Harvard Bioscience Inc (HBIO) 2010 Q4 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen and thank you for standing by. Welcome to the fourth-quarter 2010 Harvard Bioscience earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Tom McNaughton, CFO. Sir, please begin.

  • Tom McNaughton - CFO

  • Thank you, Mary. Good morning, everyone. Thank you for joining us to discuss our results for the fourth quarter of 2010. Chane Graziano, our CEO and David Green, our President, are also on the call today.

  • After the Safe Harbor statement, I will turn the call over to Chane and David who will present comments on the Company's 2010 performance and the evolution of our new regenerative medicine device business and our outlook for 2011. Lastly, I will present some additional financial highlights related to our balance sheet. Following those comments, we will open the call for any questions.

  • In our discussion today, we will make statements that constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform 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 10-K for the fiscal year ended December 31, 2009 and our other public filings.

  • Any forward-looking statements, including those related to our future results, represent our estimates as of today and should not be relied upon as representing our estimates of any subsequent date. Further information regarding forward-looking statements and risk factors is included in the press release issued earlier today reporting our fourth-quarter results.

  • Please note that, during this call, we will discuss non-GAAP financial measures because we believe that those measures provide an enhanced understanding of how our businesses are performing. These non-GAAP measures approximate information used by our management to internally evaluate the operating results of the Company. For each non-GAAP financial measure discussed, we have made available as part of our press release or on our website in the Investor Relations section a reconciliation to the most directly comparable GAAP financial measure.

  • Additionally, any material, financial or other statistical information presented in the call, which is not included in our press release, will be archived and available in the Investor Relations section of our website. Look in the Investor Relations section of our website and then click on the Investor Presentations or website icon as appropriate. A replay of this call will also be archived at the same location on our website. Our website is located at www.harvardbioscience.com.

  • Lastly, all financial information presented on this conference call relates to our continuing operation unless otherwise stated. I will now turn the call over to Chane. Chane?

  • Chane Graziano - Chairman & CEO

  • Thank you, Tom and good morning, everyone. 2010 was a landmark year for HBIO with the development of our new regenerative medicine device business. Therefore, we will now be reporting on two business units. First, in our core life science research tools business, we grew revenues by 26% compared to 2009. Non-GAAP diluted earnings per share in the core business was $0.38 per share, representing growth of 27% compared to 2009.

  • This growth was primarily driven by the acquisition of Denville, 6% organic growth and the acquisition of Coulbourn Instruments. The organic growth was a direct result of the expansion of our direct sales organizations and the introduction of new products.

  • Second, in our new regenerative medicine device business, we introduced and received revenues from three novel products. We also identified a potentially significant growth opportunity for consumables associated with bioreactors for growing organs for human transplant. We believe that this nascent market could potentially grow to be hundreds of millions of dollars.

  • In 2010, we invested approximately $900,000, or $0.02 per share resulting in non-GAAP diluted earnings per share for the combined business units of $0.36 per share. In 2011, in order to accelerate our development of these products, we will increase our investment to $2 million to $2.5 million, or approximately $0.05 to $0.06 per share. Currently, we are reviewing strategic alternatives to fund these investments going forward.

  • In 2011, in our core life science research tools business, we expect revenues to grow 4% to 6% and be in the $113 million to $115 million range and we expect non-GAAP diluted earnings per share to grow 8% to 13% from $0.38 per share to be in the $0.41 to $0.43 per share range. If the strategic alternative we choose is for HBIO to fund the regenerative medicine device business spending internally in 2011, then our overall non-GAAP diluted earnings per share will be in the $0.36 to $0.37 per share range.

  • We expect quarterly phasing of revenue and non-GAAP diluted earnings per share to be similar in 2011 to what it was in 2010. Hence, we expect first-quarter revenues to be in the $26 million to $28 million range and non-GAAP diluted earnings per share from our core life science research tools business to be in the $0.08 to $0.09 range.

  • We expect the investment in the regenerative medicine device business in the first quarter to be approximately $0.01 per share. Therefore, in the first quarter of 2011, we expect our overall non-GAAP diluted earnings per share to be in the $0.07 to $0.08 per share range. Our 2011 guidance does not include the impact of any future acquisitions. David will now comment further on the regenerative medicine business.

  • David Green - President

  • Thank you, Chane and good morning, everyone. One year ago, we announced the launch of our regenerative medicine device business. Regenerative medicine is using stem cells to either repair or replace damaged organs in the human body. Our strategy is to be a tools provider for regenerative medicine just like we have been a tools provider for life science research for over 100 years now.

  • In 2010, we made great progress in developing this business. We have already reached revenue stage and are manufacturing and shipping three novel regenerative medicine products. The first product we launched is the InBreath Hollow Organ Bioreactor, which was used in the world's first human transplant of a regenerated bronchus. The recipient, Ms. Claudia Castillo, is alive and well to this day and has never taken immunosuppression therapy.

  • Immunosuppression therapy is usually required with organ transplants to avoid the recipient's immune system rejecting the transplanted organ. Immunosuppression therapy is not only expensive, but increases the risk to the patients such as getting infections. Eliminating the need for immunosuppression therapy is a major advance for both the field of regenerative medicine and for transplant surgery in general.

  • Ms. Castillo's surgery performed by Dr. Paolo Macchiarini was not only published in the Lancet, one of the world's leading medical journals, but was recently featured on the nationally broadcast PBS television show NOVA scienceNOW. The technology of the InBreath Bioreactor is exclusively licensed to Harvard Bioscience and patents are pending.

  • Our second regenerative medicine product, LB2 Lung Regeneration Bioreactor, was used by Dr. Harald Ott at Massachusetts General Hospital in Boston in another groundbreaking surgery. Dr. Ott, one of the pioneers of both heart and lung regeneration, succeeded in regenerating and transplanting a fully functional whole lung. While this work was conducted in rodents, it is clearly a major step forward in advancing the field from simple tubular organs like the trachea and the bronchus to more complex organs like lungs, hearts, kidneys and livers.

  • Dr. Ott's work was published in the leading medical journal, Nature Medicine and was also featured in the same NOVA scienceNOW broadcast I mentioned before in which the InBreath Hollow Organ Bioreactor was featured.

  • In addition, Dr. Ott's work was also featured recently on the nationally broadcast National Geographic Channel's Explorer program titled How To Build a Beating Heart. Links to these videos are available on both the Harvard Bioscience and Harvard Apparatus websites. We have issued patents on both our lung and heart bioreactor and there are additional patents pending.

  • Our third regenerative medicine product, the PHD ULTRA Nanomite cell therapy injection system was used by Dr. Marcello Rota in the laboratory of Dr. Piero Anversa at Brigham and Women's Hospital in Boston, Massachusetts to inject stem cells into the heart of a rat that has undergone a heart attack. Our injector greatly improved the reproducibility of this exacting procedure. This product is currently marketed for research use only. For use in human stem cell therapy injections, this product will require 510-K clearance to market from the US FDA and similar approvals in other countries.

  • We have begun the engineering work on this human use injector and expect to submit it to the regulatory agencies in 2011. We expect to be shipping our first true clinical product less than a year from now. Patents are also pending on the cell therapy injection system.

  • As I hope it is clear from these examples, we have already created novel tools for regenerative medicine for the help in leading surgeons make breakthroughs that are already benefiting real patients. Unlike most companies in regenerative medicine, we are not trying to become a therapeutics company as we believe a tools strategy can have similar revenue potential, but with lower risk.

  • The reason we believe we can have similar revenue potential to a therapeutics company is because we expect some of the tools, specifically our organ regeneration bioreactors, to contain a significant disposable element that will be used only once per transplant procedure. Thus, our business model will be razors and razor blades with the bioreactors being the razors and the disposables being the razor blades. This razors and razor blade strategy gives us significantly more revenue potential than the company making only the equipment.

  • Our preliminary estimates are that this disposable could cost thousands of dollars per procedure. Based on the approximately 30,000 organ transplants currently performed in the US every year, and the additional 100,000 patients on the US transplant waiting list for lack of an organ donor, we believe that eventually the revenue potential of a razor and razor blades business could be hundreds of millions of dollars a year.

  • We believe this potential revenue stream could be obtained with less risk than that of a therapeutic strategy. The main reason a tools strategy is lower risk than a therapeutic strategy is that our products are designed to work with almost all stem cell types and we are not dependent on the success of a single cell type as a therapy.

  • Cell types as varied as adult stem cells, cord blood stem cells, bone marrow stem cells, amniotic fluid stem cells, human embryonic stem cells and induced pluripotent stem cells can all be used with our products. While there are many risks and inherent uncertainties associated with a new business like this and success cannot be guaranteed, with a potential revenue stream rivaling that of a therapeutic company, but with less of the risk inherent in obtaining clinical approval for a therapeutic, we believe we have the potential to create a very significant value for our stockholders.

  • In 2010, we invested approximately $900,000 in regenerative medicine. In 2011, we anticipate investing approximately $2.0 million to $2.5 million as we finish the engineering work on the stem cell therapy injector, which we plan to submit to the FDA in 2011 and begin design work on a bioreactor designed to grow large human organs like lungs and hearts.

  • We are very pleased that we have reached revenue stage in the regenerative medicine business. In 2011, we expect revenue to grow and in 2012, we expect revenue from our first clinically approved product, our stem cell therapy injector.

  • Because the regenerative medicine business is still very early stage compared to our very mature core business, because the clinical markets that it will aim to serve are different from the research markets that our core businesses now serves and because the clinical products may be regulated whereas our current products generally are not, we will, going forward, report the financial results of the regenerative medicine business separately from the results of the core business.

  • Going forward, we will refer to the core business as the life science research tools or LSRT business. We will refer to the regenerative medicine business as the regenerative medicine device business or RMD business for short. We will give revenue and EPS guidance for the LSRT business and we will estimate the expected investment in the RMD business. We will not give guidance for revenue for the RMD business as it is small and unpredictable at this stage.

  • This additional reporting will help our stockholders to clearly see the growth and profitability of the core business where we expect EPS to grow between 8% and 13% in 2011 and also to clearly see the investment in the regenerative medicine business.

  • In addition to providing this additional clarity in our financial results, we are reviewing our strategic alternatives maximizing the value we can create for our stockholders in the regenerative medicine business. These strategic alternatives could include raising capital, a joint venture with a strategic partner or funding it internally.

  • The reason we are reviewing our strategic alternatives is because we now believe the revenue opportunity in regenerative medicine is greater than we originally anticipated. In particular, we believe that the opportunity for a significant disposal revenue stream, the razor and razor blade strategy I mentioned earlier, makes the revenue potential both larger and because of the recurring revenue stream from disposables, the more attractive investment opportunity.

  • We believe there may be opportunities to better address this larger market in the regenerative medicine field by partnering with third parties who can bring both funding and technology. As a result, we have initiated a review of our strategic alternatives for maximizing the value created for our stockholders in the regenerative medicine business. I will now turn the call over to Tom for some additional comments.

  • Tom McNaughton - CFO

  • Thank you, David. During 2010, we generated $12.3 million of cash flow from operations. We deployed most of those funds in acquisitions and share repurchases. Related to acquisitions we made the final $1.5 million payment on the Denville acquisition during the second quarter of last year. We acquired Coulbourn Instruments during the third quarter for $4.6 million and we purchased the CytoPulse productline in the fourth quarter for approximately $1 million. So we have paid out approximately $7.1 million this past year pursuing our acquisition strategy.

  • We entered 2010 with one half of our $10 million share repurchase program completed. During the second and third quarters of 2010, we spent $5 million to repurchase approximately 1.4 million shares of our common stock at an average cost of $3.62 per share. We made those purchases through a 10b5-1 purchase plan and in so doing, we completed the Company's share repurchase program.

  • We financed some of the aforementioned investments through incremental borrowings of $4.7 million on our line of credit during the year. At December 31, 2010, our outstanding balance on the line was $18 million. However, we also had $19.7 million of cash and cash equivalents at that date.

  • Acquisitions continue to be an important part of our business strategy. Looking forward, we believe that, with our cash balances, operating cash flows and bank borrowing capabilities, we can finance up to 20% annual revenue growth through acquisitions.

  • Lastly, I would like to address a significant tax benefit that we recognized during 2010. For the past several years, the Company has had deferred tax assets related principally to net operating loss carryforwards at the US federal and state levels, foreign tax credits and R&D tax credits. However, we have full valuation allowances against the deferred tax assets because we were unable to support a position stating that it was more likely than not that we would be able to utilize the deferred tax assets to offset cash payments on taxes in future income.

  • Due to the improvement over the past few years of our US taxable income and our belief that US taxable income will be sufficient to realize the benefits of our deferred tax assets, we reversed a significant portion of the valuation allowances related to the deferred tax assets. The release of those valuation allowances results in an $11.2 million income tax benefit during the third quarter. Overall, the deferred tax assets could save up to $12.8 million of tax payments for 2010 and future years. We will now open the call to any questions.

  • Operator

  • (Operator Instructions). Paul Nouri, Noble Funds.

  • Paul Nouri - Analyst

  • Concerning the strategic alternatives, just to be clear, you are looking at it only for the regenerative medicine part, right?

  • Tom McNaughton - CFO

  • That is correct, Paul.

  • Paul Nouri - Analyst

  • And I mean you have a decent amount of cash on the balance sheet. Why are you going this route?

  • David Green - President

  • As I mentioned in my comments, Paul, in order to take advantage of what we think is a much bigger revenue opportunity in the regenerative medicine space, we may want to incorporate technologies that we don't currently own, along with the technologies that we do currently own, particularly the integrated systems. And so we think there may be merit in partnering with someone who can bring technology and funding to the table to accelerate the development of these products.

  • Paul Nouri - Analyst

  • Okay, great. Thanks.

  • Operator

  • (Operator Instructions). Sung Ji Nam, Gleacher & Co.

  • Sung Ji Nam - Analyst

  • Hi, thanks for taking my questions. So for the cell therapy injector product that you expect to submit to the FDA this year, what is your sense of how big the initial market is for that in the first 12 months after approval?

  • David Green - President

  • There are a number of different market segments that we can address with that product. The stem cell therapy part of it is a part that I think will give us several million dollars in revenue over the next few years but could grow into the tens of millions of dollars in the longer timeframe horizon.

  • In addition though, there are a number of other markets that can be addressed with a clinically approved syringe pump. And Harvard Apparatus actually had a long history of selling products into the clinical space. We don't currently sell products into the clinical space, but there are opportunities for us to sell that product outside the stem cell therapy market and we intend to take advantage of those, as well as the injection of stem cells into human patients for stem cell therapy.

  • Sung Ji Nam - Analyst

  • Great, that's helpful. And then in terms of the organ bioreactor, I think you mentioned on your previous call that you have orders from several customers.

  • David Green - President

  • That's correct.

  • Sung Ji Nam - Analyst

  • Could you provide us with an update in terms of additional potentially orders since last quarter? And then also characterize the type of customers, whether or not they are coming from the US or internationally, things like that.

  • David Green - President

  • So for the organ bioreactor, in particular, most of the interest at this point is in the US. There is interest in Europe as well, but most of the interest is in the US. We sold several of those systems in 2010. We expect to sell more than that in 2011. And the majority of customers who are interested in buying those products are large academic medical centers.

  • Sung Ji Nam - Analyst

  • Great. And then I guess looking at your life science research tools business, could you break down the sales by customer type for 2010? Do you have that update?

  • David Green - President

  • Actually we will provide that in the Q where we give a breakdown by distribution versus direct, but I don't think the mix would be substantially different to what we have reported in the past.

  • Sung Ji Nam - Analyst

  • Okay. And then I guess since the recent acquisitions, you have implemented some new sales and marketing strategy over the last year and if you could provide us with any update for any additional go-to-market strategy for the life science research tools business this year.

  • David Green - President

  • Sure. I would say what we are pursuing in 2011 really is an extension of what we were successful in pursuing in 2010, which was two things. The first was the introduction of new products. That was a major driver of the organic growth in the life science research tools business in 2010 and both the full-year benefit of those products that were introduced last year and the introduction of new products in 2011 will continue and we expect that will be part of what will drive our organic growth in 2011.

  • And the second thing that has been a big driver is the expansion of the salesforce. We have several different salesforces under different brand names. Harvard Apparatus has a salesforce for instance. Denville Scientific has a salesforce and we have been steadily expanding the number of sales reps that we have in both those field salesforces and we expect that to continue in 2011 and to be another significant driver of organic revenue growth.

  • Sung Ji Nam - Analyst

  • Great, thank you for taking the questions.

  • Operator

  • (Operator Instructions). I am not showing any questions queuing up at this time.

  • Chane Graziano - Chairman & CEO

  • All right, thank you very much. I would like to thank everyone for joining our call today. We are very pleased with our results for the fourth quarter and 2010 as a whole. We are optimistic about the outlook of our core business going forward and our new regenerative medicine device business is a very exciting opportunity. Have a great day. Thank you.

  • Operator

  • Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.