Artivion Inc (AORT) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to your CryoLife first quarter 2004 financial results conference call. At this time, all parties have been placed on a listen-only mode and the conference will be opened for questions following the presentation. Now I will turn the floor over to your host, Mr. Steve Anderson. Sir, the floor is yours.

Good morning. This is Steve Anderson, CryoLife's CEO, and I would like to welcome to CryoLife's 2004 first quarter conference call. With me today is Ashley Lee, the company's CFO and Vice President of Finance. The agenda for today's call is as follows. Ashley will discuss the company's first-quarter operating results and today's press release. He will discuss each of the operating areas of the company. I will discuss the release of the BioGlue disposable syringe and the timetable for new BioGlue regulatory submissions.

I will bring you up-to-date on the first animal studies of our new biologic vascular stent. I will discuss results of the European implants of our SynerGraft AV access device that is made from a bovine ureter. I will also bring you up-to-date on the SynerGraft allograft implant results. We will then open up the conference call for questions. At the conclusion of the Q&A session, Ashley will return and give financial guidance for the rest of the year. At this time, Ashley Lee discuss today's press release and the company's first-quarter operating results. Thanks.

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 on this 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 forward-looking statements.

Additional information concerning risks and uncertainties is contained from time to time in the company's SEC filings including the risk factors section of the our Form 10-K for the year ended December 31, 2003, and subsequent SEC filings. This morning we reported financial results for the quarter ended March 31, 2004. Total revenues for the quarter ended March 31, 2004 were 15.1 million, compared to 15.9 million in the corresponding period in the prior-year. Total revenues in the first quarter of 2004 decreased 5 percent compared to first quarter of 2003, but increased 18 percent over the fourth quarter of 2003 revenues of 12.8 million. Total revenues in the first quarter of 2003 include approximately $800,000 in adjustments to estimated recall returns, which effectively increased reported revenue in the first quarter of 2003. Total revenues in the first quarter of 2003 include revenues derived from the shipment of SynerGraft process tissues which carry a premium as compared to traditionally processed issues.

Total revenues for 2004 do not include any adjustments for the recall nor any premiums associated with SynerGraft tissues. BioGlue revenues were 8.6 million for the quarter ended March 31, 2004, compared to 6.5 million in the corresponding period in 2003. BioGlue revenues in the first quarter increased 33 percent over the first quarter of 2003, and 11 percent over the fourth quarter of 2003. Total tissue processing revenues were 6.2 million in the first quarter of 2004 compared to 9.1 million in the first quarter of 2003, and compared with 4.9 million in the fourth quarter of 2003. Total tissue processing revenues for the first quarter of 2003 include approximately $800,000 related to adjustments to estimated tissue recall returns, and premium revenues derived from the distribution of SynerGraft process tissues.

There are currently no restrictions preventing the company from processing and distributing any tissues that we've historically processed and distributed. Cardiac revenues were 3.4 million in the first quarter of 2004 compared to 4.7 million in the first quarter of 2003, and compared to 2.8 million in the fourth quarter of 2003. Vascular revenues were 2.5 million for the first quarter of 2004, compared to 4.3 million in the first quarter of 2003, and compared to 2 million in the fourth quarter of 2003. Vascular revenues for the first quarter of 2003 include approximately $700,000 in adjustments to estimated tissue recall returns.

Orthopaedic revenues were 309,000 for the first quarter of 2004, compared to 150,000 in the first quarter of 2003, and compared to 166,000 in the fourth quarter of 2003. We're beginning to see an improvement in this area and expect that trend to continue, however, we believe that this will be a gradual improvement over the next few quarters. Net loss for the quarter ended March 31, 2004 was $7 million or 32 cents per share. This compares to a loss of 434,000 or 2 cents per share in the corresponding period in the prior-year. Cost of human tissue preservation services and products as a percentage of human tissue preservation service and product revenues, were 73 percent for the first quarter of 2004, as compared to 26 percent for the first quarter of 2003, and compared to 85 percent in the fourth quarter of 2003. We're beginning to see the initial affects of our overall processing improvement initiatives in the first quarter of this year.

We expect the gradual continuing improvement in gross margins over the next few quarters as we continue our process improvement initiatives. Cost of human tissue preservation services for the quarter ended March 31, 2004, include an increase to cost of preservation services related to lower of cost to market write-downs of $3.7 million, while the fourth quarter of 2003 included 3.7 million in such amounts. We expect that these write-downs will begin to decrease over the next few quarters. Cost of human tissue preservation services for the quarter ended March 31, 2003, included a 297,000 write-down and excluded approximately 2.3 million of estimated costs associated with distributed tissues that were previously written off.

General, administrative and marketing expenses were 10.1 million for the first quarter of 2004, compared to 11.6 million for the first quarter of 2003, and compared to 7.9 million in the fourth quarter of 2003. The fourth quarter of 2003 includes a favorable adjustment of 1.8 million to product liability losses which effectively reduced reported expenses. General, administrative and marketing expenses in the first quarter of 2004 were favorably affected as compared to the first quarter of 2003, by cost savings and lower expenses, including decreased consulting expenses associated with FDA compliance issues, lower legal fees, and lower product liability losses, partially offset by increased insurance premiums.

Now that I've commented on the financials, I would like to comment on some other matters. Litigation. Overall, we believe that we have reduced the risk associated with product liability litigation. Since the beginning of 2003, we have settled or resolved approximately 30 claims and we currently have ten lawsuits that remain open. We have four product liability lawsuits outstanding that are covered by insurance, which we believe to be sufficient. We have six product liability lawsuits outstanding that are not covered by insurance. We have set aside unfunded balance sheet reserves of 5.7 million for uninsured product liability lawsuits and matters and other legal defense costs, offset by $1.1 million in insurance recoveries.

Additionally, we have an unfunded reserve of 7.5 million for incurred but not reported losses. These reserves will be reviewed periodically and may decrease or increase in the future based on our experience. Separately, we noted earlier today that in connection with our Form S-3 filing the SEC has conducted a review of our reformed Form 10-K and 10 Q's. As a result, we're discussing with the SEC the accounting treatment for our product liability cases. We believe that the results of the review will not change our previously reported operating results. Our Form 10-Q will be delayed in order to allow us time to complete our work with the SEC regarding its review. Now I will turn it back over to Steve.

Thank you Ashley. During March, we filed supplements to our BioGlue PMA and European dossier that cover the introduction of the 2 milliliter and 5 milliliter BioGlue single use disposable syringes. BioGlue will continue to be available in the 2 milliliter, 5 milliliter and 10 milliliter cartridges, with the original dispenser device. The new syringe will make it easier for physicians and surgical nurses to use BioGlue and will eliminate the need for the resterilization of the dispenser device in these two smaller sizes. We have received confirmation that our European notifying body has recommended the BioGlue disposable syringe receive a CE mark.

We expect final decisions on the new syringe in the U.S. and in Europe sometime this month. We expect final decisions on the new syringe in the U.S. and in Europe sometime also this month. Initial sales of the disposable BioGlue syringe could then begin in late May or early June. The pricing of the 2 milliliter and 5 milliliter syringe will be the same as for the 2 milliliter and 5 milliliter cartridges. Late in April, the company attended the Aortic Surgery Symposium in New York City for a presentation on the use of BioGlue in cardiac surgery, was given by Dr. John Fehrenbacher of Indianapolis. Dr. Alrich Vaas (ph) from Paris, France presented a video on his use of BioGlue in aortic valve sparing procedures using Dacron petals. This meeting was followed by the American Association of Thoracic Surgery Meeting in Toronto, Canada which was also attended by CryoLife personnel.

Featured in our convention display were cardiac and vascular allografts. Also exhibited were BioGlue Surgical Adhesive and the new single use disposable 2 milliliter and 5 milliliter BioGlue syringes. Approximately 100 surgeons visited our convention booth and about 120 surgeons attended our hospitality suite that we hosted on Monday evening. We continue to make progress on the foam version of BioGlue and expect to file an IDE for that product in 2005. The indication that we are advocating for this version of BioGlue is remedial treatment of recalcitrant type II endoleaks. We're currently talking with two potential partners for this project.

We're also developing an IDE for BioGlue's use in dura sealing for use in brain and spinal surgeries. We expect that IDE to be submitted sometime in the fourth quarter of this year. Also in April, we completed the initial feasibility study for our biological stent made from BioGlue and cast into stents of various diameters. The feasibility study consisted of implants into the carotid arteries up four pigs. The implants were left in place for seven days and then were removed for analysis. All of the stents were opened and none of them had migrated. All of the stents were in tact. The next step is to implant stents in the carotid arteries of up to six pigs. These implants will be left in place for one month. We plan to initiate this phase of our feasibility study by the end of May.

As we mentioned in the year end conference call, we feel that the biological nature of this stent will mitigate or eliminate the edge effect that is common with some of the more rigid metal stents. We continue to feel that there will be no internal hyperplasia of the vessels due to the biological stent because of its inherent protein composition and its continuous covering of the inside of the blood vessel. In early April, we hosted our annual teaching seminar for senior cardiovascular surgery fellows from across the nation. About 25 surgical fellows from many of the most prestigious medical schools in the U.S. attended the CryoLife seminar.

The fellows program which was held in the company's learning center was focused on the treatment of aortic disease. The program consisted of didactic lectures, wetlab training and case studies. The course director for the fellows program was Dr. Ronald Elkins, Professor Ameritus, Section of Cardiovascular Surgery from the University of Oklahoma Medical School. Other faculty members were John Brown M.D., Professor of Cardiothoracic Surgery at the Indiana University School of Medicine; John Fehrenbacher M.D. from Indianapolis; and John Oswalt M.D., from Austin, Texas. Our SynerGraft Vascular Graft made from a bovine ureter that is used for AV access continues its limited clinical trial at 17 clinics in Europe.

At this time we have implanted over 125 of the model 100 AV Access SynerGraft Vascular Grafts in Europe. Five have been removed and evaluated. In May, we will begin a randomized study on the SynerGraft model number 100 AV Access device at St. George's Hospital in London, England. Interim results from this study will be used to support our IDE submission for the model number 100 in the United States. We expect to enroll a total of 60 patients in this study. It is our intention to file a supplement to our CE Mark Approval for the model number 100 vascular graft for its use in peripheral (ph) vascular reconstruction.

We estimate that there are between seven and ten million people throughout Europe who suffer from peripheral vascular disease and that approximately 100,000 to 120,000 of these receive some type of interventional procedure each year. Approximately 20,000 to 40,000 other patients undergo an amputation each year. The model number 100 vascular graft is scheduled to have an IDE filed with the FDA during the first half of next year. We estimate that the U.S. market potential for an AV access device could be from $40 to $70 million annually. I would like to give you an update on the clinical performance of our SynerGraft process allograft heart valves.

We monitor the performance of these valves at seven clinics throughout the United States. From February 17, 2000 to April 1, 2004, surgeons have implanted 2,175 SynerGraft process human valves in the United States. The longest implant is now 4.1 years. There have been 1,588 pulmonary SynerGraft process valves implanted and 587 aortic SynerGraft valves implanted. These implants are further broken down by pediatric recipients, and we define a pediatric recipient as a person less than 18 years old. There are 1,067 pediatric recipients of SynerGraft process human heart valves, and 1,117 adult recipients. In the pediatric patients, 70 percent of the implants are for right ventricular outflow track reconstruction and 30 percent are for Ross (ph) cross procedures. In the adult patients, 82 percent are for Ross procedures and 18 percent are for right ventricular outflow track reconstruction.

The actuarial freedom from explant in the pediatric group is 95 percent at two years. The actuarial freedom from explant for the adult group is 96 percent at two years. During this four year timeframe, only 11 valves have been explanted. The bottom line of this analysis is that the SynerGraft process allograft valves are comparable in performance to standard process allograft boughs. We have also evaluated the clinical performance of the SynerGraft process allograft vascular grafts. Since January of 1997, we have documented the implantation of 3,866 cryopreserved vascular allografts that use the SynerGraft process. These have been used primarily for vascular access. The first SynerGraft process vascular graft was implanted in January of 2001.

Since January 2001, we can document the implementation of 833 SynerGraft processed vascular allografts. Actuarial freedom from infection at 24 months was 98 percent. The actuarial secondary patency at 12 months was 78 percent. The patient survival rate was 83 percent at 12 months. We believe the clinical data support the conclusion that the SG process vascular grafts are comparable to the standard process vascular grafts. As we indicated during the last conference call, we have a difference of opinion with the FDA's classification of the SynerGraft process vascular grafts as a medical device. We feel that the preserved human vascular tissue should be regulated as banked human tissue.

We have gathered all of the implant information we have on SynerGraft processed human vascular tissue and compared it to vascular tissue that has been processed by our standard methods. The tissues processed by both methods have comparable function in Vivo (ph) an we are filing a request for designation with the appropriate FDA people to evaluate both processing methods. We will also request a meeting to review the implant data of 2,175 SynerGraft processed human heart valves, the longest of which has been implanted for four years.

In the frequently asked questions area, I would like to make these comments. Our BioGlue application in Japan is still under consideration by the Japanese Ministry of Health. At this time, we do not know when they may approve it or if they will ever approve it. Two, we have submitted our application for membership to the American Association of Tissue Banks and we have been inspected by their inspectors. Three, the SEC investigation is still in progress. We do not know when it will be concluded. At this time, Ashley will discuss some financial guidance going forward.

I would like to give some guidance for the second quarter and full year 2004. For the second quarter, we believe that total topline revenue will be in the range of $15.3 million to $16.6 million. We believe that revenues for the full year will be approximately $66 million to $70 million. We expect BioGlue revenues for the second quarter of 2004 to be between $8.5 million and $9 million. For the full year, we expect BioGlue revenues of between $33 million and $35 million. We expect total -- we expect tissue processing revenues for the second quarter of 2004 to be between $6.7 million and $7.5 million. For the full year, we expect tissue processing revenues of between 32 million and 34 million. Our human tissue processing revenue guidance for 2004 does not include any SynerGraft process human tissue.

We expect the second half of the year will be stronger than the first half, because of the process improvement initiatives that have been recently implemented and those we expect to implement throughout the balance of the year. As we have previously communicated, we expect that gross margins will continue to improve during the remainder of the year. We expect that general, administrative and marketing expenses to be between $42 million and $46 million for the full year, and between $10 million and $11 million for the second quarter. These amounts do not include any favorable or unfavorable adjustments that may be made to product liability or other litigation reserves. R&D expenses are expected to be approximately $4 million for the year and $1 million for the second quarter. That concludes my comments and now I will turn it back over to Steve.

At this time, I will open the conference call up for questions.

(OPERATOR INSTRUCTIONS). Tom Gunderson with Piper Jaffray.

Good morning. On BioGlue, Steve, do you think the growth that you been experiencing is coming from the current users getting more comfortable with it and using it more, or are you adding more users? You're probably doing both, but where do think most of the growth is coming from?

I think most of the growth is coming from people that have used BioGlue with success in certain types of procedures and have growing confidence in how to use the product effectively in other procedures that they might be doing.

As we go-forward on Ashley's latest guidance, you're basically flat with Q1 on BioGlue that you have reached this level, and now if we just annualize this quarter you come out with guidance. Are you being conservative or do you think there is some leveling off that will take another year to get through?

We obviously had a very good first quarter, Tom, and we want to see a trend established with continuing sequential growth before we raise our guidance. So hopefully we are just being conservative, but we really are not going to change our guidance very much for the remainder of the year until we start seeing these trends repeat themselves.

Remind me, Ashley, on the 2 and 5 milliliter syringes that have the same price as the cartridges? Does it have the same or better margins?

It should have better margins because our cost is going to be somewhat lower.

One last detail question on the SEC. Your auditor clearly went through this on the 10-K. Where there any other outside consultants that looked at how you were putting together the liability accounting?

No, there were not.

Okay. Who is the accountant?

Deloitte & Touche.

Thank you.

(OPERATOR INSTRUCTIONS). Tim Nelson (ph) with Piper Jaffray.

Double-team today. Ashley could you help me understand the gross margin calculation here? It seems to me you've got some much better margins this quarter than last sequentially with improvements in both prior categories. According to my calculations your BioGlue margins went up from -- for your product sales, as you call it, margin went from 74 to 78 given the numbers in the press release. What accounts for that improvement? Did you have a price increase or is it volume related?

It is due to both, Tim. We did actually have a price increase for BioGlue, I believe it was late last year. So we're seeing the effects of that in the first quarter of this year. On the tissue processing side, we're starting to see, although we are still -- all of the gross margins are still negative in the tissue processing business, we're starting to see those losses narrow, and hopefully and eventually at some point this year we would expect to see that program hopefully become profitable at some point, at least from a gross margin standpoint. In regards to the BioGlue, just to give you a frame of reference, the business was up 33 percent year-over-year for BioGlue, and about 20 percent of that was related to the volume and the remaining portion of that was related to price increases.

Okay. So you would expect a similar level of margins for the rest of the year, given the flat guidance on revenue growth. So 78 percent is a pretty good number on product sales for the rest of the year?

I think if BioGlue continues to increase or stay at the same level, you're probably looking at somewhere around that 78 percent. We could do a little bit better with the syringes coming on also, somewhere in that neighborhood.

Great. On the tissue processing side, the negative margins are clearly a function of yields. Can you give us any more color on how yields are improving? Obviously you had some improvement, a significant improvement from last quarter and I was wondering how you expect that to look going forward?

We are still early in the process of implementing these process improvement initiatives. We certainly expect to see an improvement again in the second quarter for the tissue processing margins, but I really don't want to give any specific guidance there until we have implemented some more of these process improvement initiatives and have had time to analyze the effect that it has had on our processing yields. But I can tell you that we're pretty confident that the numbers are going to increase in the second quarter of the year and probably throughout the remainder of the year.

Good. Finally, on procurement, you didn't mention much about that this call. Can you give us some handle on how that is going in terms of number of hearts procured, in a trend there?

I think our procurement has been relatively constant over the last few months. We are intentionally not going out and trying to aggressively increase procurement while we have -- while we are working through the yield issues on the tissue processing side. I would expect that if the yields start improving as we believe they are going to throughout the remainder of the year, that we could potentially be going out and actively trying to increase our procurement. But right now it's been relatively flat over the last few months. With that being said, Tim even at the current levels, we believe that we have more than enough procurement to meet our guidance that we have thrown out there. It is just a function of working on the yields.

In terms of -- it's flat the last couple of months, how about the last couple of quarters? Have there been any trends there?

It might be down slightly, you know, over the last couple of quarters, but nothing that is alarming to us at all.

Great. Good progress.

At this time I'm showing no further questions. I would like to turn the floor back over to management for any further comments.

We don't have any further comments. We just look forward to seeing you next quarter. Thank you for joining us.

Thank you, ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.