Artivion Inc (AORT) 2012 Q3 法說會逐字稿

(Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Anderson, President and CEO of CryoLife. Thank you, Mr. Anderson, you may begin.

Good morning, everyone. This is Steve Anderson, CryoLife's President and CEO, and I would like to welcome you to CryoLife's third-quarter conference call. With me today is Ashley Lee, the Company's Executive Vice President, COO and CFO.

This morning we announced all-time record revenues of $33.4 million for the third quarter, a 13% increase over the third quarter of last year. Revenues for the nine months ended September 30 were also a record $98.9 million, an 11% increase over the same timeframe in 2011.

Earnings for the third quarter were $0.06 per share, and for the nine months ended on September 30, were $0.21. These excellent results were the result of the successful implementation of the corporate development strategy that was initiated two years ago. This strategy has successfully positioned the Company into the higher-growth and higher-margin markets in the areas of cardiovascular surgery and end-stage renal disease.

With the acquisitions that we have made over these last two years, we have significantly broadened our addressable markets to include pediatrics, adults, and aging baby boomers. We have a more comprehensive set of medical device products, and are leveraging our global sales force to reach cardiac and vascular surgeons. And we continue to look for ways to augment our product offerings.

The agenda for today's call is as follows. Ashley will review today's press release and will comment on each product's growth and our full-year expectations for those products. He will update you on the status of the clinical trial ValveXchange is conducting in Europe, and the potential timetable for their achieving a CE Mark, as well as an update on discussions that we have begun regarding a potential distribution of their valve in the EU.

He will also update to you on the launch of the HeRO Graft for end-stage renal disease and our plans for manufacturing that product in our new manufacturing facility on the Georgia Tech campus here in Atlanta.

I will comment on our expansion plans for the Asia-Pacific area and the growth opportunities that we see in those markets. I will also provide an update on the submission timing for our revised IDE for PerClot and the approximate approval cycle.

Finally, I will review our continued corporate growth initiatives and our effort to identify products and companies that we can acquire in the end-stage renal disease space to support our strong sales growth with the HeRO Graft. After my comments are completed, Ashley will discuss our financial guidance for the full year of 2012.

At this time, Ashley will comment on today's press release and earnings report.

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 may 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 managements' intentions, hopes, beliefs, expectations or predictions of the future; including the guidance for 2012 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, 2011; and our subsequently filed Form 10-Qs for the quarters ended March 31 and June 30, 2012; and September 30, 2012, which we expect to file shortly; and in the press release that went out this morning.

A reconciliation of certain non-GAAP financial measures to the comparable GAAP measures are contained on our website. This morning we reported our results for the third quarter and first nine months of 2012. We achieved an all-time quarterly revenue record of $33.4 million, driven by year-over-year increases in most of our lines of business and by the recent acquisition of Hemosphere.

The following factors influenced our revenue performance. Total product revenues grew 13% to $16.9 million. Worldwide BioGlue revenues were up 5% for the third quarter. This was driven by volume increases in international markets, primarily Japan. PerClot sales increased 18% to $734,000 for the third quarter compared to last year's quarter, and increased 6% sequentially from the second quarter of 2012.

We believe our focus on markets in the EU, where we sell directly, is starting to pay off. As we expand our international selling efforts beyond cardiac and vascular surgery to other medical specialties, and as we continue to open new markets for PerClot, we expect that we will continue to experience revenue growth for this product.

Revenues from the Cardiogenesis product line were $2.1 million for the third quarter, essentially flat with last year. Revenues from the sales of disposable handsets increased 18% in the third quarter as compared to the second quarter of 2012. We believe these results were driven by the programs recently implemented to drive procedure volume.

Revenues from the sale of the HeRO Graft were $1.4 million, in line with our expectations. We launched the HeRO Graft with our broader, 36-person sales force last month. We expect to see the results of our expanded selling effort over the next couple of quarters.

Global tissue processing revenues grew 12% to $16.4 million, driven by a 22% increase in cardiac tissue revenues resulting from an 18% increase in unit shipments, and a 3% increase in vascular revenues resulting from a 3% increase in unit shipments.

Total gross margins were 64% for the third quarters of 2012 and 2011. Gross margins for the first nine months of 2012 were 64% versus 63% in the prior year's first nine months. Margins for the nine-month period were favorably affected by an increase in preservation services gross margins.

Gross margin also benefited from an increased mix of our higher-margin products; including surgical sealants and hemostats, the HeRO Graft, and the Cardiogenesis product line.

General, administrative and marketing expenses for the third quarter of 2012 were $16.5 million, up 12% from the third quarter of 2011. G&A increased primarily due to an increase in marketing expenses, including costs of our expanded sales force and increases in spending on advertising, partially offset by a decrease in litigation expense.

R&D expenses were $1.8 million for the third quarter of 2012 compared to $1.7 million in the prior year. R&D spending in 2012 has focused on PerClot, the HeRO Graft, SynerGraft tissues and products, BioFoam, and revascularization technologies.

Net income for the third quarter of 2012 was $1.5 million or $0.06 per basic and fully diluted common share. Net income for the third quarter of 2012 included $796,000 in business development and integration charges primarily related to the acquisition of Hemosphere, and $130,000 in litigation expenses.

Excluding these charges, on a pro forma, non-GAAP basis, earnings per share would have been $0.08 in the third quarter of 2012. Pro forma, non-GAAP earnings per share in the third quarter of 2011 would have been $0.09 per share.

As of September 30, 2012, we had $13.1 million in cash, cash equivalents, and restricted cash and securities. This includes $740,000 received from the Department of Defense for the development of BioFoam, and $5 million in restricted cash and securities.

Our balance sheet remains very strong. We continue to carry almost no debt, and continue to generate cash. Based on the strength and predictability of our cash flow, during the quarter we initiated a quarterly dividend of $0.025 per share, with the first payment made to shareholders on September 21.

We are pleased to be able to return a portion of our profits to shareholders while continuing to build shareholder value through our share buyback program and our investments in organic and acquisition growth opportunities.

I have a few more updates on various subjects. Regarding the Hemosphere acquisition, we continue with our efforts to consolidate manufacturing operations to Atlanta. We recently leased a small footprint at Georgia Tech that will serve as our primary manufacturing site for the HeRO Graft and certain portions of our PerClot manufacturing, as well as serve as backup manufacturing space.

We remain on track to relocate the HeRO Graft manufacturing to Atlanta around the end of 2012. In September, we launched the HeRO Graft through our 36-person sales force, focused on vascular surgeons and nephrologists. We expect that later this year into early next year, we will begin seeing the expanded selling effort pay off in higher HeRO Graft revenues.

For our TMR business, we have initiatives underway designed to accelerate growth. We have initiated more robust training and education programs for physicians interested in the technology. We are also establishing a clinical registry that we believe will attract important data about the clinical utility of TMR, and potentially place more opinion-leading surgeons on the podium talking about the procedure.

Lastly, we expect to launch a new handpiece, the PEARL 8, in 2013. PEARL 8 is specifically designed for a less invasive, standalone TMR procedure via a thoracoscopic approach.

In regards to ValveXchange, we are pleased to report that they initiated their EU clinical study in September, which could potentially lead to a CE Mark during the second half of 2013. We recently began initial discussions with ValveXchange on EU distribution, for which we own the right. For more information about their progress, we encourage you to visit their website or contact them directly.

During the quarter, we also made the decision to discontinue our US BioFoam IDE and pilot study. Even with the protocol amendments to the study design, it was extremely difficult to recruit patients, due to the restrictive inclusion/exclusion criteria. To be good stewards of public funds, we made the decision to terminate the study, and we will be returning the unspent funds to the DoD. This decision will not have any impact on our revenue guidance, and is net-neutral to our bottom line.

Please 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.

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

With the approval of BioGlue in Japan and subsequent launch in May of 2011, our revenues in the Asia-Pacific region have been steadily rising over the past two years. Our business in the region has increased 93% from 2011 to 2012, with the majority of the growth and expansion in Japan.

We have been pleased with these results, and believe there is an excellent opportunity for continued growth in the region. We are in discussions with a potential partner in the People's Republic regarding a distribution agreement for BioGlue in China.

To better support our existing business and marketing and sales initiatives in Asia, we have made the decision to expand our physical presence in the Asia-Pacific region by relocating a CryoLife sales and marketing executive to Singapore after the first of the next year.

This executive will be responsible for developing new distributors throughout Southeast Asia, as well as being a liaison with our current distributors in the region. This person will also be responsible for our efforts to establish distribution in China.

We are also adding a contract sales and marketing executive in Thailand. The distribution network will address Asia-Pacific markets we estimate to be between $110 million and $140 million per year.

Turning to our US business, we continued to make progress on our IDE submissions to FDA for PerClot's clinical trial. We now expect the IDE to be filed with FDA in November, but the clinical trial to begin in quarter one of 2013.

We expect enrollment of the 400 patients to take about eight months, with a follow-up period of 30 days. So we would expect to file our PMA application towards the end of 2013, with FDA approval sometime in 2014.

We are also planning a regulatory strategy for PerClot in Japan, in conjunction with an approval in the United States. The manufacturing facility for PerClot has been completed at our corporate headquarters and will be ready for our IDE clinical trial, which we expect to begin in the first part of next year.

We have completed three manufacturing lots of PerClot that will be used in our US clinical trials. These manufacturing lots have been packaged and have been sent to the sterilizer. When they return from the sterilizer, they will be tested. And if they pass, they will be placed in finished goods inventory and will be ready to be shipped to our investigative sites upon the approval of the IDE.

As we phase in the regulatory approvals over the next few years in other countries, such as Canada and Brazil, this manufacturing facility has the capacity to serve those additional markets. We are continuing our corporate development activities, and are focusing on leveraging our recent acquisition of the HeRO Graft by adding complementary products that have the same call points as the HeRO Graft business. This includes products in the AV access and end-stage renal disease areas. We have recently met with several companies in these product areas, and are in continuing discussions with them regarding potential business development opportunities.

In conjunction with certain vascular surgery consultants, our physician training department has been developing the curriculum and selecting a faculty for our first end-stage renal disease summit that will be held here at our corporate headquarters next spring. We expect the faculty will be international in scope, and will attract experts in the treatment of end-stage renal disease from around the world.

Our physician training department has also been working on a curriculum and a faculty for a cardiovascular surgery fellow list program that will be held here at CryoLife in the fall of 2013. The fellows program will replace our annual Ross Procedure Summit, which will now be held in alternate years.

This initiative should help us develop professional relationships with future cardiovascular surgeons as they work their way through their resident and fellows programs at the various medical schools throughout the US.

That concludes my comments, and now I'd like to turn the call back over to Ashley so that he can give you some financial guidance going forward.

We are increasing our financial guidance for the full year of 2012. We expect revenues for the full year of 2012 to be between $131 million and $133 million, which includes revenues of approximately $500,000 related to the use of funds received from the US Department of Defense in connection with the development of BioFoam.

This represents annual total revenue growth of 10% to 11%, up from our previous guidance of 8% to 11%. We expect tissue processing revenues to increase in mid-single-digits on a percentage basis for the full year of 2012 compared to 2011, up from our previous guidance of low-to mid-single-digit percentage increases.

Revenues from our higher-margin product segment are expected to grow between 12% and 15% for the full year of 2012. The updated product revenue guidance includes expectations for BioGlue and BioFoam revenues to increase in the mid-single-digits on a percentage basis in 2012 compared to 2011, and PerClot revenues to be between $2.7 million and $3 million.

We expect revenues from revascularization technologies to be between $8 million and $8.5 million in 2012. We expect HeRO Graft revenues to be between $3.2 million and $3.6 million in 2012.

Turning to expenses, we expect general, administrative and marketing expenses for the full year of 2012 to be between $65 million and $66 million, which includes approximately $2.5 million of integration costs resulting from the acquisition of Hemosphere in May 2012. Research and development expenses are expected to be between $7 million and $8 million as a result of our investments in our US clinical trials for PerClot, and continuing investment in the HeRO product line and SynerGraft.

We expect earnings per share for the full year of 2012 to be between $0.25 and $0.27, which includes transaction and integration charges of approximately $2.5 million. This compares with prior-year 2012 GAAP earnings per share guidance of $0.20 to $0.23. We expect the effective income tax rate for the full year of 2012 to be in the upper 30% to 40% range.

Now I'd like to make a couple of comments about the medical device tax for 2013. Based on our current understanding, domestic sales of our medical devices will be subject to the device tax beginning in 2013. We believe the device tax for the third quarter the first nine months of 2012 would have been approximately $250,000 and $700,000, respectively. Of course, since the regulations implementing the medical device and excise tax are not final, all of this information is subject to the final regulations and further interpretation.

Finally, we believe we are continuing to successfully execute on our strategy of positioning the Company for accelerated revenue and earnings growth by expanding our addressable market opportunities through internal R&D, expanding and leveraging our sales and marketing, and executing on business development opportunities.

Looking forward, we have several opportunities to expand the Company's market opportunity with higher-growth, higher-margin products. These include, one, to drive revenue growth in the HeRO Graft through our recent launch in our broader US direct sales force. Two, initiate enrollment in our PerClot IDE clinical trial in the first quarter of 2013, and gain additional marketing approvals in new international markets. Three, expand our European sales and marketing coverage for PerClot to include other surgical specialties in addition to cardiac and vascular surgery. Four, potentially gain expanded indications for BioGlue in Japan. Five, build on our commitment to the Asia-Pacific region by gaining distribution partners for our products in new markets such as China and Southeast Asia. Six, drive our TMR business through our physician training and education programs, our clinical registry, and increased system placements, as well as launching the PEARL 8. And seven, continue our planning discussions with ValveXchange on the European distribution of their exchangeable valve product, with the potential for an initial European product launch as early as the second half of 2013.

If we execute on these initiatives, we will be in a good position to drive topline growth on our higher-margin medical products and further leverage our operating infrastructure to improve profitability.

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

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

(Operator Instructions). Jeffrey Cohen, Ladenburg [Granham].

No guidance for 2013 at all, yet, at this point?

No. Our normal convention is to release that guidance as part of our year-end conference call.

Got it. Regarding the litigation expenses, do you expect any for Q4?

Nothing significant at this point. All of our major litigation has been resolved, and we're not expecting anything significant at this point.

Got it. And could you review for us the stock repurchase plan that is in effect, as far as what the total is, or the balance, and when that goes in [total]? I see that there was a -- you purchased a few shares during the third quarter.

Yes, we typically purchase our shares under a 10b-5 plan, and we recently had one in place. We have a current authorization that extends up through the middle of December. And we currently have the authorization to purchase, I think, up to maybe a little over $10 million more under that repurchase plan. I significantly doubt that we'll purchase $10 million in shares between now and the middle of December. And at that time, that authorization will expire.

Okay. So, theoretically, a new one will go into effect.

The Board will probably consider that later this year.

The $500,000 from the DoD for BioFoam -- where does that exist? That's on your balance sheet now?

No, that $500,000 is actually revenue, so that is actually monies that we have spent to date on that plan. We currently have a little over $700,000 in cash that we have received from the DoD. And in all likelihood, we will be returning that, plus maybe a little bit more, at some point when that study has been formally terminated.

So what might that look like for the fourth quarter, as far as returning monies?

There will be no P&L impact. If we returned the funds to the DoD, we would simply -- again, it would be probably a little over $750,000 -- and return that amount to the DoD.

Okay, got it.

No P&L impact.

Okay. So BioFoam, the study you are terminating, so don't expect to hear anything more about BioFoam for the US.

For the US. Now, I will say that we continue to make progress on expanding the indications for BioFoam in the international markets. To remind you, we filed to expand the indications for cardiac and vascular surgery. And we remain optimistic that we are going to be able to get an expanded indication for that product in the international markets.

Okay, got it. Do you expect to be present as an exhibitor at any scientific conferences, like Veith or ISET, over the next couple of quarters?

We typically will attend. There are a few conferences beginning early next year, for instance, STS. AATS is typically sometimes in April, and we will certainly be at those. We're going to be increasing our presence at surgical conventions significantly in 2013, as a result of the acquisition of Hemosphere. I don't have that list of congresses at my fingertips. But I believe they are on our website, and you can look and see which ones we will be attending.

Okay. Could you talk a little bit about the decision to have a facility at Georgia Tech, as far as -- is that for redundancy purposes? Or because you're at full capacity in the main facility? Or why was that made?

We are not at full capacity here, but the initial decision was made to have a redundant facility in case of the (technical difficulty). 30,000, 40,000 square feet was available for lease, and it's beautiful space; pharmaceutical-grade clean rooms. And we decided to take 10,000 square feet of that. And then, upon looking further last week, I made the decision to expand that by another 10,000. So we're going to take 20,000 square feet there and manufacture the HeRO Graft there.

A certain number of steps for PerClot will be manufactured in the clean rooms there. And then we will set up a redundant allograft inventory in that facility as well. But it is beautiful space; the price was right; and we just decided that it was time to give ourselves a little protection here, because of the frequency of tornadoes in this area.

Okay, got it. Just a couple more. The three manufacturing lots for the US trial for PerClot, would that be counting as sales?

When we put them into the testing, we start our program, yes, they will be registered as sales.

Okay. I see that -- so, you got a letter from Medafor on PerClot. What was the timing of that?

I don't remember, exactly, the timing. It was, what? Within the last six weeks.

(multiple speakers) Would you say that was largely expected?

Yes. We don't think that we infringe on their patent. They evidently think that we do. But we've had a thorough analysis made of our technology; and, chemically, it's considerably different. It works differently. PerClot absorbs four or five times more fluid upon contact that the Arista product does. We just don't think that, molecularly, it is similar at all.

And they have a history of being a bearing very litigious. And I'm aware, personally aware, of about five situations where they have sued companies or individuals. And right now, they are batting 0 for 5. So I'm not taking it very seriously. And I think that we do not infringe on their patent at all. I don't think that there's going to be an issue there going forward.

Having said that, they can sue us. They can sue -- anybody can sue us for anything they want to.

Got it. Okay, perfect. Thank you very much for taking my questions.

Matt Dolan, ROTH Capital.

Hey, guys. This is Chris Lewis on the line for Matt. Thanks for taking the questions. First question is on -- cardiac tissue, it looks like, had a nice quarter. You mentioned an increase in shipments. But can you talk a little bit more about what factors contributed to that increase during the quarter?

Yes, I can. The STS, in their physician guidelines, came out with an endorsement of using human valves and human tissue replacements in cases of endocarditis. In fact, they went so far as to say that a homographed or allografted valve was the product of choice for treating active endocarditis in patients.

Some of our consultants feel that there is an epidemic of endocarditis developing in the United States. So I would expect to see that tissue -- that type of tissue continue to grow, and that business grow. Also, allograft valves last 15 to 20 years. So a lot of the patients that were implanted with our tissues in the early days of the Company will probably be having replacements. So there's a huge market -- new market developing for adult congenital patients that have to be reconstructed because the valves will wear out over 15 to 20 years.

Okay, thanks. As a follow-up to that, regarding this new sustainability and growth there, the tissue guidance implies a step down in fourth quarter, if we assume roughly a 5% growth for the year. Can you talk about -- despite the new sustainability there, why your guidance is pointing to a drop in the fourth quarter, for tissue?

Well, I think it is kind of hard for us to expect to see 22% growth continued in that space, although we are certainly very optimistic. Coming into the year, we thought that the allograft business as a whole was a flat- to low-growth business; low-single-digit grower. We now believe that it could be a mid-single-digit grower going forward. Hopefully, we're just being a little bit cautious; but it is kind of hard to guide to sustainable growth at that level.

In looking at the sales this quarter -- and this is this morning -- I have noticed that the vascular allograft tissues are doing very well. And there is no question about the fact that the acquisition of the HeRO Graft has helped us greatly. We're seeing physicians, vascular reconstruction physicians that we had been unable to see in the past, as a result of having the HeRO Graft. And I think that that trend probably is going to continue into the future.

And then the other thing that goes on in the fourth quarter for our tissue business is that a lot of that surgery is elective. And then, over the holidays, people have elected surgery; they usually delay it until the first quarter. And I think we have a history of having extremely strong first quarters, don't we?

We do, yes.

Okay, thank you. And then last question -- we've been expecting for an R&D tick-up here, with some of your projects, but hasn't quite seen it, with a another pretty flat quarter sequentially. It looks like the guidance implies R&D pick-up here in Q4. Can you discuss why we may have seen some delays in the spending tick-up there to this point, and how we should expect R&D to trend into next year?

Well, PerClot -- we had originally forecasted that we would be in clinical trials with PerClot at the end of this year. And as you'll recollect, the FDA had a number of questions. And we have been in the process of responding to those questions, and we'll be resubmitting our IDE application in November. And so, the PerClot clinical test has been delayed for some time.

Okay, thank you.

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

All right. Well, we would like to thank everyone that joined us today, and we look forward to speaking with you at our year-end conference call.

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