Artivion Inc (AORT) 2014 Q3 法說會逐字稿

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

I would now like to turn the conference call over to management. Thank you; you may begin.

Good morning. This is Ashley Lee. Welcome to our third-quarter conference call. Before we begin, I would like to make the following statements to comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995.

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-Qs for the first and second quarters of 2014, the Form 10-Q for the third quarter of 2014, which we expect to file shortly, and in the press release that was issued this morning.

Now I will turn the call over to Pat Mackin.

Thanks, Ashley, and good morning and thanks for joining the call today. On the call this morning, we will cover four topics. First, I will provide a brief review of my background and the reasons that I joined CryoLife.

Second, I will provide a high-level summary of our Q3 results. Third, I will provide an update on the top priorities for the Company. And fourth, I will be followed by Ashley Lee, our CFO, who will take you through Q3 financial results and provide an update to our guidance. Finally, we will then open up the lines for Q&A.

So let's get started. I would like to take a few minutes to introduce myself and give you some background as to why I am excited about leading CryoLife. As you know, I joined CryoLife on September 2 as President and CEO and I was recently elected to the Board of Directors. CryoLife is a natural fit to my over 20 years of leadership experience in cardiac and vascular medical companies.

I spent the last 12 years at Medtronic. During my time there, I led their global endovascular business for two years, I led their European vascular intervention business for three years, and I ran their CRM division for seven years.

In the five years before joining Medtronic, I led Genzyme's cardiac surgery business. So in total, I've spent more than 20 years running and working in businesses that are focused on cardiac surgeons, vascular surgeons, interventional cardiologists, and electrophysiologists, which ideally suits me for the role here at CryoLife.

Given my strong cardiac and vascular background, there were several things that attracted me to the Company. First, the Company has existing novel and innovative products like BioGlue, the HeRO Graft, and SynerGraft technology.

Second, they have a seasoned and professional sales team that are focused on cardiac and vascular surgeons. Third, recently launched products like PerClot Topical and about-to-be-launched ProCol and soon thereafter, PhotoFix. Four, the prospects for longer-term indication expansion of products like PerClot in the US surgical market as well as BioGlue in Japan.

Five, a profitable and growing business to enable future acquisitions. And six, when taken altogether, these factors have created a very strong CryoLife brand in the cardiac and vascular surgery markets. I am excited about combining my experience and knowledge of the cardiac and vascular customer end markets with these six strengths that I've mentioned.

While I have only been here for -- part of the organization for a short time, I have been impressed with the caliber of the team and the growth strategy they have established. In addition, I have met with a number of customers around the world, which has enhanced my conviction in the strength of our product offering and the entire organization.

At this point, I'm still in the process of evaluating our businesses and do not anticipate significant changes to our operations until I have completed a strategic review and plan with both the management team and the Board.

Turning now to the third-quarter results. This morning, we reported solid operating results for the third quarter. Total revenues increased 2% year over year to a third-quarter record of $37.1 million. This was led by 8% growth in our product revenues, which reached $20.4 million.

This was driven by strong revenue performance across several product categories, including BioGlue and PerClot, which were up 6% and 13%, respectively, and HeRO Graft, which was up 45% from the same period last year.

We generated $2.5 million in cash flow from operations and on the bottom line, we delivered earnings per share of $0.08. When I have concluded my comments, Ashley will provide a detailed review of the Q3 financial results.

As we work to prepare our five-year strategic plan in the coming months, I want to provide an overview of where my focus will be during this timeframe. And we'll provide updates on these key initiatives each quarter.

The three areas that I'll be focusing on are as follows: number one, improving our quality systems and resolving the FDA warning letter; number two, launching three new products -- PerClot Topical, ProCol, and PhotoFix; and number three, expanding indication of key products, PerClot US Surgical IDE and BioGlue indication expansion in Japan.

First on the quality front, the entire organization has been focused on completing all actions related to the Form 483 observations, with a goal of being prepared for a future FDA reinspection and the lifting of the warning letter.

In addition, we recently met with the FDA's Atlanta district office regarding our warning letter and confirmed to them that this was our number one priority and that we are working hard to improve our quality systems and prepare for the warning letter reinspection.

We expect that the FDA will conduct a facility reinspection in the next three to four months. In the meantime, we expect to continue to process our tissue products and distribute them as usual with no disruption to our operations or overall business.

Second, I would like to provide an update on our new product launches. As discussed on our last conference call, we began the initial launch of the PerClot Topical hemostatic powder in the US EMT market just before the Labor Day holiday.

We are pleased that we have had numerous customers that are actively trying PerClot Topical throughout the US, including many sites that have the product in front of their value analysis committees, where we think we have an advantage versus the competition.

We have received very positive surgeon feedback on PerClot Topical's performance, confirming our confidence in its efficacy. We expect to see further adoption in initial reviews from PerClot Topical sales beginning in the fourth quarter of this year and we look forward to updating you on the progress on our Q4 earnings call.

In the fourth quarter, we also expect to benefit from the launch of ProCol. In mid-October, Hancock Jaffe received PMA approval for their new manufacturing facility, which allowed them to restart ProCol manufacturing.

As a reminder, ProCol is complementary to the HeRO Graft in the treatment continuum of end-stage renal disease and the product is used after the failure of a synthetic graft. There is currently one player in the market with a bovine carotid artery product that had an $11 million business last year.

Our ProCol product is comprised of bovine mesenteric vein that has been through a proprietary process that we feel offers significant product differentiation advantage. The vein has higher elastin content than artery and has shown higher patency rates in clinical trials at two years. ProCol had a 73% two-year patency, whereas the competition was at 64%.

So we are confident that our strong vascular surgery sales team will take share with this novel and differentiated product. We have just begun to receive initial shipments of ProCol inventory are in the process of rolling out the product in Q4.

Additionally, we expect to launch the PhotoFix bovine pericardial patch later in the fourth quarter or early next year. We believe PhotoFix has the potential to become the product of choice for pediatric cardiac surgeons in the $30 million-plus market for biological patches used in cardiac and vascular surgical procedures.

I recently spent time at a top pediatric cardiac center in the US. All the surgeons had previous expense with the product and confirmed the differentiated benefits compared to other commercially available products.

The product is easy to use, as it's ready off the shelf and doesn't require any processing. It has unique handling characteristics, which are similar to autologous tissue, and it's safe. There is no glutaraldehyde treatment required.

The surgeons we spoke with were very excited that we will be selling the product and are looking forward to having it available again for their patients.

As for the third area of focus, one of our biggest opportunities for growth is the expansion of the US indication of PerClot into general surgery, cardiac surgery, and urology surgery. There is currently only one competitor in this product space, the revenues for which are currently estimated at approximately $60 million annually.

In terms of our US IDE clinical trial for PerClot for use in surgical procedures, we now expect enrollment in the trial to begin in the first quarter of 2015. As a reminder, we have already received an approval from the FDA for the trial and we are working to finalize the trial protocol and other design considerations.

We have a planned call with FDA during the fourth quarter to address their study design considerations, after which we intend to resubmit the IDE for approval. Based on the current timelines, this would position us for a potential FDA approval of PerClot Surgical in 2017.

An additional near-term indication expansion opportunity is BioGlue in Japan. The current indication for BioGlue in Japan is for aortic dissections as indication that our distributors have done a very good job in penetrating.

This new expansion would broaden the use of BioGlue beyond aortic dissections into all aortic cardiac and large vessel procedures, which would double the market opportunity. We are working with our partner there as well as with MHLW in Japan and hope to see an approval in the first half of 2015.

With our focus on the PerClot Topical launch as well as the US IDE, I would like to provide a brief update regarding our ongoing litigation with CR Bard. Following our filing of an action for declaratory judgment against Bard and certain of its subsidiaries requesting confirmation that our sales of PerClot will not infringe Bard's patent, Bard counterclaimed for patent infringement and also filed for a preliminary injunction against CryoLife, aiming to prevent us from selling PerClot Topical in the US.

The preliminary injunction hearing date is set first January. We believe that we have a strong case in the merits of the infringement claims and feel confident in our ability to prevail in the preliminary injunction motion. In any event, we are continuing our launch of PerClot Topical and are moving forward with our PerClot IDE clinical trial.

The final update is regarding the FDA's circulatory systems device panel meeting that was held on October 9. This was for the classification or for CryoValve SG pulmonary heart valve products, which historically has been unclassified.

I attended the panel meeting and our team presented the preliminary analysis of a prospective and retrospective study covering 800 patient years of positive safety and efficacy data on these products. While we were hoping for a recommendation to classify CryoValve SG as a Class II medical device, the panel voted 12 to 4 to recommend its classification as a Class III medical device, which would require a PMA.

With the panel's recommendation in hand, the FDA will now make a decision on CryoValve SG's classification. We expect that the FDA will announce a preliminary decision by the end of this year or in early Q1, likely in favor of Class III.

Once this decision has been released, we plan to discuss with the FDA the requirements for approval of a PMA and we are hopeful that we will be able to utilize our existing data to support these efforts. In addition, there is usually a 30-month transition period for companies to become compliant with the new regulatory requirements related to reclassification.

So in the near term, we expect that it will be business as usual with respect to our processing and sales of the SG CryoLife valve heart valve.

I will now turn the call over to Ashley for a detailed review of our third-quarter results and updated financial guidance.

Thanks, Pat. This morning, we reported our results for the third quarter of 2014. We continue to make progress on executing our strategy to leverage our established sales force to drive growth of an expanding portfolio of high-margin medical device products.

The following factors influenced our third-quarter performance. Total Company revenues increased to $37.1 million for the third quarter, driven by 8% year-over-year revenue growth from our higher-margin products segment. Our international revenues were up 4% for the third quarter of 2014 compared to the prior-year period, primarily driven by growth outside of Europe.

Our domestic revenues increased 2% for the third quarter 2014 compared to the prior-year period, primarily driven by a 35% increase in HeRO Graft revenues. I'll have more on that later in my comments.

Worldwide BioGlue revenues in the third quarter were up 6% year over year. International BioGlue revenues were up 11% on an 11% increase in volume. Domestic BioGlue revenues were up 3% on a 1% increase in volume. This was the fifth straight quarter that we have seen an increase in domestic volume year over year.

Total Company HeRO Graft revenues increased 45% to $2 million in the third quarter of 2014 compared to $1.4 million in the third quarter of 2013. This came on a 45% increase in volume. This increase reflects the growing interest in the HeRO Graft as a long-term solution for hemodialysis patients who are out of access options.

Internationally, we continue with our launch in the European markets, where we recorded $167,000 in revenue during the quarter. Overall, we remain very optimistic about the prospects of the HeRO Graft.

PerClot sales increased 13% for the third quarter of 2014 compared to the third quarter of 2013. The increase is due to growth in both new geographies and new indications, including neurology and neurosurgery.

The quarter included a nominal amount of revenue from the US, where we launched PerClot Topical just before Labor Day. We continue to actively trial the product and work our way through new product and value analysis committees. We continue to believe that this opportunity will have a meaningful impact on our sales in the future.

Although revenues from our TMR product line decreased 2% in the third quarter of 2014 compared to 2013, which resulted primarily from a decrease in console sales, handpiece volume grew 12% year over year and 7% sequentially over the third quarter of 2014.

Tissue processing revenues were down 4% for the quarter compared to the prior year. The majority of this decrease resulted from a $600,000 decrease in tissue shipments into Europe. Recall that we discontinued regular shipments into the EU earlier this year. Our domestic tissue processing revenues decreased 1% year over year.

Our effective tax rate for the third quarter was 21%. The tax rate benefited from favorable deductions taken on the Company's 2013 tax return, which was filed in the third quarter of 2014.

We expect that our effective tax rate for the full year will be approximately 25% and we expect it to be even lower than that, if the R&D tax credit is renewed for 2014 before the end of the year.

As of June 30, 2014, we had $35.7 million in cash, cash equivalents, and restricted cash and securities. We had several large cash outlays in the first nine months of 2014. They included approximately $4.6 million for share repurchases. $2.5 million for dividends, $2.1 million for PerClot inventory purchases pursuant to minimum purchase requirements, $2.1 million related to business development activities, in particular for ProCol, and $1 million for development milestone payments for PerClot.

Despite these uses of cash, our balance sheet remains very strong. We continue to carry no debt and expect to continue to generate operating cash flow.

Finally during the quarter, we renewed our credit facility with GE Healthcare Finance. Together with our strong balance sheet and cash flow generation, our credit facility provides us the needed capacity and flexibility to execute on our strategic plan going forward.

Please refer to our SEC filings for detailed discussions or factors -- of factors affecting our results of operations, including our Form 10-Q that we plan to file shortly.

And now I will update our guidance for 2014. We are reiterating our revenue guidance and expect total revenues to be between $144 million and $146 million. This represents annual total revenue growth of between 2% to 4%.

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 be down slightly for the full year of 2014 compared to 2013. We now expect R&D expenses to be between $9 million and $10 million in 2014, primarily reflecting our investments in our US clinical trials for PerClot.

We are raising our fully diluted earnings per share guidance for the full year 2014 to a range of between $0.22 and $0.24, up from our previous range of between $0.17 and $0.20. This includes the effects of the reduced R&D expense guidance, lower tax rate guidance, and the additional compensation expense related to the appointment of a new Company President and CEO and other executive personnel changes.

It is important to note that our guidance does not reflect activities related to business development, which are difficult to predict.

That concludes my comments and I will turn it back over to Pat.

So at this point, we're going to go ahead and open up the lines for the Q&A session. So the operator, could you come back on?

(Operator Instructions) Jeffrey Cohen, Ladenburg Thalmann.

So sorry to jump around, but for PhotoFix, did you make an upfront payment and what was the amount and was that made in the third quarter?

No, we made an upfront payment to Genesee back in late first quarter, early second quarter of this year, and that was approximately $0.25 million.

Got it. Can you talk about ProCol, number of SKUs that you expect, sizes, diameters, and lengths?

We're going to have four. We're going to have a -- and they're all going to be 6 millimeters in diameter and various lengths -- 10, 25, 30, and 40 centimeter grafts.

10, 25, 30, and 40 centimeters?

Yes.

Okay. You don't expect going longer than 40 centimeters?

No.

Okay. So could you talk a little bit about the PerClot IDE? It looks like you had a slight delay. Could you talk about the protocol changes or the study design changes or reconsiderations that have been made?

This is Pat. So clearly, the clinical trials and making sure you get your protocol where the FDA is happy with what you've got -- so we've actually had an IDE approval for quite a period of time.

However, there's been some items that they've wanted to refine to make sure that when this is all said and done, we have met the requirements and we've got a trial that we feel good about taking through the panel or through the PMA process.

So it's really some final -- final refinements around the statistical plan and this is a -- the fact that we've got multiple indications inside of one trial creates a little bit of -- from of a complexity. So this trial is 324 patients. They're going to be cardiac patients, there's going to be urology patients, and general surgery patients.

So that's really where this is all kind of around is really the statistical plan and really making sure that we have buy-in from the FDA on what we're going to go forward with.

Okay. Same number of centers expected?

Yes.

Got it. Okay. Could you talk about the CryoValve SG -- if there is a transition for a Class III and a PMA. What's the current sales revenue now of the product on a -- somewhat of an annual basis or quarterly basis that you could talk about?

It's about $10 million to $11 million on an annual basis.

Okay. So theoretically, you may have an IND that enrolls over 20 or 30 months, which should not affect the sales as that's going on, for transition.

[This is Craig]. This is actually a pretty complicated -- I've been to 10 FDA panels. I've never been to a classification panel. I think the last classification panels were in the 1970s.

So this is a fairly unique panel, because typically, you bring a product to a panel and they evaluate the merits of that product and decide to approve or not approve. This is very unique in the fact that they were there to -- the panel was there to discuss the whole class of products, which is more than minimally manipulated tissue valves and -- or homografts.

And we just happened to have the only product that is approved. So it was a little bit confusing. I think to the many of the panel members that voted said that they agreed that this category should move to a Class III, but CryoLife -- you guys should work with CryoLife to get this product approved. Probably because we've got such great data.

So the steps of the process on this reclassification are threefold. Number one, the panel has made a recommendation of the FDA -- it's their purview to decide what to do with that.

My sense is that they will move this to a Class III recommendation. There will be a period of time for public comment and once that's done, that will be -- in the next, probably, six to nine months, we will then go in and meet with the FDA and see what they are looking for from us to go through the PMA process.

As I commented in my comments, CryoLife had undergone a pretty extensive clinical program as a post-market requirement to the original 510(k) that they got back in the 2003, 2004 timeframe. That included 800 patient years of follow-up.

That data is just being wrapped up. We show the preliminary results at the panel meeting and that will be finalized here by the end of the year. So our hope is that we've actually shown that this product is safe and effective. We've got 800 use of patient follow-up.

My hope is that we can work with the Agency to use our existing data to go forward with the PMA. But we still have to have that conversation. But no matter what happens, this is going to be a three- to four-year process as we work through working with the Agency.

Got it. Just a couple more, if I may. Any notable pricing changes for Q3 or Q4 expected?

No. We had our last increase right at the very beginning of Q3 and there are none that are currently contemplated for the balance of the year.

Okay. And one more. Could you talk about the appetite for acquisitions, the pipeline out there that you are seeing for acquisitions on the BD front? And thanks again.

Yes. So obviously, one of the attractions to the Company for me was, as I commented earlier, I've got a lot of experience in the cardiac and vascular space. I know the customers; I know the other markets. I think to some degree that CryoLife has got an abundance of opportunities in directions we could go.

So part of what I'm going to be doing -- I'm spending a lot of time in the field with customers -- with our cardiac customers, our vascular customers. But we also have unique technologies that are coming out in other spaces.

So that's going to be a process that I will be going through with the management team over the next three to six months on what is our strategic direction and where do we want to double down on the M&A side. Because clearly, that is one of the real appeals of the Company is that -- a really strong cardiac and vascular brand, good sales forces, and we've got cash flow and the opportunity with no debt to make acquisitions.

And there's a number of different things that I'm interested -- I'm obviously not going to comment on what they are, but I think there's a lot of different opportunities and we just have to figure out, given the market dynamics, the competitive dynamics, what's available, what's in our price range, what fits.

There's lots of things we have to go through and I've got a lot of experience -- I've done 50, 60 deals in my career. So we will be looking at that, but I'm obviously not going to share much more than that, because I'm not going to show my cards.

Okay. Guys, thanks very much for taking the questions.

Joe Munda, Sidoti and Company.

As far as -- the last caller touched on the PerClot IDE. I'm just wondering how should we look at the cost going forward? Is there any material change from your outlook prior to when we actually thought the trial would take place? How should we look at it?

I think -- and Ashley can comment further, but I think the biggest difference is going to be you've seen our R&D spend has been light primarily because of the -- PerClot IDE has been delayed again, because of the workings with the FDA. So as soon as we get that trial -- the protocol agreed to the FDA and we started rolling -- those expenses are going to go back up to what we had anticipated them being this year.

Okay.

I still think that we are probably $5 million-plus from fully completing the trial. If we start enrollment in the first quarter as anticipated, there's a good chance that a significant portion of that is going to be spent or incurred during 2015.

In regards to our full R&D spend for 2015, we're going to have more to say about that in our year-end earnings conference call and that's typically when we get our first look on what the guidance is going to be for 2015.

Okay. Okay. And then I guess on BioGlue Japan, you touched on it a little bit here with the indication, the hopes for approval. Can you give us some sense of what the actual market opportunity would be like in Japan? I'm not sure if I caught that.

Yes. So I'll give you some specifics. So the current -- it gets a little technical, but the current indication for BioGlue in Japan is for aortic dissections, which is a very narrow application.

That is about a $5 million opportunity. And our partners there -- the distributors there have actually done a nice job penetrating that, because it's a real need. It's kind of a life-and-death type product.

The other big application is for BioGlue in cardiac surgery, so in most of the markets around the world. We also have -- that product can be used in complex aortic surgery, in cardiac surgery, as well is in great vessel surgery. So it really -- it doubles the opportunity. So the current $5 million market probably goes to in the $10 million range.

Okay, okay. And then in terms of -- I'm jumping around as well. In terms of the case with CR Bard, when would you hope that this would be fully resolved? I know you can't go into details, but -- specific details, but I knew you said to January [K] state. Are we assuming some resolution in January or is this thing going to be pushed out a couple months?

So there's a date set for January for -- as I made -- the comments I made, Bard is going for a preliminary injunction in the US and that trial date is set for January. So we will get obviously an early read.

My own opinion is that this is -- we've got -- I think we've got a very strong case, but I think when you look at the financials of the cost of a patent battle for us and for them, from a business standpoint, I just don't think it makes sense to take this thing to trial.

Their patent runs out in February of 2019. We're not going to commercialize PerClot Surgical until 2017. So you can do the math. It just doesn't make a lot of sense. Even if they won flat out and got a royalty, it doesn't pay for their legal bills.

So I'm not sure why they would want to take this thing forward, but we feel like we have a good case and we will take it forward, but I just think it makes a lot more sense to settle this thing than it does to fight it out.

Okay. And then I guess my last question on the tissue processing side of the business, I know you guys talked about you had stopped shipments in EU earlier this year. Any plans to reengage the EU or is that something you're staying away from?

Well, we've had some -- and I will let Ashley comment, because honestly just given my limited time here. We have looked at turning tissues back on, if you will, in Germany and Austria and are going through the process to look at what that would entail.

So we're kind of in the middle of that right now, but we're not prepared to commit whether we're going to do it or not. We're just in the initial planning stage. I don't know if, Ashley, you want to add anything.

No, I think that's fair. We're just are going to the analysis right now and when we make a determination, we will let you know.

Okay. Okay, thank you.

Thank you. And we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Well, I appreciate everybody joining the call this morning. As I commented, I'm very excited about what I see here from a -- we've got three nice product launches coming out the gates.

We've got some midterm things coming. We've got some long-term opportunities in the PerClot IDE trial. We've got a good sales force and I think the ability to acquire into unique spaces that we can make a difference.

So I've been here for two months and again, I'm very excited about what I see here and look forward to working with our team here to take the business forward. So we look forward to giving you guys an update on the next call. Thanks for joining.

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