Summary of EV3 INC. - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading "Forward-Looking Statements" below. The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this report. Business Overview
We are a leading global endovascular company focused on identifying and treating peripheral vascular disease, including, in particular, lower extremity arterial disease, and neurovascular disease. Since our founding in 2000, we have been dedicated to developing innovative, breakthrough and clinically proven technologies and solutions for the treatment of peripheral vascular and neurovascular diseases, a strategy that we believe is uncommon in the medical device industry. We believe our unique approach of focusing on emerging and under-innovated opportunities, which treat peripheral vascular and neurovascular disease, allows us to compete with smaller companies that have narrow product lines and lack an international sales force and infrastructure, yet also compete with larger companies that do not have our focus and agility.
We believe the overall market for endovascular devices will grow as the demand for minimally invasive treatment of vascular diseases and disorders continues to increase. We intend to capitalize on this market opportunity by the continued sales execution and introduction of new products. We expect to originate new products primarily through our internal research and development and clinical efforts, but we may supplement them with targeted acquisitions or other external collaborations. Most recently, in June 2009, we acquired Chestnut Medical Technologies, Inc., a then privately held, California-based company focused on developing minimally invasive therapies for interventional neuroradiology. This transaction broadened our neurovascular product portfolio by adding the Pipeline Embolization Device for the treatment of cerebral aneurysms and the Alligator Retrieval Device for foreign body retrieval to our existing embolic product and neuro access technologies. In October 2007, we acquired FoxHollow Technologies, Inc. FoxHollow's principal product is the SilverHawk Plaque Excision System, which is a minimally invasive catheter system that treats peripheral artery disease by removing plaque in order to reopen narrowed or blocked arteries. Additionally, our growth has been, and will continue to be, impacted by our expansion and penetration into new geographic markets, the expansion and penetration of our direct sales organization in existing geographic markets, and our continuing focus to increase the efficiency of our existing direct sales organization.
Our product portfolio includes a broad spectrum of approximately 100 products consisting of over 1,500 SKUs, including stents, atherectomy plaque excision products, embolic protection and thrombectomy products, percutaneous transluminal angioplasty, or PTA balloons, and other procedural support products for the peripheral vascular market and embolic coils, liquid embolics, flow diversion devices, flow directed and other micro catheters, occlusion balloon systems and neuro stents for the neurovascular market. As a result of our FoxHollow acquisition, we were engaged in research collaboration with Merck & Co., Inc. for the analysis of atherosclerotic plaque removed from patient arteries with the goal of identifying new biomarkers for atherosclerotic disease progression and new therapies for atherosclerotic disease. Merck terminated our collaboration and license agreement effective July 22, 2008. We subsequently reached an arrangement with Merck to accomplish an orderly wind-down of our research collaboration activities during the remainder of 2008. Our management, including our chief executive officer, who is our chief operating decision maker, report and manage our operations in two reportable business segments based on similarities in the products sold, customer base and distribution system. Our peripheral vascular segment contains products that are used primarily in peripheral vascular procedures by interventional radiologists, vascular surgeons and interventional cardiologists. Our neurovascular segment contains products that are used primarily by neuroradiologists, interventional neurologists and neurosurgeons. Our sales activities and operations are aligned closely with our business segments. We generally have dedicated peripheral vascular sales teams in the United States, Europe, Canada and other international countries that target customers who perform primarily peripheral vascular procedures and separate, dedicated neurovascular sales teams in such countries that are specifically focused on our neurovascular business customer base.
We have direct sales capabilities in the U.S., Europe, Canada and other countries and have established distribution relationships in selected international markets. We sell our products through a direct sales force and independent distributors in over 65 countries. Our sales and marketing infrastructure included 349 professionals as of October 4, 2009 which consisted of 294 sales professionals in the U.S., Europe, Canada and other countries. Our direct sales

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representatives accounted for approximately 85% and 86% of our net product sales during the third fiscal quarter and first nine months of 2009, respectively, with the balance generated by independent distributors. In the third fiscal quarter of 2009, we began to sell our neurovascular products in Australia through our direct sales force instead of through a distributor. Our corporate headquarters is located in Plymouth, Minnesota and the sales, manufacturing, and research and development activities of our peripheral vascular business are primarily located in Plymouth and to a lesser extent, in Irvine, California. The sales, manufacturing and research and development activities of our neurovascular business are primarily located in Irvine, although as a result of our recent acquisition of Chestnut, we now have a facility in Menlo Park, California for a portion of our neurovascular business. Outside of the U.S., our primary office is in Paris, France and we have sales offices in most countries in which we have a direct sales force.
In order to drive sales growth, we have invested heavily throughout our history in not only the expansion of our global distribution system, but also new product development and clinical trials to obtain regulatory approvals. A significant portion of our net sales historically has been, and we expect to continue to be, attributable to new and enhanced products.
During the third quarter of 2009, we launched new products in our neurovascular and peripheral vascular businesses. In neurovascular, we initiated a controlled launch of our new Pipeline Embolization Device in Europe and other international markets. Building on the success we have experienced to date with our Axium coils, we began conducting physician preference testing for two new versions of the Axium coil, the Axium PGLA and Axium Nylon microfilament coil. We launched our new Marksman delivery catheter and Alligator Retrieval Device in the U.S. and Europe. We also introduced access product line extensions, including the HyperGlide 5.0 balloon in the U.S. and Europe and the HyperGlide 3.0 balloon in the U.S. Since receiving the CE Mark for our Solitaire FR, or flow restoration, device to treat ischemic stroke in July 2009, we have completed the first cases in our European physician preference testing. We expect to launch this product in the first quarter of 2010. In our peripheral vascular business, we launched our new TurboHawk atherectomy system, which contains a SuperCutter blade designed to treat moderately to severely calcified lesions in various vessel diameters. We are planning to expand availability for the TurboHawk Super Cutter to international markets and pursue regulatory clearance in the U.S. for an endovascular indication. We also plan to launch a Smooth Cutter version of the TurboHawk for above-the-knee use in treating soft plaque in the first half of 2010. During the third quarter of 2009, we conducted physician preference testing for our TrailBlazer Support Catheters and plan to launch a full release of the TrailBlazer during the fourth quarter of 2009. We are also preparing for the launch of our PowerCross 0.018 PTA balloon platform, which we expect to release in the first quarter of 2010.
We expect to continue to further validate the clinical and competitive benefits of our technology platforms to drive utilization of our current products and the development of new and enhanced products. To accomplish this, we have a number of clinical trials underway and others that are currently in development, including our DURABILITY II trial in the U.S. with the objective of expanding our EverFlex stent's U.S. indication to include treatment of peripheral artery disease; and our DEFINITIVE trial series designed to expand the clinical evidence supporting the value of our plaque excision systems to drive increased procedure adoption, expand clinical indications and support the use of atherectomy as a front-line therapy. In our neurovascular business, we are planning our Solitaire with Immediate Flow Restoration, or SWIFT, study under a U.S. investigational device exemption, or IDE, to obtain FDA clearance for our Solitaire neuro stent.
It is our understanding that certain biliary stent manufacturers have received subpoenas from the U.S. Department of Justice. Based on publicly available information, we believe that these subpoenas requested information regarding the sales and marketing activities of these manufacturers' biliary stent products and that the Department of Justice is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties. As of the date of this report, we have not received a subpoena from the U.S. Department of Justice relating to this investigation. No assurance can be provided, however, that we will not receive such a subpoena or become the subject of such an investigation, which could adversely affect our business and stock price.
Summary of Third Fiscal Quarter 2009 Financial Results and Outlook During our third fiscal quarter 2009, we achieved another quarter of profitability and cash generation. Our operating results reflect sales growth in both our peripheral vascular and neurovascular segments, continued expansion of our international business, improvement in our gross margins and continued expense control. During the remainder of 2009, we intend to remain focused on attaining our goals of achieving revenue growth equal to or slightly above the growth in

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the markets we compete, sustaining profitability, generating cash and expanding our global position in the peripheral vascular and neurovascular markets. Our third fiscal quarter 2009 results and financial condition included the following items of significance, some of which we expect also may affect our results and financial condition during the remainder of 2009:
� Net sales of our peripheral vascular products increased 1% to $67.6 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 primarily as a result of increased market penetration of our EverFlex family of stents, embolic protection devices and balloon expandable stents, partially offset by a decline in sales of our atherectomy products and sales declines in older generation products. We expect continued penetration with our EverFlex family of stents during the remainder of 2009, although we remain cautious of the current regulatory environment regarding the off-label utilization of devices and increased competition we may experience. During the third fiscal quarter 2009, although our atherectomy sales decreased compared to the third fiscal quarter 2008, we expect the recent launch of our new TurboHawk atherectomy system to have a positive impact on our atherectomy sales going forward.

� Net sales of our neurovascular products increased 37% to $45.2 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 primarily as a result of continued market penetration of our Axium coil and Onyx Liquid Embolic System and the launch of our Pipeline Embolization Device in Europe and other international markets. We began conducting physician preference testing for our Axium PGLA and Nylon microfilament coils. We also launched our Marksman delivery catheter and Alligator Retrieval Device in the U.S. and Europe during the third fiscal quarter 2009. We believe our neurovascular business should benefit from the continued market penetration of the Axium coil and Onyx Liquid Embolic System during the remainder of 2009 and from new product introductions, including our Pipeline and Alligator devices, expanded geographic presence and improved pricing.

� On a geographic basis, 61% of our net sales for the third fiscal quarter 2009 were generated in the U.S. and 39% were generated outside the U.S. Our international net sales increased 21% to $44.4 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 driven by market penetration of the Axium coil and neuro stents, as well as the launch of our Pipeline device. We expect our international business to continue to benefit from our ability to sell our EverCross and NanoCross PTA balloon catheters outside the United States, the recent launch of our Pipeline Embolization Device in Europe and other international markets, and the launch of our Axium PGLA and Nylon microfilament coils, Marksman delivery catheter and Alligator Retrieval Device in Europe. Changes in foreign currency exchange rates had a negative impact on our net sales for the third fiscal quarter 2009 of approximately $1.7 million compared to the third fiscal quarter 2008, principally resulting from the relationship of the U.S. dollar as compared to the euro. We expect foreign currency exchange rates to have a positive impact on our net sales during the fourth fiscal quarter 2009 compared to our net sales during the same period during 2008.

� Product gross margin increased to 75% in the third fiscal quarter 2009 compared to 64% in the third fiscal quarter 2008 primarily attributable to manufacturing efficiencies, including synergies related to the consolidation of our FoxHollow manufacturing operations, margin improvement associated with selling our own line of PTA balloons, product mix and volume growth. We expect to continue to increase our product gross margins through our focus on manufacturing efficiencies. Product gross margin for internal measurement purposes is defined as net product sales less product cost of goods sold, excluding amortization of intangible assets, divided by net product sales.

� Sales, general and administrative expenses declined to 49% of net product sales in the third fiscal quarter 2009 compared to 53% in the third fiscal quarter 2008 primarily due to continued expense leverage. We expect our sales, general and administrative expenses as a percentage of net product sales to continue to decline during the remainder of 2009 compared to 2008 primarily as a result of our anticipated continued leverage of our cost structure. We expect to continue to focus on our vital few programs and implement systems and processes to improve our sales execution.

� Our net income for the third fiscal quarter 2009 was $6.7 million, or $0.06 per basic and diluted common share, compared to a net loss of $7.3 million, or $0.07 per share, in the third fiscal quarter of 2008.

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� Our cash and cash equivalents were $80.5 million at October 4, 2009, an increase of $20.1 million compared to the end of the second fiscal quarter 2009. This increase was primarily a result of cash provided by operating activities, totaling $20.9 million in the third fiscal quarter 2009. We plan to continue to focus on generating positive cash flow from operations during the remainder of 2009.

Results of Operations
The following table sets forth, for the periods indicated, our results of
operations expressed as dollar amounts (dollars in thousands, except per share
amounts), and the changes between the specified periods expressed as percent
increases or decreases or "NM" if such increases or decreases are not material
or applicable:

                                               Three Months Ended                                 Nine Months Ended
                                         October 4,       September 28,      Percent        October 4,       September 28,      Percent
                                            2009               2008           Change           2009               2008           Change
Results of Operations:
Sales:
Net product sales                       $     112,838     $      100,018         12.8 %    $     322,319     $      296,577          8.7 %
Research collaboration                              -              7,011       (100.0 )%               -             19,426       (100.0 )%

Net sales                                     112,838            107,029          5.4 %          322,319            316,003          2.0 %
Operating expenses:
Product cost of goods sold (a)                 28,608             36,182        (20.9 )%          90,074            102,442        (12.1 )%
Research collaboration                              -              2,100       (100.0 )%               -              5,647       (100.0 )%
Sales, general and administrative (a)          55,030             53,121          3.6 %          165,639            178,885         (7.4 )%
Research and development (a)                   12,545             12,133          3.4 %           36,433             37,913         (3.9 )%
Amortization of intangible assets               6,802              8,101        (16.0 )%          18,444             24,285        (24.1 )%
Contingent consideration                        2,271                  -        100.0 %            2,467                  -        100.0 %
Intangible asset impairment                         -                  -         NM                    -             10,459       (100.0 )%

Total operating expenses                      105,256            111,637         (5.7 )%         313,057            359,631        (13.0 )%
Income (loss) from operations                   7,582             (4,608 )       NM                9,262            (43,628 )       NM
Other expense (income):
Gain on investments, net                            -               (142 )       NM               (4,072 )             (542 )       NM
Interest expense (income), net                    140                 49         NM                  575               (307 )       NM
Other (income) expense, net                      (143 )            2,279         NM                1,354                192         NM

Income (loss) before income taxes               7,585             (6,794 )       NM               11,405            (42,971 )       NM
Income tax expense (benefit)                      849                516         64.5 %          (17,511 )            1,531         NM

Net income (loss)                       $       6,736     $       (7,310 )       NM        $      28,916     $      (44,502 )       NM

Earnings per share:
Net income (loss) per common share:
Basic                                   $        0.06     $        (0.07 )                 $        0.27     $        (0.43 )

Diluted                                 $        0.06     $        (0.07 )                 $        0.27     $        (0.43 )

Weighted average shares outstanding:
Basic                                     110,507,687        104,474,600                     107,080,500        104,276,029

Diluted                                   112,277,954        104,474,600                     107,719,897        104,276,029

(a) Includes stock-based compensation expenses of:

                                                      Three Months Ended                          Nine Months Ended
                                              October 4,           September 28,          October 4,          September 28,
                                                 2009                  2008                  2009                 2008
Product cost of goods sold                    $       251         $           121        $        732        $           596
Sales, general and administrative                   2,975                   2,572               9,089                  9,608
Research and development                              400                     366               1,128                  1,478

                                              $     3,626         $         3,059        $     10,949        $        11,682

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The following tables set forth, for the periods indicated, our net sales by segment and geography expressed as dollar amounts (in thousands) and the changes in net sales between the specified periods expressed as percentages:

                                       Three Months Ended                                           Nine Months Ended
                                October 4,          September 28,         Percent           October 4,          September 28,         Percent
                                   2009                 2008               Change              2009                 2008               Change
NET SALES BY SEGMENT:
Net product sales:
Peripheral vascular:
Atherectomy                    $     19,607        $        20,992            (6.6 )%      $     60,024        $        68,624           (12.5 )%
Stents                               28,787                 26,772             7.5 %             86,620                 77,932            11.1 %
Thrombectomy and embolic
protection                            7,319                  6,938             5.5 %             23,280                 19,990            16.5 %
Procedural support and
other                                11,898                 12,184            (2.3 )%            35,902                 35,243             1.9 %

Total peripheral vascular            67,611                 66,886             1.1 %            205,826                201,789             2.0 %
Neurovascular:
Embolic products                     28,408                 18,174            56.3 %             69,599                 53,469            30.2 %
Neuro access and delivery
products and other                   16,819                 14,958            12.4 %             46,894                 41,319            13.5 %

Total neurovascular                  45,227                 33,132            36.5 %            116,493                 94,788            22.9 %

Total net product sales             112,838                100,018            12.8 %            322,319                296,577             8.7 %

Research collaboration                    -                  7,011          (100.0 )%                 -                 19,426          (100.0 )%

Total net sales                $    112,838        $       107,029             5.4 %       $    322,319        $       316,003             2.0 %




                                            Three Months Ended                                            Nine Months Ended
                                     October 4,          September 28,          Percent           October 4,          September 28,          Percent
                                        2009                 2008               Change               2009                 2008               Change
NET SALES BY GEOGRAPHY:
United States                       $     68,430        $        70,452             (2.9 )%      $    197,779        $       208,773             (5.3 )%
International:
Before foreign exchange impact            46,129                 36,577             26.1 %            135,104                107,230             26.0 %
Foreign exchange impact                   (1,721 )                    -                -              (10,564 )                    -                -

Total international                       44,408                 36,577             21.4 %            124,540                107,230             16.1 %

Total net sales                     $    112,838        $       107,029              5.4 %       $    322,319        $       316,003              2.0 %

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Comparison of the Three Months Ended October 4, 2009 to the Three Months Ended September 28, 2008
Net sales. Net sales increased 5% to $112.8 million in the three months ended October 4, 2009 compared to $107.0 million in the three months ended September 28, 2008. Our net sales in the three months ended October 4, 2009 did not include any research collaboration revenue compared with $7.0 million of research collaboration revenue for the three months ended September 28, 2008. Net product sales increased 13% to $112.8 million in the three months ended October 4, 2009 compared to $100.0 million in the three months ended September 28, 2008 driven by strong growth of our neurovascular products and in our international markets.
Net sales of peripheral vascular products. Net sales of our peripheral vascular products increased 1% to $67.6 million in the three months ended October 4, 2009 compared to $66.9 million in the three months ended September 28, 2008. Net sales in our stent product line increased 8% to $28.8 million in the three months ended October 4, 2009 compared to $26.8 million in the three months ended September 28, 2008. This increase was attributable to increased market penetration of our EverFlex family of stents and balloon expandable stents. Net sales of our thrombectomy and embolic protection devices increased 5% to $7.3 million in the three months ended October 4, 2009 compared to $6.9 million in the three months ended September 28, 2008 largely due to increases in sales of our embolic protection devices. Net sales of our procedural support and other products declined 2% to $11.9 million in the three months ended October 4, 2009 compared to $12.2 million in the three months ended September 28, 2008 largely due to the transition from selling Invatec PTA balloons to selling our own EverCross and NanoCross PTA balloons. With regard to our atherectomy business, we continued to face competition and recorded an estimate of $1.0 million for sales returns resulting from product transitions to our next generation plaque excision devices. Atherectomy sales declined 7% to $19.6 million in the three months ended October 4, 2009 compared to $21.0 million in the three months ended September 28, 2008.
Net sales of neurovascular products. Net sales of our neurovascular products increased 37% to $45.2 million in the three months ended October 4, 2009 compared to $33.1 million in the three months ended September 28, 2008, driven by increases in all product categories. Net sales of our embolic products increased 56% to $28.4 million in the three months ended October 4, 2009 compared to $18.2 million in the three months ended September 28, 2008 primarily due to the continued market penetration of the Axium coil and the Onyx Liquid Embolic System as well as the launch of our Pipeline Embolization Device in Europe and other international markets. Sales of our neuro access and delivery products and other increased 12% to $16.8 million in the three months ended . . .