Thermogenesis Holdings Inc (THMO) 2007 Q4 法說會逐字稿

Good morning and welcome to the fiscal year 2007 fourth-quarter and year end conference call. Some of the statements made during this conference which are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in those statements, including but not limited to certain delays beyond the Company's control with respect to market acceptance of new technologies and products, delays in testing and evaluation of products, initiation and successful completion of clinical trials for new claims on existing products, capital resources required to fully execute on business plans and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission.

As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. If you would like to ask a question (OPERATOR INSTRUCTIONS). For your information, this conference is being recorded.

I would now like to turn the conference over to Dr. William Osgood, CEO. Dr. Osgood, you may begin, sir.

Thank you and hello, everyone. With me today is Matt Plavan, the Company's Chief Financial Officer. This is our first conference call since I was named Chief Executive Officer the Company on July 30. Although I've spoken with many of you over the past several weeks and really appreciate your input and support, I also want to acknowledge the many past contributions of Phil Coelho and those I know he will make in the future as our Chief Technology Architect.

Despite our lower than expected fourth-quarter revenues, the Company had a very solid fiscal 2007 as year over year revenues increased 39%. The bulk of the sales growth came from our new AXP platform. In addition, we continue to strengthen our patent position devoted to stem cell therapy products, achieve several important clinical milestones and reach key partnership agreements.

Since becoming CEO, I've been conducting an extensive strategic review of the Company and this has only served to increase my enthusiasm and optimism about Thermogenesis' outlook based on our technology, human capital and the market opportunities that we stand to capitalize upon. While the Company has important challenges ahead, I believe we're beginning to make meaningful progress in some key areas and I will share updates on them with you shortly. At the same time, it has become clear to me that we have both the need and the opportunity to make changes in our strategic direction.

The format for today's call will be as follows. First, I'll begin with a brief review of the key events since our last call, identify key assets of the Company as I see them, and present our updated strategy to drive the Company's revenue growth in path to profitability. Finally, I will outline what I see as important milestones for the Company in 2008. Matt Plavan will then follow with the discussion of our financial performance and guidance for 2008 before we open the call to your questions.

Let's begin with key events since our last call. In conjunction with the July 30 announcement of my appointment as CEO of the Company, we also announced a long-term supply agreement with Neoprobe Corporation as an additional source for the production of AutoXpress disposables. Neoprobe produces more than 50 million disposables for the medical market annually and has a stellar reputation for its high-quality manufacturing capabilities. Over the past several months, we have been actively engaged with Neoprobe and have been impressed by their thoroughness and attention to detail. As we indicated in July, we expect to see initial production for them before the end of the calendar year with full production ramping in the first quarter of calendar 2008. I can report to you that we received 60 bagset samples this week and are evaluating them as we speak.

At the same time, we continue to work closely with our current supplier of AXP bagsets to address the quality and supply issues that were the major contributing factor to our disappointing fourth quarter financial performance. I'm cautiously optimistic that the situation has improved and we are on track to sell more AXP bagsets in the current quarter than in the fourth quarter of last fiscal year.

We are also using this time to enhance the entire AXP system, including modifications to simplify bagset assembly and very important design changes to the [DYSON] docking station that will improve its reliability. In the meantime, I'm delighted to report that the backlog for AXP disposables has increased significantly during the current quarter and, of course, we are taking all necessary steps to fill those orders as quickly as possible.

As we discussed in our July 30 release, another factor contributing to our financial performance in the quarter was lower than anticipated sales of our BioArchive System through our distributor GE Healthcare. It is important to remind everyone that GE Healthcare is the exclusive distributor of the AXP platform and the primary distributor of the BioArchive system. Even though we are cautiously optimistic that current quarter BioArchive sales will exceed last quarter's sales, we're not satisfied with GE sales results to date and we expect to be in discussions with GE over the next few weeks to examine ways to improve sales of these products. GE Healthcare has expressed strongly their long-term commitment to cell therapy so we anticipate a positive outcome.

I also want to remind you about the collaboration with the stem cell programming U.C. Davis and Jan Nolta, a leading authority in stem cell research that we announced during the fourth quarter. Progress continues toward developing a bone marrow product by modifying the current AXP device, firmware and disposable set to allow higher cell purity than required for umbilical cord blood. We are utilizing Jan Nolta's hindlimb ischemia model to demonstrate the therapeutic efficacy of a new stem cell composition. These studies are underway and will continue for the next few months. Depending on the outcome, the next step will be human clinical trials for ischemia and bone marrow indications, both inside and outside the US.

Before turning to a discussion of our updated strategy, I want to lay out what I see as the key assets of the Company. First, we already possess a very solid umbilical cord install base and meaningful marketshare. We can capitalize on this position to increase sales of higher margin disposables. Second, the markets we are targeting, adult stem cells and regenerative medicine, are dynamic and have strong growth potential and we have the leading technology to serve those markets. Key external factors we expect to service growth drivers for us include increased government and private funding. In fact, many of you may have seen the announcement this week of a $20 million stem cell research grant to UCLA by the Broad Foundation. Other factors include growing appreciation for the benefits of storing cord blood stem cells and favorable stem cell animal studies and clinical trial outcomes around the world.

Third, we have strong IP protection and partnerships with major healthcare companies such as GE, Medtronic, BioMed and [Asati]. Fourth, we have strong relationships with regulatory bodies and continue to realize progress achieving our regulatory milestones. Finally, we have proven technology and a dedicated team of employees and a strong financial position with over $33 million in cash to deliver those assets and capitalize on our key market opportunities.

While all of these key assets provide us a strong foundation, it is critical that we bring our vision into sharper focus and implement a strategy that will maximize shareholder value by accelerating topline growth and moving the Company to profitability. It has become increasingly clear to me that the long-term value of Thermogenesis lies in its ability to become a leader in developing and commercializing innovative products and services that process, store and administer therapeutic doses of adult stem cells for the treatment of disease and injury.

Let me repeat, because this is very important. It has become increasingly clear to me that the long-term value of Thermogenesis lies in its ability to become a leader in developing and commercializing innovative products and services that process, store and administer therapeutic doses of adult stem cells for treatment of disease and injury. As a result, over the past month, I have started to initiate changes that align the organization with our stem cell Company vision. This transformation will likely go on for some period of time, although I believe many of the major changes are now behind us.

Most recently we brought back to Thermogenesis John Groat as VP of Marketing, an accomplished marketing executive; promoted Sandra LaCava to VP of Sales, who has eight years of sales leadership experience at Thermogenesis; named John Chapman, who was previously Head of Scientific Affairs to VP of both Scientific Affairs and R&D to strengthen our technical leadership; and appointed Dan Segal to VP Emerging Stem Cell Therapy, who joined us recently from GE Healthcare. In addition, we are recruiting for a VP of Regulatory Affairs due to the critical role regulatory will play in emerging stem cell markets.

Supporting our new vision is a three-prong strategy. One, growing our share of the umbilical cord blood market. Two, positioning ourselves to benefit from what we believe to achieve tissue regeneration. Three, exploring new market opportunities and evaluating ways both internally and externally to expand our product offerings. The first aspect of our new strategy, to grow our share of the umbilical cord blood market which includes private and public cord blood banks, goes beyond what I've already discussed regarding AXP quality and BioArchive sales issues. Our top priority in this market is to convert manual cord blood processing to AXP automation. When successful, this conversion will drive topline and gross margin growth for the Company.

The FDA 510 clearance of our AXP for cord blood cell processing will facilitate this conversion. Although this has not been a barrier to marketing the AXP for us to date, based on the notification last year from the FDA of their intention to start regulating cord blood processing systems, we believe the approval of our application will accelerate adoption of our technology in the clinical community thereafter. We believe we are on track to receive that approval early in the second fiscal quarter.

Another element of our strategy for this market is to address the high-volume (inaudible) preservation needs of private cord blood banks through a modular BioArchive platform. We expect to begin development work for this offering which will provide a cost-effective storage alternative to conventional doers before the end of the year. We believe that it will have a meaningful impact on increasing marketshare for the BioArchive platform.

The second aspect of our strategy, addressing the human stem cell market, is clearly a longer-term one. Our approach is to work backwards from diseases and injuries and identify target indications based on patient population, probability of clinical success, and time frame to revenue. The indications we are evaluating at this time include diabetes, myocardial ischemia, myocardial infarction, peripheral [artery] disease and neurological injury.

Two recent developments portray the potential opportunities in the stem cell market. The first is the recent FDA guidance document on point of care administration of peripheral blood stem cells that makes it clear the FDA is identifying equipment manufacturers with point of care devices like the AXP as the most important players in accomplishing point of care stem cell therapy. This means that although a 510-K can provide easy entry into a clinical trial for a specific indication, we will need PMAs to be able to make claims for each indication. As we select the target indications which most favor the AXP performance, we will ensure that the clinical trial investigators capture data necessary for our PMA indications.

Second is the recent announcement from the National Heart, Lung and Blood Institute that they will provide a grant of $33.7 million over the next five years to support the new national consortium called the Cardiovascular Cell Therapy Research Network. The Network represents the first US federal funding for adult stem cell studies in which patients are treated with stem cells taken from their own bodies. Our products and technologies are strong candidates for processing bone marrow stem cells in these studies and clinical trials.

Finally, to increase the presence of Thermogenesis outside the umbilical cord blood markets we will launch an expansive marketing campaign to increase awareness of our products in the minds of adult stem cell therapy researchers, clinical trial investigators, and practicing physicians worldwide. This effort will leverage our important competitive advantages over products being used today in this market.

The third aspect of our strategy includes the Company's entrance into various untapped markets and adding to our product portfolio. Since we have just started to explore these type of opportunities, we are not yet in a position to provide a great many details. However, I would hope that we can provide you an update on this effort during our next conference call.

What I have not touched upon, of course, is our surgical wound care business. We are delighted to receive the CryoSeal PMA approval for liver resection indication as we announced on July 30. However, it has become evident to me that while this is leading-edge and potentially important technology and we have great IP in this area, the market for autologous fibrin sealants has not developed as we expected, especially in the US. Based on recent trends and changes in liver resection surgical procedures, we believe the greater nearer-term opportunities for this technology lie outside the US. Therefore, we will continue our program to expand sales in other key markets such as Europe, Russia and Latin America and pursue regulatory approval and reimbursement in Japan. As part of this more focused strategy, we have reorganized the surgical wound care group and expect to see savings in operating expenses. At the same time, we launched a project to determine the best avenues to extract value from this technology and we have engaged an outside consultant to help us find the best strategic fit for this program going forward.

Importantly, we are learning that this technology may have potential as stem cell IP. For example, fibrin sealants have been used as a stem cell delivery medium and as a biologic scaffold for tissue engineering applications in several published studies. We continue to believe that we can generate incremental revenue growth with our Thrombin Processing Device, or TPD, used in wound care to isolate activated thrombin from blood plasma in less than half an hour. As many of you know, we have distribution agreements with industry leaders Medtronic and BioMed, and I consider those relationships to be important elements of our growth strategy. In addition, we will explore other potential market applications and other distribution partnerships for this technology that can begin to generate revenues during fiscal 2008.

I realize that we have covered a great deal of new information today and will continue to update you on our progress during future quarterly conference calls. However, I and the other members of the management team believe that the approach I have outlined gives Thermogenesis the best opportunity for maximizing shareholder value like achieving significant revenue growth and profitability. We also recognize that we have some hurdles to overcome, both in the short and long-term. Most importantly, completing the Company's transformation to an organization that is focused on excellence, executions, and delivering consistent and dependable results.

As we proceed on our new strategy, we believe it is important to provide you some milestones by which to measure our progress over the next year. These include resolving the GE issues that have impacted BioArchive sales; ramping AXP disposable production and generating increased activity among our both existing and new customers; making significant progress with a modular BioArchive development project; creating awareness of our stem cell brand and associated products outside the cord blood markets; ensuring use of our AXP stem cell compositions in adult stem cell animal studies and human clinical trials; identifying new ways of generating value for our surgical wound care technologies; successful disposition of our legacy ThermoLine offering; and continuing to evolve our management team and adding high-quality new members to our Board of Directors in the near future.

Regarding the Board of Directors, Bud Barry has resigned as a Director to pursue other professional opportunities. We want to express our appreciation for his many years of service and contributions to Thermogenesis. In addition, the Governance and Nominating Committee of the Board of Directors is actively interviewing a number of highly qualified candidates. We hope to name one or more new Board members in the near future.

To conclude, I hope I have communicated well my confidence in the prospects of the Company and the direction we have laid out to you today. My excitement and feeling of pride to be leading Thermogenesis, the stem cell company, is profound. I look forward to speaking with you during the Q&A session. In the meantime, thank you for joining us today and I'll now turn it over to Matt.

Thank you, Bill, and hello, everyone. I'll begin with fourth-quarter revenues, which were $3.5 million compared to $3.6 million in the fourth quarter a year ago. The breakout includes cell therapy revenues of $2.4 million, a 10% decrease from the $2.7 million in the same period a year ago. The primary contributor to the decrease in cell therapy revenues was the decrease in BioArchive unit sales from 7 to 3 during the comparable quarters. This decrease was partially offset by the sales of AXP bagsets which were negligible in the same period of the prior year. We are pleased to report that our backlog of orders for our cell therapy business has grown from 2.2 million at the end of June to 4.8 million as of today.

Surgical wound care revenues for the quarter increased 56% to $446,000 versus $286,000 in the fourth quarter of last year. This increase is primarily attributable to the BioMed development revenues of $150,000 during Q4 fiscal '07. Total revenues for fiscal '07 increased 39% to $16.8 million within the range we indicated in our July 30 press release. Revenues in fiscal 2006 were $12 million.

Gross margin for the fourth quarter of fiscal 2007 was 26% of net revenues versus 37% in the prior year. The decrease in gross profit percentage is due to approximately $350,000 in cost related to the AXP bagset quality and overhead and another $100,000 of increased warranty costs over the prior year quarter. We do not expect these expenses to reoccur on an ongoing basis. Our gross margin for the fiscal year was 31% as compared to 36% for fiscal 2006. As we have discussed in the past, our strategy to grow our margins is to increase our higher margin disposables revenue as a percentage of our overall revenues over time. Although we have successfully grown disposable revenues as a percentage of overall revenue year-over-year from 32% to 40%, our gross margin year-over-year actually declined due primarily to approximately $1 million of higher quality assurance costs and warranty claims.

We expect to see gross margin increase as we continue to increase disposable sales, stabilize our subcontract manufacturing and work to reduce our material cost through economies of scale. We will continue to report our progress on our gross margin improvement over time.

Turning to operating expenses, they were $4 million in the fourth quarter versus $3.3 million a year ago, an increase of $700,000 or 21%. The primary contributors to the increase were salaries and travel cost for additional sales and marketing personnel and management recruiting expenses. The net loss for the fourth quarter was $2.6 million or $0.05 per share versus $1.5 million or $0.03 per share in the fourth quarter a year ago. For all of fiscal 2007, Thermogenesis reported a loss of $6.8 million or $0.12 a share compared with a loss of $6.1 million or $0.12 per share in fiscal 2006.

In terms of the balance sheet, we ended fiscal 2007 with cash and short-term investments of $33.4 million and working capital of $37.8 million. This compares with cash and short-term investments of $39 million and working capital of $42.3 million a year ago. Our use of cash for operations in the fourth quarter was $1.7 million, bringing the total for the year to $7.7 million. We ended the year with minimal debt.

Turning to guidance for fiscal 2008, we expect sequential revenue improvement throughout the year with accelerated growth in the latter half of the fiscal year. We intend to provide more specific revenue guidance by our first quarter fiscal 2008 earnings report or possibly sooner.

Just a couple of housekeeping items before I turn the call over to the operator for questions. First, we will be presenting at the upcoming UBS Healthcare Conference on September 27 at 1:30 PM Eastern daylight time in New York. We will be on the East Coast the day preceding our presentation, so please contact us if you're interested in a meeting. Second, we will be hosting a booth at the [AABP] trade show in October in Anaheim, California. We also invite investors to meet with management here as well if you should plan to attend.

Again, thank you for joining us today and we'll now turn the call over to the operator to open it up for questions.

(OPERATOR INSTRUCTIONS) Jon Hickman, MDB Capital.

I have a couple of questions. Can you hear me?

Yes, we can hear you.

Okay, so I'll do -- from your comments, Bill, we're to assume that the fibrin sealant product is not going to be marketed here in the United States?

Not at the current time.

Okay. But you are pursuing the partnerships with BioMed and for that Thrombin Device?

Absolutely. And we're also exploring other opportunities to increase sales of that device.

Okay. So what's different in the United States versus internationally with liver resection?

Well, the difference -- liver resection is a fairly narrow procedural indication in the US and surgical techniques have evolved since the clinical trials and the use of fibrin sealants in that surgery is pretty limited. The PMA indication for liver resection, however, outside the US opens up the opportunity to get approvals for many other indications. And it opens the door and actually now is accelerating our applications in Japan. So it's quite a bit different outside the US.

Okay. Then could you help me on this? This is probably a question for Matt but revenues were up almost 40% year over year from 2006 to 2007. But none of that really went to the bottom line due to a lot of different reasons. Could you help us on your operating expense line? What do you expect that to grow during the year? Is that going to be pretty constant? Or should we build in 5, 10% growth rate there. It seems like you're adding quite a few people.

Yes, I think numbers is probably going to sit around $4 million a quarter.

The operating expenses?

Correct. [Back-on] charges are difficult to predict and they're -- we use the Black-Scholes-Merton model to determine what our expense is going to be. But as that fluctuates, the OpEx number could be anywhere from 3.8 to just over $4 million each quarter.

And then you said that you had in your total for the year, your total gross profit, was affected by $1 million because of quality type issues?

Well, it was $1 million between quality and warranty, increased warranty costs. But yes, as we have worked through the difficulties with our subcontract manufacturer there's been a fair amount of scrap and additional resource costs to assist in implementing additional quality procedures.

Okay, so what -- do you have any like goals for what you could get your gross margins to when things are going reasonably well?

We're still working through what would be the right target for that during the year and we'll provide guidance when we've got a better sense. We've got a number of -- as we bring up Neoprobe and we continue to work with the supplier we're currently working with, there are a number of moving parts. So I think it's premature to predict where gross margin is going to go in the near-term.

Okay. And one last question before I get back in the queue. Would you -- $4.8 million in backlog, what's the unit volume associated with that?

Well, for AXP bagsets, it's around 50,000.

50,000. Okay, thank you.

Joe Pratt, A.G. Edwards.

Just following up on the Neoprobe situation. When could that baby up and running such that you wouldn't have a backlog on the bags?

Again, we're on track with our Neoprobe implementation and we expect to see product by the end of the year and see them ramp up next year. As I mentioned, we're going through some bagset samples they sent us. They look very good. We're very pleased and we continue to work down the timeline. But I think you can see volume -- we're going to expect volume from Neoprobe in the third quarter.

Thank you.

Gentlemen, we're showing no further questions at this time.

Thank you very much. We appreciate your time and we look forward to seeing you.