ABIOMED Inc (ABMD) 2004 Q2 法說會逐字稿

Good morning and welcome to the ABIOMED Incorporated investor conference to discuss second quarter and year-to-date results for fiscal 2004. At this time, all participants are in a listen-only mode. Following management's prepared remarks we'll hold a Q&A session. [operator instructions] I would now like to turn the conference over to Dr. David Lederman and Dr. Edward Berger. Gentlemen, please go ahead.

Thank you. This is Ed Berger. Good morning and thanks to you all for joining us today. With me today are Dr. David Lederman, ABIOMED's Chairman and Chief Executive Officer, Dr. Robert Kung, our Chief Scientific Officer, Eugene Rabe, our Senior Vice President for Sales, Chuck Haaser, our Controller and Acting Chief Financial Officer, and Brad Goskowicz, our Vice President for Marketing. In a moment I will provide on the behalf of the entire ABIOMED management team our summary of important developments in the quarter ended September 30 as well as financial highlights for the quarter and the year-to-date. After that summary, we'll be able to take questions you may have.

First however, let me remind you that during this conference we will make forward-looking statements including statements regarding developments of ABIOMED's existing and new products, plans, timing, and clinical results to the AbioCor trial, timing and approval of the AbioCor and the company's progress towards commercial growth. Company's actual results may differ materially from those anticipated in these forward-looking statements, based upon the number of factors including uncertainties associated with development and testing and related regulatory approvals, anticipated future losses, complex manufacturing, high-quality requirements, and the like. We urge you to look at the risks and challenges detailed in the company's filings with the Securities and Exchange Commission, including the annual report filed on Form 10-K. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this release, of this conference. The company undertakes no obligations to publicly release the results of any revisions to these forward-looking statements that maybe made to reflect events or circumstances that occur after the date of this conference or to reflect the occurrence of any anticipated event. That being said, David Lederman has not planned to make any remarks, but he has indicated to me that he would like, in fact to, introduce the conference. So let me turn it over to Dr. David Lederman.

Thank you Ed and good morning to everybody. I just wanted to say a few words. We started this calendar year on the issuance of our annual report by calling it the next chapter, the next chapter by that we meant that we began earlier this year a transition from our technology driven dominated company for the customer oriented, market driven operating company. We will benefit from the best technology mix sector. And I just wanted to say that I'm very excited and everybody in the management team is extremely excited and the whole company the level of energy and enthusiasm and passion for our mission is the highest I have seen in many many years as we meet successfully important regulatory clinical and financial deadline. We have asked you to judge us by our performance not by our word. I believe that it is going to describe to you and the result of the last two quarters are in a thick conformation that we are now executing as we have indicated to you before. I am also very excited about the fact that we are attracting and recruiting many many talented people across all business critical functions in the company. And Brad Goskowicz is joining the company; he is in fact began to build the marketing team, so there are others coming in. And the same history of every important business function of company. So the level of excitement is the highest, as I said. The energy is incredible and I wanted to say that the entire ABIOMED workforce and management team builds, likely it is -- it is our great time for the company. With this, I would like to -- I thank you for letting me say a few words. Please go ahead.

Thank you David. As we detailed in our press release this morning and our Form 10-Q filed with the SEC also this morning, ABIOMED made important progress during the last quarter across a broad range of strategic and operating goals. Our financial performance continued its dramatic improvement with net loss declining by 47% against the comparable quarter of the prior year. The programs were implemented to assure that we use our financial resources effectively, are working well. We anticipate continuation of the trend established over the past two quarters. Continued efficient use of capital combined with the revenue growth and margin improvement, we can reasonably hope to achieve from new products if we execute our plans effectively, we will create the opportunity to achieve our goal of profitability by the end of next year.

FDA marketing approval for the new AB5000 circulatory support system ventricle received at the very end of September gives us an exciting new product that we believe will reinvigorate our circulatory assist business and provide substantial opportunities for growth in the future. We are all extraordinarily proud of the work accomplished by our product development regulatory and clinical team in moving this initiative forward so effectively. The AB5000 introduction is the first essential component in our strategic commitment eventually to compete across the full range of circulatory assist clinical applications. This is a long-term strategy and we are dedicated to assuring that it is built upon the strongest possible foundation. To that end, the AB5000 is undergoing a carefully controlled initial clinical introduction during the current quarter. We anticipate a broader marketing effort in the final quarter of the fiscal year with the largest impacts on revenue beginning next year. Early market reaction to the AB5000 from the limited number of surgeons who have evaluated and who used it is overwhelmingly positive.

I should note that we remain committed to our existing BVS5000 products, which we expect will remain an important component of our product sales and revenue. The AB5000 complements rather than replaces the BVS. While it is far too early to make any particular projections, we expect that many customers would use both systems choosing for each individual patient, the blood pump or ventricle that makes the most sense. We also anticipate that the substantial increase in Medicare Reimbursement for DRG 525 effective October 1 of this year will have a positive effect on our programs by helping to eliminate financial impediments to hospital use of our heart assist products.

There were also important positive developments in the quarter for our AbioCor program, despite the fact that no new clinical trial implants were performed and no patient is currently on support. On the regulatory front, FDA designation of the AbioCor as a humanitarian use devise cleared the way for our planned submission of a Humanitarian Device Exemption request. HUD designation means that the FDA has accepted our proposed definition of an initial target population for the AbioCor not exceeding 4000 patients per year and that the AbioCor is therefore eligible for HDE consideration. We are pleased to report that we have now completed our comprehensive review of clinical data from all of the patients enrolled in the AbioCor clinical trials to-date and that we have identified actions that we and our clinical partners will take to reduce the risk of stroke to future patients.

The clinical data review, which was undertaken to test chest patients in devise management recommendations that are merged from our July meeting with surgeons and cardiologists took six to eight weeks longer than we had anticipated in our last report to you. The length of the review was not due to any dramatic surprise or unexpected finding. On the contrary it was due to the fact that no easily identifiable smoking gun variable was evident. Our conclusions have validated with copious supporting data, the recommendations made by the clinicians participating in the Summer meeting. We know that our investors find such delays frustrating, and I assure you that we feel the same way, but as it's always been the case with the AbioCor program, we believe that if a choice must be made between speed and quality, getting things right is more important and more likely to leave to the success we are all pursuing than doing things fast. We feel we have not -- that we have emerged from the quarter better positioned to the success of the clinical trial. Our goal now is for our active centers to enroll additional patients and implement what we have learned. Our success in enrolling patients over the next few months and the clinical course of those patients will determine our ability to obtain an HDE in the second half of calendar 2004.

Let me turn briefly to some of the financial highlights of the quarter. Product revenues for the three months ended September 30, 2003 were $5.3m versus $5.5m for the three months ending September 30, 2002. With experience to slight reduction in BVS console sale in light of our existence high level of BVS consult penetration of our potential market and the FDA approval earlier this fiscal year of our new AB5000 console. For the six months ended September 30, 2003, overall product revenues were $10.3m as compared to $10.6m for the six months ended September 30, 2002. The slight period, the period decline was the result of our reduction in both BVS5000 console sales to new customers and revenues recognized from BVS blood pumps shipped under extended term contracts. BVS blood pump reorder revenue increased by 8% during the six months ended September 30, 2003.

International sales accounted for 12% and 5% of total product revenues during the three months ended September 30, 2003 and 2002 respectively. International sales accounted for 11% and 6% of total product revenue during the six months ended September 30 of 2003 and 2002 respectively. Our margin on product revenues improved in the quarter ended September 30 compared with the same quarter of the prior year. Cost of product revenues as a percentage of product revenues was 27% in the three months ended September 30, 2003 compared to 29% in the three months ended September 30, 2002. Cost of product revenues as a percentage of product revenues was 26% in the six months ended September 30 of this year compared to 31% in the six months ended September 30 of last year. We expect that gradual growth of the AB5000 product line in future quarters will contribute to continued improvement in our cost of products as we compliment our existing BVS product line with increase manufacturing and sales of our new AB5000 product line.

A revolution from technology-dominated activities towards commercial operations is reflected in our shifting of investment from research and developments to commercial application of the developed technology. Research and development expense was $3.6m in the three months ended September 30, 2003 compared with $5.3m in the corresponding three months of 2002. A reduction of $1.7m or 32%. Research and development expenses during the quarter consisted of continued clinical and development efforts related to the AbioCor, the AbioCor-2 and our continued efforts to enhance and extend the existing BVS and the new AB5000 product line. The decrease is primarily related to reductions in cost associated with development and pilot manufacturing for the AbioCor. Looking at six months performance, research and development expenses decreased by $3.6m or 32% to $7.7m in the six months ended September 30, 2003 from $11.3m in the six months ended September 30, 2002. We also achieved a significant reduction in SG&A. Selling General and Administrative expenses decreased by $1m or 24% to $3.2m in the three months ended September 30, 2003 from $4.2m in the three months ended September 30, 2002. For the first six months of the fiscal year SG&A expenses decreased by $1.4m or 17% to $6.4m from $7.8m in the six months ended September 30, 2002. The decrease was primarily attributable to improved efficiency of our streamlined field operations.

Overall financial performance is measured by net loss per share showed dramatic improvement for the quarter and for the six-month period. Our second quarter net loss of approximately $2.8m or $0.13 per share represented a 47% reduction against the $5.2m loss in the comparable quarter of the prior year. For the first six months of fiscal 2004, our net loss is approximately $5.9m or $0.28 per share, 44% below the first half of fiscal 2003.

Before turning to your questions, I comment on our communications efforts. We've been endeavoring to provide our investors and the general public with the information they want and need to understand our company, where we are, what we are doing, how we are doing and increasingly where we expect to be in the future. We hope that over the past few quarters, you have seen some changes in the nature and contents of our communications, press releases, filings with the SEC and these investor conferences. We would like to hear from you about how we might further improve the flow of information to you, welcome your comments through email to IR at abiomed.com or by telephone to me.

At the same time, we hope that you'll understand that it is not always possible to provide answers to every question you may have. Sometimes information is preparatory or competitively sensitive. At other times and I'm thinking primarily now of those of you who asked for reports on the progress of our AbioCor, patient clinical data review while it was ongoing, there was simply nothing definitive to say at a particular point in time and it would have been silly to convene a special investors conference. One final note on corporate communications, I am pleased to report that we have recruited a full-time communication specialist, who will join us in about two weeks. We expect that after a brief orientation, she will further augment our communications program. That concludes our prepared remarks. I would now like to open the call to your questions.

[operator instructions] Your first question comes from Randy Haul (ph.), private investor.

Hi, good morning gentlemen. Please excuse me; I was not on the first ten minutes of the call. So, except Ed Berger, I don't know who is there. So, I'll just - a general question related to the change over from BVS to ABS. Are you in a position to give any insight into the strategy or to the method that you are going to replace the BVS5000 install base with the AB5000? If in fact that's your intention, could you give us, for example some idea whether it's a goal of the company to replace 50% lets say or some number over the next two years with the AB5000?

Randy, thanks very much for the question. It's important for us to reiterate, I guess that we believe that the 85,000 [Inaudible] will for most of our accounts complement not replace the BVS 5000.

Thanks.

We are in the process of an initial clinical roll out and evaluation period, it's hard to really to make any kind of projections about the rapidity or the proportionality of uptake of the new product, okay, and at this time. Okay?

Fair enough. And the second question, you may have commented on the time line in this call, if so I missed it and I apologize, for the second generation AbioCor. Would you refresh my memory as to when you had indicated that might be available for clinical investigations and whatever that date is, are you on the time line that would seem reasonable to meet that expectation?

Randy, we certainly haven't changed the time line for clinical introduction of the second generation AbioCor that we in fact made public and which was printed in our annual report. Okay, which puts the clinical introduction of that product early in 2008. And we certainly have no adjustments to that plan at this point. I did not mention in my narrative but did mention in the press release this morning that we were very pleased to be able to report that the AbioCor-2 is approaching the demonstration of one year's durability in our laboratory testing and that we've been very pleased with some preliminary biodynamic results from animal testing. But I can't give you any further details at this point.

Okay. I understand the time line but have you not mentioned, Ed that you thought that you would seek the clinical trial involved in your AbioCor-2 sometime in 2004?

Randy, I frankly would need to check on that for you and answer that offline; I don't recall the specific number but I would need to review some of our past statement.

Okay, thank you Ed.

Your next question comes from Greg Simpson of Stifel Nicolaus.

Thanks guys, good morning.

Good morning Greg, nice to hear from you.

Yeah. Good to be back. Couple of things Ed, first of all a follow-up on Randy's question on the AbioCor-2. Your answer there in the first part of his question, did I hear it correctly, we are talking about market introduction in 2008?

Yes.

Okay. That clears it up for me then. And with respect to the development of the product, what we are seeing here on the R&D side should we assume that you guys none of you want to make this statement but should we assume that you are happy with the current design of the AbioCor-2 given the significant reduction in R&D that we have seen? Realize in course that it's kind of an ongoing process but I mean is there a conclusion that we should draw from that?

No, I mean I think that in general we are quite happy with our early experience with the design of the AbioCor-2 and with the AbioCor-2 technology. We find it to be a very interesting and complementary technology to the AbioCor-1 and we are committed to it.

Okay, then stand with AbioCor, in the press release we talk about kind of reinitiating the enrollment process and how the pace of enrollments here over the next coming months will determine whether you can meet the HDE approval timeframe in the second half of the year. Can you give us a sense, now what do you guys think, I realize it, it clearly depends on the success of the patients that would be enrolled, but is there anyway to give us some sort of sense of how many more patients may need to be included in the trial to get to where you need to be for the approval?

Greg, we've always tried to convey the notion that while there are 15 patients approved in the clinical trial, that there is no hard and fast requirement that we will need all 15 or that 15 will be sufficient. At present, we believe that we need to have a positive clinical experience with a small number of additional patients, and it's a small enough number that we believe that we can handle those enrolments before this year is over, or in the next few months take and still need our deadline. But we have tried never to be specific, because there is not specific commitment to a particular number of patients.

Right okay, so we shouldn't be necessarily still totally geared into 15, it depends little bit on the outcomes?

That's correct.

Okay, all right. Thanks guys.

Your next question comes from Robert Foreman (ph) of UBS Financial.

Hi. Now that the hiatus is listed, are you actively seeking new enrollees and also how many hospitals are currently participating in the program?

Bob, thank you very much for that question because it allows me among other things to clarify something. We have never ceased reviewing patients during this clinical data review, okay, and we had never precluded the possibility of enrolling a patient. We had been saying through the period of this review that data review was the highest priority that we had. But our active clinical centers have continued to look at patients and there has been no stoppage of the referral streams to those active patients. So, number one, we do not anticipate any ramp up time, because we had never actually stopped those activities. There are several centers and I cannot go on more specifically than that, but several centers that are actively looking for patients and who are likely candidates to participate in the enrolment before the trial is over. I hope that's reasonably responsive to you.

Thank you, I have a follow-up question. And the question is during the conference you had, this was in Houston, back in July, and in which you were -- at which time you were investigating or asked the investigators to help you determine the cause of strokes, what did you learn?

Well, I'm going to ask Dr. Lederman to address that particular question as he has -- his expertise is much clearer in that area.

Okay there, there were four general areas of action, if you wish. One of them we learned about patient selection. We learnt about improved surgical approaches to the implantation of the AdviCor, and we learned also that the management of both the device on the patients needed to be slightly modified, based on the experience that we have found with the last four patients. As Ed mentioned before, we didn't find any critical or single event or smoking guns that would say this is the cause we found, rather it was a combination of action that need to be taken, and we're pretty confident that with those, we'll be able to minimize the incidence of those, at the same time continuing to extend the lives well beyond natural lives of those patients.

Let me add one piece of data that I want to give you. If one compares the control patients and this very very important landmark HeartMate rematch trial, in that very important trial it was shown that patients we use as controls before were kept on optimal medical therapy as opposed to being implanted with the HeartMate, that, the medium time to death was of the order of 20 weeks. Just wanted to say that the degree of sickness of the patient of the comparable patient population that did not receive the AbioCor because of size, but otherwise was eligible were eligible for implantation of the AbioCor was a factor of 10 times shorter lives, in other words, the patients one could say were 10 times sicker. And yet, we have stated in our releases, we found that we're able to extend their lives by nearly six months on average for the very, very [Inaudible] patient. So, the focus continues to be reduction of adverse events, particularly stroke, severe stroke, and we think that a combination of those four grouping of actions will get us to where we need to be successfully.

Thank you.

[operator instructions] Your first question is a follow up from Randy Haul, private investor.

Hi David, glad to hear you are on board with us. My question is a follow up to Bob Foreman, and I am sorry if you've already mentioned this, as I said I was absent for the first 10 minutes. David, as patient selection being one of the criteria, how much latitude do you have in patient selection relative to the issue of the fragility of the vascular system of these patients, which intuitively will probably work against success if it's debilitated to a greater degree than otherwise might be the case? Are you modifying your selection process with an emphasis on that sort of thing over and against general levels of fragility and co-morbidity so that you might enhance along with the other things you've learned, the possibility of a better outcome?

Ran, the answer is generally yes. The criteria remain the same as they were originally. So, we are not changing any of the criteria, but we are now focusing on selecting patients who tend to be healthier in areas other than cardiac. As an example, we want to focus on patients that had for example, what are known as intractable arrhythmias are patients who are otherwise fine, but who have septal defect, septal is the wall in between the ventricles, for those patients you cannot support them with anything but replacement of their heart. So, it's really an emphasis and a focus on determining, by eliminating some of the very, very sick patients with many co-morbidities, not eliminating them, selecting patients that have a better chance, in that regard, but maybe, worse off actually from the point of view of their heart.

And the other thing that I want to mention is that, we have status is the department but its important to mention it again and that is that while we originally went to the trial hoping to be able to medicate the patients in a way similar to the medications that are given patients who have heart vaults (ph) of which there are hundreds of thousands if not millions. We were unable to do so, and we now understand better why and we think that by a combination of both, device parameter management, patient management, we'll be able in the future to medicate them adult levels that our therapeutically normal with the majority of patients that are walking around with perfectly health reliable background.

Okay, thank you very much.

Your next question comes from Philip Hares (ph) of A.G. Edwards.

Could you tell me how the criteria for selection of a patient in your current trial? How do those criteria compare to those that would be in effect for the much larger population of people who would be eligible for a transplant heart?

Yes.

In other words, is your patient population far restricted than it would be the case for those eligible for a transplant heart.

In the -- in our clinical trial obviously, you know the initial clinical trial with the initial patients, we have been very selective and that's why, David had mentioned earlier that these patients on a medium they don't last for more than couple of weeks without any additional support. The transplantations are a completely different category, in fact as you know today, transplant patients, they wait for nine months or ten months or one year before they get a transplant. Those are the not the same patients that we're dealing with in this initial clinical trail. Our patients, if they lived, they will live for a few weeks, may be a month. And these are the initial patients that we're implanting the AbioCor and that is also why the clinical trial itself has been quite challenging from the point of view of the patient management and also finding the best way to manage the device so that it will be best for -- best for the patient to recover. So, they are really very different population right now. I think that, what's -- I hope, I've answered your question.

Yes. I do have a follow-up question. I joined late so you might have already addressed this, but going to the AB5000 and the BVS5000, what is the -- what is your estimate of the total market for these kinds of devices and what is your penetration of it and who are your biggest competitors?

The current labeled indications for both the BVS 5000 and AB5000 are the short-term acute recovery patients. Patient's whose heart have failed, that have a chance to recover, and that is primarily a patient suffering from cardiogenic shock after open heart surgery, with a -- are unable to be weaned from bypass although there are also meaningful numbers of patients in other short-term recovery applications. AbioMed with BVS5000 has penetrated virtually all the US centers. That do a significant, a large enough number of open heart surgeries per year to be good candidates for this kind of technology and we have something in excess of 90% of the usage for this particular application within that niche marketplace. There are some people who use -- from time-to-time use a more expensive left ventricular or bi-ventricular assist device in place of the BVS or the AB5000, but that has remained competitively a very small number.

If I may, this is David Lederman again, I want to add a little bit to the answer that Bob Kung gave you with your question regarding heart transplantation [Inaudible] the AbioCor, I am going to summarize what we said to you again, the patients that undergo to the heart transplantation, those patients -- few patients for whom donor hearts are available are patients that are generally much healthier than the patients that would be considered for an AbioCor today. When you stated your question, you said you made a statement that the numbers are much larger for patients that could benefit from a donor heart and from AbioCor and if I understood you correctly maybe I didn't hear you to right. That is not correct. The numbers of potential patients that could have their hearts replaced is very large and most likely will be much, much larger for the AbioCor than for natural heart simply because there are not enough donors, and we will ultimately, this is our clinical, strategic, and commercial protocol and plan is that we start initially with the sickest of patients, because that's the right thing to do ethically. But eventually, we will treat healthier patients and it is our intent to compete not for concentration, because there will be no competition. There aren't any enough donor hearts. So, I just want to make clear that the numbers are large and there is no such thing as the numbers for donor heart is larger than for AbioCor, it's exactly the opposite by many orders of magnitude.

The second point that I wanted to make about the AB5000 is that we have failed to tell you that there are patients today, who are on support with the new AB5000, the ventricle was approved only one week before our fiscal quarter ended and yet there are numerous patients already on support and my -- the feedback that has been given to me by both Eugene and Brad regarding the field use of the near ventricle is that there is a tremendous amount of excitement and things are going extremely well. So, this is a very, very quick update that people are very pleased with the new AB5000 product, and we are very excited about its prospects in the future.

You also asked who is the competition. Right now the competition is anyone who has a labeled product that can be used for the short-term treatment of patients, who can expect to recover and that is the only other company that has been approved is Thoratec Corporeal System. I also want to add, because you asked the question and you reminded me that the AB5000 has the potential for expanded indications and in fact, we have stated repeatedly that our AB5000 console is a platform for a whole family of new products that go well beyond the BVS, not of the expense of the BVS or beyond the BVS and it is our plan to continue to execute on time and if you look back at our announcement on our annual report, we expect next year to offer the second arm for ventricles. It will be driven by this platform and that's we expect to be free of funded indication. So the market potential for the AB5000, well, I'm not going to give you a number right now. It's much, much larger, it can multiples larger than the BVS. I hope I have answered your question now.

Yes. I do want to, just one further question. What about foreign sales for these products? How are they going and what are the prospects?

The -- you are talking about specifically the AB5000?

Yes. Both the AB and the BVS.

Yes, well the BVS as Ed mentioned in our financials, we have seen a small growth in our revenue from the BVS, we are targeting some specific countries in Europe, specifically Germany, which is the largest market and you may or may not remember that we have now a dedicated effort located in Europe that is targeting now some of the most important centers, the same is through in Japan, we got two primary markets there. On our part of limited effort as we begin our expansion internationally, Germany and Japan are most the important countries and the AB5000 will also, over the next two-three months, the clinical interview in Europe, but only will there be a commercial rollout until after we have gotten more clinical experience and after all a very [Inaudible] product for us. And that growing along, the same strategy as we are implementing in the United States will take place largely during calendar 2004.

Thank you.

You are welcome.

At this time there are no further questions. Gentlemen do you have any closing remarks?

No. Thank you all for joining us today and we wish you all a happy Halloween and look forward to our future communications with you.

Ladies and gentlemen that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.