Artivion Inc (AORT) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CryoLife second quarter 2004 financial results conference call. At this time all participants have been placed on a listen-only mode. And the floor will opened for questions following the presentation. It is now my pleasure to turn the floor over to your host Mr. Steve Anderson, CEO of CryoLife. Sir you may begin.

Thank you. Good morning, everyone. This is Steve Anderson, CryoLife's CEO. And I would like to welcome you to CryoLife's second-quarter 2004 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 review today's press release and the Company's operating results for the second quarter of 2004 and also for the first half of 2004. He will comment on the operating results by product or service area.

He'll also comment on the status of various products liability lawsuits. I will comment on the Company's operating results in Europe and provide an update on the clinical program for the SynerGraft Model 100 AV access device which is currently in use for hemodialysis in Europe. I'll comment on the new product time tables for our biological vascular stent, bio-disc nucleus pulposus replacement and BioFoam for use in trauma situations with the Armed Forces. I will also comment on our attendance at the September European Academy of Cardiovascular and Thoracic Surgery Meeting and the Professor [Yokud] Tissue Meetings that we will be attending in [Light Saga] and Florence respectively. After my comments Ashley will return and will give some guidance for the remainder of the year. At this time Ashley will discuss this morning's press release.

Thanks, Steve. To comply with the Safe Harbor requirements of 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 involve risk 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 risk and uncertainties is contained from time to time in the Company's SEC filings including the Risk Factor Section of our form 10-K for the year ended December 31, 2003 and subsequent SEC filings. We're continuing to see the results of our process improvement and cost control initiatives during the second quarter. Although our revenues for the second quarter were at the lower end of our guidance for the quarter we showed significant improvements in our processing as evidenced by the continuing improvement in our gross margins and the decrease in our quarterly pre-tax loss from approximately $7 million in the last 2 quarters to less than 5 million in the second quarter of 2004.

We expect that margins will continue to increase over the next few quarters and that our operating losses will continue to decrease. Total revenues for the quarter ended June 30, 2004 were 15.3 million compared to 15.7 million in the corresponding period in the prior year. Total revenues in the second quarter of 2003 include revenues derived from the shipment of SynerGraft processed allograft tissues which carry a premium as compared to traditionally processed tissues. Total revenues for the second quarter of 2004 do not have revenues from SynerGraft allograft tissues.

Total revenues for the 6 months ended June 30, 2004 were 30.4 million compared to 31.6 million in the corresponding period in the prior year. Total revenues for the 6 months ended June 30, 2003 include approximately $800,000 in adjustments to estimated recall returns which effectively increased reported revenue in 2003. Total revenues in 2003 also include revenues derived from the shipment of SynerGraft processed allograft tissues which carry a premium as compared to traditionally processed tissues. Again total revenues for 2004 do not include such amounts.

BioGlue revenues were $9 million for the quarter ended June 30, 2004 compared to 6.8 million in the corresponding period in 2003. BioGlue revenues in the second quarter increased 31% over the second quarter of 2003. BioGlue revenues were 17.6 million for the 6 months ended June 30, 2004 compared to 13.3 million in the corresponding period in 2003. BioGlue revenues for the 6 months ended June 30, 2004 increased 32% over the corresponding period in 2003.

Total tissue processing revenues were 6.1 million in the second quarter of 2004 compared to 8.6 million in the second quarter of 2003. Tissue processing revenues for the second quarter of 2003 include premium revenues derived from the distribution of SynerGraft processed allograft tissues. Total tissue processing revenues were 12.3 million for the 6 months ended June 30, 2004 compared to 17.7 million in 2003. Total tissue processing revenues for the 6 months in 2004 - - excuse me in 2003 include approximately $800,000 related to adjustments to estimated tissue recall returns and premium revenues derived from the distribution of SynerGraft processed allograft tissues.

There are currently no restrictions preventing the Company from processing and distributing any tissues that we have historically processed and distributed with the exception of SynerGraft processed allograft tissues. Cardiac revenues were 2.8 million for the second quarter of 2004 compared to 5 million in the second quarter of 2003. Cardiac revenues were 6.3 million for the 6 month period of 2004 compared to 9.8 million in 2003. Vascular revenues were 2.6 million for the second quarter of 2004 compared to 3.3 million in the second quarter of '03. Vascular revenues were 5.1 million for the 6 month period in '04 compared to 7.6 million in 2003.

Vascular revenues for the 6 month period in 2003 include approximately $700,000 in adjustments to estimated tissue recall returns. Orthopedic revenues were 574,000 for the second quarter of 2004 compared to 280,000 in the second quarter of 2003 and compared to 309,000 in the first quarter of 2004. We continue to see an improvement in this area. Orthopedic revenues were 883,000 for the 6 month period in 2004 compared to 430,000 in 2003. Net loss for the quarter ended June 30, 2004 was 3.4 million or 14 cents per share.

This compares to a loss of 19.9 million or $1.01 per share in the corresponding period in the prior year. Net loss was favorably affected by a $1.4 million tax refund. Net loss for the 6 months ended June 30, 2004 was $10.4 million or 46 cents per share this compares to a loss of 20.4 million or $1.04 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 62% for the second quarter of 2004 as compared to 46% for the second quarter of 2003 and compared to 73% in the first quarter of 2004.

We expect a gradual continuing improvement in cost of services and products over the next few quarters as we continue our process improvement initiatives. Costs of human tissue preservation services for the quarter ended June 30, 2004 include an increase to cost of preservation services related to lower of cost to market writedowns of $1.2 million while the first quarter of 2004 included $3.7 million in such amounts. We expect that these writedowns will continue to decrease over the next few quarters as we continue our process improvement program. Cost of human tissue preservation services for the quarter ended June 30, 2003 included a 1.1 million lower of cost to market writedown and excluded approximately $1 million of estimated costs associated with distributed tissues that were previously written off.

General administrative and marketing expenses were $9.7 million for the second quarter of 2004 compared to 23.5 million for the second quarter of 2003. The second quarter of 2003 included accruals of approximately $13.7 million for product liability claims in excess of insurance and estimated product liability claims incurred but not reported. The second quarter of 2004 includes a favorable adjustment of $800,000 related to product liability losses. General administrative and marketing expenses in the second quarter of 2004 were favorably affected as compared to the second 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. Litigation, we continue to make significant progress on outstanding litigation.

Overall we believe that we have reduced the risk associated with product liability litigation. We have 6 product liability lawsuits outstanding that are not covered by insurance. We have recorded unfunded balance sheet reserves of $5.6 million for uninsured product liability lawsuits and claims and other legal defense costs offset by 1.2 million in anticipated insurance recoveries. Additionally we have an unfunded reserve of $8 million for incurred but not reported losses offset by 1.4 million in estimated insurance recoveries.

These reserves will be reviewed periodically and may decrease or increase in the future based on our experience. You may refer to our 10-Q for a complete discussion of outstanding litigation. Now I'll turn it back over to Steve.

Europe and other foreign markets continue to be a growth area for the Company. Sales in Europe, the Middle East and Africa increased 27% in Q2 of 2004 and 22% for the first half of 2004 over 2003. BioGlue sales in the region increased 20% in Q2 2004 and 20% in the first 6 months over the prior year. Sales of the SynerGraft model 100 AV access device increased 49% in the first half and is making solid progress is being made in supporting the clinical efficacy of this biological graft as an AV access device for patients undergoing hemodialysis.

We have shipped 490 Model 100 grafts since 2001. 300 of these have been shipped since January 2003. The model Model 100 vascular graft for AV access has been implanted in patients in 7 countries and there are currently 10 implanting centers in the U.K. The SynerGraft Model 100 is the only decellularized vascular graft that is currently on the market. The success of this vascular graft continues to reinforce the value of CryoLife's tissue engineering program. Currently there are approximately 140 documented implants in the U.K., Italy, the Netherlands and Denmark.

Based on data submitted in the Clinical Registry, the graft demonstrates an overall patency of 75% at 1 year and a 96% freedom from infection at 1 year after implantation. These results are highly encouraging given that the intended patient population which is prone to infection due to repeated needle punctures used for dialysis. A prospective randomized study is on target at St. George’s Hospital in London with 8 patients of the planned 60 patients enrolled. This study will provide a direct comparison of clinical outcomes versus PTFE, the most commonly used synthetic vascular graft material.

We remain on schedule to submit an IDE to the FDA regarding the SynerGraft AV access device during mid 2005. In the United States there are about 500,00 cases each year of end stage renal disease. And about 50% of these cases are on dialysis each year. According to data available to us, this market grows about 5% per year. CryoLife will be attending the Annual Congress of the European Association For Cardio-Thoracic Surgery in Leipzig, Germany in September. Immediately following the EACTS, CryoLife will participate actively in the Advances in Tissue Engineering and Biology of Heart Valves Meeting being organized under the direction of Professor Magdi Yacoub in Florence Italy.

CryoLife scientists and clinical researchers will present 2 oral and 6 poster presentations on the use of the SynerGraft technology in animal and human tissues. The abstracts that we have submitted include human implant results for the SynerGraft heart valves made from porcine tissues, SynerGraft vascular grafts made from bovine ureters and SynerGraft processed human vascular grafts and heart valves. The abstracts report on clinical implants of 19 SynerGraft vascular grafts at the Oxford Transplant Center, Churchill Hospital and 19 SynerGraft porcine heart valves implanted at 8 institutions in Europe and Australia.

CryoLife management continues to believe that we are the only Company in the world that has human implant experience with tissue engineered vascular grafts and heart valves. We submitted our meeting request for the reclassification of SynerGraft processed vascular grafts on June 30 with the FDA ombudsman. As you'll recollect in December 2003, the FDA made the decision that these grafts were devices and that they needed to have a 510-K submission. We were of the opinion then and are now that SG processed vascular grafts are banked human tissues and should be regulated as such under Rule 1270.

There have been a total of 833 SynerGraft processed vascular grafts implanted. The request for designation outlines the clinical experience of 136 of these processed vascular grafts that were implanted from January '01 to September '03 and compares their in vivo performance against standard processed human vascular grafts. The meeting with FDA on this issue will take place in September. Accompanying CryoLife's regulatory and clinical research staff will be 2 implanting physicians. 1 a cardiovascular surgeon and 1 a vascular surgeon.

Each will comment on their clinical results using both the SynerGraft processed tissues as compared with tissues processed with standard technology. As you will remember from previous conference calls, our scientists are working with a new biological vascular stent that is made from our protein hydrogel technology. At an earlier conference call, we reported on 6 initial implants of this material into the carotid arteries of pigs. All of these implants were removed after 1 week of implant and were patent. It was apparent to our scientists that the stents had begun to endothelialize.

There was no evidence of these biological stents causing an edge effect and there was not observable [intimal] hyperplasia. Within the next several weeks, we will implant similar stents into the carotid arteries of an additional 6 pigs. These implants will remain in place for 2 months and then will be excised and examined. It is important to note that we have developed a unique delivery device for these stents that applies the stents in a liquid form to the inside of the vessel. In effect, we are paving the luminal surface of the vessel.

The hydrogel polymer sets up in about 2 minutes after being applied to the inner surface of the vessel and seals the area where the lesion or the plaque deposit was prior to angioplasty. We will report on these additional stent implants during the October conference call. Data available to us indicates that the world wide peripheral vascular stent market is about 600 million in 2004. We continue to be on time with the development of our nucleus pulposus replacement. We have recently completed all the mechanical testing that is required for this implant and that is 10 million cycles. And the material was found to be unaffected and intact.

Our first human implant is targeted for late 2004 or early '05 in Europe and we anticipate filing an IDE with the FDA for this nucleus pulposus replacement early in 2005. We are also in discussions with a potential partner for our BioFoam product. We have identified an area of potential use for stopping and/or preventing endoleaks in endovascular AAA vascular grafts. These discussions are in their early stages but would provide us with a ready market for this variation of BioGlue.

As we discussed in a recent press release, the United States House of Representatives and the United States Senate have passed the 2005 Defense Appropriations Conference Report which includes $1 million for the development of BioFoam. This bill was signed by President Bush about an hour ago at the White House. The foam product is expected to fill voids and provides for hemostasis. We feel that BioFoam could be ideal for the treatment of penetrating wounds such as those incurred on the battle field. Domestic BioGlue sales increased 32% in the first half of 2004 versus the first half of 2003. Total BioGlue sales now represent 59% of the Company's revenues.

We appear to be on track to reach 35 million in total yearly BioGlue sales both domestic and international which is up from $28 million for fiscal 2003. As you'll recollect from previous conference calls, the approved uses of BioGlue in international markets are much broader than they are in the United States. In international markets, BioGlue is approved for use in the sealing of dura mater for brain and spinal surgery, for all soft tissue repair and for the sealing of air leaks in lungs and other pulmonary indications. In 2005 we will be filing an IDE with the FDA for the use of BioGlue in durasealing for spinal and brain surgery.

As you've probably ascertained from my comments today the Company's product development focus has clearly expanded from the preservation of tissues to include the development of our extensive biomaterials product base that is centered around our BioGlue surgical sealant and our protein hydrogel technology. The protein hydrogel technology pipeline now includes BioFoam for hemostasis for penetrating wounds, the nucleus pulposus replacement and the biological vascular stent. That concludes my comments and now I'll turn the call back over to Ashley for some financial guidance.

I'd like to give you some guidance for the third quarter and full year of 2004. For the third quarter we believe that total top line revenue will be in the range of 16 and $18 million. We believe that revenues the for the full year will be approximately 64-$67 million. And we expect BioGlue revenues for the third quarter of 2004 to be between $8.6 and $9 million. For the full year we expect BioGlue revenues of between 34 and 36 million. We expect tissue processing revenues for the third quarter of 2004 to be between 7 million and $8.5 million.

For the full year we expect tissue processing revenues of between 28 and 30 million. We expect the second half of 2004 will be stronger than the first half because of the process and improvement initiatives that have been recently implemented and those we expect to implement throughout the balance of the year. We believe that we can achieve increased revenue in the second half as evidenced in the fact our yields have improved and that we have more tissue available to distribute. Additionally effective July 1 we have increased our processing fees for cardiac and vascular tissue which should assist in improving operating results going forward.

As we have previously communicated, we expect that gross margins will continue to improve during the remainder of the year. We believe that the tissue processing operations will get to break even on a gross margin basis during 2004, potentially as early as the third quarter. And will become positive during 2005. We are working on several initiatives scheduled to be implemented late this year or early next year that we believe will have a positive effect on our current gross margins. We expect general and administrative expenses to be between 40 and $42 million for the full year and between 10 and 11 million for the third quarter.

These amounts do not reflect any favorable or unfavorable adjustments that may be made to product liability or other litigation reserves none of which are currently anticipated. R&D expenses are expected to be approximately $4 million for the year and approximately $1 million for the third quarter. We are also exploring opportunities to strengthen the financial position of the Company primarily through potential credit facilities. We will keep you updated as appropriate. That concludes my comments. And I'll turn it back over to Steve.

At this time I'll open up the conference call for questions

Thank you, gentleman. The floor is now open for questions. If you do have a question please press star 1 on your touchtone phone. If at any point your questions have been answered you may remove yourself from the queue by pressing the pound key. We do ask that when you pose your question that you please pick up the handset to provide optimum sound quality. Once again, ladies and gentlemen, that is star 1 to ask a question. Our first question is coming from Tim Nelson of Piper Jaffray.

Hi, guys. Great progress.

Good morning. Thanks, Tim.

Could you comment a little bit on the sequential decline in valve sales - - tissue process valve sales here from Q2 to Q1? Is that a product availability issue a procurement issue?

It's a product availability issue. It's certainly not a procurement issue. Our procurement across the board has been relatively constant over the last year. So really it's just a timing issue of when the tissues are made available, make it through our quality system and are made available for distribution.

And you usually have a huge Q3 in process tissue valves here. I'm just a bit concerned given that sequential decline that availability might not be there for that big surge you usually have in the summer. Is that a concern?

Well we've given you our guidance for total tissue processing revenues in the third quarter and we certainly expect that all 3 categories of tissue processing revenues will be up in the third quarter.

Okay. Good progress on the gross margins here in tissue processing. You talk about going positive. Allow us to dream a little bit and say, can you give us - - what's your goal over the next year or 2 for those margin ranges on tissue processing? What can it be?

Well we obviously - - we're going to give a lot more - - well we're going to give our initial guidance for 2005 at our next quarterly conference call. Our primary goal obviously is to get the tissue processing business to break even on a stand alone basis and profitable on a stand alone basis. I think there's enough information out there with our current financials for one to figure out exactly where our tissue processing gross margins needs to be in order for the Company to be break even and that number is somewhere between 30% and 40% based on our existing business. So I think that is probably a near term goal of ours is to get to that first and then beyond that to get the tissue processing business in and of itself back to break even and profitable. But we'll have more information about where we expect to be in our next conference call.

Great. And then on the nice little $1 million bolus you got here from the government. When does that come in the door? And how will you account for that?

That won't be available until January, we've been told.

Okay. So it's next year's. And will that be a direct offset to things you were planning to already do? Or is that an incremental program?

I think that it's going to be an incremental program.

Okay. Good. That's all I have. I'll get back in queue.

Thanks.

This is all the time we have for questions today. I would like to turn the floor back over to the speakers for closing comments.

Thank you for joining us and we look forward to talking with you at the next conference call after the third quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day. Thank you.