Thermogenesis Holdings Inc (THMO) 2011 Q3 法說會逐字稿

Hello, and welcome to the ThermoGenesis Corporation third-quarter 2011 results conference call. All participants will be in listen-only mode (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Matthew Plavan, Chief Financial Officer and Executive Vice President of Business Development. Please proceed, Mr. Plavan.

Thank you and good afternoon, everyone. With me today is Mel Engle, Chairman and Chief Executive Officer. Mel will review key events at the Company since our last call and provide some perspectives on our outlook for the next several quarters. I will follow on with a discussion of our financial results before we open up the call to your questions.

Before turning the call over to Mel, let me remind you that the statements made during this conference call are not historical facts, and are forward-looking statements that 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 market acceptance of 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 will turn the call over to Mel now.

Thank you, Matt, and good afternoon. The third quarter was marked by a number of important fundamental accomplishments, particularly in relation to the development of our international businesses. In addition, we are pleased with our successful financial offering in March, which generated net proceeds of approximately $4 million to strengthen our balance sheet and fund our expansion strategies. We will use this money primarily as growth capital to invest in both our existing business and near-term opportunities available to us through new products and pursuing new indications. And we will speak to these in more detail later in the call.

Turning now to key events during the quarter -- and let me begin with our progress in China -- while product registration progresses, our new customers and researchers have committed to utilizing our products. This is exciting. First, Nanshan Memorial Medical Institute -- or, as we call them, Nanshan -- they have announced the adoption of our cord blood products, the BioArchive and the AXP.

Secondly, we've secured another cord blood bank customer in China named BoyaLife.

Third, we have received initial orders for AXP bag sets under our new agreement with Beike Biotechnology.

And fourth, we completed a research support agreement with Dr. Gu, Chief of Vascular Surgery and a professor of medicine at the Capital Medical University in Beijing for the use of Res-Q in a multicenter study for patients with critical limb ischemia. I will address each of these accomplishments later in the call.

Turning now to our business in India, during the quarter we were delighted to announce the receipt of registration approval for Res-Q, and we expect to begin commercial sales during the current quarter. We believe India will be an excellent market for us.

In summary, we are positioned well to achieve long-term sales growth with our existing products through our distribution partnerships worldwide, particularly in breakout international markets such as China, India and Southeast Asia.

Before discussing our other recent key accomplishments, I will provide a brief overview of our financial results for the quarter. Revenues for the third quarter of fiscal 2011 were $5.2 million, an increase of 8% versus revenues of $4.8 million in the third quarter a year ago and $5.9 million over the prior quarter -- or, in the prior quarter. Our revenue performance for the quarter was impacted by the recent softness in the cord blood market in the US and Europe, offset in part by more than a $300,000 increase in Res-Q revenues year-over-year.

As we discussed in our last call, the macroeconomic environment began to impact cord blood collection activity, especially in the United States, beginning in late calendar 2010. As consumers find themselves with less disposable income, the major cord blood banks are experiencing a decline in collections.

AXP bag set orders from GE Healthcare in the third quarter were lower by approximately $700,000 versus the prior year. Approximately half of this was due to market softness and the other half due to GE Healthcare's build in inventory during the third quarter of last year to meet expected future sales increases which didn't occur.

We were able to offset this impact through AXP revenues in new, non-GE international markets. In total, AXP disposable revenues declined by approximately $300,000 year over year.

It should be noted we believe we have continued to maintain our leading market share position in the United States. Importantly, however, GE Healthcare projects a marked improvement in AXP disposable orders to us beginning in the July through September 2011 time period -- and that's our first quarter of fiscal 2012 -- returning to levels commensurate with those achieved during calendar 2010. We continue to believe that as the economy improves in the United States and Europe, long-term collection activity will return to prior levels of growth.

We had a good quarter in our BioArchive systems business as we sold 5 BioArchive units in the quarter versus 3 a year ago, generating a year-over-year increase in these revenues of approximately $400,000. Our revenue performance, combined with accelerated spending in the strategic planning and business development areas, resulted in the Company reporting a net loss of approximately $845,000 for the quarter versus a loss of $1.4 million in the same period a year ago. The $845,000 net loss includes $225,000 in strategic advisory fees.

To foster our cord blood business in Europe, we held a very successful BioArchive user meeting in Barcelona last month for our European customers and distributors. We had more than 50 attendees, including more than 30 customers representing 20 sites within 15 countries, and 17 distributor representatives. The event featured customer panels describing their positive experiences with BioArchive, its features and benefits, and we outlined the near-term improvements we are making.

In addition, we featured several outside speakers, and they included Dr. Pablo Rubinstein from the New York Blood Center, who spoke to the benefits of both the BioArchive and AXP; Dr. Colin McGuckin, Head of the Cell Therapy Institute of France, who discussed the many emerging indications for stem cell therapies; and Dr. Etienne Baudoux -- he's the head of Netcord, the official registry of cord blood in Europe -- addressed the current state of the cord blood stem cell market in the region. We plan on making this as an annual event going forward.

As I mentioned a moment ago, we received an initial order of AXP bag sets to Beike in China under the product purchase agreement we announced in February. Beike operates 2 standalone cord load processing and storage facilities in China along with 18 specialized laboratories. In addition, they maintain a bank for the storage of stem cells in partnership with the regional government in Jiangsu, and are also poised to achieve accreditation from the American Association of Blood Banks for the processing and storage of cord blood and cord tissue using our automated AXP products.

At the close of the quarter we announced that Nanshan, with whom we signed a bone marrow products distribution agreement last November, will be utilizing our AXP and BioArchive systems in its 2 stem cell banks in China. Nanshan expects over time to procure the capacity to process and store up to several hundred thousand stem cell units at each facility. Aside from the revenue generating value, this expanded relationship with Nanshan is an important endorsement for our efforts in China, and, combined with our other partnerships there, provides us a strong foothold in that important cord blood market.

As we announced a couple of weeks ago, BoyaLife has become the first operational cord blood stem cell bank in China to commit to utilizing both our AXP and BioArchive products. The BoyaLife stem cell bank was established about two years ago, and they are currently developing capacity for over 1 million units, which could make it one of the -- if not the -- largest stem cell bank in the world. With the addition of BoyaLife, we now have three major cord blood products customers in China.

We're also pleased to announce a clinical evaluation agreement with Dr. Gu, a leader in stem cell transplantation and vascular surgery in China. Dr. Gu is a professor of medicine at the Capital Medical University Vascular Institute. He will use Res-Q for bone marrow stem cell harvesting for patients with critical limb ischemia, or CLI.

This will be the third CLI clinical evaluation involving our bone marrow products. The study, which will take place through the balance of calendar 2011, will involve approximately 25 patients at up to 3 centers in China. Patients will be evaluated at 1 to 6 months for limb salvage and amputation rates, pain-free walking and blood perfusion, among other metrics. We expect initial data from this study will be presented in the fall, and we expect a full set of data to be published in a peer-reviewed journal in 2012.

Finally, in China, I should also note the announcement in March that Fenwal, which is our cord blood products distributor in China, India and Japan -- they entered into a definitive agreement with Golden Meditech Holdings to form a joint venture in China to sell advanced products and technologies for blood collection, storage and transfusion.

The joint venture formalizes a relationship first announced last year, and we understand it will be completed and operational by June. Golden Meditech Holdings is China's leading integrated healthcare device and service provider, and holds a substantial stake in China Cord Blood Corporation, the largest cord blood bank operator in China, and is the largest shareholder of CordLife Limited, the largest cord blood bank operator in Southeast Asia. We believe Fenwal's relationship with an in-country industry leader will facilitate their efforts with us in China.

We continue to be highly optimistic about the potential of the Chinese market for our products. We believe the cord blood market in China could equal or surpass the US market and reach $200 million by the middle of the decade. We believe the combination of our technology leadership of strong channel partnerships have created -- that we have created in the market -- provides us a strong competitive advantage for both our cord blood and bone marrow products. Furthermore, we believe our success in China will help drive our efforts in other important Asian markets.

In India, we have been working with Totipotent on the market launch of Res-Q, and expect to record some initial revenues from that effort during the current quarter. The growth of new stem cell technologies is starting to ramp up in India, and we believe Res-Q can achieve an important presence in the market over time.

The critical limb ischemia evaluation there that we are conducting with Totipotent with Res-Q continues to enroll patients. This is a pilot 12-patient evaluation design to establish safety and efficacy of Res-Q for use in treating the CLI patients. We expect enrollment to be completed this summer. Totipotent is also in the process of developing further Res-Q clinical evaluations that it can execute through its more than 50 partner hospitals.

Let me speak to our other clinical evaluation programs. First, we have completed enrollment at a CLI study using MXP in Naples, Italy. Data from this evaluation are being reviewed and should be available in the next 60 to 90 days.

Second, the Res-Q clinical evaluation being conducted in the United States by Celling Technologies in conjunction with UC Davis has started patient enrollment. This is a 15-patient study involving the Res-Q in the development of stem cell therapy for nonunion, trauma and long bone fractures.

Turning to our platelet rich plasma or PRP product, we remain engaged with the FDA regarding the submission of the 510(k), and we hope to have a more definitive update on this from the FDA soon. In the meantime, we have initiated discussions with potential Res-Q distributors for the PRP product.

Having reviewed our progress during the quarter in detail, I would now like to dial back the lens and take a look at how each of these milestone achievements and those in our sights today are fundamentally positioning ThermoGenesis for a positive future.

First, we have experienced heightened interest in our bone marrow and cord blood offerings from major regenerative medicine players located in growing markets such as China and India, which we believe will be a driver to revenue growth as we achieve regulatory approvals.

Second, we are leveraging our technology assets and expanding our regulatory and clinical evaluation efforts through partners worldwide to increase market adoption of existing products such as Res-Q in the bone marrow and, upon approval, the PRP sector.

Third, we are continuing to take steps to lower our manufacturing costs. This is having a positive impact on our gross margins, and we believe we will see incremental gains in this regard over the coming several quarters.

With no debt and a strong balance sheet, we believe we have the financial resources necessary to fund our growth strategies, including new product development and commercialization within new international markets. We believe the confluence of these dynamics paints a much improved financial profile for ThermoGenesis longer-term.

With China, India and other international markets coming online over the next 3 to 6 quarters, the stabilization of the US and EU cord blood markets and the continued expansion of our distribution partnerships, we believe quarterly revenues could reach $7 million to $8 million per quarter during fiscal 2013.

Beyond that, we expect that line extensions of new products such as the Res-Q-based offerings of disposables for the cord blood market, and products targeting new markets such as PRP and eventually adipose tissue, will accelerate our revenue growth rates further.

And now let's talk about profitability. Profitability is the clear and essential goal for ThermoGenesis. In fact, we believe, if it were not for the recent slowdown in the US and European cord blood markets, we would be profitable by now. And we are optimistic about the market's recovery.

Secondly, as a result of our recent capital raise, we have embarked upon a focused investment initiative within the Company to expedite. And the following is what we are expediting. A, new product introductions; B, reduced cost of goods; C, expansion of the new markets; and D, aggressive business development efforts.

In total, these factors have had and will have an impact on when we become profitable. We believe a balanced mix of improved sales and selective investments, as I just outlined, has the greatest potential for achieving long-term shareholder value. We believe we have sufficient working growth capital to achieve our near-term target growth objectives and that we will see a sustained profitability well within the limits of our existing capital resources.

In closing, the foundation of our strategy is our technology, the value of which is being validated by market receptivity, particularly in our new markets. There is a wide range of regenerative medicine opportunities emerging, many of which represent potential multibillion-dollar markets. These include orthopedic procedures, which we already are addressing; cardiovascular repair; neurodegenerative diseases and reconstructive or augmentative cosmetic surgery.

In many countries such as the US and China, there is already a significant level of ongoing clinical activity spanning a wide variety of these regenerative medicine indications. A need for a standardized and rapid process to access stem cells for therapy will drive increased adoption of point-of-care and laboratory devices, and we are well positioned to capitalize on these opportunities.

We remain excited about the future of the Company and appreciate your ongoing interest. I look forward to speaking with you during the Q&A session, and I will turn it over to Matt.

Thanks, Mel. Before reviewing our financial results, I wanted to briefly update everyone on our corporate and business development initiatives. We are on track to complete the sale of the Thermoline business by the end of the fiscal year. Divesting of Thermoline is a key part of our strategy to focus on regenerative medicine and the disposable business.

Second, in terms of our business development activities, we continue to have encouraging discussions with a number of potential partners around growth opportunities beyond what we can develop organically through product development and geographic expansion efforts. These include leveraging our core technologies into new markets, such as additional cord blood products, other potential bone marrow technologies, and, eventually, adipose tissue processing products.

The nature of the business development is that you explore a number of opportunities before finding one or more that's right for both parties. We have been in discussions with more than a dozen organizations since undertaking this initiative several months ago, and there is a pipeline of other organizations we intend to meet with in the future. Although it is difficult to predict when and what partnerships may be consummated, we are confident that we will reach one or more agreements as a result of this process.

Turning to our financial results, revenues for the third quarter of fiscal 2011 were $5.2 million, which compares to revenues of $4.8 million in the third quarter a year ago and $5.9 million in the prior quarter. We benefited from increases in our BioArchive device and Res-Q revenues, offset by the AXP activity that Mel referenced earlier in the call.

Our performance in the quarter brought total revenues for the first nine months of fiscal 2011 to $18 million versus $15.9 million in the same period a year ago, an increase of 13%. Gross margins for the quarter were 39% versus 29% a year ago and 40% in the first -- or sorry, the prior quarter. Our year-over-year increase in gross margins reflects higher revenues and lower warranty costs as well as improved efficiency of our manufacturing, which has lowered rework costs.

We have been successful in reducing material costs of our products through more aggressive sourcing, and we are seeing the benefits of lower costs for disposal manufacturing as we leverage our increasing volumes and offshore sourcing.

Operating expenses for the quarter were $2.9 million versus $2.8 million last year and $3.1 million in the prior quarter. Our net loss for the quarter, as Mel mentioned, was $845,000 or $0.06 per share. This compares with a net loss of $1.4 million or $0.10 a share in the third quarter a year ago and a net loss of $486,000 or $0.03 per share in the prior quarter. As Mel mentioned, our net loss included about $225,000 in strategic advisory expenses during the quarter.

As a reminder, the per-share numbers for all periods discussed today are split-adjusted for our reverse stock split that occurred in August of 2010. Our cash position, we are happy to report, is $13.5 million at the end of the quarter and reflects the impact of the approximate $4 million raise after fees that we generated through the recent capital raise. This compares to $10.2 million at the end of the prior quarter and $10.7 million at the end of fiscal 2010.

As Mel discussed earlier, we believe the execution of our fundamental growth drivers over the next 3 to 6 quarters will result in a substantial improvement in the Company's financial profile, and positions us well for sustained and strong growth. We believe a recovery in the US and European cord blood market will occur by mid-fiscal 2012 if not before. GE Healthcare is offering some encouraging signals about increased demand; however, we are taking a conservative view until we see some hard results in the business.

The second factor is achieving product registrations in international markets such as China. While this is taking longer than we originally anticipated, we believe we will start to realize these milestones during the first half of fiscal 2012. Consequently, we believe that we should begin to see the benefit of improved cord blood market and the growth in that market in international areas by the second half of fiscal 2012, if not before, and enter fiscal 2013 with a high level of positive momentum.

In the short term, however, how quickly these factors provide us some tailwind will have a direct impact on the growth of our quarterly revenues. Based upon our current expectations with regard to product registration timing and new market penetration, it's likely that our revenues for the fourth quarter of fiscal 2011 and the first two quarters of fiscal 2012 will be comparable to those of the third quarter and fiscal 2011.

At the same time, we expect to continue to innovate during this time using the investment capital we raised recently to fund new project-specific engineering programs, continue generating supporting clinical data for our products, and to remain active in our business development initiatives.

To the extent these growth initiatives result in operating expenses increasing at a faster pace than new revenues during the next several quarters, we may experience modest increases in our quarterly losses. However, we expect to continue managing our resources judiciously, maintaining sufficient cash for working and growth capital.

To reiterate what Mel said earlier, we believe we have sufficient working capital and growth capital to achieve our near-term target for growth, and that we see sustained profitability well within the limits of our existing capital resources.

Thank you for joining us today. Now we will open the call up to your questions.

(Operator Instructions) [Desh Govender] at [Kingbrooks Partners].

Hi, good afternoon. I had a question on what you think, then, is the nadir of the European and US markets in terms of AXP and BioArchive. Do to see -- you have said on the call that the next two quarters are going to mirror the third quarter. I'm just wondering when you see the turnaround. Is it, the catalyst GE, or is the catalyst, as you say -- what other indicators are you looking at in terms of an indication as a turnaround?

Well, I think there are several indicators. We believe, from GE Healthcare, that they are seeing more activity in the market. And they are seeing the economy's effect wearing off, and that we are getting back to business as usual. They are bullish about the future, especially with regards to the first fiscal quarter of our new year.

I had a chance to speak directly with the head of GE's divisional responsibility today, and he assured me that that was an indication that he was seeing. And from the forecast we've received from GE, that's supported by that.

I think what we're -- we are optimistic that we will see a bounce. But it's a matter of how quickly can that happen. I believe that we will see the fourth quarter that we are currently in mirror the similar dynamics that we've lived through in the third quarter, unfortunately.

It is a -- there's two things going on with GE. One is the impact of the market contraction. And the other is that they are adjusting their inventories downward as a result of the previous sales experience, by them. And so, with their -- as they are adjusting their inventories, that has an impact on our shipments to them.

So we're hopeful that we will stabilize all of that at the end of this quarter, and we will be able to demonstrate. Does that answer your question on the nadir? The nadir is really, I believe, at the end of the next quarter.

Okay. And then in terms of the product mix, in terms of disposables, for the $5.2 million in revenues, can you just give us a percentage on what was disposables?

Yes. For the quarter it's 60%, was disposables.

Do you expect that to change moving forward, or do you expect that to be higher in any way?

Well, that's -- when we look at increases in revenue, the majority of the increases should be disposable revenues as we move forward.

And then the data on the CLI trial from Italy, are you just going to announce that, topline, in the next two months or so? Or are you going to give updates on the other trials and enrollment as we move forward?

The CLI trial in Italy will be a published trial. So we'll -- as soon as that's available, we will be publishing it, to investors. So the other trials are handled by individual distributors, and when they become -- I'm not exactly sure what the publication information is on that, or if it's kept locally. But it's there -- the trial in Naples is probably our biggest one and the one that's most exciting, given what we've -- the results we've seen so far.

Again, just one last question and I'll go back in the queue. Where does it stand with regulatory in China?

The current situation is that we are working with Fenwal as our partner to be the eyes and ears and hands and feet to get the products approved through the SFDA. We have had people in China last week to find out where we were -- actually, the week before, I guess -- to find out where we were to expedite that process. And we believe that we have all of the paperwork and all of the information available that's required, and it's just a matter of getting through the administrative system there. It's not a matter of if, it's a matter of when, we believe.

And then we are shooting for a target of year end of this year, and hopefully it will be sooner. But we believe that we've done everything in advance of getting through the waiting list, if you will, that's happening in any large country, that generally the FDA or SFDA or whatever the similar organization is, is a bureaucratic organization, and it takes time to get through their system. But we are targeting, hopefully, in the September to December time period to see approval for our AXP systems in China.

Great. Thanks and congratulations on the progress so far.

(Operator instructions) this concludes our question and answer session. I would like to turn the conference back over to Mr. Engle for any closing remarks.

One final closing remark -- that is to thank you, one and all, for participating on today's call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.