Cardiovascular Systems Annual Report 2014

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FY2014 Annual Report · Cardiovascular Systems

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Redefining

Interventional Vascular Solutions

2014 Annual Report

31%

CSI’s revenue growth
for fiscal 2014

4,500+

More than 4,500 patients
have been enrolled
in CSI clinical studies

LEADING THE WAY

Cardiovascular Systems, Inc. (CSI) is leading the way in developing and commercializing

innovative solutions for treating peripheral and coronary vascular disease. Our primary focus

is helping physicians address even the most difficult disease states, including calcium, given

the complications it presents for the millions who suffer from peripheral arterial disease (PAD)

and coronary artery disease (CAD). We’re committed to clinical rigor, constant innovation, and

a defining drive to set the standard in safe, effective and economical medical devices that

improve patient outcomes.

“ Our strong revenue gains
demonstrate that we are
expanding the vascular
interventional market by
providing physicians with
new tools for patients who
were previously difficult
to treat.”
— David L. Martin,

CSI President and Officer

ABOUT CARDIOVASCULAR
SYSTEMS, INC.

CSI is based in St. Paul, Minn. The company’s

Orbital Atherectomy Systems treat calcified

and fibrotic plaque in arterial vessels

throughout the leg and heart in a few minutes

of treatment time, and address many of the

limitations associated with other surgical,

catheter and pharmacological treatment

alternatives. The U.S. FDA granted 510(k)

clearance for the use of the Diamondback

Orbital Atherectomy System for the treatment

of PAD in August 2007. In October 2013, the

company received FDA approval for the use

of the Diamondback Orbital Atherectomy

System in coronary arteries. To date, over

157,000 of CSI’s devices have been sold to

leading institutions across the United States.

Cardiovascular Systems, Inc. | 2014 Annual Report

156,000

The number of CSI PAD
devices that have been sold
since commercial launch

1,400

The number of CSI CAD
devices that have been sold
since commercial launch

FINANCIAL HIGHLIGHTS For the fiscal year ended June 30:

REVENUE (in millions)

GROSS MARGIN

2012

2013

2014

$82.5

$103.9

$136.6

2012

2013

2014

PERIPHERAL REVENUE (by quarter)

CORONARY REVENUE (by quarter)

Q1 14:

Q2 14:

Q3 14:

Q4 14:

$29.8M

$31.9M

$33.2M

$36.4M

Q1 14:

Q2 14:

Q3 14:

Q4 14:

77%

$0M

$0.4M

$1.7M

$3.2M

TO OUR STOCKHOLDERS

CSI had another strong fiscal year. On the top line, we

delivered 31 percent growth over the prior year, while

making important progress to position the company

for further success via product innovations, clinical trials

and sales force investments. Our strong revenue gains

demonstrate that we are expanding the vascular

interventional market by providing physicians with new

tools for patients who were previously difficult to treat.

Several noteworthy achievements helped drive our results.

David L. Martin, President
Chief Executive Officer

Glen D. Nelson, MD
Chairman of the Board

CORONARY EXCEEDS EXPECTATIONS

was made possible due to the execution and excellent

In the first half of fiscal 2014, we achieved a best case

results of our ORBIT II trial, which evaluated the safety

scenario—FDA approval of our Coronary device within

and effectiveness of the Diamondback 360® in treating

the earliest possible window. We believe this approval

severely calcified coronary lesions.

/ 01

SAVING LIMBS, IMPROVING LIVES: A Physician & Patient Story

PHYSICIAN — DR. JIHAD MUSTAPHA
Director of Cardiovascular Catheterization Laboratories,
Endovascular Interventions and Cardiovascular Research
at Metro Health Hospital—Metro Heart and Vascular

Dr. Jihad Mustapha’s passion and purpose is helping

those Americans suffering from debilitating vascular

disease. As a board-certified interventional cardiologist,

Dr. Mustapha at Metro Health Hospital—Metro Heart and

Vascular in Wyoming, Mich., is the founder of the

AMPutation Prevention Symposium (AMP). He has

dedicated his career to helping save the limbs and lives

of his patients. An innovator in his field, Dr. Mustapha

has used CSI’s Orbital Atherectomy Systems (OAS) to

treat thousands suffering from Peripheral Arterial Disease

(PAD). It was because of this expertise that he met patient

David Dilley, PhD.

“ We brought David into our

hospital the same Monday

that he was scheduled for

his amputation, and he

walked out of our hospital

less than a week later. Most

important, he avoided the

amputation. Without the

Diamondback, this would

not have been possible. ”

— Dr. Jihad Mustapha

When Dilley, a former college professor, was referred to

However, Dr. Mustapha and his team had a

Dr. Mustapha, he was facing amputation of both his lower

revolutionary new technology at their disposal. With

legs. Dilley suffered from serious PAD—with obstructions

CSI’s Diamondback 360® 60cm Peripheral OAS,

in the arteries of his legs severely limiting blood flow.

Dr. Mustapha performed a minimally invasive

Additionally, high levels of calcium combined with

procedure, entering Dilley’s legs through the foot

tortuous, or extremely small, vessels throughout his legs

and avoiding the tortuous vessels in the upper

made conventional therapies impossible. He was told the

leg—an option not possible before the FDA’s recent

only option was amputation.

clearance of the Diamondback.

Physician—Dr. Jihad Mustapha,

Director of Cardiovascular

Catheterization Laboratories,

Endovascular Interventions

and Cardiovascular Research

at Metro Health Hospital—

Metro Heart and Vascular

The result? Dilley’s legs were cleared of obstructions

and blood flow resumed. Said Dr. Mustapha, “We

brought David into our hospital the same Monday

that he was scheduled for his amputations, and he

walked out of our hospital less than a week later. Most

importantly, he avoided the amputation. Without the

Diamondback, this would not have been possible.”

Cardiovascular Systems, Inc. | 2014 Annual Report

DAVID DILLEY & FAMILY

PATIENT — DAVID DILLEY, PHD

Professor Emeritus, Michigan State University

amputation for the following week. Alarmed, Dilley and

his family began making phone calls. With the help of his

cardiologist Dr. Joel Cohn at the Thoracic Cardiovascular

Institute, Lansing, Mich., Dilley was referred to Dr. Jihad

David Dilley, PhD, led an active life. As a retired professor

Mustapha at Metro Health Hospital.

of horticulture—now professor emeritus—from Michigan

State University, he liked to get outdoors, particularly

to fish for trout in the streams locally in Michigan or out

in Colorado. But in August 2013 he was diagnosed with

congestive heart failure.

The morning of Dilley’s scheduled amputation, Dr. Mustapha

performed the minimally invasive procedure with the
Diamondback 360® on his right leg. The results were so
successful that they decided to complete the procedure

on his left leg, as well. Blood flow returned to normal.

Open heart surgery successfully repaired two valves and

Dilley kept both his legs, the pain subsided, and the wounds

two arteries in his heart, but another problem soon

began to heal.

emerged. Dilley noticed decreased circulation in his legs.

He developed a great amount of pain in his feet and open

wounds that refused to heal. “My feet hurt so badly that I

couldn’t do any of the exercises to help rehabilitate my

heart,” he said.

Now, Dilley is on his way to a full recovery, and he is excited

to return to the trout streams. “I spent quite a bit of time out

in Colorado before my heart and leg problems—and

I’m looking forward to getting back out there. Using the

innovative technology from CSI, Dr. Mustapha and his

When the wounds took on the appearance of gangrene a few

team have given me a new lease on life.”

months later, Dilley went to a surgeon who ordered a double

ORBIT II trial results surpassed FDA established endpoints

by significant margins, including freedom from MACE

of 90 percent. Results continued to be impressive

at one year with freedom from target lesion

revascularization of 95 percent in this difficult-to-treat

patient population. Economic data from ORBIT II is

compelling as well, showing cost savings of $3,200 to

more than $4,000 per patient with our device. We look

forward to releasing two-year ORBIT II results later this

fiscal year.

The FDA approval of our Coronary device allowed us to

launch the product before the end of calendar 2013. In

just over six months, in a controlled launch with a small

group of dedicated coronary sales professionals, we saw

adoption by key opinion leaders and generated $5 million

in device revenue—selling nearly 1,400 units. In the fourth

quarter of fiscal 2014, we began preparing for a broader

$3.5B

Combined PAD and CAD
U.S. market opportunity

strong, comprising 5 percent of peripheral device sales

in the first three months after commercial launch.

We believe the current U.S. PAD market is $2.0 billion with

opportunity to expand further. Introducing new, innovative

devices, like the Diamondback 360® 60cm Peripheral OAS

strengthens our leadership position and provide a

sustainable expansion of opportunity in this large and

underserved market.

commercial launch, including initial cross training of some

Our low-profile and coronary devices are examples of

of our PAD sales force to sell both coronary and

peripheral products in their accounts.

We enter fiscal 2015 with strong momentum, convincing

clinical data and a larger sales force to address the

$1.5 billion U.S. calcified coronary arterial disease market.

how our OAS technology is expanding CSI’s markets and

providing sustainable attractive growth. These systems

underscore our commitment to provide physicians new

options for treating the most difficult patients who were

previously underserved.

NEW PAD ACCESS POINTS HELP
PHYSICIANS AND PATIENTS

COMMITMENT TO SCIENCE CONTINUES

CSI’s commitment to ongoing clinical science gives

Also contributing to our success, in February 2014, CSI

physicians and patients the confidence that our

secured FDA clearance for the Diamondback 360® 60cm

innovative and economical solutions are effective

Peripheral OAS. This new device, with its low profile and

treatments, even for calcified arterial disease. Arterial

short length, allows physicians to gain access through the

calcium is a significant and underserved problem, often

foot or ankle to treat peripheral arterial disease (PAD) in

resulting in poor outcomes and higher treatment costs.

the small vessels located below the knee.

Our orbital atherectomy technology provides cost-

This additional access point lets physicians help a broader

range of patients who may otherwise face amputation. In

effective and long-term durable outcomes for these

difficult-to-treat patients.

addition, use of smaller sheaths has been shown to reduce

In fiscal 2014, we continued to advance our clinical

procedure and access site closure times, reduce radiation

initiatives, including our LIBERTY 360, COAST and

exposure, enable faster patient recovery and reduce

ORBIT II studies. These efforts are detailed in the

complications from bleeding. Initial demand has been

sidebars throughout this letter.

02 / Cardiovascular Systems, Inc. | 2014 Annual Report

RAPID ADOPTION DRIVES FINANCIAL RESULTS

Physicians’ rapid adoption of our Peripheral Orbital Atherectomy System, emerging

coronary system and mounting clinical data are catalysts for revenue growth. For

fiscal 2014, our growing success in the PAD market led to revenue gains of 28 percent

or more in each of our four quarters, and we ended the year with $136.6 million in

annual sales. The percentage of revenues from reorders remained robust at 97 percent—

reflecting a growing and loyal customer base.

Fiscal 2014 gross margin was strong at 77 percent. Operating expenses rose 36 percent,

as we continued to make planned investments in our business to capitalize on the large

peripheral and coronary market opportunities. Net loss totaled $(35.3) million, or $(1.25)

per common share. On an adjusted EBITDA basis, the loss was $(21.2) million*; however,

excluding net coronary investments, adjusted EBITDA was positive.

In November 2013, CSI raised approximately $84.4 million in a public offering

of common stock. We are using the proceeds to fund growth investments, including

commercial expansion, coronary rollout initiatives, clinical studies, product portfolio

expansion, education programs, international expansion and facility expansion.

WE ARE REDEFINING INTERVENTIONAL VASCULAR SOLUTIONS

CSI is committed to helping physicians successfully address the most difficult vascular

disease states. We do this through clinical rigor, constant innovation and a defining

drive to improve patient outcomes.

Our fiscal 2015 priorities are to:

Continue to achieve high growth and increase adoption in the PAD market—

expanding that market with our unique, low-profile orbital technology;

Successfully broaden our commercial launch in the CAD market—methodically

adding more physicians and hospitals and expanding the market; and

Conduct rigorous clinical studies that demonstrate the safety and effectiveness

of our technology for very challenging patient populations.

Our ability to expand these markets by treating previously underserved patients is expected

to drive adoption of our systems, thereby providing continued attractive growth for CSI.

We enter fiscal 2015 with significant momentum and we look forward to updating you on

our progress throughout the year.

Sincerely,

David L. Martin
President and Chief Executive Officer

G.D. Nelson, MD
Chairman of the Board

October 3, 2014

* For a reconciliation of the non-GAAP financial measure referred to as adjusted EBITDA, please refer to the table

on page 34 of Form 10-K

/ 03

CLINICAL RESEARCH

ORBIT II ONE-YEAR RESULTS

In February 2014, the company released one-year data

from its ORBIT II study of the company’s Diamondback 360

Coronary OAS in treating severely calcified lesions. Results

demonstrated rates of freedom from major adverse coronary

events (MACE) of 84 percent and freedom from target lesion

revascularization of 95 percent. Moreover, patients treated with

the Diamondback 360 Coronary OAS have been associated

with shorter lengths of hospital stay and lower readmission

rates, providing an estimated cost savings of $3,200 to more

than $4,000 per patient for the treating institutions.

LIBERTY 360°

CSI continued enrolling patients in its post-market study,

LIBERTY 360°, during fiscal 2014. The study is evaluating the

acute and long-term clinical and economic outcomes of the

company’s orbital atherectomy system in treating PAD. It is

the first study of its kind to compare orbital atherectomy to any

other PAD interventional treatment option in a difficult-to-treat

patient population. As a prospective, observational, multi-

center post-market study, LIBERTY 360° will enroll up to

1,200 patients at up to 100 sites across the United States,

including patients with claudication (painful circulatory

problems), critical limb ischemia (a severe form of PAD)

or are scheduled for amputation.

COAST

In June 2014, CSI enrolled its first patients in the Coronary

Orbital Atherectomy System Trial (COAST). This investigational

study will assess the safety and efficacy, as well as economic

outcomes, of CSI’s new micro crown OAS in treating severely

calcified coronary lesions in patients suffering from coronary

disease. In total, 100 patients will be enrolled in the COAST

study at up to 15 sites in the United States and five sites in

Japan. If the trial is successful, the results may help secure

commercial approval for the second generation Coronary

OAS device in Japan. This would be significant as Japan

is both a large and underserved CAD market.

04 / Cardiovascular Systems, Inc. | 2014 Annual Report

10-K

CARDIOVASCULAR SYSTEMS, INC.
For the fiscal year ended June 30, 2014

EXECUTIVE OFFICERS

BOARD OF DIRECTORS

David L. Martin

President and Chief Executive Officer

Laurence L. Betterley
Chief Financial Officer

Kevin J. Kenny
Executive Vice President,
Sales and Marketing

Paul Koehn
Senior Vice President,
Quality and Operations

Robert J. Thatcher
Chief Healthcare Policy Officer

HEADQUARTERS
Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, Minnesota 55112

Glen D. Nelson, MD

Chairman
Chairman, GDN Holdings
Vice Chairman (retired)
Medtronic, Inc.

Scott Bartos

President and Chief Executive Officer
Rural/Metro Corporation

Brent Blackey

President and Chief Operating Officer
Holiday Companies

Edward Brown

Senior Advisor
Health Evolution Partners

Augustine Lawlor

Managing Partner
HealthCare Ventures

David L. Martin

President and Chief Executive Officer
Cardiovascular Systems, Inc.

Leslie L. Trigg

Executive-in-Residence
Warburg Pincus

Scott R. Ward

Managing Director
SightLine Partners
President
Raymond Holdings

TRANSFER AGENT
AND REGISTRAR

For change of name,
address, or to replace lost
stock certificates, contact:

American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
info@amstock.com
www.amstock.com
800.937.5449

INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
Minneapolis, Minnesota

CORPORATE COUNSEL
Fredrikson & Byron, P.A.
Minneapolis, Minnesota

INVESTOR RELATIONS
Jack Nielsen
651.202.4919
j.nielsen@csi360.com

ANNUAL MEETING
The annual meeting
of the shareholders of
Cardiovascular Systems, Inc.,
will be held November 12, 2014,
at 10:00 a.m. CT at:

Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, Minnesota 55112

FORWARD-LOOKING STATEMENT

Certain statements in this annual report are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and are provided under the protection of the safe harbor for forward-looking statements provided by that Act.
For example, statements in this document regarding (i) the market expansion from CSI’s Orbital Atherectomy Systems; (ii) CSI’s
clinical trials, including the expected number of patients expected to be enrolled in the LIBERTY 360° and COAST trials; (iii) the
broader coronary launch; (iv) the size of the U.S. calcified CAD and PAD markets; (v) the potential to secure commercial approval in
Japan; (vi) the size of the Japanese CAD market; (vii) the use of proceeds from CSI’s public stock offering; (viii) CSI’s priorities in
fiscal 2015; and (ix) potential future growth of CSI, are forward-looking statements. These statements involve risks and uncertainties
that could cause results to differ materially from those projected, including, but not limited to, regulatory developments in the U.S.
and foreign countries; the experience of physicians regarding the effectiveness and reliability of the PAD and CAD Systems; the
potential for unanticipated delays in enrolling medical centers and patients for clinical trials; actual clinical trial results; dependence
on market growth; the reluctance of physicians to accept new products; the difficulty of successfully managing operating costs; FDA
and similar foreign clearances and approvals; the impact of competitive products and pricing; approval of products for reimbursement
and the level of reimbursement; unanticipated delays or costs related to construction of CSI’s new corporate headquarters;
unanticipated developments affecting CSI’s estimates regarding expenses, future revenues and capital requirements; fluctuations
in results and expenses based on new product introductions, sales mix, unanticipated warranty claims, and the timing of project
expenditures; CSI’s inability to expand its sales and marketing organization and research and development efforts; CSI’s ability to
obtain and maintain intellectual property protection for product candidates; CSI’s actual financial resources; general economic
conditions; and other factors detailed from time to time in CSI’s SEC reports, including its most recent annual report on Form 10-K
and subsequent quarterly reports on Form 10-Q. CSI encourages you to consider all of these risks, uncertainties and other factors
carefully in evaluating the forward-looking statements contained in this annual report. As a result of these matters, changes in facts,
assumptions not being realized or other circumstances, CSI’s actual results may differ materially from the expected results discussed in
the forward-looking statements contained in this annual report. The forward-looking statements made in this annual report are made only
as of the date of this report, and CSI undertakes no obligation to update them to reflect subsequent events or circumstances.

Cardiovascular Systems, Inc.
651 Campus Drive
St. Paul, Minnesota 55112
www.csi360.com

T: 651.259.1600
877.CS I.0360
F: 651.259.1696

Product Disclosures:

Peripheral Products
The Stealth 360® PAD System, Diamondback 360® PAD System and Predator 360® PAD
System are percutaneous orbital atherectomy systems indicated for use as therapy in
patients with occlusive atherosclerotic disease in peripheral arteries and stenotic material
from artificial arteriovenous dialysis fistulae. The systems are contraindicated for use in
coronary arteries, bypass grafts, stents or where thrombus or dissections are present. Although
the incidence of adverse events is rare, potential events that can occur with atherectomy
include: pain, hypotension, CVA/TIA, death, dissection, perforation, distal embolization,
thrombus formation, hematuria, abrupt or acute vessel closure, or arterial spasm.

Coronary Product
Indications: The Diamondback 360® Coronary Orbital Atherectomy System (OAS) is a
percutaneous orbital atherectomy system indicated to facilitate stent delivery in patients
with coronary artery disease (CAD) who are acceptable candidates for PTCA or stenting
due to de novo, severely calcified coronary artery lesions.

Contraindications: The OAS is contraindicated when the ViperWire guide wire cannot pass
across the coronary lesion or the target lesion is within a bypass graft or stent. The OAS
is contraindicated when the patient is not an appropriate candidate for bypass surgery,
angioplasty, or atherectomy therapy, or has angiographic evidence of thrombus, or has only
one open vessel, or has angiographic evidence of significant dissection at the treatment site
and for women who are pregnant or children.

Warnings/Precautions: Performing treatment in excessively tortuous vessels or bifurcations
may result in vessel damage; The OAS was only evaluated in severely calcified lesions, A
temporary pacing lead may be necessary when treating lesions in the right coronary and
circumflex arteries; On-site surgical back-up should be included as a clinical consideration;
Use in patients with an ejection fraction (EF) of less than 25 percent has not been evaluated.
See the instructions for use before performing Diamondback 360 Coronary OAS procedures
for detailed information regarding the procedure, indications, contraindications, warnings,
precautions, and potential adverse events. For further information call CSI at 1-877-274-0901
and/or consult CSI’s website at www.csi360.com.

Caution: Federal law (USA) restricts this device to sale by or on the order of a physician.

Micro Crown OAS
CSI has commenced its COAST Investigational Device Exemption clinical trial to evaluate
the safety and effectiveness of its new micro crown orbital technology in treating coronary
arteries. This new system is limited by federal law to investigational use and is currently
not commercially available in the United States or Japan.