Artivion Inc (AORT) 2014 Q1 法說會逐字稿

Greetings and welcome to the CryoLife Corporation first-quarter 2014 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Steve Anderson. Thank you, sir; you may begin.

Good morning, everyone. This is Steve Anderson, CryoLife's CEO, and I would like to welcome you to CryoLife's Q1 2014 conference call. With me today is Ashley Lee, the Company's Executive Vice President, COO, and CFO.

Today the Company reported record revenues of $35.7 million for the first quarter of 2014. Earnings for the first quarter were $0.04 per share.

HeRO Graft sales were up 26% year-over-year; cardiac allograft revenues were $7.2 million, an increase of 8%; vascular allograft revenues were $9.1 million, an increase of 1%. Ashley will get into the details of these numbers during his financial remarks.

The agenda for today's call is as follows. Ashley will discuss the Company's first-quarter results by product.

He will discuss the completion of the distribution agreement and purchase option with Hancock Jaffe for their vascular graft product that complements the HeRO Graft. Ashley will comment on the recent FDA inspection and the resultant Form 483 that we received.

I will discuss the filing of our motion for a declaratory judgment to obtain the court's confirmation that PerClot technology does not infringe on Bard's patent. I will discuss the FDA clearance of our 510(k) application for PerClot Topical and the marketing launch date for this topical product in the US.

I will discuss the IDE PMA clinical trial for PerClot's use internally. I will also discuss the opening of a sales and service center in Singapore. At the conclusion of my comments, Ashley will return to give you some financial guidance for the rest of the year.

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

Thank you, 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 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, and our Form 10-Q for the first quarter of 2014, which we expect to file shortly, and in the press release that went out this morning.

This morning we reported our results for the first quarter of 2014. We continue to make progress on executing our strategy to leverage our established salesforce to drive growth of an expanding portfolio of high-margin medical device products. We are pleased with our results from that perspective in the first quarter.

We achieved record first-quarter revenues of $35.7 million, driven by 26% year-over-year revenue growth from the HeRO device and 4% growth in tissue processing. The following factors influenced our revenue performance.

Our domestic revenues were up 3% for the first quarter of 2014 compared to the prior-year period, led by a 23% increase in HeRO revenues and a 12% increase in cardiac tissue processing revenues. Our international revenues were down 7% for the first quarter of 2014 compared to the prior-year period, primarily due to the timing of shipments to international distributors.

More specifically, Japanese BioGlue revenues were over $800,000 higher in the first quarter of 2013 as compared to the first quarter of 2014. For the full year of 2014, we expect BioGlue shipments to Japan to exceed those in 2013.

Our first-quarter revenue included 8% year-over-year growth in our European operations. Our international operations outside of Europe were down, driven primarily by the timing of orders from our Japanese distributor. Our international markets continue to represent an attractive growth opportunity for the Company; and following our expansion into Asia Pacific and South America, we will be going direct in Switzerland in the second quarter.

Domestic BioGlue unit shipments increased year-over-year for the third straight quarter. For the first quarter of this year, BioGlue domestic revenues increased 5% on a 2% volume increase.

Revenues from the sale of the HeRO Graft increased 26% to $1.6 million in the first quarter of 2014 compared to $1.3 million in the first quarter of 2013. 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 hosted our third symposium focused on durable dialysis access in patients with central venous stenosis. We had about 70 dialysis professionals attend this event. We believe this symposium will help to continue to drive interest in the HeRO Graft over the course of the year, although it had limited impact on the first-quarter results due to the timing.

Internationally, we continue with our launch into European markets. Overall, we remain very optimistic about the prospects of the HeRO device.

PerClot sales increased 6% for the first quarter of 2014 compared to the first quarter of 2013. The increase is 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.

Tissue processing revenues were up 4% for the quarter compared to the prior year, despite the limitations placed on our ability to ship tissues into the EU.

Our tax rate for the first quarter was affected by the nonrenewal the Federal R&D Tax Credit. If the credit is renewed this year, we expect that our effective tax rate for the full year will be in the mid-30% range.

As of March 31, 2014, we had $38.4 million in cash, cash equivalents, and restricted cash and securities. 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.

I also have some additional comments. As we previously disclosed in our in 2013 10-K, in February and March of this year the FDA reinspected our main headquarters' manufacturing and processing facilities. Following this reinspection we received a Form 483.

We responded on a timely basis to the FDA. And while we believe we are well positioned to address their concerns, we are taking these observations very seriously.

We have a follow-up meeting with the FDA within the next couple of months to review our response. We will update you as appropriate when we have further information.

We will incur some additional cost, both operating and capital, as part of our response to address the FDA's concerns, but don't believe that these costs will have a material impact on our financial statements. We also believe that the changes we have and will implement will adequately address the FDA's observations.

In March, we announced that we had obtained the distribution rights and a purchase option for the ProCol Vascular Bioprosthesis from Hancock Jaffe Labs. ProCol is a biological vascular graft derived from bovine mesenteric vein that is used for vascular access in patients undergoing hemodialysis. It is one of two biological vascular grafts approved for distribution in the US.

As a reminder, ProCol provides vascular access for earlier-stage ESRD patients, while HeRO is designed for patients with limited access options and central venous obstruction.

As part of this transaction we obtained a limited number of ProCol grafts for distribution. We will use that inventory to support current customers while we wait for Hancock Jaffe to complete the FDA requirements for their new manufacturing facility. When they have completed those requirements, they will be in a position to deliver newly manufactured product to us, and we will have a full commercial launch in the US.

We expect that to occur during the second half of this year. When that occurs, we will update our financial guidance as appropriate.

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 April 3, the FDA cleared our 510(k) submission for PerClot Topical powdered hemostat. This clearance allows CryoLife to begin commercialization of PerClot hemostatic powder throughout the United States.

The approved intended uses for PerClot include: use as a topical dressing for the temporary treatment of mildly bleeding wounds, such as surgical wounds; for the treatment of mild bleeding from topical ENT surgical wounds; and for the control of bleeding from the skin at percutaneous needle access, vascular access, and percutaneous catheter access sites.

I would like to reiterate some points I have made in the past regarding the comparison of the CryoLife product, PerClot Topical, with the Bard product, Arista. PerClot Topical absorbs 4 to 5 times the amount of water that Arista absorbs. PerClot also absorbs water twice as fast as Arista, and PerClot forms a much more robust gel than Arista does.

There is a film on our website that compares the activity of each product in a head-to-head timed experiment using water. I would encourage you to look at the film.

We will market PerClot through our 54-person direct salesforce in the US. This salesforce will be augmented by manufacturers' reps who previously sold hemostatic powders. This will give us a unique hybrid salesforce.

We will be focusing initially on the ENT market with PerClot Topical. We estimate the US market to be about $100 million for a product with the indications of PerClot Topical.

In the future, we expect to realize a gross margin north of 85% for PerClot Topical, once manufacturing is fully ramped up. We intend to launch this product in the US on June 1 of this year.

It is important to note that we also have an approved IDE for the clinical evaluation of PerClot for use as an internal hemostatic agent. PerClot Topical and PerClot powdered material are the same, but are regulated differently because of how they will be used.

The IDE trial will be conducted at up to 15 centers throughout the US and includes multiple therapeutic areas. There will be 324 patients enrolled in the trial. The FDA suggested that we have 162 patients in the PerClot test group and 162 patients in an Arista control group.

This is a head-to-head, prospective, randomized trial. We are currently working toward Institutional Review Board submissions to initiate enrollment in July of 2014. We could potentially receive PMA approval from the FDA by the end of 2015.

We believe that the US market for a powdered hemostat that that addresses internal surgical uses is currently about $780 million a year, growing to approximately $915 million by 2016. Over the past few months, we have also received import licenses for PerClot in Panama and South Korea.

In 2012, Medafor notified us that they believed our PerClot technology infringed on the patent they had on powdered hemostat technology. As a result of that company's subsequent sales to Bard, their patent on powdered hemostats now belongs to Bard.

Given Medafor's previous allegations and the recent positive developments regarding PerClot, we made the decision to file an action asking the United States District Court in Delaware to confirm our strong belief that sales of PerClot will not violate the Bard patents or, in the alternative, that the Bard patents are invalid. Declaratory judgment patent proceedings are expensive and sometimes lengthy; and we would expect that it would take two to three years for the court to rule in this case.

We expect 2014 expenses for this litigation to be approximately $1 million to $1.5 million. For more information on this issue, please consult our 10-Q.

In March, we announced that we had opened a regional headquarters which will serve as a sales and service center in Singapore. This is in response to our growing business in the Pacific Rim countries. This office, run by Richard Gridley of our staff, will support our business in Southeast Asia, Australia, Japan, Indonesia, and direct our joint venture in China for BioGlue surgical adhesive.

That concludes my comments, and now I will turn the call back to Ashley for some financial guidance going forward.

We are reiterating our guidance for the full year of 2014, with the exception of the effects of the previously mentioned declaratory judgment action we filed with respect to PerClot. 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. As a reminder, this does not yet include any consideration from the ProCol agreement.

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, including the voluntary discontinuation of allograft tissue shipments into the EU beginning in April of this year. We expect research and development expenses of between $11 million and $12 million in 2014, primarily reflecting our investments in our US clinical trials for PerClot.

We expect earnings per share for the full-year 2014 of between $0.17 and $0.20, down from our previous range of $0.21 and $0.24 per share. The decrease compared to our original guidance is primarily due to the estimated anticipated legal expenses related to the declaratory judgment action.

The decrease in EPS as compared to 2013 is primarily a result of the increased R&D spending on our PerClot clinical trial, which we expect to begin enrollment in, in the near future, as well as the litigation expense. It is important to note that our guidance does not reflect activities related to business development and potential share repurchases, 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 platform, and executing on business development opportunities such as the ProCol transaction. The acquisitions that we have made recently are producing an 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 for higher-growth, higher-margin products. These include, one, continue to drive revenue growth in the HeRO device through the launch by our broader US direct sales force, our CVP Summit, and other marketing events aimed at raising product awareness and the market launch in Europe.

Two, initiate enrollment in our PerClot IDE clinical trial and drive US adoption of PerClot Topical for ENT following our recent 510(k) approval. Three, drive adoption of the ProCol Vascular Bioprosthesis once Hancock Jaffe completes the FDA's requirements for manufacturing.

Four, seek expanded indications for BioGlue and PerClot in international markets. And five, continue to evaluate and capitalize upon strategically appropriate 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 in further leverage our operating infrastructure to improve profitability. That concludes my comments, and now I will turn it back over to Steve.

At this time I will open up the call for questions.

(Operator Instructions) Thom Gunderson, Piper Jaffray.

Hi, good morning, guys. So first, just a housekeeping one, Ashley, on BioGlue. I think you said it was up 5%; 2% on volume.

Did you have a price increase at the beginning of the year? Or is that product mix differences?

That was 5% domestic increase, Thom. And we did have a price increase on July 1 of last year, so it was more -- the volume, obviously, helped us with the revenue increase, but I don't think there was really a big change in product mix. It was just more volume driving it, along with the price increases.

Got it. Thanks. And then, more to the point, the PerClot headline surprised this morning. And then you figure out it is not the PerClot that you are seeking a PMA on; it is Topical.

In your description, you said it is the same product. Is it packaged the same? Deliver the same? Is it -- if you had PMA approval, would it be one SKU on the shelf? Or would it -- does it look different to the customer?

It will eventually look different. The package that is on the shelf right now says PerClot Topical, however it is packaged the same. And it is really the same product, it is just that the FDA regulates it differently depending on where you use it.

So, since -- if you are going to use it internally, they expected us to do an IDE PMA. Interestingly, they consider ENT surgery to be topical; so that is an area that we are very keenly interested in.

So if some of the competitors in that zone deliver the hemostatic agent through gauze or a plug or some sort of thing that can go up into the sinuses, at least part of ENT surgery, is that something that would be done in the OR by the doctor? Or are you thinking of maybe delivering it sometime in the future through other methods?

It would be done by the doctor. But I know that in ENT surgery a lot of the postoperative care is done by physicians' assistants. So both parties would be using the product.

It comes in a small bellows, and the powder can be ejected out of the bellows by squeezing the bellows. We also have extender tips that go along with it, extender tips of different lengths so you can access the sinus cavity with those extender tips quite easily.

Thom, the existing configuration of PerClot has been used successfully many times in ENT surgeries in Europe.

So just go back to the beginning. I want to make sure my assumptions are right. But this is FDA regulations, 510(k), PMA, topical versus internal. But essentially the FDA -- or at least one arm of the FDA said that PerClot, this configuration, is a safe product to use on the human body. So I am thinking (multiple speakers)

They have (multiple speakers) it for general commercial use in the United States.

Got it. But I mean if they had any safety issues, they would have brought them up. And so the assumption that investors might or could make is, at least from a safety standpoint, your PMA is a little bit more visible as far as approval today than it was last week.

Yes, Thom. On the IDE PMA for the surgical product, that is really going to be focused on both safety and effectiveness. The 510(k) clearance, all of the preclinical animal work and bench testing that we submitted to the FDA suggest that -- they made the determination that the product is safe to use. And so we will begin commercializing on June 1.

Got it. Thanks. Then last, you didn't mention weather. I am just curious whether the bad weather that we experienced this winter had any (multiple speakers)

Well, we had big problems in Atlanta as many other areas of the United States did. We think that it cost us probably $750,000 in lost sales.

Got it. Steve, sales that you will make up, or sales that are just gone?

Hard to know.

Okay, thanks. That's it for me, guys.

Jeffrey Cohen, Ladenburg Thalmann & Company.

Good morning, Steve and Ashley. So just as one follow-up on the topical approval, would that be a separate line item? Or that will just fall under PerClot as one line item?

It will probably fall under PerClot.

Okay. Could you talk a little bit about the revascularization line item and revenue for Q1, and any general trends you are seeing?

Obviously, the number was below where we expected it to be. If you compare it to the fourth quarter of 2013, Jeff, our handset volume was actually relatively flat compared to the fourth quarter of 2013.

We actually benefited from some laser console sales in the fourth quarter of 2013. But excluding that, the first quarter was relatively flat compared to the fourth quarter of 2013.

Now with that being said, the business is not where we want it to be. We think that we lost some momentum with that product line when we had -- when we introduced the new handset in July of last year. And, quite frankly, we have not yet recovered some of that momentum that we had.

If you look at the month of April of this year, it has been pretty strong in regards to handset purchases and volume. So we are optimistic that we are going to get the business turned back around.

Okay. Turned back around meaning -- I know you don't provide specific guidance. But turned back around meaning revenues in excess of 2013 for 2014?

Well, for handsets the answer is yes. I think that we guided -- I wouldn't give specific guidance on TMR. But we are expecting that the revenues will increase year-over-year.

Okay. That's insightful. Okay.

So for ProCol, do you anticipate for Q2 that you will have a new product line item broken out for ProCol specifically? Because I am assuming you have a couple or a few hundred veins in-house ready to be sold.

That is correct. Now some of that is short-dated inventory, but we are beginning to distribute ProCol grafts in the second quarter. We don't anticipate that we are going to have a significant volume of revenues until Hancock Jaffe has gotten their PMA Supplement, and we get newly manufactured product, and we can have a full commercial launch.

We don't anticipate that to happen until the second half of this year. It depends on how material the product line becomes as to whether or not we have a separate line item in our financial statements that we file with the SEC. But we will be reporting on our progress with ProCol in our quarterly conference call, so you will have some insight on a quarterly basis as to what our progress is.

So, it may be under Other until it becomes its own line item?

That's correct.

Okay, but -- and you do expect that the Hancock Jaffe manufacturing facility will be up and running and turning out product by the end of 2014?

That is our expectation. Again, they have to get a PMA Supplement from the FDA. They have recently restarted their manufacturing. And as we -- when we get to our next quarterly conference call, hopefully we will have more insight as to what the exact timing is, as to when we expect to launch that product.

But we think it is a great opportunity for the Company. It is very complementary to both our allograft vascular program as well as the HeRO device.

If you look at the other competitive product that is out there in the space right now, the other biological graft, according to IMS they did over $11 million in revenues last year, shipped over 10,000 grafts, and their business grew at 30% on the top line. So we think it is a pretty attractive market for us to be in.

I concur. One more if I may. If you could discuss a little bit about the PMA status and timeline, so you are expecting that the trial for PerClot will start in July. Could you walk us through number of centers as well as the timing?

Yes, there are 15 centers and there are multiple indications for that across multiple specialties. So I am of the opinion that the enrollment will move pretty quickly.

Pretty quickly is six months, approximately?

I do. I think the enrollment, if we start in July, I wouldn't be surprised if we were finished with enrollment by the end of the year.

Okay. Will you be discussing and releasing data to talk about, prior to filing?

We really hadn't made that determination yet, Jeff. It just depends on the progress that we make.

Okay. But at this point, no change in the timeline. You are still looking for a PMA approval by the end of 2015?

Yes.

Perfect. Thanks very much, guys. That does it for me.

Joe Munda, Sidoti & Company.

Hey, Steve and Ashley, thanks for taking the question. Just a quick follow-up on ProCol. I was just wondering if you could give us some sense of what possibly the gross margin could be when the production is ramped up at their facility. Any sense of that would be very helpful.

Yes. Initially, Joe, we are going to be distributing the product, and then we have an option to purchase the product line beginning in month 25 of the agreement.

Yes, you have a three-year window; and then it's an option for each year afterwards; it is a one-year option, correct?

That's correct, to renew the distribution agreement. So during the distribution phase of the agreement, we think our margins are going to be in the mid-50% range, based on the transfer price that has been established. If we are successful with the product line, and we exercise our purchase option and bring the manufacturing in-house, we believe that at some point we could easily see 70%-plus gross margins for the product.

Okay. And as far as the quarterly payments of $2.3 million, I'm a little confused here. When is that going to occur, and how is that going to be accounted for?

Okay. We are going to be paying that approximately $2.3 million in quarterly installments. And we have a budget, essentially, that we are utilizing to guide us as to what -- the amounts that we're going to pay on a quarterly basis.

The payments that we are making are by and large prepayments for inventory. So where you are going to be seeing those payments manifest itself in our financial statements is predominantly in inventory.

Okay, that's helpful. And then, Steve, as far as the patent infringement, I know you guys spoke a little bit here about that, and you gave us some good guidance as far as what's the litigation you expect to pay in 2014 of $1 million to $1.5 million.

Is that number a baseline number to work off for 2015? Or do you think it could ramp higher as we progress?

It might ramp higher. That is our best estimate for this year, but I have been told it is quite expensive going forward in patent litigation.

Okay, okay. Then I guess my final question, as far as what went on in Japan, you guys are saying that it was basically just timing issues and those sales should recover going forward. Is that correct?

Yes, absolutely. It is just the ordering patterns from our distributor, based on our discussions with them. And we fully believe that the 2014 revenues to Japan are going to be higher than the 2013 revenues.

Okay. Thank you.

Thank you. This concludes today's Q&A session. I would now like to turn the floor over for closing comments.

Thank you, everyone, for joining us and we look forward to meeting with you at the end of the second quarter.

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