Thermogenesis Holdings Inc (THMO) 2009 Q2 法說會逐字稿

Hello. This is the Chorus Call operator. Welcome to the ThermoGenesis Fiscal Year 2009 Second Quarter Results Conference Call.

Some of the statements made during this conference, which are not historical facts, are forward-looking statements that 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.

(OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Matthew Plavan, CEO. Mr Plavan, the floor is yours, sir.

Thank you and good afternoon, everyone. This is my first opportunity to speak with your since our call in early December when I assumed the Chief Executive Officer position at ThermoGenesis.

It has been a busy but exciting 60 days and I look forward to updating you on our progress during today's call. We had a strong quarter, with respect to revenues, and made major advancements in a number of important areas. During my comments today, I will outline important accomplishments on our major initiatives, highlight key events during the quarter, and then discuss our financial results and outlook for the future.

As we discussed in our last call, the Board's charge to me was to define, design and implement a strategy to accelerate near-term revenues and manage operating expenses so as to improve the bottom line performance of the Company.

Over the past two months, the Company's management team and its employees have had a renewed focus on this principle objective. In addition, I've been working closely with our directors, as we continue to develop and refine a longer-term strategy moving forward.

Despite facing some headwinds from the continuing difficult economic environment, I am encouraged with what we have achieved to date but, more importantly, for the groundwork that we had laid for our future progress. Please keep in mind that the most significant organizational changes occurred in early January after the close of our second quarter. Therefore, we still look forward to the impact of our adjustments beginning to be reflected in the third, and more fully, fourth quarter results.

With respect to our strategic initiatives, I want to update you on the key elements that I outlined in December. They include, one, reorganization of the Company for success. Two, refocusing the Company on the core blood banking business to drive the Company profitability. Three, successfully launch the MarrowXpress, or MXP, in the third quarter. Four, maximize the value of our ThermoLine and Wound Care business and five, to hit key milestones for our Res-Q point of care solution for bone marrow and peripheral blood processing.

I will now review these initiatives with you in a little more detail. First is the corporate reorganization to maximize the value our resources, to generate the greatest near-term revenue growth, while managing operating expenses. That reorganization was implemented a month ago.

A significant number of employees were reassigned to new positions to maximize their value to the organization. In addition, we tightened our belt and reduced our headcount by approximately 10%. While always an unfortunate process, I felt this was necessary to achieve our goals and we will continue to manage our human resources to ensure that we are appropriately staffed for success.

The second element of our stated strategy is to generate near-term revenue growth by optimizing the value of our core Cord Blood business with our BioArchive and AXP offerings. Overall revenues in the quarter increased 12% year-over-year and 36% versus the prior quarter. While I will discuss our financial results in more detail shortly, I want to report that we have made good progress in this regard, as our BioArchive revenues increased by 14% and our AXP revenues increased 51% over the prior year's second quarter.

Our revenue growth is derived from several factors, including increased volume and improved pricing. We recorded revenue from the sale of seven BioArchives during the quarter. This compares with six in the prior quarter and with eight in the second quarter of last year. AXP bag set volume in the quarter was 26,500 versus 20,000 in the second quarter a year ago and 12,000 bag sets in the most recent quarter. These results fit well within our strategy of growing our Disposable revenue with their attendant higher margins.

Importantly, I believe we are beginning to rebuild our sales momentum with the AXP for cord blood, as evidenced by increasing number of evaluations and placements underway through GE and our newly established distributors in non-GE territories. The new AXP placements during the quarter include cord blood banks in Mexico, Taiwan, and Hong Kong. We expect this new market expansion trend to continue and look forward to reporting to you our progress going forward.

We are encouraged by the comments from the Cord Blood Registry, our largest customer, at a recent leading healthcare industry conference. While acknowledging that the current economic environment is having some impact on their business, they also were upbeat about the long-term future of the storage of cord blood and the growing number of indications in which stem cells from cord blood are being studied as a prospective form of therapy.

CBR is now involved in several clinical studies in this area and also indicated that over the past year or so they have released more samples for transplant than they have in the past 14 years. We continue to work closely with CBR and have established new processes internally to ensure that our efforts for them in the areas such as customer service, quality, and manufacturing are receiving our utmost attention.

During the quarter we continued to expand our BioArchive distribution into a number of new countries, including several Eastern European markets. We also continued to pursue market development programs that will facilitate the growth of this core business and expand the awareness of ThermoGenesis and it's products and capabilities.

In February, we will be co-sponsoring a symposium with the New York Blood Center, focusing on the determinants of cord blood unit quality. Participating in this event will be Doctors Wagner and Laughlin, two pioneers in the cord blood transplantation field. This meeting will provide a comprehensive update on blood and marrow transplantation, laboratory research, and patient care for clinicians and healthcare professionals.

In addition, we will be submitting several scientific abstracts to both in the International Society of Cell Therapy for it's meeting in early May and the Cord Blood Symposium in June.

With respect to AXP production and quality, we have bag set production ongoing with both of our manufacturing suppliers sufficient to meet market demand. I was very satisfied with my meeting with Nipro in Japan last week, at which we reviewed supply chain, quality improvement, and production plans.

I'm also pleased by the response of our quality and manufacturing engineers to my request to identify and implement quality upgrade opportunities to the component and subassemblies that are utilized in the production of the AXP System. In addition, we have identified opportunities for cost reductions and they are under active evaluation.

With respect to the status of our discussions regarding last year's recall with the FDA, our dialog has remained positive in tone while we are essentially waiting for our filing to work it's way through their system. We have not been asked to respond to any inquiries from the FDA in the last month.

While we do not have a definitive answer from the FDA as of yet, we continue to believe that the corrective action we outlined to them last quarter will meet with their approval. As a result, we're reasonably confident that the accrual we made in the first quarter will be sufficient.

The third leg of our strategy was ensuring the successful launch of our MXP system used to concentrate stem cells from bone marrow. As we announced last week, we have achieved two key milestones in this regard, including the initial shipment of the product to Celling Technologies under the distribution agreement with them that we announced last fall.

Celling, which is a leader in the use of cell therapy for treatment of orthopedic injuries, is using the MXP to perform bone marrow stem cell separation and clinical research. We have completed our training and market introduction programs with Celling and expect to see a number of practices in the Southwest adopting our technology as Celling begins to roll out their new program.

Additionally, we announced that the MXP is being used in a Phase II clinical trial at the University of Naples in Italy that is studying the affect of bone marrow derived mononuclear cells on patients with critical limb ischemia, or CLI. I want to be clear that we are not a sponsor of this trial and are incurring only nominal costs to support it. This is a very closely followed trial as the lead investigators Doctors Cobellis and Sica, are recognized as leaders in this emerging therapy.

As many of you know, patients suffering from CLI face a high probability of amputation and death and the study will focus on the utility of bone marrow-derived cells to prevent amputation by restoring blood flow to the effected limb. This is a 30-patient study with one-year follow-up and we will apprise you of its progress going forward.

In addition, we continue to have encouraging discussions with trial sites in several other non-US markets and hope to be able to announce the use of the MXP in additional studies in the near future.

Several members of our R&D and marketing teams also recently attended a meeting on the use of stem cells in treating cardiac disease and critical limb ischemia in New York, sponsored by the Cardiovascular Research Foundation of Columbia University. And it was clear that the interest in using stem cells to treat these diseases is gaining increasing momentum.

The fourth element of our growth strategy was determining the best approach for maximizing the value of our ThermoLine and Wound Care businesses. They have continued to generate revenue and we have been able to successfully manage operating expenses associated with them. With respect to the ThermoLine business, we are pursuing two tracks in parallel. The first is looking for potential acquirers of the business and the second is looking for ways to decrease manufacturing costs.

In terms of our Wound Care technology, we continue to explore possible means of better unlocking the value of the technology with other parties and we look forward to updating you on our efforts in this area by the time of our next conference call, if not before then.

Our final key initiative was to hit certain milestones in our product development pipeline, including our Res-Q point of care solution used to generate bone marrow stem cell concentrate and platelet concentrate for the use in cell therapy and regenerative medicine applications. As we have discussed with you in the past, our strategy has been to launch this offering in the equine market during the second half of fiscal '09, with a rollout to the human market by the end of this fiscal year. We remain on track with both of these targets and we'll keep you informed of our progress.

I also want to update you briefly on the CEO search. The Board has reviewed a number of candidates and is in the process of screening them and concluding initial interviews. I have also indicated my interest in the position and being considered.

Before discussing our financial results for the quarter, I want to assure our investors that our acute focus on bringing the Company to profitability does not come at the expense of our longer-term strategic efforts to accelerate our growth, in the out years, by being a leading provider of products for adult stem cell-based therapies and regenerative medicine.

Last year we completed the build-out of a new cell biology laboratory facility in our corporate headquarters. This lab is up and running and equipped with the state of the art molecular biology equipment to advance our scientific endeavors.

Our Scientific Affairs and R&D groups continue to perform innovative research fusing advanced engineering with stem cell biology. We are actively working to expand our patent state in the processing and cryopreservation of stem cells derived from cord blood bone marrow and adipose tissues. In fact, we have several new prototype products for cell separation technologies for both point of care and laboratory use that we believe have potential applications in these areas.

A strategic objective for us is to also seek development funding to assist in the commercialization of these product concepts, in exchange for marketing and marketing-related rights while we maintain the value and the revenue potential of these technologies within ThermoGenesis.

We have focused on market leaders in adjacent technologies, as we believe they represent the most likely and immediate types of partnership opportunities for commercialization funding, as well as opportunities to perhaps cross-sell products into our respective adjacent markets. In addition, we continue to have very positive discussions in this regard with GE Healthcare about potential joint research and development and marketing development programs.

It is also worth noting that we've submitted a grant application to the NIH for stem cell research for improved bone healing. We expect to hear back shortly from the NIH on the status of our application and are cautiously optimistic that our grant will be funded. The initial grant is expected to be approximately $250,000 a year and being awarded, it would be an important milestone for us as it would mark the first funding for ThermoGenesis from the NIH.

With regard to current events, we believe that the renewed support and interest in stem cell therapy resulting from the new administration can portend new opportunities for ThermoGenesis. As a reminder, however, our devices are not currently used in the embryonic stem cell area, although there could be potential applications in the future as the use of these stem cells evolves. In the meantime, we believe that the increased funding and support for stem cell therapy may create new opportunities for our current offerings and the markets we serve.

Turning now to our financial results for the quarter, revenues were $6.1 million, a 12% increase over revenues of $5.5 million in the second quarter a year ago. For the first six months of fiscal 2009, revenues were $10.6 million, a 17% increase over revenues of $9.1 million in the same period a year ago.

As I mentioned earlier, factors driving our revenue growth in the quarter included increased BioArchive and AXP activity. AXP and BioArchive disposable revenues were $3.5 million versus $2.6 million, or more than a 50% increase versus a year ago. These increases were offset by an expected decline in our Cryo-Cell disposable revenues to about $92,000 from $402,000 a year ago.

Gross margin in the quarter was relatively consistent with the prior year quarter at 36% this year versus 35% a year ago and 28% in the most recent quarter.

As I mentioned earlier, I am pleased with the progress we are making on the management of operating expenses. Operating expenses in the quarter were essentially flat with the year-ago at $4.0 million, but they included $370,000 related to a severance accrual to the former Chief Executive Officer. Operating expenses in the prior year included approximately $400,000 in stock-based compensation expense that was awarded to our former Chief Technology Officer.

Operating expenses were also flat when compared to those of the first quarter, but remember that we've reduced our operating expenses from $5.0 million in the fourth quarter of fiscal 2008, or just two quarters ago. We should start to see the additional benefits of our expense management programs in the Company's third and fourth quarter results.

I should also note that interest and other income declined by nearly $300,000 versus the prior year, reflecting reduced cash balances and declining interest rates. We reported a net loss of $1.7 million, or $0.03 per share. This compared to a net loss of $1.7 million, or $0.03 per share in the same period a year ago.

Turning to our balance sheet, we ended the quarter with cash and short-term investments of $18.8 million, versus $22.3 million at the end of the first quarter and $25.3 million at the end of fiscal 2008. I should note that our receivables were up $1.6 million versus the first quarter, reflecting an increase in revenues and payment terms with our new distributors.

Working capital at the end of the quarter was $25.6 million and we continue to have minimal debt. Our use of cash in the quarter was to fund operations.

Turning to our outlook for the balance of 2009, we continue to expect that revenues will increase 10% to 20% over the fiscal 2008 year. We also anticipate a significant reduction in our quarterly loss in the fourth fiscal quarter and a continuing quarterly trend to achieve profitability during fiscal 2010. We believe we will be successful in doing so through a combination of revenue growth and continued expense management, while maintaining a consistently strong balance sheet during that period.

Our inability to achieve profitability sooner is due primarily to two factors. One, the increase in the final development costs for the Res-Q due to new features and requirements that we wanted to have incorporated into the initial release of the Res-Q. And two, the impact of the weakened dollar on certain costs of goods sold for us doing the quarter. However, we do not expect the impact of these factors to persist in fiscal 2010.

That's the end of my formal comments. I want to thank you again for joining us today and I'd like to now turn it over to the operator for questions.

Yes sir. (OPERATOR INSTRUCTIONS) Greg Warren, Warren Co.

Hi Matt.

Hi Greg, how are you?

Good, thanks. The only thing that kind of, I think, disturbed a lot of people at the last quarter's conference call was the issue with the fact that we didn't seem to have any kind of product defect insurance with Nipro. Have you corrected that situation or can you explain what that's all about, because I don't understand how we could contract with somebody and have no liability insurance?

Well, the costs of the recall we've essentially accrued for, we think we're well accrued for in the first quarter. And as I had mentioned, given that we believe that the FDA is going to approve our plan for remediation, we think we've got a pretty good handle on what that cost was and it's accrued in the first quarter.

So, if there's an opportunity for us to recover any of that, we'll certainly be looking at doing that. But that was essentially a quality problem that we're taking responsibility for and our objective is to improve our quality systems so that we don't have this problem going forward and don't have to worry about that situation in the future.

So what you're saying is we don't have any kind of product defect insurance coming from them toward ThermoGenesis?

Well, certainly --.

Is that industry thing? Is that something that you find in general in the stem cell industry, that the people that provide service for the different stem cell companies aren't required to have any kind of liability insurance for the products they're making?

Well, certainly there are -- unfortunately it's not as cut and dried as that. If there's a defect, clearly a manufacturing defect where they haven't manufactured to specifications, that's certainly something you would want to hold them accountable to and we will do that in the future.

In this particular recall, I think, as I had mentioned the defect, we take part responsibility for that, the program that occurred in manufacturing due to requirements that we set and some question around whether or not the changes were effectively communicated back and forth. So, in the future, I can -- my point is, in the future we are looking to indemnify ourselves against any manufacturing defect, if it is in fact negligence or a defect issue.

Okay, so I see. So it may be that they designed it according to your design and it just flawed in that process? In other words, they're not responsible because they actually made it exactly the way you requested it to be made?

No, no. It's probably -- we're probably getting a little too much into the weeds here. But I think it's better to just focus on, as we move forward, having clearer specifications and good accountability for our manufactures to have good quality systems in place.

Okay. My only other question in regards to that as a follow-up would be have any of the users of the 3,000 bags that were involved in that, that are now getting filters, how have they responded to that? Are you getting any requests for refunds or are you offering any kind of promotion to them in that regard?

Well, we're providing the filters that need to be used for transplant and we've had no complaints or adverse effects of using the filters.

That's good. I'm glad to hear that one, because I've seen some things on the Internet where some lawyers are trying to garner up some support to create some kind of class action lawsuit in that regard. But I guess they're just bottom feeders in that respect.

Yes.

Okay. Well, thank you for your response there.

Okay, 5hanks, Greg.

Sure.

Jon Hickman, MDB Capital Group

Hi Matt, can you hear me?

Yes. Hi Jon, how are you?

Fine. I just have (technical difficulty) --?

Hey Jon?

(Technical difficulty).

Hey Jon, can you get to a landline, maybe? I'm sorry, you are breaking up.

Okay, well I'll just talk to you later, okay? Bye.

Thanks.

Thanks.

Do we have any other questions?

No sir. I'm showing no further questions at this time. Would you like me to give the instructions again?

No. I think that if there are no other questions, we look forward to reporting on our progress in the future. Thank you.