Artivion Inc (AORT) 2009 Q2 法說會逐字稿

Greetings, and welcome to the CryoLife Second Quarter 2009 Financial 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, Steve Anderson, President and CEO for CryoLife. Thank you. Mr. Anderson, you may begin.

Good morning, everybody. This is Steve Anderson, CryoLife's CEO, and I'd like to welcome you to CryoLife's Q2 and First Half 2009 Conference Call. With me today is Ashley Lee, the Company's Chief Financial Officer, COO, and Executive Vice President.

This morning we announced all-time record quarterly revenues of $28.2 million. June of 2009 represented our all-time high monthly revenues of $10.1 million. Cardiac revenues were up 16% in the second quarter, as compared to the first quarter of 2009, representing a significant rebound from cardiac revenues in the last two quarters. The second quarter also represented the Company's tenth consecutive quarter of profitability.

The agenda for today's call is as follows; Ashley will discuss the financial results for the quarter by product line. He will comment on our revenue performance by product line, cash flow, and our strengthening balance sheet. I will discuss the status of our CE Mark application for the BioDisc Nucleus Pulposus replacement device, the status of our CE Mark application and IDE timetable for BioFoam Surgical Matrix, and our continued success with SynerGraft-treated decellularized pulmonary human heart valves.

After my comments are completed, Ashley will return to give some financial guidance for the rest of the year. After Ashley's comments, we will open the call for questions. At this time, Ashley was going to comment on the Company's Q2 and first half of '09 operating results.

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 in our 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.

Additional information concerning risks and uncertainties that may impact these forward-looking statements 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, 2008, our form 10-Q for the quarter ended March 31, 2009, our form 10-Q for the quarter ended June 30, 2009, which we expect to file by the end of this week, and the press release that went out this morning, a copy of which is contained on the Investor Relations portion of our website.

This morning we reported our results for the second quarter and first half of 2009. We set an all-time quarterly revenue of $28.2 million in the second quarter of 2009 and an all-time first six-month revenue record of $54.9 million. These amounts were 4% higher than the corresponding periods of 2008.

The second quarter total was 6% higher than total revenues in the first quarter of 2009, which reflects improvements in our cardiac tissue processing business and continuing growth in HemoStase revenues.

Our operating income for the second quarters of 2009 and 2008 was $4.2 million. Our operating income for the first half of 2009 was $7.7 million, an increase of 11% compared to 2008. Operating margin was 15% in each of the second quarters of 2009 and 2008. Operating margin increased to 14% in the first half of 2009, compared to 13% in 2008.

Net income for the second quarter of '09 was $2.5 million, or $0.09 per basic and fully diluted common share, compared to $3.9 million, or $0.14 per basic and fully diluted common share for the second quarter of 2008.

Our effective income tax rate was 41% for the second quarter of 2009, compared to 6% in the second quarter of 2008. Our effective tax rate was lower in 2008 due to the valuation allowance on our deferred tax assets in that year. If we had recorded 2008 income taxes at a normalized 41% effective tax rate, net income in the second quarter of 2008 would have been $2.4 million and fully diluted earnings per share would have been $0.09.

Net income for the first six months of 2009 was $4.5 million, or $0.16 per basic and fully diluted common share, compared to $6.7 million, or $0.24 per basic and fully diluted common share for the first six months of 2008. If we had recorded 2008 income taxes at a normalized 41% effective tax rate, net income in the first six months of 2008 would have been $4.1 million and fully diluted earnings per share would have been $0.15.

See our press release issued this morning, a copy of which is contained on the Investor Relations portion of our website, for a reconciliation of these non-GAAP net income and earnings per share numbers to the corresponding GAAP numbers.

Cardiac revenues for the second quarter and first six months of '09 increased 2% and decreased 4% compared to the corresponding periods in '08. The increase in the second quarter was primarily due to a 2% increase in unit shipments, partially offset by a decrease in average service fees. But more importantly, cardiac revenues in the second quarter of '09 increased 16% compared to the first quarter of '09 on a 16% increase in unit shipments.

We saw evidence that the cardiac business stabilized during the second quarter and we saw significant improvement compared to the first quarter of '09 and the fourth quarter of '08. We believe factors contributing to the cardiac improvement include our efforts in physician training, including the Ross Summit and monthly aortic allograft workshops and the efforts of our new specialized cardiac technical representatives in addition to anticipated seasonal increases in our cardiac tissue business. We are encouraged by this progress and expect continued improvement in this business.

Revenues from the distribution of CryoValve SG Pulmonary Heart Valves increased to $1.5 million for the second quarter of '09, from $1.4 million in the second quarter of '08. This represents 24% of our cardiac tissue processing revenues in the second quarter of '09. Revenues from the distribution of CryoValve SG Pulmonary Heart Valves increased to $2.7 million in the first half of '09, from $1.6 million in the first half of '08.

Vascular revenues for the second quarter and first six months of '09 increased at 7% and 11% compared to the corresponding periods in '08. These increases were driven by a 7% and an 11% increase in unit shipments for the second quarter and first six months in '09 compared to the corresponding periods in '08.

Recall that annually there are over 170,000 lower limb amputations due to peripheral artery disease and critical limb ischemia. We think with the aging of the US population this will continue to be a very attractive market for us and we believe that we have significant room for growth in this business.

Product revenues, which consist primarily of BioGlue and HemoStase, increased 5% in the second quarter of '09 compared to the second quarter of '08 and increased 6% in the first half of '09 compared to the first half of '08. We had a very difficult prior year quarterly comp for BioGlue as the second quarter of last year was by far our best quarter during 2008. BioGlue revenues were $12.4 million and $24.1 million for the second quarter and the first six months of '09, compared to $13 million and $24.9 million for the corresponding periods in '08.

BioGlue revenues in the second quarter of '09 did improve over the first quarter of '09 with an increase of 5%. Excluding the effects of changes in foreign currency exchange rates year-over-year, which reduced BioGlue revenues by $331,000 and $639,000 in the second quarter and first six months of '09, BioGlue revenues would have been $12.7 million and $24.8 million.

HemoStase revenues for the second quarter and first six months of '09 were $1.5 million and $2.6 million. HemoStase was added to our product portfolio in the second quarter of '08.

Tissue processing and product gross margins were 63% and 64% for the second quarter and first six months of '09 compared to 66% and 65% for the corresponding periods in '08. We expected to see this decrease in gross margins as HemoStase sales, which carry a lower gross margin than our recent aggregate gross margins, continue to grow and with some pricing pressure that we've seen as a result of the economy and its effect on hospital purchasing patterns.

Tissue processing gross margins for the second quarter and first six months of '09 were 43% and 44% compared to 46% in the corresponding periods in '08. Tissue processing gross margins decreased due to previously mentioned pricing pressures and slightly higher unit processing costs.

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.

As of June 30, 2009, we had $26.7 million in cash, cash equivalents, and marketable securities, compared to $22.8 million at December 31, 2008. As of today, these balances stood at approximately $28.3 million. Of the $26.7 million on hand at the end of the second quarter, $2.5 million was received from the DoD as advanced funding for the developing of BioFoam and $5 million was designated as long-term restricted money market funds due to a financial covenant required under our credit agreement. That's it right now and I'll turn it back over to Steve.

Thank you, Ashley. Our CE Mark application for BioFoam Surgical Matrix was submitted in December of '08. The initial clinical indication for use that we applied for is the sealing of lacerated parenchymal organs such as livers and spleens.

For those of you not familiar with the product, it consists of the same base chemical component as our BioGlue surgical adhesive, but includes the addition of expansion agents in the formulation. When BioFoam is administered to the site of application, it increases its volume by a factor of roughly four times and works by providing a mechanical seal of the underlying parenchymal surface through its adherence to the tissue surface and the aggregation of cellular components within the foam matrix. It looks a lot like Ready Whip when it is applied.

We are expecting a response and approval of our CE Mark application for BioFoam sometime during the third quarter. After we have received approval, we intend to begin a controlled clinical launch at about five to six hospitals throughout Europe including the UK, Germany, France, and Italy.

From my point of view, BioFoam has a number of advantages over other sealants. First, it is more easily seen in the surgical field. Second, it is more viscous than other products and it tends to stay where you initially apply it. Third, it is quite porous and will biodegrade more quickly than some other sealants on the market. And fourth, it is more flexible and does not have a rigid or solid nature to it as do some other products.

We are continuing to work with the FDA on our IDE application for BioFoam. As you may recall, we have received conditional approval for the initial clinical testing of BioFoam in the US. We have recently submitted an amended IDE to the FDA to address the outstanding issues and we expect to hear back from them before the end of August.

Once we receive final IDE approval, our clinical study will evaluate BioFoam as an adjunct when cessation of bleeding by ligature or conventional methods is ineffective or impractical on liver parenchyma. This is a two-part investigation including a feasibility phase followed by a pivotal phase. Both phases will be prospective, multi-center, randomized, and controlled.

The feasibility phase of the investigation will be conducted at a maximum of two investigational sites and will enroll 20 eligible subjects. The pivotal investigation will include a total of 164 eligible subjects, 82 subjects in each treatment group enrolled across a maximum of 10 investigational sites. We believe that we can obtain commercial approval in approximately two to three years.

We think the annual worldwide market opportunity for a product like BioFoam, used for the sealing of abdominal parenchymal tissues, is over 100 million. We continue to evaluate other potential uses for BioFoam including its clinical utility in the treatment of traumatic injuries and in cardiovascular surgery.

As we have mentioned in previous conference calls, in November of '08 our European Notified Body responded to our submission for a CE Mark for BioDisc with numerous questions. We provided a detailed response to these questions in April of this year. They have recently asked for additional time to evaluate the data that we have supplied. Our bench testing and clinical implant data are being reviewed by a spine surgeon that is a consultant for the Notified Body. We expect their answer sometime during the third quarter.

Depending on the final outcome of the CE Mark review, we may look to license the technology to a corporate partner for further development or possibly continue with a limited post market clinical study.

As I commented in my opening remarks, the second quarter saw the cardiac portion of our business rebound substantially with a quarter-to-quarter increase of about 16%. We believe this turnaround is due to a couple of things. First, we believe that our implementation of our specialized cardiac technical representatives last year, who focused solely on a cardiac surgeon call point, has started to gain traction.

Secondly, the continuing acceptance of the efficacy of our CryoValve SG SynerGraft Process to pulmonary heart values that are used for both right ventricular outflow tract reconstruction, which is primarily performed in pediatric patients, and in conjunction with the Ross procedure. We now have more than 2,000 implants of this valve, with the longest implant being over nine years.

Based on our multi-center retrospective cohort study of 342 consecutive patients at a mean of four years, the CryoValve SG Pulmonary Heart Valve is as safe as other pulmonary heart valves and has at least comparable, if not improved, hemodynamic performance.

A compelling reason for use of the SynerGraft process valve is that the reduced cellular content provides an immunological benefit to the patient. As part of the three-year post-clearance study, additional long-term follow-up of these patients is ongoing and may provide us with additional clinical benefits that we can use to promote the SG pulmonary valve.

Plans are well underway for the second annual Ross Summit Meeting of cardiovascular surgeons that will be held at our corporate headquarters on September 25 through September 26. The faculty of over 30 world-renown cardiovascular surgeons will be presenting their clinical data on heart reconstruction surgeries at their respective clinics.

The Congress includes didactic sessions as well as two afternoons of wet lab instruction in various techniques of cardiac reconstruction. Faculty and attendees currently number more than 115 surgeons from 28 countries around the world. The course director of the Congress is Professor Sir Magdi Yacoub of the Imperial Heart Hospital in England, assisted by William F. Northrup, III, M.D., Vice President of Physician Relations and Medical Education at CryoLife.

Some, but not all of the countries, represented at the Congress are Argentina, Brazil, Russia, Saudi Arabia, Romania, Germany, the UK, and the Netherlands. For a complete list of the faculty and the program of clinical presentations, please refer to the website called www.rosssummit.org. Now I'll turn the call back over to Ashley for some additional guidance.

Thanks, Steve. Despite the challenging economic environment that we find ourselves in, we believe that we are well positioned to continue moving forward. Many of our products, and especially our tissue offerings, are implanted in critically ill patients for which there are few options. In addition, we are the leading cardiovascular tissue processor in the world and we have limited competition from other human tissue processors.

We are updating our guidance for the full year of 2009, which we initially gave to you in October of 2008. Our GAAP revenues are comprised of tissue processing and product revenues plus other revenues. We expect total revenues for the full year of '09 to be between $112 million and $116 million.

We expect tissue processing revenues to be between $57 million and $59 million. We expect product revenues to be between $54 million and $56 million, with BioGlue revenues to be between $49 million and $50 million for the full year of '09 and other medical device revenues, which consistent primarily of sales of HemoStase, to be between $5 million and $6 million in '09.

Tissue processing and product revenues could be affected by several factors including, but not limited to, the general economic environment and its effect on demand for our tissues and products, and changes in foreign currency exchange rates and their effects on revenues generated in international markets.

Other revenues for '09 are expected to be approximately $1 million related to funding received from the Department of Defense in connection with the development of BioFoam. The amount of other revenues is largely dependent upon actual expenses incurred related to the development of BioFoam.

We expect G&A and marketing expenses of between $50 million and $52 million and R&D expenses of between $5 million and $6 million for the full year of '09. The R&D expectations include approximately $1 million to be funded by the Department of Defense in connection with the development of BioFoam.

We expect operating income to increase for the full year of '09 compared to '08. We expect our effective income tax rate to be approximately 41% in '09 compared to a tax benefit in '08. As a result, EPS in '09 will be lower than in '08. That concludes my comments and I'll turn it back over to Steve.

At this time, we'll open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from Mr. Matt Dolan with Roth Capital Partners. Please state your question.

Good morning, Steve and Ashley.

Good morning.

Good morning.

Just a first question on the guidance here. Looks to be relatively across-the-board in terms of your revenue segment. What has changed your outlook relative to probably some of the issues we've seen here in the past in terms of hospital inventory, volumes, pricing, et cetera? Can you just walk us through the rationale behind that reduction?

I think the primary reason for the rationale is that when we gave our initial guidance it was in October of '08 and that was really right at the outset of the really challenging environment that we entered into as it related to the economy and hospital spending. So I think it's really just a reflection of the environment in which our initial guidance was formulated.

And after we saw what happened in the fourth quarter and the first quarter, it was apparent that the environment that we were in was affecting just about every healthcare company that was out there. So it was really just a function of the timing of when our initial guidance was generated.

Okay. And it looks like your expense expectations have also come in and bid at that. Is that a strategic initiative or is there a reason behind that?

No, I think some of it is due to the fact that revenues are down slightly -- the guidance. And so things associated with that like commissions are down. Also, we've seen a negative impact on the top-line as it relates to foreign currency exchange rates. We're seeing a little bit of a benefit as it relates to the expense line. So no really strategic initiatives there related or causing the decrease in the expense guidance.

Okay. As you start thinking about moving in 2010 with your sales infrastructure, do you feel that you're well covered now or is there a push to possibly ramp that up to further drive revenue maybe next year?

We currently have no plans to increase sales force at this time. We think that we have enough at this point to continue driving our business with the product mix that we currently have.

Okay. And then finally on the strategic front. Are there any potential ways to kind of augment the sales force's bag at this stage or any tuck-in type of products that could be available to you?

I think that we have stated publicly in the past that when we look at growing our business, first and foremost we want to grow our business organically and we have things in our pipeline that we think will be added to growth, if we are successful in getting them through the pipeline.

The other thing that we have mentioned publicly is that we continue to look for opportunities that would be synergistic, primarily with our distribution channels right now, our direct sales force, and the distributors around the world. So we continue to look for opportunities to augment our growth, but it's got to be the right opportunity.

Sure. Okay. Thanks, guys.

Our next question is from Mr. Greg Brash with Sidoti & Company. Please state your question.

Steve and Ashley, good morning. Thanks for taking my call.

Hi, Greg.

You mentioned some pricing pressure on the cardiac tissue side. How bad is it? Is it getting worse or is it pretty much similar to where it's been the last several quarters?

I don't think that we're seeing it getting any worse. We saw a lot of it in the fourth quarter and first quarters of this year. We see a little bit more in the second quarter, too, but I think a lot of the push-back that we got we saw in the first and fourth quarters. We continue to see a little bit even now, but I don't think that pricing pressure are going to really be forcing pricing down substantially from where we currently are right now over the remainder of the year.

The thing is, though, is that when we enter into these contracts to renegotiate some pricing, they typically are contracts that last for about a year and so we're not seeing a lot of new push-back, although we're seeing some, but we saw a lot in the fourth quarter of last year and the first quarter of this year.

Okay. And then just on the vascular tissue side. Are you seeing any pressure there? It looks like it was down a little sequentially. I know that's a lumpy business. Is there anything going on just other than quarterly lumpiness?

We think it's that purely. We had a really good first quarter. We still remain very optimistic about that business and think longer term that we've got a great opportunity to continue growing that business.

Okay. And I'm not sure if you mentioned or if I missed it, any update on BioGlue in Japan?

None.

Any idea or any expectations you have for when that may come through or is it just --

Based on the past history, I have stopped making prognostications on that.

Okay. Fair enough, Steve. And then just one more on cardiac tissue. Is it fair to assume that the inventory to stocking has run its course? And the growth you saw sequentially in this quarter, was there any restocking or was that driven primarily by procedure volume?

We believe it's primarily driven by procedure volume.

Great, thank you.

Again, the business strengthened as we went throughout the second quarter and the month of July looks pretty good, too. We hope that this is a trend that's being established and we're optimistic that the business is going to continue to stabilize and improve. So we think what we saw in the second quarter was primarily procedure volume-driven as opposed to restocking.

Great. Thanks.

The reason we feel that way is that Dr. Northrup has monthly training classes where he meets with between seven and 10 physicians one-on-one for two days a month. They come in here to corporate headquarters and they work through all of the development of sophisticated cardiac reconstruction surgical techniques. And so there is an opportunity for a lot of one-on-one contact.

We have been very pleased with the reception of this kind of training by the physicians throughout the United States. And I think based on how many people or how many doctors Bill has trained so far, I think by the time we get to the end of this year he's going to have trained 85, 90 doctors with one-on-one training in how to do complex cardiac repair. So that, I think, is one of the strong points behind Ashley's statement that we think that this is procedurally driven; it isn't just a matter of restocking our freezers in the hospitals.

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

All right. Well, thank you for joining us today and we will look forward to talking to you at the end of the third quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.