Artivion Inc (AORT) 2013 Q4 法說會逐字稿

Greetings and welcome to the CryoLife's fourth quarter and year-end 2013 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, sir; you may begin.

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

This morning, we reported record revenues of $141 million for fiscal year 2013 and record earnings of $0.57 per share. International revenues were up 13%, domestic revenues were up 5%. International PerClot revenues were up 14%. International BioGlue revenues were up 18%. Total BioGlue units were up 10% year-to-year, with 26,211 boxes of five syringes shipped in 2013. Total corporate year-over-year revenue growth was 7%.

The agenda for today's call is as follows. Ashley will discuss today's press release in detail; he will also discuss future corporate development plans. I will give you an update on the status of the PerClot IDE and our plans for expansion into the Pacific Rim. After my comments, Ashley will return to give you financial guidance for 2014. After Ashley's guidance comments, we will open up the call for questions.

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

To comply with the Safe Harbor requirements of the Private Securities Litigation 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 in our 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 2014 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 Form 10-K for the year ended December 31,2013, which we expect to file shortly, our previously 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 fourth quarter and full year of 2013. We continue to make progress executing our strategy to drive revenue growth of additional high-margin products. We achieved record fourth quarter revenues of $35.5 million, driven by year-over-year revenue growth from the HeRO device, BioGlue, tissue processing and TMR. We were particularly pleased with the strong performance in our higher-margin product segment, which increased 11% year-over-year in the fourth quarter of 2013, highlighted by a 51% year-over-year quarterly increase in HeRO device revenues and a 10% year-over-year increase in BioGlue. Our tissue processing revenues increased 6% year-over-year in the fourth quarter, compared to last year.

In addition, during the quarter, we received a 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. We have the potential to receive up to an additional $8.4 million from escrow and milestone payments. As of February 14, we had approximately $45 million in cash and cash equivalents.

The following factors influenced our revenue performance. We saw strong revenue growth in all geographies. Our domestic revenues were up 8% and 5% for the fourth quarter and full year of 2013, compared to the prior-year periods. Our international revenues were up 9% for the fourth quarter and 13% for the full year of 2013, compared to the prior-year periods, primarily due to an increase in our surgical sealants and hemostats business.

Our fourth quarter international revenue growth of 9% included 3% year-over-year growth in our European operations in 23% growth from remaining international markets. Our full-year 13% growth in international revenues included 10% growth in our European operations and 18% growth from remaining international markets. Our international markets continue to represent an attractive growth opportunity for the Company, particularly in the Asia-Pacific region where we've made a strategic decision to focus more time and resources to expand our presence.

Worldwide BioGlue revenues were up 10% for the fourth quarter and 9% for the full year of 2013 compared to the prior year, with the increases primarily driven by international growth. As we've mentioned, we believe that we can continue to grow our BioGlue franchise going forward with increased international usage in neurosurgery, a potential expanded indication in Japan and a potential approval in China.

Revenues from the sale of the HeRO Graft increased 51% to $1.7 million in the fourth quarter of 2013, compared to $1.1 million in the fourth quarter of 2012. The increase reflects the growing interest in the HeRO Graft as a long-term solution for hemodialysis patients, who are out of access options. In March, we will be hosting our third symposium focused on durable dialysis access in patients with central venous stenosis. We already have 50 dialysis professionals registered for this event, which we believe will help to continue to drive interest in HeRO Graft. Internationally, we continue with our launch into European markets. Overall, we remain very optimistic about the prospects of the HeRO device.

PerClot sales decreased 20% for the fourth quarter, but increased 14% for the full year compared to last year. The decrease in the fourth quarter was primarily due to the inclusion of a large order from a single hospital in the fourth quarter of 2012. We did not receive a similar order in the fourth quarter of 2013. The full-year increase is 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 7% in the fourth quarter and 11% for the full year compared to last year. Tissue processing revenues were up 6% for the quarter, and up 1% for the full year compared to the prior year, despite the limitations placed on our ability to ship tissues into Europe. As we've stated in previous calls, our European tissue business operates near-breakeven. Due to the increased regulation and requirements of certain European regulatory and licensing authorities, we have voluntarily decided to discontinue shipping allograft issues into Europe beginning in April of this year. We've reflected the discontinuation of shipments in our guidance for 2014, and note that the European issues had not affected our US tissue processing business.

Regarding earnings, we reported EPS of $0.33 per basic and $0.31 per fully diluted common share for the fourth quarter of 2013, and $0.59 per basic and $0.57 per fully diluted common share for the full year of 2013. Excluding certain items, pro forma EPS for the fourth quarter of 2013 would have been $0.08 per fully diluted common share and $0.36 per fully diluted common share for the full year of 2013. You can find the full reconciliation of GAAP and pro forma EPS in the press release that we issued this morning.

There were some significant factors that affected fourth quarter and full-year pro forma EPS, including the following. First, during the fourth quarter of 2013, we recorded a pre-tax gain of approximately $12.7 million related to the sale of our investment due to Bard's acquisition of Medafor. This amounted to approximately $0.31 per fully diluted common share using a 31% tax rate.

Second, we recorded a non-cash pre-tax impairment charge of approximately $3.2 million related to our investment in ValveXchange, writing it down to zero. This amounted to approximately $0.08 per fully diluted common share using a 31% tax rate. Even though we continue to feel that ValveXchange's technology has a place in the surgical valve market, and we expect that they will soon receive CE Mark approval, they've had difficulty in raising capital to fund their business. Based on all the evidence currently available to us, we determined it was appropriate to record an impairment charge. We continue to have important strategic rights in regards to ValveXchange, which include a right of first refusal to match any offer that ValveXchange receives for the Company.

I also have some comments on other topics. As of December 31, 2013, we had $43 million in cash, cash equivalents, and restricted cash and securities. We generated $5.5 million and $16.8 million in operating cash flow for the fourth quarter and full year of 2013.

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 gain shareholder value through our dividend, our share buyback program, and our investments in organic and acquisition growth opportunities. Please refer to our SEC filings for detailed discussions of factors affecting our results of operations, including our Form 10-K that we plan to file shortly.

Now, I'll turn it back over to Steve.

In our past conference calls, we have outlined our discussions with the FDA regarding our IDE application for PerClot surgical hemostat. I am pleased to announce that we believe we are close to reaching an agreement with the FDA on the content of the trial and certain other trial parameters.

The trial we have proposed includes multiple therapeutic areas at up to the 15 institutions in the United States. There will be 320 patients in the trial, 160 in the control group and 160 in the PerClot group. The control will be Arista, Bard's powdered hemostatic agent.

We expect to begin the IRB approval process in March with patient enrollment in late Q2 of this year. We estimate that it will take us six months to eight months to enroll all the patients with a three-month follow-up time. We would expect to submit our PMA application in Q3 of 2015. Therefore, we should expect FDA approval in Q2 of 2016.

In previous conference calls, I've commented on certain parameters of PerClot. And for those of you who are new to our call, I'd like to go through some of the product differences at this time. PerClot absorbs about four times to five times more water than Bard's Arista product. In addition, PerClot's fluid absorption rate is significantly faster as compared to Arista and makes a more adhesive gel or a clot. PerClot biodegrades in about 48 hours.

We estimate that the US market for a powdered hemostatic agent is about $780 million and we believe the international market is also similar in size to the US market. We expect this product to have a gross margin in excess of 80% once we begin manufacturing here. We have a film on our website that shows the difference between the two products. I would encourage you to access this film and note the quickness of the action of PerClot and the fact that it makes a very robust clot.

We've also made the decision to significantly expand our activities in the Pacific Rim area. Later this month, we are relocating an experienced marketing executive, Richard Gridley, to Singapore to open a sales and marketing office there to service our growing business in China, Japan, and Southeast Asia. We expect this area of the world to be one of our major growth areas in the future. Our marketing plans in that area of the world include an expected expanded indication for BioGlue in Japan in Q4 of this year and an expected approval of BioGlue in China in Q2 2017.

We are also expecting approval of BioGlue in India, in Q1 2015. Additionally, we expect to significantly increase sales in Australia, excuse me, in Southeast Asia and South Korea with the introduction of PerClot in this area of the world. With the addition of the Singapore office, we now have sales and marketing offices in London, England; Singapore, Buenos Aires, Argentina, and Freiburg, Germany. CryoLife is well on its way to becoming a worldwide implantable medical device company.

That [includes] my comments, and I'll turn the call back over to Ashley, so that he can share our 2014 financial guidance with you.

So, we are issuing our initial financial guidance for the full year of 2014. We expect total revenues to be between $146 million and $150 million. This represents annual total revenue growth of 4% to 7%. We expect revenues from our higher-margin product segment to increase in the mid-to-high single-digits on a percentage basis for the full-year of 2014.

We expect tissue processing revenues to increase in the low single digits on a percentage basis for the full year of 2014, compared to 2013. That includes the voluntary discontinuation of allograft tissue shipments into Europe beginning in April of this year. We expect research and development expenses to be between $11 million and $12 million in 2014, primarily reflecting our investments in the US clinical trials for PerClot. We expect the effective income tax rate for the full year of 2014 to be in the mid 30% range.

We expect earnings per share for the full year of 2014 of between $0.21 and $0.24. The decrease in EPS as compared to 2013 is primarily a result of the anticipated increased R&D spending for our PerClot clinical [trial]. It is important to note that our guidance does not reflect activities related to business development or litigation, which are difficult to predict. We believe that we are continuing to execute successfully 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. The acquisitions that we have made recently are producing accelerating revenue growth and we look forward to those contributions expanding as our revenue base grows.

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, our CVP summit, and other physician education and marketing events aimed at raising product awareness and a market launch in Europe; two, upon obtaining FDA approval, 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, building 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 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 will open up the call for questions.

Thank you. We will now be conducting question-and-answer session. (Operator Instructions) Thank you. Jeffrey Cohen, Ladenburg Thalmann.

Hello, hi, good morning. Thanks for taking the call.

Hey, Jeff, it's good morning.

Good morning. Could you talk a little bit more about the ramifications of the voluntary recall and stopping of shipments starting April into Europe? What percent composition is it for tissues, and do you anticipate any charges associated with that?

In 2013, Jeff, we shipped approximately $1.2 million to $1.5 million of tissues into Europe, and as we had previously stated, that business operates near break-even for us. So despite the fact that we're not going to have that revenue base in 2014, we do believe that we will still be able to grow our tissue processing business overall in the low-single digit range going forward. In regards to any charges related to that, we don't expect any meaningful charge to come out of our decision to discontinue shipping tissues into Europe.

Okay, got it. Could you talk a little bit more if you're able on ValveXchange $3.2 million charge write-down? What's the latest as far as the approval or revenue or corporate valuation or any other information that you can provide?

I think that we're limited in what we can say about what they're doing internally, but we continue to believe that their product definitely has a place in the surgical valve market based on the data that we've seen and communications from management that they've made publicly. They expect to get CE Mark in the very near future. And as I stated earlier, we still think that it has a place in the surgical valve market going forward. If you've got I think other specific questions about their activities on a daily basis, I would refer you directly to ValveXchange's management, but we are still very optimistic about the opportunity for their technology.

Okay. And one more if I may. Steve, you had mentioned some parameters on BioGlue, and the first one, could you reiterate that? So for Japan, we anticipate expanded indications and what indications and what time frame?

[Full], BioGlue in Japan, we are trying very hard to get another indication for neurosurgery, and I would think that would take a couple of years.

Got it. Okay. That does it for me. Thanks, again.

Tom Gunderson, Piper Jaffray.

Hi, good morning.

Good morning, Tom.

Good morning, Tom.

So, I'll follow up on the last question on PerClot indications, the IDE, you're close even to the point where you believe, you can go to the IRBs next month. Are you getting all of the indications that you wanted with that IDE?

We don't know that yet.

Got it. Is that sort of the final (multiple speakers)?

We're still discussing that with the [powers it would be].

Got it, got it. But, Steve, you've been through this frustratingly slow process more directly than anybody, and yet in late February, you think you're close enough to talk about IRB discussions in March. What is it that's giving you that confidence?

There have been numerous meetings between our management, and the reviewer, and the management of the FDA over the past three weeks to four weeks, and ironing out some of the details of the clinical trial, and we have taken some of their council, and I have repaired a -- re-done the IDE and it will be sent it here by the end of the month. So they will have a document to review with the final review that they have participated in along with us. And so there shouldn't be any questions remaining in their mind about how the clinical trial is going to be run, how it's going to be constructed, and so forth. I'm expecting that will be a couple more conversations before we send it to them to make sure that the indications that we are asking for are going to be approved.

Got it. Yes, (multiple speakers).

Yes, I don't want to get it back again, but it should be submitted by February 28.

Okay. And then, Ashley, on the lower than we expected, I think the Street expected, EPS guidance, you're attributing that to higher R&D. I'm still having a little trouble getting that low. Is it fair to assume that if you have higher growth rates in your higher profit margin products on the revenue side that gross margin stays the same or goes up a little bit?

I think gross margins are going to be kind of flattish in 2014 compared to 2013, and maybe just to give you a little bit more color on some of the other expectations we have for 2014, on a G&A standpoint, we're expecting about mid-single-digit growth overall in G&A expenses in 2014 compared to 2013. A lot of that is reflection of the investments that Steve and I talked about in some of our international markets, we indicated earlier that our growth over there is very good, and we want to continue that momentum going forward as we continue to get these additional products approved and onto the market. And in order to do that, we've got to make some investment predominantly with the distributor relationships in management at this point, but that's one of the areas that we're focusing on investing in next year. Hopefully, that was helpful.

Yes, it is. Thanks. And then, while we're on that international expansion, it's something we're going to track going forward obviously, it's where the higher growth is coming from. You gave us good numbers on the split for the growth of revenues in the US and OUS and then subdivided OUS into Europe and rest of world. Can you remind me what the percentage of revenues is between US and OUS, and how that breaks out between Europe and rest of world?

Yes. For US versus OUS, it's about 78% in the fourth quarter and the full year, compared to about 22% for OUS. So 78% domestic, about 22% OUS. The breakdown between Europa, our European operations and the remaining international markets, I'm going a little bit from memory here, but I can confirm this later, Tom. I think it's roughly two-thirds, one-third between Europe and international markets outside of Europe.

Okay. Good, thanks. That's it from me for now. Thank you, guys.

(Operator Instructions) Joe Munda, Sidoti & Company.

Good morning, Steve and Ashley, thanks for taking the questions.

Good morning.

Good morning, Joe.

I'd like to touch on Europe for a second. I know you spoke about it in your comments and you're going to discontinue selling the allograft into the EU. Are there plans maybe sometime down the line to retry to get back into those markets again or re-enter those markets?

We don't have any plans at this time.

Okay. And then, Steve, in your prepared remarks, you talked about China. Can you give us some indication or some color on the approval environment as far as it goes in China? I know you had mentioned 2017, that seems of a little bit of aways off.

It's a three-year process, it definitely is a three-year process and our clinical trial is being conducted by our joint venture partner, and it has just begun, it is just getting underway. So that is why we chose that particular date. So there is just no way that we can speed it up.

Okay.

But I think it will be accomplished and get done as a result of the fact that our partner is very experienced in those markets.

Okay, that's helpful. And you also spoke about India. What type of potential do you see for BioGlue in India as far as market opportunity?

Yes, it's a little bit too early to set some expectations now at this point, Joe, but as you know, India is a very large country and there is certainly a large subset of the population there that has access to a good healthcare. So as we get a little bit closer to that approval, we'll give more information on what our expectations are in that market going forward. But it's certainly a market that is attractive and worth pursuing.

Okay. And then, just some housekeeping items here. Ashley, in your guidance with the R&D spend, can we expect some of it to be front-end loaded with the initial enrollment or do you see it being more spread out evenly over the quarters?

I think it's probably going to be a little bit more back-end loaded. As Steve mentioned earlier, we're hoping to get the trial underway in the second quarter. I would expect that the third and fourth quarters are going to be more of a heavy spend as that enrollment ramps up.

Okay. And Ashley, what was the CapEx for the year?

I believe it was around $4 million to $4.5 million.

Okay. And then, I guess my final question, Steve, Singapore, what -- I mean the cost to open an office in Singapore, I know Ashley spoke about single-digit, mid-single-digit growth in G&A. But is there any charges or anything we're going to see one-time from that opening of that office in Singapore, I don't mean charges, but some expenses that may be bigger initially?

We're not expecting that.

Okay. Okay. Okay. Thank you, 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.

All right. Thank you, everyone, for joining us and we look forward to speaking with you after the completion of our first 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.