Stereotaxis, Inc.
Q4 2007 Earnings Call Transcript

Published: 5 Mar 2008

[Operator:]

Ladies and gentlemen thank you for standing by, and welcome to the Stereotaxis conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder this call is being recorded today, Monday March 3, 2008. Then I would like to turn the conference over to Mr. Doug Sherk. Please go ahead, sir.

[Doug Sherk:]

Thank you, operator and good morning everyone. Thank you for joining us at this early hour for the Stereotaxis conference call and webcast to review financial results for the fourth quarter of 2007. Before we get started we would like to remind you that during the course of this conference call, the company may make projections and other forward-looking statements regarding future events or the future financial performance of the company including without limitations statements regarding operating results in 2008, growth opportunities and other statements that refer to Stereotaxis plans, prospects, expectations, strategies, intentions and beliefs. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of risks and uncertainties that affect the company's business and qualify the forward-looking statements made in this call, we refer you to the company's recent public filings filed with the SEC, specifically the Form 10-Q for the third quarter of 2007 and the annual report on Form 10-K. The company's projections and forward-looking statements are based on factors that are subject to change, and therefore these statements speak only as of the date they are given. The company assumes no obligation to update any projections or forward-looking statements. Finally on behalf of management I like to apologize for the rescheduling of this mornings call, given very recent developments we made decision late on Friday to move up the call in order to provide investors with a comprehensive review of the company's progress as quickly as possible. With that said I would like to turn the call over to Bevil Hogg, Chief Executive Officer of Stereotaxis.

[Bevil Hogg:]

Thank you, Doug and good morning everyone. With me today is Jim Stolze, our Chief Financial Officer and Dr. David Burkhardt, our Chief Medical Officer. At Stereotaxis, we are building a company that is pioneering a new standard of care in interventional medicine for the treatment of complex arrhythmias as well as the treatment of cardiovascular and peripheral vascular disease. There is ample evidence that our approach is being accepted by most of the world's leading clinicians and institutions. We believe that no other modality offers the same potential for safety, efficacy and cost effectiveness in the treatment of complex cases. We believe we have established leadership from every perspective in the emerging market for the interventional robotic treatment of atrial fibrillation. A substantial market that currently has a penetration rate of less than 1% for manual procedures and where we believe as many 50% of the cases are being self referred at certain leading centers. We have a business model that benefits the hospitals practice, while evidencing increasing pricing power to us. At the same time, we are position to create favorable returns to our shareholders. Today I would like to focus my comments on how we intend to do just that. Jim, will follow-up my comments with the review of our financials and then Jim, David, and I would be pleased to take your questions. While we are the clear leader today in the field of interventional automation and information management, by the time we talk to you at this time next year, we expect our leadership to be even more pervasive. There are tangible facts to reinforce our perspective. First in 2007, our average install base for the year was roughly 60 NIOBE magnetic navigation systems. We expect this average number to grow to approximately 100 in 2008 and 150 or more in 2009. It is this rapidly growing average installed base that drives our expectations for the number of cases performed by our system. In 2007, more than 6000 procedures were performed on a Niobe system without the availability of an irrigated catheter. And that number could potentially be closer to 10,000 in 2008 and 20,000 in 2009, these numbers of course dependent on the full commercialization of our partnered magnetic irrigated catheter. We have a robust pipeline of more than 275 prospects in the mid to late stages of decision making, our backlog is continuing to grow, and its conversion to revenue has improved year-by-year despite the lack of availability of magnetic irrigated catheters. This strongly supports our contention that the Stereotaxis Niobe system is an effective platform for the full spectrum of arrhythmia treatments, ranging from right side of SVTs to the most complex ischemic ventricular tachycardias. Second, in conjunction with our rapidly growing installed base, we have gained substantial pricing power in the marketplace. Our gross margins in 2007 were nearly 66% and this year it should approach 70%, which is a soft contrast to our competition. For the first time, our per procedure disposable revenue, associated with magnetic irrigated catheter cases in Europe has crossed the $100 mark. These favorable trends in combination with the availabilities of magnetic irrigated catheters position us to continued strong growth of revenue from disposables. Our disposable revenue doubled in 2007 from 2006 and we believe it to grow substantially in 2008. The third factor driving our optimism is that, we continue to experience no material impact on our backlog or orders due to competitive efforts offerings. Part of this situation exists because the vast majority of the competition sales to-date that institutions outside our electrophysiology target market. We are in fact largely addressing different market opportunities. As a reminder, our target in this sector is defined as the roughly 250 to 300 EP labs, estimated by us to be undergoing construction or refurbishment each year. To illustrate this lack of impact, it is interesting to note that we believe only two institutions in our total target market have to-date purchased competitor's offerings. And therefore, the impact on our mid-to-late stage pipeline remains negligible. The fourth factor driving our leadership is the continuing innovation we're bringing to the market. This innovation simplifies complex procedures while enhancing procedure efficacy in both patient and doctor safety. For example in 2007, we began to move into the large interventional cardiology and peripheral vascular markets, and expect 510K clearance this year for our RF wire device which is used to open totally occluded arteries. During 2008, we expect to introduce at the Heart Rhythm Society conference major transformative software that will substantially improve the simplicity and efficacy of our Niobe system user interface, while at the same time enhancing our automation and procedure work flows. In addition, we are in strategic discussions with a number of major industry participants regarding the partnering of our Odyssey information management backbone for the interventional laboratory in order to extend its potential far beyond the Niobe market opportunity. As a reminder, the Odyssey system not only consolidates the sources of information within the cath lab into the single mouse and large screen format, but it's private network capability to which we expect to add archiving capacity later this year makes it uniquely able to provide clinical support services on a global basis and to connect hospital labs within each hospital and between the hospitals. Meanwhile we continue to build interest in orders for Odyssey within our existing EP lab market and are optimistic about its prospects for 2008. To-date, we have sold about 11 Odyssey systems and our goal is to deliver 20 or more during 2008. Finally, we expect to extend our leadership for improving our financial performance and generating returns to our shareholders. Once we have the full commercialization of the magnetic irrigated catheter, we anticipate strong demand for our system as well as an increase in utilization. In fact, at the eight European centers and one Canadian center that had participated in an external evaluation of the magnetic irrigated catheter currently being conducted by our catheter partner, average utilization increased to 4.5 cases per week across these sites. This external evaluation has involved roughly 250 cases to-date and the results are currently being reviewed. We understand that there was about a 94% acute success rate achieved in these cases, with exemplary safety. There is only one minor and transient adverse event which was not attributed to the performance of the system or the catheter. We are proud of this continuation of our historical safety record. Most importantly, the average economics for complex cases from disposable revenue at these sites to Stereotaxis was approximately $1000 for magnetic irrigated catheters, which is the first time we have achieved this economic threshold. We expect that this number will continue to increase in the years to come. Overall, we are extremely pleased with the results and have invited Dr. Burkhardt to answer your questions in these regard. Our success with the irrigated catheter has clearly attracted the attention of others and we have knowledge of two other device companies that are developing irrigated magnetic catheters that we believe were intended for production in the EU this year for use with our system. While we are respectful of our catheter partner's interests, and mindful of our own intellectual property, we nonetheless see this as a tremendous endorsement of our own technology. At the same time, the external evaluation phase of the catheter launch has identified a relatively small number of catheters that exhibited signs of char formation. Although it is our observation that changes in temperature setting and saline flow have largely resolved this issue in the clinical setting, our catheter partner has advised us that these characteristics are inconsistent with the product specifications. Consequently, they have notified us that they will be temporarily halting procedures done with magnetic irrigated catheters and will be delaying the full commercialization until this issue which is an extremely high priority for them is resolved. Our catheter partner has attributed this issue to inconsistencies with specifications, and this information, together with the observations of our own engineers leads us to believe that the root cause lies in the area of manufacturing conformance to specifications and should be addressable accordingly. Given the very recent developments concerning the magnetic irrigated catheter, we are not yet in the position to provide formal guidance for 2008. However, assuming the magnetic irrigated catheter is available for full commercialization by mid-year, and that we have reference sites during the second quarter, we can share with you our potential for the year which represents our internal expectations. First, we believe we can set the stage for substantial revenue growth during 2008 by converting at least 50% of our beginning backlog of approximately $58.5 million to revenue during the year. In addition, we expect to generate a substantial improvement in new order generation versus 2007, of which about $5 million to $10 million will be converted to revenue during the year, we believe. Based on our preliminary experience in Europe, disposables and other components of recurring revenue are expected to grow by well over 50% and we expect to generate an important new source of revenue from the sale of more than 20 Odyssey systems during the course of the year. With this revenue growth, we believe our gross margins will approach 70%, and we expect to benefit from our planned reduction in overall expenses, centered on R&D, enabling us to hold these below last year's run rate. Finally, with this type of performance in 2008, we would be better positioned to achieve profitability in 2009. As we get further clarity on the status of the magnetic irrigated catheter, we expect to provide specific guidance for the year. At this point, it is difficult to estimate the likely duration or financial impact of this temporary interruption in the commercial launch of the irrigated catheter, but it is reasonable to assume that any delay in the available to the irrigated catheter could materially impact our revenue and order ramp, particularly during the first half of the year. In summary, although we are disappointed with the potential for additional delay in the availability of the magnetic irrigated catheter, we believe that the approximately 250 cases performed to-date in Europe and Canada with this catheter, have established a new standard for the safe efficacious treatment of complex arrhythmias and we can build on this, as well as on our successful new Odyssey platform and new offerings in the vascular arena, to achieve continued strong growth in our business. Now, I would like to turn the call over to Jim to review the financial highlights.

[Jim Stolze:]

Thank you, Bevil. Stereotaxis reported total revenue $10.3 million in the fourth quarter compared with $14 million in the fourth quarter last year. Included in the total was systems revenue $7.6 million in the recent fourth quarter, compared with $12.4 million in the 2006 fourth quarter. We sold seven systems during the quarter. Of these six were placed in the US, and one was international. Our disposable service and accessories revenue was a record $2.6 million this quarter, compared with $1.6 million last year reflecting continued growth in the installed base and improved utilization. The gross profit was $6.5 million on the fourth quarter, or 64% of revenue. This compared with a gross profit margin last year of 59%. The year-over-year improvement reflects an increase in our average selling price of approximately 5% and the increasing contribution of disposables and service to our recurring revenue total. Operating expenses in the fourth quarter were $18.9 million, 28% above the fourth quarter last year. The increase was principally due to increased sales and marketing expenses to support the growth in our business as well as higher research and development expenses. The higher R&D was a result of incremental spending for new products platform improvement and device enhancement. We generated a net loss of $12.2 million or $0.34 per share. This compared with a net loss of $6.2 million or $0.18 per share in the 2006 fourth quarter. In the recent fourth quarter average shares outstanding were $36.3 million compared with $34 million in the same period last year. The increase was primarily due to the issuance of 1.9 million shares of stock in a registered direct offering completed in March 2007. We used approximately $9 million in cash for operations during the quarter. Cash investments at December 31, 2007 totaled $23.7 million. Subsequent to the close of 2007, we received $20 million in one-year unsecured loan commitments from two of our investors. With our cash the loan commitments and funds available from our working capital facility, Stereotaxis has approximately $60 million in liquidity, which we believe is sufficient to fund our operations well into 2009. Total debt at the end of the fourth quarter was $7 million; the increase from the third quarter reflects the draw-down of $5 million under our working capital facility. As Bevil indicated our backlog net of systems taken to revenue this quarter grew to $58.4 million at the end of December. As a reminder, we do not include orders for disposables service or accessories in the data. We would now to be happy to answer your questions.

[Operator:]

Hello, ladies and gentlemen at this time we will conduct a question-and-answer session. (Operator Instructions). Now first question comes from the line of Tao Levy from Deutcshe Bank. Please go ahead.

[Tao Levy:]

Good morning.

[Bevil Hogg:]

Hi, Tao.

[Tao Levy:]

Hi. Bevil I was wondering if you could go into a little bit more detail regarding your discussions with J&J, and regarding the catheter, how long is they are going to take them to get catheters back on spec? And then, do we have to go to another beta launch? And also surround that with the probability that you think you could hit a mid year launch of irrigated catheter, which you talked about in your informal guidance.

[Bevil Hogg:]

Tao, we are not yet in a position to make definitive or even well informed prognostications until the root cause analysis has been completed. However, it is our observation as we noted in our call, comments that the issue appears to be centered on conformance to specifications and its turns out to be the case, most manufacturing problems are resolvable. Our catheter partners have tremendous experience in this domain, and have placed a very, very high priority on resolving the issue. As to whether or not catheters are available by the mid point of the year, our earlier guidance on this was that we did not expect the catheters to be in broad distribution before the mid point of the year. So, I will stay with that original guidance, although my hopes are center obviously on getting the catheter out as soon as possible.

[Tao Levy:]

Okay. It's clear that Dr. Burkhardt on the phone, maybe you could go into a little bit more detail, your experience with charring, either with the manual irrigated catheter implications for patient safety and then just lastly Bevil, can you remind us on the contractual agreement that you have with J&J, when does it expire? What happens if other companies launch a European irrigated catheter, again to your relationship with J&J. Thanks?

[Bevil Hogg:]

Perhaps we will do this in reverse order. I'll answer the question about our contractual issue, which is a business issue, and then hand the mike to Dr. Burkhardt. With regard to our contractual alliance with our catheter partner, we are committed to them exclusively for catheter development and supply for at least the midpoint of 2009. However, this does not preclude other companies independently developing and commercializing magnetic devices. So, I wouldn't be able to comment more on that other than to say that the other companies have clearly noted the success of the catheter and growing installed base and apparently willing to invest their own funds in entering this arena. David?

[David Burkhardt:]

Charring is one of the overheating related complications I have seen in all catheters potentially. In general, with the irrigated catheters that are manual and magnetic, we expect less overheating related complications, and that's something that we actually have seen with those with the exception of steam pops, which is one of the things that we see more or tend to see more with irrigated catheter. So, manual irrigated catheters and some of the initial experience has had a large report of steam pops. Char does actually appear to be seen sort of less in general particularly with the manually irrigated. The charring, however, that's been reported with this is different than typical charring. In fact, it's more coagulum formation. So on both manual non-irrigated and irrigated catheters, charring in coagulum that tends to be seen is usually seen on the very tip of the catheter or the distal portion of the, what we call the distal electrode. In general what has being seen on this is a very small amount of coagulum or the char what's called char that I have seen is actually charred coagulum. That's at the proximal edge of the distal electrodes. So it's a little bit different in terms of the clinical outcome of this. As we've seen with the European experience, even though this catheter appears to have had this occur, it's been actually remarkably safe, considerably safer than the manual irrigated catheter in comparison with its initial release.

[Tao Levy:]

Great, thank you.

[Operator:]

Thank you. And our next question comes from the line of Keay Nakae from Collins Stewart. Please go ahead.

[Keay Nakae:]

Yeah, just a follow-up with Dr. Burkhardt. The fact that J&J feels the catheters are off spec. Is that related to the size or the size of the outflow ports not being of a consistent size? Or could you be more specific about what do you think the manufacturing specification issue is related to?

[David Burkhardt:]

I don't think that has been resolved and that's one of the things that they are looking into.

[Keay Nakae:]

Okay. And just a follow-up on one of Tao's questions. Once they have it ready to go again, do you see them having to go through a second beta launch?

[Bevil Hogg:]

The answer to that while not definitive is probably not. Our initial information is that the beta launch is largely complete, and that it was successful from a clinical standpoint to a clinical endpoint, and that it would be unlikely to be repeated in Europe. It's possible that there could be a short pre-launch in the US because the catheter hasn't been launched in here, but we don't think there will be a repeat in Europe.

[Keay Nakae:]

Okay. With respect to the other third parties who are developing magnetically-enabled irrigated catheters, if they are not CARTO-enabled, Bevil or Dr. Burkhardt how attractive do you think that would be as an option for use with Niobe?

[Bevil Hogg:]

I'll answer that question initially just based on my observation that we have seen fairly widespread use of competing systems to CARTO with our system, and our assumption would be that they would be used in tandem.

[Keay Nakae:]

And Dr. Burkhardt, do you have any opinion about that?

[David Burkhardt:]

Yes, I think particularly for people in the US, at least the ones that I am familiar with, the availability of catheter that could be used with the competing system would be something people would certainly reach out to.

[Keay Nakae:]

Okay. And to finally Bevil, the upgrade to the software that you talked about launching later this year, could you be more specific about the functionality that we would see included? Is this going to at least on the software side include, a gating to respiration?

[Bevil Hogg:]

We are still in the final stages of development of our new 3.0 software release and we see this as a transformative improvement or upgrade to our software capabilities, and that everything should become a lot easier. And we believe that it will significantly enhance our automated routines, but I don't want to talk about the specific aspects of it yet because these are not complete.

[Operator:]

Thank you. And our next question comes from the line of Rick Wise from Bear Stearns. Please go ahead.

[Rick Wise:]

Good Morning, Bevil.

[Bevil Hogg:]

Hi Rick.

[Rick Wise:]

Couple of questions. First, I am a little confused by the OUS experience seems to be different than the domestic experience. I assume it's exactly the same catheter. Am I missing something here?

[Bevil Hogg:]

Rick, the irrigated catheter has only been released in Europe. It does not go into broader release in the United States, because it has not yet completed its external evaluation phase. So the only cases that have been done, those roughly 230 cases that I referred to were done in Europe.

[Rick Wise:]

I see. I thought you were suggesting that there had been some evaluation cases done in the United States?

[Bevil Hogg:]

In Canada, yes, but not in the United States.

[Rick Wise:]

Were the cases centered in a particular lab? Is it handling at all, or was it a widespread experience?

[Bevil Hogg:]

Well, it's fairly probably widespread. There were roughly nine sites and these are all relatively high volume sites, one site in Canada and eight in Europe.

[Rick Wise:]

Okay. Turning to the income statement, it was encouraging to see disposable income even with the modest contribution from irrigated up strongly. Am I understanding it correctly, am I seeing it correctly that gross margins were sequentially lower in the fourth quarter than they were in the third quarter. Can you help me understand why that should be given the strength in disposables?

[Bevil Hogg:]

I'll defer that question to Jim, because it's more of a technical financial question than business model question. Because from a business model standpoint, as our case volume increases and as the proportion of irrigated catheters which sell for higher ASP and therefore higher royalty predominate, our situation should improve. Jim?

[Jim Stolze:]

Yeah. Rick, the disposable and other margins, as Bevil said will continue to improve as you get the higher percentage of royalties, the systems margins can move a point or two in each quarter depending on the ASP that happen to fall through. Half of the actual margin difference in the quarter is driven by the systems which are driven by really insignificant changes in the ASP of the actual systems recognized, as well as some field service costs that we incurred in the fourth quarter. That's all wrapped into one number. So they're generally going obviously in the right direction. You'll get some small variances quarter-to-quarter.

[Rick Wise:]

Okay. But there is nothing significant that would have happened fourth versus third quarter?

[Jim Stolze:]

No.

[Rick Wise:]

Okay. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Larry Keusch from Goldman Sachs. Please go ahead.

[Larry Keusch:]

Hi, good morning. On the charring issues, and as you guys think, perhaps the challenge of the manufacturing to the specs. You haven't talked about any potential involvement of the FDA here. Do you suspect that they will get involve in some way and if they've been notified?

[Bevil Hogg:]

We don't handle regulatory communications with the FDA, but here is what we believe and what we understand. First of all, we do not see any clinical safety issue here based on the 250 or so cases. And obviously all adverse events are reported. And I think we've been pretty acidulous in doing so over the years. And I noted one transient adverse event that incidentally was not attributed to the use of either the catheter or the system. With regard to our manufacturing conformance I do not believe that is a regulatory issue. It's simply a manufacturing process issue and obviously there maybe notification to the regulatory bodies of the appropriate time that we and this is we Stereotaxis are not qualified to opine in this area, but nonetheless do not expect that to become a significant issue.

[Larry Keusch:]

Okay. And at this point again everything that you guys have seen and looked at you are, it sounds like you are pretty confident that this is not a design/class engineering issue and that again this is manufacturing related?

[Bevil Hogg:]

Well, our confidence stems from a number of sources not the least of which our catheter partner statement that the issue relates specifications, but the vast majority of catheters performed extremely well. So, we know without coagulum or char, so obviously if you can make some to perform well then the fact, which you can't make them all perform well in our view is a manufacturing issue and not design issue.

[Larry Keusch:]

Okay and then just a couple of other quick one. Just talking a little bit about the guidance -- you didn't provide guidance, but as you sort of thought through 2008 and some of the comments that you've made. When you talk about your income statement in the expense line item, it sound like you I just want to clarify are you assuming that both SG&A and R&D are at levels below your 4Q exiting run rate for the year 2008 both line items?

[Bevil Hogg:]

Yeah our total OpEx should be on a par with or below last year that I'll give that specific question to Jim to answer.

[Jim Stolze:]

Right, yeah. Larry, I'd suggest R&D would be the biggest adjustment and that as Bevil says, targeted to have total OpEx remain below 2007 levels on a year-over-year basis, you would see there is a marketing continue to grow and we would hold some incremental smaller growth in SG&A, but the R&D line would go backwards.

[Larry Keusch:]

And what exactly is changing on the R&D side?

[Jim Stolze:]

Oh. It's project driven as you know. There has been a lot of Odyssey development work in 2007. There was continued work on integration as continued work obviously on device development, as you know Bevil talked about the RFR developments. So, there are a lot of projects in 2007, which will not need to continue into 2008. So, it's a selective review of projects that are completing as we stage new projects.

[Larry Keusch:]

Right, okay and then just lastly the other one the $1000 this is sort of nit picky, but the $1000 Bevil you talked to concerning the per-procedure fee that you are generating out of Europe on the irrigated side. I'm just trying to translate to that the US, then $1000 is translated back in euros that you are picking up over there. We should be thinking about the $800 in the US or you selling in dollars and so it would be consistent here in the US as well.

[Bevil Hogg:]

Okay. Larry, first of all, let me say that my comment about the $1000 is not sort of precise enough to translate directly into US experience, but roughly we are looking at irrigated catheters in Europe that sells for we believe somewhere in the region of 3000 euros and a royalty on the order of about 15%. Then we have our own CARDIODRIVE disposable, which has increased gradually it's ASP over time and we are now negotiating new contracts at around $600 for the CARDIODRIVE, but I just usually loosely use $400 price point for that device. So, that more landscape $1 to $1000.

[Larry Keusch:]

Okay. And then last one for you Bevil, since you mentioned it, the 150 systems that you expect to be installed in 2009, obviously this business runs a lot on back order and presumably by mid '09 you would have to have some visibility as to where you going to get. So, we be thinking about visibility on that 150 systems developing in the -- as has in the past, in the second half of '08 and into first half of '09?

[Bevil Hogg:]

Larry, could you restate the question. I understand you are asking about the sort of average installed base in 2009. We need to calculate average installed base for each year, so is to use it in our modeling and financial projections, and as I said, the average installed base was about 60 last year, should be around 100 this year and most of these installed base systems are coming out of backlog. We don't need to generate a huge number of new orders in order to accomplish these average installed base numbers, and then the projection is for roughly 150 systems in 2009 and that would largely depend on the state of our ending backlog this year.

[Larry Keusch:]

Right that's what I was getting to. So, no, you're not looking for some inflection point other than the approval of the catheter, and then that backlog build and that's how we get visibility on '09?

[Bevil Hogg:]

I think that we're going to see a continuation of strong order flows and revenues from systems, but we're noting a very substantial contribution from our current revenues, which we expect to grow over time as our CARDIODRIVE ASPs move northwards, and our royalties increase on more expensive devices multiplied by a larger installed base. So, the contribution from non-Niobe revenues is going to evolve substantially upwards over the next 24 months.

[Larry Keusch:]

Right, okay. Thanks very much.

[Bevil Hogg:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from the line of Ed Shenkan from Needham and Company. Please go ahead.

[Ed Shenkan:]

As far as adverse events recently, you mentioned one in your press release, are there any others that are, you can mention that have happened?

[Bevil Hogg:]

Not, that I'm aware of Ed and generally I'm aware at those events.

[Ed Shenkan:]

And as far as Europe you mentioned, you expect to place or sell 20 units in 2008. Can you give us some why you feel so confident that you are going to place so many units given the issue that we discussed earlier today?

[Bevil Hogg:]

Ed, the 20 units were first to Odyssey.

[Ed Shenkan:]

Okay.

[Bevil Hogg:]

And we have a very large backlog and as I indicated in my comments we expect 30% of that backlog or more, to further revenue during the year, and we also have an extremely large pipeline. Our pipeline exceeds 600 prospects, we have had very little or no attrition to that pipeline from our competition and we have a target of delivery dates and installation dates and order generation dates for all of our backlog units, and for most of our late stage pipeline units. So, we have a pretty reasonable perspective on what can happen, and we don't think that these drivers of our system revenues will be substantially impacted provided the hiatus and the availability of the irrigated catheter is relatively short.

[Ed Shenkan:]

And is this wholly a manufacturing issue and how have you ruled out that isn't perhaps design related?

[Bevil Hogg:]

I mentioned a bit earlier in my comments that because the substantial majority of the catheters are to specification and appear to have performed extremely well. That would indicate that they are manufacturable and have been manufactured successfully. We are looking at here in our view and this is only in our view, we cannot speak for our catheter partners who are experts in this field. In our view, what we are looking at is a manufacturing conformance to specification. Many, many catheters, irrigated magnetic catheters have been built that conform to specifications.

[Ed Shenkan:]

And what is Stereotaxis's role in this actual investigation or review versus J&J's role.

[Bevil Hogg:]

J&J is the developer and manufacturer of the catheter. And our role is advisory and participatory as an observer, but we are not involved in making the final decisions.

[Ed Shenkan:]

And last question would be your sales people. How are they going to address this issue in the US and abroad?

[Bevil Hogg:]

Our sales people are busy selling systems and we have never told our customers that irrigated catheters will be available now or tomorrow or next week. Our customers are quite able to make their own informed judgment as to the value proposition of our system with or without irrigated catheters. I will note that we did over 6000 cases last year without an irrigated catheter. And we are receiving orders and we believe we will continue to receive orders in line with our expectations.

[Ed Shenkan:]

I'll jump back in queue.

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Steve Ogilvie from ThinkEquity. Please go ahead.

[Steve Ogilvie:]

Thanks. Could you clarify on the Odyssey, you said you sold 11, and does that mean you'll recognize the revenue? And could give us an ASP and does that replace when you talk about system sales replace Niobe sales, in terms of the guidance you gave?

[Bevil Hogg:]

No to the last question. But let me go back to the first part of the question. Odyssey is a -- an information management workstation that is the front end for an integrated EP lab. And as such, we are currently selling Odyssey for an ASP that is or let's just say we're selling it for a list price that is well in excess of $200,000, and in ASP that is around $200,000. We've sold 11, some of the early Odysseys were sold on lease programs but currently this is a straightforward sale with a service agreement to follow.

[Steve Ogilvie:]

Okay. So then 11 systems you said that's not a backlog, you actually recognized that revenue in the first quarter?

[Bevil Hogg:]

I will defer that to Jim because of the lease aspects here Steve, recognizing revenue on many of the 11 systems is not an immediate thing. Jim?

[Jim Stolze:]

Right. Yeah, that's one. We used the word sold. That means taken orders for, Steve, not recognized revenue necessarily. So we've had a couple of recognized revenues. As Bevil said some are on a lease basis where the revenue gets just filtered in over the period of the lease. So there is not a significant amount of revenue in 4Q.

[Steve Ogilvie:]

Okay. And then on the magnetic irrigated catheter that's being developed by someone besides J&J. Is that something that you're working with them at all? And do you get any economics on such a product?

[Bevil Hogg:]

We are not working with any other catheter manufacturer or developer currently other than with our principal catheter partner. Economics is centered on our CARDIODRIVE disposable for which the list price has recently reached $1,200.

[Steve Ogilvie:]

Okay. And then just a follow-up. What were the royalty economics you are hoping for on the irrigated magnetic catheter? Thank you.

[Bevil Hogg:]

I don't think it's a matter of hope. We have been getting royalties on the irrigated catheter on the order of about 15%.

[Steve Ogilvie:]

Great, thanks guys.

[Bevil Hogg:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Mimi Pham from JMP Securities. Please go ahead.

[Mimi Pham:]

Hi, good morning.

[Bevil Hogg:]

Hi, Mimi.

[Mimi Pham:]

Bevil, can you clarify, did you say that all nine of you evaluation sites saw the charring in the magnetic irrigated catheter?

[Bevil Hogg:]

I don't think so. But let me defer that question to Dr. Burkhardt. David?

[David Burkhardt:]

It was about a half actually. Some sites had it more than others.

[Mimi Pham:]

Okay. But it wasn't just like one single user?

[David Burkhardt:]

No, the majority were actually in a couple of centers.

[Mimi Pham:]

Okay.

[David Burkhardt:]

But no, it was not, it was more spread out in about half.

[Mimi Pham:]

And did the centers see the charring like in the cases that we were reported at the AFIB Conference in Boston?

[David Burkhardt:]

Yes. And so the people who were onstage, several of them did report seeing some?

[Mimi Pham:]

And just again, clinically they didn't see it during the case. They just saw it when they pulled the catheter out and then J&J then said hey this is an issue?

[David Burkhardt:]

It was pulled out and reported on a detailed case report form that was filled out for every case.

[Mimi Pham:]

Okay. Because I guess it was always the case where they didn't expect to see charring or just well as bother some was that it was in the distal -- sorry it was in the proximal part of the catheter versus the distal part?

[Bevil Hogg:]

Mimi, I will answer that, it's not that they didn't expect to see any charring because charring occurs on all catheters.

[Mimi Pham:]

Correct.

[Bevil Hogg:]

What I think to serve a partner was the sort of randomness of the issue and the fact that it appeared to be related to specifications in the device, and when you have a randomness in specifications, it's important to revisit manufacturing operations and other aspects of the production of the device.

[Mimi Pham:]

Okay. And then also with the AFIB symposium, I think someone has mentioned, they ideally want to see more reach in the irrigated catheter. Now that they have more experience, is this issue with of any of centers, or would you say overall the nine centers feel that they can maneuver the magnetic irrigated better than the manual irrigated?

[Bevil Hogg:]

The satisfaction rating or ranking given by the centers that the last time that the data was recorded was, I believe a 4.5 out of 5 scale and the issues of reach had largely been aggressive. It was a matter of inexperience in placement of sheath rather than the ability of the catheter to perform. I think David could probably talk about the performance of the catheter.

[David Burkhardt:]

I'd agree that most people have rated the performance very high and the ability to achieve independent users end point also greater than 90% overall.

[Bevil Hogg:]

David perhaps you could allude to your early experience with the initial launch of the manual irrigated catheter.

[David Burkhardt:]

Our initial US experience with the manual irrigated was actually quite a problem in terms of one overheating related issues mostly in the form of the steam pops, tamponade that is blood accumulating in the sack around the heart. We actually saw a quite a bit around 20%, 100% steam pops at higher powers, expand powers that are even typically used and then 20% of this blood accumulation in the initial experience. And so in terms of complication rates and overheating related complications, this catheter has performed remarkably well. In fact that was surprising to me that no steam pops had actually been reported in the initial experience particularly with from centers using higher powers. So, in terms of that performance in that safety, it's in stark contrast to our initial experience with the manual catheter, but I think that experience with manual catheter one of the reasons, I suspected it's one of reasons that Biosense has released the catheter with this type of evaluation.

[Mimi Pham:]

Okay, thank you. And one last question on the 20, 25 accounts in your mid to late stage pipeline, would you say that most of these labs are planning to upgrade or build out a new lab starting 2008, so that want to make decision this year to purchase Niobe or not?

[Bevil Hogg:]

I don't know the exact distribution of the placement dates for labs within mid to late stage. Clearly late stage would principally be in 2008, that they replace their order. Remember that this is order generation comes before installation, so the bulk of these accounts would from an installation standpoint, revenue recognition standpoint would fall into 2009.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Spencer Nam from Summer Street Research Partners. Please go ahead.

[Spencer Nam:]

Thanks for taking my question. I just have a couple of quick questions for all of you. How do you calculate the average installed base?

[Bevil Hogg:]

Jim, you can answer that specifically, but we looked at the number of systems that are installed in January versus February versus March, and essentially the average installed base would be the sort of average number of systems that was, that were in operation for the year as a whole. Jim, you want to be more specific?

[Jim Stolze:]

Sure. We go to the actual installed date. So, when a system is sold there several weeks before it's actually completely installed, the training has occurred. So, there is some period of time before it's actually able to produce revenues. So, we try to factor in a number that is relevant to a systems ability to actually begin producing revenue.

[Spencer Nam:]

So the installed base is based on the time that the system is able to produce revenue.

[Jim Stolze:]

Yes.

[Spencer Nam:]

Great I appreciate that. Quick question, are you planning to add any sales reps this year?

[Bevil Hogg:]

Yes, we are. We will continue to grow our sales force. They have a lot to do. Selling systems and now, I mean Niobe systems and now Odyssey systems. So, we will expand our sales force, but the cost of that is largely being offset by reductions in R&D hence our statement that the overall spend should be on a run rate basis consistent with lower than last year.

[Spencer Nam:]

Great thank you very much.

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. (Operator Instructions). Our next question comes from the line of [Ray Tang from Etech Advisors]. Please go ahead.

[Ray Tang:]

Good morning. [Technical Difficulty].

[Bevil Hogg:]

Operator, we can't hear his question

[Ray Tang:]

Can you hear me, hello.

[Bevil Hogg:]

A little better.

[Douglas Sherk:]

Operator?

[Operator:]

And I did adjust the line sir, go ahead.

[Douglas Sherk:]

We could not hear the question at all.

[Operator:]

Okay. Mr. Tang, can you repeat the question, please.

[Ray Tang:]

Can you hear me right now.

[Douglas Sherk:]

No, not really.

[Ray Tang:]

Let me try it off later.

[Operator:]

Then our next question comes from the line of Keay Nakae. Please go ahead.

[Keay Nakae:]

Yes, Bevil I wanted to follow-up on the mid higher list price for the CARDIODRIVE. What should we modeling as an ASP for that device going forward and would you charge more for it if someone is using a third party catheters instead the J&J catheter?

[Bevil Hogg:]

We like to think that we favor our partners and their customers. So, typically we would be inclined to provide beneficial pricing to joint customers in as much as that is permissible depending on the jurisdiction. However, to be more specific about the ASP of the CARDIODRIVE, we have gradually been increasing the ASP over time from the low 300s to the mid-400s, and we are currently pricing it in the $600 range on new contracts.

[Keay Nakae:]

Okay. And as we look forward to mid '09 and your exclusivity with J&J expires, what would be the downside of not renewing that exclusivity with J&J?

[Bevil Hogg:]

We have an excellent relationship with J&J and we would certainly work hard to continue collaboration with them. Obviously, Stereotaxis needs catheters that conform to specifications, and we are very hopeful and confident that our current principal catheter partner will be able to achieve this objective.

[Keay Nakae:]

Okay. And finally for Jim, with respect to modeling the revenue that comes in from Odyssey, what's the typical term of the lease that these folks are signing?

[Jim Stolze:]

Keay, we've been able to convert most of these new quotes into just a capital sale. So for the most part, systems that we will be recognizing will be a one-time capital revenue transaction. We'll have some historical systems that will bleed in, but that's a handful.

[Keay Nakae:]

Okay. So going forward, the goal is to sell them outright?

[Jim Stolze:]

Yes, sir.

[Keay Nakae:]

Okay. Very good, thanks.

[Operator:]

Thank you. And our next question comes from the line of Tao Levy. Please go ahead.

[Tao Levy:]

Just a quick follow-up. On Odyssey you mentioned in the press release, discussions with other partner, what type of agreement would you hope to strike. It would be with one company, with multiple companies, would it involve royalty, would it involve upfront payment? Just I guess your hopes in an arrangement. Thanks.

[Bevil Hogg:]

Tao, Odyssey is a very new approach to information management and networking in the cath lab. We believe it's absolutely unique in this regard. There are really two components or two parts to Odyssey. One is a piece of equipment which as Jim said we will be selling and are selling for roughly an ASP of $200,000. Clearly, our reach currently is to be able to sell these Odyssey systems into Niobe labs or into Niobe lab prospects. That's the current capacity of our sales force. So one of the things we will be looking to do in order to expand our reach beyond the Niobe installed base and Niobe prospect, would be to find a partner whose sales force and other distribution capabilities would enable us to play a more Odyssey systems into more labs not necessarily Niobe labs alone. For example to illustrate this point, we've had an inquiry from a hospital, actually a Hanson customer, who is talking to us about placing an Odyssey system in the Hanson Lab. So the capabilities of Odyssey to extend beyond our own installed base, but our capacity to sell and distribute the product at this point is limited. The market we believe is virtually unlimited because it includes 2,500 EP labs, and then obviously there are all the other 30,000 or so interventional labs outside of the electrophysiology arena. But there is more to Odyssey than just distribution of a product which presumably would be done at a transfer price with a distributor margin. But there is also the network connections and network content and we would hope that we would retain some level of control over that and have opportunities to charge for content and network distribution. Finally, Tao, there are accessories to other services attached to Odyssey such as archiving capabilities or connectivity within the hospital to viewers and various areas of the hospital which would carry additional charges and would generate additional income.

[Tao Levy:]

Okay. Is there a timeframe when you expect to finalize finding a partner or partners for Odyssey?

[Bevil Hogg:]

Could you say that again please?

[Tao Levy:]

Is there a timeline where would you expect to conclude the partnership talks and announce something a little more formally?

[Bevil Hogg:]

I wouldn't put a timeline on it because these are fairly complex and far reaching talks. For example, we have partnerships with Siemens and Phillips, and both of them are obviously interested in the integration of their systems with Odyssey, and how they can bring Odyssey into the front-end of their labs. They could enhance some of the information management and procedure workflow capabilities. But there were also device companies like our catheter partner or other catheter and device companies. So we are going to move slowly and steadily toward perhaps a series of strategic relationships that will be built around integration, distribution, call center and networking sharing and so on.

[Tao Levy:]

Okay. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Ed Shenkan from Needham and Company. Please go ahead.

[Ed Shenkan:]

Yes, as we are two months into the first quarter this year, just wondering what you are expecting as far as the trend compared to maybe the fourth quarter of '07? Would you expect it to be kind of flat sequentially or up or down?

[Bevil Hogg:]

Ed, we are not prepared to give guidance for the first quarter, particularly given the hiatus with regard to the irrigated catheter. But certainly we think that the impact of irrigated catheters most likely to affect us in the first part of this year. So certainly we wouldn't look for substantial growth at all in the first half of the year.

[Ed Shenkan:]

Thanks, Bevil.

[Operator:]

Thank you. And I am showing that we have no further questions at this time. Please continue with any closing remarks that you may have.

[Bevil Hogg:]

I just wanted to thank everyone for your time and appreciate your being here to talk to us early on Monday morning. Thank you very much.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.