Artivion Inc (AORT) 2010 Q1 法說會逐字稿

Greetings and welcome to the CryoLife first quarter 2010 financial conference call. At this time all part pants 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, everyone. This is Steve Anderson. CryoLife CEO. And I would like to welcome you to our first quarter 2010 earnings conference call. With me today is Ashley Lee, the Company's Executive VP, COO and CFO. We were very pleased to release our earnings report, today as we reported record quarterly revenues of $29.7 million, an 11% increase over the same period of a year ago and earnings of $1.9 million or $0.07 per share.

Revenues were up in all parts of our business. It was an all-time record quarter for vascular tissue and a best first quarter record for BioGlue and BioFoam combined. This is the 13th consecutive quarter of profitability for the company. The agenda did you for today's call is as follows -- Ashley will comment in detail on the company's operating results for the first quarter. He will comment on our significant cash position and how we intend to use that cash to enhance shareholder value.

After Ashley completes his comments, I will comment on the initial clinical outcomes with BioFoam in Europe and the overall European launch plans. I will also comment on the Department of Defense approval process for the BioFoam IDE study and the time line for patient enrollment once final approval is achieved. I will comment on the company's participation in the upcoming American Association for Thoracic Surgery meeting. After my comments, Ashley will return for the purpose of updating the company's financial guidance for the rest of the year. After his guidance comments, we will open the call for questions. At this time Ashley will comment on today's press release.

Thank you, 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. 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. Additional information concerning risk and uncertainties that may impact these forward looking statements is contained from time to time in the Company's SEC filings including the Risk Factor section of our Form 10-K for the year-ended December 31, 2009, our Form 10-Q for the quarter ended March 31, 2010 which we expect to file by the end of this week, and in 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 first quarter of 2010. We set an all-time quarterly revenue record of $29.7 million in the first quarter of 2010. This represents an 11% increase compared to the corresponding period in 2009. As of March 31, 2010, we had $37.7 million or roughly $1.30 per diluted share in cash, cash equivalents and restricted securities, compared to $35.1 million at December 31, 2009. Of this $37.7 million, $2.5 million received from the US Department of Defense as advanced funding for the development of BioFoam protein hydrogel technology and $5.3 million was designated as restricted securities primarily due to a financial covenant requirement under our credit agreement. Our cash, cash equivalents and restricted security balances as of today are approximately $40 million.

Net income for the first quarter of 2010 was $1.9 million or $0.07 per basic and fully diluted common share compared to $1.9 million or $0.07 per basic and fully diluted share for the first quarter of 2009. We recorded pretax charges in the first quarter of 2010 of $729,000 in connection with the writeoff of capitalized legal expenses associated with our BioGlue intellectual property rights in Germany, approximately $380,000 in business development costs primarily associated with our proposal to acquire Medafor, and approximately $415,000 in cost associated with our litigation with Medafor. Additionally we recorded an $817,000 gain on the change in value of the derivative related to the investment in Medafor common stock.

Cardiac revenues for the first quarter of 2010 increased 23% compared to the corresponding period in 2009. The increase in first quarter compared to the prior year was primarily due to a 21% increase in cardiac tissue unit shipments. We believe this is in large part due to the efforts of our cardiac specialist sales force. Additionally we are seeing growing interest in international markets for our preserved cardiac tissues.

The vascular business continues to do very well, driven by strong unit growth. Vascular revenues for the first quarter of 2010 increased 10% compared to the corresponding period in 2009. This increase primarily resulted from an 8% increase in unit shipments for the first quarter of 2010 compared to the comparable period of 2009.

Product revenues, which consist primarily of BioGlue and HemoStase, increased 8% in the first quarter of 2010 compared to the first quarter of 2009. The increase year over year primarily reflects the growing usage of HemoStase in cardiac and vascular surgery in the US and cardiac vascular and general surgery indications in many markets outside the U.S.

Total preservation services and product gross margins were 60% for the first quarter of 2010 compared to 64% for the first quarter of 2009. Preservation services gross margins for the first quarter of 2010 were 40% compared to 45% in the first quarter of 2009. Product gross margins for the first quarter of 2010 were 82% compared to 85% in the corresponding period in 2009.

General, administrative, and marketing expenses for the first quarter of 2010 were $13.8 million, compared to $12.7 million for the first quarter of 2009. G&A and marketing expenses for the first quarter of 2010 included a charge of $729,000 related to the writeoff capitalized legal expenses associated with our BioGlue intellectual property rights in Germany, $380,000 in business development costs associated with our proposal to acquire Medafor and approximately $415,000 in costs related to our litigation with Medafor. R&D expenses were $1.3 million and $1 million for the first quarters of 2010 and 2009 respectively. R&D spending in 2010 primarily focused on BioGlue, BioFoam and our SynerGraft tissues and products. Refer to our SEC filings for our detailed discussions of factors affecting our results and operations including our Form 10-Q that we plan to file by the end of this week.

And now I will turn it back over to Steve.

During the first quarter progress continued on the European post-market study for BioFoam at 3 EU centers. The focus of the study is the assessment of BioFoam as a surgical hemostatic adjunct in the open repair of liver parenchyma following live resection or liver transplant surgery. A total of 53 patients have been enrolled into the study with a target enrollment of 55 patients at these 3 centers. This includes 13 in the United Kingdom, 15 in France and 25 in Germany. Interim analysis shows achievement of hemostasis within 1 minute in 88% of the application sites and within 3 minutes in 94% of the application sites. We are adding a fourth center from Leipzig, Germany to increase overall enrollment to 70 patients.

As we broaden our clinical approach, CryoLife is also establishing an on-line data registry for surgeons to document clinical information related to the use of BioFoam. Based on the successful outcomes and surgical technique refinements developed during the European post market study, distributor and direct sales team training was conducted in late January at the annual European kickoff meeting that was held in Rome. The product was formally introduced to the marketplace at the European Association for the Study of the Liver which was held in Vienna in mid-April this year. Initial sales to date have been made to distributors and clinics in Germany, Italy, France and Spain. Early acceptance of BioFoam by clinicians has been encouraging, with more than 70 applications of the BioFoam product to date.

On December 9, the Company received approval from the Department of Defense to move forward with the IRB submissions at pilot centers for the BioFoam IDE in the United States. This is the last step in the DoD approval process for the IDE study. As you will recall , the DoD is funding the US clinical study for BioFoam. FDA has already provided approval for this IDE study. We expect to receive final written approval from the DoD within the next 4 to 6 weeks. We expect patient enrollment for the United States IDE for BioFoam's use as an adjunct to conservative measures of achieving hemostasis on resected liver parenchymal tissue to commence in Q2.

An interim analysis is planned once all 20 patients from the two pilot centers reach 12-month follow-up. The study report along with a request to initiate the pivotal phase of the study will be submitted to FDA and DoD at that time. During the recent pre-clinical testing of BioFoam, it was observed that it was effective in withstanding aortic blood pressures. Accordingly, a decision was made to design a study to evaluate hemostasis in a cardiovascular application. The animal work is beginning and will consist of 25 animals to be followed for up to 3months. BioFoam's effectiveness will be evaluated against the effectiveness of gel foam and BioGlue. This study is expected to begin during the second half of this year.

As you may recall, CryoLife at the FDA's request committed to conducting a post clearance study to collect long-term safety and hemodynamic data on the Cryovalve SG pulmonary human heart valve. This study which includes both retrospective and prospective patients will provide 10-year performance data on the valve. A minimum of 140 patients will be enrolled into the study at 9 centers in the US of which prospectively enrolled patients will comprise approximately 40% of the total patient population. Our first prospectively enrolled patient was enrolled in April of this year. We anticipate that the study will be completed at the end of 2011. Data collected in this study will be compared to data from the defined control patients implanted with a conventionally processed pulmonary human heart valve. CryoLife believes the information may help ascertain whether the SynerGraft process impacts the long-term durability of the valve.

The Company will be attending the American Association of Thoracic Surgery meeting in Toronto May 2 through 4. This meeting is typically very well attended by US and international physicians. All of our products that are approved either in the US or internationally will be featured including Cryovalve SG, Cryopatch SG, BioGlue, BioFoam and HemoStase. In addition, the booth will feature 7 wet labs conducted by Dr. Northrop. It should be an extremely productive meeting at the Company.

At this time Ashley will return and give you some financial guidance for the remainder of the

We are reiterating our guidance for the full year 2010 subject to the on going litigation with Medafor including our continued ability to sell HemoStase. We expect total revenues for the full year of 2010 to be between $118 million and $123 million, which includes between $1.5 million and $2.5 million related to funding received from the Department of Defense in connection with the development of BioFoam. We expect tissue processing revenues and BioGlue revenues to each increase between mid single and low double digits on a percentage basis in 2010 compared to 2009. With HemoStase revenues increasing significantly more than that on a percentage basis. R&D spending should increase for the remainder of the year as we anticipate beginning enrollment in the BioFoam IDE in late 2Q or early 3Q.

We expect our effective income tax rate for the remainder of this year to be between 40% and 41%. We expect EPS of between $0.36 and $0.40 for 2010. Our guidance includes general expenses associated with business development opportunities, but does not include significant expenses associated with specific targets such as Medafor. We have withdrawn our proposal to acquire Medafor and do not currently anticipate a transaction with them occurring during 2010. However, should we renew our proposal or take other actions to acquire Medafor such as a proxy contest or tender offer, we could incur expenses or changes in the value of the Medafor derivative that could materially affect our guidance.

Medafor informed us on March 18, 2010 that the distribution agreement between the parties was terminated. We filed an emergency motion for preliminary injunction in federal court requesting that the court order the agreement to not be terminated. The court has set a hearing date for May 10, 2010. If Medafor is successful in its attempt to terminate the agreement, and elects to discontinue shipping HemoStase to us, our full year 2010 guidance would be adversely affected. We believe that Medafor does not have a basis for terminating the agreement, and the guidance above assumes it will not be successful. However, there is no guarantee the outcome will match our expectations. Additionally we had budgeted for a certain level of expenses related to our ongoing litigation with Medafor. If the actual future legal expenses exceed the amounts budgeted, then it could materially adversely affect our expense and earnings guidance.

We continue our efforts on the business development front to find complementary products for companies that we can acquire to leverage our existing infrastructure and sales force. We have carefully evaluated alternatives and believe business development efforts are a prudent use of our cash reserves in a strategy that will create value for our shareholders. However, we are also considering other potential uses of our cash, including a share repurchase. Whatever pathway we ultimately take will be with the intent of delivering value to our shareholders.

That concludes my comments and now I will turn it back over to Steve.

At this time we will open up the call for questions

Thank you. (Operator Instructions). Our first question is from the line of Matt Dolan with Roth Capital Partners. Please proceed with your question.

Hi, guys, good morning.

Good morning.

Hi, Matt.

First question on the sales force, can you give us an update of where you are and your plans for expansion this year? It looks like the base preservation business has come back nicely.

We currently don't have plans to expand the sales force for the balance of this year domestically. You know, we currently stand including sales managers at approximately 50 people. You know, we are considering maybe expanding in Austria on a direct basis at this time, but domestically, you know, we are not planning on doing anything at this point.

Okay. And your maintenance of your earnings guidance -- what costs have you baked in that are associated with business development and litigation and what allows you to maintain your guidance as those costs are obviously higher than what you thought initially?

You know, without giving you the specific numbers, I'll frame it this way, Matt -- if our expenses for the last three quarters of the year related primarily to litigation are similar to what they were in the first quarter of this year, then we will probably be closer to the lower end of our guidance.

Okay. With respect to the Medafor agreement, where are you on HemoStase supply at this point? Are they still shipping to you and how far along are you on any contingency plans you might have?

As it relates to their shipping product to us, the last purchase order that they were -- where shipment was due to us was placed in January. And they have substantially fulfilled the shipment of that purchase order. We recently placed additional purchases -- purchase orders recently, and the shipment for those particular purchase orders are not due until mid-May. So we will find out in mid-May as to whether or not they will -- they are planning on continuing to ship product to us.

So you have inventory through mid-May?

No, we actually have about three months of inventory on hand right now. But the next shipment that is due from Medafor is due in mid-May.

Okay. And a couple other quick ones, you talk about your business development evaluations continuing, but also looking at a share repurchase. Maybe you can explain when you draw that conclusion to go with a share repurchase or how you get there and what are the major points of coming to that ultimate determination?

Our annual meeting is toward the end of May, and that will be discussed at the reorganizational board meeting that takes place immediately following the annual meeting, and I believe the date of the annual meeting is May 20. So that decision will be made that day.

Okay. And finally on the gross margin, Ashley, it looks like it was a little lighter than what we anticipated although BioGlue didn't grow as well as the other side of the business. What do we account for there and maybe just give us guidance on how that tracks this year.

You know, we think our margins for the balance of this year are going to be relatively stable. I mean, they could fluctuate slightly either way somewhat contingent upon what percentage of the revenue mix BioGlue has. But we expect revenue -- we expect gross margins to remain relatively stable for the balance of the year.

Thank you, guys.

Okay.

Thank you. Our next question is from the line of Greg Brash with Sidoti and Company. Please go ahead with your question.

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

Hi, Greg, how are you?

Doing well. On the HemoStase side, you mentioned you have three months of inventory. I thought your inventory ended at the end of May. So you're saying you have inventory through July? Is that correct?

Roughly. Depending on what particular product it is and what particular size, but it is roughly three months worth of inventory as we sit here today.

Okay. And you are maintaining your guidance. I'm assuming you have some confidence the judge will enjoin this termination, but if he doesn't you have plans to bring on some additional products to replace HemoStase?

We have stated that we remain very active on the business development front. We are not going to talk about specific areas or specific targets until it is appropriate to do so. But the HemoStase product is important to us and to that extent we would like to protect that revenue string going forward.

Okay. Switching to BioGlue, some past quarters you were seeing off label use, less off label use, pricing pressure, hospitals just curtailing the use of surgical sealants, any improvement there?

We continue to see those types of issues out in the field. I think one of the areas that -- you know, first of all the business is up year over year. That's the important thing. One of the areas of the country where we did see some challenges more so than recently was in the northeast. But all of the other issues that we see, they are still out there, but we still remain focused on growing that business.

Okay. And then just switching to cardiac, have you seen any of the hospitals that last year were destocking inventory. Are they still running at lower levels? Have any started to restock back to levels that they did prior to the recession? And any change in pricing pressure because it looks like your gross margin has stabilized.

We have had very good results not only in the fourth quarter, but the first quarter and increasing the unit shipments of Allograft heart valves, and that business has been quite strong for us. There have been a number of new papers that have come out regarding Allograft valve transplants and longevity. I think that is also helping us. But that business is thriving, and our cardiac specialist approach that we started at the beginning, I believe, of 2008 has really paid off on that. That's a very strong and growing part of our business. With more usage, more unit shipments, certainly the freezers in the hospitals are being restocked.

Okay. No change in pricing pressure?

No. We haven't had any changes at all. The longevity data for an Allograft valve is very favorable in comparison to anything else that you might use in patient population we serve. I think that that's going to stay that way. I think our prices are fair and reasonable.

Lastly, were there any revenues from BioFoam sales in Europe this quarter?

In the first quarter there were less than 50, 000, but we obviously expected that to increase as we received more clinical data of the efficacy of the product.

Great, thanks, guys.

Thank you. Our next question is from the line of Raymond Meyers with the Benchmark Company. Please proceed with your question.

Thank you.

Hello, Raymond.

Hi, Ashley. First question is what was deferred preservation cost in the first quarter?

Hang on one second. I can get that information for you. Deferred preservation costs were $34.7 million at the end of the first quarter. So it was roughly a $1.7 million decrease from the end of the year balance.

That's great, good. And one more question about the earnings guidance. Does that include continued Medafor litigation expenses that will be anticipated from the current ongoing dispute?

It does. We do have an amount provided in our budgets for litigation moving forward. I will refer you back to the press released and we have incurred roughly $400,000 a little more than that in litigation costs associated with all the litigation that's going on with Medafor.

There were a couple of items of note in the first quarter. First, the action that Medafor brought personally against Steve Anderson was settled in the first quarter of this year. We incurred a significant amount of cost associated with that, and that is not going to be recurring in the last three quarters of the year. The other thing is that we spent a significant amount of money on the emergency preliminary injunction in the first quarter of this year and we obviously don't expect to incur that cost for the remainder for the balance of the year. But again, litigation is inherently uncertain, and the costs could spike. But there were a couple of things that occurred in the first quarter that we don't expect to incur for the balance of the year.

So what you have visibility to currently in April and in this current quarter is included in guidance?

That's correct. As we have stated, even if the litigation with Medafor continues at the levels that it did in the first quarter of this year in total, you know, we think that would push us toward the lower end of our guidance that we stated.

Okay. That sounds good. Next I wanted you to explain the -- why the patent loss -- or explain whether the patent loss in Germany would impact your BioGlue sales in Europe.

We don't think that it will. First of all, Tenaxis, the other party of the nullity action, has been distributing their BioGlue -- or their product, which is ArterX, in Europe. We've been competing against that in Europe for a year or two now. Even with that competitive product on the market, if I recall correctly, we increased our revenues in Germany year over year in excess of 20%. And we expect to do even more than that in 2010 compared to 2009 as it relates to Germany. And the nullity action that resulted in us taking charge in the first quarter is only specific to Germany. It doesn't really affect the other countries in the EU.

Right. Good. Steve, you had mentioned that you were discussing a share repurchase at a restructuring meeting that you would be holding after your annual meeting?

Well, we have the annual board of directors meeting that follows the annual meeting. And assignments have to be made at that meeting for chairmanships of all of the various committees. The officers all have to be re-elected and so that is a very busy meeting, more busy -- busier than other meetings generally are throughout the year.

Okay. So we shouldn't be anticipating a significant restructuring from the outcome of that meeting?

No. It is just that I am hopeful I get re-elected.

I'm sure you will.

Yes, you know. Nothing is sure in this world.

Okay, great. Thank you, gentlemen.

Thanks, Ray.

Thank you. Our next question is a follow-up from the line of Matt Nolan from Roth Capital Partners. Please proceed with your question.

Matt?

Mr. Dolan your line is live for question.

I guess he left us. Are there any other questions?

Gentlemen, we have a follow-up from the line of Raymond Meyers. Please go ahead with your question, sir.

Thanks. One other question, how is there a gain on the Medafor stack when it is not publicly traded? How do you value that?

That's a long discussion, but I will do my best to answer it here, Ray. When we initially purchased our position in Medafor we gave the selling share holders a make hold provision whereby we could pay them additional compensation for their stock that we were able to successfully acquire Medafor. What we had to do when we initially set up that asset on our books, we had to determine what we could -- we had to consider a couple factors, the likelihood that we would acquire Medafor, what an eventual price might be, and so a lot of assumptions went into what the ultimate value was we established on our balance sheet to acquire Medafor.

Since we withdrew our proposal to acquire Medafor, all of those assumptions changed, and since those assumptions changed, the value of the derivative or the likelihood the transaction might occur, all of those assumptions changed. And that resulted in us revaluing the derivative associated with their stock. And as a result of that we had to take income into other income for the first quarter of this year. There's going to be along discussion about that in our 10-Q that will provide you much more detail, but hopefully in a nutshell that wasn't too confusing as to how that resulted in a gain in the first quarter.

Well, we couldn't assume any quarterly -- necessarily any quarterly volatility based on share price or anything else, unless there is a material change in your Medafor relationship.

That's fair.

Great. Thank you.

Thank you. 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 joining us today, and we look forward to talking with you at the end of the second quarter.

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