Artivion Inc (AORT) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your CryoLife first-quarter conference call. At this time, all parties have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. If you do have a question throughout the presentation, you may enter the queue by pressing 1, followed by 4, on your touch-tone phone.

At this time, it is my pleasure to turn the floor over to your host, President and CEO, Mr. Steve Anderson. Sir, the floor is yours.

Good morning, and welcome to CryoLife's first-quarter 2003 conference call. I'm Steve Anderson, the CEO of CryoLife, and with me today are Ashley Lee, CryoLife's Chief Financial Officer and Vice President of Finance, and Joseph Schepers, the company's Vice President of Communications. Today's conference call agenda is as follows: Ashley will discuss this morning's press release and give you the details of the first-quarter's financial performance. Then I will provide you with an overview of the developments in the first quarter, as we achieved good revenue growth compared to the fourth quarter of last year. My overview will include a summary of our progress with the FDA and litigation issues, the results of our international marketing initiatives, the sales growth of our surgical adhesive BioGlue, and a review of certain BioGlue R&D projects. At the conclusion of my comments, Ashley will return and discuss guidance for the remainder of the year. After those remarks, we will open up the call to questions from investors. At this time, Ashley will discuss this morning's press release and the first quarter's financial results.

Thanks, Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement.

Comments made in this telephone call which look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations, or predictions of the future. All statements made during this conference call that do not reflect historical results or information should be deemed to be forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning risks and uncertainties is contained from time to time in the company's SEC filings, including the risk factor sections of our Form 10-K for the year ended December 31, 2002. This presentation may contain information such as revenues prior to adjustment to estimated tissue recall returns, and pro forma net loss per share that is deemed to be a non-GAAP measure pursuant to regulation G promulgated by the SEC.

A reconciliation of these measures to the most closely applicable GAAP measure is contained in the company's press release issued this morning, which has been posted on the company's website. This morning, CryoLife reported financial results for the first quarter ended March 31st, 2003. Revenues for the first quarter were $15.9 million. As you recall, we established a reserve for tissues estimated to be returned pursuant to last year's recall. Those estimates proved to be conservative, and the adjustment to the reserve has been reflected as an increase in revenues during the first quarter.

Excluding such revenues of $848,000, revenues from tissues and products shipped during the first quarter were $15.1 million, compared to 12.2 million for the fourth quarter of 2002. That's a 24% sequential increase in quarterly revenues. Reported gross margins in the first quarter of 2003, as defined by cost of preservation and products divided by total revenues, excluding grants and distribution revenues, were 74%. This reflects the distribution of allograft tissues that had been previously written off in connection with the FDA order.

The total preservation cost associated with the tissues that were previously written off is estimated to be $2.3 million. The gross margin also reflects the adjustment to the recall reserve previously mentioned, as well as an increase in the percentage of revenues derived from the sale of BioGlue.

Net loss for the quarter was $434,000, or 2 cents per share. Excluding the adjustment to the recall reserve and the effects of the shipment of tissues previously written off, our pro forma net loss would have been 12 cents per share. BioGlue revenues were $6.5 million for the quarter ended March 31, up 33% over the first quarter of 2002, and up 16% over the fourth quarter of 2002.

We're currently focusing BioGlue marketing efforts on increasing usage with our current customers. To give you an idea of how hospital sales are tracking, we compared pre-PMA approval sales in the last six months at our top 50 hospitals and compared that to the average monthly sales for our top 50 hospitals since the PMA approval.

On average, the total pre-PMA sales of BioGlue per hospital were about $3,800 per month compared to about $10,300 per month since the PMA approval.

Total tissue processing revenues were $9.1 million, up 45% compared to the fourth quarter of 2002. Excluding adjustments to the recall reserve, revenues from tissues and products shipped during the first quarter were 8.3 million, an increase of 31% over the fourth quarter of 2002.

Cardiac revenues were $4.7 million for the first quarter, up 44% over the fourth quarter of 2002. Cardiac revenues for tissues shipped during the first quarter were 4.6 million, compared to 3.3 million for the fourth quarter of 2002. That represents a 41% increase in sequential (inaudible) revenues.

The difference in revenues is attributable to adjustments to the recall reserve. Vascular revenues were 4.3 million for the first quarter, up 46% over the fourth quarter of 2002. Vascular revenues for tissues shipped during the first quarter were 3.5 million, compared to 2.9 million for the fourth quarter of 2002. That represents a 22% increase in sequential quarterly revenues. Again, the difference in revenues is attributable to adjustments to the recall reserve.

Orthopedic revenues were $150,000 for the quarter. Orthopedic revenues for tissues shipped during the first quarter were $105,000, compared to $108,000 in the fourth quarter of 2002. And again, the difference in revenues is attributable to adjustments to the recall reserve.

General, administrative, and marketing expenses for the first quarter of 2003 were $11.6 million. This compares to 9.5 million in the first quarter of 2002 and to 15.4 million in the fourth quarter of 2002. These expenses include $2.5 million in professional fees and settlement costs associated with regulatory and legal issues. That compares to $425,000 in the first quarter of 2002.

That concludes my initial comments, and now I'll turn it back over to Steve.

There has been good sequential revenue growth, as the first quarter of '03 revenues were 24% higher than the fourth quarter of '02, excluding a favorable adjustment of $848,000 to estimated recall returns. April revenues also give us confidence that we are on track to achieve our full-year revenue projection that's approximately 70 million that we provided during our year-end conference call. Preserved human cardiac tissue revenues were up 41% in the first quarter of '03 versus the fourth quarter of '02. Vascular revenues were 22% higher in the first quarter than they were in the fourth quarter of '02.

All of these revenue results exclude the favorable adjustment of $848,000 that I mentioned earlier. We commenced orthopedic processing during the first quarter.

Procurement of tissues is accelerating nicely, as the tissue procurement organizations have shown their confidence in CryoLife. Heart procurement in April was over 300, compared to the first quarter monthly averages of 275. Vein procurement for April was over 325, compared to the first quarter '03 monthly average of 268. These numbers have been increasing month to month, and it appears to us that if this trend continues, within the next few months we will be very close to procurement levels that will be supporting our demand.

Please remember that it takes about six to eight weeks for tissues to go through our diligent quality assurance and process controls before they are ready for distribution, and so the increases in procurement that we've had in the first quarter and that have continued throughout April suggest that we should have a strong second quarter. Remember also that the summer months are our busiest months, and so the increase in procurement during April where total tissues processed daily averaged 15% higher than those processed on a daily basis in March indicates a procurement trend that, should it continue, should assure us of a strong third quarter as well. We are now processing tissues from about 90% of the tissue banks and organ procurement groups that we were working with prior to the recall.

As previously announced, the FDA inspected our facility on February 14th. The vast majority of the Form 483 observations from the April 20, '02 inspection were corrected as of that date. A new 483 notice of observations was left with the company.

The company responded to the February 14th 483 on March 25th. We are engaged in ongoing discussions with the FDA. We are currently in discussions with the FDA regarding the reclassification of certain SynerGraft processed human valves and vascular grafts. The FDA has advised the company that its SynerGraft heart valves and SynerGraft units for AV access will be regulated as medical devices. The company is in discussions with the FDA about the type of clearances that will be necessary for these products. The company is not processing tissues using the SynerGraft process at this time.

During the past six months, we have been able to settle four product liability per lawsuits, including the Lykens action and one additional suit that has been dismissed. The company continues to believe that the company has adequate insurance to cover all of the outstanding products liabilities claims.

The securities fraud class actions that were filed against the company in July 20, '02 have been consolidated into one lawsuit. Recently, our legal counsel filed a motion with the court to dismiss the securities lawsuit. Counsel anticipates a ruling on this motion to dismiss sometime during the third quarter of this year. The separate derivative actions remain in a preliminary stage. International sales continue to show good progress. International BioGlue sales are up 43% during the first quarter of '03, as compared to the first quarter of '02. The primary reasons for the increase are the conversion of the U.K. sales force to a direct sales force, seven additional marketing approvals, an expanded approval for BioGlue that was CE marked in January of '02 and approved in Canada in February of '03, as well as several presentations of our clinical data that have been given throughout the year at various meetings.

Sales of the O'Brien porcine stentless heart valve are up 68% over last year. Portions of the manufacturing process for this valve have been moved overseas, with the final steps being completed here at our facility in Georgia. We have been able to realize substantial cost savings with this decision that should convert into improved profitability for this product line.

The model No. 100 SynerGraft vascular graft made from a bovine ureter continues to be well-accepted in Europe. We have over 80 documented implants of the SG Model No. 100 in Europe, and we have been told that there will be two clinical presentations on the SynerGraft vascular graft Model 100 for AV access at the vascular access surgery meeting in Lisbon, Portugal, during the latter part of May.

Mr. Chris Darby, who is a surgeon at the John Radcliffe hospital in Oxford, England, will present his series of 12 patients, many of whom have had the SynerGraft Model 100 graft implanted for over 1 year, and Mr. Kamel Abusen (ph) of Queen Alexandria Hospital of Portsmouth, England will present a poster on his series of 10 patients. We intend to file an IDE with the FDA for the model 100 SynerGraft vascular graft in Q2 of '04. BioGlue is approved in the U.S. as an adjunct to sutures and staples for use in adult patients in open surgical repair of large vessels. It is CE marked in the European community, approved in Canada for use in soft tissue repair, and approved in Australia for use in vascular and pulmonary sealing and repair. BioGlue continues to set sales records quarter to quarter and month to month. Sales for Q1 '03 were 6.5 million. That's a 16% increase over the 5.6 million that was sold in the fourth quarter of '02. 79% of BioGlue's sales for Q1 '03 were in the U.S., and 21% were in international markets. BioGlue's sales in April continue to be strong, and they place us on schedule to achieve the 26 to $27 million that we have forecasted for the year, which, if it continues, would be a 25% year-to-year sales increase. Based upon reports available to management, we continue to feel that the annual U.S. wound closure market is about 875 million.

We have scheduled an IDE filing with the FDA for the use of BioGlue in the sealing of dura mater in spinal surgery for Q4 '03. Management believes that the 2006 market for a dura sealant in the U.S. will approach $63 million, and this is based on a total of about 193,000 procedures that potentially could use BioGlue. That would be spinal procedures. Two papers were given on the use of BioGlue's protein hydrogel in spinal disk replacement at the International Intradiscal Therapy Society meeting in Chicago April 2nd through the 6th. The 2 presenters were Dr. Phillip Benton, past president of the society and Dr. Umet Suxsola (ph) of CryoLife's staff. The titles of the papers were "Use of a polymerized protein hydrogel for post discectomy augmentation" and "Restoration of the biomechanical properties of calf (hp) spinal discs using Biodisc, a protein hydrogel nucleus replacement . Plans for a CE Mark submission for a spinal disc nucleus replacement are ongoing and currently scheduled for Q1 '04. The IDE submission for a spinal disc nucleus replacement is scheduled for Q2 '04. Management believes that there are about 349,000 yearly spinal procedures in the United States that could use BioGlue. That's a potential market of about $150 million.

That concludes my comments, and at this time, I'll turn the conference call back to Ashley, who will give you some guidance for the rest of the year.

I'd like to make a few additional comments about our financial condition and give some limited guidance for the remainder of the year and the second quarter.

As Steve stated earlier, we believe that we will be able to generate approximately $70 million in revenues during 2003. We're not giving any revenue guidance by product line for the full year, other than that we expect BioGlue revenues to be between 26 and $27 million.

We expect revenues in the second quarter of between 16.2 and $16.8 million. Allograft tissue revenues are expected to be between 9 and $9.6 million, and BioGlue revenues are expected to be between 6.8 and $7 million. There are several reasons why we believe this level of revenues is achievable. First, we are now receiving approximately 75% of our record cardiac procurement just prior to last year's recall. Several of those organizations representing the remainder of our cardiac procurement have indicated that they will resume sending cardiac tissues to CryoLife once the FDA concerns have been fully addressed.

Second, we have sufficient vascular procurement to meet demand during 2003.

And finally, our orthopedic tissue procurement has exceeded what we had initially anticipated, and this bodes well for our orthopedic program. Gross margins, in large part, will be determined by the number of shipments of tissues previously written off, allograft processing levels for the remainder of the year, and the percentage of revenues generated from the sale of BioGlue surgical adhesive.

Currently, we're not able to project gross margins with a great degree of accuracy, although we expect that they will be less than the gross margin percentages posted in the first quarter. We believe that SG&A expenses will be at the high end of the 42 to $46 million range that was communicated in previous conference calls. This is an area that is highly dependent upon the timing of the resolution of our regulatory issues, legal issues, securities issues, and other miscellaneous items. We have approximately $20 million in cash, cash equivalents, and marketable securities. We anticipate receiving approximately $8.7 million within the next few days relating to tax NOL carry-backs. Considering the above factors, we believe that we have more than adequate cash to ensure that we will be able to manage our way through these issues and return to profitability.

That concludes my comments, and now I'll turn it back over to Steve.

We'd like to open up the conference call to questions from investors at this time.

Thank you. The floor is now open for questions. If you have a question or a comment at this time, please press 1, followed by 4 on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, ladies and gentlemen, if you do have a question or a comment, that's 1, followed by 4 on your touch-tone phone.

Our first question is coming from Tom Gunderson of Piper Jaffray.

Hi. Good morning.

Hi, Tom.

Hi. Just on some of the last guidance that was given on SG&A, the 2-and-a-half million that you had in professional fees, when you gave that 42 to 46, especially the 46, which you're now saying closer to the high end, what was your assumption on the professional fees for the rest of '03? Was that continuing on through the end of the year?

Yes.

Okay. And so anything short of that is upside. The second question, then, is back on regulatory. Just to be as clear as we can, Ortho procurement is going on, Ortho processing is going on. Care to make any estimates as to when it can actually be shipped?

What we're currently -- we've always been shipping orthopedic tissues throughout the last six months on a very limited basis.

Right.

We're currently making plans to resume distribution of certain orthopedic tissues on a limited basis, but with that being said, we still have some issues to work out with the FDA, and we continue to work with them diligently to get their concerns addressed.

Are these timing, bureaucracy issues, or are there some clinical/scientific, bench testing kinds of things that need to be done? Or both?

I think it's probably more of some issues that we are currently working on, some testing and so forth that we're getting completed, hopefully, over the next couple of months. And then we'll sit down with the FDA and hopefully get their full buy-in of -- that we've addressed all their issues.

Okay. And then last question, and I'll get back in queue. Would you care to estimate when gross margin -- you said you didn't know what it is, but, you know, no later than this date it would normalize?

That's really hard to say at this point, Tom. If you look at our gross margins historically, they have typically been in the upper 50% to right around 60% range. I think that in the best case for the remainder of this year, they would probably be slightly less than that. But again, there are a lot of variables that go into that equation. But I think that if you look at our historical gross margins, they would probably be something less than that for the remainder of the year.

Okay. Thanks, guys.

Again, ladies and gentlemen, if you do have any questions or comments, that's 1, followed by 4 on your touch-tone phone. Our next question is coming from Jonathan Roben (ph) of Gagnon securities.

Hi, guys. Could you help me understand kind of the remaining actual orthopedic tissues that have been previously written off? What is left? Just the raw dollar amount and how much is -- you know, potential -- obviously not all of it is going to be recognized over a portion of this next quarter. I just want to kind of get a better understanding of that.

Well, they have previously all been written off, so that there's really not any financial exposure. Any tissues that we would be distributing that were processed prior to last September would represent pure upside, but there's really no financial downside because they've all been written off.

Can you help me quantify how much from a product dollar value amount that actually is?

I don't have that information handy at this time, Jonathan. I'll have to get back with you on that.

Fair enough. Given the $70 million guidance range that you guys have, how much inventory to date is processed SynerGraft product, and how much of the estimate is dependent upon a SynerGraft product sale versus the traditional hard valve sale? I mean, because you have a premium for SynerGraft versus your traditional product. I just want to make sure I understand that.

We're currently not processing cardiac and vascular tissues using the SynerGraft process at this time. If you look at our revenues for the first quarter of this year, about 65% of our first-quarter revenues were generated using the SynerGraft process. But with that being said, we recognize that there is some premium risk in the revenue numbers for the second half of this year, but to offset that, our procurement has been better than anticipated, so we still remain comfortable at this time with our total $70 million revenue guidance for the year.

Okay. Great. Given -- and I promise you I'll get back in queue here in just a second. How many total number of employees do you have today?

Roughly 280 to 290.

280 to 290. And the recent announcement by Angiotech and Baxter regarding the -- I guess the Co-seal product or whatever -- I can't honestly remember -- is that a true competitive product of BioGlue?

I think both products can be used in certain indications, and I think there are probably some indications that are different. However, you know, we have been -- that Co-seal product has been on the market for over a year now, so we've been competing with it out in the marketplace for the last 15 months.

Okay. Great. I'll get back in queue. Thanks, guys.

Thank you. Our last question is coming from Alex Arrow (ph) of Lazard.

Thanks. Hi, Lee. You mentioned that the O'Brien porcine valve had been doing better in Europe this quarter. Can you give us any comments on what the driver was for the better performance of that heart valve?

I think the primary driver is the fact that we switched last year to a direct sales force in the U.K., and they have been doing an extremely good job. We also have a very good distributor in France and in Greece. And that is, I think, primarily the reason, but we're very pleased with the direct sales force in the U.K.

Okay. And in case I missed it, I'm sorry, did you give any quantitative or dollar amounts, or was it just a percentage that you're willing to say on how well that valve did?

I think Steve gave just a percentage increase, but we generated a little over a hundred thousand dollars in revenues in the first quarter from O'Brien valves.

Okay. Okay. Thank you.

Ladies and gentlemen, that does conclude the Q&A session for today. I would like to hand the floor back to the speakers for any closing comments or remarks.

We'd like to thank you for being with us today. We look forward to seeing you at the end of the second quarter, and if you have any further questions, you can call Joseph Schepers, the Vice President of Corporate Communications, and he'll be happy to answer them for you.

Ladies and gentlemen, we thank you very much for your participation. This does conclude today's CryoLife first-quarter financial conference call. You may disconnect your lines at this time, and have a wonderful day.