Thermogenesis Holdings Inc (THMO) 2010 Q2 法說會逐字稿

Hello. This is the Chorus Call operator. Welcome to ThermoGenesis fiscal year 2010 second quarter results conference call. (Operator Instructions). If you should need assistance during the conference, please signal a conference specialist by pressing star then zero on your touchtone phone. For your information, this conference is being recorded.

I would now like to turn the conference over to J. Melville Engle, Chief Executive Officer. Mr. Engle?

Welcome to the ThermoGenesis fiscal year 2010 second quarter results conference call.

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.

Thanks, Mel. Thanks and good afternoon, everyone. It's good to be here today with Mel, and I just wanted to say a couple of things before Mel starts into the comments for the call.

So he'll begin today with a review of important recent events, including our continued achievement of improved results and the enhanced distribution agreement with GE Healthcare for our AutoExpress cord blood processing product. I will then follow with a review of our financial performance, our outlook for the balance of fiscal 2010 and an update of key operational initiatives.

Before turning the call over to Mel let me remind you that the statements made during this conference call that 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 business plans and other risks detailed from time to time in the Company's filings with the SEC.

Mel, you want to go ahead?

Thanks, Matt, and good afternoon, everyone.

Since our last call we have made great progress against the key components of our strategy to realize leadership in the adult stem cell processing and storage markets, and let me tell you what they are -- first, generating growth in existing indications in markets with our core offerings; expanding the geographic presence of these core products; growing our MXP and Res-Q business through our selling technologies relationship as well as through other parties for indications outside of orthopedics; adding new distributor agreements for our product portfolio to increase our presence in key geographies outside the United States, including Europe, the Far East and other potential growth markets; launching line extensions of our existing technology into new markets such as adipose and platelet-rich plasma; to divesting non-core businesses such as CryoSeal while outsourcing product manufacturing to streamline operations and improve gross margins; and lastly, continuing successful management of expenses.

An important accomplishment reported today was the signing of a new and enhanced distribution deal for our AXP product line with GE Healthcare. The completion of this agreement followed a solid second quarter in which we generated sequential revenue growth of 15% versus the first quarter of fiscal 2010 and reduced our net loss by 33% during the same period. We also progressed on other elements of our growth strategy, and I'll speak to the new GE Healthcare agreement and other key events in a moment, but I'll begin with a review of our revenue performance for the quarter.

Let's begin with total revenues. As I mentioned, total revenues for the second quarter of 2010 increased 15% to $6 million versus total revenues of $5.2 million in the prior quarter of fiscal 2010. Sales were relatively flat versus the second quarter a year ago. Year-over-year total revenues in the second quarter of fiscal 2010 included sales of the MXP and Res-Q, which were not being marketed a year ago. These gains were offset by declines in the BioArchive and AXP sales due to the timing of BioArchive orders and lower AXP device sales.

Switching to disposable sales -- and these sales have the highest gross margin for us and as such are key to the Company's profitability -- we saw a significant jump in our disposable product business in the second quarter of 2010 versus the first quarter of 2010 with an increase of 16% to $3.5 million, driven primarily by the performance of our AXP disposable products. Our bone marrow disposable product revenues were essentially flat with the prior quarter, and this reflects the rollout of Res-Q in the second quarter offset by the normalization of the MXP orders after its initial launch. We expect to see significant increases in Res-Q sales volume going forward.

So summarizing, then, for the six months, total revenues for the first six months of fiscal 2010 were $11.1 million versus $10.6 million in the first half a year earlier. Disposable revenues increased 19% in the first half of fiscal 2010 to $6.6 million versus $5.5 million in the first six months of the prior fiscal year. An important thing to note -- disposable sales accounted for 59% of total revenues in the first half of fiscal 2010 versus 52% of total revenues in the first half of fiscal 2009.

We have made steady gains in our overall financial performance from the beginning of fiscal 2010. Over the last six months, quarter-to-quarter sales have grown from $4 million in Q4 fiscal '09 to $5.2 million in Q1 fiscal 2010 to $6 million in Q2 of fiscal 2010. Similarly, operating losses have been reduced from $3.1 million to $2.2 million to $1.4 million over the same three consecutive quarters. We are turning the Company around and expect to see breakeven results in the third quarter, with profitability being reported in the fourth quarter of fiscal 2010.

And now a few comments on the GE Healthcare contract. We're delighted with the signing of the new distribution agreement with GE Healthcare. It is a two-and-a-half-year deal and includes provisions requiring GE Healthcare to spend incremental marketing and market research dollars. The contract also has mutual incentives for sales growth, product quality and delivery.

We believe this recommitment between GE Healthcare and ThermoGenesis will propel us to increased AXP sales. It provides continuity for our existing customers as well as for the number of core blood banks that are currently conducting evaluations of the AXP system with GE Healthcare. The relationship between our two organizations is solid, and we believe GE Healthcare views ThermoGenesis as a much stronger company today in terms of quality, management and direction. By signing the agreement, they have made a renewed commitment to supporting the AXP system and ThermoGenesis.

It is important to note that we spent a substantial amount of time evaluating other potential distributors for the AXP in parallel with our evaluation of renewal with GE Healthcare. After intensive negotiations, we believe we got the best deal possible. Along the way we identified other possible partners that may wish to sell our AXP products in geographies not currently covered by GE, and these discussions are still ongoing.

The scope of our diligence efforts encompass not only the AXP but also included an evaluation of possible Res-Q and MXP distribution partners. Therefore, we expect to broaden our MXP and Res-Q bone marrow franchises through the appointment of new distributors over the coming weeks and months. Expanding the use of Res-Q and MXP's processing technology footprint beyond orthopedics is essential to our growth strategy.

Speaking of Res-Q and MXP, we continue to make good progress with our other key initiatives, including those supporting our offerings in the bone marrow sector. We expanded our collaboration efforts with Selling Technologies, who is our distributor for the MXP and Res-Q devices in the orthopedic market, and are setting the stage for much higher sales levels as they penetrate their existing geographic base and then roll out their footprint across the US and elsewhere.

Working with Selling Technologies, we recently completed protocols for the clinical evaluations that Selling will be conducting soon with both the Res-Q and MXP products. We expect these study designs will be submitted to the appropriate hospital IRBs by the end of the current quarter. Enrollment activity is scheduled to begin during the third calendar quarter of this year.

Turning to our R&D initiatives, let's start with adipose tissue. Line extension of our existing products into new indications is an integral element of our growth strategy.

One example of our efforts in this realm is the material transfer agreement we signed with the GID group in December for the processing of adipose tissue with our MXP technology. GID's program is moving forward. Their team from Spain visited ThermoGenesis in early January as part of the technology transfer plan and for training. We anticipate the clinical phase of the program will be under way by mid calendar 2010.

The principals from GID are a group of plastic surgeons recognized as the first scientific contributors to explore adipose tissue as a rich source of adult mesenchymal stem cells for the regeneration and repairing of body tissues. We believe adipose tissue will continue to emerge as an important source of therapeutic cells for regenerative medicine, particularly in the fields of plastic, reconstructive and orthopedic surgery. Our goal is to contribute to and grow this exciting area by commercializing the tools doctors and companies will need to isolate the therapeutically important cells from adipose tissue.

We are enthusiastic about this opportunity to collaborate with GID and believe this program will demonstrate the utility of the MXP as a scaleable technology platform capable of efficiently processing a large volume of adipose tissue in a fast and easy-to-use procedure.

Regarding the critical limb ischemia trial in Italy, the CLI trial being conducted at the University of Naples with our MXP system has now enrolled about one fourth of the "up to 30 patients" planned for the study. Enrollment started in September of 2010. The clinicians are using the MXP to process bone marrow aspirate to prepare stem cell concentrates which are then injected into ischemic tissues of the lower limb with the goal of restoring blood circulation. The patient cohort will under go six and 12-month follow-ups to determine the impact of the treatment. This trial represents the first human use of the MXP for the treatment of CLI patients. The early outcomes suggest that the patients who have been treated are responding consistent with clinical expectations.

Shifting to our efforts with platelet-rich plasma or PRP, consistent with our line extension strategy this week we filed a 510(k) with the FDA seeking market clearance for the use of our Res-Q technology in the preparation of PRP from peripheral blood. The US PRP market size is estimated at $150 million per year. PRP is used for its rich content of growth factors to enhance wound healing.

In this clinical application, a small amount of the patient's blood is collected and processed to prepare a platelet concentrate which is then re injected where the physician wants the enhanced healing to occur. We have demonstrated in our laboratories that Res-Q technology is well suited for preparation of PRP. While we are waiting for the regulatory process to be completed, we will consult with key opinion leaders and conduct market research to prepare for this market opportunity. If cleared by the FDA, we hope to launch this product by the end of the calendar year.

And now to speak about two important clinical papers positively profiling the AXP's performance. Recently two leading journals published papers that highlighted the AXP as a state-of-the-art cord blood system. Dr. Pablo Rubinstein, who is the head of the National Cord Blood Program for the New York Blood Center, authored a comprehensive review on the current methods of cord blood banking in the journal Bone Marrow Transplantation. Dr. Rubinstein is recognized globally for his expertise and key contributions to the development of cord blood transplantation technologies.

In his paper, Dr. Rubinstein presented data on more than 6,000 cord blood units processed by the New York Blood Center using the AXP. This data confirmed the remarkable efficiency of the AXP in readily capturing in excess of 97% of the viable stem cells in the cord blood units. The paper highlighted the AXP's efficacy versus competing products in the market. He also presented data on our BioArchive, demonstrating that it provided the highest recovery of viable cells after thawing versus other methods he reviewed--and clearly this is going to be used by our sales force.

Secondly, Dr. Pilar Solves from Valencia Transfusion Center in Spain was the lead author of an article reporting the results of a study using three different volume reduction methods, including the AXP. The article appeared in Cytotherapy, a journal of the International Society for Cellular Therapy or ISCT. Dr. Solves et al. concluded that the AXP system was a highly-efficient method for red blood cell depletion while achieving high stem cell recovery. And the authors noted -- and I quote -- "AXP has the advantages of being an automatic and functionally closed system that shortens and better standardizes the proceedings," unquote.

We will continue to pursue similar opportunities during the year. For example, as part of our relationship with Selling Technologies, we'll be submitted joint scientific abstracts on the performance characteristics of the MXP and Res-Q in the inter-operative point of care setting for the upcoming ISCT meeting in May.

Okay, shifting gears to other matters, we were delighted to announce the appointment of Craig Moore as an addition to our Board of Directors in December. Craig has more than three decades of health care industry experience, including the stem cell collection sector, and has worked with leading health care companies such as American Hospital Supply and Baxter. In his short time with us Craig has already provided valuable insight, and I look forward to his counsel in areas such as sales, marketing and business development.

We continue to monitor our listing requirements with NASDAQ relative to our stock price. We confirmed we currently meet the requirements for an additional six month extension period during which to achieve the minimum bid price of $1 a share for our common stock.

Our approach to get the stock over $1 is as follows. Within this additional six month period, we'll have reported the results of our critical financial and operational milestones for the third and fourth fiscal quarters. Our milestones have been outlined to the Street over the past several quarters. Our results will demonstrate continued revenue growth from the expansion of our distribution channels and the reduction of operating expenses, which will be in line with revenues required to break even, and profitability for ongoing operations.

We believe these achievements will demonstrate credible evidence of a sustained turnaround of the Company, and I would hope the market would respond accordingly in its valuation of the Company and our stock price, enabling continued listing on NASDAQ without recourse to other measures. However, we will continue to monitor the market's response to our efforts and take necessary and/or required steps within our control to maintain our listing.

Before turning the call back to Matt, I want to briefly review what we see as our key performance and operational milestones for fiscal 2010 -- first, continue to grow revenues and achieve operational efficiencies as we manage the Company towards breakeven in the current quarter and profitability in the fourth quarter of fiscal 2010; second, capitalize on the new opportunities available to us through our enhanced distribution agreement with GE Healthcare and complete additional agreements with other health care industry leaders covering our cord blood and bone marrow offerings; third, work collaboratively with Selling Technologies to broaden the penetration of MXP and Res-Q in the orthopedic and regenerative medicine areas; fourth, expand our distribution relationship and partnerships, particularly as we broaden the market opportunity for Res-Q beyond the orthopedic market to sectors such as adipose, PRP, cardiovascular and critical limb ischemia; fifth, achieve our quality goals and the important operational initiatives related to outsourcing of manufacturing and divestiture of the CryoSeal business that Matt will update you on during his comments.

I am pleased with the substantial progress we have made to date during the first half of fiscal 2010. Our sales of $11.1 million have grown 22% over the preceding six-month period. The Company's improved financial performance during the first half of fiscal 2010 and enhanced AXP distribution agreement with GE Healthcare are evidence that we are on track with our growth strategy as we move towards profitability in the fourth quarter. These six-month results are a compelling scorecard of the new management team and reflect major positive changes within the Company and with our products and customer service.

Thank you again for joining us today. I'll now turn the call over to Matt.

Thank you, Mel. And I apologize for wrestling the call away from you at the beginning of the call, but the operator I think had intended to introduce me to start out with the forward-looking language.

So thanks again, Mel, and since you already addressed the revenue performance during your comments, I'll focus on other metrics of our quarterly results, beginning with our gross margins which, as we discussed in the last call, are an important point of leverage as we drive to profitability during the current fiscal year.

Overall gross margins for the quarter were 34%, which compares to 30% in the prior quarter and 36% in the second quarter a year ago. Our margins in the second quarter of 2010 reflect the impact of costs related to AXP device and disposable manufacturing improvements and one-time start-up costs related to our transition of the ThermoLine manufacturing.

These manufacturing variances totaled 4 basis points of our cost of goods sold during the quarter, down from 9 basis points in the prior quarter. Adjusting for these variances, product gross margins were 38% in the second quarter of 2010 and 39% in the first quarter of 2010. The expected continued reduction in these manufacturing variances and increased high-margin disposable sales are the key elements of our plan to improve gross margin in the next two quarters.

The other important element of our strategy for reaching profitability is the management and continued management of operating expenses. Operating expenses in the quarter were $3.5 million, a decline of nearly $300,000 versus the first quarter of fiscal 2010 and nearly $500,000 versus the second quarter a year ago. These significant reductions in SG&A reflect severance expenses in prior quarters and lower overall compensation costs in the second quarter of 2010.

At the same time, we continue to maintain our investment in research and development, where our spend has been relatively consistent quarter-over-quarter.

From the big picture viewpoint, overall operating expenses year-to-date were lower by nearly 10% versus the first six months of fiscal 2009. As we indicated in our last call, we expect to see continued progress in this area during the second half of the year and believe we should be able to maintain quarterly expenses in the range of between $3 and $3.5 million through the balance of the year.

The improvement in revenues and gross margin, combined with our lower operating expenses, resulted in a 33% reduction of the Company's net loss versus the prior quarter. Our net loss in the second quarter of 2010 was $1.5 million or $0.03 per share versus a net loss of $2.2 million or $0.04 per share in the first quarter of fiscal 2010.

With respect to liquidity and capital resources, we ended the quarter with $11.2 million in cash and short-term investments. This compares with $13.1 million at the end of the first quarter. Our cash burn during the quarter was $1.9 million, which compares to $2.5 million in the prior quarter. With reaching breakeven and profitability on the horizon, we believe we have sufficient cash resources to fund our near-term growth strategies.

Before opening the call up to questions, I want to provide you with a brief update on our key operational initiatives. As we announced in early December, we have completed the manufacturing outsourcing of the ThermoLine product line. And with respect to our initiative to divest the CryoSeal business, we've made a great deal of progress with several interested parties and have established mid March as the deadline for the submission of bids for that business. We believe this timetable will put us on track to complete the transaction by the end of our fiscal year. Additionally, we hope to complete the transition for outsourcing the BioArchive equipment manufacturing before the end of our next fiscal year.

There are multiple benefits associated with these initiatives, including the ability for us to streamline our supply chain and production activities, lower the cost of production and achieve increased gross margins over time while we focus on larger and more immediate market opportunities.

In closing, we're pleased with the Company's improving financial performance and our ability to execute on the key elements of our growth strategy. We are achieving an increased market presence for our current offerings and are developing a product pipeline designed to accelerate revenue growth in the future. We remain on track towards profitability in the fourth quarter.

Thank you for joining us today, and we'll now open the call to your questions.

(Operator Instructions). Our first question comes from Steve Brozak at WBB Securities.

Well, congratulations, gentlemen. It seems like you're turning the corner here.

Basically the questions I've got are two. The first one is an integral part of turning that corner is basically winnowing down the backlog in terms of what you've got as far as sales go, and from the press release it shows that you expect to have the backlog pretty much addressed by Q3. Does that still hold true and is that also one of the ways -- one of the metrics you're using for being able to say that that's when you expect to get to break even?

Yes, Steve, this is Matt. That's right.

We expect to be able to fulfill the AXP Bag Set backlog that we pointed out in the earnings release during this third fiscal quarter, so it gives us good visibility on some of the revenue growth we need to march towards profitability.

Okay, and that leads me to a follow on. I assume that any deal that you would have cut with GE would have basically had some metrics in terms of min sales on their part in terms of what they have to continue to sell so that you can have some visibility going on forward, so it wouldn't be as if you were looking at a quarter where you've got, quote-unquote, break even then profitability then the next quarter would be a lumpy system. Is that also accurate?

There's a different formula in the contract which is based on a series of incentives that as the sales go up towards the peak of 25% or more that there would be a relaxation of the average selling price. But when you go through the arithmetic, if you're going to sales at that level and you relax the average selling price, that's an incentive for GE and also an incentive for us to see the numbers grow.

On the flip side, if sales fall below standard, as we say, then the average selling price will go up. So we have ourselves a methodology to keep everybody's interests very clearly on the table in terms of what we need to do going forward.

Okay, so there's never a perfect catch, but you have a situation now which basically provides for some standardization in terms of revenue and revenue recognition, which obviously brings us to a point, the difficulty in terms of revenues -- quality control. It's on the top of everyone's mind.

How comfortable are you in terms of having addressed every issue that can happen, and what are your statements as far as QC right now because obviously that's -- you guys keep quality control in there, and it looks like you basically have a straightforward formula.

Quality has improved dramatically over the last year and more specifically over the last six months, and more specifically over the last three months. It's one of those passions that we have as a company to make it better every day.

So I'd say that we're not totally covered for every imaginable thing because this is a medical device company and this kind of stuff happens and we're coming a long way. We are still working to perfect the overall recipe, but we're much better off than we have been.

You know, thinking back in fiscal 2008, we had two week goals. I mean, that's really the starting point to the point now where we're doing much, much better. We hired a new quality vice president, Jorge Artiles, who's an industry expert, and he's had a major impact on our quality functions and with our suppliers. So we're in the best shape we've been in in the quality area for, I don't know, forever probably.

Okay, well, I mean, you guys obviously are focused job one on quality control, so it's obviously on the top of everyone's mind. It seems self-evident on getting to your bottom line.

One last question and I'll jump back in the queue. On the BioArchive system, I mean, you've got the Rolls Royce as far as cryopreservation is concerned on systems. Can you give us some granularity on it? It is a significant ticket item but, at the same time, it does offer a competitive advantage and people are looking at, you know, well, stem cells, banking and such. What do you see that in terms of going forward? Give us some thoughts on that in terms of have there been more people expressing interest? Give us whatever you can on that, and I'll jump back in the queue.

Sure, Steve, this is Matt.

The Bioactive stands apart from really all other preservation technologies because of its ability to preserve and maintain cell viability. And when it comes to a transplant of cord blood into a patient, there is no more important metric than the number of cells and the viability of the cells, and so that's what the BioArchive does best.

We think that certainly on the public banking side there's an acute appreciation for that, and that's why you see more BioArchives in public banks than anywhere else. Private banks, I think, as they start to understand the FDA and regulations are going to apply to them sooner than later, that they're going to have to meet the standards that public banks meet in terms of GMP and potential licensing of cord blood banks.

So we see a bright future for the BioArchive technology as this business grows or as this market grows. We're always looking for ways to reduce the cost. You did mention it's a big-ticket item. You know, Rolls Royces and top-quality products often cost more, you pay more for them, but certainly we see opportunities through our outsourcing efforts and continued streamlining to bring those costs down to keep that product competitive. So we're working both angles, and we think the BioArchive has a great future.

Great. I'll jump off, and good luck and congratulations.

Thanks a lot, Steve.

The next question comes from [Jerry Cornell], private investor.

Yes, guys. It looks like you had a pretty good quarter there.

I've got a question on the GE deal. You sound like you had a couple of people who were interested in maybe becoming our distributors, but you chose GE, I'm guessing, because you made the deal a much better deal than it was before. Does that deal start on January 1st of 2010 as opposed to the end of the other contract, which was January 1st of 2011?

The effective date of the contract is February 1, 2010, so it replaced the existing -- it's pretty much an amendment to the existing contract but with a new renewal date.

Now, some of the other companies that might have been interested, was there any way to also engage them in selling the products away from the territories that GE might be handling?

Yes, we mentioned that in the conference call script, I think, that is, that we've got geographies around the world that GE does not necessarily have a footprint in, and we're looking for distributors for those sections of the world.

And as we went through the negotiation process, we found parties that were very interested in taking on different parts of the world that GE doesn't have, and we're in conversations with them still. And I'm cautiously optimistic we'll be able to get something going there before too long.

All right, terrific. Thank you very much.

Thanks, Jerry.

Thanks. See you, Jerry.

The next question comes from Paul Sonz, Sonz Partners.

Good afternoon, gentlemen.

Hi, Paul.

I'd like to ask you if you could expand a little bit on the relationship with GID, not so much into the relationship but into the ability to your interest in the adult stem cell market coming from fat tissue and the ability to, I guess, change your machine in a way to address that potential market.

Well, the principals involved with GID are plastic surgeons that basically discovered the fact that adipose tissue is a rich source of stem cells, and they've been intimately involved with that technology from the get go and been evaluating different device manufacturing opportunities or companies to deal with. And so after a lot of back and forth, they've locked in our MXP technology because they believe that our separation technology can separate a lot of adipose tissue, a lot of stem cells from adipose tissue in large quantities effectively.

We're very early in the game here. We've just recently sent MXPs to them in their Majorca, Spain operation, and they will be doing pre-clinical work. So it's not like we're going to be doing adipose separation work in humans right away, but I believe that the relationship between the two companies will work towards a collective answer that will hopefully pan out for both companies.

But we've got some more work to do, and we're just excited about the opportunity to get started with them and we'll see where it goes from here.

Any timeline on how long you think it would take to make that adaption?

I think we're still early on in the conversation. We really have to show proof of concept. We believe we've got the right answer, but they've actually got to see it in practice.

They were out here a couple of weeks ago kicking the tires and looking at the system, and they seemed to be very happy with what they saw. Now they actually have to take it back home and try it out in reality.

So I'm cautiously optimistic on this one, too, but it's still early. I hate to oversell it right now, but we're on the right track and we've got the right people and I think we have the right strategy. This is a key part of our growth business, but we've got to do it right and we're going to do this thoroughly. It's just a little early to be able to comment about timing and that sort of thing.

Yes, if I could add to that, Paul, in terms of technology risk, I think we believe it's really pretty low for us. I think the adaptation of the MXP to process adipose tissue and derive a high concentration of viable stem cells, we've demonstrated that in our labs and we have high confidence we can do that.

I think one of the gating items is how quickly will or will adipose indeed become a significant and viable source of stem cells and perhaps be as viable as bone marrow is today. So we want to stay poised to capitalize on that opportunity should that become the case. There's a couple of different schools of thought around how that business model would unfold, but we think the GID group has the best handle on those aspects of this emerging market, so we're happy to be partnering with them on this. But we really do have high confidence that we've got the technological capability to process these cells as this market defines itself.

Now, is part of the agreement with GID that you share in the intellectual property developed. They're taking a machine and they're going to get very valuable experience. Do you share in all of that?

Well, at this point it's really our IP, and they're really focused more on the business model, centers of regenerative medicine, and perfecting that part of the project. So they're looking to us to develop the technology, and we would own that IP.

Okay. All right. Thank you very much.

(Operator instructions) At this time we show no further questions. Would you like to make any closing remarks?

Thank you for being on the call today, and we look forward to seeing you soon.

Thank you for participating in the ThermoGenesis conference call. This concludes today's event. You may now disconnect.