Stereotaxis, Inc.
Q3 2008 Earnings Call Transcript

Published: 24 Nov 2008

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Stereotaxis third quarter 2008 earnings conference call. 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) This conference is being recorded today, Thursday, November 6, 2008. I’d now like to turn the conference over to Doug Sherk. Please go ahead, sir.

[Doug Sherk:]

Thank you, operator, and good morning, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review financial results for the third quarter of 2008. Before we get started, we’d 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 limitation, statements regarding operating results for calendar 2008 and 2009, 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 the 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 with the SEC, specifically the Form 10-K for the fiscal year ended December 31, 2007. 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, during today’s question and answer session, we would like to ask each participant to limit themselves to two questions, and then re-queue if you have additional questions. In advance, we thank for your cooperation with this process. And now I’d like to turn the call over to Bevil Hogg, Chief Executive Officer of Stereotaxis.

[Bevil Hogg:]

Thank you, Doug, and good morning everyone. On the call with me this morning is Jim Stolze, our CFO, and Mike Kaminski. Mike is currently our President and Chief Operating Officer, and I am pleased to report he will be replacing me as Chief Executive Officer effective January 1 as part of a carefully planned leadership transition in Stereotaxis, which I’ll speak more about during my closing comments at the end of this call. That has been considerable discussion in the media of late about the impact of external events on hospital capital expenditures and I’d like to open this morning by addressing this concern. Clearly many segments of hospital capital expenditure budgets have been impacted by what’s happening to the credit markets. However several indicators illustrate the relative robustness of the electrophysiology lab’s capital equipment budget. Specifically, the major device companies in this domain have reported very strong growth in the AF components of their businesses and our imaging partners continue to see the electrophysiology segment as a focus of our hospital capital expenditures. Our own experience year to date despite the withdrawal of the all important magnetic irrigated catheter has showed continued interest in Niobe systems and growth in our backlog. All of the above continues to indicate that the EP lab’s capital equipment expenditure budget remains a key focus of hospital investment programs. Within this market environment, Stereotaxis is building on the value we bring to our hospital customer base and we expect our momentum to accelerate with the return of the initiated catheter. The ability to treat a good portion of the world’s 6 million cases of atrial fibrillation with EP lab based technologies is in its nascent stages. There is broad agreement that this market segment is likely to double over the next five to seven years, especially as technologies are cleared for specific AF treatment labeling by the FDA. Therefore hospitals are likely to continue to spend on capital equipment to address this market opportunity, particularly on those technology that can provide higher patient safety, better outcomes and greater efficiency. Within this positive environment for EP capital spending, we have in place nearly all of the building blocks for accelerated growth and profitability. Clinician interest in our solutions remains very high. Our margins are good, our backlog is growing, our operating expenses are down, and our recurring revenue continues to expand strongly. The capstone remaining to be safe in place is the magnetic irrigated catheter. As we speak to you today, we expect the irrigated catheter to be launched very shortly in Europe where its devaluation has we believe been a resounding success. I should note that utilization rates of the nine participating evaluation centers have increased significantly. We continue to believe that the irrigated catheter will be launched in the U.S. shortly after the European launch. When that development occurs, all the necessary building blocks would be in place to achieve a point of inflection for Stereotaxis in terms of systems placements and recurring revenues and ultimately profitability. Finally before I turn the call over to Mike, I am pleased to note that we have reached agreements with our principal venture capital investors to extend their $20 million commitment made earlier this year by at least another year into 2010. This commitment further underlines the confidence of our longest standing investors, and the ultimate success of Stereotaxis, and provides us with the financial flexibility to execute our plan through 2009. Now for a review of our third quarter progress, I’d like to turn the call over to Mike.

[Mike Kaminski:]

Thank you, Bevil, and good morning everybody. Bevil, I appreciate your leadership and support over the past several years and I look forward to continuing to work with you as we move Stereotaxis towards realizing its full potential. Revenue in the third quarter was $10.6 million and was highlighted by a record $3.2 million in recurring revenue. We recognized revenue from six Niobe systems during the quarter and shipped, transfer titles and invoiced customers for an additional three systems that are reflected in the deferred revenue line of our balance sheet. We anticipate that the approximate $3 million in deferred revenue from these three Niobe systems will be recognized in the upcoming months. New capital orders and commitments for the quarter were approximately $30 million reflecting solid market interest and demand. U.S. Niobe owners were below our expectations and continue to be challenged by the lack of magnetic irrigated availability and reference site development. However European order growth has been especially strong during 2008 as Niobe orders have doubled up 100% from the same period in 2007. An example of our increasing momentum in Europe recently occurred in Germany where we received an order by a hospital system in that country for the fourth Niobe system. We believe our order growth in Europe is being fueled by the very favorable first clinicians use of the magnetic irrigated catheter in late 2007 and reflects the strength of our value proposition to the EP lab with availability of the magnetic catheter and access to reference sites. As soon as these components are available in the U.S., we would expect a similar up turn in momentum. Our backlog ending September 30 is $75 million which includes both Niobe and Odyssey systems. Our backlog grew 4% from June 30 and is up 29% as compared to September 30, 2007. We cancelled one Niobe system order during the quarter due to a customer not receiving certificate of need approval for the EP lab renovation project. However that same customer is now on the initial phases of a new building project and still plans to install our system in approximately two years. We booked our first Odyssey Cinema order and continue to grow the number of Odyssey sold outside of Niobe labs. This exciting new platform built around data integration, storage and distribution has seen strong market interest and we anticipate will lead to significant growth in 2009 and beyond. Year to date we’ve received 34 orders for Odyssey systems at an average size of approximately $200,000 each exceeding our expectations. The strong demand for Odyssey in the U.S., the continued mid stage strength of our U.S. sales pipeline and the strength of Niobe orders in Europe all combined to lead us to conclude that accelerating Niobe U.S. sales is going to be largely dependent on demonstrating the value of the Thermocool to our customers and prospects. While orders for the Niobe and Odyssey systems are continuing to demonstrate strong market demand, it is the clinical utilization that is the key to sustainable long term growth. Our third quarter recurring revenue set a new company record at $3.2 million and resulted from a combination of disposable sales and increases in service and software fees associated with the growth of the installed base. The magnetic irrigated European evaluation had minimal impact on Q3 financials due to the controlled volume in the mid September limited release. However, at the nine centers that participated in the valuation, utilization significantly increased. Our partner has completed patient enrolment for the evaluation, which took place at these nine sites, eight in Europe and one in Canada. Combined 92 cases were performed at these sites with extremely positive results. Some of the highlights include the catheter met or exceeded all clinical endpoints established by our partner. The safety profile of the magnetic platform continues to be exemplary. Mapping and ablation time for AF patient improved approximately 20% versus documented manual times. The X-Ray time for physicians was minimal and for the patients 30% below manual times. One site averaged three minutes of total floor time for AF patients in the study. Importantly, we’ve now completed 358 magnetic irrigated cases from the two European evaluations. Approximately 75% of the 358 cases treated patients with AFib. These patients were evenly split between those having paroxysmal and those having persistent AFib which have historically been much more difficult to treat. What is particularly exciting is that in the twelve month follow up data for patients treated with the magnetic irrigated catheter during late 2007, evaluations are showing very promising chronic results. These results may be published in time for the Boston AF or at the HRS 2009. With these extremely positive results from the external evaluation in hand, our partner is in the process of releasing the magnetic irrigated catheter in the EU. In the U.S., the magnetic irrigated catheter is on track for what appears to be a normal review process, we are hopeful for clearance within a short period of time after the European launch. The product roll out in the U.S. will occur shortly after the clearance since our partner has informed us a US evaluation is not required due to the extensive testing they have completed in Europe. We are confident that the launch of the magnetic irrigated in Europe and shortly thereafter in the U.S. coupled with the continued use of the Niobe system for right sided and left sided cases should position us well to reach our goal of becoming a standard of care for EP ablations. I’d like to now turn and spend a moment updating you on Niobe clinical results generated from vascular applications. The vascular market opportunity for Niobe is the delivery of therapy in tortuous vessels. In cardiology, we have had several cases where our system enabled patients to have an interventional procedure after they failed a manual approach. Most recently, this capability was highlighted in a press release featuring a pulmonary atresia patient in Germany who failed several manual interventions and was successfully treated with the Niobe system. With the recent regulatory clearance and first commercial use of the RF wire, we are expanding our capabilities to address the challenges of crossing chronic lesions in peripheral applications. In our first case using the RF wire, the Niobe system demonstrated early success in crossing fibrous caps and providing inter lesion steering both of which are fundamental to safe and effective crossing of the peripheral CTOs. While we are very optimistic about the market opportunity, we are taking a very measured approach to our investment in vascular and other interventional cardiology markets until we are more broadly penetrated in the EP lab opportunity. I’d like to now focus on a few of the financial highlights for the quarter which Jim will review in much more detail in a few moments. Overall gross margin for the quarter was 66%, we generated 58% of gross margin from the sale of capital products and 83% gross margin from recurring revenue. The increased utilization with the availability of the magnetic irrigated and the substantial royalties we received from this catheter should continue to strengthen our gross margins in the future. Once the magnetic irrigated is introduced and in combination with the Cardiodrive II product, we believe our overall revenue per procedure will approach our role of $1,000. This goal includes revenue generated for EP procedures performed on the left side of the heart as well as the right. Operating expenses for the quarter were $16.1 million or $2.6 million below the same period last year. Sales and marketing personnel expenses for the quarter were up year over year, but total expenditures were down. We are mindful of the need to be prudent with our expenditures and have generated savings from several areas. First is a more efficient delivery of clinical case support. We are focusing our field support on driving adoption to more focused support at each account leading to more efficient travel and lower support costs per case. Secondly, we are leveraging our Odyssey network to provide a virtual presence for customers or real time support when the clinical specialist is not present. Third, we are focused on marketing investments and programs that are proven to have the most impact on driving market awareness and top line revenues. R&D is down year over year, the decline is primarily being driven by focusing our new product developments on those innovations with the highest value. We are on schedule to release 8 new products between the third quarter of 2008 and the end of the first quarter half of 2009. Among those products being introduced are a new user interface that simplifies use of the Niobe for both right side and left sided cases, four new disposable devices, including a new catheter advancer, and three Odyssey product line extensions. These new products will enable us to expand our applications for the platform, increase revenue per case and expand our odyssey platform outside of Niobe labs. Finally we have conducted a detailed review of our revenue and cost projections and have developed a plan to achieve breakeven. We are planning on providing our thoughts on revenue cost guidance following the achievement of the U.S. launch of the magnetic irrigated catheter. In closing, I’m honored to be leading this highly skilled motivated team. We’ve collectively have put in place the building blocks for the company to accelerate growth. These building blocks include many of the new product releases such as the magnetic irrigated catheter and the Odyssey system, a growing level of revenue per procedure, the increased margin and a prudent control of our fixed cost structure. At this time, I’d like to turn the call over to Jim Stolze to review our financial performance in more detail.

[Jim Stolze:]

Thank you, Mike. Stereotaxis reported total revenue of $10.6 million in the third quarter, a decrease of 12% compared with $12 million in the third quarter last year but roughly flat with the $10.7 million in revenue in the second quarter. Total revenue included $7.4 million generated from sales of our systems with five Niobe systems recognized in the U.S. and one in Europe, as well as four Odyssey systems recognize this quarter. During the third quarter, we also shipped and invoiced three additional Niobe systems, which were not recognized in revenue under our current accounting policy, thereby adding approximately $3 million to our deferred revenue account. We expect to recognize the deferred revenue from these systems in the coming months. We generated $3.2 million in revenue from disposable, services and accessories. This compares with $2.5 million recognized in the third quarter of 2007 and $2.8 million in the recent second quarter. The increase continues to reflect the growing installed base of our systems and consistent utilization across a broad range of applications. Year to date 2008 revenue was $28.2 million compared with $29 million in 2007. Year to date revenue includes 18 Niobe and 10 Odyssey system sales not including the three systems reflected in deferred revenue compared to 20 systems sold in the comparable period of 2007. Backlog during the third quarter reached a record $75 million. As a reminder, there can be no assurance that the company will recognize revenues related to its purchase orders and other commitments in any particular period or at all because some of these purchase orders and other commitments are subject to contingencies that are outside of the company’s control. In addition, these orders and commitments may be revised, modified or cancelled either by their express terms as a result of negotiations or by project changes or delays. Gross margin for the quarter was $6.9 million or 66% of revenue compared to $8 million or 67% of revenue in the same 2007 quarter. Our average selling price for the Niobe system and Odyssey product remain at historical levels with the margins for each of these two product lines at approximately 58% for the quarter while recurring revenue margins remain in excess of 80%. Operating expenses in the third quarter totaled $16.1 million, a 14% decline from the $18.7 million reported both for the third quarter of 2007 as well as the second quarter of 2008. The second quarter 2008 expense included $1.1 million related to the remediation issue of the irrigated catheter. Excluding this spending, this year’s second quarter expenses were $17.6 million, and on this basis, third quarter operating expenses declined $1.5 million or 8% sequentially. This is the lowest level of operating expenses since the fourth quarter of 2006 and we are very much on track to achieve our target of reducing 2008 operating expenses to levels significantly below 2007. We expect to see continued year over year reduction in operating expenses in the fourth quarter and are targeting total expenses to approximate those of the third quarter. This has been an important initiative of the company and has resulted in improved leverage as we prepare our plan for 2009 and beyond and move the company to realize the potential for profitability. We reported a net loss of $10.1 million in the quarter or $0.28 per share. This compares with a net loss of $10.4 million or $0.29 per share in the prior year’s third quarter. Average shares outstanding were 36.6 million compared with 36.3 million in the same period last year. Net loss year to date 2008 was $36.4 million or $1.00 per share compared to $35.9 million or $1.01 per share in the 2007 period. We ended the quarter with cash investments of $19.8 million. Total bank and investor debt at the end of September was $18.5 million with $14 million from against the $20 million commitment received from two insiders in February this year and approximately $15 million from amounts owed to Biosense Webster reflected as debt. We used approximately $5.5 million of cash in operations in the third quarter, an improvement from the $7 million used in the second quarter and a significant step in the right direction compared to the $12 million used in the first quarter. We are pleased to report we have reached an agreement with the inside investors to extend their $20 million loan commitment into 2010, and that we’re in negotiations with our bank to likewise extend their current working capital facility into 2010. As a reminder, our balance sheet reflects as debt approximately $15 million owed to Biosense Webster related to the $18 million facility that was finalized in July of this year. Repayment of those liabilities will come from royalties otherwise payable from Biosense to Stereotaxis with no minimum cash outlay requirement by Stereotaxis until May 2010. It is interesting to note that our weighted average cost of our total debt is currently approximately 6% per annum. With the cash on hand, the extension on the $20 million commitment, the line of credit from our bank, as well as the Biosense Webster facility, the company has significantly liquidity base to pursue its plans into 2009 and beyond. We also anticipate being able to improve on the current year cash consumption as we move into 2009 and the irrigated catheter release becomes reality. Now I’d like to turn the call back to Bevil for a few closing remarks.

[Bevil Hogg:]

Thank you, Mike and Jim. Before we open the call up to questions, I’d like to briefly discuss the leadership transition that is underway at Stereotaxis. As I trust you gathered from our remarks this morning, the return of the magnetic irrigated catheter to the market is expected to occur in the very short term following what we believe to be very successful initial evaluation in Europe. With the catheter’s return, Stereotaxis is poised to drive towards fully implementing its business model with a strong focus on commercial prosperity. While external economic circumstances are not favorable, Stereotaxis is nonetheless well positioned to revolutionize the interventional lab for automation, information management, and our technology is bringing real value to what we believe is one of the fastest growing segments of interventional procedures. We’ve reached the point where my expertise and inclination towards creating technologies and companies around those technologies should ideally be succeeded by a leader who can bring experience, expertise and focus to all levels of operational execution, and who can lead Stereotaxis to broad commercial success. Therefore I have been working with the Board on a transition plan that involves bypassing the CEO baton to Mike as of January 1, 2009. By then I believe the building blocks for Stereotaxis’ value proposition business model and future growth will be solidly in place. The Niobe navigation platform, the Odyssey information management system, Cardiodrive and the irrigated catheter will now provide our company with a broad platform to accelerate system sales, recurring revenue growth and ultimately to achieve profitability. The Board and I believe that Mike has demonstrated the operational capability as well as the strategic vision to drive this company forward and achieve increasing levels of shareholder returns. I expect to play an active role in the company at the Board level and look forward to working closely with Mike as we move into 2009, a year that I strongly believe will be characterized by increasing shareholder returns. And now we would like to open the call up to questions.

[Operator:]

Thank you, sir. (Operator instructions) And our first question comes from Mimi Pham with JMP Securities. Go ahead please

[Mimi Pham:]

Hi, good morning and, Mike, congratulations, and Bevil I wish you well in your new endeavors next year.

[Bevil Hogg:]

Thank you, Mimi.

[Mike Kaminski:]

Thanks, Mimi.

[Mimi Pham:]

Can just clarify your comments about the European launch of magnetic irrigated. Is JNJ waiting for any feedback or data from any of their nine sites or is it just a matter of just getting the people ready to go and it’s really going to be in the next weeks?

[Bevil Hogg:]

Mimi, I’ll defer that question to Mike.

[Mike Kaminski:]

Mimi, recollect the nine sites have completed enrollment. They’ve collected all the data forms and they are in the process of approving the final paperwork.

[Mimi Pham:]

So, it’s just a matter of – I’m just wondering if there is going to be any new feedback that could potentially affect their decision to the re-launch that catheter in Europe.

[Mike Kaminski:]

There is no new data expected to come in, it’s closed down.

[Mimi Pham:]

Okay. And then in terms of the manufacturing capacity for the magnetic irrigated, if the U.S. approval comes sometime by December, January, are they ready to go there or will that be any kind of limiting factor in terms of getting it out in beta sites in the U.S?

[Mike Kaminski:]

As far as we know and we have talked closely with every other week, they are ramping to have full capability to supply both Europe and the U.S. in a reasonably short period of time.

[Mimi Pham:]

Okay, and then I guess last question, the FDA panel that’s coming up on November 20 for the manual irrigated catheter, can you just comment on what you think if it does get approval for AF label, what you could think that would do for the industry and also obviously for your business?

[Mike Kaminski:]

Well I think it would be extremely positive, I think obviously to have a product that this on label is the way that an industry gets legitimized. For us, we would expect hopefully to follow behind the manual Thermocool and seek approval as well, but I believe it’s a key cornerstone for legitimizing AF in the U.S. Bevel, have you got anything to add to that?

[Mimi Pham:]

Okay.

[Bevil Hogg:]

Mimi?

[Mimi Pham:]

Yes.

[Bevil Hogg:]

This is Bevil. Hi. I concur absolutely. We see this as a tremendous conferring of legitimacy on a market segment that has explosive growth opportunity, but is currently constrained in the U.S. by lack of labeling. And we’re optimistic that Stereotaxis will benefit directly from any favorable labeling decisions by the FDA.

[Mimi Pham:]

Okay, thank you very much.

[Operator:]

Okay. Thank you. And are next question comes from Tao Levy with Deutsche Bank. Go ahead, please. And Mr. Levy has dropped from the queue. So our next question is from Ed Shenkan with Needham and Company. Go ahead, please.

[Ed Shenkan:]

Congratulations, Mike, on assuming the CEO role very soon and, Bevil, congratulations as well on moving towards the next phase of your career. As far as the European current users of the irrigated catheter, could you just talk about how many cases per week they are doing, and are they slowly ramping up or have these guys just loved it, how many weeks have they been using it?

[Bevil Hogg:]

Ed, I’m going to defer those details to Mike, but I would like to say that we have seen a significant turnaround in our overall European situation this year, both in terms of system placement orders momentum, and this is most clearly centered on improvements in utilization around the use of the irrigated catheter. If what we saw earlier in the year prior to the withdrawal of the irrigated catheter and it now seems to be back unforeseen. Mike, perhaps you could put some numbers behind those commentary.

[Mike Kaminski:]

So, Ed, the evaluations started mid September. It concluded mid October and that valuation obviously was constrained to get the cases needed to call out the external valuation. So we are just beginning to roll out those sites with kind of unlimited inventory, so those nine sites can continue to use it. It is not going to go to the tenth site until our partners releases it for commercial release. And they continue to use it as we expected, we continue to see strong demand.

[Ed Shenkan:]

Mike, in coming forward as CEO, any changes that you’re going to be excited to implement in strategy or operationally, any changes that we should expect?

[Mike Kaminski:]

Ed, I think if you look at the challenges that we face, obviously, I think the number one challenge is to get the Thermocool out and our installed base re-energized around the use of our product for both right side and left side. I think we have several products that will help with that. The Thermocool, we have this user interface software that makes it simpler to use, we have a catheter advancer that gets to it, actually more responsive. And some of the improvements in Odyssey will help to bring a Workstation together in a more meaningful way. Our focus is going to be on the near term, driving value into the installed base. Obviously we’re going to use that as a focal point to leverage kind of the prospective orders through so that we can build the reference sites, and then build the Odyssey infrastructure to help bring efficiency to both of those processes, how we deliver clinical services and how we provide reference sites. But I think those three things in the near term are the key challenges for Stereotaxis to get through.

[Ed Shenkan:]

Okay, thanks

[Operator:]

Thank you. And our next question is from Tao Levy with Deutsche Bank. Go ahead please.

[Tao Levy:]

Hi, good morning. I think there were some telecommunications issues a minute ago, I apologize. First of all congratulations, Mike, on your promotion. I wanted to ask about the FDA regulatory process with Thermacool, has there been any recent correspondence with Biosense Webster in terms of any follow up questions over or requests for additional data?

[Bevil Hogg:]

Hi, Tao, this is Bevil. I’ll defer that question to Mike. I think that this is an area where we see normal course progress through the re-approval of the magnetic irrigation catheter, I believe we have learned from our partners that they just received a question from FDA that again we would consider to be a normal course question. And perhaps, Mike, you can add some color to that?

[Mike Kaminski:]

So, Tao, I think the specifics I’m not sure about the question, I think it’s in the normal routine of clarifying our submission, and it has been a few weeks ago, it’s not recent.

[Tao Levy:]

Okay. And then assuming your expectations for your European launch and FDA approval go as expected, how should we think about sequential trends over the next can couple quarters in terms of Niobe placements?

[Mike Kaminski:]

Obviously assuming Thermacool launch in the U.S. we would think the U.S. would rebound quickly in 2009. Europe continues to show strong momentum, so I believe that in combination we should continue to see strengthening Stereotaxis quarter over quarter.

[Tao Levy:]

Okay. But in terms of the fourth quarter specifically, should we expect sequentially up or down quarter relative to the Q3?

[Mike Kaminski:]

Bevil, you want to answer that? Tao, I believe it should be sequentially up related to Q3. You want to add any color, Bevil?

[Bevil Hogg:]

No, I think that the fourth quarter is historically a strong quarter for Stereotaxis. We are buoyed by the results in Europe, we don’t think that the U.S. approval, if it comes in the fourth quarter, would be likely to have any impact but given the momentum that we have with Odyssey, not to mention the European trajectory following what we expect to be a very early re-launch of the irrigated catheter there, fourth quarter should be a good quarter.

[Tao Levy:]

Okay. Then I’ve a couple of questions for you, Jim. Of the $13 million of new orders in the quarter, what was the geographic breakdown there?

[Jim Stolze:]

Geographic breakdown of those orders was – I’ll let Mike take that.

[Mike Kaminski:]

It’s $5 million in Europe, $2 million in the rest of the world, and the balance in the U.S.

[Tao Levy:]

Okay. And then last question, of the four Odyssey systems that were sold in the quarter, were any of those the result of the co-promotion agreement with Biosense Webster, were those all from your own sales?

[Mike Kaminski:]

They were all result of our own sales efforts.

[Tao Levy:]

Okay, great. Thank you very much.

[Operator:]

Thank you. And our next question comes from Keay Nakae with Collins Stewart. Go ahead, please.

[Keay Nakae:]

Yes. Wanted to talk about the ASPs for service and software. I think, Mike, you mentioned that pricing on that might have gone up, so where are those tracking right now?

[Mike Kaminski:]

They are, except on contracts, Keay, so we’re still bringing in the revenue probably the historical levels of our software license fees still running around $40,000 a system. Our service contracts are headed north and they are at the $70,000 plus level.

[Bevil Hogg:]

Keay, let me clarify. I think my comment was in relation to the installed base increases. We see that come through our income statement in a bigger portion, right. So that impact impacts recurring avenue. The per contract price remains relatively stable.

[Keay Nakae:]

Okay. Great. And then we did see that nice improvement in operating expense. Jim, I think you said that we’ll see something similar in Q4. As we move into 2009, especially both G&A and obviously maybe the fixed portion of the sales and marketing, is that something you can hold the line on, or how should we be thinking about that as we move into 2009 ?

[Jim Stolze:]

Our plan is to continue to hold operating expenses beneath 2007 levels as we go into 2009.

[Mike Kaminski:]

Yes. So, Keay, I think the answer is, yes, we anticipate being very prudent in how we manage expenses. Marketing, we’re going to trade off our in sales and marketing, obviously. As odyssey comes in, we believe we have a real opportunity to do remote clinical case support that can offset some cost per case expenses that we see. And in combination with that increasing installed base and kind of holding G&A down, I think we will be in good shape for 2009 trends being better than 2007.

[Keay Nakae:]

Okay. In R&D you talked about in terms of products in the pipeline, but we shouldn’t expect to see much of a delta from the current R&D spending levels as well?

[Jim Stolze:]

Yes. R&D as we move forward will – the nice part of where we are as a company is the system cost development will move beyond – we are leveraging that now. And if you look at our investments, they are largely software and devices. So we’re leveraging the work we’ve done in the past. We think we can continue to get efficiencies out of that at the same level of spend and continue to see more products coming to the market which add value.

[Keay Nakae:]

Okay. One final question, when JNJ goes to a full launch of the irrigated catheter in Europe and perhaps beyond outside of the U.S., how many of your installed base customers – what is the delta from the current nine, to what number is going to be ready to use it?

[Bevil Hogg:]

Keay, is the question how many are in Europe?

[Keay Nakae:]

Yes, how many of your installed sites are ready to use an irrigated catheter upon expanded launch?

[Bevil Hogg:]

In Europe – let me see if this answers your question, in Europe we roughly have 35 sites. Of those 35, we would begin rolling out in phases, so we’d go to I think the current plan is between six and eight sites every other week. So we would roll them out pretty quickly so that we concentrate on making the next wave of sites successful then move the resources to that site. So we would go through a fairly stepped approach in doing that.

[Keay Nakae:]

Okay. So a couple of months to get everybody up on board.

[Bevil Hogg:]

Yes.

[Keay Nakae:]

Okay. Very good, thanks.

[Operator:]

Okay. Thank you. And our next question comes from Spencer Nam with Summer Street Research Partners. Go ahead, please

[Spencer Nam:]

Thanks for taking my question, just a couple of questions here. First question is, you know this panel coming up on November 20, what will happen, is there any potential impact if the panel were not as positive on the catheters – change your catheters?

[Bevil Hogg:]

Clearly, the AF market as a whole in the United States would not benefit from an unfavorable panel decision. We are optimistic, we believe that JNJ has done an excellent job in preparing for their submission and we’re hopeful that the outcome will be positive. The negative implications for Stereotaxis would be relatively minor. In other words it would be a case of our situation not benefiting from a market enhancing decision but there would be no downside for Stereotaxis. It doesn’t affect us directly. It is just that the opportunity in this country we believe would be greatly expanded over time with a favorable panel division.

[Spencer Nam:]

I see. So any sort of questions of any sort of issues that may be raised from the panel should not have an impact on the irrigated catheter approval process or the aspects?

[Bevil Hogg:]

To our knowledge, there would be no connection whatsoever.

[Spencer Nam:]

Great, thanks. And then just a follow up to that, in the prepared statement, Bevil, you essentially, at least that was the way I understood it was that the irrigated catheter will “solve“ this ramp up issue. And I was just curious whether you know it sounds like a very confident statement to me and I was wondering if that is based on your conversations with your customers and that lack of irrigated catheter is specifically the reason for many of your potential customers to be waiting on the sidelines. And is that what gives you that level of confidence here?

[Bevil Hogg:]

No, the level of confidence we have is built up around our experience in Europe. In Europe, we’ve seen the irrigated catheter irrigated be used, we’ve seen the impact of reference sites in Europe who are using the irrigated catheter and speaking about it favorably. And all of this has been reflected into two various, which is very quantifiable. One is system sales which were up 100% year over year, and the other is utilization, which is also are up by a very large factor. So when we consider the impact of the irrigated catheter in any market, we have to recognize that it is used in at least 90% of left sided cases. And what is remarkable is that Stereotaxis has been maintaining a utilizational rate even in the United States that we believe is comparable or superior to that of our competition. To have access to the irrigated catheter, we have been doing that without access to the irrigated catheter inning, and so this all important device is put in the hands of clinicians who have Stereotaxis systems, or who are thinking about acquiring Stereotaxis systems, we believe it will have a catalytic or accelerating impact on the market opportunity for us.

[Spencer Nam:]

Great, thanks very much.

[Bevil Hogg:]

Thank you.

[Operator:]

Thank you. (Operator instructions). Your next question comes from Ray Tang [ph] with Etek Advisors [ph]. Go ahead, please

[Ray Tang:]

Bevil, thanks for all the work that you’ve done in the past in setting up the foundation for Stereotaxis, setting up the partnership through recent products such as the Odyssey. And Mike, congratulations.

[Bevil Hogg:]

Thank you, Ray.

[Ray Tang:]

My question on the end point that Biosense has set up, can you give me a specific list of what you think are the most important end points that they are looking at?

[Bevil Hogg:]

I think we should not be too specific about what we think our partners are looking at because obviously they can have their own criteria. However, Mike, you have calibrated some clinical results that we’ve been able to observe ourselves and perhaps you could talk to them.

[Mike Kaminski:]

Yes, as I mentioned Ray, they did meet their clinical endpoints. Obviously you would expect one of those to be looking at the catheter’s performance on the chart, right, because that is the reason they look at that. Other than that, we’d like to keep the comments to what we saw and we looked at, did the product – was it more efficient, did we reduce radiation exposure, did we continue to show a safety profile that is consistent with our past, all of those things I mentioned in my commentary are very positive. We’ve heard very positive statements from our clinicians using the product, and we continue to think it is the key product. And if you look at what physicians want to do, they want to use our system on the left side of the heart, both for EP and atrial procedures. And to do that, obviously, they want a safe catheter and they view that the Thermacool provides a safety profile they’re looking for.

[Ray Tang:]

Regarding the chart, was there any chart at all?

[Mike Kaminski:]

Ray, we can’t address very, very specific questions like that, because we’re not privy to JNJ’s information, to our partners information, and it wouldn’t be appropriate for us to comment. However, our view is formed from observations, comments that we’ve receive from the clinicians and from our partners. So without being specific, we believe that that issue is behind us.

[Ray Tang:]

Excellent. The one production line that you have for making the irrigated catheter, assuming that everything goes well, and you can launch both in Europe and in the U.S. by early next year, the capacity of that line, how long do you think that’ll be sufficient for in terms of – or you have to build another line, production line?

[Bevil Hogg:]

Mike, can I defer that question to you? This is a capacity issue and I believe you would give us some insight into that.

[Mike Kaminski:]

So, Ray, we believe today that Biosense has a capacity to supply Europe today, and I think they are well prepared to improve the capacity or expand the capacity in a very short period of time to support the U.S. launch. I don’t believe that there is a capacity constraint that we face in the near term.

[Ray Tang:]

Okay. On the odyssey orders, the first question which is, how many of those orders are for installations that already have Niobes and how many orders are for – are going to come of new Niobe installations?

[Bevil Hogg:]

Mike?

[Mike Kaminski:]

Ray, you have to go back and look at the extra list for – you’re asking how many went into the installed base versus how many are associated with new Niobe order?

[Ray Tang:]

Right.

[Mike Kaminski:]

I think historically I think it is probably close to 50-50 right now. 50% are sold to those people who already had a Niobe, and then since inception the 50% are associated with those buying Niobe. Now obviously there is some that are now buying for labs that don’t have a Niobe, right. And so there’s a small percent that continues to grow outside of the Niobe lab.

[Ray Tang:]

And how many of those orders include Cinema?

[Mike Kaminski:]

We just sold our first Cinema, so Cinema is just rolling out as we speak, only one.

[Ray Tang:]

Only one, okay. And in terms of timing, so you would think that 17 of those orders going into existing facilities already with the Niobe, are those going to be turning around pretty soon?

[Mike Kaminski:]

If the orders – the question is order to cash, how long does it take? There are three paths, right? If there is already an installed Niobe, and they give us an order, it’s a relatively short period of time. If it is with a Niobe, obviously it is on the Niobe time line. And if it is a non–Niobe lab, we are not going to begin to install those into the back half of 2009, so depending on where that order came in, that would be answer.

[Ray Tang:]

You‘d expect that to be less than 12 months for those…

[Mike Kaminski:]

For the non – if the Niobe is already installed, I would expect it to be less than 12 months.

[Ray Tang:]

Okay, thank you. And is there any difference between the preferences for odyssey orders inside of USA?

[Mike Kaminski:]

Yes, today largely it is inside the U.S., most of the orders are inside the U.S., although Europe is picking up.

[Ray Tang:]

Is there a reason for that, why is the …

[Mike Kaminski:]

I think we were late in getting Europe launched I think is the primary reason, but the U.S. obviously has been a very strong market for us.

[Ray Tang:]

Okay. Can you name – I think (inaudible) Odyssey I think you said. What are the thought leaders in Europe going to adopt do you think ?

[Mike Kaminski:]

Some of the EU sites have adopted Odyssey. So we have seen that Thermacool sites or the magnetic irrigated sites have also bought. So we have a system in Copenhagen, and some other sites that are coming up very quickly here.

[Ray Tang:]

Okay, all right. Thanks a lot. That is all I have.

[Mike Kaminski:]

Thank you, Ray.

[Operator:]

Thank you. We have a follow up question from Tao Levy. Go ahead please.

[Imron Zafar:]

Hi, this is Imron again. Just getting back to the AF panel coming up, provided there is positive recommendation from that panel, how then would JNJ go about getting that same label for the magnetic irrigated catheter? I would assume that would be relatively straightforward, an easy process?

[Bevil Hogg:]

Imron, this is Bevil. Obviously JNJ operates by its own rule book and we can’t speak for them. However, it is likely that Stereotaxis would benefit either directly or indirectly from that label approval, either because it applies to us, or it gives us a pathway to apply for the same label in a relatively short amount of time. So to have the basic JNJ irrigated catheter carry an AF label, we will have very favorable on the industry as a whole in terms of legitimizing treatment of AF in this country. And the benefit that would accrue to Stereotaxis would be a substantial shortening of the time that it would take us pursue that same label. When I say us, obviously I mean our partners, because Stereotaxis in not the prime mover in this arena. This is a product that is – and an initiative that is driven by our partner.

[Imron Zafar:]

Okay. What’s your latest intelligence on the development of magnetic irrigated catheter from other AF players?

[Bevil Hogg:]

We have indirect information that at least one competing irrigated magnetic catheter is being evaluated in Europe but we would prefer not to say more about that because it is hearsay. In other words, we’re hearing feedback from clinicians, we are certainly not involved ourselves in the evaluation or dissemination of what you might call a competing magnetic irrigated product.

[Imron Zafar:]

Okay. And then last question, Jim, how should we think about Odyssey Cinema in terms of driving revenues, in other words what is the approximate ASP on that?

[Jim Stolze:]

Cinema ASP is probably going to add another 125 plus to the Odyssey – will be additive to the Odyssey.

[Imron Zafar:]

So $200,000 plus 125?

[Jim Stolze:]

Yes.

[Imron Zafar:]

Great. Okay, thanks very much gentlemen.

[Bevil Hogg:]

Thank you.

[Operator:]

And ladies and gentlemen, that concludes our question and answer session. I would now like to turn the conference back over to management for any closing statements.

[Bevil Hogg:]

Thank you for joining us this morning. We are available if you have any further questions and look forward to updating you on our progress in the future. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes the Stereotaxis third quarter 2008 earnings conference call. If you would like to listen to a replay of today’s conference, please dial 800 405 2236 or 303 590 3000 with password 11120546. ACT would like to thank you for your participation, and you may now disconnect.