Artivion, Inc.
Q3 2008 Earnings Call Transcript

Published: 30 Oct 2008

[Operator:]

Greetings, ladies and gentlemen, and welcome to the CryoLife Third Quarter 2008 Financials Conference Call. At this time all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steven Anderson, President and Chief Executive Officer of CryoLife. Thank you, Mr. Anderson, you may begin.

[Steven G. Anderson:]

Good morning, everyone, this is Steve Anderson, CryoLife’s CEO, and I would like to welcome all of you to CryoLife’s Third Quarter ’08 conference call. With me today is Ashley Lee, the company’s Executive Vice President, Chief Operating Officer and Chief Financial Officer , and Dr. William Northrup, the company’s Vice President of Medical Relations and Education. As you will recollect. Dr. Northrup is a cardiovascular surgeon who specialized in cardiac reconstruction procedures before joining CryoLife in March of this year. This morning we released the revenues and earnings for the third quarter. We reported total revenues of $26.8 million, and increase of 21% over the same period last year, and the highest third quarter revenues in the company’s history. Fully diluted earnings for the quarter were $0.12, a 71% year-to-year increase. The third quarter of ’08 was the seventh consecutive quarter of profitability for the company. Cardiac revenues were up 26% for the quarter, vascular revenues were up 36% quarter to quarter. BioGlue revenues were up 13% for the same period. Ashley will give you a more detailed analysis of the quarter in just a couple of moments. First, I would like to give you the agenda for today’s call. Ashley will give you a detailed analysis of the quarter’s financial performance by product. He will also give an update on the sales of Hemostase, the powdered hemostatic agent that we began distributing in May. I will comment on the progress that has been made on the Trophic Solutions animal testing of the organ transport solution, the CE mark and IDE timetables for the submission of BioFoam, and an update on our BioDisc Nucleus Pulposus Replacement product. Dr. Northup will comment on the recent Ross Summit meeting that was held in our corporate offices on October 10th and 11th. He will also review five recent papers that document the long-term success of the Ross Procedure that uses a preserved pulmonary valve. After Dr. Northrup’s comments, Ashley will return to give you revenue guidance for the remainder of 2008 and then for the first time will give guidance for fiscal year 2009. After Ashley’s guidance comments have been completed, we will open the call for questions. At this time, Ashley will comment on the company’s financial performance for the third quarter.

[Ashley Lee:]

Thank you, Steve. To comply with the safe harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement

[Steven G. Anderson:]

Thanks, Ashley. We have recently received feedback from our European notified body on their review of our CE submission for the BioDisc Nucleus Pulposus Replacement product. We are reviewing their comments and questions to formulate our response. During the quarter we were awarded another grant of $848,000, of which $212,000 has been received from the Department of Defense for our continued development of our BioFoam surgical matrix product. Our CE mark application for BioFoam is targeted to be submitted to our European notified body in December. We would expect that we would receive approval for the BioFoam CE mark in April of ’09. Our plans are to launch this product throughout Europe beginning in the second quarter of 2009. After CE approval, we plan to conduct several post-approval studies to evaluate BioFoam in liver resections. These will be conducted at three European clinics, with approximately 15 patients per clinic. For approval in the United States, we will need to submit an IDE application and conduct a clinical trial. We are currently targeting a December submission for the BioFoam IDE. The U.S. human study indication will be as an adjunct to control bleeding following liver resection surgery. We will initially be requesting a pilot clinical study at one or two centers, in 10 to 20 patients. We would expect our follow on pivotal U.S. study to include up to 200 patients. We estimate that it will take about two years to complete the pilot and pivotal studies in the United States. A 510(NYSE

[William F. Northrup:]

Thank you, Steve. The Ross Summit was held at CryoLife Corporate Headquarters on October 10 and 11, with 61 cardiac surgeons from nine countries. Primary goal of the meeting was to facilitate a renaissance of the pulmonary autograft operation, developed in 1967 by Mr. Donald N. Ross in the U.K. The operation, which is usually referred to as the Ross Procedure, involves trading a normal pulmonary valve for an abnormal aortic valve in the same person. The term for this is an “autograft” and substituting the borrowed valve with a transplanted valve from another person. The term for this is an “allograft.” It is the only aortic valve replacement operation that can provide a living valve with the capacity to grow in the case of the pediatric population. It is a technically demanding operation which has steadily declined in popularity over the past several years, especially in adults, in favor of simpler procedures involving primarily mechanical valves and stented bioprostheses. In just the past two years, at least five articles reporting large series of patients undergoing the Ross Procedure with follow-up into the second decade have appeared in the most respected peer-reviewed cardiology and cardiac surgical journals, with information that was previously unreported. All of these patient series are from different centers by different surgeons from the U.K., the Netherlands, Germany, and the U.S. Surprisingly, all of these papers demonstrated restoration of normal life expectancy with the Ross Procedure when compared to specific populations appropriately matched per gender, age, and the reference country. Based on these data, the Ross Procedure appears to be only the second heart valve operation, after mitral valve repair, with the potential to restore normal life expectance. These reports are in contrast to data in the same peer-reviewed literature regarding all other aortic valve replacement options where excess mortality, above and beyond expected survival, has been consistently documented, especially in younger patients. The dimensions of this excess mortality have been in the range of 1-2% per year over expected. In addition to this impressive survival data with the Ross Procedure, it is equally clear from these peer-reviewed journals that some surgeons have been able to achieve more predictable, long-lasting functional autografts than others. Some of these surgeons formed the nucleus of our Ross Summit faculty, in order for others to learn, in a manner of speaking, the secrets of their success. Finally, since the midterm data on CryoLife’s decellularized SynerGraft Human Pulmonary Heart Valve, which was approved by the FDA this past February, have been favorable, as reported this past June at the Western Thoracic Surgical Association annual meeting, we felt the timing was ideal to host the Ross Summit at CryoLife, Incorporated. In the context of facilitating a renaissance of the Ross Procedure, the Ross Summit embraced four objectives. The first was to examine data supporting a patient’s survival advantage for the Ross Procedure, compared to other aortic valve replacement operations. The second was to examine and define the critical technical success factors required for a lifelong-lasting functional autograft. The third objective was to examine data on the impact of decellularization on pulmonary allograft function and durability. The fourth was to examine strategies to restore the Ross Procedure to the surgical menu of aortic valve operations among individual cardiac surgeons. The Ross Summit consisted of interactive lectures, videos, and hands-on wet labs with pig hearts. Some of our distinguished international faculty included Professor Sir Magdi Yacoub, from London, U.K., Professor Hans Henrik Sievers from Luebeck, Germany, and Dr. Hanneke Takkenberg from Rotterdam, the Netherlands. Mr. Ross, age 86, was also honored in person for inventing his ingenious operation. Additional updated data from Professor Yacoub’s ongoing prospective randomized trial between the Ross Procedure and the aortic allograft operation gave additional support to the impressive life expectancy advantage of the Ross Procedure. Numerous technical nuances were shared by our distinguished faculty, which have already influenced some of the other faculty members to add these new technical maneuvers to their repertoire based on the early feedback we have already received. Finally, we launched the Ross Community at www.therosscommunity.org as an educational forum for physicians and patients with an interest in the Ross procedure. The educational proceedings of the Ross summit, will soon be available on the Ross community website, and on a DVD. We hope that as it evolves, it will serve to facilitate an eventual consensus regarding the original objectives of the Ross Summit. There was general agreement already that the Ross procedure was indicated for any patient with life-threatening aortic valve disease, with a life expectancy of 20 years, at the time of the operation, making it an appropriate choice for patients with a broad age range, from infancy well into the seventh decade. Inasmuch as these objectives are clearly a work in progress. We are planning the next Ross Summit at CryoLife Incorporated, for September 24 - 26, 2009.

[Steve Anderson:]

Thank you Dr. Northrop, and now Ashley will give some guidance for the fourth quarter of 2008, and for the fiscal year 2009.

[Ashley Lee:]

Thanks Steve. Our (inaudible 00

[Steve Anderson:]

At this time, I’ll open up the call for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator instructions) Our first question comes from Matt Dolan with Roth Capital Partners.

[Steve Anderson:]

Hello Matt.

[Matt Dolan:]

Hi guys, good morning, can you hear me? Okay, thanks a lot. First question on the guidance, a couple variables it seems at work here, could you give us -- and you did touch on the economy and exchange rates, but I guess specific to the economy, what are you hearing even in October, I would assume with the severity of a lot of the procedures you’re involved in, it’s a much more mild impact, but do you expect that to have any impact on ordering patterns, number one, and secondly, in 2008, I don’t see a break-out bi-product as detailed as we’ve had in the past, so maybe just update us on bi-product line, which ones are tracking in line or ahead of expectations, and which ones are slightly lower than you may have anticipated?

[Steve Anderson:]

Okay, that was a lot, but I’ll try to answer all of that. In regards to the current economic environment, if you look at the month of October, we haven’t seen a noticeable effect on our business as it relates to the current economic environment. So things have changed dramatically since the end of September, we’re not really seeing much of an effect at this point as it relates to our business. But again, we think it’s prudent for us to -- we can’t ignore that when we formulate our 2009 guidance, and we’ve tried to take some of that into account. So hopefully that answers that question. As it relates to 2008, and the guidance for individual product lines, we did not break that out separately in the press release, we do expect all of our product lines to be within the guidance that we have given out previously.

[Matt Dolan:]

Okay, great that’s helpful. The second question, on looking out to next year, I think we talked about adding five reps to a U.S. infrastructure in the near term. Any plans -- now that you have your budget for 2009 together -- any plans to continue that expansion in 2009? And by how much?

[Steve Anderson:]

We are continuing our expansion of the sales force, Matt, as you know, we’ve converted some of our better sales reps and more qualified sales reps into cardiac specialists that will handle only the allographed heart valves, and the balance of the sales force will handle glue and the vascular tissues. And we do anticipate adding another five sales reps in the Unites States over the next year. We have added five at the present time to fill in behind the people that were promoted into cardiac specialists, so that plan is still in place.

[Matt Dolan:]

Okay, great, and last one on gross margin, it looks like you’re closing in on 65% this year, that’d be up over 200 basis points over 2007. How should we think about that going forward as your mix continues to favor that gross margin? Is 200 basis points in 2009 aggressive or is that something that could continue?

[Steve Anderson:]

Well, you know Matt, we don’t give specific guidance on gross margins, and I won’t give it now, but I’ll tell you that there are a lot of factors that we need to consider as we move into 2009. I think most notably, we expect Hemostase MPH to become a more significant component of our revenue mix, and as we’ve discussed in previous conference calls, the gross margins on Hemostase MPH are in the upper 50% range, so it’s a little bit lower than what our composite gross margins are during the course of this year. The other thing is -- which is really kind of hard for us to predict with any degree of accuracy -- is where are foreign currency exchange rates going to go? The dramatic move in foreign currency rates over the last month in particular, we expect that to have an effect on both our top line and gross margins for all of our international business. If the dollar weakens from current levels, that would certainly be beneficial for us, but if it continues to strengthen, we think that would put a little bit of pressure on margins, especially as it relates to our international business. So you know, we don’t have specific guidance, but there are some other factors that might not lead to another 200 basis point improvement year-over-year.

[Matt Dolan:]

Sure. Great, okay thanks a lot guys, congrats on the results.

[Steve Anderson:]

Okay, thanks.

[Operator:]

Our next question comes from the line of Greg Brash with Sidoti & Company.

[Greg Brash:]

Hi guys, thanks for taking my call. I just wanted to continue on with the gross margin. In this quarter, I guess the product gross margin was down a little bit sequentially. Is that product-mix issue where you’re doing a little better with the NPH and the dollar appreciating, is that pretty much what caused it to come in around 83.5 versus 86 in the prior quarter?

[Ashley Lee:]

It was largely due to exchange rates, the effect of Hemostase MPH on the revenue mix, and then we had some small write-downs of some inventory. So they (inaudible).

[Greg Brash:]

Okay, and then you mentioned the impact of foreign exchange on 2009. If rates stay where they are today, could you quantify what impact you think that would have on 2009 revenue?

[Ashley Lee:]

Yeah, I can, we’ve done some work on this, and if you look at the first nine months of this year, and you look at the exchange rates that are in effect at the end of October, our revenues would have been a million dollars lower in -- they will be a million dollars lower in 2009, assuming constant units. But we have already provided for all of that in our guidance.

[Greg Brash:]

Okay, that’s very helpful. And then I’m just curious on the CryoValve SG, it looks like you’re doing pretty well with that, is pricing holding up? Are doctors giving you any pushback because you are pricing at a premium to the other graphs?

[Ashley Lee:]

We have had no pricing issues with the decellularized heart valve, and we’ve shipped about 270 of them so far. It’s hard to know how many have been implanted, because the implant cards come in slowly, and of course, there’s a certain percentage that never come back. But it’s our opinion that most of the ones that we’d have shipped have been implanted.

[Greg Brash:]

Okay. And it just looks like unit growth on the cardiac side is slow a little bit over the last couple of quarters, is there anything to be concerned about there? Or is it competition or anything a long those lines?

[Ashley Lee:]

No, I don’t think that we’re seeing a lot on the competitive front at this point, so I don’t think there’s really anything to be overly alarmed about at this point.

[Greg Brash:]

Okay, and is the -- just one last question, is the Hemostase MPH, is that tracking your expectations? Are you pleased with how the product is selling and the physician feedback?

[Ashley Lee:]

Yes, we are, we’re getting a lot of attraction with that product, and we think it’s also very complimentary to BioGlue, and we think that it’s had some impact on the BioGlue sales increases.

[Greg Brash:]

Okay, I mean do you think doctors are pretty brand-loyal on this market? Obviously, you’re doing pretty well, and you’re still initial launch year, but are they pretty open to trying the product?

[Ashley Lee:]

They are open to trying the product. When you see it work, it’s a very impressive visual reaction, because it works instantaneously so I think from that stand and it’s effective, so I think that it will continue to grow.

[Greg Brash:]

Okay, thanks guys.

[Operator:]

Our next question comes from the line of Raymond Myers with Emerging Growth Equities.

[Raymond Myers:]

Hi Ashley, good morning Steve, congratulations on a great quarter. I notice that your expenses in the quarter were down a bit sequentially, SG&A of only $12.1 million, R&D down to $1.2 million. Can you explain why each of those were down?

[Ashley Lee:]

I don’t think it was anything out of the ordinary as it relates to G&A; the revenues were down slightly sequentially. The first two quarters of every year, we attend a lot of conventions and things of that nature, so the expenses are ordinarily a little bit higher in the first couple of quarters. R&D is just really so project driven, it just depends on the progress we make on projects, and when we can initiate studies and so forth, so I don’t think there’s anything to be read into R&D being a little bit below our expectations, because currently, we’re still on track, as Steve mentioned earlier, for BioFoam, as it relates to the CE mark and IDE.

[Raymond Myers:]

You raised your guidance for R&D for the full year this quarter correct?

[Ashley Lee:]

I don’t recall exactly where it was at the end of the third quarter, so you might be right, we might have raised it slightly, but I’m not sure about that.

[Raymond Myers:]

So well whether it was raised or not, it’s tracking -- the guidance is tracking higher, much higher than you run rate at Q3, so does that imply that there are some major projects or major expenses that are either starting or finishing somehow expense in Q4?

[Ashley Lee:]

Yeah, but most notably, the animal studies continue for the organ preservation solutions, so that will be a major expenditure during the fourth quarter of this year, and I think that we’re also continuing to do some work on BioFoam, as when we get closer to the CE and IDE submissions. So yeah, there are some things that are ongoing right now that would lead to that increase.

[Raymond Myers:]

Okay, good. You didn’t give a sales force number. What is the number of your sales force now?

[Ashley Lee:]

I think that we have roughly 35 people that are vascular reps and about five that are cardiac specialists, so it’s about 40; and then on top of that we have the five regional managers and a couple of people in sales management.

[Raymond Myers:]

Great. Okay thanks, that’s all for now.

[Ashley Lee:]

Okay.

[Operator:]

There are no further questions; I’d like to turn the call back to management for any concluding remarks.

[Steve Anderson:]

Thank you for joining us for the third quarter financial report, and we look forward to meeting with you on teleconference after the close of the fiscal year, so I would expect that to be in February of 2009.

[Operator:]

Ladies and gentlemen, this concludes today’s teleconference, thank you for your participation.