Artivion Inc (AORT) 2013 Q3 法說會逐字稿

Greetings. Welcome to the CryoLife third-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, 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 third-quarter conference call. With me today is Ashley Lee, the Company's Executive Vice President, COO, and CFO.

This morning we announced record revenues and record earnings for the third quarter. Revenues were $36.3 million, up 8% from $33.4 million in 2012, and earnings per share were $0.11, up from $0.06 in the third quarter of 2012.

The agenda for today's call is as follows. Ashley will discuss the third quarter's results in detail and by product line. He will discuss the significant financial gain that we realized in the fourth quarter on our investment in Medafor common stock, as a result of their acquisition by C.R. Bard.

He will comment on our ongoing corporate development activities. He will also comment on our continuing stock buyback initiatives. Last, he will comment on our corporate expansion into the Pacific Rim countries.

I will discuss the PerClot IDE submission, and the approximate timetable for its approval and the beginning of the human clinical trials. I will also comment on the recent cardiovascular fellows training program that we sponsored in September.

After my comments, Ashley will return to give you an update on our financial guidance for the rest of the year. At the conclusion of Ashley's guidance comments, we will open the call for questions.

At this time, Ashley will comment on this morning's earnings release.

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 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 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 three quarters of 2013, and in the press release that went out this morning.

This morning we reported our results for the third quarter and first nine months of 2013. We continue to make progress on executing our strategy of leveraging additional high-margin products to drive revenue growth and are pleased with our results from that perspective in the third quarter.

We achieved record quarterly revenues of $36.3 million, driven by year-over-year revenue growth from BioGlue, tissue processing, PerClot, and revascularization technologies or TMR. We were particularly pleased with the strong growth in our higher-margin products segment which helped drive third-quarter EPS of $0.11.

In addition, last week we received an initial payment of $15.4 million in connection with the sale of our investment in Medafor, which bolsters our already strong balance sheet and will further support our growth initiatives. The following factors influenced our revenue performance.

We saw strong revenue growth in all geographies. Our domestic revenues were up 6% and 5% for the third quarter and first nine months of the year, compared to the prior-year periods. Our international revenues were up 17% for the third quarter and up 14% for the first nine months of the year compared to the prior-year periods, primarily due to an increase in our surgical sealants and hemostats business.

We achieved overall growth of 19%s in our European operations and 13% growth from all international markets outside of Europe. For the first nine months of the year, we achieved 12% growth in our European operations and 16% 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 along with the potential approvals of PerClot in Japan and BioGlue in China.

Worldwide BioGlue revenues were up 12% for the third quarter and 8% for the first nine months of 2013 compared to the prior-year period. The year-to-date increase resulted primarily from increases in our international markets, especially Europe. As previously mentioned, we believe that we can continue to grow our BioGlue franchise going forward with the potential expanded indication in Japan, a potential approval in China, and with increased international usage for neurosurgery.

PerClot sales increased 20% for the third quarter and 30% for the first nine months compared to last year. These increases are partially due to growth in both new geographies and new indications, including urology 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 14% for the third quarter and 12% for the first nine months compared to last year. We believe that the growth initiatives for our TMR business, including improved training and physician education programs that we implemented in the second half of 2012, are continuing to pay off.

Revenues from the sale of the HeRO Graft were $1.4 million in the third quarter. In the second week of November, we will be hosting our second symposium focused on durable dialysis access in patients with central venous stenosis. We have 100 dialysis professionals already registered for this event, up from the 75 attendees at the inaugural event in April, with a lengthy waiting list of registrants.

We remain optimistic based on the feedback we are receiving from the field regarding this product, and we expect to see the results of our expanded selling effort over the next couple of quarters.

During the quarter, the first European HeRO Graft was implanted at the University of Leuven Hospital in Belgium. We received positive feedback on the implantation from the surgical team and on its performance from the dialysis team. We are conducting a control European launch of the HeRO device over the balance of this year, with a broader launch in 2014.

I also have some comments on some other topics. As of September 30, 2013, we had $23 million in cash, cash equivalents, and restricted cash and securities and generated $7.3 million in operating cash flow for the quarter. At the end of the month, we expect our cash balances to be a little under $40 million, which includes the funds received from the sale of our investment in Medafor.

Our balance sheet remains very strong. We continue to carry no debt and generate strong cash flow. We are pleased to be able to return a portion of our profits to shareholders while continuing to build shareholder value through our dividend, our share buyback program, and our investments in organic and acquisition growth opportunities.

In regards to the FDA warning letter we are still waiting for the FDA to inspect our facilities. As we have mentioned previously, we have received verbal communication from the FDA that our corrective actions to address the concerns 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 are hopeful that it will be sometime this year. We remain committed to resolving concerns in the warning letter and continue to remain focused on safety and quality.

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. Now I will turn it over to Steve.

On September 27 we resubmitted our IDE for PerClot to the FDA. As you will recollect, we had received a conditional approval from FDA on June 14 of this year.

This revised and updated application includes indications for cardiovascular, urology, general, and orthopedic surgical indications. Final FDA approval is required before we can begin to enroll patients and conduct the trial.

The trial as submitted will be comprised of 320 patients. There will be 160 patients in the experimental group and 160 patients in the control group, with one month follow-up. We anticipate that enrollment will take about seven months.

We are expecting to receive PMA approval for PerClot in the second half of 2015, depending on how quickly we complete enrollment.

In prior conference calls, we have made comments about certain product features of PerClot that we feel are superior to Medafor's Arista. Among the features that we feel are significantly better is the fact that PerClot absorbs about 4 to 5 times the amount of water that Arista absorbs. In addition, PerClot's water absorption rate is significantly faster as compared to Arista and makes a more adhesive gel, to resist dis-lodgment from the wound.

We continue to believe that the US market for powdered hemostats in 2014 will be about $1.1 billion.

On September 18 through the 20th, we hosted a surgical workshop attended by cardiovascular surgery residents and fellows from across the United States. Many of the top medical schools were represented at this meeting.

The meeting concentrated on aortic valve repair, aortic valve replacement, aortic reconstruction, and the Ross procedure. This training program was focused on cardiovascular surgery residents and fellows who, of course, may well be future implanters of our processed tissue and users of our other products.

The course directors were William F. Northrup the third, MD, Vice President of Physician Relations and Education here at CryoLife, and George L. Hicks Junior, MD, Chief of Cardiac Surgery and Professor of Surgery at the University of Rochester Medical Center in Rochester, New York. They were assisted by 11 other faculty members who are professors of surgery from various medical schools. We received positive feedback on the workshop from the faculty and attendees and remain committed to providing advanced medical training for our customers.

That concludes my comments; and now Ashley will return to give you some financial guidance for the rest of the year.

Our updated 2013 financial guidance was included in our press release that went out this morning. In summary, we increased our range of earnings per share guidance to $0.58 to $0.60 per share, primarily to reflect our strong third-quarter performance and the gain on the sale of our investment in Medafor. 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.

We believe that 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, one, continue to drive revenue growth in the HeRO Graft through the launch in our broader US direct sales force and the market launch in Europe. Two, initiate enrollment in our PerClot IDE clinical trial and pursue additional marketing approvals in new international markets.

Three, continue to expand our European sales and marketing coverage for PerClot to include other surgical specialties in addition to cardiac and vascular surgery. Four, seek expanded indications for BioGlue in Japan and regulatory approval for PerClot in Japan and BioGlue in China.

Five, built on our commitment to the Asia-Pacific region by retaining distribution partners for our products in new markets such as China and Southeast Asia. Six, drive our TMR business through our clinical registry and increased laser console evaluations.

And finally, seven, 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 I will turn it back over to Steve.

At this time we would like to open up the call for questions.

(Operator Instructions) Jeffrey Cohen, Ladenburg.

Thanks for taking my questions, and nice quarter. So when will you put out any type of guidance on fiscal 2014?

We typically have issued our initial guidance in our February year-end conference call. So it looks like February of next year is when we will have our initial 2014 guidance.

Okay. And your quarter should be submitted tomorrow, or today?

The 10-Q?

Yes.

Later today or tomorrow at the latest.

Okay. Can you talk about some of the M&A opportunities, and the general environment, and prices out there, and products out there that exist that you have been looking at?

We are currently looking at two already approved products that would be tuck-in acquisitions into the vascular area of our Company. We are in early discussions; I can't say anything more about them at this time.

There are plenty of opportunities out there, Jeff, just simply because of the lack of venture money and investment capital. Small, one-product companies in the medical device segment continue to struggle and need working capital. And we are talking to a number of them at this time.

Okay. That's helpful. Steve, you had commented before, so you resubmitted your IDE for PerClot on September 27. Could you review for me the specific label on indications? You said cardiovascular, urology, general, and orthopedic?

Yes. We expected to hear from them by today, meaning this month. But, of course, because of the shutdown in Washington that undoubtedly has been delayed.

But I was very confident that we would hear before the end of October. So that has probably been pushed out by a couple of weeks.

Okay, so -- and that would be your submittal was accepted as filed?

Yes. There is continuing dialogue between our regulatory department and FDA. So they are working their way through the issues and the questions that they had had. It is just, I think the general governmental shutdown has negatively affected that.

Okay. So will you put out an 8-K when your submittal is accepted?

You sure bet we well. Maybe a press release.

And number of centers for the trial that gets started?

It will be up to 15 centers.

Up to 15. Domestic or European?

Domestic.

All domestic?

Yes.

Up to 15 centers? Okay, got it. Just a couple more; sorry to be a pain.

For Q4, is the gain for Medafor for the sale approximately $12.5 million? Is that a good number to use?

Yes, that is about right.

That is about right?

Yes.

Okay, so -- well, that is $0.54, obviously, before tax. So you are stripping out about $0.29 for that after-tax? So your guidance goes up from by about $0.05 to $0.29 to $0.31, it looks like, if you strip that off.

That is correct.

That is a good estimate? Okay. It looked like -- just on a couple product numbers, so -- any specific commentary as far as cardiac tissue for the quarter, which appeared very strong?

Cardiac tissue was very strong in the quarter. Third quarter is typically one of our stronger quarters because of all of the pediatric surgeries that are done in the summer months.

In addition to that, we made some changes internally that resulted in getting some tissues cleared through our system more quickly. And I think that is reflected in our third-quarter numbers.

Okay. How did that relate to the much-higher margins for the preservation services for the quarter? Was that just better throughput, or more inventory coming out of -- more product coming out of inventory at lower margins?

I think a large part of it was just due to product mix. Our long saphenous [vertix] tissues in particular did extremely well. We also had a small price increase in the middle of the year, too. So it was a combination of a couple factors.

Okay. Lastly, any commentary specific to any seasonality? Typically Q3 is light and it looks like it may have been a little light for you only as it relates to a few of the products, but not necessarily overall. So how might that relate to Q4? Or is that some commentary that you can comment on after Q4?

Well, I would just say this. Based on what we are seeing right now, we expect to be at least in the middle to upper part of our range of revenue guidance. So we expect to have a good fourth quarter.

Okay. So year-over-year is turning out to be higher single digits than previously expected, right?

If we end up at the upper end of our range of guidance, the answer would be yes.

Or beyond it?

Yes.

Okay. Okay, perfect. Thanks, guys.

(OPERATOR INSTRUCTIONS) Joe Munda, Sidoti.

Morning guys. Thank you for taking the questions. Let me start off, Ashley, on the guidance, you talked about HeRo Graft revenue. And in the prepared remarks you talked about entering a new market with a broader launch in 2014 for Europe.

But I'm looking at the guidance here and HeRo revenues, you guys revised it down or narrowed the range from $5.5 million to $6.5 million to $5.5 million to $5.7 million. I'm just a little curious as to why.

Is it maybe taking longer for you to launch the product into Europe? Any color would be great.

Not necessarily in Europe. The European plans are going according to plan. You know we were going to have the controlled launch this year and we weren't expecting a big contribution in 2013.

I think that we are seeing is developing the referral channels is one of the things that we continue to work at. The gatekeeper to this particular patient is the nephrologist, as opposed to the vascular surgeon, and it has taken us a little bit longer than we initially thought in order to develop that referral network.

But we continue to get very good feedback out in the field. And with this upcoming central venous nephrology summit that we have coming up, we think that is going to help jumpstart the program too.

So even though we are a little bit lower than where we wanted to be, we are still very optimistic about the program.

Got you, that is helpful. Also, here you guys talked about preservation services growth. It was very nice in the quarter here.

But I picked up that the vascular unit volume had decreased, but overall growth in the segment was up roughly -- I'm looking at 8% for the quarter. I'm just trying to get a sense of how much volume decrease did you see, and what were the fee increases.

we saw like very low single-digit decrease in vascular volume. We did see a favorable mix shift into our longer segment saphenous veins, which carry higher ASPs. And then we also had a mid-single digit increase in prices in the middle of the year, too. So a combination of all of those factors led to the result that we saw for tissues in the quarter.

That increase in the fees, does that carry into 2014? Or are we looking at possibly another fee increase in 2014?

Possibly another in 2014.

Okay, okay. On the P&L front, as far as general and administrative cost, in your prepared remarks you spoke about your Hemisphere cost, roughly $800,000 in the quarter, basically, due to business development and integration cost.

When can we see some of that dissipate? Are we expecting to see that carry into 2014?

I think you will start to see it dissipate almost like now. Over the first I would say couple quarters of this year into the third quarter, we migrated the manufacturing from Minneapolis down to Atlanta. In the first half this year we were really validating the facility and readying it for manufacturing.

Those really kind of the integration costs that you saw. We are now manufacturing that product at our facilities here in Atlanta. And the quote-unquote integration costs that you saw previously are now going to be part of our product cost.

Okay. So, looking at it just bare-bones on this quarter, you guys had $16.5 million in G&A. Is that number expected to -- I mean, obviously it is proportional to revenue. But is that number expected to rise going forward with the trials going on?

I know that it is primarily R&D, but how should we look at it? Is G&A going to decrease proportionately to total sales going forward?

We are certainly going to continue to have to invest to support the business going forward. So you should expect to see some increase in G&A expenses going forward.

Our goal over time is to have, as you would expect, our G&A expenses -- the increase in G&A be less than what we are experiencing on the top-line increase. So that is our plan, to get -- realize more operating leverage as we move forward.

With that being said you can probably can expect to see some increase in G&A. And again in February of next year we will give out our 2014 guidance with a little bit more clarity.

Okay, I've just got two more real quick. On the R&D line, it appears as well in your guidance you guys revised it down; I'm assuming that you were hoping to get this trial started a lot sooner. So going forward in 2014, I know you don't give guidance there, but is it safe to assume that the guidance you gave for $11 million to $12 million in R&D expense would carry over into 2014? Is that something that we're looking at due to the impact of this IDE?

Again, we haven't given out guidance on the 2014 R&D number. I will say this though, Joe. We expect the cost to complete the clinical trial from this point going forward to be somewhere in the range of $5 million to $6 million; and the timing of when that expense will fall is going to be largely dependent upon the enrollment in the study.

So we certainly expect our R&D to increase in 2014 as compared to 2013. Whether you would expect to see a full $5 million to $6 million increase over this year's run rate, I am not prepared to guide to that at this point. We will have more clarity in the conference call in February.

No, I understand that. But I think that Steve had mentioned that he is expecting TMA approval in the second half of 2015. Correct?

Right.

So that $5 million to $6 million we are looking at probably in the first and second quarter. Right? Because, I mean --

I mean, there will be some follow-up too, but yes, I mean a large portion of it will probably occur sometime during 2014. But there again there are other projects we were working on in 2013 that won't be recurring in 2014 either.

So, yes. You know, even though we might see the full 5 million to $6 million next year, there are other things that we have been working on this year that we are not going to be working on in 2014.

Then finally, the $40 million cash balance that you guys stated at the end of the month here, you talked about some acquisitions. I'm just curious. With CR Bard acquiring Medafor and you guys, from a competitive standpoint for the US, are looking at the second half of 2015, it seems like they have a little bit of a jumpstart on you guys. And CR Bard obviously is a larger company.

How do you anticipate really gaining physician awareness in the product when it is approved and can be sold in the US? And also the $40 million, are there any acquisitions in the surgical sealant side or the products that you're looking at? Thank you.

I will take the first part of that question. I don't know you've ever seen a demonstration of Arista and PerClot side-by-side, but you need to do that. It is shocking, the difference in the reaction of the products, one to another.

Our clinical trial is a head-to-head comparison of those two products, as requested by the FDA. And we were delighted do that because you can't quite believe your eyes when you see the difference between the activity.

I think we will also have an opportunity to bundle our hemostatic agent with the BioGlue as we move forward. You know we do have close to 60 people in the field, in the cardiovascular area, both cardiac and vascular. And I think that we will be able to compete well there.

We have been competing with Baxter and others for 10 years, 12 years, maybe more. So, I'm looking forward to the approval of that product because it is so obviously superior.

Okay, thank you.

At this time there are no further questions. I will now turn the floor back to Mr. Anderson for closing comments.

Thank you for joining us today and we look forward to talking with you again in February for our year-end conference call.

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