Artivion Inc (AORT) 2003 Q3 法說會逐字稿

Good afternoon. Welcome to the CryoLife third quarter financial conference call. At this time, all parties have been placed on a listen-only mode, and the floor will be opened for question-and-answer after the presentation. Mr. Anderson, the floor is yours.

Good morning, everybody and welcome to CryoLife’s third quarter earnings conference call. This is Steve Anderson, CryoLife's CEO, and with me today is the company's CFO and Chief Financial Officer Ashley Lee.

The agenda for the call today is as follows. Ashley will review this morning's earnings report and will comment on certain financial matters. He will also comment on revenues by product line. Then I will comment on international sales, new product implant results, FDA submission timetables, BioGlue sales SynerGraft implant devices, [CryoVac] SG and [CryoGraft] SG regulatory statuses, cost-savings measures and procurement results. Then the call will be transferred back to Ashley for some forward guidance. After the guidance, we will open up the conference call for questions. At this time, Ashley will discuss this mornings press release. Ashley?

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 call which look forward in time involving risk and uncertainties and are forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. The forward-looking statements include statements made 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 risk and uncertainties is contained from time to time in the company's S.E.C. filings, including the risk factor section of our form 10-K for the year ended December 31, 2002.

This morning we reported financial results for the third quarter and nine months ended September 30th, 2003. Revenues for the three and nine-month periods were 15.1 and 46.7 million, compared to 16.9 and 65.6 million in the corresponding periods in the prior year.

Revenues in the third quarter decreased 11% compared to the third quarter in 2002, and decreased 4% compared to the same quarter of 2003. Revenues in the third quarter were adversely affected by tissue availability, the elimination of the process tissues and lower than expected orthopedic revenues.

BioGlue revenues were 6.7 and 20 million for the three and nine months ended September 30th, 2003, compared to 5.2 and 15.3 million in the corresponding periods in 2002. BioGlue revenues continue to track toward previously issued guidance. Total [processing] revenues were 8.1 million in the third quarter of 2003 compared to 11.3 in the third quarter of 2002, and compared to 8.6 in the second quarter of 2003.

Cardiac revenues were 4.5 million for the third quarter of 2003, compared to 5 million in the second quarter of 2003, and compared to 5.3 million in the third quarter of 2002. Vascular revenues were 3.1 million for the third quarter of 2003, compared to 3.3 million in the second quarter of 2003, and in the third quarter of 2002. Orthopedic revenues were 467,000 for the third quarter of 2003 compared to 280,000 in the second quarter of 2003.

Net losses for the three and nine months ended September 30th, 2003 were 4.7 million or 24 cents per share and 25.1 million or $1.27 per share. This compares to losses of 19.6 million for $1.01 per share and 22.1 million or $1.14 per share in the corresponding period in the prior year.

The year to date figures include a favorable adjustment to previously reported financial results for the second quarter 2003. The adjustment reflects an additional 2.4 million of income tax refunds resulting from tax loss carrybacks. Accordingly, the company has restated its results of operations to reflect a $2.4 million decrease in income tax expense for the quarter ended June 30th, 2003. This adjustment decreased previously reported loss per share in the second quarter by 13 cents.

Cost of human tissue preservation services and products, as a percentage of human tissue preservation services and product revenues, were 62.1% for the three months ended September 30th, 2003. As compared to 196.5% for the three months ended September 30th, 2002. And we're 44.4% for the nine months ended September 30th 2003, as compared to 95.5% for the nine months ended September 30th, 2002.

Cost of human tissue preservation services for the three and nine months ended September 30th, 2003 include an increase to cost of preservation services related to lower of cost or market write-downs of $1.8 million and $3.2 million, respectively, and includes the favorable effect of shipments of tissue with a zero cost basis of 791,000 and 4.2 million, respectively.

Cost of human tissue preservation services for the nine months ended September 30th 2003 -- I mean, excuse me, 2002, included a $32.7 million write-down of deferred preservation cost, partially offset by a $1.1 million decrease in cost of preservation services due to the estimated tissue returns.

Cost of preservation services as a percentage of revenues increased over historical levels primary due to lower processing throughput, due to the usage of tissues in connection with FDA validations, changes in processing methods, and higher overhead cost allocations associated with the decreased volume of tissues processed. We believe that cost of human tissue preservation, as a percentage of revenues during the first half of next year will decrease, as compared to current levels.

General, administrative and marketing expenses were 10.6 million for the three months ended September 30th, 2003, compared to 11.2 million for the three months ended September 30th, 2002. For the nine months ended September 30th, G&A expenses were 45.7 million, compared to 32.1 million in the corresponding period in the prior year. Included in the 2003 nine months' amounts is an accrual of 12.5 million related to product liability accruals.

The decrease in general administrative expenses in the third quarter of 2003, as compared to the third quarter of 2002, results from cost savings and lower selling expenses associated with lower sales, offset by increases in general and administrative expenses due to an increase of approximately $600,000 in professional fees due to increased litigation issues surrounding the FDA order and increased insurance premiums.

Also during the third quarter, the company paid off its $4.5 million term loan and the company currently has no debt outstanding.

Now I'll turn it back over to Steve.

On November 3rd, we announced the insurance company who carried our third layer of products liability insurance for the 2002-2003 policy year had agreed to make all 10 million of the third layer policy available for the settlement of certain products liability claims that were outstanding. We received the $10 million from the insurance company yesterday, and it is now available to the company.

There is about $2.5 million of insurance remaining in the second layer of insurance, so that gives you approximately $12.5 million of insurance with which to address pending products liability claims that remain unsettled as of October 1st of this year.

We are pleased to announce that we have made substantial progress regarding the settlement of many of the outstanding personal injury lawsuits that have been filed against the company over the last two years. Since our August of '03 conference call, we have resolved, or reached agreements in principle to resolve, 15 product liability lawsuits. Management is trying to resolve as many of the remaining suits as possible by January 1, '04.

As you'll recollect, some time ago we established a $9 million reserve for a potential insurance shortfall in the 2002-2003 policy year. While there can be no assurances management believes the remaining insurance of approximately $12.5 million, combined with the $9 million reserve will be adequate to resolve all pending product liability claims for the 2002-2003 policy year. A more complete discussion of all of our outstanding litigation will be contained in the company's 10-Q.

International revenues continue to be a bright spot in the company's performance. International revenues were up 25% in the third quarter of '03 versus the same quarter of '02. Third quarter 2003 versus third quarter 2002 international BioGlue sales were up 48%. International BioGlue sales were up 58% September '03 versus September '02.

Total sales for CryoLife Europa for September were $630,000, the best sales month in the history of CryoLife Europa. One of the key reasons for the record Europa revenues in the third quarter is that the company converted to a direct sales force in the U.K. in 2002, and that direct sales force is beginning to show significant results.

There have been two recent papers on the use of BioGlue that have been very encouraging. First there is a paper from Professor [Pateras] in Greece that discussed the successful use of BioGlue in sealing air leaks in lungs. While this indication is proved in the European economic area, Canada, Latin America, Australia and parts of Asia, it is not an approved indication in the United States.

The second paper by professor Andrew Kaye of Australia discusses the successful use of BioGlue for reconstruction of the cellar floor following [transfenoidal] procedures. Professor Kaye’s work was part of a trial done with ethics committee approval and was conducted in Australia. This indication is also approved in the European economic area, Canada, Latin America, and parts of Asia. However, it is not currently approved in Australia or the United States.

BioGlue sales in the United States continue to do well in the face of stiff competition. Sales in the third quarter were up over 24% from those in the third quarter of last year. Sales of BioGlue in the U.S. year to date are 15.5 million, up 29% over the same period in 2002. We are on track to sell 26 to 27 million dollars' worth of BioGlue worldwide for calendar '03.

We are working on an I.D.E. submission for the use of BioGlue in the sealing of dura matter. We expect it to be sent to the FDA sometime late in the first quarter of 2004. As you know, we also sell the SynerGraft model 100 vascular graft made from a bovine ureter in Europe for AV access. We estimate that we have about 100 of these grafts implanted for use as AV access devices for dialysis patients and it's being marketed in Europe under a CE mark. Ongoing clinical follow-up with this graft in Italy and the U.K. is encouraging.

One graft that was explanted at about four months post-implant showed good remottling of the graft with the patient's own cells. We continue to work on the collection of European data for the model 100 singer graft vascular graft. We now plan to apply for an I.D.E. for this product sometime in the fourth quarter of 2004.

During the third quarter of this year, the FDA asked us to submit a 510-K premarket notification for SynerGraft processed heart valves. The notification for processed human heart valves was submitted for the FDA yesterday, November 3rd. We anticipate this 510-K could be cleared by the early part of May of 2004, but there can be no guarantees to when FDA will make a final decision or what that decision will be.

We are still talking with the FDA regarding whether SynerGraft processed human vascular grafts require a 510-K, or will be regulated as banked human tissues. We hope to have a meeting with them in the near future to attempt to resolve this issue.

In October of this year, the FDA inspected us in response to a reported infection in an orthopedic tissue recipient. As we previously announced, a form 483, which is a notice of inspectional observations was issued that related to our continuing efforts to validate our processing procedures. Our response to the October form 483 was sent to the FDA on October 28th. The observations specifically mentioned our current antimicrobial solution, and we expect to complete this validation in about six to eight weeks.

In March of '03, we put in place a broader program to validate all of our systems, equipment, and processes in order to meet not only the current requirements, but also the new good tissue practices that are expected to issue in the near future. Excellent progress is being made on this long-term program.

We continue to work closely with the FDA on all matters concerning the 2002 recall. We have been sending them progress reports every three weeks so to keep them informed of technology updates and procedure changes as we make them.

On September 15th, we completed the plan validation of our new anti-microbial solution we have developed, and we expect to be implementing aerobic and anaerobic processing step into our preservation procedures after the first of the year.

CryoLife filed its application for accreditation with the American Association of Tissue Banks on October 13th of this year. The AATB is a not-for-profit trade association founded in 1976. Its mission is to facilitate the provision of high-quality transplantable human tissues in quantities sufficient to meet national needs. We were pleased to finalize this submission.

And during the quarter, we implemented two cost containment steps. We brought the pre- and post-processing tissue swabbing testing step in-house and built a new pathology laboratory in building number one, and will be bringing this function in-house also. We have hired a full-time [board] certified pathologist and are in the process of hiring two pathology/hissology technicians. We anticipate these steps will allow us to contain costs and enhance quality. On November 3rd, we implemented a rinse recovery methodology into our processing procedures.

Our procurement continues to be strong. Procurement of cardiac and vascular tissues were up 9% in Q3 of this year over Q2 of '03. In order to increase efficiency in the laboratory, we are adding a third shift. We were able to staff this shift from people who have worked on other shifts for us in the past. We think any cost associated with the addition of this shift will be negligible.

On September 9th, we announced test results from our wholly owned subsidiary, ORIZIMe pharmaceuticals which tested their anti-cancer compound AZ-spin 310 in pre-clinical trials in mice. In trials conducted in conjunction with UCLA researchers, AZ-spin 310 demonstrated accelerated reduction of breast cancer tumor cells at the site of activation with a single low-dose of [Paxiltaxil] when AZ-spin 310 was light activated.

This was covered in the October issues of Drug Week, Cancer Weekly, Women’s Health Weekly, Bio-Tech Week and Health and Medicine Week. We continue to meet with potential partners regarding this technology.

At this time, the call will be turned back over to Ashley, who will comment on guidance going forward.

I'd like to give just some limited guidance. We believe that revenues for the full year will be approximately 70 million, which is below our previous guidance. The decrease -- excuse me. We believe revenues for the full year will be approximately 60 million which is below our previous guidance. The decrease is due to the factors mentioned previously. We will offer guidance on 2004 during our next scheduled financial conference call.

Currently we are not able to project gross margins with a great degree of accuracy, although we expect that they will continue to be weak during the remainder of the year before improving sometime mid-next year. We expect general and administrative expenses to be up upper end of the range as communicated in previous conference calls. The ultimate level of G&A expenses is highly dependent upon the timing of resolution of our regulatory issues, legal issues and other items. I'll turn it back over to Steve.

At this time, we would like to open up the conference call for questions.

Thank you. If you do have a question or comment, please press the numbers 1, followed by 4 on your telephone key pad. Questions will be taken in the order they're received, and we do ask that you pick up your handset to provide optimum sound quality. If you do have a question or comment, please press numbers 1, followed by 4. Our first question comes from Tom Gunderson with Piper Jaffrey. Your line is live.

Good morning. Just a clarification on the regulatory path on SynerGraft. The FDA asked for a 510-K on heart valves, and you sent in a 510-K, and I missed a step. Is there still some dispute whether that is sufficient even though they asked for it?

Not with the heart valves. The heart valves have historically been regulated as medical devices. So they felt there were enough significant differences in the processing methodology that they wanted a separate 510-K for the SynerGraft processed human heart valves. We're still in discussion with them regarding the classification SynerGraft-processed vascular grafts. We have taken the position that they are banked human tissues, and they feel that they are medical devices. We have asked for a meeting in an attempt to resolve that issue.

And if they are devices, would that be a 510-K?

We understand that will be a 510-K.

Okay. And for the vascular grafts, you say in your press release you lost the labeling for AV dialysis access grafts. Is that a subset of the vascular grafts, or is that the whole thing?

We had the FDA rule that if we had continued to label them, that they were for AV access that we would have definitely had to have filed a 510 K I.D.E. application, and if we have no claim for use -- in other words, it's just labeled as a preserve vascular graft, then they are considered to be banked human tissues.

Tom, this is Ashley. Historically the femoral veins and arteries that have been used for arterial venous access have represented somewhere around 20% of our total preserved vascular graft business. The majority of it is the saphenous veins.

Thanks, Ashley. Then on cash, it looks like the situation is improving. If I do my math right, you're still in a cash burn of maybe three to four million on operating. Is that right? And are there any -- other than the tax refund that you mentioned in the news release, is there anything unusual that you anticipate in the next two to three quarters?

No, there's not anything unusual that we anticipate, and you are correct, we're still looking at somewhere between three and four million on a quarterly basis in regards to cash burn.

Okay. Then last question and I'll get in queue. On procurement, Steve, last quarter you gave us numbers of about 300, 400, and 200 products per month that you were procuring in hearts, vascular grafts and ortho-tissues and you've given us percentage increases. Can I apply those percentages to those numbers?

Yes. I think last conference call I told you we had procured on average about 300 hearts per month, and I think I also told you that our all-time high was 406 per month. My recollection is that in September, we procured around -- we received about 330 hearts.

Okay.

That's my best recollection, but that -- my recollection in October is that we were up again in October to about 340, 338, for some reason, but I don't have that front of me. I'm doing that by memory.

Okay. Thanks. I'll get back in line.

Thank you. Our next question comes from Catherine Sellman (ph) with Barrington Partners. Your line is live.

Could you talk about how much it's cost to resolve the 15 lawsuits that you have resolved or reached some agreement on since August 5th? And also, how many lawsuits are remaining? That's my first question.

We're not going to comment specifically on how much it's cost to settle individual lawsuits. I think as Steve has mentioned earlier, we have approximately $12.5 million of insurance proceeds available to us, and together with the $9 million reserve that we have previously established, we believe that, based on the experience that we've seen to date with the settlements and what we have remaining at this point, we believe that those amounts will be adequate to address the remaining product liability issues that we have.

Okay --

We have about three or four lawsuits remaining from the 2002-2003 time frame.

Okay. And then going forward, you've spoken about the insurance coverage you have for '02-'03. Could you talk about the insurance coverage you have available for '03-'04?

Yeah, I can. We do have limits available up to approximately $12.5 million for this policy year, as compared to about 20 to 25 million for the last policy year. So we do have a program in place which we believe and hope to be adequate for any issues that might arise during this year.

When you are taking that into consideration, though, I think you have to realize that it relates to a yearly revenue stream that's considerably less than the year before. And the -- and so, therefore, you have to sort of balance that with the recoveries we had available in 2002-2003 with the revenue stream we're generating this year.

Okay. My last question, you gave aggregate revenue guidance, but could you add a little color to what you think BioGlue will do over the next year?

We're not going to be given any guidance for '04 until our next conference call. We continue to work on some issues internally with the FDA and operationally, and we anticipate getting a lot of those cleared up over the next couple months and at that time I think we'll have a lot more clarity as to how revenues will shape up for '04.

Thank you very much.

Once again, ladies and gentlemen, if you do have a question at this time, please press the number one followed by 4 on your key pad. As a reminder, ladies and gentlemen, that's 1 followed by 4 on your telephone keypad.

If there are no further questions, we can't bring this call to a close.

Sir, at this time I'm showing to no further questions.

Thank you everyone for joining us today and we look forward to talking with you in February after the close of our calendar year and fiscal year.

Thank you. Ladies and gentlemen, at this time it does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.