Artivion Inc (AORT) 2011 Q3 法說會逐字稿

Greetings, and welcome to the CryoLife third quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, 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 third quarter 2011 conference call. With me today is Ashley Lee, CryoLife's CFO and Executive Vice President.

This morning we announced quarterly revenues with 29.7 million, a 4% increase over the same period last year. Our earnings for the third quarter were $0.07 compared to a loss of $0.11 in 2010.

BioGlue's quarterly sales in Japan were ahead of our expectations again. As we've previously communicated, we had predicted that we would sell $600,000 worth of BioGlue in Japan during its first 12 months on the market there. Instead, we have sold over $1 million of BioGlue in the first six months it has been on the market in Japan. We were also pleased with sales of $2.1 million of the Cardiogenesis products during the quarter.

The agenda for today's call is as follows, Ashley will discuss this morning's press release in detail and by product. He will update you on the integration of the Cardiogenesis acquisition into the CryoLife product line. He will also discuss the first-in-man implants of three ValveXchange valves in Paraguay and the timetables for the application for a CE Mark for this valve. I will discuss and describe our recent acquisition strategy and the repositioning of the company to higher growth cardiovascular surgery products. I will discuss our acquisition of PerClot, a powder hemostatic agent, its European sales success and our plans for filing an IDE for PerClot in the United States.

At this time, Ashley will comment on this morning'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 that 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 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, 2010 and our subsequently filed Form 10-Qs 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 third quarter and first nine months of 2011. Before getting into the details, a few highlights of the quarter included the fact that we continued executing on our strategy to position the Company in higher growth and larger addressable market opportunities with our investment in ValveXchange, our ongoing integration of the Cardiogenesis acquisition, and continued progress in rolling out PerClot in international markets, while preparing for the resubmission of our IDE to begin US clinical trials for PerClot.

We also had an all-time third quarter revenue record of $29.7 million, driven by strength in the BioGlue business and the recent acquisition of Cardiogenesis, an increase in gross margins for the quarter compared to the prior year and a strong balance sheet which continues to position us to pursue business development opportunities to potentially accelerate the growth of our business.

As I previously mentioned, we set an all-time third quarter revenue record of $29.7 million. The following factors influenced our revenue performance. Total international revenues were up 33% in the third quarter compared to the prior year, and up 27% for the nine-month period compared to the prior year. We saw strength across all parts of our international business on a quarterly basis compared to the prior year, with tissue processing revenues increasing 18%, combined BioGlue and BioFoam revenues increasing 36% and powdered hemostat revenues increasing 24%.

Worldwide BioGlue revenues were up 10% for the third quarter and up 5% for the nine-month period. These increases were predominantly driven by volume increases, particularly in Japan due to the recent launch of the product. This was the largest year-over-year quarterly increase for BioGlue revenues since third quarter of 2008. And we continue to remain enthusiastic about the opportunity in Japan.

Total sales in the third quarter in Japan were $651,000. And year-to-date in Japan were approximately $1.2 million. To date, approximately 250 surgeons have been trained and over 160 accounts have ordered the product. We expect another large order from Japan before the end of the year.

PerClot sales for the third quarter were $620,000 and were $1.9 million year to date. We experienced some delays in getting PerClot approved in certain international markets and some competitive issues in the EEU, which leads us to slightly lower our guidance. However, despite these delays, our international revenues from the sale of powdered hemostats in the third quarter still increased 24% compared to the prior year and 55% for the nine-month period compared to the prior year.

Based on the feedback we've received from customers, we are optimistic that PerClot will be favorably received once we complete the registration and approval process in other countries.

Revenues from the Cardiogenesis product line were $2.1 million for the third quarter and $3.3 million since we acquired the product line in mid May of this year. During the transition and integration of our sales force, we were able to maintain the current level of disposable handpiece revenue which we viewed as critical. Now that our sales force has been actively promoting the product for a full quarter and had the opportunity to reintroduce the technology to the marketplace, we believe that we will be able to grow in line with the guidance that we gave when we acquired Cardiogenesis, which is in the low double-digit range.

We believe that PerClot and Cardiogenesis represent attractive top-line growth opportunities for the Company going forward.

Vascular revenues were essentially flat with the prior year's quarter and increased 1% for the first nine months of 2011 compared to the first nine months of 2010. As compared to the prior year, unit shipments of vascular tissues decreased 1% for the quarter and were flat for the nine-month period.

Cardiac revenues for the third quarter of 2011 decreased 5% compared to the corresponding period in 2010 and decreased 3% for the first nine months of 2011 compared to the corresponding period in 2010. As compared to the prior year, unit shipments of cardiac tissues were down 3% for the quarter and down 1% for the nine-month period. These amounts exclude pericardium that we procured in previous years for a third party who processed the tissue for noncardiac surgical indications.

Total gross margins were 64% and 53% for the third quarters of 2011 and 2010 and 63% and 58% for the first nine months of 2011 and 2010. Gross margins for both 2011 periods were favorably affected by an increase in preservation services gross margins, primarily resulting from decreased unit costs associated with increased manufacturing throughput and due to favorable product mix as surgical seamlets and hemostats became a larger percentage of our business.

The Cardiogenesis product line generated gross margins of 77% during the quarter. Cost of products for 2010 included a $1.6 million writedown of HemoStase inventory.

General, administrative and marketing expenses for the third quarter of 2011 were $14.7 million compared to $11.4 million for the third quarter of 2010. General, administrative and marketing expenses for the first nine months of 2011 were $42.7 million compared to $36.9 million for the first nine months of 2010. We expect our G&A expenses to be higher than they have historically been due to the addition of the Cardiogenesis sales and service personnel that we acquired in mid May.

The third quarter and first nine months of 2011 included $1.1 million and $4.1 million in costs related to our acquisition of Cardiogenesis and other business development activities. This includes costs associated with a specific business development opportunity that, after thorough due diligence, we have decided to discontinue pursuing. We currently do not expect to close on any other business development opportunities for the balance of the year.

Also, we largely completed the integration of the administrative and support functions related to our Cardiogenesis acquisition during the third quarter and closed our Irvine, California, facility during the third quarter.

R&D expenses were $1.7 million and $1.6 million for the third quarters of 2011 and 2010. R&D expenses were $5.1 million and $4.1 million for the first nine months of 2011 and the 2010. R&D spending in 2011 primarily focused on PerClot, SynerGraft tissues and products, BioFoam and BioGlue. Steve will provide some updates on the timing of our development pipeline.

The effective income tax rate for the third quarter of 2011 was 12%, and 36% for the first nine months of 2011. The rate in the third quarter primarily results from the effect of a one-time benefit for 2010 tax deductions taken on our recently filed tax returns. Going forward, we expect a normalized tax rate in the mid-30% range, excluding the effects of any business development activities.

Net income for the third quarter of 2011 was $2 million, or $0.07 per basic and fully diluted common share, compared to a loss of $3 million, or $0.11 per basic and fully diluted common share for the third quarter of 2010. Excluding pretax transaction and integration expenses of $1.1 million related to our acquisition of Cardiogenesis and other business development activities, and applying a normalized tax rate, non-GAAP adjusted net income for the third quarter of 2011 was $2.2 million, or $0.08 per basic and fully diluted common share.

Net income for the first nine months of 2011 was $5.5 million, or $0.20 per basic and fully diluted common share, compared to net income of $1.8 million, or $0.07 per basic and $0.06 for fully diluted common share for the first nine months of 2010. Excluding pretax and integration expenses of $4.1 million related to our acquisition of Cardiogenesis and other business development activities, non-GAAP adjusted net income for the first nine months of 2011 was $8.1 million, or $0.30 per basic and $0.29 for fully diluted common share.

As of September 30, 2011, we had $26.4 million in cash, cash equivalents and restricted securities, which includes $1.4 million received from the DoD for the development of BioFoam and $5.3 million in restricted securities. Our balance sheet is strong, and we will -- we remain well positioned to leverage our capital resources and cash flow from our more mature business segments to invest in complementary products and technologies in high-growth areas of cardiovascular surgery. You should 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 shortly.

In July, we made an equity investment in ValveXchange, a privately held Company that is developing a lifetime tissue valve replacement system. They recently announced first-in-man implants of their Vitality valve in three patients. Our understanding is that all three patients are doing well, and ValveXchange is making plans to begin efforts to obtain their approval of their valve technology in the EEU.

Our agreement gives us the right of first refusal to acquire ValveXchange. This investment is consistent with our strategy to invest in differentiated technologies that address large, growing segments of the cardiovascular market. Their first generation system is complementary to our cardiac tissue business and fits well with our expertise in sales channels into the surgical valve replacement market.

Additionally, ValveXchange also has a minimally invasive TAVI product under development that leverages the same technology as the first generation and has substantial promise. We encourage you to visit their website for the most recent updates on their progress.

And now I'll turn it back over to Steve.

Thank you, Ashley. Beginning in the first quarter of 2010, Ashley and I began an aggressive campaign to identify and buy undervalued or underfinanced products or companies that were focused on cardiac and vascular surgical products. We were particularly interested in products that addressed complex cardiac and vascular repair. We were interested in products or companies that had high gross margins and expansive market opportunities. We were also very interested in leveraging our worldwide distribution network that is focused on cardiovascular and vascular reconstruction. I think that we investigated about 12 to 15 products or companies.

As Ashley has discussed earlier, in the third quarter of 2010, we announced our first technology acquisition and that we had signed a worldwide manufacturing and distribution agreement for our unique powdered hemostatic agent, PerClot, with Starch Medical of San Jose, California. PerClot is an ideal replacement for the hemostatic powder that we had been distributing worldwide. The primary difference is that PerClot's gross margin will be 80%, whereas our previously distributed hemostatic agent had a gross margin of 50% plus. PerClot and BioGlue give us the opportunity to sell these two hemostatic agents together in European markets. And we're doing so successfully. We estimate that the worldwide markets for PerClot will be about $1.5 billion in 2014.

As you'll recollect, we filed our IDE for PerClot with the FDA in March of this year. The FDA had questions about our submission that we have been addressing. We will be resubmitting our IDE to the FDA in mid November. We expect to begin the clinical trial for PerClot during the second quarter of next year. The clinical trial will probably involve about 300 patients, 150 PerClot patients and 150 control patients. We expect that with six-month enrollment and three-month followup with these patients, that we will file our PMA in the second quarter of 2013.

In May of 2011, we made our second technology acquisition when we acquired Cardiogenesis, a publicly traded Company that is focused on the treatment of patients with severe class IV angina. As Ashley discussed earlier, Cardiogenesis fits perfectly into the Company's strategy to focus on products that are involved with complex cardiac reconstruction. We continue to evaluate the administration of autologous stem cells with the Cardiogenesis handpieces to assess if this type of therapy will provide additional benefit to the patients with severe angina. This product line addresses a total market of 175 million. We expect Cardiogenesis to be accretive to our revenues and earnings in 2011, outside of our acquisition and integration costs as a result of its approximate 80% gross margin.

Ashley also discussed the first-in-man implant of ValveXchange heart valves. The equity investment of $3.5 million in ValveXchange gave us an initial 19% ownership position in a unique heart valve replacement platform. Further, CryoLife will make available up to $2 million to ValveXchange in additional debt financing through a revolving credit facility.

We estimate the prosthetic heart valve market to be $800 million worldwide. It should be apparent to everyone that CryoLife has been in the process of restructuring our business model over the past 18 months. The Company's cardiovascular surgical products and surgical adhesives are focused on the aging baby boomer population that comprises approximately 78 million people in the United States. We are also focused on that doctor population that is involved in complex cardiac and vascular repair.

In the second and third quarters, we have been focused on a potential medical device acquisition. After thorough due diligence, we have decided to discontinue those discussions. We are not contemplating any additional Company or product acquisitions in the fourth quarter. We continue to be active in evaluating other corporate development opportunities, and we will maintain a disciplined approach to acquisitions to ensure we are positively affecting shareholder value. The criteria for this include innovative product and technologies that will accelerate top-line growth with a focus on cardiac and vascular surgery for products or technologies that we can integrate into our global sales force and achieve leverage with our commercial and clinical infrastructure, and above all, transactions that have a clear path to shareholder value.

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

We expect 2011 revenues to be slightly below $122 million, which is the lower end of our previous total revenue guidance for the full year of 2011, of between $122 million and $125 million. This guidance includes revenues of approximately $500,000 related to the use of funds received from the US DoD in connection with the development of BioFoam.

We expect combined BioGlue and BioFoam revenues to increase in mid-single digits on a percentage basis in 2011 compared to 2010, tissue processing revenues to be flat in 2011 compared to 2010, and revenues from powdered hemostats, including PerClot and HemoStase, to be between $4 million and $5 million. We expect revenues from the Cardiogenesis product line to be between $5 million and $5.5 million in 2011. We expect research and development expenses to be between $7 million and $8 million in 2011, down compared to the previous expected range of $10 million and $12 million as a result of a shift in timing of certain R&D expenses into 2012. We expect earnings per share of between $0.23 and $0.25.

Excluding transaction and integration expenses related to the acquisition of Cardiogenesis and other business development charges of approximately $0.09 per share incurred in the first nine months of 2011, and accounting for a normalized tax rate of 36%, we expect non-GAAP adjusted earnings per share of between $0.32 and $0.34 in 2011, up from our previous range of guidance of between $0.28 and $0.32 per share.

We believe we are successfully executing on our strategy of positioning the Company for accelerated revenue and earnings growth by expanding our addressable market opportunities through our internal development and business development activities.

Looking forward, we have several key milestones that we expect to complete in the upcoming months. One, complete enrollment in our BioFoam IDE feasibility study in preparation for a pivotal US clinical trial. Two, refile our PerClot IDE in mid November and begin clinical trials next year, positioning us to potentially enter the US market with the next generation hemostat by 2014. Three, initiate a European study of the PHOENIX autologous stem cell TMR system and file an IDE to begin human clinical trials in the US using the TMR procedure in conjunction with autologous stem cells. And four, continue evaluating potential acquisitions that will allow us to enter large high-growth segments of the cardiovascular market and accelerate the growth of the Company.

That concludes my comments. And now I'll turn it back 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) One moment, please, while we poll for questions. Thank you. Our first question is from Matt Dolan with Roth Capital Partners. Please proceed with your question.

First question on the guidance, just looking at the revenue at this point, it implies maybe around a 10% sequential uptick in Q4. So how far below $122 million should we expect? Or what gets you to that type of sequential uptick? Meaning, is there a category that improves or something on the macro-level that that rebounds?

We think that the upside is in the Cardiogenesis product line and the PerClot product line as well as potentially BioGlue in Japan.

Okay. But given your guidance on those categories, it still requires a pretty big sequential uptick.

Yes. Well, the possibility exists that -- again, that we could do better, and then we expect to do better in Cardiogenesis, PerClot and with BioGlue in Japan. And we think that that's -- we have more upside in those three areas than the rest of the business.

Okay. And then on the earnings guidance, just to clarify, I think the delta between adjusted and GAAP last quarter was $0.05 as opposed to an $0.08 differential at mid year. So I wanted to make sure that that's the reason for the increase in the earnings guidance. And secondly, the implied guidance for Q4 cuts EPS basically in half. So I'm just trying to understand why that would be.

The primary driver in non- -- the increase in non-GAAP EPS as compared to the end of the second quarter is primarily due to the shifting of some R&D expenses due to some delays in getting some studies started. So those will be shifting out of 2011 into 2012. As it relates to the fourth quarter, we provided for some additional expenses in the fourth quarter this year to account for the ongoing discovery and the acceleration of the discovery in our litigation with Medafor.

Okay. So how do we think about -- you're exiting the year at a much lower EPS run rate. What's a normalized earnings number for the Company, $0.04, or what we just saw here in Q3?

Well, a lot of it's going to be dependent upon how we perform on the top line. It's going to be dependent upon the timing and enrollment of our clinical trials as well as the progress of what's going on with the litigation with Medafor. So we're anticipating giving our initial guidance for 2012 in our year-end conference call which is scheduled for February.

Okay. The last one on Cardiogenesis. It was doing, I think, $11 million in the year before you acquired it. Your guidance still puts you below that run rate. Have you lost any revenue in that business? Or I know you mentioned it might be conservative, so maybe you could chalk it up to that.

The one thing that we haven't realized yet, since we acquired Cardiogenesis, is the sale of any consoles. And one of the things that they had some -- they had some sales of consoles in each of the previous two years. Our focus has been primarily on going out and focusing on the hospitals that already have consoles placed and trying to increase handset usage.

Okay. Thanks for the time.

Okay.

Our next question comes from the line of Raymond Myers with Benchmark. Please proceed with your question.

Thank you for taking questions. What charges might we expect from the discontinuance of the potential acquisition? Did that occur -- that decision to discontinue, did that occur in Q3 or Q4? And where do the charges get placed?

That decision occurred late in the third quarter of this year. In the third quarter, we incurred roughly about $450,000 worth of expenses. And over the course of the year, we incurred close to $750,000 in expenses related to the target that we were pursuing.

So nothing more in Q4?

We don't anticipate anything more related to that particular target in Q4. And all of that shows up in the G&A line.

Okay, great. And then -- let's see. How much of the Japan BioGlue sales year to date has been stocking, and how much is a reasonable run rate?

I think we're a little bit too early in the rollout to determine that, Ray. In the second quarter of this year, we had roughly about $550,000 in revenue, and in the third quarter, about $650,000. We know that, as we indicated in the comments, there have been over 160 accounts that have ordered. Certainly some of it has been stocking. But our distributor has been ordering from us regularly since they began. So I think that we'll probably have more color on stocking as opposed to actual usage, although the indications are that we're getting a lot of usage of the product in Japan.

That's good to hear. What level of SG&A and marketing expense should we expect as more of a normalized rate here in Q4 now that you've made the acquisition?

Well, if you look at the results for the third quarter, which were about $14.7 million, and we included -- I think that we indicated that there was about $1.4 million related to business development costs in the third quarter. We also have brought on some additional -- so you would normalize it for that. We've also brought on some additional infrastructure related to Cardiogenesis. We essentially brought on their sales force of 10 to 12 people along with two or three other additional employees. And roughly, on an annual basis, we're carrying probably $3.5 million to $4 million in additional expense for that infrastructure that we brought on.

So if you want to go back to a previous quarter, say in the second quarter, probably adding about $4 million in additional G&A is probably, I would say, normalized. But what that doesn't take into account is any acceleration in legal expenses associated with the ongoing Medafor litigation. And we expect that to accelerate starting in the fourth quarter of this year.

And that was going to be my next question. So let's get right to that. Roughly how much Medafor litigation expense do we expect?

If you go to the end of -- through the end of the third quarter, we had spent about $1.4 million. And we're expecting a similar amount in the fourth quarter of this year, about $1.4 million. And then going forward into 2012, as the litigation proceeds, we're going to have a better handle on what the 2012 levels are going to be. And we're going to be able to share that with you in our conference call in February of 2012 when we give our initial guidance.

Okay, great. Is there -- is it reasonable to assume that that $1.4 million quarterly run rate would continue potentially throughout all of 2012, or is that drastically too high or low?

It's difficult to say at this point. A lot of it just depends on the scheduling with the courts and how it proceeds through the courts. And that's inherently unpredictable. So it's really kind of hard to say at this point. But I certainly -- I mean, year to date, including the fourth quarter, we're guiding to, what, maybe $2.8 million for all of 2011. I wouldn't expect it to be any less than that going into 2012. But beyond that, we're going to have more color on that in the year-end conference call.

Okay. Great. Thanks. And then a question about the PHOENIX stem cell delivery system. Is that launched in Europe? And if so, how is that going?

We had our first exhibition of the Cardiogenesis products at the EACTS in September. And it was received very well there. There had been a CE Mark issue for that product line sometime ago, but it's just never, ever been distributed in Europe. And we're in the early stages of setting up a pilot study in Europe for the autologous stem cell technology.

And when do you expect to start to commercialize that in earnest or get any revenue from the PHOENIX system?

I think what we would like to do is conduct this pilot study, or this study, 30-patient study in Europe. And once we get the results of that, actually we'll have some data to begin going out and marketing the product in Europe. So it'll probably be sometime in 2012 before we see any noticeable revenues from the PHOENIX system in Europe.

And how long will that pilot take to do?

Excuse me, Ray? I didn't hear you.

When should the pilot conclude?

Again, that's going to be based on the rate of enrollment. We hope it would be sometime in the first half of 2012. But again, it's going to depend on the rate of the enrollment.

Okay, great. Thanks. I'll get back in queue.

Our next question is from the line of Joe Munda with Sidoti & Company. Please proceed with your question.

Just a couple of quick questions here. I was wondering if you can give us a little bit of color on the acquisition that didn't go through and why it didn't go through. Was it more of a valuation, or was it the technology that you didn't find was beneficial to you guys?

That decision was really based around our technological evaluation of the product.

Can you give us -- what was the nature of the product?

Can't answer that question.

Okay.

All we can say is that it was consistent with our strategy to look at cardiovascular surgical products.

Okay. And in terms of your investment in ValveXchange, $3.5 million for 19%, and you guys had said you would provide $2 million in a credit facility for the Company. Would that give you increased ownership of the Company if you guys were to provide that credit facility to them?

No, it would not.

And my other question was, in regards to cardio and vascular flat this year, is that more to -- due to demand, or is there new players entering the market that you're seeing?

I think it's primarily due to the issues that we're seeing with cost containment at hospitals. There are some competitive activities that are going on out there. There aren't any new players particularly in the market. But it's -- hospitals are under a lot of pressure to go out and find the lowest cost option.

What would be the alternative? That's really what --

There's a not-for-profit entity based in Virginia that's our primary competitor in the Allograft tissue space. So that's one thing, the primary competitor there. But a lot of it just stems from the environment that we've been operating in. It's nothing new now as compared to the last several quarters. It's just a very challenging environment for hospital spending.

Okay. And then actually just more followup to the question before. You guys have PerClot revenues going $4 million to $5 million. Right now you guys are, for the first nine months, at $1.9 million. What is going to jump that to that $4 million to $5 million? Is it a new order or -- I know you talked about the success in other markets. But really, what is driving that from $1.9 million to, let's say, $5 million?

The $4 million to $5 million includes revenues from HemoStase also that we distributed in first quarter of this year. So the $4 million to $5 million is combined powdered hemostat revenue, which includes PerClot and HemoStase.

Okay. All right. That's all I had. Thank you.

We have no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Thank you for joining us for the third quarter. And we look forward to meeting with you in February of 2012 for our year-end conference call.

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