Harvard Bioscience Inc (HBIO) 2002 Q2 法說會逐字稿

Good afternoon.

My name is

and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Harvard Bioscience second quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period.

If you would like to ask a question during this time simply press star, then the number one, on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you.

Ms. Luscinski, you may begin your conference.

Thank you.

Good evening.

And to those or you not on the East Coast, good afternoon.

This is Sue Luscinski, CFO of Harvard Bioscience.

Thank you for joining us today to discuss our results for the second quarter of 2002.

Chane Graziano, our CEO, and David Green, our President, are also on the call today.

Today after the Safe Harbor statement I will take you through GAAP results for the quarter, then Chane will discuss the results from a pro forma operating perspective and David will update you on the business development activities of the company.

Afterwards we will open up the call for questions.

In our discussion today we will make statements about our future expectations, plans and prospects that constitute forward looking statements under the safe harbor provisions of the Private Securities Litigation Act of 1995.

Our actual results may differ materially from those projected due to risks and uncertainties including those detailed in our annual report on form 10K filed with the SEC.

Any forward looking statements represent our estimates as of today and should not be relied on as representing our estimates on any subsequent day.

Further forward looking statements in this

of information is included in the press release we issued today reporting second quarter results.

Foreign exchange had approximately a three percent favorable effect on revenues for the second quarter of 2002 when compared to the same quarter last year, due primarily to the exchange rate change of the British pound sterling and Euro.

This favorable impact on revenues in Q2 brings the impact for the year to approximately a half percent favorable position.

Our gross margin remains healthy at approximately 51.5 percent, relatively unchanged from last quarter and up one and a half points from the second quarter of 2001.

While we anticipate gross margins to improve on a year-to-year basis, the quarter index of products sold will cause fluctuations in the quarterly margins.

SG&A spending increased approximately 550,000 in the second quarter over the first quarter, mainly due to increased marketing and sales support.

One of the areas, specifically to build infrastructure in

to support ultimate distribution of their product lines.

As a percentage of revenue, however, SG&A spending is consistent with the first quarter and down approximately two points from the second quarter of last year.

R&D spending has remained constant since Q1, in terms of absolute dollars but as a result as a percentage of revenues it's reduced by approximately one percent.

The increase in both SG&A and R&D spending over last year's is primarily due to the acquisitions made during 2001.

Other income for the quarter was$242,000 consisted of approximately $92,000 net interest income from the currency gain of approximately 173,000.

This compares to other income for second quarter last year of 377,000 consisting primarily of 406,000 net interest income offset by a currency loss of approximately 32,0000.

On a year to date basis, net interest income for 2002 is approximately $187,000 compared to 2001 of approximately 952,000.

Significantly lower interest rates as well as lower cash balances being available in 2002 resulted in this reduction of net interest income.

Available cash in 2002 was lower due to cash being used during 2001 for acquisitions.

The cash for amortization of goodwill and intangibles for 2002 excludes amortization of goodwill and certain intangibles as the result of the company adopting FAS142 goodwill and intangibles.

This

requires that goodwill and certain intangibles be tested for impairment annually rather than being amortized monthly.

Had this rule been adopted in 2001, the cash from amortization would have been approximately 104,000 compared to the second quarter of 2002 charge of $307,000.

We ended the quarter with approximately $27 million of cash and cash equivalence, approximately a $2.4 million decrease from yearend.

During the second quarter, approximately $3.6 million was used to pay off notes originating from the acquisition of

.

Before turning the call over to Chane, let me say that we still feel it was important to discuss our results on a basis that excludes non-cash, non-operating and exceptional one-time items, as we have done since our

.

Accordingly, Chane's comments today will be made in reference to the pro forma format issued in our earnings press release.

We feel this presentation is easy to understand and believe it is a more meaningful way to present our business results.

This discussion will exclude charges from amortization of intangibles, stock compensation expense and acquired

R&D - Chane.

Thank you, Sue.

Good afternoon, everyone, and welcome to our call.

As I stated in our earlier press release, it is the strong growth of our core products, the impact of the acquisitions we made last year and the growth of these acquisitions as we leverage our marketing and distribution channels that continue to be the key to our success.

In Q2, all major product groups: ADMET,

and COPAS contributed to our growth.

Our COPAS product line had the highest growth, at 150 percent, versus the same quarter last year.

Even so, the development of this market is still below expectation.

Therefore, consistent with our commitment to profitability, we will scale back some of our investments in

in order to match expenses with our revenue run rate.

In this past quarter,

expenses we did not break even on, and therefore it cost us about one penny per share on a pro forma basis.

We will do so in part through the leverage of the Harvard Apparatus infrastructure by consolidating some of the functions in our

operation.

It is important to note that we are still very optimistic about the future of this technology because we continue to see significant growth in the number of prospects.

However, we believe it is prudent at this time to make the necessary expense adjustments.

We do not expect any of these changes to negatively impact the future revenues of COPAS product lines, and with the pending acquisition of Genomic Solutions, we see significant leverage of this technology through their sales and service organization in the future.

That concludes my comments on the second quarter performance.

Now for guidance on the balance of the year.

In light of the slower than expected development of COPAS market, we, at this time, anticipate achieving the low end of our previously issued guidance of 25 to 30 cents pro forma earnings per share and $55 to $60 million in revenues for the year before any adjustments for pending Genomic Solutions acquisition.

As we indicated in our earlier press release and on our conference call, announcing the proposed acquisition of Genomic Solutions, it is uncertain as to when this acquisition will actually close.

If it closes at the beginning of Q4, we would expect Genomic Solutions to add approximately $5 million in revenues to our guidance, but will have minimal impact on Q4 pro forma EPS.

Also, as we previously announced, we believe Genomic Solutions will add $20 million in revenues and five to six cents pro forma EPS in 2003.

That concludes my remarks.

Now I'll turn the call over to David Green.

Good evening, everyone, and thank you for joining the call.

In addition to our solid earnings and growth, the most significant recent development has been the signing of the definitive agreement to acquire Genomic Solutions.

I think it's appropriate to give an overview of the products and markets Genomics Solutions addresses and how that fits with our strategy.

Strategically this acquisition is about three things: we're both tools for drug discovery companies, we both target the bottlenecks in drug discovery, and thee is considerable leverage in combining operations.

We believe this will drive growth in our earnings per share.

There are three bottlenecks which Genomics Solutions focuses on: first, genomic sample preparation, particularly in microarray preparation; secondly, proteomics sample preparation, particularly sample preparation prior to mass-spectroscopy; and thirdly, high throughput screen sample preparation, particularly preparing

for analysis prior to being read in high throughput

.

We keep referring to this theme of attacking the bottlenecks of drug discovery because we believe this allows us the opportunity for higher margins and growth rates.

Strategic Directions International, a well-known market research firm, has studies the analytical cycle time and has come to the conclusion that sample preparation is often the bottleneck.

And you'll see as I go through the product line how the seam of addressing the sample preparation bottleneck comes out in the Genomics Solutions products.

First let me talk about the genomics sample preparation, then I'll talk about proteomics sample preparation, and then the high throughput screening area.

In the genomics area, Genomics Solutions has as strong product line for the manufacture of microarrays with very flexible

systems.

Also Genomic Solutions sells pre-printed arrays for those people who do not want to manufacture their own including human, rat and mouse arrays, specialized cancer arrays, and specialized

arrays.

Genomic Solutions is one of very few

licensed partners to do this.

Genomic Solutions also has a strong position in the automated hybridization of the sample to the slide.

Once the hybridization is complete, Genomic Solutions again has a strong product line of array readers with walk-away automation capability, which is very important for the lab

high throughput.

Finally, all the data generated by these experiments needs to be collected and analyzed.

And again, Genomic Solutions has strong software products for collecting and analyzing the data.

Let me move on to the proteomics sample

area.

Here Genomics Solutions has a strong product line in two-dimensional gels.

Two-dimensional gels are typically very flimsy.

The Genomics Solutions' product line has a much stronger gel than the typical gel sold, which is a great benefit in using two-dimensional gels.

A protein spot from that gel is then picked out using the picking robot and, again, Genomics Solutions has a strong product line here.

Genomics Solutions also has robotic products

digesting the protein out of the gel and then spotting the protein down onto the target for the mass-spectrometer to analyze.

This area of mass-

automation we believe is one of great potential for the future.

In addition, Genomics Solutions sells a range of software to both analyze and acquire the data from mass-spectrometers and the gel analysis.

This software is able to work with virtually all mass-spectrometers.

This is a significant advantage as most software will only work with a single mass-spectrometer.

Moving on to the area of high throughput screening, typically there is a mother plate taken from a compound library to be transferred to a daughter plate and possibly then to a

plate as well.

The Hummingbird technology which came with Genomics Solutions acquisition of Cartesian Technologies at the end of 2001, can do both 96 and 384 while simultaneous transfer from the mother plate to the daughter plate.

This is done very rapidly with very low volume.

And because it is non-contact there's no well-to-well contamination.

This technology was developed by Glaxo Smith Kline and is now exclusively

solutions.

The next step in the process is adding

agent typically the

on the target to everyone on the slate.

The

technology began develop by competing technologies allows the extremely fast, extremely accurate low volume dispensing of the same agent to all the wells in the plate.

rate is the plate reader for analysis.

I hope I gave you an overview of the products and how they address the bottlenecks we are discovering.

Let me talk now about the leverage opportunities between the two companies.

We believe there are three main areas.

Our subsidiaries and sales forces, our partnerships we major bioscience companies and using our direct marketing expertise.

In our subsidiaries for the business, Harvard Bioscience has subsidiaries in Massachusetts and Connecticut.

Solutions has subsidiaries in California and Michigan.

The combined has clearly much greater spread across the United States than either individually.

In Canada, Harvard Bioscience has a subsidiary in Montreal.

Solutions in Winnipeg.

In Europe, Harvard Bioscience has subsidiaries in France, Germany, Belgium, Austria and the U.K.

Solutions only has a subsidiary in the U.K.

Harvard Bioscience does not have a subsidiary in Japan.

Solutions does.

There is great complimentarity in these subsidiaries and we think we can leverage that to the future growth of both businesses.

The

Solutions sales force is approximately 25 sales people worldwide where Harvard sales group has high screening systems.

Today we only have four people in the U.S., sales and support of

and only two in Europe.

Giving access to the greater field distribution network, we believe are the positive impacts on our

business.

In the area of partnerships, our long standing partnership with

Biosciences and

Solutions pharmacy with

we believe can be forces for growth by taking the technology that we have and making specialized products for the

customers.

This is another example of distribution channel outreach.

The final area where we believe there is distribution channel leverage is the expertise that we've developed at Harvard Apparatus for catalog marketing and E-mail based marketing that we think can be used to successfully generate leads to the capital equipment business that

Solutions typically sells.

This combination of sales force, catalog and distributors we believe gives us one of the broadest distribution platforms in the industry.

In addition to these three strategic leverage opportunities, there are also cost savings of becoming a single public company.

To summarize, we have strong niche products in bottleneck segments of the drug discover marketplace.

We have a broad product line with four distribution channels and we believe we'll be able to leverage our distribution channel for future growth.

We expect the combined entity will have between 75 and 80 million revenue run rates this year and potential for over a 100 million next year with a strong track record of profitability.

We'll now open up the call to any questions.

Questions?

At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

The first question comes from Thomas Flaten of RBC Capital Markets.

Afternoon.

Just a couple quick questions.

One for Sue, just on a modeling issue.

With the increase in your SG&A number, what can you give us in terms of color for the third and fourth quarters?

Do you expect that to drop back down again or will that stay at that level?

Stay at level.

OK.

And just if we crank up at least that

model just to, you know, somewhere in the neighborhood of four million for the third quarter, maybe a little more than that in the fourth quarter.

That has a significantly negative impact on your EPS number relative to your guidance.

I'm just wondering if most of that - do we scale back R&D to be commensurate with the second quarter then?

Just so I understand how you guys are getting the 25 cents.

Yeah, we don't anticipate there being much of a change in R&D in the third quarter.

From the second quarter?

Yeah.

OK.

And I guess for Chane or David, in regards to COPAS, if you guys were scaling back the investments to match that, I'm just curious how it is that COPAS in and of itself drives you towards the lower end of your EPS range.

Originally, when we gave our guidance of $55 to $60 million in revenues, we were really talking about COPAS being profitable and costing us some money in the first quarter, a penny, breaking even in second quarter, and then being profitable in the second half of the year.

Now we saw this

gaining the $60 million in revenue, while COPAS generated $10 million in revenues for us.

COPAS is actually tracking closer to in the $5, $6 million range at this stage.

And, therefore, although we're cutting back expenses, we won't get the full impact of adding the third quarter.

So, therefore - but we should in the fourth quarter.

So it still could cost us a little bit of money in the third quarter, but not fourth.

So if it's going to be - so you - OK, so you've gone from being significantly profitable on that line to being marginally

?

Exactly.

And, you know, in general, what's the holdup there?

Why hasn't that progressed as well as you would have thought?

It's really market development.

You know we see the number of prospects building, we see the number of orders going up.

I mean when we bought the business itg was basically a startup business, and they would sell one here, one there.

You know we've been growing the business to

a quarter, now

a quarter and so on and so forth.

So you know the business is growing and the prospect base is building.

It's just much slower than anticipated in getting to penetrate the pharmaceutical marketplace, which is where I think long term the high growth comes from.

Great, thanks.

Your next question comes from

of Thomas Weisel.

Hi guys.

I was just wondering if you could give some information on your orders and your backlog for the quarter.

Orders continued to be strong across the board.

The growth rate in orders, I don't know off the top of my head.

I didn't look at that either.

One part of your question I may be able to address,

, is sometimes in the process, specifically to answer your question about growth by pharmaceutical and biotech versus academic customers,

great interest, as a lot of other companies have complained about a slowdown and pharmaceutical companies spending, et cetera.

Right.

And I can give you those numbers.

This is for our U.S. business, essentially the Harvard Apparatus business in the U.S., where we collect

and track our customer types.

But the pharmaceutical customers so far this year are up 56 percent versus last year.

Biotech customers are up about 30 percent versus last year.

And academic and government is up about three percent versus last year.

So I think that really goes back to strategy we've been espousing now for quite a while of focusing on the bottlenecks in drug discovery, which obviously is what is driving that pharmaceutical and biotech growth.

I think those numbers stand in quite strong contrast to the kind of numbers that people who - companies that are playing in the non-bottleneck areas have been producing.

And just to get back to the - I'll get back to the backlog in a second, but for the COPAS technology, are you seeing the kind of slowness in adaptation or acceptance I should say?

Is that more in the academic area?

No.

Quite frankly, academic has been very quick and there are more and more papers being written on the technology.

So the fact is that that's the normal development phase of the new technology, it starts in academia in research, in basic research, and then you see papers.

And as papers grow normally the business grows.

I think the area that we're most surprised is that it's been much slower even though we've, you know, continued to expand into the pharmaceutical industry the number of pharmaceutical companies buying the company.

It's a slow process.

And it's basically for research today rather than being used in - for high throughput screening kind of application.

So have you seen a slowdown in your academic orders for the

business?

No.

I'm sorry?

No, I wouldn't say a slowdown.

The growth rate I said was three percent in the academic/government sector this year over last year.

Obviously

screening is something that is of far more interest to pharmaceutical companies than it is to academic institution.

So I think that's really a kind of apples-to-oranges comparison.

OK.

And what was the backlog for the quarter?

The back - the ending backlog is like $2.7 million I believe.

Great, thanks.

Your next question comes from Thomas Hancock of Piper.

Yeah, this question is for Sue.

I was wondering if you could give us - I know you'd spoke a little bit about margins, but I was wondering if you could give us a little bit of a sense of what to expect during the second half of the year and how that may help compensate for a slight increase in SG&A?

Well, as I mentioned, we expect the margin to improve overall on a year-to-year basis.

But it really does depend on what the mix is going through the revenue stream.

We don't expect anything significantly different than what we've reported in Q1 and Q2.

OK.

And for Chane or David, to expand your discussion on the strength in the marketplace.

Could you give us a sense of what is happening in the

market?

Outside the U.S., actually, if you look at all of our subsidiaries they're quite strong, up on a year-to-year basis.

So, I mean, we're seeing continued strength there as well.

France is having a record year.

Germany continues to do not as well but modestly up from last year.

And the U.K. is up significant from last year.

Our distribution in Japan is very strong, up significantly from last year.

So those are the - so overall I think we're seeing very broad in all product lines and also in all geographies pretty strong growth.

Great.

Thank you.

Your next question comes from

of

.

, can you please just remind us the progression of steps for the

acquisition.

You've got to go through the SEC with an S-4?

Just tell us about the specifics, please.

That's correct.

That is the main step in the process.

Like, we will be filing a S-4, which is simultaneously both a registration statement for the 3.2 million shares, which is part of the purchase price for

.

It's also their proxy statement.

So it's a combined statement which will eventually be what the shareholders of

will vote on to approve the deal.

So that's -- that is the basic process.

Once that document is filed, the SEC has a statutory review period, and they may choose not to review it, they may choose to review it.

We don't know.

And once they're finished with the review process, the proxy statement can be used for the solicitation of votes at the

shareholder meeting.

And they'll set the date on that later and probably in the fourth quarter, it sounds like.

It really depends on whether or not the SEC reviews it.

It's -- you know, that's something that we have no control over.

What kind of lock up will there be on those shares you're giving to the

holders?

I don't think there's any lock up on any of the shares given to the

holders.

We're a public company today, they're a public company today.

And one more detail.

Can you update me on the amount of floating supply?

I know you've sold some, David, and some of the VCs have sold some.

You clearly have more outstanding than the 7.5 million shares when you went public.

But what is a good float number?

Actually, I don't have the float number off the top of my head.

What I can tell you is at the time the lock up expired, our

investors held about 10 million shares.

Today, they hold between about 2 and 2.5 million shares.

I don't think they've sold any recently.

You can obviously check that on the form 4 filings, because both our current venture investors are both board members, so they have to file under -- on form 4, so you can check that and be sure.

But my belief is they've not sold any shares recently.

I also made a public statement, I think it was in early June, about the termination of my

sales program and a commitment I've made to remain out of the market until at least the fourth quarter, and even then to sell shares only at above $9.00.

OK, thank you.

I mean, the total shares held by insiders today is roughly 10 million shares, according to

?

Yes.

Your next question comes from

of

.

Hey guys.

Just a couple of quick questions.

In the detail regarding SG&A, you talked about the cost of building an alternate distribution channel for

.

Can you just talk about that a little bit more, talk about the reasons behind that and just a timeline for spending for that?

Sure.

Actually,

sells primarily through

as you know, and that was when we acquired the company, you know, 95 percent of the revenues went to

.

Today, it's probably 80 percent, and part of that is that other than the life science marketplace,

is a very broad-based, analytical technique.

And part of our agreement with Amersham is we can address those other markets with a differentiated product based on the same technology.

And so this year we made some investments up front in order to put people in place to set up distribution for a line of products called

, which was introduced this year at Pittcon.

That, coupled with the products that we acquired with

, which are the

readers, as well as the dispensers, is the major reason for the distribution channel.

We think there's an excellent opportunity to grow outside of the Amersham business going forward.

So that's what the investment is.

We're starting to see some initial orders already with the launch of the products at Pittcon, as distributors begin to build up product.

We also have a product line which is an amino acid analysis system, which is an

product, which has been on the market for a long time.

But today, we're the only people with an up-to-date instrument,

, who really owned the market once upon a time, dropped out of the marketplace.

And we've been capitalizing on that.

Therefore, to put an infrastructure to support that product line going forward, and that product line has been showing very nice growth through the biochrom business this year.

Does the Amersham channel reach any non-life sciences research customers now?

Not really.

I mean they're primarily focused there.

They may get a one-off order here in the food market of some

customers, but not in general.

Can you guys just

for me what you think the non-research life sciences opportunity is versus the life sciences research opportunity?

Yeah.

I mean the marketplace for spectrophotometers is - depending on what report you read -- $450 to $600 million.

And the life science represent maybe 20 percent of that.

OK.

So it's huge.

And your early feedback on the

line, is it competitive within the industrial and beverage segments?

Yeah, absolutely.

OK.

Absolutely.

The product is very competitive.

That was why the decision was made to do it.

OK, fair enough.

Let me just shift gears and ask you one other question to follow up on the COPAS questions earlier.

Can you just tell me this, are you receiving price pushback that is changing your approach this year?

I thought of the product as having kind of a fully-loaded price in the $250,000 area.

Is that the way that I should continue to think of the product?

It seems like there are also some versions that get sold for well less than that.

How should I be thinking of a revenue per copy angle with respect to the COPAS product?

The average order is probably $175,000.

Fully loaded it's $250,000, and it may be as low as $145,000 or so.

But a system would typically be in the $175,000 range.

And,

, we have not seen any change in the pricing on that.

Yeah, there's not - you know the people that want it need it.

Now do we need another product that has different capabilities of just dispensing, no analytical capability?

I mean there's probably a market for that as well, but that isn't where we've been focusing initially.

OK.

OK, terrific.

Thank you very much.

Sure.

Your next question comes from Thomas Flaten of RBC Capital Markets.

Hi.

Just one quick follow-up on COPAS.

When did you guys start to see a significant slippage in the sales relative to your expectation?

From the very beginning.

If you recall, when we acquired the company we anticipated that this was - market was much further along and much further developed and I believe the original guidance I gave said that we expected $15 to $20 million.

And it became very obvious as we got into it that the market really wasn't going to develop that fast.

So when we put together this year's budget we based our $55 million on $5 million and our $60 million on 10 million.

So we were very conservative to begin with.

OK.

I maybe should be more specific.

When did you see it start to track towards the bottom end of this year's range?

Well ...

Did it start from January 1 or was that something that's come up in the last like month or two?

No.

Actually, you expect it to continue to ramp but it's not.

Although the prospects of ramping at the rate you would anticipate, the orders aren't ramping at that same rate yet.

OK, thanks.

At this time there are no further questions.

Do you have any closing remarks?

Yeah.

We appreciate everyone listening to our call tonight.

We're very happy with the quarter results.

We very positive about the future and we look forward to getting the Genomics Solutions situation all a part of our family.

So thanks again.

This concludes today's Harvard Bioscience second quarter earnings release conference call.

You may now disconnect.