Artivion, Inc.
Q1 2009 Earnings Call Transcript

Published: 30 Apr 2009

[Operator:]

Good morning, ladies, and gentlemen. At this time I would like to welcome everyone to the Cryolife First Quarter 2009 Financial Conference Call. (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 Anderson:]

Good morning, everybody, this is Steve Anderson Cryolife’s CEO and I would like to welcome you to our Q1 2009 conference call. With me today is Ashley Lee, the Company’s Executive Vice President, COO, and CFO. This morning we reported Cryolife’s first quarter ’09 revenues and earnings of $26.7 million and $0.07 per share effectively. Q1 2009 revenues exceeded Q1 2008 revenues by 4%. The $26.7 million is a record performance for the company during a first quarter. The first quarter of 2009 was the third best quarter in the history of the Company. The first quarter of 2009 was also the 9th consecutive quarter of profitability for the Company. We are very proud of this achievement considering the economic climate in which we are operating. The agenda for our call today is as follows

[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

[Steve Anderson:]

Thank you, Ashley. During the month of March we received an award from the Department of Defense for $1.7 million for the continuing development of BioFoam® Surgical Matrix, our next generation biomaterial to affect hemostasis. This award brings the total of Department of Defense awards for the development of BioFoam® to $5.4 million over the past three years. The recently received $1.7 million Department of Defense award will be used primarily to fund the IDE clinical trial of BioFoam® within the U.S. For those of you who are not familiar with the product, it consists of the same chemical component as our BioGlue® Surgical Adhesive with the addition of a foaming agent included in its formula. When BioFoam is administered to the site of application it expands its volume by a factor of roughly four times and creates a mechanical barrier to decrease blood flow and pores for the blood to enter leading to cellular aggregation and enhanced hemostasis. We believe that is may be ideal for sealing organ lacerations, as it is very difficult to effectively suture human organs. The FDA has given us a conditional approval to conduct a feasibility phase of the Company’s BioFoam IDE submission for a liver parenchyma sealing. We expect to receive full approval and begin initiation of our IDE clinical trial within the next several months. The clinical trial for BioFoam in the U.S. including the feasibility phase will consist of about 185 people and should be completed and submitted for commercial approval in three years. In December of ’08 we submitted our application for a CE mark for BioFoam to our notified body in Europe. We expect to receive our CE mark towards the end of the second quarter of 2009. After we receive approval we will begin a limited clinical trial with a target enrollment of 45 patients at multiple centers in Europe. We expect to have BioFoam released and in general distribution in Europe during the third quarter of 2009. We expect that the CE mark approval of BioFoam will greatly expand our International franchise in hemostatic devices complimenting our BioGlue® and HemoStase™ product offerings. We believe that the market for this initial indication of liver and spleen sealing could be as much as $20 million; however, when considering BioFoam’s potential use for traumatic injuries, including the battlefield and other indications such as cardiothoracic surgery, we believe that the potential market for a product like BioFoam is significantly larger. From my point of view, BioFoam has a number of advantages over other products. First, this is more easily seen in the surgical field. Second, it is not as runny as other products and tends to stay where you initially apply it. Third, it is quite porous and will biodegrade more quickly than some other sealants on the market. Fourth, it is more flexible and does not have a rigid or solid nature to it as do some other products. We have recently responded to comments and questions from our notified body in Europe regarding their review of our CE submission for the BioDisc® Nucleus Pulposus Replacement product. Depending on the final outcome of the CE mark review we may continue with a limited post market clinical study or look to license the technology to a corporate partner for continued development. During the third quarter last year, in 2008, we made the decision to split our U.S. sales force in two specialties, and we developed a new position that we call Cardiac Specialist. The Cardiac Specialists call exclusively on cardiothoracic surgeons. We now have ten Cardiac Specialists located throughout the U.S. The 10 Cardiac Specialists are complimented by 34 technical representatives that primarily call on vascular surgeons. The Cardiac Specialists focus on Allograft heart valves, BioGlue and HemoStase and the 34 technical reps are focused on vascular Allograft, BioGlue and HemoStase. Much of the time these two technical reps call on a hospital together and we have found that these types of calls are becoming more effective than just having someone call on cardiac or vascular surgeons separately. We are in the process of printing our 25th Anniversary booklet. It features five patients who have had cardiac reconstruction using tissues we have preserved and in some cases our BioGlue. The physicians who performed these patient surgeries are also featured and they describe the particular cardiac reconstruction procedure used on their patient. Over the past few years we have made the assertion that cardiac reconstruction is a lot more complex than heart valve replacement and I think that the clinical discussions of these patient’s problems will bring that point home to those of you who follow the Company. The book is written in a style that should be easily understood by non-technical people and I think that you will get a much better understanding of the effect that Cryolife’s products and services have on people who require complex cardiac procedures. You may get your own copy of this booklet by logging onto our website www.cryolife.com and filling out the order blank that you will find on the Home page. That concludes my comments and now I will turn the call back to Ashley for some guidance for the rest of the year.

[Ashley Lee:]

Thanks, Steve. I have an overall comment before I discuss our guidance. Despite the challenging economic environment we find ourselves in, we believe that we are well positioned to continue moving forward. Many of our products, and especially our tissue offerings, are implanted in critically ill patients for which there are few options. In addition, we are the leading cardiovascular tissue processor in the world and have limited competition from other human tissue processors. With that in mind we are reiterating our guidance for 2009 as follows

[Steve Anderson:]

At this time we would like to open up the conference call for questions.

[Operator:]

(Operator Instructions) Your first question comes from Matt Dolan with Roth Capital Partners.

[Matt Dolan:]

My first question is on the inventory issues that we talked about on the last call. Can you give us an update on how far through working through some of those inventories you are at the end user level? Are hospitals still in reduction mode or do you think that’s stabilized for the most part here in Q2?

[Steve Anderson:]

I think it’s stabilized, but I think that some of the hospitals are in the process of working down their standard process cardiac tissue inventory, as witnessed by the significant increase that we’ve had in the SynerGraft process pulmonary valves. My recollection is that the SynerGraft process pulmonary valves now constitute slightly more than 20% of our total cardiac valve revenues. It is my feeling that that is what is going on there.

[Matt Dolan:]

Okay and what are you getting on pricing on SynerGraft? Have you been able to maintain kind of a 20% premium or where is that falling?

[Steve Anderson:]

We are charging approximately $14,000.00 for a pulmonary SynerGraft heart valve and our typical price for a standard processed valve is about $11,000.00.

[Matt Dolan:]

Okay. Can you talk about the split of the sales force and how that may or may not have impacted revenue in the quarter? Did you see the cardiac group have to play catch up and hit some of the territories or maybe the hospitals that maybe weren’t working in the past? Is there any impact there, how smooth was that transition?

[Steve Anderson:]

I think the transition was very smooth. We chose the top ten representatives from our sales force to be cardiac specialists. They had to try out for the position. They went through an intensive interview process with Dr. Northrup on our staff and marketing management. There are two cardiac specialists assigned to each region. We have five regions in the United States. I think that has and is in the process of becoming a very effective marketing tool. We didn’t flush out the 10 cardiac specialists until towards the end of the year, so there are two to four of them that just began getting started in that new position in January of ’09. I think that you will see their effectiveness pick up as we hit mid-year and towards the end of the year.

[Matt Dolan:]

Okay, so between that and SG we should return to growth on the cardiac line, is that right?

[Steve Anderson:]

I am assuming that. There have been a number of very favorable papers that have come out recently on the effectiveness of the SynerGraft process. I think that the doctors are becoming aware of those publications, and we also conduct monthly wet labs here at Cryolife that are shared by Dr. Northrup and we have had very good participation in those wet labs. My recollection is that through the first quarter, that would be last year, we started this about June, and then through the first quarter of this year, I think we have trained about 60 physicians here at the Company in how to transplant human heart valves.

[Matt Dolan:]

Okay great and then final thought on the BioGlue and HemoStase side of things, it looks like you’re maintaining your BioGlue guidance. Are you seeing any conversion? I know that they are obviously different products for different applications, but is there more usage than you originally anticipated of HemoStase relative to BioGlue? How are those tracking and how should we think about those products fundamentally here going forward?

[Steve Anderson:]

We are doing very well with HemoStase and I think it was a good addition to our Hemostasis line. It is very effective in a wet operating field and it’s very helpful to the physicians who have bleeding problems. As you will recollect, BioGlue is also very effective, but it has to be used in a dry field. BioGlue is much stronger than HemoStase and of course it lasts much longer. HemoStase disappears, biodegrades in a couple of three days, after doing its initial work. But, I think they are very complimentary to one another. I think as a result of that I am expecting both of those product areas to grow. I think they are going to, pardon the pun, they are going to have their own synergistic impact on one another.

[Matt Dolan:]

Okay, great. Thank you, guys.

[Operator:]

Your next question comes from Greg Brash with Sidoti & Company LLC.

[Greg Brash:]

Just following up on the BioGlue, how is pricing holding up, and are you seeing any inventory destocking with that product?

[Ashley Lee:]

Pricing is actually holding up very well. We get a little push back here and there, but by and large the pricing has held up pretty well. We aren’t really seeing a lot of destocking. As we stated in our previous comments, the volume was actually up year-over-year and absent foreign currency exchange we would have seen an increase in BioGlue revenues year-over-year. I think that as we move forward through out the year and into the future, there is no reason for us to think that BioGlue volumes shouldn’t be growing consistently with cardiac and vascular surgical volumes, which is typically in the mid upper single digit range.

[Greg Brash:]

Okay. Do you plan to keep prices where they are? I mean historically you have raised prices.

[Ashley Lee:]

We had some very slight increases at the beginning of the year for certain BioGlue products, but by and large they were left flat this year. Going forward we will just have to evaluate and see where the economy is and where demand is before we make pricing decisions in 2010 and beyond.

[Greg Brash:]

But your guidance, and this is for all of your products, your guidance doesn’t assume further price increases throughout the year, does it?

[Ashley Lee:]

No, it does not.

[Greg Brash:]

Okay good. Then on the gross margin side, I am curious. BioGlue increased year-over-year. I found that surprising with the FX impact and PH becoming a larger percentage of sales. I am just curious what is driving that?

[Ashley Lee:]

I think that in the first quarter of 2008 we actually had some write offs of some inventory and I think that that negatively affected the 2008 quarter from last year. Then BioGlue, we actually have become, I think, a little bit more efficient during 2008 and early 2009 from a manufacturing standpoint. I think our BioGlue margins might have actually increased slightly just due to manufacturing.

[Greg Brash:]

Okay, that’s helpful. Then going back to the cardiac, you mentioned some drawing down of inventory of the standard valves, but it looks like the CryoValve SG was also down sequentially. Is that something cyclical or is there something else going on here, or some hospitals trading down to cheaper valves?

[Ashley Lee:]

There might be a little cyclicality there. We are heading into what have traditionally been our stronger quarters for cardiac surgery and that is the second and third quarter. We still see some issues out there in the field. Some procedures are being delayed due to patients losing healthcare coverage. To a lesser extent we might see some other product being used, but that is not a significant issue for us right now. So, I think that as we move forward throughout the remainder of 2009 we are going to see our cardiac business pick up in the second and third quarters.

[Greg Brash:]

Okay and what gives you confidence that it’s going to pick up? Is it just knowing that a lot of the hospitals have depleted their inventory to levels that need to be replenished? Also, what was the price versus unit growth in cardiac for the quarter?

[Steve Anderson:]

I will tackle the first part of that question. The majority of our cardiac tissues are implanted in children that have congenital heart defects and we have historically seen the volumes increase in the second and third quarter because the kids are getting out of school, they have summer vacation and in many cases this type of surgery is elective, so they can pick the time of year when they’re going to have that kind of surgery. So, that is why we can pretty confidently state that we expect that part of our business to increase in the next couple of quarters.

[Greg Brash:]

Okay and as far as like price.

[Ashley Lee:]

The actual ASPs were actually up 1% year-over-year offset by an 11% decrease in revenues due to shipments.

[Greg Brash:]

Okay great. Thanks, guys.

[Operator:]

Thank you. Ladies and gentlemen we have no further questions at this time. I would like to turn the call back to management.

[Steve Anderson:]

Thank you very much for joining us for this conference call. We look forward to talking with you at the end of the second quarter.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. (Operator Instructions) thank you for your participation.