Artivion Inc (AORT) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the CryoLife, Inc. first quarter 2007 financial conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host. Steven Anderson, President and Chief Executive Officer of CryoLife. You may begin.

Good morning everyone. This is Steve Anderson, CryoLife's President and CEO. I'd like to welcome you to CryoLife's first quarter '07 conference call. With me today is Ashley Lee, the Company's Executive Vice-President, Chief Operating Officer and Chief Financial Officer This morning we announced the company's Q1, '07 operating results. Revenues for the first quarter of '07 were $24.5 million compared to $19.4 million, a 26% increase from the same quarter a year ago. Net income was $1.4 million, which was a significant improvement from the $1.8 million loss we reported in Q1 '06. Margins in the first quarter of '07 continued to show substantial improvement over '06 margins for the same time period. The company's tissue preservation services and adhesive products had substantial revenue increases in Q1. BioGlue set a quarterly sales record with the first quarter showing our first quarter over $11 million in BioGlue revenues. Ashley will discuss the details of this morning's earnings release in a few moments.

The agenda for this morning's call is as follows. Ashley will discuss this morning's's earnings release in detail. He will provide specifics on what's driving revenue growth, gross margins and also provide an update on product liability litigation. I will discuss the turn around in the cardiac tissues business and what we can expect going forward. I will discuss the status of the company's CE mark submission for BioDisc in Europe and the company's progress in finding a marketing partner. I will also discuss the status of the 510K application for our CryoValves SG decellularized human pulmonary heart valve that we discussed during the last conference call. Ashley will return to give revenue guidance for the rest of calendar '07. 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'd like to make the following statement. The 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, 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 form 10-K for the year ended December 31, 2006 and our form 10-Q for the quarter ended March 31, 2007, which we expect to file by the end of this week, and in the press release that we released this morning.

This morning we reported our results for the first quarter of 2007. Revenues for the first quarter of 2007 increased 26%, to $24.5 million compared to $19.4 million in the first quarter of 2006. Net income in the first quarter of 2007 was $1.4 million and $0.04 per basic and fully diluted common share compared to a net loss of $1.8 million and $0.08 cents per basic and fully diluted common share in the first quarter of 2006. Please refer to the Investor Relations section of our website at www.cryolife.com and select the headings "Webcast and Presentations" for a reconciliation of non-GAAP adjusted earnings contained in the follow discussion to the comparable GAAP earnings number. Excluding a $686,000 charge related to executive retirement benefits and a $374,000 charge related to stock-based compensation, adjusted non-GAAP net income for the first quarter of 2007 was $2.4 million or $0.09 per basic and $0.08 per fully diluted common share. Excluding a $244,000 charge related to stock-based compensation and a $248,000 income tax charge for the adjustment of income tax valuation related to foreign, deferred tax liabilities, the adjusted non-GAAP net loss for the first quarter of 2006 was $1.3 million or $0.06 per basic and fully diluted common share.

BioGlue sales in the first quarter of 2007 increased 14% to $11.2 million compared to $9.8 million in the same period in 2006. The increase was primarily attributable to an increase in BioGlue average selling prices which increased revenues by 8%, a 7% increase in the amount of milliliters shipped which increased revenues by 5% and the effect of foreign currency exchange which increased revenues by 1%. U.S. BioGlue sales were $8.3 million and $7.4 million in the first quarter of 2007 and 2006, respectively. International BioGlue sales were $2.9 million and $2.4 million in the first quarter of 2007 and 2006, respectively. Tissue-processing revenues in the first quarter of 2007 increased 39% to $13 million compared to $9.3 million in the first quarter of 2006. Tissue -processing revenues increasing 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. Cardiac revenues were $5 million for the first quarter of 2007, compared to $3.6 million in the first quarter of 2006, an increase of 39%. The increase in cardiac revenues was due to a 24% increase in cardiovascular units shipped, which increased revenues by approximately 25% and an increase in service fees which increased revenues by 14%. Vascular revenues were $6.1 million for the first quarter of 2007 compared to $4 million in the first quarter of 2006, an increase of 52%. The increase in vascular revenues was driven by a 30% increase in vascular unit shipments, which increased revenues by 36% and by fee increases which increased revenues by 16%. Orthopedic revenues were $1.8 million for the first quarter of 2007 compared to $1.7 million in the first quarter of 2006, an increase of 7%. The increase in orthopedic revenues was driven by fee increases which increased revenues by 14%, off-set by a 2% decrease in orthopedic unit shipments, which decreased revenues by 7%. Total product and tissue processing gross margins were 61% in the first quarter of 2007, compared to 55% in the first quarter of 2006. Tissue processing gross margins in the first quarter of 2007 were 41% compared to 28% in the first quarter of 2006. Total product and tissue processing gross margins increased primarily due to an increase in tissue procurement and an improvement in processing yields and price increases.

General administrative and marketing expenses in the first quarter of 2007 were $12.3 million compared to $11.3 million in the first quarter of 2006. General administrative and marketing expenses in the first quarter of 2007 included a $686,000 charge related to executive retirement benefits and a $374,000 charge for stock-based compensation. General administrative and marketing expenses for the first quarter of 2006 include $244,000 for stock-based compensation. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations, including our form 10-Q that we plan to file by the end of this week.

We are experiencing favorable procurement trends in 2007. Total cardiovascular procurement increased 22% in the first quarter of 2007 as compared to the first quarter of 2006. Cardiovascular procurement increased 13% in the first quarter of 2007 as compared to the fourth quarter of 2006. We believe these trends will support continued year-over-year quarterly revenue growth throughout 2007. As of April 30th, 2007, the company had approximately $10.3 million in cash, cash equivalence, marketable securities, and restricted securities of which $1.7 million has been received from the U.S. Department of Defense as advanced funding for the development of protein hydrogel technology for use on the battlefield.

We continue to explore options for selecting a partner for the commercialization of BioDisc. We continue to receive interest in this technology and will complete the collaboration of this technology if, in our opinion, it is in the best interest of our shareholders. Also, we are actively seeking a partner to assist in the commercialization of ProPatch Soft Tissue Repair Matrix for rotator cuff repair and other sports injuries. We are in discussions with potential partners at this time and will make an announcement regarding our progress at the appropriate time. We also continue to explore the commercialization of ProPatch for other indications, including cardiac and general surgery applications. Finally, we continue to evaluate other opportunities to enhance shareholder value within the strategic guidelines that we announced last fall. Regarding litigation, we settled one product liability case during the quarter and one case was dismissed. This leaves a total of one remaining case against the company. That's it for now.

Now back to Steve. Thanks, Ashley. The revenue results for the first quarter of '07 show the traction that our new tech reps are beginning to show as they confront the competitive environment in the marketplace. With revenues up 26% over from the first quarter of '06 and 16% over the fourth quarter of '06, we expect to continue to show double-digit sales increases throughout the remainder of this year. Ashley's financial guidance for the rest of the year, which he will give towards the end of the conference call, will reflect our continued optimism in the continuing growth of the company. Procurement is up 22% for '07 over the same time frame in '06. Sometime during May, we will process tissue from donor number 90,000 since we began operations in 1984.

BioGlue revenues were a record $11.2 million for the first quarter of '07, compared to $9.8 million for the first quarter of '06, an increase of 14%. U.S. BioGlue revenues were $8.3 million and $7.4 million in the first quarter of '07 and '06 respectively. International BioGlue revenues were $2.9 million and $2.4 million in the first quarter of '07 and '06 respectively. We began offering CardioWrap, our new cardiac reconstruction patch, during the first quarter and sales have begun progressing nicely. We believe there are limitations with many of the products presently available for peracardio replacement and we think this product is a very good opportunity for us. 10 out of 31 sales territories have completed sales of CardioWrap during its market launch. As you recollect, we submitted our BioDisc implantable nucleus pulposus replacement data to our European notified body just prior to the last conference call in February. This data included follow-up data from our initial 11 implants. Our objective is to receive a CE mark and conduct a post -approval marketing study encompassing about 100 to 150 patients at several centers in the U.K. and Austria. We expect to hear from the notified body sometime in late August of 07.

Also, in February, we submitted follow-up data on 510-K application for CryoValve SG, the decellularized human pulmonary heart valve. Data was submitted on 342 patients with the longest implant being over 6 years. 193 of these patients had received the valve for a Ross Procedure and 149 had received the CryoValve SG as part of a right ventricular out-flow track reconstruction. We believe the data supported the substantial equivalency of the SG process valves to a standard processed human heart valve. We are hopeful we will hear from the FDA by the end of May regarding the clearance of the 510-K SynerGraft process pulmonary valves. Now I'll turn the call back to Ashley who will provide updated guidance for the remainder of '07.

Thanks, Steve. The company expects to record annual product and tissue processing revenues for the full year of 2007 of between 92 and $96 million. We expect tissue processing revenues between 47.5 and $50.5 million and BioGlue revenues between 43.5 and $44.5 million for 2007. We expect orthopedic tissue processing revenues to gradually decline throughout the year. We expect continuing improvement in gross margins for the full year 2007 as a result of more of the company's tissue-processing revenues being generated from cardiac and vascular tissue shipments versus orthopedic. We expect general administrative and marketing expenses of between 46 and $48 million and research and development expenses of between 4 and $5 million for the full year of 2007. That includes my comments. Back to you to Steve. At this time we will open the call for questions.

Thank you. Ladies and gentlemen we will now conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] . One moment while we poll for questions. Our first question is from Raj Denhoy from Piper Jaffray Please state your

Good morning, guys. Wonder if I could ask a couple on tissue business. Nice acceleration here. Is there anything in this quarter's numbers from the RTI tissue swap agreement you guys signed recently?

Uh there, is a minimal amount of revenues included in the first quarter, Raj. As you recall, we started receiving tissue from the RTI procurement groups at the beginning of the year and you know based on what you know about our business, it takes a while for those tissues to make it through our system. Generally 60 to 90 days on average. So there was,some impact of that in the first quarter of 2007, but nothing substantial.

So it's fair to assume even though you guys did almost 40% in cardiovascular, now with the RTI stuff that number could accelerate more off that number?

We expect to see a positive effect of the RTI transaction in the last three quarters of this year.

Okay, I guess on the margin side you went above 40% for the first time in three years. What are assumptions on what that number can get to? Should we expect it to continue to expand here, from 41%?

We certainly expect to improve off of 41%, Raj. We haven't been giving detailed guidance on where we expect margins to go, but we expect some improvement over 41% for the remainder of this year. I will say we don't expect to be back at 60% where we were historically, this year, but we do expect continued improvement.

I guess, even, you know, back in the good days, it was in the mid-40s. Did it get as high at 60% in tissue?

It did. We were on a composite basis, we were just below 60%. On cardiac tissues we were actually a little above 60%. Vascular and orthopedics were in the mid-50s. We don't expect to that level this year, but we do expect some improvement over where we are right now.

Just on tissue, with being close to approved. Maybe you could outline your expectations for that product. Back when it was available, a large percentage of your valves were being processed with this SynerGraft technology and it commanded a pretty nice premium. Are there assumptions it will reassume that trajectory and surgeons who were using it were forced to give it up when the FDA had to withdraw it, that those surgeons will come back and the premium will still be able to be had?

As you'll recollect, the 510K concerns only the pulmonary heart valves. And so when we get approval of that, 510K for SynerGraft process pulmonary valves, the manufacturing process for those valves will change relatively quickly so that 100% of the pulmonary valves processed will be SG processed, I'd say by the end of the third quarter. We will continue to process aortic valves using standard processing technology. If the 510K for the pulmonary valve is approved, then more than likely we will submit some type of similar application of the FDA for approval of SynerGraft-processed aortic valves. So I think that you would see for a while that 50% of the valve business at CryoLife would be SynerGraft and 50% wouldn't be. The data looks good. We have six-year data, like I mentioned earlier, but all we have to prove with a 510K application is substantially equivalent and that's what the last documents that we sent to the FDA were focused on. We're not going to make any claim at this time for superior performance, but the data, implant data in the patients, I guess it's 300 and something is looking very favorable.

Absolutely, are you willing to offer anything about what type of premium?

We probably will have a premium price on the pulmonary SynerGraft heart valve. That hasn't been established yet, but I think you should look for that. If you were going to redo your model, Raj, that you could pick a number and plug it in and probably be close to accurate. We aren't going to make that decision until the product is approved. One other thing I want to just comment on is that at the last conference call I made a point that we were not processing SynerGraft tissues at risk and we will not do that looking forward to this approval. So if the SynerGraft process for pulmonary heart valves is approved at the end of May, we will then start SynerGraft processing in June. As Ashley referenced earlier in the call, regarding another question, it takes about 60 to 90 days to get things through the system. So if this were the case, you're not going to see substantial SynerGraft process, pulmonary valve revenue until the third quarter.

Okay, and then just one last one on the BioDisc product. You mentioned year end discussions with parties in Europe for potential distribution, beyond just financial considerations, are there other things you're looking for in a distribution partner? Maybe you could outline what that might look like?

We would like to find a distribution partner in rest of world that is focused on the spine business and that will give us the time that is needed to work our way through an expanded pilot study. I'm not expecting that we would release the product for general distribution, even if we received a CE mark in August,, I think our strategy of expanding the pilot study for about another 150 patients is a sound strategy. And we want to stick with that. It would be nice if the partner that we choose for international distribution is also strong in the United States, because we do intend to file an IDE application for the nucleus replacement, but we do not have a date yet for doing that. We want to use some of the data we accumulated in Europe as a basis for that application and it would be nice to use some of our, or some part of the additional 150 patients for that, but the partner, the potential partners that we have spoken with have not given us the value that we think that we need to have in that product and I think as the success of the product goes forward with the expanded pilot study that we should be able to demand and receive a valuation for that product that reflects the uniqueness of it. And its effectiveness.

Great, thanks a lot.

(OPERATOR INSTRUCTIONS) Our next question is from Raymond Myers from Emerging Growth Equities. Please state your question .

Thank you, congratulations Steve and Ashley for another great quarter.

Hello Ray, how are you?

Doing well, thanks. I want to ask you about the Q1 revenue and whether any of it was unusual or one time periodic. In particular, vascular revenue grew quite substantially in the first quarter to $6.1 million. Was that or any other revenue not sustainable at those levels?

We don't think so. We think that we're just seeing the results of a couple of things. One, we spent the last several years improving our manufacturing processes and driving procurement growth and that's made more tissues available for distribution. The second thing is, we were able to restaff our sales force fully in the early part of 2006 and we think we're seeing the pull-through of having a fully staffed and fully trained sales force out in the marketplace right now. So we saw nothing unusual at all about the revenue performance in 2007 in the first quarter and we think these levels are sustainable.

Okay, well that's great. It would seem that your revenue growth guidance for the year would appear to be quite conservative if none of that was one-time.

Well, as we stated, we expect our orthopedic revenue to continue to decline throughout the year. We are working off existing inventory and, as you know, we revisit our guidance on a quarterly basis and we will do that again at the end of the second quarter and if we believe that it is warranted to adjust our guidance at that time, we will do so.

Thanks, that sounds optimistic. The tax rate, what do you expect your tax rate to be for the year?

We don't expect it to be substantial at all. The taxes that we are providing for that you saw in the first quarter, were primarily related to two things, one is alternative minimum tax and then some taxes for our foreign subsidiary in Europe. That's really what you're seeing there. We wouldn't expect our tax rate to differ substantially than what you're seeing in the first quarter because, as you do recall, we do have significant interwells that we have available to us and we wouldn't expect our tax rate to change substantially for the remainder of the year.

So it was 6 or 7% in Q1. On a percentage basis, it should stay roughly the same?

I'd have to get back to you on that rate, but I don't think the absolute dollar levels will change much.

It's more toward fixing the dollars, not the percent?

I think that's correct.

This $686,000 in executive retirement benefits, is that a periodic expense? Should we expect this type of expense to reoccur?

That relates to an employment agreement that was put into place two years ago. That is a charge we do not expect to see for the remainder of this year.

Okay. Is that something you would expect in Q1 every year or--

We don't believe so.

So it should not reoccur?

No.

Can you help us understand more about the impact of the Regeneration Technologies transfer? What total annualized revenue do you expect to get by Q4?

We're not giving any specific revenue guidance on that transaction, I think it's all baked into the total top line guidance we're given. We are seeing that our procurement is up anywhere between 15 and 20% as it relates to that particularly transaction. At the time we completed the transaction with RTI, I think their revenues from cardio vascular procurement and the resulting revenues were between 4 and $5 million. So when we're fully operational on an annualized basis we would expect to see that much on our top line.

Ray, I'd like to add a couple things to your thought process. Allograft valves typically last, in young people, when you put them in someone who is two to four, five years old, last 12 to 15 years. So many of the allografts that were used for RBOT are pushing out against that timeframe. The children that were implanted when the company was much younger. In speaking with physicians when I work the convention booth, they're expected to have a significant increase in allograft usage over the next year or two as they replace valves on a routine basis. If you're putting them into a child, let's say four years old or five years old, you have to have a valve big enough to handle the growth pattern and cardiac output for that particular child. So naturally you'd have a replacement and from our data that we've accumulated over 15 years and the doctors are well aware of this, allograft valves work well with normal hemodynamics in many cases, so, we expect that the patients that are going to confront redos, and their parents will request allograft valves for replacement. And I think, this is a personal opinion, I think that's a growth market and a substantial one in the years going forward.

Which would be the larger adult valves?

Yes, because if you're now dealing with someone that is 18 to 20 years old, then you'd be putting in a valve that would -- you'd expect someone to also grow into because I guess most people continue to grow until they're 22, 23 years old. So they would expect that valve to last them well into their mid-to late 30s. So I think it's just the dynamics of the market. And it's interesting to hear the physicians respond when you're talking to them in the booth about how their practice is going to change.

I always understood this to be a supply constrained market. If you could get human allograft valves, those were considered the best and therefore, you're constrained by the supply, not the demand.

There's another constraint. Not every doctor can do the surgery well and it takes special skills to do it and to do it properly. You're really replacing a natural valve there and what they call an orthotropic transplantation technique. Not everybody is good at that. At the procurement growth that we've seen over the last four to six months, we're very encouraged about the continual availability of allograft valves to keep up with our growth patterns. I looked at data this morning before the call started and my recollection is, Ashley, correct me if I'm wrong, I think the heart procurement for April was 503 hearts.

That's total, cardiac and vascular.

Oh, cardiac and vascular, I stand corrected. Based on the reaction of these procurement summit, the people we had in here from procurement groups throughout the United States, we did this two to three weeks ago, their enthusiasm for sending us tissue was high.We share our implant results with them, show the impact that their services provide to children that need right heart reconstruction and women of child bearing age. I'm looking for the procurement to continue with growth that Ashley talked about a little while ago.

Won't procurement also benefit from, hopefully, an approval of the SG product?

We think it will. We think that the data is compelling. And it would be our intention, if that were approved that we would share those, that particular six, six-year implant data with all the physicians in the United States that do cardiac reconstruction because I do feel we need to share that. I would also expect that some of the doctors would publish their data. Since they've had to assemble it all for us and give it to us to give to the FDA, I would expect we'd have a number of publications coming out of major clinics in the United States that would show the results of the SynerGraft process tissue show on a clinical basis and I would expect those papers to be favorable.

What's the most favorable? Is it the lack of immune response or are they growing in children?

I don't know whether they grow. However, there are physicians, that in examining the children, wonder that also. Because it seems that in some patients, the incidence of regurgitation is less than in a standard processed valve which would, in other words, they're functioning better and it also seems their longevity is better, but that will remain to be seen when the clinicians publish their data from their own clinic or university.

Would this open the door to SynerGraft process 14 or other (inaudible) valves?

We're continuing our work on that. We do have a collaborative agreement with Professor's [Eukubes] Clinic and Foundation in the UK. He's associated with the Imperial Heart Hospital and we've had an ongoing research agreement and collaboration with him and his clinic over the past 15 months now. Our Ph.D.s go over there every quarter to work with them and collect data and to work on those experiments. We're encouraged by the results of that research.

That would seem to be potentially a huge market.

Of course, just because of the way things are regulated in the world. You would expect then that if it continues to progress and look favorable, then of course we would apply for a CE mark for that technology and those generally precede IDE approvals for as long as five years. That's just the way it is.

Let me switch gears and talk about CardioWrap for a minute. What kind of revenue run rate to do you expect CardioWrap to produce in the near term. A million dollar a year seller or larger?

We hope it'll be larger than that. If you look at our guidance, we implied that our other device revenue for the full year will be around $1million and that number includes what we expect to do for CardioWrap during 2007. Again, this is a rollout year. We certainly expect to do better than that in future years. The CardioWrap guidance is baked into that number.

Right, thanks Ashley.

There are no further questions in queue at this time.

Thank you very much for joining us for the CryoLife Q1, '07 conference call. We look forward to talking with you when the second quarter is completed.

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