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Cardiovascular Systems, Inc. Steady Progress in First Quarter; Waiting on Coronary Data Next Year

• Tuesday afternoon, October 30, Cardiovascular Systems announced first fiscal quarter results that were well above our estimates. Revenue was $23.3 million (up 25% year‐over‐year), $1.8 million above our estimate. Adjusted loss per share was
$0.26, $0.08 better than our target.

• The company made substantial changes in its field organization over the previous year, and launched the new, electric version of its rotational atherectomy product, and as a result has seen a renewal of revenue growth in recent quarters. We will raise our revenue estimates substantially, as major investments in clinical trials, the field organization and medical education efforts, should to drive midteens growth through fiscal 2014 on the core peripheral business alone.

• The company also reported that it has only another 32 patients to enroll in its roughly 450‐patient ORBIT 2 trial. This study, with just 30‐day follow up, is evaluating CSI’s Diamondback 360 and Stealth 360 atherectomy products for the treatment of calcified lesions in coronary lesions. Should the results confirm earlier results, this could open up a substantial new clinical opportunity for the company as it seeks to move beyond the peripheral vasculature into an even higher value market opportunity (with strong pricing power). We view the opportunity in the coronaries as a call option of sorts for CSI investors, and while we would prefer to see longer‐ term follow up in the trial to broaden clinical acceptance of the product, we expect to see significant uptake of the product given how difficult to treat these lesions are currently.

• Guidance and Model Changes. We will raise our fiscal second‐quarter revenue target to the midpoint of management’s $23.5 million to $24.5 million range (for 19% to 24% growth), and our fiscal 2013 (June) revenue target by $5.1 million, to $97.6 million, up 18.4%. We now see fiscal 2014 revenue growth at 14.3% (versus 12.6% before). We will also modestly increase our fiscal 2013 loss per share target to $1.17, and reduce it for fiscal 2014 to $0.98 on increased clinical and field spending. Our estimates for CSI have proved volatile in recent periods, but it appears that the strengthened field organization, steady reimbursement trends, and the move to the physician office setting are creating broader adoption of the company’s technologies.

• Stock Thoughts and Valuation. At 2.1 times our calendar 2013 revenue target of
$104 million (on an enterprise basis), the valuation of Cardiovascular Systems is inexpensive compared with its small capitalization growth peers in the medical technology space. Given the company’s compelling products for treating PAD and the potential for the product in coronary applications, we encourage risk‐tolerant investors to increase positions in the name and rate the stock Outperform

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