LeMaitre Vascular Inc (LMAT) 2007 Q3 法說會逐字稿

Welcome to LeMaitre Vascular's Third Quarter 2007 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Shantalay. Good afternoon and thank you for joining us at our Q3 2007 conference call. Joining me on the call today is our Chairman and CEO, George LeMaitre. Our President, Dave Roberts, is handling this call remotely from Europe. Before we begin, I would like to read our Safe Harbor statement.

Certain statements contained in this conference call may be considered forward looking, as defined by the Private Securities Litigation Reform Act of 1995. In particular, any statements we make about our expectations for future financial, clinical, and operational performance. Forward-looking statements may be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations. These statements involve various risks and uncertainties that could cause our actual results to differ from those expressed in such forward-looking statements.

These risks and uncertainties include risks related to product demand and market acceptance of our products; the significant competition we face from other companies; technologies and other alternative medical procedures; our ability to expand our product offering through internal development and acquisition; our ability to recognize the anticipated benefits of our acquisitions; disruption at our single manufacturing facility; general uncertainty related to seeking regulator approvals for our products, particularly in the United States; potential claims of third parties that our products infringe their intellectual property rights; and the risks and uncertainties included under the heading Risk Factors in our most recent annual report on Form 10-K, as updated on our most recent quarterly report on Form 10-Q and other periodic filings with the SEC and available on our investor relations website at www.lemaitre.com and on the SEC's website at www.SEC.gov.

Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will be achieved. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, November 5th, 2007, only. We do not undertake any obligation to revise or update publicly any forward-looking statements expressed on today's conference call. I will now turn the call over to George LeMaitre.

Thanks, J.J. Welcome to our Q3 2007 conference call. I'll start by reviewing some of the quarter's financial and strategic highlights. Dave will follow with a few words regarding our recent business development efforts and J.J. will conclude with a detailed look at our Q3 financial results.

At the end of the call, Dave, J.J., and I will be happy to take any questions you may have. We posted sales of $10.1 million in Q3 2007, 19% over the year-ago quarter. At the anniversary of our IPO, I am pleased to report that our sales growth rate for our four public quarters has been 11%, 15%, 18%, and now 19%.

It seems that the growth capital you provided to us at the IPO is now impacting our growth rates. Sales were strong in Q3, partly because we saw our open vascular category grow 15%. And while we can't always promise this kind of growth in our vascular category, perhaps this is due to the year-over-year growth of our sales force.

We ended Q3 2007 with 58 sales reps, versus 36 at the end of Q3 2006. Of course, our growth rate has also been helped by our European Endologix Powerlink sales, which have been in line with their historical results. As a reminder, we began distributing the Powerlink stent grafts in January 2007.

You will notice that our Q3 2007 sales of $10.1 million were down slightly from our Q2 2000 sales of $10.3 million. As we sell more high-priced endovascular products and as we go direct to hospital in more countries, our summer seasonality may become more pronounced. Due to the higher cost per procedure, stent grafts are more likely to be carried into the operating room by our sales force and billed on the day of surgery, rather than stocked on a hospital shelf.

Also, as we have eliminated several of our stocking distributors in Europe, inventory is less likely to be sold onto our dealers' shelves during the summer. As you would expect, due to heavy European vacationing in July and August, the more international our revenue base becomes, the more we can expect summer seasonality. 39% of our revenues in Q3 2007 were generated internationally.

On September 21st, 2007, we held a conference call detailing the Vascular Architects acquisition. Let me give you a brief update on how we are integrating VA at the front end. Our first post-acquisition move was to retain the five VA sales reps, as well as the two managers. Given the learning curve associated with the remote endarterectomy procedure, sometimes called RE, our strategy is to have all the RE cases covered by these VA sales reps through the end of 2007.

The technique-specific knowledge which these sales reps possess was a key part of the acquisition. Over the coming months, we intend to cross-pollinate their knowledge by having the LeMaitre Vascular reps also present at all RE cases. By the end of Q1 2008, we hope to fully integrate these two domestic sales forces, giving each rep an exclusive geographic territory in which to sell the combined sales bag.

We believe this commingled approach will maximize the selling synergies of RE technique in the thigh and our core in situ bypass technique in the calf. As you know, both procedures are performed almost exclusively by the vascular surgeon. Thus reps whose sales calls formerly focused on the $700 valvulotomy and the $400 carotid procedures will now be able to detail the $2,000 RE procedure. As a reminder, VA posted $1.8 million in annual sales prior to the acquisition, predominantly in the United States.

Moving down the income statement, we reported a gross margin of 74.7% in Q3, versus 73.3% in Q3 2006. In general, the Company continues to realize operational benefits from its centralized manufacturing, various cost-cutting programs and a reduction in its direct labor headcount. In addition, we implemented our annual domestic price hike on October 1st.

As far as the bottom line is concerned, we posted an operating loss of $1.54 million in Q3 and a net loss of $1.35 million. As you may know, these numbers were largely influenced by our agreement to buy our Italian distributor. We also had a similar, though smaller, distributor buyout in Ireland, which will become effective in October. These two charges totaled $1.054 million, so despite our healthy balance sheet we continue to spend our IPO cash prudently.

With respect to the two distributor buyouts referenced above, our go-direct strategy has been a consistent Company theme for years. In general, direct to hospital sales allow us to develop closer relationships with our vascular surgeon customers, capture higher gross margins and gain more control of the sales channel.

Italy is the largest aortic stent graft market in Europe and considered to be the fifth largest vascular device market in the world. With the help of our distributor of 14 years, Italy has become a significant market for LeMaitre Vascular, recording approximately EUR1.9 million of hospital-level sales in 2006. We have already hired a country manager and expect to announce the opening of our Rome office sometime in Q4 2007.

We will start selling directly to many Italian hospitals on January 25, 2008. Due to the unique Italian hospital purchasing process, we expect the transition to 100% direct to hospital sales to be a lengthy one, perhaps even as long as three years. While the Italian marketplace does come with its own set of unique challenges, such as one to two-year hospital payment terms, we look forward to increasing our share in this attractive market.

With respect to R&D, I am pleased to report that we recently launched Flexcel II, a revision of our original Flexcel carotid shunt. Flexcel is our non-balloon product for carotid shunting. LeMaitre Vascular is a significant player in the carotid shunting market, principally through our Pruitt-Inahara balloon occlusion carotid shunt. In many instances, however, surgeons refuse to use non-balloon shunts.

Our entrance into the non-balloon category with our Flexcel means we now have both options covered. We continued to protect our cash-producing open vascular niches with selected follow-on R&D projects.

I would now like to turn to our UNITE clinical trial in the United States. On June 7, 2007, we completed our first UNITE implant at Emory University Hospital. Since then, we have completed three additional implants, one in August and two in October. In addition, we now have six trial sites which are approved for implantations. This is up from two sites at our last call. While this progress has been slow, it does seem like we are gaining momentum.

That said, this is a long-term project and I would encourage investor patience, as revenues are still far off. In summary, from my perspective, this was a solid quarter where we pushed the ball down the field on sales growth, R&D, our clinical trial, geographic penetration and acquisitions. I will now turn the call over to Dave for more on our business development activities.

Thanks, George. I'd like to spend a few moments going through our September 20th acquisition of Vascular Architects. The conference call we ran the day after the acquisition covered much of this ground, but because of the quick notice of that call, perhaps it's worth hitting the strategic high points one last time.

After that, I'll say a few words about the April acquisition of Cardiovascular Innovations, Inc., then turn the call over to J.J. for a more detailed review of our Q3 financial results. Perhaps a quick primer is in order. RE, as it is called, is a hybrid open endovascular procedure for the less-invasive removal of plaque, typically in the superficial femoral artery, also known as the SFA.

Recently, an increasing number of devices have been created to treat SFA occlusions less invasively. You may have recently heard of the Fox Hollow SilverHawk and the Spectranetics excimer laser.

While many of these modalities are effective in treating less-severe lesions, their effectiveness is limited when treating the most severe of leg blockages, sometimes called total occlusions. This is where RE comes in.

RE is a technique pioneered by Vascular Architects that falls between the aforementioned minimally invasive procedures and the classic surgical bypass. RE requires only one incision, rather than two, for open surgery and results in a next-day discharge, rather than a multiple-night hospital stay. In addition, RE preserves the saphenous vein, often needed for heart or leg bypasses. Simply put, we believe that this procedure is good for the patient and preserves vascular repair options.

On a business level, our acquisition hypothesis was that this product needed a larger and more dedicated vascular sales force. By comparison, our vascular surgeon-centric sales force is nearly 10 times larger than the previous owners. In addition, as many of you know, LeMaitre Vascular has a long history of direct marketing and we look forward to applying many of our past techniques to the VA product suite.

Another benefit of this acquisition is that it will expand and improve the sales bag, of our current LeMaitre Vascular sales force. Of particular importance is the $2,000 average selling price for RE. This will attract attention from many of our American vascular sales reps, who are accustomed to selling devices in the $200 to $700 neighborhood.

Finally, another compelling leverage point may be the ability to bundle multiple LeMaitre Vascular products around the RE procedure itself. It is difficult to perform RE cases without using our VascuTape and our embolectomy catheters can confirm and clean the newly created lumen.

With regard to our April 2007 acquisition of Cardiovascular Innovations, Inc., you may recall that shortly after the acquisition, we discovered pinholes in the product packaging, causing us to stop shipments and recall the CII-manufactured products. In our efforts to fix the pinhole issue, we discovered additional sterilization validation problems. The former has now been fixed, and we believe we are close to a resolution of the latter.

We hope to be back in the market with our newly branded LeverEdge device by the end of Q4. While this has been a frustrating delay, one small silver lining is that we were able to deliver healthy Q3 2007 sales without LeverEdge. As a reminder, LeverEdge's annual sales prior to the acquisition were approximately $240,000. With that, I'll turn it over to J.J.

Thanks, Dave. I'm now going to talk about Q3 financial results, make a few remarks about our September 30th balance sheet and finish with our 2007 guidance. Q3 2007 revenues were $10.1 million, a 19% increase over Q3 2006.

Foreign exchange accounted for 3% of the increase. In terms of our three product categories, endovascular and dialysis access continued to grow the fastest, increasing 33%, while vascular grew 15%, and general surgery increased 3%. Indeed, our revenues are becoming more endovascular.

In Q3 2007, our endovascular and dialysis access category accounted for 32% of revenues, versus 28% in Q3 2006. By geography, our North American, European, and Japanese revenues grew 14%, 27%, and 48%, respectively. For Q3 2007, the Company reported a gross margin of 74.7%, versus 73.3% in Q3 2006, an increase of 140 basis points.

Of course, our gross margin results were muted by the sales of Powerlink, which we sell at a standard distributor gross margin. The Company continues to drive manufacturing improvements across all product lines, realizing operational benefits from a single manufacturing location.

Over the past 12 months, the number of direct labor employees at the Company decreased 25%, while sales increased 19%. Q3 2007 sales and marketing expenses were $4.6 million, an increase of 30% over $3.5 million in Q3 2006. Higher spending was driven by the continued ramp of our sales force, as well as increased sales rep W-2s.

The number of LeMaitre Vascular bag-carrying sales representatives grew from 36 at the end of Q3 2006 to 58 at the end of Q3 2007, a 61% increase. As of September 30, we had retained five sales reps from the VA acquisition. Total marketing expenses were flat quarter-over-quarter. Total Q3 2007 selling and marketing expenses were 45% of sales.

Q3 2007 G&A expenses were $2.3 million, up 52% over Q3 2006. Much of this increase was the result of public company expenses, such as increased audit fees, insurance costs, and Sarbanes-Oxley compliance. Total Q3 2007 G&A expenses were 23% of sales.

On the R&D side, expenses increased 42% year-over-year to $1.1 million. This increase deserves further explanation. In 2006, much of our R&D spend was incurred as process development, a byproduct of our factory consolidation program. In 2007, however, process development was greatly reduced, with product development largely taking its place. Indeed, year-over-year, product development expenses have more than doubled, primarily driven by the hiring of additional R&D engineers. Total Q3 2007 R&D expenses were 11% of sales.

We posted an operating loss in Q3 2007 of $1.541 million, compared to operating income of $342,000 in the same period of 2006. Much of this Q3 2007 operating loss can be traced directly to a $1.054 million related to the buyout of our distributors in Italy and Ireland.

Net loss for Q3 2007 was $1.354 million, compared to net income of $221,000 in Q3 2006. Q3 2007 net income included $359,000 of interest income, as well as income tax expense of $393,000. Stock-based compensation in Q3 2007 was $168,000.

With regard to VA, we expect the acquisition to be slightly dilutive to earnings over the next 12 months. Incremental expenses include higher than normal cost of goods sold due to the purchase accounting, the hiring of VA sales reps and standard integration costs. We do, however, expect this acquisition to become accretive after the first 12 months. As mentioned previously, we do expect to see spotty backorders in the three of the six VA product lines over the next two quarters. This will not likely impact the long-term value of this acquisition.

Turning to the balance sheet, we held cash and cash equivalents of $25.6 million at September 30, 2007, compared to $27.9 million at June 30, 2007. This $2.3 million decrease was driven almost entirely by the $2.5 million cash payment to VA. As to our guidance, the Company is narrowing its 2007 sales expectations to $40.5 million to $41.3 million. We continue to expect a net loss for 2007 based on our ongoing investment in selling, marketing, and R&D.

We also expect to have 55 to 60 sales reps in Q1 2008. We will give our full-year 2008 guidance at our next quarterly call. Our expectations for future financial performance do not include the impact of any future acquisitions.

As a reminder, we will be hosting our first-ever analyst day on November 19th at the Marriott Marquis Hotel in New York City. Please feel free to contact me for further details. With that, I'll turn it back over to the operator for Q&A.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Mr. Rob Faulkner of Thomas Weisel Partners. Please proceed, sir.

Hello?

Hi, Rob. You're on.

Hi, George. Thank you. Nice quarter. I guess a few things. One, just housekeeping, pricing this quarter, how does pricing look today versus what it did a year ago?

Let's see, versus a year ago, worldwide, I would say pricing is up something like 3% to 6%, Rob, and it depends on what category you're talking about, it depends on what geography you're talking about.

And I wonder, what kind of opportunity do you see in Italy with this convergence? Do you see this as being an upside for you long term or is it kind of a steady --

Right, I think this is a nice opportunity for us. We worked with the fellow for 14 years. He was a terrific partner. You sense maybe in the last two or three years, our corporate-wide growth was outstripping what he was able to get to and so maybe he stagnated a little bit. And so we could take over that and maybe get growth back on the right track in Italy, but he did a good job. I'm not saying he didn't do a good job.

In general, Rob, we find great successes whenever we go into a market that had a deal in it for quite a long time and there were opportunities that the dealer was leaving on the table that maybe only the Company can really access. And at sort of a high level, I would guesstimate that we were something like 20% to 30% of his sales and therefore, as a result, he probably only gave us 20% to 30% of his time and effort, which stands to reason.

So when we go in there with our own employee in Rome, when we've already hired one of them, as we mentioned, you know you get a guy full time on our products in Italy and then you'd expect him to go out and hire a nice sales team to get things going. So I would expect over the long run the great things that you've seen us do with places like the UK, Germany, Japan, Sweden, Austria. I would expect that to be duplicated by and large in Italy.

And how should we think about the kind of step up you're getting in the revenue lines?

I think somewhere in one of our press releases, Rob, maybe on the press release, and correct me if I'm wrong, J.J., I think we released the fact that we sold in EUR900,000.

Approximately that, Rob.

And we estimate his hospital-level sales to be about 1.9 million. Now, that transition, having said that, doesn't happen immediately. There's a fairly complex system of distributors and direct-to-hospital hoops that you have to jump through over there. And it will take some time to work through those, maybe as much as a couple of years to get through all of them. So you don't get that all. It's not a step function all at once, but you do get it over time.

You had nice stability in general surgery this quarter. Any news there, or is it just normal --

Honestly, no news there. It just bounces around to be quite honest with you.

Yes, good, okay. I'll hop back in the queue. Thank you.

Thanks, Rob.

(OPERATOR INSTRUCTIONS). And your next question comes from the line of Larry Keusch of Goldman Sachs. Please proceed.

Great. Hey, guys.

Hey, Larry.

Just a couple of quick questions for you. Just coming back to the price increases. You mentioned that those went in on October 1st for this. What is the average increase? Is that what you were talking about, George, the 3% to 6%?

I answered that a little bit odd because I was talking about the U.S. and Europe. I was trying to bracket all of that, Larry. And, actually, the October price hikes we do are strictly domestic, and then in January, on January 1st, we'll do a European price hike. So the October price hike that went in domestically, call it an average of sort of 5% to 6%.

Okay, perfect. And then just understanding Italy phases in over time, what are the other sort of obvious European opportunities to go direct?

The next one that jumps out at you would be Spain. Obviously I'm conscious whenever I'm on these phone calls that I don't want the distributors to think we're going to go do something. But market size, you'd be looking at Spain, typically. The opportunities go down from there, Larry. That's probably a biggie. You probably think about Switzerland, Denmark, Norway, Finland, stuff like that.

So it starts to get smaller at that point, and then you may be over into the Eastern European, what we think of as the Eastern European bloc.

Okay, and then last two for you guys, first, if you could just help us understand the mix of stent grafts that are custom now, which continues to be a nice competitive advantage for you guys. And then in the U.S., with the UNITE trial, I guess I am a little bit surprised -- sounds like you've got a total of four now, implants, but why do you think that is kind of moving along slowly? You've got 90 patients to do in your protocol. So maybe just help us think a little bit about that.

Sure, okay, both good questions. On the first side, Larry, I have to admit, I had that on my list of homework items to do for this phone call. I can't give you the exact number on custom-made stent grafts. I don't have any reason to believe that it's changed from the last phone call, where I think we quoted 40%. But I'll tell you, I will get back to you on that topic.

On the trial, the UNITE trial, I realize the framework of that question is. I agree with you, it's going a little slow. I will say we've been heartened recently. We had a management change on that trial in June internally, Larry. And things have seemed to perk up since then. And maybe you're not seeing all of the fruits of the perking up, because with the trials first you tend to open up the sites and then secondly the sites become productive.

So we have -- since the last phone call, we have tripled the number of sites open from two to six. We're real happy about that. And the final number of sites can only be 14, so I feel like we're almost halfway there on that project. And I hope as these sites go on down the road you'll start feeling that power come out of those new sites. At a higher level, why is the UNITE trial a little bit slow? I think it has to do with LeMaitre Vascular getting more accustomed to working on clinical trials than anything else.

We've only done one of these in our history, and I think if you look around the table at all the other departments that we've founded and become successful at, it takes us a little while to get successful at these departments. It's a relatively young department inside the Company and we're just working through some teething issues.

I don't think it says anything bad about the product. You know that the UniFit product is bundled up inside of those endovascular revenues inside of Europe, and you're seeing generally speaking the endovascular and dialysis access category continue to power along. So I think you can infer from the fact things are doing well in that category that the product line is still very much a marquis product line for us that we have a lot of hope for.

Okay, terrific. Thanks very much, guys.

Thank you, Larry.

Thanks, Larry.

(OPERATOR INSTRUCTIONS). And there are no further questions in the queue at this time, and I would like to turn the call back over to Mr. George LeMaitre for closing. Please proceed, sir.

Thank you very much, Shantalay. Thank you very much for the analysts, as well as the investors on the phone call. Thanks for joining us. We will look forward to our next phone call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.