Thermogenesis Holdings Inc (THMO) 2009 Q3 法說會逐字稿

Hello, this is the Chorus Call operator. Welcome to the Thermogenesis fiscal year 2009 third quarter results conference call. As a reminder, all participants will be in listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) For your information, this conference is being recorded. I would like to turn the conference over to J. Melville Engle, Chief Executive Officer. Mr. Engle?

And I'd like to turn the floor over to Matt.

This is Matt Plavan, thank you and good afternoon everyone. With me is Mel Engle, who joined the Company as Chief Executive Officer on April 14. I just wanted to take this opportunity to again welcome Mel to Thermogenesis, and say how delighted I am that he has joined the Company. He has brought a high level of enthusiasm and a new perspective to Thermogenesis, and I look forward to working with him as we continue to implement the Company's turn around and growth strategy.

Before continuing, I want to note some of the statements made during this conference call which are not historical facts, and are forward-looking-statements, 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 filing with the Securities and Exchange Commission.

During the quarter we realized some meaningful progress, despite a challenging economy, including the successful rollout of the MXP in the early part of the third quarter, continuing geographic expansion of our AXP business, and achieving a significant reduction in operating expenses. Both year to date revenues and our net loss have improved versus fiscal 2008. In fact, we reduced our net loss by 60% year over year as we decreased operating expenses resulting primarily from our reduced headcount, and tight spending controls.

During today's call I will discuss the key events of the quarter, along with our financial results. But first, Mel will provide his perspectives based on his first three weeks here, and outline his initial thoughts on the Company. After our formal remarks, we will open the call up to your questions. Mel?

Thanks Matt, and hello everyone. I've had the opportunity to talk with a number of you since I've joined the Company, and I look forward to speaking with you during our quarterly conference calls, in person visits, and through other potential opportunities.

Let me begin by saying my first three weeks here have only served to reinforce my view of the factors that attracted me to Thermogenesis. I believe the Company has the strong technology, a track record of product innovation, and a dedicated team of employees, all well positioned to capitalize on the growing stem cell market. I would like to acknowledge the great job Matt has done during the time period as the interim CEO, and you'll see evidence of the value of his initiatives he's put into place since early December during the comments today.

While I'm sure that you can appreciate that it's too early for me to provide a significant level of detail regarding the Company's future strategy, I do want to take a few minutes to share some of my initial observations and direction, however.

I have communicated to the board, to the management team, and to our customers and partners that there are five key areas that I'll be focusing on in the near term. First, developing a clear strategy for the Company; second, achieving top line growth and customer satisfaction; third, creating an environment of teamwork and personal accountability; fourth, realizing Company prosperity, not only initial profitability, but prosperity long-term, driving for excellence in everything we do; and fifth, insuring our offerings provide the highest possible quality.

We're in a much better position with respect to quality than we were four months ago, and have more work to do. As in any well run company, quality must be job one. We have increased staffing in the quality area and have initiated rigorous training and new policies and procedures. We've also adopted new proactive testing and other measures to insure we minimize the opportunities for problems going forward.

During the third quarter Thermogenesis implemented companywide cost reduction efforts and operating efficiency improvements. These were absolutely necessary. In my mind, however, the most important key to Thermogenesis' long-term success is top line growth. The Company will drive to maximize its full sales potential by; a) achieving a strong performance with its existing products in existing markets; b) by entering new markets; c) by creating new product flow; and d) by implementing an aggressive business development strategy. This is the course we will be taking effective immediately.

In simple terms, our core strategy will be to take what we have learned about where adult stem cells are being used and position Thermogenesis technology as the cell separation company of choice. To that end we are pleased with the early success of our MXP device through our distribution agreement with SpineSmith, with whom I visited in April, and look forward to initiating joint product launch efforts for Res-Q in June. Res-Q is a disposable device used to generate bone marrow stem cell and platelet concentrate for the use in cell therapy and regenerative medicine applications.

To insure that we meet our goals, I have implemented a reorganization of the Company. As we announced in April, Matt, Executive Vice President, has been named Chief Operating Officer while retaining his role as Executive VP and CFO. In addition to the financial functions, Matt will have operations and manufacturing and engineering reporting to him. This organization structure will allow me to focus squarely on top line growth and quality. In addition to Matt, reporting to me will be sales, marketing, new business development, scientific affairs, human resources, and of course, quality assurance and regulatory affairs.

We are at a good starting point with respect to managing expenses and the focus on near-term revenue opportunities. The Company has been internally focused for the past few months, which was necessary, but now is the time for growth. There is a sense of urgency and excitement within the Company, and I'm delighted to be here. We are recognized as a leader in cell separation, and are well positioned as the stem cell markets continue to grow. As I mentioned before, the core strategy, in simple terms, will be to take what we have learned about where adult stem cells are being used and position Thermogenesis' technology as the cell separation company of choice. That opens up all sorts of windows to the future.

I look forward to updating you on our progress and will now turn the call over to Matt for a review of key events during the quarter, and I'll have the final word.

Thanks Mel. Well I'll discuss our revenues in more detail shortly. From a macro perspective our BioArchive and AXP businesses were impacted by the global economic environment as we saw a slowdown in both capital equipment expenditures and activity at our customers. For example, we sold five BioArchives in the quarter, which was below our internal forecast. This compares with seven in the prior quarter, and six in the third quarter of last year. AXP bagset volume in the quarter was also impacted, as we sold 23,600 bagsets in the third quarter versus 26,500 in the prior quarter, and 25,800 in the third quarter a year ago.

Despite our decline in quarterly revenues year over year however, we were pleased with our ability to reduce the Company's net operating loss by $1.6 million, or 60%, versus a year ago. We also realized some important accomplishments in our core business, despite the challenging economic environment. Key achievements included adding new AXP accounts in three important geographies for us, India, Hong Kong, and Mexico, and securing registration for the AXP in Brazil, which we believe represents an important market opportunity for the Company.

During the quarter we achieved an important milestone in the evolution of our business as products derived from our intellectual property have now been used to collect, process, and/or store stem cells from cord blood in more than one million procedures since their introduction a decade ago. Now we estimate that the worldwide market for cord blood collections in 2008 exceeded 250,000 units, including both Thermogenesis bagsets and those from companies licensing our technology. Cord blood stem cells are serving as therapies to treat a growing number of indications, as well as being used in studies for treatment of more than 70 diseases.

We're encouraged by the continued progress on the AXP bagset quality front. As a reminder, we announced at the end of February that the FDA concurred with our remediation plan related to the voluntary recall of certain lots of AXP bagsets that occurred late last year. Over the past four months we have implemented new processes and added qualified new staff to our quality effort. We believe this has led to an improved product quality based upon the lower levels of warranty returns, and positive feedback about the improved product reliability, from our customers.

We realized progress in our newest market, the processing of stem cells from bone marrow. As we have begun to gain a greater understanding of this market, it has become evident to us that the MXP is best suited to laboratory applications, while the Res-Q has exciting potential as a point of care device. The market introduction of our MXP system, which is used to concentrate stem cells from bone marrow, is going well. Our initial MXP program is with SpineSmith, a leader in the use of cell therapy for treatment of orthopedic injuries. We are pleased with the initial response to the device, and SpineSmith has indicated that it expects to secure increased placements of the MXP during the quarter.

I'd like to update you on the MXP's involvement in a Phase II 30 patient clinical trial at the University of Naples in Italy, announced in January. The trial is studying the utility of bone marrow derived stem cells to restore blood flow to the affected limb in patients with critical limb ischemia, or CLI, hopefully eliminating the need for amputation. We expect training to begin in the next several weeks, with an initial patient treatment occurring sometime this summer. The first phase of the trial will involve 10 patients.

We continue to increase our presence in the clinical and professional arenas. We are pleased that our devices are the subject of several abstracts being presented at this week's International Society for Cellular Therapy, or ISCT, annual meeting in San Diego. These include findings from the Company's studies that demonstrated essentially all of the stem cells are recovered from bone marrow following processing with the MXP, and virtually no loss of cell viability during the cryopreservation process with the BioArchive.

A second study involving the Res-Q showed that the device demonstrated the ability to efficiently separate stem cells from bone marrow aspirate, and platelet rich plasma from whole blood. In addition to the data presentations, we have a booth demonstrating our products at the ISCT, and having visibility at these events not only demonstrates the efficacy of our devices, but also furthers our presence in the industry.

With respect to our ThermoLine business, we continue to view this as not being part of our long-term growth strategy. We continue to explore a number of divestiture opportunities. This is proving to be a challenge in the current economic environment, particularly given that we want to maximize the value of this business. In the meantime, we are initiating an outsourcing manufacturing program for the ThermoLine business, and are targeting to have it in place by the end of the second quarter of fiscal 2010. We expect this outsourcing program will decrease manufacturing costs and improve on time product delivery.

Turning now to our financial results for the quarter, let me begin by sharing our results, and then I'll follow with the factors behind them. Revenues were $5.1 million, this compares with revenues of $5.6 million in the third quarter a year ago, and $6.1 million in the prior quarter. BioArchive and AXP disposable revenues were $2.7 million versus $2.8 million a year ago, and $3.4 million in the prior quarter. In addition, our total disposable revenue of $2.8 million reflects a decline in CryoSeal disposable revenues, which were $87,000 versus $218,000 a year ago.

For the first nine months of fiscal 2009 total revenues were up 7% to $15.8 million, compared with $14.8 million for the same period in fiscal 2008. The primary driver was an 11% increase in disposable revenues, which were $8.4 million in the first nine months of fiscal 2009 versus $7.5 million in the same period a year ago. Total cancellable backlog at the end of the quarter was approximately $900,000.

Several factors impacted our top line performance during the quarter, including the overall macro economic environment, which has had an impact on all segments of our business, as cord blood banks, hospitals, and other customers had deferred much of their capital expenditures and new commitments until they have better visibility into the timing of a turnaround. Devaluation of foreign currencies has also negatively impacted sales in certain countries, such as Korea, Japan, Russia, and the CIS countries, as the purchasing power in these geographies versus the dollar has declined. Also we believe that we experienced some residual effect from last year's recall during the quarter. However, as we've discussed today, we believe we've made meaningful strides in this area, and that we'll start to see renewed interest in our offerings as we demonstrate progress in the quality area.

Despite these factors and the uncertainty as to when the economic environment will improve, we successfully closed three new AXP accounts in the quarter, and we feel confident in our ability to grow AXP revenues in fiscal 2010, as our pipeline remains strong. It includes a number of prospects that are using a competitive offering, to which the AXP represents a cost savings for them, as well as potential customers located in eastern European countries that, at least to date, have not been significantly impacted by the economic environment. In fact, several of these prospects have completed their evaluation of our offering and have earmarked funding for purchase.

Moving on now to gross margin, it was 35% in the quarter, versus 27% a year ago and 36% in the prior quarter. This reflects lower warranty costs and the impact of higher margin royalty revenues during the quarter. In addition, gross margin in the third quarter of last year was negatively impacted by a cost of $386,000, related to the February 2008 voluntary recall of AXP bagsets.

In our last call, we spoke to the progress we were making on the operating expense front and this continued during the third quarter. Operating expenses in the quarter were $2.9 million or a roughly one-third reduction, versus operating expenses of $4.5 million a year ago. This compares with operating expenses of $4 million in the prior quarter, which included approximately $400,000 in severance accrual expenses.

The comparison versus a year ago includes some one time expenses in the third quarter of last year, including $300,000 in legal fees related to the renegotiation of our GE agreement and the voluntary recall. In addition, stock compensation expense last year included $420,000 related to restricted stock awards to our former Chief Technology Officer.

Our ability to lower ongoing operating expenses reflects several factors, including the reduction in headcount we effected in January, our reduced expenditures related to the equine market and tighter controls of spending for new product development. I should note that some incremental spending will occur in the fourth quarter, primarily associated with the release of our new product, the Res-Q. However, we do not expect those expenses will persist into Fiscal 2010.

In terms of our bottom line, we reported a net loss of $1.1 million, or $0.02 per share. This compares with a net loss of $2.7 million, or $0.05 per share a year ago and a net loss of $1.7 million or $0.03 per share in the prior quarter. I should also point out that year-over-year we experienced a decline of approximately $220,000 in net interest and other income reflecting lower cash and short-term investment balances and interest rates. So, despite a drop of roughly $750,000 in revenue, and other income versus a year ago, we were able to reduce our net loss by 60%.

Our ability to manage expenses is evidenced on our balance sheet, as we have lowered our rate of cash burn, even in a difficult environment. We ended the quarter with $17.7 million in cash and short-term investments. This compares with $18.8 million at December 31st, 2008 and $25.3 million at the end of fiscal 2008.

Based on our performance to date, and given the factors that we've described today, we now believe that revenues for fiscal 2009 will be essentially flat with those in fiscal 2008. Nevertheless, because of our initiatives to reduce costs and stabilize the Company, we firmly believe that our cash position is more than sufficient to fund our growth strategies.

Through implementing the focus and direction articulated by Mel earlier in the call, we continue to be focused on achieving profitability during fiscal 2010 by realizing a combination of revenue growth and continued expense management while maintaining a solid, balanced balance sheet.

Thank you again for joining us today. I'll turn the call back to Mel for some closing comments before we open up the call to your questions.

Thanks, Matt. I want to again express my optimism about the Company's long-term future. As you have heard today, while our top line growth was not what we had expected, we realized a number of important accomplishments during the quarter. These included achieving a significant reduction in operating expenses, implementing improved quality systems and processes and hitting key milestones in our product pipeline, with the roll out of the MXP and readying for the Res-Q introduction in the next several weeks.

We are fully aware that the Company has hit some rough patches in the past couple of years. However, I am confident that we will develop and execute the strategy and action plans necessary for the Company to reach its growth objectives. I look forward to sharing our progress with you and want to express my appreciation for your support. Thank you again and we'll now open the call for your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Steve Brozak, of WBB Securities.

Hey, good afternoon, gentlemen and welcome aboard, Mel. A quick question here; in terms of interest and demand, are you seeing any kind of situation where price sensitivity or anything like that might boost sales, in terms of volumes, especially on the bags? Is there anything like that, that might give you any kind of prospects for increased sales, should we start to see a change in currency exchange rates?

Are you starting to see any kind of more questions about technology, calls coming in, even though they don't lead to immediate sales? Because, you know, the idea is to position yourselves so that when and if we do get an economic recovery, you'll start to see the product, obviously, sell more robustly. Any color on that?

Steve, it's Matt. In terms of pricing, I'll start with that question, we have a pretty good handle on various markets and the pricing in those markets. I think we're competitively priced now. I don't anticipate any significant moves in pricing, changing any immediate buying patterns in the near future.

In terms of technical interest in the Company and the ability to have sales respond rapidly when the market recovers, we are well positioned, in the market, for a strong recovery as the market comes back, especially with the new products in the bone marrow area.

Okay then I'll follow it up with one last question and jump back in the queue.

Obviously, people are going to care about one thing and one thing; quality control, quality control and quality control. You know, that's obviously been something that's been a central focus. What are you looking at to do differently than what was done in the past? Just give us the top three items.

Okay. I think most recently, there is a number of things that we've done. And as I mentioned in the prepared comments, we're getting positive feedback from our customers and we're seeing lower warranty costs, which I think are really important indicators.

But a couple of the things that we've done is we've implemented a more robust supplier quality, qualification in process; developed and implemented a formal field action process, to insure complete and timely notification to our customers and the regulatory agencies as needed. And then, as I also mentioned in the comments earlier, we've brought on some highly qualified folks to fill some critical open quality and regulatory positions within the Company.

We also have gone through a pretty rigorous regulatory compliance training program that was provided to all of the Company personnel that we have and that's everybody, whether you're actually, formally in quality or not. And we've also implemented a new quality management software suite that is very comprehensive and robust.

So, we've done a number of things and we're also much more focused on routine communication with our customers on their operations and positioning ourselves closely to them so that we can monitor and be responsive and continue to improve quality in lock step with them.

I'd add one thing that we're working on and that is the old adage of doing things right the first time is something very important. It's not only what the quality control department does to check how things are done. It's also building excellence into the manufacturing process on the front end. And that's where we're going to be spending a lot of our time, making sure that we do things right the first time, instead of having to clean up the mess later. That's not the way we're going to run the railroad.

Got it; thank you, gentlemen. Let me jump back in the queue.

(OPERATOR INSTRUCTIONS) We'll wait one moment while you poll for questions.

Our next question comes from [Jerry Carnell at Carnell Enterprises].

Yes, welcome aboard, Mel, Matt. So the M&M boys now, huh?

I've got a question. If you could go over a little bit of market size, domestically, and worldwide in both the Xpress and in the new Res-Q and maybe give us a little flavor for the gross margins on both those different products, if one is a much better product, more than the other.

For the AXP and, I'm sorry, the second one was which?

The Res-Q.

Oh, okay. The AXP market, when you look at the numbers we talked about early on, anything that's a cord blood collection, in our opinion, is [right] for the AutoXpress. So, approximately 325,000 collections occur worldwide each year. So, the pricing on that can vary throughout the world. But that in and of itself is somewhere between a $30 million and $40 million market.

As you know, we're probably 30% of the market today. We see an opportunity, again as we talked about, as the economy gives us an opportunity, we've got a lot of growth that we can secure here, in this business, even though it's not a huge market.

Domestically, I would say we're more well penetrated domestically than we are internationally. Pricing is a little bit better right now, domestically, than it is internationally for cord blood. So, that kind of sizes the market for you, kind of gives you a sense of where we stand. Although we've got a strong market share, we believe there's a real opportunity to increase our share in the near-term.

The Res-Q is a little bit more difficult to quantify but early indications are that the opportunity for a point of care cell processing disposable, such as this, with the high recoveries, has a really meaningful opportunity in processing bone marrow for a number of indications. And there are some experts out there, Robin Young and others, who have quantified the bone marrow processing market opportunity, in the billions. And that is based upon the number of procedures being performed today in some of the targeted therapies and indications such as orthopedics, critical limb ischemia, myocardial infarction and a number of other indications that have high procedures.

The Res-Q, right now, we're targeting initially the orthopedics indication and that is, as you know, there are 300,000 or 400,000 procedures a year, involving spine, for example. And then many more for knees and hips and other areas. So, it's just an enormous market and it's really a matter of how quickly we can convert from conventional applications to cell therapy, using stem cells.

And so, it's an enormous market and we are expecting great things. It's just evolving right now, through our partnership with SpineSmith, beginning with orthopedics. But that Res-Q and that technology, we think, can be used, possibly with adipose as a source, as well as peripheral blood.

So the Res-Q application, we are very excited about the potential of that and the market potential.

All right. Gross margin, in both products, they're both disposables. Any one better than the other?

Well, I think, if you were going to bring up the word commodity, I would say, cord blood is, since there's a fair amount of manual processing going on, I would say pricing pressure is greater in cord blood. And the opportunity for value pricing is much greater with bone marrow and some of the regenerative medicine. The procedures that we're replacing give us an opportunity to extract a lot more value with the Res-Q.

But we do see some opportunities to improve our margins, even in the cord blood space, through sourcing and cost reduction initiatives that we have under way that we're hoping to see the benefit of in 2010.

So clearly, the Res-Q and the bone marrow market represent higher, significantly higher gross margin opportunities for us in the very near future; magnitudes higher.

Which will be cheaper to manufacture, the Xpress or the Res-Q?

Well they're both pretty close, actually.

All right. Mel, I'm going to ask you a question, okay? I would say that the number one problem that Thermogenesis has had in the last couple of years is similar to what you just announced, that 2010 will be a profitable year. Well we've heard that probably for the last five years, and we've lost total credibility with the Street.

How, as the CEO, will you change that, and how will you take a beginning PR problem and turn it into an opportunity? Because we have literally been the best untold story in the world, and it's your job to tell the story. How are you going to do that Mel?

Well you've got to do it by getting on the Street, and getting out and telling the word. And we're heading out Monday for a week on the road, we're going to San Francisco first, I think as you know, and we're then going to New York from there. We've been to Austin, Texas already and we're heading to Tucson to see CBR from there. And so it is something that we've got to get out and press the flesh, and see the investors, and do a better job in our overall communication of how the company's doing. I think we've got some good news stories to share, especially with the new products that we're launching.

I think you'll see a sizeable lift in terms of us becoming more and more present on the Street. So that comes from me speaking at conferences, being in front of customers, etc., so we'll definitely have an improvement there.

I think the other thing is that the profitability in 2010, we're not only going to do it with our existing products, we've got new products, as we mentioned; new markets we're going after, as well as business development is a very important piece of our strategy. There are a lot of customers out there that need stem cells, and we have the wherewithal to be able to get them for them, and put them together with their particular technology. And that puts us in a marvelous position to enjoy the growth in the market.

It's not just using our existing strategy of going after cord blood for infants' use of stem cells later. There are many other opportunities where stem cells can be used with other companies and their own particular technologies, and we're already talking to some of these guys. So I think that's really where the lift is going to come from.

Last question, then I'll let you go. How are we going to get, when CNBC or Wall Street announces something to do with stem cells, how is Thermogenesis going to be acknowledged as one of those players, and probably the best player, in the stem cell industry?

Well I guess it really comes down, I'll let Matt chime I too, we have to be careful on what the story is all about. If it has to come from embryonic stem cells, which is really, this is I guess the topic of the day. We are not in that particular field, we're on the adult side. So if there's an adult story to be printed, we should be there. And the way we're going to do that is by creating a scientific advisory board, and making it vital and relevant. And I'm not exactly sure where that is right now, but that's clearly a key component of our outside strategy of having physicians and scientists and researchers in the field talk on our behalf. But that's part of the overall strategy of moving the awareness of our company up.

All right Mel, thank you very much, and good luck to you.

Okay, thank you.

Thanks Jerry.

Now I would like to turn the conference back over to Mr. Engle for any closing remarks.

Well thank you for being on the call today, I look forward to future opportunities to meet and speak with you.

Thanks everyone, bye-bye.

The conference has now concluded, thank you for attending today's presentation. You may now disconnect.