Thermogenesis Holdings Inc (THMO) 2011 Q2 法說會逐字稿

Good afternoon. This is the Chorus Call operator. Welcome to the ThermoGenesis Second Quarter Fiscal 2011 Results Conference Call. (Operator Instructions) For your information, today's conference call is being recorded. I would now like to turn the conference call over to Mr. Matthew Plavan, Chief Financial Officer and Executive Vice President Business Development. Please proceed, Mr. Plavan.

Thank you and good afternoon, everyone. With me today is Mel Engle, Chairman and Chief Executive Officer. ThermoGenesis continued to execute on its key growth initiatives during the quarter. Mel will review the highlights of our activities since our last call, and I will then follow with a review of our financial results and update our guidance for fiscal 2011. We will then open the call to your questions.

Before turning the call over to Mel, let me remind you that 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 these expressed in those statements including but not limited to certain delays beyond the Company's control with respect to the market acceptance and new technologies and products; delays in testing and evaluation of products; initiating and successful completion of clinical evaluations; and 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. I'll turn the call over now to Mel.

Thanks, Matt, and good afternoon. As Matt indicated, we achieved a number of important milestones in our growth strategy during the quarter, including the third conservative quarter in which we recorded a significant reduction in our quarterly loss versus the prior year, the addition of new customers, and progress with our clinical efforts also. We look forward to sharing these with you today.

In addition to our earnings release, I hope you had a chance to see today's press release announcing our agreement with Beike Biotechnology Company, Ltd., which I will refer to as Beike. We are very excited about that development, and I will cover it in greater detail later in the call.

We continue to see excellent progress in the ongoing development of the worldwide regenerative medicine market, as I will discuss. We have had meetings with a number of potential and existing partner organizations since our last conference call. There is a high level of enthusiasm about the emergence of regenerative medicine, and more importantly the potential value of our devices in helping to develop the market.

There have been two recent transactions of note in our sector. The first was a $350 million investment by Cephalon and Mesoblast, which is developing stem cell-based therapies for bone and joint diseases that includes the potential for additional investments based on the achievement of milestones.

The second was a $10 million investment by Cytori, by Astellas Pharmaceuticals. We believe the acceleration of these kind of strategic investments signal a growing recognition of the importance of recent clinical advances and cell therapy to the practice of medicine. We would also like to note the opening yesterday we saw in the Chronicle of the $123 million Dolby Regenerative Medicine Building at UC San Francisco.

Let me briefly reiterate the key elements of our growth strategy, and they include, first, growing revenues in the near term, but also putting programs in place that will accelerate top line growth in the next fiscal year and beyond. This includes geographic expansion particularly in China and the rest of Asia, and new product indications.

Second, leveraging our IT, scientific and engineering assets to create products that augment Res-Q in the bone marrow sector. This includes enhancing our regulatory clinical evaluation efforts on a worldwide basis.

Third, continuing to improve gross margin and lower manufacturing costs while realizing increasing leverage to improve bottom line performance.

And fourth and not least, investing in the Company through an aggressive business development initiative.

I will speak to each of these areas, but before doing so, I will address our financial performance for the quarter, and Matt will discuss it in more detail during his comments.

Our total revenue of $5.9 million for the quarter was comparable to that of the second quarter a year ago. Our loss for the quarter was $486,000, as compared to $1.5 million in the same period in FY10. Included in this loss are $300,000 in nonoperating charges including about $200,000 in strategic advisory fees, and approximately $100,000 in noncash stock compensation charges associated with the initial grant of restricted shares to Nanshan.

Year-to-date our revenues are up 16% versus the first six months of fiscal 2010, and we have improved in our bottom line performance by $3.1 million versus the same period last year.

Second quarter sales were lower than in the first quarter due to the last quarter's inventory build of about $1 million in AXP bag sets by GE Healthcare to meet certain customer contractual requirements. As we indicated on our last call last quarter, we did not expect this inventory accumulation to continue.

With respect to BioArchive System sales, we shipped six units, consistent with the second quarter a year ago. All of our BioArchive sales in the second quarter of this year occurred outside the United States including two units in Europe and the balance in South America. CEI sold four systems in Brazil to support a new government cord blood program in that country.

We are carefully monitoring cord blood activity in the United States and Europe. It is clear from our ongoing discussions with our distribution partners that the macroeconomic environment has resulted in a softening of sorts in this market in the past couple of quarters. Our conversations with GE Healthcare indicate our customers are seeing a decline in cord blood collections between 5% and 10% versus last year.

We are finding that with less discretionary income, fewer expectant parents are choosing to collect and store their newborn's cord blood. As a result, GE Healthcare has lowered their AXP forecast to reflect the current environment. As the economies in these regions improve, we expect collection activity to return to prior levels of growth.

This short-term outlook for the United States market is counterbalanced by what we believe to be the exciting market opportunities internationally, both for cord blood and bone marrow. In mid-January, I spent time visiting our distributors and customers in Europe, and Hal Baker, our Vice President of Commercial Operations, spent two weeks in China. Both of us had extremely positive discussions about the future of our business and markets we serve. We have also had members of our sales team in India, Turkey, Italy, China, Portugal and the Middle East over the past several weeks. Based upon what we have learned in the field, we continue to be encouraged about the many opportunities internationally for our cord blood and bone marrow products.

A perfect illustration of such opportunities is the product purchase agreement we announced today with Beike in China. Under this agreement, ThermoGenesis becomes the exclusive supplier of automated cord blood processing and cryo preservation storage equipment for Beike. This agreement is a major and an immediate step forward for ThermoGenesis. We expect to record initial AXP and BioArchive system revenues from this transaction in the second half of fiscal 2011, and believe the annualized revenue potential of this account could be in the seven figures. Beike is the leading biotechnology company with headquarters located in Shenzhen. They have offices in other major Chinese cities as well.

The company processes the full line of stem cell products derived from umbilical cord tissue, cord blood, and bone marrow stem cells. They have two standalone cord blood processing and storage facilities, and also have 18 specialized laboratories in China where cord blood collections are processed. Some of the laboratories are located inside the research departments of hospitals while others are located directly inside government blood banks. Beike also has two large standalone research and process laboratories.

In partnership with the regional government, Beike also maintains a bank for the storage of stem cells located in the China's Medical City in Jiangsu Province. This storage facility is capable of storing cord blood, cord blood tissue, and other IPS cells. Beike is poised to become the first cord blood bank in China to achieve accreditation from the American Association of Blood Banks, which is the AABB, for the processing and storage of cord blood and cord tissue using our automated AXP products.

In addition to our supply agreement, we have agreed to collaborate with Beike in the development of enabling technologies to maximize automation of the workflow process used in the expansion of certain kinds of stem cells from umbilical cord tissue and cord blood. Beike's proprietary processing and quality assurance technologies prepare the cells for the use in treating a variety of serious medical conditions including ataxia, brain injury, cerebral palsy, diabetic foot disease, lower limb ischemia, multiple sclerosis, muscular dystrophy, spinal cord injury, and optic nerve damage.

This type of arrangement is a prime example of our growth strategy. As companies like Beike further develop treatments using specific cell population from within the umbilical cord and cord blood itself, ThermoGenesis will be there to develop the tools and processes needed to enable cord blood banks and stem cell companies to perform repeatable, safe and efficacious manufacture of those therapies. In plain English, helping to bring life-saving therapies to the market means new disposable product opportunities for ThermoGenesis.

Turning now to our four-year bone marrow distribution agreement with Nanshan Medical Memorial Institute governing China and Hong Kong for Res-Q and MXP. We are off to a good start. During the quarter we met with eight members of their senior management team and board of directors to begin our go-to-market strategy. The next step will include regulatory and registration approvals for the five provinces we are targeting for Phase I of this program.

As a reminder, Nanshan is a leading progressive regenerative medicine company in China that distributes medical products and has operated hospital stem cell banks at research centers. Dr. Lu Daopei, Founder and Medical Director of Nanshan, is a world renown hematologist and expert in the field of hematopoietic stem cell transplants and highly regarded in China's scientific medical communities.

Also in China, Fenwal, our partner there, continues to advance the registration process for BioArchive and AXP. We are looking forward to record initial revenues through their efforts later this fiscal year.

All in, we are very pleased with our developments in China. We believe the Chinese cord blood market could equal or exceed the size of the US market in the next two to three years. We believe we have a first mover advantage there.

As indicated in today's announcement regarding the Beike agreement, we believe we have developed the strongest channels into the Chinese regenerative medicine market of any cell separation equipment provider. We also believe that our ability to gain a strong foothold in China will lead to similar successes at other Asian countries.

With respect to our international bone marrow business, Totipotent in India has provided the additional information required of the local regulatory officials, and we expect registration of Res-Q and MXP will occur in the near future. CEI in Latin America is also making progress on registration efforts and several other geographies.

Finally, Celling Technologies has established distributor relationships in several countries including Mexico and Turkey. In parallel with our efforts to obtain regulatory approvals, we made encouraging progress with our clinical evaluations of Res-Q and MXP.

First, in India, enrollment in the Critical Limb Ischemia, or CLI evaluation that we are conducting with Totipotent, started several weeks ago. We expect enrollment to be completed by March or April. As a reminder, this is a pilot 12-patient evaluation designed to established safety and efficacy of Res-Q for use in treating CLI patients. Totipotent will fund the majority of this effort.

Second, 20 patients have been enrolled in our CLI clinical evaluation in Naples, Italy, with 10 patients having received their second injection of cells using MXP, with eight of them having researched their six-month evaluation period, and four of them having completed their 12-month follow-up evaluations. Results of these evaluations are being reviewed now and we expect them to be complete and published in the middle of calendar 2011.

Third is the study being conducted by Celling Technologies in the United States. Their initial clinical evaluation for spinal fusion using Res-Q continues to enroll patients. Also, a study being conducted in conjunction with UC Davis has scheduled to begin enrollment in the near future. This will involve 12 patients in a nonunion trauma and long bone fracture study using Res-Q.

Turning to PRP, which is platelet rich plasma. Our partners, BioParadox, recently presented data from an animal study indicating that PRP shows promise as a potential treatment for heart attacks, possibly expediting cardiac function recovery while slowing the progression of congestive heart failure. While they did not use Res-Q for the specific study, they will be doing so in future cardiac studies in conjunction with our agreement we announced in October. We are awaiting response from the FDA on our Res-Q PRP 510(k) submission and have heard nothing definitive as of this call.

Before turning the call back over to Matt, I would like to update you on the status of our business development efforts. We are excited about the potential in the regenerative medicine market and believe there may be growth prospects beyond those we can develop organically. Stem cell therapies represent the potential to cure a number of serious diseases. More and more companies are pursuing and developing stem cell based treatments and clinical activity is growing. As a leading provider of devices and disposables for the processing and storage of stem cells, we feel we are well positioned to serve the needs of these companies and clinical organizations, and believe we can enhance our position in the market through partnering programs as well as our internally driven product development and geographic expansion efforts.

Over the past several months we have had encouraging discussions with a number of potential partners. We continue to evaluate opportunities to leverage our core technologies and to expand our capabilities in new markets, such as adipose tissue processing and additional core blood processing services. Although no new agreements are imminent, we expect that certain of these discussions will progress to our tangible collaborations this fiscal year.

In closing, we are looking forward to the second half of fiscal 2011 as we advance our sales product development and clinical strategies. We will be focused on adding new customers, distributors and partners, and the ongoing expansion of our presence in international markets, including China.

In addition, we will be supporting and expanding our clinical efforts to produce data that we believe will portray the value of our products. Thank you again for joining us today and I'll turn the call over to Matt.

Thank you, Mel. Before diving into our financial results, I want to mention that we are in meaningful discussions to sell the Thermoline business to an unidentified party. We hope to close the transaction by the end of fiscal 2011, but because we are still in negotiations, I cannot comment on any of the specifics of the proposed transaction at this point, but we will provide full details upon the closing of that deal.

As Mel noted, revenues for the second quarter of fiscal 2011 were $5.9 million, which were consistent with revenues of $6 million a year ago. Revenues reflected doubling of Res-Q orders from Celling Technologies of over $400,000 during the quarter. However, the softening in orders for AXP and BioArchive disposals offset this gain by $460,000. Revenues for the first six months of fiscal 2011 were $12.9 million, an increase of 16% over revenues of $11.1 million in the same period a year ago.

Gross margins for the quarter were 40% versus 34% a year ago, and 37% in the prior quarter. The improvement of 6 basis points over the prior year is substantial and is a result of our ongoing efforts to reduce our cost of manufacture. We have been successful in reducing the material costs of our products through more aggressive sourcing, and we are seeing the benefits of lower costs from our disposable contract manufacturing partners as we leverage our increasing volumes and offshore sourcing, and with outsourcing we require fewer employees. Lastly, we have improved the efficiency of our manufacturing, which has lowered our scrap and rework costs.

Operating expenses in the quarter were $3.1 million versus $3.5 million last year, and $2.7 million in the prior quarter. We are continuing to see the positive effects of reduced headcounts and other expense management programs. However, during the quarter these benefits were offset by noncash stock compensation expenses of approximately $300,000, attributable to the annual grant of options to our independent board members and the amortization of the initial grant of restricted stock related to the Nanshan distribution agreement. In addition, we reported [banker] and legal fees of approximately $200,000 related to our business development initiatives. Our research and development expenses, those declined 45% year-over-year.

A majority of the decrease was due to the costs incurred in the quarter ending December 31, 2009, did not recur in the current quarter, namely, $240,000 for the termination of the consulting agreement with the Company's former chief technology architect, $60,000 for quality system consultants, and $90,000 related to the hiring of a new vice president, chief of quality and regulatory affairs. Also, there was a $200,000 decrease in salary and benefits due to lower headcount.

Although we do not intend to increase research and development spending significantly in the near future, as development opportunities arise, we may increase spending if warranted. However, the majority of this $600,000 decrease was due to the recruiting, relocation and severance charges incurred in the prior year quarter.

Major components include $240,000 of expense related to the termination of the chief technology architect, which I mentioned previously.

Interest and other income in the quarter was $265,000 versus $11.000 a year ago. As we garnered a $244,000 grant from the Department of Health and Human Services that we discussed in our last call under Other Income.

Our net loss for the quarter was $486,000, or $0.03 per share. This compares with a net loss of $1.5 million, or $0.10 per share in the second quarter a year ago, and a net loss of $68,000, or $0.0 per share in the prior quarter. For the first six months of 2011, we recorded a net loss of $544,000, or $0.04 per share. This compares with a net loss of $3.7 million, or $0.26 per share for the first six months of fiscal 2010. As a reminder, the per-share numbers for all periods discussed today are split adjusted for our reverse stock split in August of 2010.

Our cash position of $10.2 million at the end of the quarter was flat with that of the prior quarter, and compares to cash at $10.7 million at June 30, 2010. Thus, for the first six months of the fiscal year, we have used only approximately $500,000 cash. As for the sales backlog, we had $750,000 in orders at the end of the second quarter comprised mostly of our cord blood disposables.

Turning now to our financial outlook for 2011, we expect gross revenues to increase approximately 10% over the prior year excluding Thermoline revenues for both years. The anticipated growth in bone marrow and BioArchive revenues year-over-year is expected to be offset by lower cord blood disposable revenues during the balance of the year due to the slowing US and Europe market demand. However, we believe it is not likely we will achieve profitability as previously indicated due in part to the aforementioned nonoperating charges intended to drive near term revenue growth and optimize our cost structure.

Beyond fiscal 2011, we remain confident in the global demand for our cord blood and bone marrow products and expect to experience significant growth in these markets following regulatory approvals.

In closing, I want to elaborate for a moment on Mel's comments regarding the business development environment. Although we are in the early stages of our expanded outreach, our conversations and interactions with potential collaborators have been encouraging, productive and strategically valuable. We have met with organizations that are potential distribution and product development partners and customers. Beike is an example of a customer and a development partner for additional products and services to be sold into the cord blood markets. Working with a progressive stem cell company like Beike on how to improve and further automate the emerging elements of the cord blood processing work flow represents a tangible and exciting opportunity.

In parallel to cord blood opportunities, we are evaluating ways to accelerate our growth in other areas of regenerative medicine, including how to better leverage our bone marrow capabilities in clinical practice, and how to best participate in the evolving adipose processing market.

We look forward to sharing our continued progress with you in these areas. Thank again for joining us, and now we will open up the call to your questions.

(Operator Instructions) Our first question comes from Stephen Dunn from LifeTech Capital.

I'd like to start off talking about your China strategy. I guess if you could clarify exactly how you are approaching that region. I have the Fenwal agreement and now congratulations on your Beike agreement. Are they competing against each other in that space, or is it separated geographically? And then when you throw Nanshan in the therapeutics, you know, the development market, where do you see your emphasis on growing China? Is it on, let's say the cord blood cell, the bone marrow, the banking or the therapeutic? What is your overall strategy for the region?

Well, let me take a shot at this one. The agreement that we have with Fenwal is an exclusive agreement for the BioArchive and for AXP. And as we reflected in our press release, we received a, I guess a waiver for this particular contract that we have with Beike with our partner, and the partner is Fenwal. So, we see that we have two major players that are going to be looking after the Chinese market from a cord blood standpoint, which is good. The more the merrier, I think, and Fenwal will be receiving a royalty, a minor royalty for that concession. So, we see that as there are more players in our camp on the AXP side than before.

Secondly, Nanshan is essentially on the other side of the fence, which is bone marrow. They will be exploiting their MXP and Res-Q business in China, so that allows us to have a portfolio product in China. And so we've got a strategy of basically covering all the bases in China. Downstream we will be looking at entering the adipose market as well.

Okay. So, for, let's say, cord blood, it sounds like you've got your -- you've placed the bets on the horses and that's it. We don't anticipate any more partners there for cord blood; is that correct?

Not at this time, but we are always looking at an opportunity. We don't have anything near-term.

Okay. The Nanshan agreement does not block out other agreements with other entities for noncompeting therapeutics; is that correct?

That's correct. It's a nonexclusive contract with them.

Right. And then adipose is just, I guess, getting out of the gate now?

Adipose is on our drawing board. We do not have products in that category yet, but clearly we see that as an area we need to pursue.

Sure. I guess I think this one might be for Matt, I'm not sure. If we take your gross margins, nice 40% margin past quarter, if your margin had been 48% you would have been break even for the last quarter just reported. You've guided to 55% to 60% gross margin over the long term. I was wondering if you could describe what is over the long term and let's say if you hit 50% gross margin, when do you feel that would be? Is it dependent mostly on the volume on the disposables, or what's going to drive that market improvement?

Yes, Stephen, you really hit the nail on the head. It really comes down to disposable revenue and increasing disposable revenues. Disposable revenues, their margins are anywhere from 50% to 70%, depending on the disposable we're talking about. And so over the next three years, as we really push our way into the global markets, most of the revenue we're going to be adding to the top line will be disposable revenues. So, each revenue dollar we add is going to improve our gross margin. The trajectory that we take in getting to the targeted amounts noted in the press release is something that we're not ready to get real specific on, but I think that the intent and the expectation is that over the next three years we're going to make pretty good progress as we reach into these new territories.

Let me add a couple of thing sin there. Really, the essence in disposables, while the percent disposable versus perhaps equipment is important, the mix. It is very important, but the more volume we get, the more attractive it is to the bag set manufacturers we are dealing with. We have a corporate program in place to reduce the sourcing cost of our bags, and we are working aggressively with outside third-party suppliers to try to get the lowest possible cost of goods, or price from them. And this has been going on now for a while.

We are exploring opportunities with current vendors, looking at opportunities in China. Clearly, we believe that because of our business growing like we believe it will, there is going to be more and more opportunity for our volumes to grow, and in concert with that, that will drive down our prices for a cost from our suppliers. And this is a very competitive environment, so we fully expect to see leverage coming out of there.

All right. Just one follow-up on this topic then. My experience is generally, for this kind of situation, the margin benefit will be about one-third based on reduced manufacturing costs but about two-thirds of increased volume. And if I carry that further, gee, healthcare kind of has a track record of being overly pessimistic over the years. So, should the -- at least the American economy starts to strengthen in the next 12 to 24 months, one would expect that, at least the cord blood cell banking business may come back. It sounds like because you are fairly close to break-even that it would actually -- you'd be very sensitive to any -- to the upside for any uptick in the American cord blood cell banking market. Is that a fair statement?

I would say we are looking at coming back, if we can -- we really believe that this dip is temporary because of the economically, but once we get back to the original growth rates. We were a different company back a year ago, two years ago, where our break-even points were much higher than they are now. So, we would enjoy a very nice pop at the margin line with any incremental volume that would come out of the improvement in the market. So, we really believe that we are positioned well for these kinds of ebbs and flows that go on in our market. We are not -- this is not the end of the world. We do have other products to fall back on. We do have efficiencies internally that allows us, even with this dip in the US market, to maintain a break-even situation, which is really where the Company needs to be.

Final question and I'll jump back in the queue. On your PRP 510(k), I mean, the FDA, the medical device side, it's really kind of reworked their whole 510(k) thinking. Do you foresee an issue with them giving that clearance ultimately, or is there a possibility they may come back and say you have to do a full PMA?

We haven't received any indication that we are going to be required to do a full PMA for this product. We believe that we are going through the Q process and we have had one cycling of questions. We believe that we are going to get the approval. That's what our internal people are telling us. So, we're not in a situation where we believe that we'll have to convert that product to a PMA.

Okay. I didn't know you had already done one cycle of questions with FDA, okay. All right. Thanks so much, guys, and congratulations, and looking forward to the rest of the year. I'll jump back in the queue.

(Operator Instructions) And at this time I am showing no additional questions and would like to turn the conference call back over to Mr. Engle for any closing remarks.

Thank you. I hope we have conveyed our high level of enthusiasm about the Company's prospects and strides we have made in the execution of our growth strategies. In particular, we are excited about our continued success in establishing a strong footprint in China. We are pleased with the success in turning around the overall company of ThermoGenesis, including the improvement of gross margins and enhancing the bottom line performance of the Company. We have come a long way.

Finally, we are encouraged by the business development discussions we are having with a number of potential partners and customers. Thank you for joining us today and we look forward to talking with you in the near future.

That concludes (inaudible) --