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Spectranetics Corp. Reports Operating Results (10-Q)

August 10, 2009 | About:
insider

Spectranetics Corp. (SPNC) filed Quarterly Report for the period ended 2009-06-30.

Spectranetics Corp. is a medical device company engaged in the development manufacturing marketing and distribution of its technology for interventional cardiovascular therapy. The Company\'s CVX-300 excimer laser system is the only excimer laser system approved by the FDA for multiple cardiovascular procedures. The technology has been designed for use in multiple cardiovascular applications including coronary angioplasty and the removal of pacemaker and ICD leads. (press release) Spectranetics Corp. has a market cap of $161.83 million; its shares were traded at around $5.03 with and P/S ratio of 1.56.

Highlight of Business Operations:

For the six months ended June 30, 2009, cash provided by investing activities was $1.2 million, consisting of proceeds from the maturity of investment securities of $4.2 million and a decrease in restricted cash of $0.6 million, offset by capital expenditures of $2.1 million and a milestone payment to Kensey Nash Corporation (KNC) of $1.5 million. This milestone payment was made in accordance with the terms of the agreements between us and KNC, whereby we agreed to pay KNC an additional $6 million once cumulative sales of the acquired products reach $20 million, and up to $8 million based on various product development and regulatory milestones associated with the acquired products. The second product development and regulatory milestone, receiving CE mark approval for the next-generation ThromCat device, was achieved by KNC in June 2009, which triggered the $1.5 million payment to KNC at that date. This payment was recorded as additional goodwill. The decrease in restricted cash was due to a payment made in the Rentrop case; see Part II, Item 1, Legal Proceedings, for more information. The capital expenditures included manufacturing capacity expansion projects as well as additional capital items for research and development projects and additional computer equipment purchases.

As of June 30, 2009, the unrealized loss on our auction rate securities was approximately $2.1 million, recorded in 2008, reducing the par value of the securities of $17.3 million to their fair value of $15.2 million. No further reduction of fair value was deemed to have occurred in the first half of 2009. At December 31, 2008, we also performed a sensitivity analysis in the valuation of our auction rate securities using an estimated date to liquidation of plus or minus two years and a discount rate of plus or minus 50 basis points. The sensitivity analysis with these parameters calculated a valuation ranging from $14.6 million to $16.2 million.

Our exposure to foreign currency fluctuations is primarily related to sales of our products in Europe, which are denominated in the euro. Changes in the exchange rate between the euro and the U.S. dollar could adversely affect our revenue and net income. Exposure to foreign currency exchange rate risk may increase over time as our business evolves and our products continue to be introduced into international markets. Currently, we do not hedge against any foreign currencies and, as a result, could incur unanticipated gains or losses. For the three months ended June 30, 2009, approximately $0.5 million of decreased revenue and $0.3 million of decreased operating expenses were the result of exchange rate fluctuations of the U.S. dollar in relation to the euro as compared to the prior year period. Accordingly, the net impact of exchange rate fluctuations on consolidated net loss for the three months ended June 30, 2009 was an increase in net loss of $0.2 million as compared to the prior year.

In January 2004, Dr. Peter Rentrop filed a complaint for patent infringement against us in the United States District Court for the Southern District of New York (the New York Court). The complaint alleges that certain of our Point 9 laser devices infringe a patent held by Dr. Rentrop. After various legal proceedings and an attempt at mediation, the case was returned to the New York Court for trial, which began in late November 2006. In December 2006, the trial was concluded and the jury returned a verdict in favor of Dr. Rentrop, awarding him a total of $500,000 in royalties and $110,261 in prejudgment interest, along with an order of post-judgment interest at the rate of 4.16% per annum. The Company filed an appeal to the Federal Circuit Court of Appeals on September 3, 2008. On December 18, 2008, the Court of Appeals upheld the District Courts ruling. The Companys rights of further appeal were exhausted in March 2009. In February 2009, the Company paid $0.6 million to Dr. Rentrop in satisfaction of the judgment and commenced an effort to negotiate a license that reflects the value of his patent claims. The Court retains jurisdiction over this matter particularly with respect to Dr. Rentrops claims for post-judgment royalties and other damages, which claims are disputed by the Company.

The Company has been engaged in a dispute with Cardiomedica S.p.A. (Cardiomedica), an Italian company, over the existence of a distribution agreement between Cardiomedica and Spectranetics. Cardiomedica originally filed the suit in July 1999. The lower courts judgment was rendered on April 3, 2002. In June 2004, the Court of Appeal of Amsterdam affirmed the lower courts opinion that an exclusive distributor agreement for the Italian market was entered into between the parties for the three-year period ending December 31, 2001, and that Cardiomedica may exercise its right to compensation from Spectranetics B.V. for its loss of profits during such three-year period. The appellate court awarded Cardiomedica the costs of the appeal, which approximated $20,000, and referred the case back to the lower court for determination of the loss of profits. Cardiomedica had asserted lost profits of approximately 1.3 million euros, which was based on their estimate of potential profits during the three-year period. In December 2006, the court made an interim judgment which narrowed the scope of Cardiomedicas claim from their original claim of lost profits associated with 10 hospitals down to lost profits on two hospitals during the period from 1999 to 2001. On July 1, 2009, the Court issued a ruling in favor of Cardiomedica for an amount equal to $0.6 million, which includes a judgment for lost profits, interest thereon, and certain costs assessed by the Court related to the proceedings. Such amount was included in accrued liabilities at June 30, 2009 and was paid in July 2009.

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