Artivion Inc (AORT) 2007 Q2 法說會逐字稿

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

It is now my pleasure to introduce your host, Mr. Steve Anderson, President and Chief Executive Officer of CryoLife. Thank you Mr. Anderson, you may now begin.

Good morning, everyone, and welcome to CryoLife's second quarter '07 conference call. I am Steve Anderson, the Company's CEO, and with me today is the Company's COO, Executive VP and Chief Financial Officer, Ashley Lee. This morning the Company announced its operating results for the second quarter and first half of '07. We were pleased to announce our second consecutive quarter of earnings. Revenues for Q2 were $23 million, and the net earnings per share were $0.05. Revenues for the first half of '07 were $47.5 million and earnings for the first six months were $0.09, both of which were right on management's earlier projections. Ashley will speak in more detail about the Company's operating results in a few moments.

The agenda for today's conference call is as follows: Ashley will discuss today's financial press release and the Company's operating results in more detail. He will comment on new financial guidance that the Company has announced. He will discuss certain developments in the clinical evaluation of BioGlue for use in brow lifts by Bioform our plastic surgery partner. Ashley will also comment on certain procurement trends and what they mean for the expansion of our cardiovascular tissue processing business. I will discuss the development of a direct salesforce in Germany, and the continuing expansion of our U.S. salesforce as well as the addition of a U.S. national accounts manager who will focus his efforts on certain hospital buying groups throughout the U.S. I will discuss the status of the CryoValve SG 510(K) that is working its way through the FDA. I will also discuss the status of the European approval of BioDisc, our nucleus pulposus replacement device. At this time Ashley is going to comment on 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, 2006, and our form 10-Q for the quarter ended June 30, 2007, which we expect to file by the end of this week and in the the press release that we released this morning.

This morning we reported our results for the second quarter and first half of 2007. Revenues for the second quarter of 2007 increased 11% to $23 million compared to $20.8 million in the second quarter of 2006. Net income in the second quarter of 2007 was $1.3 million and $0.05 per basic and fully diluted common share compared to net income of $217,000 or $0.0 per basic and fully diluted common share in the second quarter of 2006. Please refer to the schedules included in this morning's press release for a reconciliation of non-GAAP adjusted earnings contained in the following discussion to the comparable GAAP earnings number. Excluding an $866,000 charge for the change in the valuation of the derivative related to the Company's preferred stock, a $548,000 charge related to stock-based compensation and a $490,000 gain related to the adjustment of reserves for product liability losses, adjusted net income for the second quarter of 2007 was $2.2 million and $0.09 per basic and $0.08 per fully diluted common share.

Excluding a $403,000 charge related to stock-based compensation and an $800,000 benefit related to the adjustment of reserves for product liability losses, adjusted net loss in the second quarter of 2006 was $180,000 and a loss of $0.02 per basic and fully diluted common share. Revenues for the first half of 2007 increased 18% to $47.5 million compared to $40.2 million in the first half of 2006. Net income in the first half of 2007 was $2.6 million or $0.10 per basic and $0.09 for fully diluted common share. Compared to a net loss of $1.6 million or $0.08 per basic and fully diluted common share in the first half of 2006. Excluding a $923,000 charge related to stock-based compensation, an $821,000 charge for the change in the valuation of the derivative related to the Company's preferred stock, a $686,000 charge related to executive retirement benefits, and a $505,000 gain related to the adjustment of reserves for product liability losses, adjusted net income in the first half of 2007 was $4.6 million and $0.17 per basic and fully diluted common share. Excluding a $647,000 charge related to stock-based compensation, and a $670,000 gain related to the adjustment of reserves for product liability losses, adjusted net loss in the first half of 2006 was $1.6 million and a loss of $0.08 per basic and fully diluted common share.

BioGlue revenues were $10.9 million for the second quarter of 2007 compared to $10.3 million in the second quarter of 2006, an increase of 6%. The increase was primarily attributable to an increase in BioGlue average selling prices which increased revenues by 7%, a 2% decrease in the amount of milliliters shipped which decreased revenues by 2% and the effect of foreign currency exchange which increased revenues by 1%. U.S. BioGlue revenues were $7.7 million and $7.5 million in the second quarter of 2007 and 2006 respectively. International BioGlue revenues were $3.2 million and $2.8 million in the second quarter of 2007 and 2006 respectively. BioGlue revenues were $22.1 million for the first half of 2007 compared to $20.1 million in the first half of 2006, an increase of 10%. The increase was primarily attributable to an increase in BioGlue average selling prices which increased revenues by 7%, a 2% increase in the amount of milliliters shipped which increased revenues by 2% and the effect of foreign currency exchange which increased revenues by 1%. U.S. BioGlue revenues were $16 million and $14.9 million in the first half of 2007 and 2006 respectively. International BioGlue revenues were $6.1 million and $5.2 million in the first half of 2007 and 2006 respectively.

Tissue processing revenues in the second quarter of 2007 increased 15% to $11.7 million compared to $10.2 million in the second quarter of 2006. Tissue processing revenues in the first half of 2007 increased 26% to $24.7 million compared to $19.5 million in the first half of 2006. Tissue processing revenues increased primarily due to an increase in demand for the Company's processed tissues and to a lesser extent price increases. Cardiac revenues were $5 million for the second quarter of 2007 compared to $3.8 million in the second quarter of 2006, an increase of 33%. The increase in cardiac revenues was due to a 32% increase in cardiovascular units shipped, which increased revenues by approximately 29% and an increase in average service fees which increased revenues by 4%. Cardiac revenues were $10 million for the first half of 2007 compared to $7.4 million in the first half of 2006, an increase of 36%. The increase in cardiac revenues was due to a 28% increase in cardiovascular units shipped which increased revenues by approximately 27% and an increase in average service fees which increased revenues by 9%.

Vascular revenues were $5.4 million for the second quarter of 2007 compared to $4.6 million in the second quarter of 2006, an increase of 19%. The increase in vascular revenues was driven by fee increases which increased revenues by 11% and by a 6% increase in vascular unit shipments which increased vascular revenues by 8%. Vascular revenues were $11.6 million for the first half of 2007 compared to $8.6 million in the first half of 2006, an increase of 35%. The increase in vascular revenues was driven by a 17% increase in vascular unit shipments which increased vascular revenues by 21% and by fee increases which increased revenues by 14%.

Orthopedic revenues were $1.2 million for the second quarter of 2007 compared to $1.8 million in the second quarter of 2006, a decrease of 33%. The decrease in orthopedic revenues was driven by a 47% decrease in orthopedic unit shipments which decreased revenues by 41% offset by fee increases which increased revenues by 8%. Orthopedic revenues were $3.1 million for the first half of 2007 compared to $3.6 million in the first half of 2006, a decrease of 13%. The decrease in orthopedic revenues was driven by a 24% decrease in orthopedic unit shipments which decreased revenues by 24% offset by fee increases which increased revenues by 11%. The decrease in orthopedic shipments in the second quarter and first half of 2007 is a result of a limited supply of orthopedic tissues available for shipment following the the Company's cessation of procuring and processing orthopedic tissues on January 1, 2007, in accordance with the RTI agreement.

Total product and tissue processing gross margins were 61% in the second quarter and first half of 2007 compared to 56% in the second quarter and first half of 2006. Tissue processing gross margins in the second quarter of 2007 were 40% compared to 31% in the second quarter of 2006. Tissue processing gross margins in the first half of 2007 were 41% compared to 29% in the first half of 2006. The increase in total product and tissue processing gross margins was primarily a result of price increases. General, administrative and marketing expenses in the second quarter of 2007 were $10.8 million compared to $10.2 million in the second quarter of 2006. General, administrative and marketing expenses in the second quarter of 2007 included a $548,000 charge related to stock-based compensation and a $490,000 gain related to the adjustment of reserves for product liability losses. General, administrative and marketing expenses in the second quarter of 2006 included a $403,000 charge related to stock-based compensation and an $800,000 benefit related to the adjustment of reserves for product liability losses.

General, administrative and marketing expenses in the first half of 2007 were $23.2 million compared to $21.6 million in the first half of 2006. General, administrative and marketing expenses for the first half of 2007 included a $923,000 charge related to stock-based compensation, a $686,000 charge related to executive retirement benefits and a $505,000 gain related to the adjustment of reserves for product liability losses. General, administrative and marketing expenses in the first half of 2006 included a $647,000 charge related to stock-based compensation and a $670,000 gain related to the adjustment of reserves for product liability losses.

Other income and expenses in the second quarter and first half of 2007 included an $866,000 and an $821,000 charge respectively for the change in the valuation of the derivative related to the Company's preferred stock. Other income and expenses in the second quarter and first half of 2006 include an $11,000 and a $67,000 charge respectively for the change in the valuation of the derivative related to the Company's preferred stock. With the conversion of the preferred stock during the second quarter, we will not see any earnings impact from the derivative associated with the preferred stock going forward. 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 and vascular procurement increased to 19% in the second quarter of 2007 as compared to the second quarter of 2006, and increased 20% in the first half of 2007 as compared to the the first half of 2006. We believe these trends will support continued year-over-year quarterly revenue growth throughout 2007. As of June 30, 2007, the Company had $11.4 million in cash, cash equivalents and marketable securities of which $1.7 million was received from the U.S. Department of Defense as advanced funding for the development of protein hydrogel technology for use on the battlefield. We recently announce that had our partner for cometic and plastic surgery, bioform medical had began their feasibility study to evaluate BioGlue's use in brow lifts. We believe that there are several hundred thousands of procedures annually where BioGlue could be potentially used in cosmetic and plastic surgery, and we are pleased that this first trial is under way. We remain committed to pursuing additional potential uses for BioGlue in areas that are not core to our business.

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 active 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 indications. Finally, we continue to evaluate other opportunities to enhance shareholder value within the strategic guidelines that we announced last fall. Now I will turn it back over to Steve.

Thanks, Ashley. After a lengthy analysis, management made the decision to move from an independent representative salesforce to a direct cardiovascular salesforce in Germany. The move to a direct salesforce in Germany was initiated as a result of a very successful direct sales effort that the Company began in the U.K. in 2000. Initially the German direct salesforce will consist of two people in Germany, one located in the north in Berlin and one located in the south in Nuremburg who will be supervised by an experienced native German sales manager who joined us in 2006 and is located in southwest Germany. The German Customer Service center will be located in Freiburg on the border of Switzerland and Germany. Orders will be received by this office, and product will be shipped from our U.K. distribution center.

Based on our successful direct sales efforts in the U.K., we expect this approach to be more effective than the independent representative approach has been. We have been very encouraged about our early direct sales efforts in Germany as we have received orders from German hospitals within the first week of our are being direct. Our direct sales forces in the U.K. and in Germany promote and distribute BioGlue, the CryoLife O'Brien Heart Valve and Preserve cardiovascular allograft tissues. Both the German and the U.K. direct sales forces will be distributing BioFoam when it receives its CE mark. Many of the Company's new products are approved and distributed in the European Union prior to receiving U.S. FDA approval.

In the United States we have added four additional direct sales reps that will focus on selling BioGlue into newly created sales territories. These new reps have been assigned to metropolitan areas throughout the United States and will augmented our BioGlue sales efforts in Portland, Oregon, Richmond, Virginia, Chicago, Illinois and New Orleans. We have also expanded our sales management team in the U.S. We have promoted our most experienced regional sales managers to the positions of national sales manager and a newly created position of national accounts manager. The primary objective for the national accounts manager will be to focus on hospital buying groups where there will be an opportunity to bundle our products. He will also focus on the buying groups that control and dominate certain hospital management companies. We now have grown to 35 direct sales reps for regional managers, a national sales manager and a national accounts manager. Overseeing this team is the Senior Director of United States Sales and Marketing. The field representatives are supported by marketing managers and an extensive Customer Service department.

I would like to give you an update on the status of decellularized human pulmonary heart valves that are presently undergoing FDA review. We submitted our original 510(K) application for the CryoValve SG in the fall of 2003. Since the original submission there have been several sets of questions posed to us and we have diligently responded with our answers. As you will recollect from recent conference call updates, we were asked a series of questions in January '06. We submitted our answers to these questions in July '06 and in February '07. We were expecting a response from the FDA by the end of May of this year. On July 18th this year the FDA sent us a letter requesting additional information on the SG process pulmonary allograft valves. We have been assessing their request and are preparing our responses.

When the FDA receives our answers to say the latest questions, their targeted 90-day response time clock is reset. We are hopeful that the latest series of questions are the last questions they will ask, but we can't be sure of that. The current follow-up data that was collected and analyzed as part of the 510(K) submission was recently submitted in abstracts for review to the upcoming Society of Thoracic Surgeons meeting to be held in Ft. Lauderdale, Florida, in January of '08. Co-authored by the implanting surgeons, two separate abstracts were written, one of these was written for outcomes with the CryoValve SG for right ventricular outflow track reconstruction, and one for use of the CryoValve SG in conjunction with the Ross procedure. The status of the acceptance of these abstracts son't be known until later this year. In separate discussions with the FDA, they have indicated that they will have to inspect us again as part of the clearance process for the SG valve. We feel this is a reasonable request in that their last inspection here was in August 2005, almost two years ago. We would anticipate this inspection to take place sometime later this quarter.

As you will recall, we submitted our design dossier for the BioDisc to our European notified body in February of this year. We were recently notified that the review of this submission has been delayed due to non-product related internal administrative matters within our notified body. Based on their projected time lines, the review of this submission might not be complete until the end of the year. As you will recollect, our plans are to conduct a 150-patient post-market approval study for the disc product. The clinics that will be doing the additional implants are located in the U.K. and in Austria. They have been trained and they are eager to begin the study. We have not selected a partner for BioDisc distribution as yet, as we haven't received an offer that we think reflects the true value of the product. And we expect that a disc replacement that has an approved CE mark will be worth a good deal more than the disc that does not have an a approved CE mark. That concludes my comments and I will turn the call back over it Ashley for some financial guidance.

As announced on July 11, 2007, the Company now expects revenues for the full year of 2007 to be between $93 million and $96 million. The Company expects BioGlue revenues to be between $43.5 million and $44.5 million and tissue processing revenues to be between $48.5 million and $50 million for the full year of 2007. Other device revenues are expected to be approximately $1 million in 2007. We expect general, administrative and marketing expenses of between $46 million and $48 million and research and development expenses of between $4 million and $5 million for the full year of 2007. That concludes my comments and I will turn it back over it Steve.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) One moment while we poll for questions. Our first question is from Raymond Myers from Emerging Growth Equities. Please state your question.

Thank you for taking the question, Steve and Ashley. I wanted to ask you, you didn't mention BioFoam very much. You did mention you received nearly $2 million from the U.S. government. When did you receive that funding and what is the research progress to date at BioFoam?

We received the majority of those funds earlier this year, like in the first quarter and some in the latter part of 2006. The efforts on that project have been picking up steam, and we are currently scheduled to begin here in the third quarter and into the fourth quarter some animal studies related to BioFoam, and again we expect that the spending on that project will increase and probably pretty significantly starting here.

Here in Q3?

Yes.

Okay. Good. That's good to hear.

We can add a couple of things to that, Ray. The early animal tests that were conducted to -- prior to starting the formal animal studies were directed at seeing if the product worked on lacerated organs and the results were extremely encouraging. Our researchers have told me that the veterinarians that were doing the work felt the product worked better on handling lacerated organs than sutures did. So we're very encouraged by that, we just have to go through the more formal animal testing. And sometime in the first quarter, I don't know anything more defined than that, but sometime in the first quarter of next year, we'll submit all of that data in our application for a CE mark.

Is there a possibility that the U.S. military might purchase this product in say 2008 without FDA approval.

I don't know the answer to that. I know that they're keenly interested in the product and in the results, and we have periodic meetings with their staff. When I say we, I mean our Ph.D. staff, our research staff goes there to give them periodic updates on how the product is working and the animal studies. But I don't know whether they would be able to access a product that hadn't been approved by the FDA. I would have to probably ask counsel about that. I just don't know.

Next I was hoping you could describe the contribution that the RTI transaction made both in terms of revenue, costs, perhaps gross margin?

It is hard to track that separately because we had a lot of shared procurement customers as well as a lot of shared customers on the implanting side. The effect of the RTI transaction on our procurement is reflected in the increases that I spoke about earlier. And on the procurement side our cardiovascular and vascular procurement is up around 20% year-over-year, and that includes the effects of the RTI transaction. As far as how that translates to top line, we know that RTI is continuing to distribute their cardiovascular tissue. When they no longer have a supply, then we would expect some of those customers will be coming to us, and that's reflected in our guidance for the remainder of the year that we gave a little bit earlier.

Okay. So that's important when they run out of supply that's the key.

Yes.

All right. What's the tax rate you expect? When do you expect to be reporting a more normalized tax rate?

We don't expect we will be reporting a more normalized tax rate until probably sometime well into 2008 and potentially 2009. There is some strict accounting rules as to when you can recognize all of your tax assets, and if you recall, we have in excess of $30 million in deferred tax assets that aren't even recognized on our balance sheet right now, and there are some strict rules about when you recognize those benefits and so forth all at one time, so when we start is -- having a more normal tax rate is probably late 2008, early 2009, but that could change.

Okay. Good. And the final area of questioning was the human tissue preservation margin trend. Can you describe where you expect that to go over the next few quarters? I think there was some guidance regarding when you might reach 50%.

You know, we haven't been giving any detailed guidance on gross margins, and we're not going to start right now. And although we have an opportunity to continue driving margins this year, but we expect that we're not go to go see a significant movement in margins one way or the other until we get sinograft approved to our volumes especially on the device side increase significantly. But equally as important is the fact that we can drive profitability at these margin levels by growing revenues and our guidance reflects that growth. We feel that we have an opportunity to leverage our current infrastructure and drive profitability going forward, and that's evidenced by the fact that we haven't had to increase our G&A expenses significantly since 2004, and we've been able to drive in excess of a $30 million plus revenue increase during that time period, so I think that margins are important, but our infrastructure is important, too, and I think that we're really in a position now to really drive profitability going forward.

Ashley, Steve actually was talking about the increased salesforce, and I had received questions from investors regarding, well won't that increase your SG&A. What extent does that happen?

That's all included in our SG&A guidance. That's included in our guidance. We don't expect that the changes that we have made are going to increase our G&A expenses beyond what we've already spoken about, and again they're not significant increases to our already current head count.

Okay. And do you still expect the reduced BioGlue sales in Q3 due to seasonality or the increased salesforce help to mitigate that?

We don't give specific quarterly guidance revenues. That's included in our annual guidance, but we feel good about where we are and our ability to continue growing our business.

Excellent. Thank you.

Sure.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you for being with us today and we look forward to talking with you again after the completion 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.