Artivion Inc (AORT) 2011 Q1 法說會逐字稿

Greetings and welcome to the CryoLife first quarter 2011 financial conference call. (Operator Instructions) As a reminder, this conference is being record. 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 and welcome to CryoLife's first quarter conference call. This is Steve Anderson, CryoLife's CEO and with me today is Ashley Lee, CryoLife's Executive VP, COO, and CFO.

This morning, we reported record first quarter revenues of $30.2 million and earnings of $0.06 per share. Ashley will discuss these results in detail in a few minutes.

The agenda for today's call is as follows. Ashley will discuss the results of the first quarter by product line and the financial implication for the potential acquisition of Cardiogenesis. I will discuss the recently announced planned acquisition of Cardiogenesis and the first quarter sales of PerClot, our new powdered hemostat that we acquired last September. I will also discuss the progress in the launch of BioFoam in Europe and I will discuss BioGlue in Japan. After my comments are completed, Ashley will return to give us some financial guidance for the rest of the year.

At this time, Ashley will discuss this morning's press release and our financial results for the first quarter.

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 statements.

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 in a moment.

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 previously filed Form 10-K for the year ended December 31, 2010, and our Form 10-Q for the quarters ended March 31, 2011, 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 find the comparable GAAP measures and the reconciliation of these non-GAAP measures to the applicable GAAP measures 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 2011. We set an all time quarterly revenue record of $30.2 million. As of March 31, 2011 we had $42.9 million in cash, cash equivalents and restricted securities, which includes $1.6 million received from the DoD and $5.3 million in restricted securities. We generated cash flow from operations of $3.9 million in the quarter.

Net income for the first quarter of 2011 was $1.7 million, or $0.06 per basic and fully diluted common share, compared to net income of $1.9 million, or $0.07 per basic and fully diluted common share for the first quarter of 2010. Excluding pretax charges of $1.2 million related to our proposed acquisition of Cardiogenesis Corporation and other business development activities, non-GAAP adjusted net income for the first quarter of 2011 was $2.4 million, or $0.09 per basic and fully diluted common share.

Vascular revenues increased 5.0% for the first quarter of 2011, compared to the first quarter of 2010. The increase for the first quarter resulted primarily from the 2.0% increase in unit shipments and an increase in average service fees.

Cardiac revenues for the first quarter of 2011 decreased 5.0% compared to the corresponding period in 2010. The decrease for the quarter was primarily due to a decrease in shipments of cardiac valves and patch material, primarily as a result of competitive pressures and cost containment practices at certain hospitals.

Product revenues, which consist primarily of sales of BioGlue, PerClot and HemoStase, were $14.4 million for the first quarter of 2011, compared to $14 million for the first quarter of 2010, an increase of 3.0%. The increase in product revenues was primarily due to the addition of PerClot revenues in the first quarter of 2011, partially offset by a decrease in HemoStase revenues.

Total gross margins were 61% and 60% for the first quarters of 2011 and 2010. Preservation service gross margins were 41% and 40% for the first quarters of 2011 and 2010 and product gross margins were 83% and 82% for the first quarters of 2011 and 2010.

General, administrative and marketing expenses for the first quarter of 2011 were $14.3 million compared to $13.8 million for the first quarter of 2010. General, administrative, and marketing expenses for the first quarter of 2011 included approximately $1.2 million in costs related to our proposed acquisition of Cardiogenesis and other business development activities.

General, administrative, and marketing expenses for the first quarter of 2010 included approximately $729,000 in costs related to the write-off of the Company's BioGlue intellectual property rights in Germany.

R&D expenses were $1.8 million and $1.3 million for the first quarters of 2011 and 2010. R&D spending in 2011 was primarily focused on PerClot, SynerGraft tissues and products and BioFoam. Refer to our SEC filings for detailed discussions of factors affecting our result of operations, including our Form 10-Q that we plan to file shortly.

Now I'll turn it back over to Steve.

Historically, the Company has focused on unique products for the treatment of complex cardiac and vascular reconstruction procedures. Its management's thinking that with aging of 78 million Baby Boomers the indications for complex cardiac and vascular repair will continue to significantly expand.

To that end, in March we announced a planned acquisition of Cardiogenesis Corporation of Irvine, California. Cardiogenesis is a pioneer in the development and use of laser technology for transmyocardial revascularization in patients with severe or refractory angina. With its technology directed at severe cardiac disease, this technology fits perfectly into CryoLife's corporate focus of complex cardiac repair. It is approved by the FDA for distribution in the US and the CE Mark for distribution in Europe. It is Medicare approved and is reimbursable.

TMR is accepted as meaningful therapy by the American College of Cardiology, American Heart Association and the Society of Thoracic Surgery. Cardiogenesis also has a handpiece product that is approved in Europe that combines TMR with the delivery of biologic materials, specifically, stem cells derived from the patient's bone marrow to promote cardiac angiogenesis. We are intrigued by the potential use of stem cells in conjunction with TMR and plan to submit an IDE request to the FDA to begin testing in the United States.

Analysts estimate that the annual US market for a laser device like Cardiogenesis is about $175 million. With an approved indication for use with stem cells, they estimate that the total annual US market could be greater than $700 million. Currently, Cardiogenesis' handpieces have generated gross margins above 80%. Cardiogenesis sales in 2010 were $11.3 million.

We expect this acquisition to be breakeven to slightly accretive to earnings per share in 2011, net of transaction expenses. We expect this transaction to close in mid-to-late May, after which time we will be consolidating their sales force with ours, which will allow us to almost double our sales force that is focused on cardiac surgery presently working in the field.

As you'll recollect, we announced the acquisition of rights to distribute and manufacture PerClot, a powdered hemostat, from Starch Medical in September of 2010. Our agreement gives us exclusive worldwide distribution and manufacturing rights except for China, Taiwan, Hong Kong, Macao, North Korea, Iran and Syria. We were able to sell PerClot in Europe for the last ten weeks of 2010 and our revenues for those ten weeks were $264,000.

We are pleased to tell you that sales of PerClot in the first quarter of 2011 were $660,000, about two-and-a-half times what we did in the fourth quarter. We're extremely pleased with the progress we are making with PerClot and with the doctors' reception of the product. We have sold as much PerClot in less than six months as Starch Medical did the whole prior year.

As previously announced, we filed our IDE for this product with the FDA on March 31st. We are waiting for FDA approval to begin our human clinical trial in the United States.

The European market launch of BioFoam continues to gain traction. Currently, BioFoam is approved in Europe for use as an adjunct in the sealing of abdominal parenchymal tissues such as lever and spleen, when cessation of bleeding by ligature or other conventional methods is ineffective or impractical. We also believe that BioFoam may have significant clinical utility in cardiovascular indications and we have begun to evaluate our opportunities to expand the European label claims for BioFoam to include cardiovascular applications.

The screening for enrollment of BioFoam patients in the United States IDE clinical trial has begun. In the IDE study, BioFoam is used to help seal liver parenchymal tissue when cessation of bleeding by ligature or other conventional method is ineffective or impractical.

In September of 2010, BioGlue received Shonin approval from the Japanese Ministry of Health, Labor, and Welfare for use in the repair of aortic dissections. Prior to distribution, the Ministry completed a remote inspection of CryoLife pursuant to Japanese quality management system requirements and required product reimbursement paperwork for Japanese authorities. CryoLife's partner, Century Medical, will distribute BioGlue in Japan for use in this subset of cardiac surgery.

The Company estimates that the annual Japanese market for the use of surgical adhesives in the repair of aortic dissections is approximately $10 million and the total annual market for the use of adhesives and sealants in Japan is approximately $150 million. We shipped our first BioGlue to Century Medical in Japan yesterday.

It is management's opinion that the product platform of BioGlue, PerClot and BioFoam will establish CryoLife as a major player in the worldwide surgical adhesive and hemostat area. The total annual worldwide market for surgical adhesives and hemostats is about $2.0 billion based on industry analysts estimates.

That concludes my comments and now I'll turn the call back to Ashley for his comments and rest of year guidance.

We believe that we are taking the steps necessary to position the Company for future revenue and earnings growth by expanding our addressable market opportunities through our internal development and business development activities, including the PerClot transaction and the pending acquisition of Cardiogenesis.

As we look to the future, there are several important milestones related to our business development activities that we expect to achieve in the coming months, as we progress towards increasing our addressable market opportunities. They include, one, the closing of our announced acquisition of Cardiogenesis; two, the initiation of enrollment in our PerClot IDE scheduled for later this year; and three, the filing of our IDE for the Cardiogenesis stem cell trial, assuming the close of our pending acquisition of Cardiogenesis.

Additionally, given our strong financial performance and cash position, we continue to evaluate opportunities on the business development front as a means to accelerate the growth of the Company.

We now expect total revenues for the full year of 2011, excluding any revenue related to our potential acquisition of Cardiogenesis, to be near the lower end of our previously issued range of between $120 million and $126 million, which includes revenues of between $0.5 million and $1.0 million related to the use of funds received from the US DoD in connection with the development of BioFoam.

We expect tissue processing revenues to increase in the mid-single-digits range on a percentage basis in 2011, compared to 2010; BioGlue and BioFoam revenues to increase in the low single-to-mid-single-digits on a percentage basis in 2011 compared to 2010, with revenues from powdered hemostats, including PerClot and HemoStase, to be between $5.0 million and $6.0 million. We expect research and development expenses to be between $10 million and $12 million in 2011.

Excluding any future impact from Cardiogenesis, we expect GAAP EPS of between $0.23 and $0.27 and expect non-GAAP EPS of between $0.26 and $0.30 in 2011, excluding $0.03 per share of acquisition and related integration costs and other business development expenses incurred in the first quarter.

If we successfully complete the acquisition of Cardiogenesis in May, we expect revenue from the Cardiogenesis product line to be between $4.0 million and $5.0 million in 2011, which primarily reflects disposable handpiece and service revenues. We believe this will offset the loss of revenues derived from the powdered hemostat, which we previously distributed for a third party.

We expect the transaction to be accretive to our revenue growth rate and gross margin and to be either breakeven or slightly accretive to diluted non-GAAP EPS of between $0.26 and $0.30 in 2011, excluding acquisition-related charges and integration costs and excluding the increase to cost of goods sold related to the step up in inventory values required under purchase accounting expected to be incurred during 2011. We expect the total of these charges to be between $0.06 and $0.08 for the full year, including expenses of $0.03 per share included in the first quarter of this year.

We expect our effective income tax rate for the full year of 2011 to be in the mid-30% range. If we successfully complete the Cardiogenesis transaction, we expect our effective rate to be significantly higher in the second quarter of this year, as compared to the first quarter of this year, due to the tax treatment of nondeductible acquisition-related charges, which would significantly increase the rate for the full year also.

To reiterate, we believe that we are taking the necessary steps to position the Company for sustainable, enhanced, future revenue and earnings growth and we'll continue to work to execute on our strategy of creating value for our shareholders.

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

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

(Operator Instructions) Matt Dolan, Roth Capital Partners

Hi guys, good morning.

Good morning.

Hey, Matt, how are you?

Good. First a question on the guidance. It looks tissue preservation, the growth rate has come down a little bit in the language around BioGlue and Foam is a little weaker as well, so maybe two parts. Can you tell us what's going on, from a macro standpoint, as it relates to growth to push you towards the low end of guidance? And then, secondly, assuming you're not, but do you see any possibility of a benefit in the second half through the integration of the Cardiogenesis sales group?

There are a couple of factors, Matt, that are pushing us towards the lower end of our previously issue range and I think that they are things that you hear quite often when you talk to companies that are providing services and products to hospitals. And those two are, one, cost containment pressures, we continue to see those and two, we're seeing some competitive issues with some of our products. So, with that being said, that pushes us towards the lower end of our previously issued range.

As it relates to any potential benefit related to the pending acquisition of Cardiogenesis and hopefully the successful integration of our sales force with ours, there is a potential benefit there as it relates to not only their product line but ours. But we haven't really included a significant benefit for that integration in any of the numbers that we've set forth right now.

We think over the balance of the year, again assuming the successful completion of the acquisition, we would begin the integration of these sales forces immediately and we would expect that to continue over the balance of the year, so maybe not an immediate benefit, but certainly longer-term we would expect to see a benefit.

Can you elaborate on what some of these competitive pressures you're sensing are?

As it relates to cardiac tissues, we're seeing some of our cardiac patch business -- there's a new player in that market that's been in there for the last year or two and we're seeing some competitive issues as it relates to that particular new product coming onboard. It's from a company called CorMatrix. We're seeing some price pressures in that particular area. As it relates to the vascular tissues, Gore came out with a product a while ago, Propaten, which is used for peripheral vascular reconstruction.

So we're seeing pockets of it, but again, despite that we think that we've got a very strong core business in both of these areas. They continue to generate a significant amount of operating cash flow for us that allow us to pursue these other business development activities that we've been focusing on.

Okay and then on Cardiogenesis, a couple questions there. First of all, on the guidance, why only $4.0 million to $5.0 million versus what would appear to be a run rate at a higher level that that? And then walk us through the integration strategy with the sales force if you could. It sounds like you're going to maintain the entire group. What do you do in the situation of territory crossover and those types of potential conflicts?

Well, first of all, the territory conflicts will be worked out. I'm pretty optimistic that with the doubling of that specialist sales force that we will have increases right across the line in both of the product lines. It's my opinion that it will take more work to train the Cardiogenesis people in the use of tissues in cardiac surgery than it will to train the CryoLife people in the function and use of Cardiogenesis lasers. That's just my personal opinion.

But I think that the reaction that we have seen from the physicians in the marketplace to the prospects of stem cell trial using the Cardiogenesis instrumentation is very encouraging to us and I'm expecting to have a great deal of enthusiasm from the surgeons regarding participation in the stem cell clinical trial.

Matt, to your question on the revenue guidance, if you'll notice that the numbers that we set forth, one, do not include any revenues from capital equipment, just due to the somewhat under-predictable nature of that. We have not included any guidance and therefore capital equipment. And two, assuming that we meet the time table that we have laid out there in closing and immediately beginning the integration, it is going to be a transition period. So we didn't want to out-of-the-gates get ahead of ourselves as it relates to revenue guidance for the disposables, which are reflective of procedure volume.

And you're expecting volumes or disposables to grow on an underlying basis, excluding those variables? Is that fair to say?

Going forward, yes. We will say that this potential acquisition, even with the existing approved product line that Cardiogenesis has, we think makes a lot of sense for CryoLife and our shareholders and we think that over the new few years that we're going to be able to grow that business in the low double-digits and possibly better than that. If we are successful in getting the stem cell approval, which we are very excited about, it will only increase the upside and benefits for this potential transaction to CryoLife.

Okay and a last one. Thanks for the time, but a last one on the business development side. You've proactively mentioned that. Is that something that's a true near-term opportunity? You could have another acquisition or end-licensing opportunity here shortly?

Yes.

Thank you.

Joe Munda, Sidoti & Co.

Good morning, guys. How are you?

Good morning.

I wanted to touch a little bit of what Ashley had just said, as far as the stem cell approval. Once the acquisition goes through, what possible regulatory issues do you see occurring, maybe, from the FDA?

Well, if we get the transaction completed as anticipated in mid-to-late May, at some point, either late in the second quarter or sometime in the third quarter we would expect to file the IDE with the FDA to begin the clinical trial process and only after we do that will be get a formal response from the FDA as to what their specific issues are. So its hard to say what those might be, but, again, we plan on filing the IDE in the very near future and once we do that we'll know exactly what the FDA's thoughts are.

I'm just asking because I know stem cell is a hot button issue.

Well, the thing about the project that we would be working on is that they are autologous stem cells, which are the patient's own cells.

The patient's own, yes.

So we think that that could possibly mitigate some of the issues that you see with some of the other stem cell technologies that are out there.

And do you expect a similar timeline that you guys are experiencing with PerClot to occur with this type of approval?

Do you mean for the full development cycle?

Yes, exactly.

Again, we'll only know after we file the IDE and hear from the FDA, but from beginning to end you could conceivably get a trial like this done and approval within a three-year timeframe, but again, its going to be dependent on what the FDA ultimately says.

You know it is approved for use with stem cells in Europe.

Yes.

And because of the fact that they did not have a lot of working capital, they really haven't pushed their product in Europe at all, so we look at that as a great marketing opportunity to have the basic laser technology and the stem cell technology already approved and ready to go in Europe.

So, basically, you're using the same model that you have now for PerClot and you're applying it to this?

Yes.

Okay. The other thing is in regards to PerClot. You guys had mentioned FDA approval in 2013. Is that the beginning of 2013 or are you hoping -- or do you think its going to be end of 2013, going into 2014?

I think it's going to be early in 2013 or even late in 2012.

Okay and just one other question. Can you comment a little bit on the amended tender offer? What made you guys go back and amend the offer?

That was really dictated by some nuances in California law and the amendment was really in response to a comment that we got from the SEC.

In California, if you acquire more than 49.9% of the outstanding stock of a company - let's say its 50/51 or 50/52 percent - you have to use your own company stock, in this instance it would be CryoLife's stock, to buy the remaining existing shares of the company.

So the current plan is to, hopefully at the conclusion of the initial period, close on 49.9% of the outstanding stock, call a special shareholder's meeting and if we acquire more than 50%, or we get more than 50% of the vote in the affirmative for the merger, then we'll move quickly after the shareholder's meeting to close on the merger. So it's really more of a procedural issue than anything else.

Okay and do you know if -- I know the shop period had just expired. Do you know if they were approached by anybody else?

It's our understanding that they were not.

Okay. Alright, thanks guys.

Tim Lee, Piper Jaffray

Hi guys, good morning.

Good morning.

Just a couple of follow ups. I think you just touched on it in the previous question, but what is the gating factor in terms of what needs to happen to close the Cardiogenesis transaction in May? I mean, is that fairly high confidence that that's going to occur or what's the risk of it slipping a little bit?

The tender seems to be going according to plan, at this point. Now we won't know until the end of the initial period, which is midnight on Monday, as to whether or not we've gotten to 49.9%, but as it stands right now, things seem to be going according to plan. If things remain on target, then we are pretty confident that we will be able to close the transaction in mid-to-late May.

Got it. Okay, thank you and then just kind of switching gears, in terms of HemoStase, was there any inventory left over at the end of the quarter? Was what was left over kind of in line with the reserves you had previously taken?

That is correct. We actually sold approximately $300,000 worth of HemoStase inventory that had been previously written off, so there are no additional write-offs to occur related to HemoStase.

So then to just make sure. I know where kind of splitting hairs a little bit. So you said $300,000 of inventory you had written off so there's a slight gross margin benefit because of that?

That is correct.

Okay, perfect and then just lastly in terms of the BioFoam opportunity in Japan. I think you cited an initial opportunity of about $10 million for the aortic dissection work, but you said you cited the total market potential at $150 million. What's really needed to drive kind of your opportunity from $10 million to $150 million? Is that additional clinical studies? Is that different distribution? Just any color on that front, please? Thank you.

We would have to have a completely different clinical trial. We'd have to have a clinical trial based around different indications than what the product was initially approved for.

Then, I guess the better way to think about that $150 million opportunity is a three-to-five year type opportunity? Is that -- what would you put the timeframe in terms of realizing or entering those (inaudible - multiple speakers)?

I would say five years.

Perfect. Okay. Thank you very much. I'll get back in queue.

Raymond Myers, The Benchmark Co.

Great, thank you. Most of my questions have been answered, but let me ask this one. PerClot revenue in Q1 was $660,000. We don't have a lot to compare that with except for Q4 where it --.

We lost you.

We lost you, Ray.

-- after having a very strong $660,000 in Q1, is any of that due to stocking and what does that tell you about the potential for the product over the course of the year?

We've actually seen the majority of our distributor's reorder already, so we remain very optimistic about PerClot revenues for the balance of this year and our expectations are included in the guidance that we gave for all powdered hemostats that we talked about earlier.

I guess what I'm driving at is trying to understand how conservative guidance is. I'm assuming, for starters, we're not going to sell any more HemoStase, correct?

That is correct.

And PerClot increased by well over 200% sequentially from Q4 to Q1. Was any of that due to stocking orders that you don't expect to repeat in Q2?

No. Most of the distributors have reordered by this time, not all, but most.

So with that kind of a quarter on quarter growth rate, what kind of PerClot revenue would we expect in Q2?

We don't give quarterly guidance out, Ray, but again, we gave for powdered hemostats. It could be as much as $5.0 million for the full year and we would expect to see sequential growth in PerClot revenues over the balance of this year, so we'll leave it at that.

One of the things that we've pointed out in previous calls is that our R&D people feel that the PerClot absorbs two-to-three times the amount of fluid that the prior product absorbed and I can tell you that the difference in the action activity of the product is striking, if you exhibit them side by side.

Now its very hard to describe that conversationally, but what I would suggest is the next time that we have a booth at a convention, that you ask to personally see the demonstration of the two products side by side, because the doctors' reaction to the activity, the chemical activity of PerClot, has been extraordinary and we're very, very enthusiastic about that product.

Well that sounds great. I will do that and look forward growth in that area. Thanks.

Thanks, Ray.

I'd now like to turn the floor back over to management for closing comments.

Thank you for joining us and we look forward to talking to you after the second quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. 12