where there might be a reduction in the size ofthe magnetic components or in the installation or in the structural re-changingof the rooms or is this the machine that's going to go forward than youcurrently have?

[Bevil Hogg:]

I think that there are two ways to look at an answer to thatand I have to be careful here, because I need to talk about the [hearing nowand for real], because that's what our customers want from us, not promises orconjectures, but reality. And the reality is that our current system can beinstalled in most hospitals in most installations, and it is going to be availablefor some time to come. And anyone who is planning on approaching computer-aidedtreatment of complex arrhythmias should think in terms of our Niobe System. That being said, we are obviously doing research. And thereare some very, very compelling and promising approaches that we will bepursuing over time.

[Paul Goldberg -Abacus Asset Management:]

Okay. My next question is you're stating -- Dr. Chan or anumber of studies in Europe, you're stating acomplication rate of zero, I'm not sure which study it came from. But generallyin the United States, again, most of them are being either manual procedures,et cetera, it's more in the range of, say, a 3% complication rate of majorcomplications. There seems like a tremendous difference in the complicationrate that we're seeing from your studies in Europe.Is there any explanations that you have in reference to that or any particularreasons or is that number correct at the complication rate, unless I read itwrong that is it truly zero.

[Bevil Hogg:]

Well, first of all, the complication rate that we havereported is 0.1% on 2,000 complex cases.

[Paul Goldberg -Abacus Asset Management:]

Right.

[Bevil Hogg:]

That complication rate really looks at perforations andmajor vascular injury. If we look at the totality of 10,000 cases done, ourreportable complication rate is much lower. However, in part, this is becausewe have not been using high energy catheters like the irrigated catheter in the8-millimeter. Nonetheless, we do have several hundred 8-millimeter cases thathave been done and the complication rate is still, even for these devices,extraordinarily low. So in part, it's because of the types of catheters thatwe've been using. But I think the principal reason is that are our cathetersare very soft, very flexible and not very prone to perforation. The way anycatheter can perforate is by burning its way through. But setting that aside,and assuming that settings and calibration of the system is done withinappropriate norms, our system ought to be extremely safe.

[Paul Goldberg -Abacus Asset Management:]

Okay. Thank you. Could I ask one or two further questions?Is there a time then we could expect more of a head-to-head study, or is thereone going on versus manual procedures versus robotic with perhaps the real endtime not in acute success rate, which is in this condition. I mean it'srelevant, but not totally relevant for the patient in the long run, maybe anendpoint of a year or a year and a half where we can have a direct head-to-headstudy, or will this never happen, or are you carrying these type of studiesout? Are these being done at this point in time, whether in the United States or Europe?

[Bevil Hogg:]

These studies are being done at individual sites. But wewill launch a significant study in this arena in 2008. This is an outcomestudy. And we are very confident that the attributes of our system will prevailin a long-term outcome study. However, in terms of acute results, what issignificant for hospitals and clinicians is reducing case times in half,reducing radiation by a factor of five. And these are near term results that weare looking at.

[Paul Goldberg -Abacus Asset Management:]

Right. Now, as far as the acute type success rate, which hasbeen phenomenal, is there any information in reference to the number ofprocedures in PAF that are, let's say, at this point being required forcomplete control or what degree of control, what percent of control as comparedto also the use of additional drugs, as many of studies have shown that you needat least two procedures in order to accomplish an 80% success rate.

[Bevil Hogg:]

What I said earlier was that the typical redo rate formanual procedures is about 30%. It has a typical long-term success rate formanual procedures in the hands of average operators is about 65%. But I'm notqualified to talk about these medical endpoints, particularly where drugs areinvolved.

[Paul Goldberg -Abacus Asset Management:]

Okay. Well, appreciate it. And thank you very much andcongratulations.

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. And presenters there are no further questions atthis time.

[Bevil Hogg:]

Is that an invitation for my closing comments?

[Operator:]

Yes, please.

[Bevil Hogg:]

Okay. Well, I'd like to thank everyone and I'd also like tonote that this evening the Public Broadcasting System show the Nightly BusinessReport is expected to devote its Bill of Health segment to the StereotaxisSystem. I am advised this show airs at different times throughout the country.And these things are always unpredictable because we don't control them, but Ithought I would mention that to you. Thank you all for your time and attention.

[Operator:]

Thank you. Ladies and gentlemen, this concludes theStereotaxis third quarter 2007 results conference call. If you would like tolisten to the replay of today's conference, please dial 1-800-405-2236 andenter the access code 11098126. International participants may dial [phone].Those numbers again are 1-800-405-2236 or 303-590-3000, access code 11098126. Thank you for your participation and have a great day.