Misonix, Inc.
Q1 2014 Earnings Call Transcript

Published: 9 Nov 2013

[Operator:]

Good afternoon, and welcome to the Misonix first quarter fiscal year 2014 results. (Operator Instructions) I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead.

[Joe Diaz:]

Thank you, Amy, and thanks to all of you for joining us today to review the financial results of Misonix for the first quarter of fiscal year 2014, which ended on September 30, 2013. As the conference call operator indicated, my name is Joe Diaz, I'm with Lytham Partners, and we are the Investor Relations consulting firm for Misonix. With us on the call representing the company today are Michael A. McManus, Jr., President and Chief Executive Officer; and Richard Zaremba, Senior Vice President and Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the release, you can retrieve it from the company's website at misonix.com. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Misonix Incorporated during the course of this conference call that are not historical facts are considered to be forward-looking statements, which are subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Investors are cautioned that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the statements made. These factors include, but are not limited to

[Michael McManus:]

Thank you, Joe, and welcome to all of you on the call. Despite lower sales, the past quarter was another important building block for your company. You'll remember that we have previously discussed the strategy we have adopted of consigning our important unique product, the BoneScalpel in the United States, in conjunction with the commitment to purchase disposable blades and other products. When we look at the indicators of progress, we placed or sold 15 units in United States compared to seven in the same quarter of 2013. These numbers excluded sales to Aesculap, our distributor to certain of their key account. Sales to Aesculap were down approximately $363,000, which resulted in part of our shortfall. BoneScalpel domestic disposable revenue, however, increased 74% excluding Aesculap driven by a 65% increase in disposable units. Recurring revenue accounted for 53% of our total sales during the quarter compared to 40% in the fiscal first quarter of 2013. We believe these are all positive indicators of surgeons' acceptance of this new technology and their continued building use in their practice. Net sales were lower as I said, due to lower sales to Aesculap, but also as the continued long-time for budget and VAC approvals in United States and the extraordinary number of initial international stocking orders in the first quarter of fiscal 2013. We continue to realize wins in these value assessment committees in the United States, but the time to get approval varies by hospital. More importantly to us, the number of valuations continues to grow. Our pipeline continues to show surgeons interest in purchasing the BoneScalpel. In addition, recent participation in Spine Meeting showed greater recognition of the brand. And both new surgeons and distributor signing up for evaluations and information. We continue to see interest in our SonaStar aspirator outside the United States. In Europe and Asia, we sold a total of 11 systems as compared to 10 in the same quarter of fiscal 2013. We do continue to find that in some international markets our disposables on the SonaStar are being reused, and we are looking at possible ways to address this issue. In United States, we did sell two units of SonaStar this quarter versus one in the last year during the same quarter and we expect an increase in units per quarter going forward. We have an important evaluation of the higher volume SonaStar in the next few weeks in China. Early reviews saw acceptance of this product, which we expect to result in growing sales in this new and huge market. We're excited about the increased interest in our SonicOne in the wound care market in the United States in both the clinic and operating rooms. We now have highly regarded wound care consultants managing our wound clinic market distribution, and separately we'll be directly selling into the operating room where as Misonix where reimbursement allows for our sales of disposable tips. The expanded education of surgeons in the antimicrobial benefit of ultrasound and its tissue regeneration enhancements, we believe will result, and you're seeing increased consignments of SonicOne's, and subsequent growth in the associated high-margin disposable revenues. I want to briefly mention my recent trip to China. I had a chance to meet with a number of surgeons using both our SonaStar and BoneScalpel. There is considerable enthusiasm for our technology in that country. One special doctor I met has already done more than 45 complex tumor surgeries around the spinal chord using our BoneScalpel. This is a huge exciting market and we have indications that we could see strong new sales there over the upcoming months and quarters. Lastly, I want to refer you to three of our last releases from some of the recent conferences we attended as indications of what I've been talking about. These include the National Association of Spine Surgeons, the CNS Conference for Neurosurgery and the Diabetic Limb Conference in Georgetown, which is one of the most prominent conferences in that area in the country. Testimonial quotes we received from some of the most prominent surgeons in their fields speak volumes about the recognition and acceptance of our unique technology on our products and their value to doctors, patients and hospitals. We've been spending a lot of time working on this education and it's starting to bear fruit. For instance, Dr. Paul Holman, a leading orthopedic surgeon at Houston Methodist Hospital was quoted at, now saying, I view the BoneScalpel as one of the three most important technologies to enter the spine world in the last 10 years. He then goes on to refer to less blood loss, allowance for efficient bone removal and the retention of local bone for better fusion. It's just one of the many examples of the kind of support and energy we are seeing from surgeons that will we believe result in more evaluations and continued growth for sales of our products. Let me turn it over to Rich. Rich?

[Richard Zaremba:]

Thanks, Mike. Revenues for the three months ended September 30, 2013, were $3.1 million, compared to revenues of $4.6 million for the same period in fiscal 2013. BoneScalpel revenues were $1.3 million, SonicOne revenues were $469,000 and SonaStar revenues were $1.1 million. BoneScalpel, SonicOne and SonaStar revenues were $3 million for the first quarter of fiscal 2014. Net royalty income increased 317% to $900,000 for the three months ended September 30, 2013, compared to the same period in fiscal 2012. The company reported a net loss for the three months ended September 30, 2013 of $884,000 or $0.12 loss per. The company's cash position as of September 30, 2013, was $4.7 million. Days sales outstanding is 82 days. Inventory turnover is 1.3x and the company has no long-term debt. The company's backlog of unfilled orders as of September 30, 2013 was 302,000. Most current orders are shipped when received. Mike?

[Michael McManus:]

Operator, if you would, we'd be happy to take questions if there are some at this time.

[Operator:]

(Operator Instructions) Our first question comes from Steve Kruger at Foresight.

[Steve Kruger:]

Question for you on the number of units, BoneScalpel units placed or sold in Q1. The press release says that there were, if I read it right, 15 units placed in the U.S. versus seven a year ago. But worldwide, I read that to say, that there were 36 total units placed worldwide in Q1 2014 versus 57 in the first quarter last year. So we see U.S. units sold or placed going from seven to 15, but total worldwide going down from 57 to 36. And if I do the arithmetic, it says that units sold or placed outside the U.S. decline from about 50 units in 2013 to 21 units in Q1 2014, which is a rather drastic reduction. Am I doing the math right? And if not what am I doing wrong? And if I am doing it right, what accounts for this (multiple speakers).

[Michael McManus:]

I think you are doing the math right. And what accounts for it is, is particularly on quarter-to-quarter basis, the first quarter last year was the beginning of stocking sales to a significant number of distributors outside the United States. But they take in more than one unit and they sell them off overtime. So we don't have control of when they restock and they did a buy a lot. And so our indications and our metrics, and our conversations with people in the international markets suggest that we are going to see a increase in sales outside the United States and we expect to see a more than 10% increase in sales across the board outside the United States, not including the possibility of new sales into China. So over the year, we would expect to see continued growth in international markets. We didn't see it in the first quarter, you're absolutely right, as compared to the quarter a year ago.

[Steve Kruger:]

So we do you have a metric that shows on a pull-through, end-user sold or placed basis, what the international market looks like and is that also trending up?

[Michael McManus:]

Yes, I think it is trending up. We have better visibility with some distributors than others. I mean the difficulty is that once you've sold the product to a distributor, they own it. And we need to get metrics with regard to where it's sold, and the particular doctors, but in terms of the number of units, they still have an inventory and things like that. Some hold that more close to their vest than others. We're trying to get the best metrics that we can, across the board of the visibility that we do have, the indications are that orders are going to pick up, and that's what we fully expect to see.

[Steve Kruger:]

On a percentage basis, the number of units placed and sold in the U.S. is impressive, but at the same time, I'm wondering on a productivity basis with the number of feet on the street that we've discussed in the past being somewhere in the neighborhood of over 150. I think you've said individual sales reps out there now trained and they're trying to place or sell units, but still like less than for one unit per 10 reps or something like that, it's still very low productivity. What kind of metrics can you share with us about the size of funnel at the front-end and do you see that growing? What rate do you see that growing and what indication do you have about whether or not this indirect sales model is really going to work for you in getting traction.

[Michael McManus:]

Well, I do think it's going to work for us and I do think it is getting traction and we do have indications that the pipeline is building and we haven't completed all of the training of all of the 150 you talked about, because some came on later than others. But we do have a lot of feet on the street and the traction has not been at the rate I would like to see it. But there are number of things that are important here that we've talked about in the past. And one of the reasons I don't want to get into what the funnel is with any specificity is that we don't have control particularly with regard to the end of the funnel. We do have control in terms of our visibility to the kinds of a numbers of evaluations we're seeing, and I think I did say that they are picking up. But a doctor evaluates a product like the BoneScalpel over a period of time and some evaluations are longer than others. Some hospitals require longer evaluations, and no matter what the time of evaluation is, at some endpoint, because we are a new product, we wind in having to go to these value assessment committees where we don't have any control and neither does the doctor in most cases over how long it takes to get that evaluation completed. So I'd say the answer to your question is, yes, you're right again, it is too slow. We do see indications internally that seem to suggest that its getting more robust and we expect to see a pickup. But we can't say, what date the approvals will come from VAC, so we don't know what quarter the sales will eventually be realized in. And that's just the best we can do. What we do have to do is what we've been doing, that has resulted in some of these most recent releases, which is we have to continue to execute and go into shows, making sure that doctors, more doctors are aware of what we're doing and the value of this product. We have to continue to do clinicals like we've done in the past and we will continue to do this year. We have to generate more economic data for the VACs and other information to help them understand the value proposition with regard to the product. And then we have to continue to get referrals from some of the prominent doctors saying such good things about us. So that the word gets out there and the ability for us to see doctors becomes accelerate. That's the key. We're trying to see some of the busiest people in the world. And we have to do the kinds of things that keep banging away at that to help us get in the door.

[Steve Kruger:]

I know, Mike, you just mentioned that you need to do some more work in establish and documenting the value proposition, so that you can explain it convincingly to your perspective customers. Did I hear you right? And how much more you have some additional studies to do, is there more effort involved or have you collected the data at this point that you need? And it's just a question of packaging it?

[Michael McManus:]

Well, it honestly takes a lot of both. We've done data analysis and gathering, there was a wonderful report, by a doctor out in California, recently about blood loss, which is a substantial significant issue and benefit in terms of the use of the BoneScalpel versus other technology. So if you can reduce blood loss over a five hour severe deformity case, there's a lot of benefits to the hospital impact and to the patient. And we've already documented that. What we need to continue to do and we've started to do this year is an evaluation of say three docs, who have done hundreds of procedures and it's a retrospective review of how much time it took them to do it, what made the procedure safer, how much blood did they save, those kinds of things. But I can assure you that the information that we have before the VAC Committees now is well documented and good data. And we are winning the vast amount of VAC analysis that we go through. It's just a continuing job if you win this business, you have to continue to update the science across all of our products.

[Steve Kruger:]

What I hear saying is that the product that you have now in terms of communicating the value proposition is more than adequate to get the job done in terms of closing these sales.

[Michael McManus:]

Well, it is in fact doing that, when we come before the valuated committee. I'd wish we had a way to speed it up. And by the way, so does the doctors, who have done the evaluations and sent down to somebody in the hospital have request to purchase a BoneScalpel.

[Steve Kruger:]

One last question for the moment if I may, Ethicon has a product called the Harmonic Scalpel. Is that a competitor to the BoneScalpel or not?

[Michael McManus:]

You know what it is, it's actually a competitor to the Autosonic, which is one of the first ultrasonic products on medical device side that we made, which is being sold by Covidien. That's a product for laparoscopic surgery. It's basically product for among other things, sealing off vessels and taking out gall bladders and doing things like that, it's not cutting hard bone.

[Steve Kruger:]

So it's a soft tissue device as oppose to a bone device.

[Michael McManus:]

Yes.

[Operator:]

At this time, we have no further questions. I would like to turn the conference back over to Mr. McManus for any closing remarks.

[Michael McManus:]

Thank you, Amy, and thank you all for being on the phone. I do think that we're making progress. I know it's slower than you would like. And I can assure you it's slower than I would like. But it is a matter now, we believe, of execution and I think that we have the team in place now to do that, and to do it well with the discipline that we need to be successful. I do encourage you to, if you have time, take a look at the last series of releases that we came up with, because I think it represents a dramatic change in the vocal support that we're getting from prominent surgeons across the spectrum of our products, and it does result from the kind of education that we've been doing. It hasn't resulted yet in the acceleration of sales that we'd like to see, but when you have the best in the field for instance in the field of wound care, that Dr. Rogers, out in California talking about how we debride better and more selectively than existing technology, and we're more cost effective. That's important. And doctors see that and it's one of the things that we have to continue to try to produce and that takes time. It takes going to these shows. It takes us working with these doctors. But I can assure you that you would not see some of the most prominent people in the field go out on a limb for a new product and a new technology, unless they are very confident in the benefits that they choose. So another just quick example is from Dr. Peter Blume, who is one of the best in the country in terms of wound care at Yale School of Medicine, who said the demonstrated safety and efficacy of the SonicOne O.R. for the operating room, ultrasonic debridement system, has the potential to finally transform operative wound debridement in a way that we have not seen in the recent past. So that's not a sale, although it's a sale to him, and we're sold to him. But the point is that this a vibration, this is noise that is going across the medical world, talking about the value of these products. We still have to get to see. As I said, the busiest people in the world, and ask them to spend a day and go to a cadaver lab, do an evaluation, and then do a number of procedures, make a recommendation inside their hospital and push as they can at VAC Committee to approve the product and eventually the sale. And they're doing that. It is taking longer than I'd like. But you don't get this kind of support from world-class surgeons, without having something that can really make a difference in these markets. And we just have to keep banging away with it, on it, and I assure you we will. As I said before, my visit to China was extremely impressive in terms of how good those surgeons are in China and Beijing, the magnificent hospitals that they've built and the work that they're doing, which has complexes as anybody in the world, and they're interested in new technology, they want things that are approved by the FDA. They're excited about the potential to use the BoneScalpel and the SonaStar in China. And we're very hopeful that that's going to see a significant difference in the building up of sales from this quarter over the subsequent quarters. And that you will begin to realize the value that you have in this company Misonix. So we thank you very much for being on the call. We appreciate your interest. Happy to take your questions at any time. Have a good evening. Thanks very much.

[Operator:]

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