Artivion Inc (AORT) 2013 Q2 法說會逐字稿

Greetings and welcome to the CryoLife second-quarter 2013 financial results 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, sir. 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 Q2 2013 conference call. With me today is the Company's Executive Vice President, COO and CFO, Ashley Lee.

This morning CryoLife reported sales and earnings for the second quarter of $33.5 million and $0.06, respectively. We set a quarterly sales record for the HeRO Graft of $1.4 million. Sales for the first six months of the year were $69.1 million, a 5% increase over the same period a year ago.

The agenda for today's call is as follows. Ashley will go over this morning's press release in detail. He will comment on revenue by product line. He will comment on the year-to-year success we are having with the HeRO Graft and the cardiac laser business we bought from Cardiogenesis. He will also comment on the Company's potential decision to open a sales office in Singapore.

I will comment on the FDA conditional approval of the PerClot IDE and give some details about the size and scope of the trial, the number of patients, and institutions involved, as well as give you some idea of the approval cycle.

I will also comment on the critical trial that we plan for BioGlue in China and the major joint venture distributor with whom we expect to partner. I will also comment on the new tissue distribution initiative that we are contemplating establishing in Germany in the very near future.

After my comments are completed, Ashley will come back to discuss our financial guidance for the rest of the year.

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 in this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the Company or management's intentions, hopes, beliefs, expectations or predictions of the future, including the guidance for 2013 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, 2012 and our subsequently filed Form 10-Qs for the first and second quarters of 2013 and in the press release that went out this morning.

This morning we reported our results for the second quarter and first six months of 2013. We achieve record second-quarter revenues of $33.5 million driven by year-over-year and sequential quarterly revenue growth from our three newest product lines -- PerClot, revascularization technologies or TMR, and the HeRO Graft balanced by lower sales in our tissue preservation segment.

During the quarter, we also achieved important regulatory milestones, including conditional IDE approval from the FDA to begin our PerClot clinical trial; FDA approval for our improved TMR laser handpiece; FDA clearance of our next generation HeRO device; and CE mark for the current commercial version of the HeRO Graft.

The following factors influence our revenue performance. Our domestic revenues were up 2% and 4% for the second quarter and first half of the year compared to the prior years. Our international revenues were down 3% for the second quarter and up 12% for the first half of the year compared to the prior year periods. The decrease in international sales in the second quarter of 2013 was due primarily to timing of our Japanese distributor orders, which included a large order during the first quarter of 2013.

For the first six months of the year, we achieved strong, 12% growth in international sales, including 9% growth in our European operations and 18% growth from all international markets outside of Europe. We are encouraged by this performance, particularly in Asia-Pacific, where we expect continued future growth with the potential expanded approval for BioGlue in Japan and approvals for PerClot in Japan and BioGlue in China. In order to continue driving growth in Asia-Pacific and to ensure that we are well positioned to execute should we obtain these regulatory milestones, we will likely establish a sales office in the region, probably in Singapore, to support our independent distributor network. We currently have one sales executive located in Thailand and will likely relocate another sales executive to Singapore to support our efforts there.

We also have an excellent opportunity to continue growing our business in Latin America. To support our activity in the region, we hired Andres Sarmiento for the newly-created position of Latin America Sales Manager. Andres has extensive experience in Latin American markets and distribution networks for hemostatic agents. He will focus on the expansion of our global product portfolio of PerClot, BioGlue and the HeRO Graft.

Worldwide BioGlue revenues were up 1% for the second quarter and 7% for the first half of 2013 compared to the prior year. The year-to-date increase resulted primarily from increases in all of our international markets, including Europe, South America, and Japan where our distribution partners continued to deliver excellent results. We believe that we can continue to grow our BioGlue franchise going forward with a potential expanded indication in Japan, a potential approval in China and with increased international usage for neurosurgery.

PerClot sales increased 36% for the second quarter and 35% for the first half compared to last year. These increases are partially due to growth in both new geographies and new indications, including neurology and neurosurgery. We continue to remain very optimistic about the positive impact that PerClot will have on our business in the future.

Revenues from our TMR product line increased to 19% in the second quarter compared to the second quarter of 2012, driven by a 31% increase in disposable handpiece revenues in the second quarter compared to the prior year quarter. We believe that the growth initiatives for our TMR business that we implemented in the second half of 2012 are continuing to pay off.

We also announced during the second quarter that we received FDA approval for our newest Sologrip III and PEARL handpieces. As part of this approval, we are conducting a voluntary exchange of the new handpiece for those handpieces in the field manufactured with the previous design. This resulted in a charge of approximately $434,000 that adversely affected gross margins and operating income during the second quarter.

Revenues from the sale of the HeRO Graft were $1.4 million in the second quarter. This was a quarterly revenue record for this product line. We remain optimistic based on the feedback we are receiving from the field, and we expect to see the results of our expanded selling effort over the next couple of quarters.

We also had our first implant of the HeRO Graft in Europe earlier this week. We will have a controlled European launch of the HeRO device over the balance of this year with a broader launch in 2014.

Tissue processing revenues were down 6% for the quarter and 3% for the first half compared to the prior year. Our tissue processing revenues were affected by some supply and throughput issues that occurred late in the first quarter and into the second quarter. We believe those issues have been addressed and should not affect revenues in the second half of the year. International tissue processing revenues, which were expected to be approximately $500,000 for the second quarter, were adversely affected by the UK's Human Tissue Authority's limitations on our ability to export tissues into the EU, which began during the second quarter. We continue to work with the HTA to address their concerns, but we are unsure as to when and if those issues will be resolved.

We had expected tissue processing revenue from the EU to total over $1 million for the second half of this year. At this time, we do not anticipate the realization of meaningful revenue from the EU tissue processing business during the remainder of 2013, which is reflected in our updated revenue guidance.

It's important to note, however, that our EU tissue business operates near breakeven, and the lower revenue is expected to be neutral to EPS.

I have some comments on a couple of other topics. As of June 30, 2013, we had $17 million in cash, cash equivalents and restricted cash and securities and generated $5.2 million in operating cash flow for the quarter. Our balance sheet remains very strong. We continue to carry no debt and generate cash flow.

We're pleased to be able to return a portion of our profits to shareholders, while continuing to build value through our dividend, which we increased by 10% in May, our recently renewed and expanded share buyback program and our investments in organic and acquisition growth opportunities.

In regards to the FDA warning letter, we have received verbal communication from the FDA that our corrective actions to address the issues raised in their warning letter are viewed as satisfactory. We must now wait for the FDA to conduct an additional inspection to verify these corrective actions. We do not know when the FDA will conduct that inspection, although we were hopeful that it will be sometime this year. We remain committed to resolving the concerns in the warning letter and continue to remain focused on safety and quality. Please refer to our SEC filings for detailed discussions and factors affecting our results of operations, including our Form 10-Q that we plan to file shortly.

Now, I'll turn it over to Steve.

The big news this quarter was the FDA's conditional approval of the IDE for PerClot's clinical trial in the US. The PerClot IDE is a prospective, multicenter, multi-disciplinary controlled clinical trial. Upon meeting FDA's conditions for approval, we expect the trial to begin in the late fourth quarter and to include 320 patients at no more than 15 institutions. There will be 160 patients who will receive PerClot, and 160 will receive the other FDA-approved powdered hemostatic agent. The follow-up time for the clinical trial will be one month.

The clinical trial will permit us to conduct a head-to-head clinical evaluation of an already approved hemostatic agent against PerClot, which we believe has some compelling advantages. We believe that PerClot is a very superior product, achieves hemostasis twice as fast, and absorbs 4 to 5 times more fluid than the presently approved product.

The primary objective of this investigation is to demonstrate noninferiority in the achievement of hemostasis at 5 minutes in subjects receiving PerClot compared to subjects receiving a controlled hemostatic device.

In addition, we will assess safety outcomes and a secondary endpoint of hemostasis at 2 minutes in the patient cohort.

When approved, we believe PerClot has the potential to have a substantial impact on the sales and operating results of the Company. We feel this way primarily because PerClot will be manufactured in our facility here in Georgia, and we expect it to have gross margins north of 80%.

Additionally, PerClot addresses markets that are really large in comparison to the markets for CryoLife's in-line products. We estimate that the 2014 US market for a powdered hemostatic agent is $1.1 billion, while the European market is estimated to be $430 million in 2014.

For the first half of 2013, we had international sales of $15.8 million versus 2012 international sales of $14.1 million, an increase of 12%. The first-quarter 2013 PerClot sales in Europe were up 38% over the first quarter of 2012, and during the second quarter of 2013, PerClot sales were up 37% over the same period in 2012.

Our European sales efforts for PerClot have given us a 37% increase during the first half of the year. We expect to continue to be successful in Germany, Austria, France, Spain and the UK with PerClot.

One reason is because one of our competitors in the hemostatic market, Medafor, closed their marketing office in Germany, a country located in the center of Europe and the largest market. They moved their office to Sweden, a country on the periphery of Europe with less than 15% of Germany's population.

We estimate that PerClot has been used in 100,000 surgeries and international markets over the last four years.

We are also having excellent sales results with BioGlue in Europe. And during the first half of the year, BioGlue sales were up 34% in the UK, 6% in France, 32% in Austria and 4% in Germany.

We are beginning the process of setting up a GmbH in Freiburg, Germany, which will further enhance the marketing and distribution of our products in the area. We anticipate that the German location will be operational approximately in the first quarter of 2014.

The other very encouraging news about BioGlue is that we won a tender offer in Saudi Arabia for a large order of the 2 milliliter BioGlue. It is an order for $480,000. The first half of that shipment is scheduled for August of this year, and we hope to complete the order in December of this year.

The Company's marketing strategy will be to bundle PerClot with BioGlue, providing our customers with one-stop shopping for surgical adhesives and hemostatic agents. We think we will be able to give our hospital buying groups better pricing and a superior powdered hemostatic agent in a stronger surgical adhesive with BioGlue. We think this will give us a distinct competitive advantage over our competitors in the surgical adhesive and hemostatic agent business.

Over the past few years, we have enjoyed a very productive relationship with our Japanese distributor, Century Medical, who distributes our BioGlue throughout Japan. Sales of BioGlue in Japan for the first half of 2012 were $2.3 million, and for the first half of 2013, sales are $2.9 million with a $1 million order pending for Q3 delivery. Century Medical and its parent company, Itochu International, are 49% equity partners in a newly formed joint venture called [Wego] Century Medical. This formidable joint venture was formed to distribute medical products in China, and they indicated that BioGlue is one of the medical products they are excited about distributing. Wego Century is currently conducting a sealant market research study to better value the Chinese market potential, which we believe to be in the range of $200 million a year.

To obtain regulatory approval of BioGlue in China, during the week of July 8, we began funding the clinical trial and registration costs, which ultimately will come to approximately $1.3 million. We have contracted with the [Giton] Group, who are experts in Chinese regulatory matters, to manage the clinical trial and the registration process, which we expect to begin during the fourth quarter, and we think it will take about three years for approval.

During the second quarter, we also received a CE mark for our HeRO Graft in the European Union. The first European HeRO Graft was implanted in a patient in Belgium on July 23 and will be followed by seven implants in Germany and the UK during the next week. We expect significant sales from this product beginning in 2014 as it is the only totally subcutaneous, long-term access solution for patients with central venous pathology that is available in Europe at this time. We believe the current market opportunity for the HeRO Graft in Europe approaches $15 million.

That concludes my comments, and now I'll turned the call back over to Ashley for some financial guidance.

Our updated 2013 financial guidance was included in our press release that went out this morning. In summary, we slightly decreased the top end of our total revenue guidance from $143 million to $141 million and lowered our range of earnings-per-share guidance by $0.01. The primary factor behind lowering the top end of the revenue range was that UK HTA's limitations on our ability to ship tissues into the EU. Although we expected our tissue-processing revenues will be flat in the second half of 2013 as compared to 2012, our third-quarter comp will be more difficult than our fourth-quarter comp.

Note that our EPS guidance can be materially affected by a variety of factors, including the magnitude of our R&D and clinical trial expenses, expenses related to potential future business development, litigation, and share repurchases, which cannot currently be estimated.

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 believe that we have several opportunities to expand the Company's market opportunity with higher growth, higher margin products. These include continuing to drive revenue growth in the HeRO Graft to be the launch in our broader US direct sales force; the limited market launch in Europe; and the introduction of the next-generation HeRO device in the US near the end of the year; initiate enrollment in our PerClot IDE clinical trial and pursue additional marketing approvals in new international markets; continue to expand our European sales and marketing coverage for PerClot to include other surgical specialties in addition to cardiac and vascular surgery; seek expanded indications for BioGlue in Japan and regulatory approval for PerClot in Japan and BioGlue in China; build on our commitment to the Asia-Pacific region by retaining distribution partners for our products in new markets such as China and Southeast Asia; drive our TMR business through our clinical registry and increased laser counsel evaluations; and finally, continue to evaluate business development opportunities. If we execute on these initiatives, we will be in a good position to drive top-line growth on our higher-margin medical products and further leverage our operating infrastructure to improve profitability.

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

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

(Operator Instructions). Thom Gunderson, Piper Jaffray.

So just a couple of clarifying questions. Conditional approval, I know that is standard language, I'm talking about the PerClot IDE. Are there any conditions that are unusual or something that you scratched your head and said, why do we have to do that?

Not really. We have to provide them with some more data and information and do some additional and minor animal studies that they wanted to see. But I think that we can get that done and completed no later than the fourth quarter.

Okay. Thanks. And then also, on PerClot, thanks for the description of the clinical trial and the primary and secondary endpoints. Do you have to do anything different or new for that, for PerClot to be used in da Vinci robots in the US like it is in Europe question, or is that practice of medicine and doctors will be free to do them?

That is practice of medicine. There aren't any requirements by the FDA regarding robotic surgery, use of it, at all.

Thanks. And then on BioGlue, just a couple of clarifications and I will be done. One is the BioGlue order for Saudi Arabia, is that brand-new to Saudi Arabia, or is that a continuation of -- an increase and continuation of sales that you had before?

Our Saudi distributor has been increasing their business year over year and has been doing very well. This tender is incremental to their base business, so this will be totally incremental. But even outside the tender, our distributor there continues to do very, very well.

Got it. Thanks. And then last question, TMR handpieces continuing to do well. Did you sell any systems in the quarter, or are you not even trying to?

We sold one system during the quarter, and the ASP was less than $100,000 on that particular system. But again, it's not our focus. It is driving utilization, but with that being said, if a hospital wants to purchase a system, then we are happy to sell them one.

Got it. Okay. That's it for me. Thank you.

Jeffrey Cohen, Ladenburg Thalmann.

A few to go over and a couple were already addressed. So could you talk about the TMR handpiece breakdown? Are those pretty much garbage, the previous generation? Are they going to be discarded and not used?

That is correct. They will be discarded and not used.

Okay. And could you clarify a little bit if you can on detail on the other $344,000 for BD and integration charges? What is that related to? Specifically to handpieces?

No, that is predominantly related to just ongoing business development initiatives where we continue to evaluate opportunities.

And the other thing that it relates to is some G&A expenses that were incurred in closing the Hemosphere facility in Minnesota and transferring that process down to our Atlanta operations.

Okay. So relocation.

Yes.

Okay. Your commentary about the UK HTA limitations, is that specific -- that's for all of Europe, not just for the UK, correct?

That is correct. Our subsidiary outside of London is our importer of record for all tissues that are exported into the EU. So any shipment that or tissue that we make into the EU touches down in the UK first and then travels on to its final destination in Europe. That is one of the reasons why we're potentially looking at establishing a GmbH in Germany that if we do that, that will become our importer of record, assuming that we're not able to get the issues with the HTA resolved.

I got it. Okay. Thanks.

Steve, on the PerClot IDE, what is your current anticipated timeline? Do you think you will begin enrollment by the end of the year?

Yes, I do.

And will you specify the institutions, or we will have to wait to see that on the FDA side?

I don't think I'm going to specify the institutions. But it won't be more than 15.

Got it. Okay. And will you specify or will we know the quote-unquote powdered hemostatic agent which is being used as a comparator?

Yes, we will when we start the trial. I will do that at the next call.

Okay. Got it. When you say you are bundling PerClot with BioGlue, are you selling those, you permitted to sell those together, or are there bundled packages that you are actually selling?

That is what we're planning to do. We're planning to a hospital which is to purchase both products. Then we will arrange a discounted price format for them based upon their volumes. We are doing that --

And that will be --

Yes, we aren't doing it at the present. When it gets approved, that's what we will be doing.

Okay. You're talking about in the US. Is that being done presently in Europe?

No, it's not.

Okay. I got it. And the reinspection, that's very good news. Congratulations on your verbal communication with the FDA. Any idea, they will have to schedule a reinspection. Could that be weeks or months?

It could be months, but they will not schedule it. They will come in here some morning and put their badges in at the front desk and tell us that we are being inspected. We have no way of knowing when they will come here or how long it will last.

Okay. And --

The last time they inspected CryoLife per se, it lasted about a month.

Okay. I got it. Okay. And will you file your Q today or tomorrow?

We are attempting to file it today. It might slip to tomorrow, but it will be this week.

Perfect. Okay. Guys, thanks. Nice quarter. Thanks for taking the questions.

Thank you.

Joe Munda, Sidoti & Company.

A lot of information here and a lot of questions have been answered already. Ashley, I was just looking for some clarification on the tissue issue in the UK and the EU. Can you fill us in a little bit on the background of what they are saying or the reason as to why they're not letting you bring it into the country and the possibility of Germany GmbH?

Yes, back in the first quarter of this year, the HTA became aware of the FDA warning letter, and they placed their importation limitations on our tissues solely based on the fact that we had received a warning letter, without conducting an inspection of our facility or really even having a conversation. So the FDA warning letter was really the basis for the fact that they impose these limitations.

Since that time, we have been working and going back and forth with the HTA more as an educational process to inform them as to exactly about our process and so forth, and they've had some questions. And there's been a lot of back and forth over the last three to four months, and we have been able to answer the majority of those questions. There are still one or two that are open that are we attempting to resolve with them.

And as it stands right now, we're waiting to hear back from them as to whether or not they are satisfied with our responses. So we continue to wait, and we really have no idea as to when or if that particular issue can be resolved.

If it is not resolved successfully, then we very well could establish a GmbH in Germany that would become the importer of record for our tissues going into Europe. That would be a process that we would have to go through, but that is one of the reasons why we're contemplating establishing that particular organization.

Now Ashley, from what I understand, would they have to send over an inspector for the facility to give the go-ahead? Is that the next step in the process?

We don't think so. We don't know for sure, but we don't think that an inspection by HTA would be necessary. Everything that has been done so far has just been a back and forth with documentation and answering questions. And, again, we don't believe that an inspection would be necessary.

Okay. And then as far as -- you guys did make an interesting point with Medafor closing their office in Germany and moving to Sweden. Now you still retain the ownership stake in Medafor, correct?

Yes.

Now how does that affect the relationship with Medafor with you guys moving into that area? I am just trying to get a sense of a), what the possibilities are with that Medafor stake, and b), what the possibilities are in Germany? Just a little bit more clarity on the situation would be great, if you can.

Well, our business continues to do very well in Germany and all of our direct markets as it relates to PerClot, as well as several of our distributor markets in Europe. So our business continues to do very well there. The fact that they no longer have a presence in that particular market I think can only be a positive force. I think it remains to be seen as to exactly the full impact that it will have on our business. But it certainly can only be viewed as a positive for us going forward.

In regards to -- what was -- the stake in Medafor. We currently have no plans right now. I think eventually in order to realize the value of that stake, we will have to sell it either to another interested investor or if Medafor is ultimately acquired. But just as reminder, the carrying value of that particular investment is about $2.5 million, and it is roughly about a 10% stake in the Company. So it's not a huge amount that we are carrying that particular investment at. And as it stands right now, we think that that stake is worth at least that much.

Okay. And just one quick question on the trial. Steve, I know you touched on it a little bit, but as far as the cost for the trial and the length of the trial, I mean I know in previous calls you guys had mentioned 2015 as a possible launch date. I want to know if that is still a feasible launch date, as well as possible clinical trial costs related to PerClot. Thank you.

I think 2015 is still a good number, I mean a good year, a good opportunity. We're going to start the clinical trial probably toward the end of the fourth quarter of this year, and it will be across numerous specialties. So the trial should be -- we should be able to enroll people quickly, I would think.

As far as costs to do, we think it is going to be somewhere in the $6 million-plus range to complete the trial going forward with the majority of that cost being incurred in 2014.

Do you think spread evenly over the four quarters, or is it weighted any different maybe --?

Hopefully I would weight it more towards the first three quarters of the year. I would hope enrollment would be, by and large, completed by that time. So I would weight it a little bit more toward the first three quarters.

Okay. And Ashley, just one last question, as far as operating cash flow and CapEx, can we get a clean number for the quarter?

Operating cash flow came in at $5.2 million. CapEx, I believe, was in like a $2.3 million to $2.5 million range -- right at about $2.3 million.

And that is for nine months or for the quarter?

That is a year-to-date number.

Okay. Year-to-date, okay. Great.

First six months of the year. We do expect over the balance of the year CapEx to probably be $2 million-plus. I think it's going to be little bit higher this year than it has been in the last few years with our establishment of the HeRO manufacturing process, the PerClot manufacturing process and the purchase of some laser consoles to support the TMR business. So it should be a little bit higher than it has been historically.

Okay. Thanks, guys.

Mr. Anderson, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you. We've enjoyed having you visit us during the conference call, and we look forward to speaking with you next quarter.

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.