Artivion Inc (AORT) 2007 Q3 法說會逐字稿

And welcome to the CryoLife third quarter 2007 financial results 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. You may begin.

Good morning, everybody. This is Steve Anderson, the CEO of CryoLife. And I would like to welcome to you CryoLife's third quarter 2007 conference call. With me today is Ashley Lee, CryoLife's Executive Vice President, Chief Operating Officer and Chief Financial Officer. This morning we released our operating numbers for the third quarter of '07 and for the first nine months of 2007. For a reconciliation of certain nonGAAP performance measures that will be discussed on this call to the comparable GAAP measures, please see our earnings press release which can be viewed on our website at www.CryoLife.com by clicking on news releases under the investor relations section. Revenues for the quarter were $22.2 million, up 11% from the third quarter of 2006. And revenues for the first nine months of 2007 were $69.7 million, up 16% over the first nine months of 2006. Combined cardiac and vascular tissue preservation revenues increased 25% to $10.8 million to the third quarter of 2007, compared to $8.7 million in the third quarter of 2006. Combined cardiac and vascular tissue preservation revenues increased 31% in the first nine months of 2007 to $32.4 million, compared to $24.6 million in the first nine months of 2006. Our revenue objective for calendar 2007 would be a record for the company.

Importantly, the company was profitable for the third consecutive quarter. Our bottom line for the third quarter of 2007 was $1.9 million. The company earned $0.07 per basic and fully diluted common share in the third quarter of 2007. Next profit for the first nine months of 2007 was $4.6 million, or $0.17 per basic and $0.16 per fully diluted common share. Excluding orthopedic tissue processing revenues of $566,000 in 2007 and $1.7 million in 2006, nonGAAP revenues for the third quarter of 2007 increased 18% compared to 2006. The increase in nonGAAP earnings in the third quarter reflects our continued growth in our core cardiac and vascular tissue processing business, as well as our ability to expand gross margins, while keeping general and administrative expenses relatively flat on an adjusted basis. Ashley will get into more details about our operating results in just a few moments.

The agenda for today's call is as follows: Ashley will discuss today's third quarter 2007 earnings. He will give you an analysis of the company's results by product line for the first nine months, including a discussion of gross margins. He will discuss the Proxy Medical license agreement for BioGlue's use for hernia mesh fixation. We will comment on the progress that has been made about BioForm Medical with their clinical study for the use of BioGlue in certain plastic surgery operations. I will discuss the recently completed FDA inspection regarding the SynerGraft processed decellularized pulmonary heart valve. I will also discuss the anticipated filing for a CE mark for the BioFoam tissue sealant that may be used in liver resection surgery. I will comment on the status of the CE mark for BioDisc. I will also comment on the company's annual cardiac fellows training program that we held at corporate headquarters on October 19th. After my comments, Ashley will return with the company's guidance for the fourth quarter of 2007 and for the fiscal year of 2008. At this time, Ashley will comment on today's third quarter 2007's earnings 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 future. 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 10K for the year ended December 31, 2006, and our Form 10Q for the quarter ended September 30, 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 their quarter and the first nine months of 2007. Revenues for the third quarter of 2007 increased 11% to $22.2 million, compared to $20 million in the third quarter in 2006. Net income in the third quarter of 2007 was $1.9 million, or $0.07 per basic and fully diluted common share, compared to net income of $2 million and $0.07 for basic and fully diluted common share in the third quarter of 2006. NonGAAP EPS was $0.09 per diluted share in the third quarter of 2007, compared to nonGAAP EPS of zero per share in the third quarter of 2006. Revenues for the first nine months of 2007 increased 16% to $69.7 million, compared to $60.2 million in the first nine months of 2006. Net income in the first nine months of 2007 was $4.6 million, and $0.17 per basic and $0.16 for fully diluted common share, compared to net income of $415,000 and a net loss of $0.01 per basic of fully diluted common share in the first nine months of 2006. NonGAAP EPS was $0.28 per diluted share for the first nine months of 2007, compared to nonGAAP loss per share of $0.04 in 2006.

BioGlue revenues were $10.3 million for the third quarter of 2007, compared to $9.4 million in the third quarter of 2006, an increase of 9%. The increase was primarily attributable to an increase in BioGlue average selling prices which increased revenues by 5%, a 4% increase in the amount of milliliters shipped, which increased the revenues by 3%, and the effect of foreign currency exchange which increased revenues by 1%. BioGlue revenues were $32.4 million for the first nine months of 2007, compared to $29.5 million in the first nine months 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 3% increase in the amount of milliliters shipped which increased revenues by 2%, and the effect of foreign currency exchange which increased revenues by 1%.

Tissue processing revenues in the third quarter of 2007 increased 10% to $11.3 million, compared to $10.3 million in the third quarter of 2006. Tissue processing revenues in the first nine months of 2007 increased 21%, to $36 million compared to $29.8 million in the first nine months of 2006. Tissue processing revenues increased primarily due to an increase in demand for the company's cardiac and vascular process tissues, and increased availability of these tissues due to the improvements in procurement and to a lesser extent price increases.

Cardiac revenues were $5.6 million for the their quarter of 2007, compared to $4.2 million in the third quarter 2006, an increase of 33%. The increase in cardiac revenues was due to a 30% increase in cardiovascular units shipped which increased revenues by approximately 21%, and an increase in average service fees which increased revenues by 12%. Cardiac revenues were $15.6 million for the first nine months of 2007, compared to $11.6 million in the first nine months of 2006, an increase of 35%. The increase in cardiac revenues was due it a 29% increase in cardiovascular units shipped, which increased revenues by 24% and an increase in average service fees which increased service fees by 11%.

Vascular revenues were $5.2 million for the third quarter of 2007, compared to $4.5 million in the third quarter of 2006, an increase of 17%. The increase in vascular revenues was driven by a 7% increase in vascular unit shipments, which increased revenues by 9%, and by fee increases which increased revenues by 8%. Vascular revenues were $16.8 million for the first nine months of 2007, compared to $13.1 million in the first nine months of 2006, an increase of 28%. The increase in vascular revenues was driven by a 14% increase in vascular unit shipments which increased revenues by 17%, and by fee increases which increased revenues by 11%. Orthopedic revenues were $566,000 for the third quarter of 2007, compared to $1.7 million in the third quarter of 2006, a decrease of 66%. Orthopedic revenues were $3.7 million for the first nine months of 2007, compared to $5.2 million in the first nine months of 2006, a decrease of 30%. The decrease in orthopedic revenues for both periods is a result of a limited supply of orthopedic tissues available for shipment, following the company's cessation of procuring and processing, orthopedic tissues on January 1, 2007.

Total product in tissue processing gross margins was 63% in the their quarter of 2007, compared to 57% in the third quarter of 2006. Total product and tissue processing gross margins were 61% in the first nine months of 2007, compared to 56% in the first nine months of 2006. Tissue processing gross margins were 42% in the third quarter of 2007, compared to 33% in the their quarter of 2006. Tissue processing gross margins were 41% in the first nine months of 2007, compared to 30% in the first nine months of 2006. The increase in total product and tissue processing gross margins was primarily the result of price increases.

General administrative and marketing expenses were $11.2 million in the third quarter of 2007, compared to $8.5 million in the third quarter of 2006. NonGAAP general administrative and marking expenses in the third quarter of 2007 were $10.6 million, compared to nonGAAP general administrative and marketing expenses in the third quarter of 2006 of $10.4 million. General administrative and marketing expenses were $44.4 million in the first nine months of 2007, compared to $30.1 million in the first nine months of 2006. NonGAAP general administrative and marketing expenses in the first nine months of 2007 were $32.1 million, compared to nonGAAP general administrative and marketing expenses in the first nine months of 2006 of $30.8 million. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations including our Form 10Q, that we plan to file by the end of this week.

As you know, we licensed BioGlue to BioForm Medical for medical, aesthetic uses late last year. BioForm is responsible for the regulatory approval, marketing and distribution of BioGlue for those purposes. BioForm believes that BioGlue may offer an attractive alternative to conventional fixation methods in browplasty surgeries for forehead lifts which involve drilling into the skull for fixation, either with reabsorbable screws, posts or other suspension methods. In June 2004, BioForm began to enroll patients in a feasibility study to evaluate BioGlue as a method for tissue fixation in patients undergoing browplasty. At the conclusion of the feasibility study, BioForm will discuss options with the FDA for moving forward with a pivotal study for the approval of BioGlue. We will keep you updated as appropriate as developments occur.

During the quarter, we also announced that we had entered into an agreement with Proxy Biomedical, whereby Proxy would kit BioGlue with its proprietary surgical meshes to be used in hernia repair. BioGlue would be used as the fixation method for the meshes as compared to the current standard methods which are suture and tacking systems. Pain is often associated with current methods of fixation and BioGlue may reduce or eliminate the postsurgical pain associated with current fixation methods. Proxy is currently setting up studies in order to generate marketing data to support a full roll-out of the hernia repair kits. Again, we will keep you updated on their progress as developments occur. As of September 30th, 2007, the company had $14.2 million in cash, cash equivalents and marketable securities, of which $1.5 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. Now I will turn it back over to Steve.

On September 7th, we responded to the FDA's questions of July 18, 2007, on the CryoValve SG SynerGraft decellularized human pulmonary heart valve. After sending these answers to the FDA we requested a follow-up inspection directed at the CryoValve SG SynerGraft processed pulmonary valve. This served as a follow-up to their July/August 2005 inspection. The FDA inspectors were here from September 18th through September 28th. They did not issue a Form 483, notice of observations, at the end of their inspection. Therefore from our point of view, we have no outstanding compliance issues with the FDA. All of the information that the FDA has requested for our SynerGraft pulmonary CryoValve SG 510(K) premarket notification has been sent to them. We are awaiting their decision. It's impossible to predict how quickly the FDA will fact, or what they will do, but I'm hopeful that we could receive 510(K) clearance by the first quarter of 2008. Shortly after receiving clearance we will convert all of our pulmonary valve processing to SynerGraft processing. As a result of changing all of our pulmonary heart valve processing to SynerGraft processing, we should see a favorable impact on our revenues and our heart valve processing gross margins since the pulmonary SynerGraft heart valves are expected to have a premium fee over the standard processed CryoValve.

The official regulatory submission date for BioGlue in Japan was March of 2005. It now appears that we could receive approval within the next six months. Approval of BioGlue in Japan would be a significant achievement for us and would introduce us to what could be a very lucrative new market. Management believes that the Japanese surgical adhesive market may be the second largest adhesive market in the world. We are continuing the animal testing of BioFoam, an expandable form of BioGlue in preparation for our submission of a CE mark. We continue to evaluate the BioFoam against standard methods of controlling bleeding in liver resection surgery. We are also completing our stability, shelf life and biocompatibility studies for BioFoam. We remain on schedule for submitting our application for a CE mark during the first quarter of 2008. We are also continuing our development and evaluation of the BioFoam technology for use in trauma-based politics. To date we have received $1.9 million from the Department of Defense to assist in the development of a BioFoam that could be used for battlefield trauma. The BioDisc CE mark submission is still under review by our notified body in Europe. They have not asked any more questions or requested more data. We do not know at this time when the application will be approved.

On October 19th we hosted our annual Cardiac Surgery Fellows Allograft Symposium at our corporate headquarters. 27 cardiac fellows from around the United States attended the program. The course director this year was Dr. Paul Stelzer from the Mount Sinai Medical School in New York City. The keynote speaker was Dr. David McGiffin, who is the Associate Director Division of Cardiothoracic Surgery at the University of Alabama School of Medicine in Birmingham, and Chief of Dissection of Cardiopulmonary Transplantation at the University of Alabama at Birmingham. Attending faculty at the allograft symposium were: Dr. John Fehrenbacher, Director of Cardiothoracic Surgery at CORVASC in Indianapolis, Indiana, Dr. Francis Robicsek, Chairman of the Department of Thoracic and Cardiovascular Surgery, Carolinas Medical Center in Charlotte, North Carolina, and Dr. Craig Saunders, Chairman of Cardiothoracic Surgery at the Saint Barnabas Health Care System in Newark, New Jersey. That concludes my comments, and now I will turn the call back over to Ashley for the guidance for the fourth quarter of 2007 and for the fiscal year of 2008.

Thanks, Steve. We now expect product and tissue processing revenues for the full year of 2007 to be near or slightly below the lower end of our previously announced range of revenue guidance, which is $93 million. We expect general administrative and marketing expenses of between $45.4 million and $47 million and research and development expenses of between $4 million and $5 million for the full year 2007. We expect product and issue processing revenues for the full year of 2008 to be between $100 million and $104 million. This revenue guidance does not include any upside from the distribution of SynerGraft processed human heart valves. BioGlue revenues are expected to be between $47 million and $49 million, and tissue processing revenues are expected to be between $52 million and $54 million for the full year of 2008.

Other implantable medical device revenues are expected to be approximately $1 million in 2008. We expect general administrative and marketing expenses of between $48 million and $51 million, and research and development expenses of between $6 million and $8 million for the full year of 2008. The research and development expectations include an estimate of up to $1.6 million to be funded by the U.S. Department of Defense in connection with the development of BioFoam. Over the last couple of years, we have been releasing revenues a couple of weeks after the end of each quarter. We will continue that practice through the end of this year. Beginning with the first quarter results of 2008, we will no longer be releasing quarterly revenues prior to our quarterly earnings release. That concludes my comments, and I will turn it back over to Steve.

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

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from Mark Mullikin with Piper Jaffray. Please state your question.

Good morning.

Good morning, Mark.

On 2008 guidance, can you give us any color on your expectations for gross margin?

We believe that we have the opportunity to improve margin over and above what they currently are in the third quarter of this year. We don't expect a significant improvement in margins until we get a SynerGraft approval on our human pulmonary heart valves, but we do think that we can drive margins slightly higher than where they currently are.

And this year's gross margin, we had a nice bump this quarter. How much of that is being driven by price increase versus a mix shift to the cardiovascular tissues?

Yes, I don't have an exact percentage, Mark, but certainly the pricing has certainly helped to drive margins this year, and to a lesser extent, I think that we have seen some margin improvement due to the shift mix in our tissue business from orthopedics and into cardiac and vascular tissues. But I think it's predominantly pricing driven over the last couple of quarters.

Okay. And will those price increases continue into '08, or do you expect that to flatten out?

We are currently evaluating our pricing for 2008, and we plan on implementing some selective price increases going into 2008. We expect those to be in the mid-to-high single digits on average.

Okay. And the R&D guidance for next year seems a little bit higher than we were expecting. First of all, on the payments from the Department of Defense, how do those get counted for on the income statement?

We currently have received money from the Department of Defense right now, and I think it's at approximately $1.5 million right now. And that -- that amount is included as deferred revenue on our balance sheet. When we actually conduct studies related to that project, we will concurrently record revenue and expense.

Okay. So it will be offset by the R&D line then.

Yes. It will have a net zero effect on our bottom line.

Okay. So the core R&D is going up a bit. Are there any particular areas where you are spending that money?

I think a lot of areas that Steve referred to in his comments, we're spending money on BioDisc, BioFoam. We are continuing to make progress on our SynerGraft platform, as it related to both human tissues, as well as xenograph issues. So, it's really across the board, and we are really investing in both of our platforms which is the protein hydrogel technology and our SynerGraft technology.

Okay, thank you.

You're welcome.

At this time, there are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Thank you very much for joining us for the third quarter report and the update for our guidance for '07 and for fiscal year '08. And we will look forward to meeting with you at the close of our fiscal year.

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