Artivion Inc (AORT) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the CryoLife Corporation second quarter earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. Steve Anderson, President and CEO of CryoLife Corporation. Thank you, Mr. Anderson, you may begin.

Thank you, operator. Good morning, everyone, and welcome to CryoLife's second quarter 2006 conference call. This is Steve Anderson, the company's CEO, and with me today is Ashley Lee, CryoLife's Executive Vice President, COO, and CFO. This morning's press release outlined an excellent quarter for CryoLife. Q2 revenues were up 21% over revenues for the same period in 2005. The second quarter tissue processing revenues were up 38% over the first quarter of 2005. Revenues for the first half of 2006 were up 15% over the same period for 2005. We are extremely pleased to report that BioGlue sales for Q2 exceeded $10 million for the all-time highest quarterly sales for BioGlue since the product was released in the U.S. in early 2002. The company also made money from operations during the quarter for the first time since the second quarter of 2002. Ashley will get into more details about the quarters financial performance shortly.

The agenda for today's conference call is as follows. Ashley will review the company's significantly improved financial performance for the second quarter and for the first half of 2006. He will comment on our progress in identifying a partner for BioDisc, our nucleus pulposus replacement, and he will also comment on the recent settlements the company has made in relation to certain products liability litigation. I will comment on discussions regarding a license agreement with the Cleveland Clinic for their technology surrounding a combination aortic and mitral allograft valve that would be used to treat patients with endocarditis of both valves. I will comment on the progress the company has made regarding the collection of certain additional implant data that the FDA has requested regarding the SynerGraft pulmonary allograft valve.

I will also comment on a very positive paper on SynerGraft process allografts that was co-authored by Dr. Kenton Zehr of the Mayo clinic and published in the July 20, '06 issue of the Journal of Thoracic and Cardiovascular Surgery. Dr. Zehr has been a frequent CryoLife consultant, but this paper was not sponsored by CryoLife. That will be followed by a discussion of the timeframe that we see developing for potential regulatory approval of our 510(K) application for this SynerGraft process allograft valve. I will also bring you up to date on the progress we have made with the BioDisc study that is being conducted in Aberdeen, Scotland. And we will give you the anticipated timetable for the company's application for a CE Mark for the BioDisc nucleus pulposus replacement. After my comments have been completed, Ashley will return to give some financial guidance for the rest of 2006. At this time, Ashley will discuss this morning's press release.

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 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 risk and uncertainties is contained from time to time in the company's SEC filings, including the risk factors section of our Form 10(K) for the year ended December 31, 2005, and subsequent SEC filings and in the press release that we released this morning.

This morning we reported that the company has posted a profit during the second quarter of 2006. It's obviously a huge milestone for the company and we look forward to continued progress in the future. Revenues for the second quarter of 2006 increased 21% to 20.8 million, compared to 17.2 million in the second quarter of 2005. Net income in the second quarter of 2006 was $217,000, or $0.00 per basic and fully diluted common share, compared to a net loss of 14.4 million or $0.61 per basic and fully diluted common share in the second quarter of 2005.

Excluding a $403,000 non-cash charge related to stock-based compensation expense and an $800,000 gain related to an adjustment of reserves for product liability losses, the non-GAAP adjusted net loss in the second quarter of 2006 was $180,000, or $0.02 per basic and fully diluted common share. Excluding an $11.8 million charge associated with the settlement of the shareholder class action suit and an $800,000 benefit related to an adjustment of reserves for product liability losses, non-GAAP adjusted net loss in the second quarter of 2005 was $3.4 million, or $0.15 per basic and fully diluted common share. Revenues for the first six months of 2006 increased 15% to 40.2 million, compared to 34.9 million in the first six months of 2005. The net loss in the first six months of 2006 was $1.6 million, or $0.08 per basic and fully diluted common share, Compared to a net loss of 15.7 million, or $0.68 per basic and fully diluted common share in the first six months of 2005.

Excluding a $647,000 non-cash charge related to stock-based compensation expense and a $670,000 gain related to an adjustment of reserves for product liability losses, the non-GAAP adjusted net loss in the first six months of 2006 was $1.6 million, or $0.08 per basic and fully diluted common share. Excluding an $11.8 million charge associated with the settlement of the shareholder class action suit and a $1.1 million benefit related to an adjustment of reserves for product liability and other legal losses, non-GAAP adjusted net loss in the first six months of 2005 was 5.1 million or $0.23 per basic and fully diluted common share.

BioGlue sales in the second quarter of 2006 increased 8% to 10.3 million, compared to 9.6 million in the same period in 2005. The increase was attributable to an increase in BioGlue sales volume, which increased revenues by 4%, and an increase in average selling prices, which increased revenues by 4%. U.S. BioGlue sales were 7.5 million and 7.1 million in the second quarter of 2006 and 2005 respectively.

International BioGlue sales were 2.8 million and 2.5 million in the second quarter of 2006 and 2005 respectively. BioGlue sales in the first six months of 2006 increased 3% to 20.1 million compared to 19.4 million in the same period in 2005. The increase was primarily attributable to an increase in average selling prices, which increased revenues by 3%. U.S. BioGlue sales were 14.9 million and 14.8 million in the first six months of 2006 and 2005 respectively. International BioGlue sales were 5.2 million and 4.6 million in the first six months of 2006 and 2005 respectively. We indicated in our previous conference call that procurement trends were favorable in that we expected that to be reflected in our top-line. We are continuing to see the results of favorable procurement in the second quarter of 2006. Tissue processing revenues in the second quarter of 2006 increased 38% to 10.2 million compared to 7.4 million in the second quarter of 2005.

Tissue processing revenues for the first six months of 2006 increased 31% to 19.5 million compared to 14.9 million in the first half of 2005. Tissue processing revenues increased primarily due to an increase in tissue procurement and an improvement in processing yields, which resulted in an increased number of allografts available for distribution and price increases. Procurement trends continue to be favorable. You may refer to our Form 10(Q), which we plan to file by the end of the week, for more information about procurement trends. Now I'd like to talk about specific tissue processing product lines.

Cardiac revenues were 3.8 million for the second quarter of 2006, compared to 3.5 million in the second quarter of 2005, an increase of 8%. The increase in cardiac revenues was primarily driven by fee increases, which increased revenues by 8%. Although we saw an increase of 7% in cardiac units shipped in 2006, we experienced a product mix shift in 2006, which resulted in more, lower priced cardiac patches being shipped and fewer higher priced valves being shipped.

Cardiac revenues were 7.4 million for the first six months of 2006, compared to 7.3 million in the first six months of 2005, an increase of 1%. The 1% increase in revenues was due to an increase in service fees, which increased revenues by 4%, partially offset by a decrease in volume, which reduced revenues by 3%. Although we saw an increase of 4% in cardiac units shipped in the first half of 2006, we experienced a product mix shift, which resulted in more lower priced cardiac patches being shipped and fewer higher priced valves being shipped.

Vascular revenues were $4.6 million for the second quarter of 2006 compared to 2.7 million in the second quarter of 2005, an increase of 66%. The increase in vascular revenues was driven by fee increases and a 44% increase in vascular unit shipments, which increased the vascular revenues by 55% in the second quarter of 2006, as compared to the same period in 2005. The increase in unit shipments is the result of the strengthening procurement trends and an increase in yields.

Vascular revenues were 8.6 million for the first six months of 2006, compared to 5.5 million in the first six months of 2005, an increase of 58%. The increase in vascular revenues was driven by fee increases and a 39% increase in vascular unit shipments, which increased vascular revenues by 49% in the first six months of 2006, as compared to the same period in 2005. The increase in unit shipments is a result of the strengthening procurement trends and an increase in yields. Orthopedic revenues were 1.8 million for the second quarter of 2006, compared to 1.1 million in the second quarter of 2005, an increase of 68%. Unit shipments of orthopedic tissue increased 40%, which increased revenues by 56% in the second quarter of 2006, compared to the second quarter of 2005. Orthopedic revenues were 3.6 million for the first six months of 2006, compared to 2.2 million in the first six months of 2005, an increase of 64%. Unit shipments of orthopedic tissue increased 36%, which increased revenues by 55% in the first six months of 2006, compared to the first six months of 2005.

Again, the increase in unit shipments reflects improving procurement trends and improving tissue yields. For a more detailed discussion of the factors driving revenues, please refer to our Form 10(Q) for the quarter ended June 30, 2006, which we expect to file by the end of the week.

Total product and tissue processing gross margins in the second quarter of 2006 were 56% compared to 53% in the second quarter of 2005. Tissue processing gross margins in the second quarter of 2006 were 31%, compared to 17% in the second quarter of 2005. Tissue processing gross margins improved in 2006, compared to 2005, primarily as a result of price increases and improvements in the company's tissue processing yields. Total product and tissue processing gross margins in the first six months of 2006 were 56%, compared to 54% in the first six months of 2005. Tissue processing gross margins in the first six months of 2006 were 29%, compared to 20% in the first six months of 2005. Again, tissue processing gross margins improved in 2006 compared to 2005 primarily as a result of price increases and improvements in the company's tissue processing yields. We expect continued improvement in gross margins on tissue processing services during 2006.

General, administrative and marketing expenses in the second quarter of 2006 were 10.2 million, compared to 21.6 million in the second quarter of 2005. Excluding a $403,000 charge, related to stock-based compensation expense, and a benefit of $800,000, related to an adjustment of reserves for product liability losses, non-GAAP second quarter 2006 G&A expenses were $10.6 million. Excluding an $11.8 million charge associated with the settlement of the shareholder class action suit and an $800,000 benefit related to an adjustment of reserves for product liability losses, non-GAAP second quarter of 2005 G&A expenses were $10.6 million.

General, administrative and marketing expenses in the first six months of 2006 were 21.6 million, compared to 31.6 million in the first six months of 2005. Excluding a $647,000 charge, related to stock-based compensation expense, and a $670,000 gain, related to an adjustment of reserves for product liability losses, non-GAAP general, administrative and marketing expenses for the first six months of 2006 were $21.6 million.

Excluding an $11.8 million charge, associated with the settlement of the shareholder class action suit, and a $1.1 million benefit, related to an adjustment of reserves for product liability and other legal losses, non-GAAP G&A expenses for the first six months of 2005 were $21 million. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations.

During the second quarter our cash and securities balances decreased from 11.3 million at March 31, 2006, to 8.3 million at June 30, 2006. We had some rather large outlays of cash during the second quarter. We made our annual payment for BioGlue royalties and the down payments for our insurance renewals. We also upgraded our SAP software system. We settled three lawsuits during the quarter, leaving us with three outstanding lawsuits. We paid a total of $2.4 million for all of these items combined during the quarter. We believe that we will not need to finance in order to fund the day-to-day operations of the company.

In early January we announced that we had engaged Piper Jaffray to assist the board and management in identifying and evaluating potential strategies available to the company. This is a comprehensive process that is ongoing and we cannot talk about any specifics of the process. When the Board of Directors has determined an appropriate course of action, we will communicate that information to you. As we have previously mentioned, we are in the process of evaluating potential partners to commercialize BioDisc in international markets. We have met with a couple of organizations and are currently scheduled to meet with two other organizations. This process is in its early stages and we will have more to report in the future. We are also looking at potential partners to commercialize BioGlue in medical specialties that are not core to our cardiac, vascular and orthopedic businesses. That's my comments for now and now I will turn it back over to Steve.

Over the past six to nine months, the company has been discussing a license agreement with the Cleveland Clinic regarding certain technologies they have for the transplantation of a combination aortic and mitral allograft heart valve. This combination allograft heart valve, the so-called combo heart valve, would be used primarily in situations where a patient has developed a case of endocarditis that involves both the aortic and the mitral valves. In situations where a patient has developed a case of valvular endocarditis, prosthetic heart valves, be they mechanical or biologic, have not proven to be as effective as have allograft heart valves. This is primarily because when bacteria invade the synthetic material used in the manufacture of prosthetic valves, it can result in antibiotics not being as effective as they usually are. Allograft valves have been proven to be far more effective in these situations. In many cases of endocarditis, allograft heart valves truly are life saving devices.

Upon completion of a license agreement, the company and Dr. Jose Navia, the inventor of this technology, in conjunction with the Cleveland Clinic, plan to develop and conduct a pilot study consisting of four patients over the next six to nine months. After these patients have been studied and the feasibility of the surgical technique and design concept has been determined, then this technology could be expanded for more general use. This proprietary technology would help strengthen the intellectual property position of the company in the area of cardiac reconstruction, where CryoLife is a world leader.

The company has had ongoing discussions with FDA regarding the additional data supporting the company's 510(K) application for our CryoValue SG decellularized human pulmonary heart valves. We have agreed to supply the agency with additional followup data on a minimum of 300 patients who have previously received SynerGraft processed pulmonary heart valves. 150 of these patients will be Ross procedure patients and 150 of the patients will be right ventricular outflow track reconstruction patients. These patients will come from seven separate clinics throughout the United States. These retrospective patients will be required to have had an echo examination at least one year postoperatively and also a general followup within the past year.

The control group for this evaluation will be the World Literature on cryopreserved allograft heart valves including data from CryoLife's multi-center clinical data registry for our conventionally processed CryoValve. The company has also agreed to perform certain bench tests comparing the CryoValve SG to CryoValve controls. We submitted some of this additional data and clarifying information to the agency on July 21. We are targeting to complete the gathering of the patient data and the bench test some time in the fourth quarter and to submit a report to the FDA prior to the end of the year. The FDA is technically required to respond to 510(K) notifications in 90 days. Therefore, if the FDA's response to our submission is favorable, clearance of the CryoValve SG pulmonary valve could take place as early as the end of the first quarter of 2007.

In the July 2006 issue of the Journal of Thoracic and Cardiovascular Surgery, Dr. Kenton Zehr of the Mayo Clinic reports on the histopathologic evaluation of an ex-planted SynerGraft processed human aortic valve that was removed due to the patient undergoing a heart transplant procedure two years after implantation of the valve. The report indicated that endothelial and smooth muscle cell populations were present and that the tissue had minimal inflammation and calcification. Since co-authoring this paper, Dr. Zehr has left the Mayo Clinic and is now Chairman of the Department of Cardiovascular Surgery at the University of Pittsburgh. For those of you not familiar with the SynerGraft technology, I will give you a brief outline of the technology.

The SynerGraft tissue processing technology consists of a hypotonic cell lysis and a series of enzymatic washing steps that remove cells from the tissues, both human and animas. In the U.S. approximately 1600 human pulmonary heart valves treated with the SynerGraft decellerrization technology have been implanted for up to six years. Our clinical study for BioDisc, the company's nucleus pulposus replacement, has been completed.

The final patient was implanted on July 19. The longest implant has been in for about 11 months. Our plan is to submit the implant and followup data in support of a CE Mark application towards the end of this year. We are hopeful that our CE Mark will be granted late in the first quarter of 2007. If the CE Mark is granted, we intend to develop a larger clinical registry based on four to five clinics in the UK and Germany and we will target another 150 patients. There will be 100 BioDisc patients and 50 discectomy only patients that will be followed for two years post implant. In reports available to us, we feel that the worldwide market for a nucleus pulposus replacement is about $800 million annually. As Ashley has previously stated, we have been engaged in discussions with several companies in the field of spinal repair and we may be able to announce a European partner for BioDisc about the same time as we submit our application for the CE Mark.

Recently the surgeon who was conducting our BioDisc clinical trial, Mr. Douglas Wardlaw, has been asked to author a chapter in a new spine surgery book on BioDisc's uses and implant techniques. We are assisting Mr. Wardlaw in the accumulation of the data that is needed for this discussion of the BioDisc.

On June 30th we filed a 510(K) submission with the FDA for a decellularized surgical patch that is made from bovine pericardium. We call this product ProPatch. ProPatch would be used for repairing soft tissue injuries like rotator cuffs. We are hopeful that we can obtain clearance for this new device as early as September of this year. The sales force that will handle this product initially will be our orthopedic sales force. We are planning a 50 patient, multi-center clinical evaluation to support our marketing efforts for this product to commence following product clearance.

From reports available to us, we estimate that the United States market for a surgical patch for rotator cuff procedures is about $90 million a year. That concludes my comments and now I will turn the call back over to Ashley for some financial and sales guidance for the rest of the year.

Thanks, Steve. The company expects tissue processing and product revenues to be between 80 and $82 million for the full year of 2006. We expect BioGlue revenues to be between 39 and $40 million and tissue processing revenues to be between 40 and $41 million for the full year of 2006. Bioprosthetic, cardiovascular and vascular device revenues are expected to be approximately $1 million in 2006. There are no other changes to our full year guidance.

We will attempt to keep you updated on significant corporate developments that are likely to affect the outlook for the company, but can make no guarantee that we will in fact be able to identify and communicate such factors to you on a timely basis. And we undertake no obligation to update our guidance or other forward-looking statements. That concludes my comments and now I will turn it back over to Steve.

At this time we will open up the call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Raj Denhoy with Piper Jaffray.

Good morning.

Good morning.

A couple questions. Looking at the cash situation, you mentioned it was down 3 million and you outlined sort of what the big four issues were there. The last one, the three settled lawsuits. Are you in a position to tell us what those were settled for?

Collectively a little more than $0.5 million.

So the three that are still outstanding, is it fair to say that those would probably be in that range as well?

It's hard to say. Some of them are very early in discovery, Raj, but based on the knowledge that we have at this point, none of them cause us any great deal of concern.

And those three are the last of the lawsuits stemming back from the events of 2002. Correct?

That's correct.

Just had a couple questions on the BioDisc front. Is there a possibility we might see some data from that product at NAS coming up here in September?

Yes, there probably will be.

But it hasn't been confirmed yet?

My recollection is that Wardlaw might be giving a paper.

Just on the price front, you mentioned it in most of the product lines that there was some price increase. Can you sort of back out -- you guys obviously grew the top-line pretty handsomely this quarter. But of that, really, how much was price overall in the quarter?

Of the 21% increase overall, Raj, I believe that around 6% was price and 15% was volume.

Okay. Still very, very good volume growth?

We had great volume growth and I believe that we are going to be filing our Q later today, in fact, and there is a lot more information contained in the 10(Q) about the individual product lines.

Okay. One last one and I will let some other folks jump in here, but obviously BioGlue is recovering quite nicely and there was some price there, but what do you attribute that to? I know there was some issues with the sales force, that's now it seems like it's been properly wrapped up here, but is there anything beyond that, have you seen broader indications or just general wider acceptance? How do you kind of explain that improvement in that division?

We've had a lot of training of the sales force with that product since the first of the year. And my recollection is that we had added seven or eight additional sales representatives since January 1, of '06. We now have 32 or 33 salesmen in the field. And I think that that is contributing greatly to the growth in that product. And also there's a big switch going on between the cartridges and the syringes. And the 10-milliliter syringe has been gaining quite a bit of traction and I think that also is part of the reason for the increase in the sales.

Very helpful. Nice quarter.

Thanks.

Our next question is from Raymond Myers with Emerging Growth Equities.

Thank you for taking the questions and congratulations, Steve and Ashley, for a long string that has finally led to profitability. That's a key milestone.

Thank you.

Picking up where Raj left off with the 10-milliliter syringe, if that's been gaining traction describe how the 10-milliliter syringe gross margin differs from what it replaces?

They are a little bit better than the products that they are replacing.

So I hate to pick out the one point that wasn't stellar in the quarter was the BioGlue gross margin, declined by 60 basis points. What can we read into that?

They actually did not decrease. I think what you are looking at in the press release is gross margins for all of our devices, which include the porcine heart valves that we sell in Europe as well as the bovine ureter vascular graft that we sell in Europe. So I think you are looking at the total device gross margins and not BioGlue individually.

You're right, Ashley. Well, help me to understand how that trend should look in the second half and going out into 2006, then? Because you had that on a long history of improving product margins?

Well, I think that year-over-year the margins did improve. We don't expect margins in our device business to move substantially either way for the remainder of this year. And obviously going into '07 we will have our initial guidance for '07 at our next conference call.

Okay. That helps. How about the tissue preservation margin, that was stellar, increasing to almost 31%. You have stated in the past that you had process improvements in January of '06 that would improve tissue margins in the second half of this year. Considering that you already had such strength in the second quarter, do we still expect further strength in the second half?

We believe that we can see some incremental improvements in the second half of this year. We are not going to give out specific guidance but we believe that we have the opportunity to improve on gross margins and tissues in the second half of this year.

Is mid 30s tissue gross margin by the fourth quarter still within the realm of possibility?

I don't want to give out any specific guidance, Ray, but we do believe that we have the opportunity to improve on our margins in tissue processing over and above what they are right now.

I will leave it at that. Price increases, do we expect any more price increases throughout the rest of this year, if so, what are they? And will we see any more impact of price increases that may have been taken in the first half?

We actually had some very selective price increases in July of this year. They weren't across the board. They were very selective depending upon what the particular product was. We believe that those price increases should have a positive impact in the second half of this year.

How large were the price increases?

Depending upon what the particular product was, but typically they were in the mid to high single-digit range.

Over what proportion of your revenues?

Maybe half.

Okay. That's nice. What was the $357,000 other expense in the quarter?

I don't have that right off the top of my head, Ray. I will have to research that and get back with you.

It would be nice if we are not paying that every quarter.

Yes.

I'll go back into queue. Thank you.

[OPERATOR INSTRUCTIONS] Our next question is from Josh Colvan with Millenium Partners.

Hi, guys, how are you? Congrats on what looks like a pretty good quarter. There is just one comment I want to make sure I heard correctly. After you were talking about the cash burn, I suppose you could call it, did you say there is going to be no financing necessary going forward?

We stated that we believe that we don't need to finance in order to fund our day-to-day operations.

Okay. Great. Thank you. Just wanted to make sure I heard that correctly.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much for joining us for our conference call and we look forward to talking to you after the results of the third quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.