Artivion Inc (AORT) 2015 Q2 法說會逐字稿

Greetings and welcome to CryoLife Corporation's second-quarter 2015 financial conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to the CryoLife management team. Thank you. You may begin.

Good morning. This is Ashley Lee. Before we begin, I'd 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. 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 and in the press release that was issued this morning.

Now I'll turn the call over to Pat.

Thanks, Ashley, and good morning. Thanks, everyone, for joining the call today. This morning, I'll cover the following two topics. First, a high-level summary of our second-quarter results; and second, an update on our growth vectors that we have been communicating for the past year. Following my comments, Ashley Lee, our CFO, will provide a detailed review of our second-quarter 2015 financial results and our updated 2015 guidance. We will then open the lines for Q&A.

This morning, we reported total revenues of $35.5 million for the second quarter, a 2% increase year-over-year. We were pleased with the improvement in tissue processing revenues, which were up 9%. Product revenues were down 2% and reflect mixed results for the quarter. On the one hand, we continue to see very strong performance in our recently launched products of ProCol and PhotoFix; while on the other hand, we were disappointed with the lower growth rate for HeRO and the negative impact of foreign currency in markets like Europe and Brazil.

Finally, as we've been communicating all year, we had planned on revenue reductions of BioGlue in France, as our distributor sells down their inventory in preparation for us going direct on October 1st. Ashley will provide further details about the quarter during his remarks.

We also continue to make good progress on the four growth vectors that we've been communicating for the past year. Number one, building momentum for our new products, ProCol and PhotoFix. Number two, increasing our global distribution footprint by going direct in France on October 1st. Number three, expanding indications for our key products, which include the enrollment of the PerClot surgical IDE clinical trial in the US, as well as BioGlue in Japan. And number four, assessing business development opportunities.

In addition, we have added one growth vector to the list, number five, improving efficiency and results of our tissue processing operation. I am confident that these five growth vectors will enhance our ability to drive growth and build value over the next few years.

I will now provide more color on the five growth vectors in the order that I listed them. First, I will discuss the momentum for our new products. The customer feedback on PhotoFix continues to be excellent, and we achieved $343,000 of revenue in the second quarter. We are also working on rounding out the PhotoFix product portfolio with new sizes, as well is working on getting a CE Mark, which will provide us access to the European market.

We continue to believe that PhotoFix has the potential to become a leading product in a $30-million-plus market for biological patches used in cardiac surgery. As for ProCol, we achieved $333,000 in revenue during the second quarter, and expect to expand surgeon adoption and sales growth in the coming quarters.

Our second growth vector is focused on expanding our global distribution footprint. Transitioning to a direct sales model in select international markets is a key strategic initiative for CryoLife, because it enhances our revenue and gross margin mix. It also allows us to implement a more focused sales and marketing strategy, and also provides a platform for future new product introductions.

We recently announced plans to transition to a direct sales model in France effective October 1st. As part of this transition, certain members of our French distributor sales team will become members of CryoLife. These reps are currently responsible for executing sales of CryoLife products in France, and they have an established footprint and strong relationships with their surgeon customers.

This transition provides a direct channel of distribution for our growing product portfolio in an important European market. And we expect to see positive impact to revenue and gross margin in 2016. We are working very closely with our distributor to ensure a smooth transition as we prepare for October 1st.

Our third growth vector is expanding indications on key products. I'll begin with an update on the PerClot IDE pivotal trial. To date, we have enrolled four patients in the trial, and it has been taking us longer than anticipated to bring sites through the IRB and contracting process. We currently only have four out of 15 sites fully qualified for enrollment. We are working diligently to bring additional trial sites to the enrollment phase as soon as possible, and we are targeting to have all 15 sites up and running by the 1st of January 2016.

Once we get all 15 centers qualified for enrollment, we believe that we remain on track to complete enrollment in the trial in the second half of 2016. With a three-month follow-up period, we could potentially gain US FDA approval for cardiac, general, and neurological surgery for PerClot in 2018.

In addition, earlier this month, we received Japanese regulatory approval of an expanded indication for BioGlue, doubling the market opportunity in Japan to over $10 million. This essentially allows us to leverage our existing surgeon customer relationships to broaden the use of BioGlue in all aortic, cardiac, and large vessel procedures.

We are very proud of the commercial success of BioGlue that our Japanese distributor has achieved to date, and we will continue to work together to train their sales team on the expanded indication. We are on track for our distributor to begin selling BioGlue for the expanded indication in the third quarter.

The fourth growth vector is our focus on growing the Company through business development transactions. While I will not make specific comments in this area, we continue to assess opportunities that could leverage our global footprint in cardiac and vascular surgery. As you will hear in Ashley's portion of the call, we did have significant spending in this area in the quarter, so I want to remind everyone that we have been very open that this is a key growth vector for our strategy.

Our fifth and newest growth vector is our focus on improving the efficiency and results of our tissue processing. Following the resolution of the FDA warning letter last quarter, we put in place several important initiatives to enhance the tissue processing operation and increase tissue supply as we move through 2015.

We began to see those efforts pay off in the second quarter, as our revenues increased sequentially from $14.4 million to $15.6 million. We continue to make significant progress on these initiatives, and believe that our tissue processing revenues will meaningfully increase in the second half of the year, as compared to the first half of this year.

Overall, we continue to make very positive strides in the second quarter. And while we still have a lot of work to do, we believe we have significantly improved our position with the upcoming transition to a direct sales in France, the expanded BioGlue indications in Japan, our other new product launches have provided another growth vector, and we're working hard to improve yields on our tissue business and drive growth for other medical device products.

Together, we expect that this improved top-line performance will improve top-line performance in late 2015 and into 2016.

I will now turn the call over to Ashley for a detailed review of our second-quarter results and updated 2015 financial guidance. Ashley?

Thanks, Pat. This morning, we reported our results for the second quarter of 2015. And the following factors influenced our second-quarter performance. Compared to the prior year, total Company revenues increased 2% to $35.5 million for the second quarter, driven by a 9% year-over-year increase in tissue processing revenues, driven primarily by price increases.

Product revenues decreased 2% in the quarter, primarily as a result of the conversion to a direct sales model in France and FX, which has resulted in both currency translation issues and affected orders from our OUS distributors who order in US dollars.

On the bottom line, we reported a loss of $0.02. However, excluding $1.4 million in severance-related charges, $857,000 in business development expenses, and an $891,000 gain on the sale of investments, we reported non-GAAP EPS of $0.03 per share.

Focusing on geographic revenues, our domestic revenues increased 5% for the second quarter of 2015 compared to the prior-year period. This increase was driven primarily by price increases for tissue processing and the recent launches of ProCol and PhotoFix.

Our second-quarter international revenues were $7.7 million, down 7% compared to the second quarter of 2014. International revenues accounted for 22% of our business in the second quarter. The decrease in international revenues was driven by a lack of revenues from our French distributor, as we transition to a direct distribution model in France, and the effects of foreign currency, which has affected our distributor ordering patterns and volumes in several large OUS markets, including Russia and Brazil.

Focusing on individual product lines, tissue processing revenues increased 9% for the quarter compared to the prior year, primarily due to price increases. As Pat mentioned, we're also seeing positive effects of the processing improvement initiatives that we implemented earlier this year. Our tissue processing yields have increased dramatically, and we expect that to have a positive effect on the top-line in the second half of this year, and on gross margins beginning late this year and into 2016.

Worldwide BioGlue revenues in the second quarter decreased 6% year-over-year, slightly more than expected, driven primarily by a decrease in international revenues. HeRO Graft revenues increased 2% to $1.7 million in the second quarter of 2015 compared to the second quarter of 2014. The increase was driven by increased adoption of the HeRO Graft in international markets.

PerClot sales decreased 9% for the second quarter of 2015 compared to the second quarter of 2014. The decrease was due primarily to FX and competition from other powdered hemostats in the European market. Revenues from our TMR product line decreased 7% in the second quarter of 2015 compared to 2014, which resulted primarily from a 6% decrease in hand-piece volume.

Gross margins for the second quarter were 60.7%, up from 58.1% in the first quarter. Gross margins were pretty much in line with our expectations. As I stated earlier, we expect tissue processing gross margins should begin to improve in the fourth quarter and we expect meaningful improvement in 2016.

SG&A expenses were $19.3 million for the second quarter, up from $18 million last year. The second quarter included $1.4 million in severance-related benefits and $857,000 in business development expenses. As Pat mentioned, we continue to seek out, evaluate, and pursue business development opportunities that would align with our business strategies and priorities, and enhance our prospects for future growth.

With our bottom line guidance projected to be near breakeven, it is difficult to accurately predict our 2015 effective tax rate, which can change significantly during the year, based on minor changes in projected 2015 income and anticipated tax benefits in the second half of the year. We will continue to update our 2015 effective income tax rate as facts and circumstances change during the year.

As of June 30, 2015, we had $40.9 million in cash, cash equivalents, and restricted cash and securities. We continue to carry no debt and expect to continue to generate operating cash flow.

And now for our updated guidance for 2015. We are reiterating our previously issued financial guidance, with the exception of our guidance for product revenues, which we now expect to grow in low-single-digits on a percentage basis versus our previous guidance of mid-single-digits on a percentage basis.

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

Thanks, Ashley. We will now open up the lines for questions. Rob?

(Operator Instructions) Jeff Cohen, Ladenburg Thalmann.

So a few questions. You said that the uptick in the tissue business was primarily as a result of pricing. Could you talk about the pricing and specific to what the pricing affected and the percentage of that? And could you also talk about the number of units that were sold? Was that in line with expectations, an increase or decrease from Q1? Thanks.

If you look at a year-over-year basis, our cardiac units were flat and our vascular units were actually up about 1%. On a sequential basis, we saw volumes increase for both cardiac and vascular tissues. On a year-over-year basis, the 9% increase in revenues was almost exclusively driven by price increases.

Now, with that being said, as Pat mentioned and I alluded to in my comments, we are seeing some meaningful improvements in both our processing yields and volumes following the work that we did to fix the issues with the FDA late last year and early this year. And we expect going into the third quarter, and especially in the fourth quarter, that our volumes should increase significantly.

I will add one other thing, too. Over the last couple years, we have had midyear price increases for tissues -- in each of the last two to three years, those were effective on July 1st. And you're seeing the impact of some of those price increases on our business.

Okay. But the 9% you referenced was price increases prior to a midyear price increase?

That's correct.

Okay. And when was that from? Price increase from last year of 9%?

Yes, pretty much.

Okay. So you expect another beginning July 1st?

Yes. And they might not be as significant as we've had in the last two to three years, but we will be having a small price increase in the middle part of this year, too.

Okay. Could you talk a little bit about the total sales force now that you have out there in the marketplace, and the composition of it and the net delta over the past couple quarters, please?

Yes. We have got two different channels in the US. We have got a cardiac -- a channel that focuses on cardiac surgery and we have got a channel that focuses on vascular surgery. So the vascular surgery channel is -- with reps and managers, is roughly at a number -- roughly 30. And the cardiac sales force is at roughly 20. And that -- in typical gyrations.

We have got a pretty stable field organization, but you do have turnover from time to time. So, I'd say that it's been kind of on par with what we have seen historically.

Okay. And a couple more for me. Could you comment thus far on what you're seeing in Q3? I know that historically, you've had a bit of a seasonality effect for the third quarter. And also, could you talk about any anticipated headwinds going forward as far as currencies, and if there's any hedging program in plan or what you've seen at least thus far?

Well, we don't -- maybe the hedging first -- we don't hedge as of late. And trying to predict currencies, as we found out at the beginning of this year, was fairly difficult to do. That has been a big challenge for us, particularly in what we have seen in the euro as well as what we saw in Brazil.

That's been a -- the Brazil -- the performance of the real and the economy down there, that's a pretty good sized business for us in the international markets. And we have kind of seen that dry up. And that's been a big challenge, particularly on the international BioGlue number.

Ashley, if you want to talk about the seasonality? I mean, it's pretty early in the quarter.

Yes, I mean, it's relatively early. I think typically in the past, you've seen our cardiac business kind of spike a little bit in the third quarter, just due to the number of pediatric surgeries that occur. What I'll say right now in regards to July, and again, we're one month into the quarter, but so far, we seem to be tracking to plan.

Perfect. Thanks for taking the questions.

Thanks, Jeff.

Thor Gunderson, Piper Jaffray.

This is actually Kyle on for Tom. So I'll start with ProCol and the recent introduction. As you talked about in the prepared remarks, the strategy will be to increase surgeon adoption to drive growth. And to do this grabbing share from the competing product will be particularly important.

I know it's early, but what have your interactions been like with the practitioners as you've rolled out the product? And have the clinical data, supporting higher patency rates over the competing products, played a significant role in the usage by the docs?

Yes, I mean, it's a -- I think it's an interesting product in that it's a pretty narrow segment in this kind of biological grafts for dialysis. But it's a very tough environment. In fact, we think there's lots of future applications in dialysis, where it actually could potentially compete head-to-head in certain patient populations versus, for example, fistulas.

I think it's too early to tell. I mean, we just launched this product at the beginning of the year. So if patients were implanted on January 1st, they're only six months into their kind of time with the graft. So we're trying to figure out what their one-year patency rates are. I think it's pretty difficult.

I think it's safe to say that we have -- there's been a number of clinical papers published on that technology. And I think we are seeing similar performance in the marketplace.

And I think this is a -- I think one of the things is, if you look at the dialysis marketplace, these patients are in really significant need, and they're really looking for products that can be more durable. And this graft has some very unique characteristics that make it, I think, a very interesting option for physicians, as we see them get more and more data.

So I think to date, it's been pretty good. I think a lot of these -- a lot of physicians will trial the product and see how it works in their patients. And so far, we have seen good feedback.

Great, thanks. And then looking at R&D for the quarter, as you mentioned, enrollment was maybe a little bit slower. We were expecting a little more R&D, given the ID ramp. I know you reiterated R&D guidance for the year, but could you comment, Ashley, maybe a bit more on Q3 and Q4 cadence, and sort of how we should think about that?

Yes, I mean, if you look at the -- where we currently stand with having sites fully qualified for enrollment, I think that would kind of indicate that the spend in 4Q we're expecting to be a little more than 3Q. And then for the full year, we have guided to between $13 million and $14 million. And so that's our current guidance. But again, 4Q is probably going to be a little heavier than 3Q.

Okay, thanks. And then, lastly, what was the actual top-line impact for FX for the quarter?

I think that it's probably close to around $300,000. It's roughly around 1% ballpark. I'll confirm that. And if it's different, I'll shoot you another --

I think it's around $400,000.

About $400,000.

Great. Okay. All right, thanks for taking the questions.

Thank you.

Joe Munda, First Analysis.

Thanks for taking the questions. Real quick -- you guys talked about the trial, four out of the 15 locations, it seems to be moving slower than you had originally anticipated. Can you give some color there as far as possibly some of the reasons there as why it's taking a little bit longer? Just a little bit more granularity would be great.

Yes -- no. And I tried to address it upfront. I mean, just give you some high-level. The process to get a site up and running in 2015 has become much more difficult for any IDE type clinical trial. So, there's the whole IRB process where you have to go through the internal Review Board of the hospital to get the -- kind of the regulatory approval on the hospital side.

And once that's done, then you've got to get the contract approved. And that goes into all the different stipulations on who's responsible for what, and also kind of legal type topics like indemnification, different types of things. So, I mean, some institutions have become very difficult to work with, frankly, and this is through my experience over the last 15 years.

I've had -- previously, I've seen hospitals that take a year to get their contract negotiated. Now, we try to avoid places like that. But I think the fact of the matter is just the time to get the IRB up, the time to get the contract signed, and then you've got to train the center. So there's a lot of work. And predicting that is always difficult.

I mean, we feel pretty good that the -- kind of things are moving along through the phase. And as we see, we have now got four of the 15 centers up. The remaining centers are in the -- either the IRB contracting or training phase. And we feel that by the end of this year, we should have all 15 centers up and running.

And once you have that, this trial is actually -- should be fairly easy to enroll. There's only a three-month follow-up, and we are doing a modular PMA. So I think there is other things at the back end of this that give us some confidence that that 2018 days is very realistic. But as each quarter goes by, we'll give you guys updates on how we are progressing on the -- on getting the centers up and running.

Okay. Thank you, I appreciate it. I mean, the timeline you provided us, is that basically a worst-case scenario? Or could it be expedited in any way? I mean, you just said you would provide us an update, but is there (multiple speakers) --

I think we're -- I actually think we are being -- it's hard to say we're being conservative when we are missing our enrollment. But at the same time, I mean, if you look at -- if we have all the sites up and ready to go by January 1st, and we can enroll this trial and just make it, say, in 2016, there's a three-month follow-up, and a module PMA is a six-month -- you know, the final approval will be a six-month window, assuming everything is solid.

That gets you still well within 2018, even if you kind of stretch out your enrollment phase. So, I think there's a possibility we could get into 2017; we're just trying to be conservative on the dates we're throwing out there.

Okay. And then my other question in regards to what's going on with Medafor, back and forth between you guys. Any updates there as far as a resolution? Or are we still -- is it still like a wait-and-see type of situation?

Yes. I mean, I think at this point in time, I mean, the more -- it's kind of an ironic situation, like the longer the trial takes to enroll, the less exposure we have on the length of their patent. Their patent expires -- and I've mentioned this previously -- their patent expires in February of 2019.

So let's just say, with the -- we say early 2018 approval, you've got a one-year window when your injunction is still in effect. So again, to some degree, this kind of legal overhang and the trial enrollment kind of go hand-in-hand. And I don't want to drag the trial out, but at the same time, if Bard is going to be unreasonable about trying to settle something, then we'll just take longer to enroll the trial and we'll launch when their patent expires.

So I think there is potentially a way we could get resolution. I mean, we still have the legal case open. And we'll provide updates on that. There's really nothing new there. The case is still in effect, and we're going to look at our options. And if we feel like we have one, then we'll pursue it.

And -- but again, I think for the investors on the phone, the patent expires February 2019. We're saying that, based on the timeline we just talked about on the trial, we could potentially have approval by February of 2018. That's a 12-month difference. And whether we push the case forward or try to get some financial resolution with Bard, we'll see as time goes by.

Okay. As far as the tissue business is concerned, you talked about some efficiencies there. It was nice to see this quarter, obviously, a nice reversal here after four straight quarters. Obviously, the FDA playing a part there.

But I mean, can you give us some more -- you talked about improving yields, some of the stuff that you put in place. But can you give us some examples, some concrete examples of why we're seeing improvements in that business? Was there pent-up order demand as well because of the FDA? Anything would be -- I know you cited the price increases, but you're expecting further volume increases at the end of this year into 2016. So, I mean, any color there would be helpful.

Yes, no. And so I think Ashley mentioned this in his -- and I mentioned it as well in my comments. In my first six, seven months here, we really did like the student body right on quality, and getting the FDA warning letter resolved. And through that time, we actually had significant backorders on tissue, both for saphenous vein, and pulmonary and aortic valves.

But frankly, it really -- we really couldn't focus on that because our number one priority here, and still is today, is quality. And once we got that resolved -- the FDA warning letter got lifted in March -- we literally then did -- we feel like we've got a good underpinning here of quality. And then we did a student body write on tissue.

So we have been meeting with our top leaders kind of on a biweekly basis, and have a number of key initiatives going on, on tissue. And we have been able to, through probably a dozen different initiatives, including increasing our procurement, increasing our hiring in the lab, beefing up the training, coming up with different programs to improve our yields and efficiencies -- again, there's a dozen different projects that are underway.

And we have been able to kind of forecast out, as Ashley mentioned, meaningful increases to come on tissue volume as well as improvements in cost. And that was what we said at the end of last quarter. We said -- it's going to take us some time. And you've got to remember the day we put tissue in the freezer, it takes a quarter for it to come out. So all the initiatives we have been working on starting in March haven't even hit the freezers yet -- or haven't hit the commercial market yet.

And today, we still -- I just looked at the numbers yesterday -- we still probably have $7 million, $8 million of tissue on backorder, primarily in the pediatric pulmonary valve, adult aortic valves, and saphenous veins. And we expect to be out of a good chunk of those backorders as we go into 2016. So we think the picture is going to get much better for tissue on the top line and on the bottom line, as we move through the rest of 2015 and then go into 2016.

Okay. That's very helpful. Thanks, Pat. Ashley, some housekeeping items here. Can you give us a rundown in operating cash flow, CapEx, and depreciation and amortization for the quarter?

Yes. Operating cash flow was a little over $5 million for the quarter. Depreciation and amortization was probably close to around $2 million, and then CapEx was right at about $2 million, give or take, for the quarter.

And Ashley, I guess my final question -- the business development expense is $857,000. Based on Pat's comments that you're continuing to look at opportunities, is that an expense we could expect to -- is an expense we can model out going forward in the coming quarters? Or was this quarter just a one-timer? Any color there would be great.

Yes, let me take that one, Joe. I mean this is one that -- I mean, this is obviously a sensitive area, because we clearly aren't going to get into specifics around what it was. And it's obviously a tough decision for us, because there's nothing to really announce here.

But we have been very active in every financial conference that Ashley and I have been to over the last nine months. We've talked about our four growth vectors. We've talked about our new products. We've talked about expanding globally. We've talked about expanding indication. We've talked about expanding the Company through M&A.

And this is the first time you've seen it show up in the P&L. And it's a pretty sizable chunk. But I would not sit here and tell you that you should model out $857,000 for the next four quarters. It's hard to predict what those are going to be. Because, frankly, we're always looking at different opportunities.

And so until we can say more on it, I have a hard time giving you guidance on how to model that. I don't know if you want to add anything, Ashley?

No. It's -- the spend on evaluating the opportunities just depends on what the opportunities are. So it's very difficult to model that out.

Okay. And the severance expense -- I mean, does that roll off next quarter? Are we expecting another [$1 million] -- $1.4 million? Or is it --

No. That was an item that was specific to the second quarter.

Okay. Okay, thanks, guys.

Yes, thanks, Joe.

There are no further questions. At this time, I'd like to turn the call back over to management for closing remarks.

Yes. Look, I want to thank everybody for joining. And as I mentioned, we have some -- we've got some work to do on the tissue side. I think the tissue -- I'm actually very pleased that tissue is going to be improving over the rest of 2015 and into 2016. And I think it's a very positive sign. And I think I'll be pleased to share those numbers with you as those come out.

We had some good news in the quarter. The fact that we got the BioGlue indication in Japan is a significant upside, doubling that market opportunity in one of the highest-priced, highest-margin markets in the world. And we're getting ready to launch that in the third quarter.

We also have been kind of taking our lumps through the first couple of quarters, and we'll do the same in Q3 on going direct in France. And we were upfront about that -- not necessarily the country, but that we were doing it. And now you know the country. But we have been not selling anything in France for the first two quarters.

And starting October 1, we're going to start selling BioGlue at end-user prices, end-user margin, with the same direct team that was doing it under our distributor. So that's a nice positive upside. So I feel good about the tissue business is going to look better. I think our BioGlue franchise will look stronger with what we're doing in Japan, what we're doing in France. We have had great product momentum on the ProCol and PhotoFix. And we continue to believe that will go strong.

We've got some work to do on the trial, and we've been very open about that. We have also got some work to do on HeRO. I'm not real happy about the growth rate in HeRO at this point, but we're working to get that back in line. So, as we go in -- as we exit 2015 and go into 2016, I think we're going to start seeing an improving top-line and an improving bottom line. And we are just going to keep working, and every quarter, try to get better.

So, thank you, guys, all for your interest and attention to CryoLife. Have a great day.

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