Artivion Inc (AORT) 2010 Q4 法說會逐字稿

Greetings, and welcome to the CryoLife fourth-quarter and year-end 2010 financial conference call.

(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's CEO, and I would like to welcome you to CryoLife's year-end conference call. With me today, is Ashley Lee, the Company's Executive Vice President, COO, and CFO. This morning, we announced record revenues for CryoLife of $116.6 million, and earnings of $0.14 per share. Ashley will discuss the revenues and earnings in more detail in just a few minutes.

The fourth quarter of 2010 was a very busy time for CryoLife's management. As you will recollect, we closed on a manufacturing and distribution agreement with Starch Medical for a powdered hemostat product that they have been marketing in Europe. This assures our participation in a world-wide market estimated to be about $2 billion. This manufacturing and distribution agreement gives us access to all medical specialties in our territory. I will comment more completely on this in a few minutes.

The agenda for the conference call today is as follows. Ashley will discuss today's press release in detail, and will comment on the growth that we have seen in our business in 2010. I will comment on the manufacturing and distribution agreement with Starch Medical, and our international and domestic strategies for launching this product throughout the world. I will also comment on the recent approval of BioGlue in Japan. I will comment on the pending Humane Device Exemption approval of the SynerGraft processed aortic valve. And I will comment the BioFoam European post-market study, and the BioFoam IDE study that is beginning in the US. After my comments have been completed, Ashley will return to give you some financial guidance for the rest of 2011. After the guidance comments, we will open the call up for questions. At this time, Ashley will comment on today's press release.

Thanks, Steve. As 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 on this call, which look forward in time, involve risk and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 . The forward-looking statements, include statements made as to the Company's or management's intentions, hopes, beliefs, expectations, or predictions of the future, including the guidance for 2011 that I will provide a moment.

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 Factors section of our previously filed Form 10-K for the year ended December 31, 2009, and our previously filed Form 10-Qs for the quarters ended March 31, and June 30th, and September 30, 2010, and our Form 10-K for the year ended December 31, 2010, which we expect to file shortly, and in the press release that went out this morning .

On the call today, I will discuss certain non-GAAP financial measures. You can also find the comparable GAAP measures, and the reconciliation of these non-GAAP measures to the applicable GAAP measures as schedules to 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 fourth quarter and full-year of 2010. We set all-time the fourth quarter and the full-year revenue records of $29.2 million and $116.6 million for the periods ended December 31, 2010. As of December 31, 2010, we had $40.8 million in cash, cash equivalents and restricted securities, which includes $1.7 million received from the DoD, and $5.3 million in restricted securities. The $40.8 million reflects the $6.75 million paid in September 2010, in connection with the license of the PerClot technology, $5.8 million paid during 2010 for the repurchase of shares of CryoLife common stock, and $2.4 million paid earlier this year to invest in Medafor common stock.

We generated cash flow from operations of $7 million in the quarter, and $20.8 million, for the year ended December 31, 2010. We expect to continue to generate significant cash flow from operations going forward, which will allow us to continue our efforts on the business development front. Net income for the fourth quarter of 2010 was $2.1 million or $0.08 per basic and fully diluted common share. We also recorded pre-tax charges in the fourth quarter of 2010 of approximately $474,000 related to business development activities, and $268,000 in costs associated with our litigation with Medafor. Net income for the full-year of 2010 was $3.9 million, or $0.14 per basic and fully diluted common share.

Excluding pre-tax charges of $3.5 million for acquired in-process R&D, related to the license of the PerClot technology, $3.6 million for the impairment of our investment in Medafor common stock, and $1.6 million related to the write-down of HemoStase inventory, net income before items, for the full-year of 2010 was at $9.5 million, or $0.34 per basic and fully diluted common share. We recorded pre-tax charges in the full-year of 2010, of approximately $1.4 million in costs associated with our litigation with Medafor, $1 million related to business development activities, and $729,000 in connection with the write-off of capitalized legal expenses associated with our BioGlue intellectual property rights in Germany. Additionally, we recorded a $1.3 million gain on valuation of the derivative related to the investment in Medafor common stock.

Cardiac revenues for the fourth quarter of 2010 increased 5%, compared to the corresponding year of 2009, and increased 7% for the full-year of 2010, compared to the corresponding period of 2009. The increase for the fourth quarter, was primarily due to an increase in shipments of cardiac valves. The increase in a full-year period was primarily due to a 10% increase in shipments of cardiac valves, primarily due to increasing demand for the CryoValve SG pulmonary valve in domestic markets, partially offset by a decrease in shipments of cardiac patches.

Vascular revenues decreased 1% for the fourth quarter of 2010, and increased by 5% for the full-year of 2010, compared to the corresponding periods of 2009. The decrease for the fourth quarter resulted primarily from increasing pressure from lower cost competitive products, and the increase for the full-year resulted primarily from a 2% increase in unit shipments, and an increase in average service fees.

Product revenues, which consist primarily of BioGlue and HemoStase increased 4% in the fourth quarter and full-year of 2010, compared to the corresponding periods in 2009. For the three-month and full-year periods, HemoStase revenue increased, partially offset by a slight decrease in BioGlue revenues. Fourth quarter of 2010 also included $264,000 of PerClot revenue, as we began to roll-out PerClot in international markets.

Total gross margins were 60% for the fourth quarter of 2010, compared to 61% for the fourth quarter of 2009. Total gross margins, excluding the write-off of $1.6 million for the HemoStase inventory, was 60% for the full-year of 2010, compared to 62% in the full-year of 2009. Preservation services gross margins for the fourth quarters of 2010 and 2009, were 39% for each period, and 40% in the full-year of 2010, compared to 42% in the full-year of 2009. Product gross margins for the fourth quarter of 2010 were 80%, compared to 82% in the corresponding period in 2009. Product gross margins, excluding the write-down of $1.6 million of HemoStase inventory, were 81% in the full-year 2010, compared to 83% in the full-year of 2009.

General, administrative and marketing expenses for the fourth quarter of 2010 were $12.2 million, compared to $12.6 million for the fourth quarter of 2009. These expenses for the fourth quarter of 2010, included approximately $474,000 in cost related to business development activities, and $268,000 in costs related to our litigation with Medafor. General, administrative and marketing expenses for the full-year of 2010 were $49.1 million, compared to $50 million for the full-year of 2009. The full-year of 2010 included a charge of approximately $1.4 million in costs related to our litigation with Medafor, $1 million related to business development activities, and $729,000 related to the write-off of capitalized legal expenses, associated with our BioGlue intellectual property rights in Germany.

R&D expenses were $2 million and $1.4 million for the fourth quarter of 2010 and 2009, and $5.9 million and $5.2 million for the full-year of 2010 and 2009. R&D spending in 2010, primarily focused on PerClot, SynerGraft tissues and products, and BioFoam. The $3.5 million of acquired in-process R&D expense was for an intangible asset for PerClot distribution and manufacturing rights in the US, and certain other countries where PerClot does not have current regulatory approvals. This amount was therefore expensed upon acquisition.

During the fourth quarter and full-year of 2010, we purchased 263,000, and 1 million shares of our common stock at average prices of $5.70 and $5.56 per share. This resulted in aggregate purchases of $1.5 million for the fourth quarter, and $5.8 million for the full-year of 2010. You can refer to our SEC filings for detailed discussions, of factors affecting our results of operations, including our Form 10-K that we plan to file shortly. And now I will turn it back over

As I stated earlier in the call, the recent license distribution and manufacturing agreement that we signed with Starch Medical for their powdered hemostat product PerClot, assures CryoLife's participation in a world-wide market estimated to be in excess of $2 billion. The Starch powdered hemostat product, PerClot, appears to be the most effective, powdered hemostat in the world. Our scientists estimate that it absorbs two to three times more water, than the other powdered hemostat products that are currently available.

For the 10 weeks last year that we were able to market PerClot internationally, we sold $264,000 worth of the product. We shipped about $838,000 in total powdered hemostat sales internationally during the fourth quarter. PerClot is an extremely complementary product to our BioGlue surgical adhesive, as it can be used in wet surgical fields, and will bio-degrade in about 48 hours. It initiates hemostasis immediately when it is confronted by blood from a wound. So far, in the early distribution and introduction phase of the marketing of PerClot, we have sold it in 17 separate countries throughout around the world. We are actively engaged in securing the approval of PerClot in additional countries.

In preparation for our US FDA investigational device exemption submission, animal efficacy studies and the biocompatibility tests are on-going for PerClot, and will be completed in early March of this year. A key opinion leader meeting will be held at CryoLife the first week of March of this year to finalize the investigational plan. We expect to file the Company's IDE at the end of this quarter. Our proposed investigational study is designed to enroll a total of approximately 300 subjects, across 10 investigational sites in the clinical trial.It is our expectation, that we will begin manufacturing PerClot in our corporate headquarter' facility in late 2011. Management believes that the US market for a powdered hemostat is about $730 million.

Late last year, we announced that our Japanese distribution partner, Century Medical, had received product approval of BioGlue in Japan. Japanese regulatory authorities are completing their required quality system review, and we anticipate shipping our first order of BioGlue to Century Medical before the end of this quarter. Their initial stocking order is for 40 boxes for $105,000. We estimate the market for a product like BioGlue in Japan is about $10 million a year. Management estimates that the first 12 month sales in Japan will be close to $600,000.

We have completed a European post-market study of BioFoam in liver resection surgery, and the results have met our expectations. The results of the 55 patient study have been accepted for Poster presentation at the May 2011 Association of Surgeons of Great Britain and Ireland meeting, that will be held in the UK.

BioFoam has been shipped to accounts in 13 countries in Europe. During 2010, we sold $130,000 worth of the BioFoam internationally. The United States IDE pilot study has begun, and we have consented the first of 20 patients in this initial US study. Our present European surgical adhesive and hemostatic agent product platform will enable us to effectively compete across all aspects of the surgical adhesive market. We have a fast-acting hemostatic agent, PerClot, that works well in the wet surgical fields, and we have a choice of a surgical foam, BioFoam, for parenchymal organ sealing, as well as a very strong, long-acting, surgical adhesive, BioGlue, that is the market leader in it's field.

These three hemostatic adhesive products will be the basis of a product platform, that will enable us to compete effectively for hospital buying groups tender offers, and should give us an excellent opportunity to expand our market share. This type of complementary product offering should also provide the analysts who follow the Company, with a good idea of our marketing strategy, when all three of these products are approved in the United States.

As you know, we have been working on a Humanitarian Device Exemption submission for the SynerGraft processed decellularized aortic human heart valve. As required by FDA, we have completed implantation of 12 bovine allografts. Eight of them were processed with the SynerGraft process, and four were processed with standard processing technology. They all have a 150 day evaluations completed, on 11 of the 12 animals that had surgery. The last animal will complete the follow-up period in April of 2011.

The echocardiographic results indicate the SynerGraft process valves remained competent, with low pressure gradients, which are key indicators of valve performance.Our bench testing on the valves will be completed on March 11th, with the valves having completed 80 million cycles. So far there are no signs of valve deterioration. We anticipate submitting our data for the HDE, to the FDA by the end of June. FDA review of an HDE is usually required for 75 days from the date of the submission. This could lead to the approval of the SynerGraft processed aortic valve HDE sometime in late September of this year. That concludes my comments. And now I will turn the call over to Ashley for the purpose of giving you some guidance for the rest of the year.

We expect total revenues for the full-year of 2011 to be between $120 million and $126 million, which includes between $0.5 million and $1 million related BioFoam funding received from the DoD. We expect tissue processing revenues to increase between mid-single and low double-digits on a percentage basis in 2011, compared to 2010. BioGlue and BioFoam revenues to increase by mid-single digits on a percentage basis in 2011, compared to 2010, with revenues from powdered hemostats, including HemoStase and PerClot to be between $4 million and $6 million.

R&D expenses are expected to be between $10 million and $12 million in 2011. We expect earnings per share of between $0.26 and $0.30 in 2011. We expect our effective income tax rate for 2011 to be around 40%. We continue to evaluate opportunities on the business development front, as a means to accelerate the growth of the Company, and we continue to invest in our R&D pipeline as reflected in our guidance. Given our strong financial performance and cash position, we are well-positioned on the business development front to identify complementary products or companies, that we can acquire to leverage our adjusting infrastructure and sales force. We continue to believe business development efforts are a prudent use of our cash reserves, and a strategy that will create value for our shareholders. That concludes my comments, and now I will turn it back over to Steve.

Thank you, Ashley. And now we are going to open up the call for questions.

Thank you.

(Operator Instructions).

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

Hello, good morning, Ashley and Steve. How are you?

Good morning.

Hi, Matt.

First question, Ashley, on the guidance side, just a couple of moving parts. First on the revenue, can you help us understand how -- as HemoStase comes off, I believe at the end of March, how should we expect kind of revenue progression this year to differ from prior years? And then secondly, where are you with respect to R&D, in terms of PerClot, and is that ramping or have we seen a pretty good level to base off of here in Q4?

Okay. I'll try to answer your first question, regarding PerClot and HemoStase revenues in 2011. To give you, maybe kind of a basis for what we are projecting in 2011, if you look at 2010, we generated about $2.4 million and international revenues from powdered hemostats. So that's the base of business that we are working off, as we go into 2011. As has been documented, we will cease to distribute HemoStase in March of this year. So from the standpoint of powdered hemostats in general, we expect the first quarter to be pretty good. We will obviously drop off a little bit in the second quarter, because we're going to be distributing purely in international markets. And we expect the ramp -- the revenues to ramp throughout the remainder of the year, as we move forward. So, that's -- on the revenue side.

On the R&D side, in the fourth quarter of 2010, we spent roughly $0.5 million, maybe a little bit more than that, on PerClot R&D. And that was predominantly related to the large animal studies necessary to submit for the IDE, which we -- Steve mentioned earlier, we hope to get in at the end of this quarter, or very early in the second quarter. Our anticipation is that we will be enrolling patients later this year . So, there might be a little bit of a lull in the expenses in the near-term, but once we begin enrollment we expected to be rapid, and we will be spending significant amount of money. And a lot of the increase that you are seeing year-over-year in R&D expenses is related to

Okay. Great. On the business development side, it appears to be one of your priorities this year. I guess, again, a two-part question. Are the opportunities that you called out, in terms of expenses in the fourth quarter, are those still on-going and available to you? And then maybe you could just generalize and help us understand, what you're looking for with respect to the stage of regulatory or commercial status, for anything you might acquire and license?

Okay. As evidenced in our press release, and what we said on the call a little bit earlier, we spent a significant amount of money in the fourth quarter, evaluating more than one opportunity on the business development front. And those options remain very viable at this time. So that's all I will say about the opportunities that we are looking at, but we are looking at more than one, and we are finding some interesting things out there.

I think your second question was more focused on maybe what generally, we might be looking at, and at what stage. I will -- our preference is obviously to find things that are related to the markets that we are currently distributing into, so cardiac and vascular surgery. Those are, obviously, two areas that we remain very focused on. We also would, preferably like to acquire revenues. So we are focused on acquiring revenues, and if not immediate, then opportunities where there is a very near-term pathway fro revenues. So that's kind of what we are focusing on.

Okay, I will let somebody else get on. Thanks, guys.

Our next question is from the line of Joe Munda of Sidoti & Co. Please state your question.

Hello, Joe, how are you?

Mr. Munda, your line is open for a question. (Inaudible).We will move on to Raymond Myers of the Benchmark Company. Please go ahead with your question, sir.

Yes, thank you. I'm here. Ashley and Steve, could you maybe start with, reminding us how many salespeople do you have now, and what are your plans to expand that?

In round numbers, we have about 50 in the field in the United States, and we are direct in the UK, Germany, and Austria, with approximately ten people in the field over there.

Great. And in the past, you had mentioned a porcine dermis product for hernia repair that you were expecting to launch early in 2011. Where does that stand?

We continue to remain in discussions with some potential partners, to try and get that product commercialized. If all goes according to plan, we could be -- I'm referring actually to ProPatch right now, Ray. And with ProPatch, we could potentially be first in human implants late this quarter, or early in the second quarter. The porcine dermis product that we are working on, remains in the R&D shop at this point. We are getting very close to a design lock on that particular product. And obviously, the thought would be to take both of these products, ProPatch, the bovine pericardial product, as well as the porcine dermis product, and hopefully, work with the same partner for those two products in the general surgery area.

And would those require a 510-k?

ProPatch already has a 510-k. The porcine dermis product would acquire -- require a 510-k

Okay, good. When were you targeting a PerClot approval and launch?

I think that PerClot's approval will be sometime towards the end of the 2012 or early 2013. But clinical studies that we are going to run is -- includes about 300 patients, and it will be across a number of different specialties, for a number of different indications. But I would say that the soonest we can get it done is the end of 2012, probably a more timely expectation is early 2013.

And that's for approval, or for finishing the study?

Approval.

And so, let's start with the study. To finish the 300 patient study, if you file your IDE at the end of March, when do you think you can finish the study?

It will go pretty quickly, but I don't think that we would be finished with the 300 patient enrollment until fourth quarter of 2011.

And that leaves about a year for FDA? Is that your thought?

Yes.

Great. Your HemoStase revenue was quite strong in the fourth quarter. Is that related to winding down the sales, and a desire to push out the last of your inventory before you can't sell it anymore? Or does that more represent underlying strength in the market?

I think it represents both. This whole area of powdered hemostatic agents is growing. And that's why we make a commitment to be in it long-term, with the acquisition of the PerClot distribution rights. And at the same time, as you mentioned, we do have some inventory that we are trying to sell prior to, our discontinuing distributing HemoStase, which is going to be in late March. So it's a combination of both.

So should we expect similar sales in Q1, as we saw in Q4?

For HemoStase?

Yes.

No.

Lower, higher?

They would be lower than the fourth quarter of 2010. And I think that, our guidance for, again, for the full-year, for all powdered hemostats is between $4 million and $6 million.

Okay. And is some of the HemoStase that you might be selling in Q1, product that is already written off?

Potentially.

So there could be a potential of a reversal of the prior charges?

I wouldn't say, a reversal of the prior charges. We could be recognizing some revenue, for which there is no associated costs, associated with the revenue. So, not -- not by definition a reversal, but we could have a some revenue with very high gross margin on it.

Do you expect that to be potentially meaningful to earnings in the quarter?

I wouldn't expect it to be meaningful to earnings in the quarter,

Okay.

It might be meaningful to cash flow though.

Ah, nice, your cash flow is already very good.Let's see, you've had a share of buyback, consistently through 2010. Do you intend to continue that in 2011?

The buyback has continued into the first couple of months of 2011. And just to give you an idea of where we are, we have had purchased roughly about $1.3 million to $1.4 million of stock in the first two months of 2011, at an average price of somewhere around $5.25 -- that's a guess.

So you purchased 1.3 million dollars or shares?

Dollars.

Dollars.

At an average price of somewhere around $5.25, give or take.

25 in Q1. Great. Good. And what was the fourth quarter capital expense?

Capital expenditures?

Yes, CapEx.

I don't have that number right at my figure tips, Ray. But for the entire year of 2010, it was a little over $2 million, and for 2011, we would anticipate CapEx to be somewhere between $1.5 million and $2 million. And it's predominately maintenance CapEx. And then there is some CapEx , probably $100,000 to $200,000 at the most, associated with us setting up the PerClot manufacturing

Okay, excellent.

Great.

Thank you.

Thank you. Our next question, gentlemen, will be coming from the line of Joe Munda of Sidoti & Co. Please go ahead with your question, sir.

Good morning, guys.

Good morning.

Hello, Joe.

Sorry about that. I had technical difficulties, and had to switch phones. A lot of the questions I had were already answered, but I was wondering if you guys could shed a little bit more light on the government agreement with BioFoam. And are -- is that something that you guys are aggressively pursuing? More government contracts?

Well, the Department of Defense has been funding that for the last few years. And that has to come through an Appropriations Committee in the House of Representatives. And we are anticipating that that will continue throughout 2011. I don't know if it will continue after that.

Okay. And, is it -- was it an open bidding process? Were you competing with other companies? Or did the government contact you?

The government contacted us. And as far as I know, there wasn't any kind of a bidding contest or anything.

Okay. Thank you. And that's all I have.

Thank you. Our next question is from the line of Tim Lee of Piper Jaffray. Please state your question, sir.

Good morning, and thanks for taking the question. In terms of PerClot, what's been kind of the early feedback from customers ? Are you starting to see re-orders, or are you potentially seeing customers move away from you

The early response to the product has been excellent. And when you compare it to other powdered hemostats, the chemical reaction of PerClot is very visibly striking. It immediately absorbs large quantities of fluid. It forms a very strong, a much stronger clot, than competitive products. It's a stickier clot, and a more effective clot. I believe I can say that. And generally, the physicians are impressed with the chemical reaction of how it works. Next time we see you, I will try to remember to put some in my pocket to show you when we get together.

Got it. Excuse me for interrupting, but given some of those characteristics that you're talking about, the fact that it is visually more effective and the like, are you getting a premium for this relative to HemoStase, are you -- is it being priced comparably, or is it being priced?

It's priced comparably.

Okay. Okay.And just kind of circling back on the earlier question, in terms of the HemoStase inventory write-off, that was taken lat last quarter. In terms of you, working through your HemoStase inventory, is it -- kind of in line with what you are thinking, or is it reducing quicker than you thought? Any clarity that you can provide on that front, please?

It is pretty much in line with what we were thinking. I think that as of the end of the year, we had about $550,000 of cost of HemoStase inventory, still in inventory. So our goal is obviously to distribute all that and more, but as it stands right now, it's pretty much in line with what we had anticipated.

Got it. And then just lastly, in terms of your cash use, you're sitting on a good chunk of cash, and generating good amounts of it. If you had to prioritize your use of cash, how would business development rank, relative to share buybacks? I mean, on the business development side, how big are the assets that you are looking at? Should we think of -- a large portion of this cash will be used for business development, or should we think that a large portion will be used for share buyback?

If we had to prioritize, I think that business development is first, and ahead of share buybacks. When we initiated our share buyback last year or in the past, we did that recognizing the fact that there was some business development assets out there that we wanted to pursue. And we thought that we could do both. And that's what we have been doing. And so going forward, we will continue to balance the assets that we are pursuing, as well -- and balance that with our ability to continue with share buyback.

But business development is definitely taking a priority, at this particular time. As far as the size of the assets that we are looking at, we're not going to limit ourselves to size. I mean, obviously, we've got $41 million in cash as of the end of the year. We have credit facilities that are available to us. And we have the ability to take on some leverage, if we need to, depending on what the -- what opportunity presents itself. We are not going to limit ourselves to an acquisition being too small or too large . We are going to pursue things that make sense for our organization going forward, and make sure that they fit in strategically with, where Steve wants to take the Company. And we will leave it at

Great, thank you. I will jump back in queue.

Thank you. Ladies and gentlemen we have reached the end of our allotted time question-and-answer session today. I will now turn the floor back over to management for closing comments.

Thank you very much for joining us today, and we look forward to talking with you at the end of the first quarter.

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