10:05: Cryolife Inc (CRY) Q4 2013 Earnings Conference Call February 20, 2014 10:00 AM ET

Steven Anderson – President and Chief Executive Officer David Ashley Lee – Chief Operating Officer, Chief Financial Officer, Treasurer, Executive Vice President and Head-Media Relations

Jeffrey Cohen – Ladenburg Thalmann & Co Thomas J. Gunderson – Piper Jaffray & Co. Joseph Munda – Sidoti & Company LLC

Greetings and welcome to the CryoLife’s Fourth Quarter and Year End 2013 Financial Results Conference Call. At this time, all participants are in a 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 Steve Anderson, President and CEO for CryoLife. Thank you, sir. You may begin.

Good morning, everyone. This is Steve Anderson, CryoLife’s CEO, and I would like to welcome you to our year-end conference call. With me today is Ashley Lee, the company’s Executive Vice President, COO and CFO. This morning we reported record revenues of $141 million for fiscal year 2013 and record earnings of $0.57 per share. International revenues were up 13%, domestic revenues were up 5%, international PerClot revenues were up 14%, international BioGlue revenues were up 18%. Total BioGlue units were up 10% year-to-year with 26,211 boxes of five syringes shipped in 2013. Total corporate year-over-year revenue growth was 7%. The agenda for today’s call is as follows; Ashley will discuss today’s press release in detail. He will also discuss future corporate development plans. I will give you an update on the status of the PerClot IDE and our plans for expansion into the Pacific Rim. After my comments Ashley will return to give you financial guidance for 2014. After Ashley’s guidance comments, we will open up the call for questions. At this time, Ashley will comment on today’s press release.

To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement. Comments made in this call that look forward in time involve risk and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, including the guidance for 2013 that I will provide in a moment. Additional information concerning risk and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company’s SEC filings, including the Risk Factor section of our Form 10-K for the year ended December 31, 2013, which we expect to file shortly, our previously filed Form 10-Qs for the first three quarters of 2013 and in the press release that went out this morning. This morning we reported our results for the fourth quarter and full year of 2013, we continue to make progress executing our strategy to drive revenue growth of additional high margin products. We achieved record fourth quarter revenues of $35.5 million driven by year-over-year revenue growth from the HeRO device, BioGlue, tissue processing and TMR. We were particularly pleased with the strong performance in our higher margin product segment, which increased 11% year-over-year in the fourth quarter of 2013, highlighted by 51% year-over-year quarterly increase in HeRO device revenues and a 10% year-over-year increase in BioGlue. Our tissue processing revenues increased 6% year-over-year in the fourth quarter compared to last year. In addition during the quarter, we received the payment of $15.4 million in connection with the sale of our investment in Medafor which bolsters our already strong balance sheet and will further support our growth initiatives. We…

In past conference calls we have outlined our discussions with the FDA regarding our IDE application for PerClot surgical hemostat. I’m pleased to announce that we believe we’re close to reaching an agreement with the FDA on the content of the trial and certain other trial parameters. The trial we have proposed includes multiple therapeutic areas that up to the 15 institutions in the United States. There will be 320 patients in the trial, a 160 in the controlled group and 160 in the PerClot group. The control will be Arista by as powdered hemostat agent. We expect to begin the IRB approval process in March with patient enrollment in late Q2 of this year. We estimate that it will take a six months to eight months to enroll all the patients with a three month follow-up time. We would expect to submit our PMA application in Q3 of 2015. Therefore we should expect FDA approval in Q2 of 2016. In previous conference calls I’ve commented on certain parameters of PerClot and for those of you who are new to our call, I’d like to go through some of the product differences at this time. PerClot absorbs about 4x to 5x more water than Arista product. In addition, PerClot’s fluid absorption rate is significantly faster as compared to Arista and makes a more adhesive gel or clot. PerClot priority grades in about 48 hours. We estimate that the U.S. market for our powdered hemostatic agent is about $780 million and we believe the international market it’s also similar in size to the U.S. market. We expect this product to have a gross margin in excess of 80%, once we begin manufacturing here. We have a film on our website that shows the difference between the two products, I would encourage…

So we are issuing our initial financial guidance for the full-year of 2014, we expect total revenues to be between $146 million and $150 million. This represents annual total revenue growth of 4% to 7%. We expect revenues from our higher margin product segment to increase in the mid to high single digits on a percentage basis for the full-year of 2014. We expect tissue processing revenues to increase in a low single digits on a percentage basis for the full-year of 2014 compared to 2013. That includes the voluntary discontinuation of allograft tissue shipments into Europe beginning in April of this year. We expect research and development expenses to be between $11 million and $12 million in 2014, primarily reflecting our investments in the U.S. clinical trials for PerClot. We expect the effective income tax rate for the full-year of 2014 to be in the mid 30% range. We expect earnings per share for the full-year of 2014 of between $0.21 and $0.24. The decrease in EPS as compared to 2013 is primarily result of the anticipated increase R&D spending for our PerClot clinical product. It is important to note that our guidance was up reflect activities related to business development or litigation which are difficult to predict. We believe that we are continuing to execute successfully on our strategy of positioning the company for accelerated revenue and earnings growth by expanding our addressable market opportunities through internal R&D, expanding and leveraging our sales and marketing and executing on business development opportunities. The acquisitions that we have made recently are producing accelerating revenue growth and we look forward to those contributions expanding as our revenue base grows. Looking forward, we believe that we have several opportunities to expand the company’s market opportunity with higher growth, higher margin products. These…

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

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question. Jeffrey Cohen – Ladenburg Thalmann & Co: Hi, good morning. Thanks for taking the call.

Hi, Jeff. Good morning. Jeffrey Cohen – Ladenburg Thalmann & Co: Good morning. Could you talk a little bit more about the ramifications of the voluntary recall and stopping of the shipments starting April into Europe, what percent composition is it for tissues and you anticipate any charges associated with that?

In 2013, Jeff we shipped approximately $1.2 million to $1.5 million of tissues into Europe, and as we had previously stated that business operates near break-even for us. So, despite the fact that we’re not going to have that revenue base in 2014, we do believe that we will still be able to grow our tissue processing business overall in the low single digit range, going forward – in regards to any charges related to that, we don’t expect any meaningful charge to come out of our decision to discontinued shipping tissues into Europe. Jeffrey Cohen – Ladenburg Thalmann & Co: Okay. Got it. Could you talk a little bit more if you’re able on ValveXchange $3.2 million charge write-down, what’s the latest as far as approval or revenue or corporate valuation or any other information that you can provide?

I think that we’re limited in what we can say about what they’re doing internally, but we continue to believe that their product definitely has a place in the surgical valve market, based on the data that we have seen and communications from management that they’ve made publicly. They expect to get CE Mark in the very near future. And as I stated earlier, we still think that it has a place in the surgical valve market going forward. If you’ve got, I think other specific questions about their activities on a daily basis, I would refer you directly to ValveXchange’s management. But we’re still very optimistic about the opportunity for their technology. Jeffrey Cohen – Ladenburg Thalmann & Co.: Okay. And one more if I may, Steve, you have mentioned us some parameters on BioGlue and the first one, could you reiterate that, so for Japan we anticipate expanded indications and what indications and what timeframe?

Oh, BioGlue in Japan, we’re trying very hard to get a – another indication for neurosurgery. And I would think that would take a couple of years. Jeffrey Cohen – Ladenburg Thalmann & Co.: Got it. Okay, that does it for me. Thanks again.

Our next question comes from the line of Tom Gunderson with Piper Jaffray. Please proceed with your question. Thomas J. Gunderson – Piper Jaffray & Co.: Hi, good morning.

Good morning. Tom.

Good morning. Tom. Thomas J. Gunderson – Piper Jaffray & Co.: So, I’ll follow up on the last question on PerClot indications the IDE you’re close even to the point where you believe, you can go to the IRBs next month. Are you getting all of the indications that you want it with that IDE?

We don’t know. Thomas J. Gunderson – Piper Jaffray & Co.: Got it. Is that sort of the final decision?

We’re still discussing with some – with the power it would be. Thomas J. Gunderson – Piper Jaffray & Co.: Got it, got it. But Steve, you’ve got, you’ve been through this frustratingly slow process more directly than anybody, and you had in late February, I think, you’re close enough to talk about IRB discussions in March, what is that, that’s given you that confidence?

There have been numerous meetings between our management and the reviewer and the management of the FDA over the past three or four weeks, and ironing out some of the details of the clinical trial. And we have taken some of their counsel and I have repaired a re-done the IDE and it will be sent in here by the end of the month. So they will have a document to review what the final review that they have participated in along with us. And so there shouldn’t be any questions remaining in their mind about how the clinical trial is going to be run, how it’s going to be constructed and so forth. I’m expecting there will be a couple of more conversations before we send it to them to make sure that the indications that we are asking for are going to be approved. Thomas J. Gunderson – Piper Jaffray & Co.: Got it. Yes, [indiscernible] back again.

Yes. I don’t want to get it back again, but it should be submitted by February 28. Thomas J. Gunderson – Piper Jaffray & Co.: Okay. And then Ashley on the lower than we expected, I think the street expected EPS guidance you are attributing that to higher R&D. I’m still having a little trouble getting that low, is it fair to assume that if you have higher growth rates in your higher profit margin products, on the revenue side that gross margin stays the same or goes up a little bit?

I think gross margins are going to be kind of flattish in 2014 compared to 2013, and maybe just to give you a little bit more color on some of the other expectations we have for 2014. On a G&A standpoint, we’re expecting about mid single-digit growth overall in G&A expenses in 2014 compared to 2013. A lot of that is a reflection of the investments that Steve and I talked about in some of our international markets. We indicated earlier that our growth over there is very good and we want to continue that momentum going forward as we continue to get these additional products approved on to the market. And in order to do that we’ve got to make some investment predominantly with the distributor relationships and management at this point. But that’s one of the – the areas that we’re focusing on and investing in next year, hopefully that was helpful. Thomas J. Gunderson – Piper Jaffray & Co.: Yes, it is thanks. And then while we’re on that international expansion, it’s something we’re going to track going forward obviously as where the higher growth is coming from. You gave us good numbers on the split for the growth of revenues in the U.S. and OUS, and then subdivided OUS into Europe, and rest of world. Can you remind me what the percentage of revenues is between U.S. and OUS and how that breaks up between Europe and rest of world?

Yes, for U.S. versus OUS it’s about 78% in the fourth quarter and the full-year compared about 22% for OUS, so 78% domestic about 22% OUS. The breakdown between Europa our European operations and the remaining international markets and I am going a little bit from memory here, but I can confirm this later time I think it’s roughly two-thirds to one-third between Europe and international markets outside of Europe. Thomas J. Gunderson – Piper Jaffray & Co.: Okay. Good, thanks that’s it from me for now, thank you guys.

(Operator Instructions) Our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed with your question. Joseph Munda – Sidoti & Company LLC: Good morning Steve and Ashley. Thanks for taking the question.

Good morning.

Good morning, Joe. Joseph Munda – Sidoti & Company LLC: I’d like to touch on Europe for a second I know you spoke about it in your comments and you are going to discontinued selling the allograft into eve, are the plans maybe sometime down the line to retry to get back into those markets again or renter those markets.

We don’t have any plans at this time. Joseph Munda – Sidoti & Company LLC: Okay. And then Steve in your prepared remarks you talked about China. Can you give us some indication or some color on the approval environment as far as, it goes in China and now you had mentioned 2017 that seems if a little bit of ways off,

The three-year process – it definitely is three-year process and in our clinical trial has been conducted by our joint venture partner and it is just begun. It is just getting underway, so that is why we chose that particular date. So it’s just – there is just no way that we can speed it up. Joseph Munda – Sidoti & Company LLC: Okay.

But I think it will be accomplished and get done as a result of the fact that our partner is very experienced in those markets. Joseph Munda – Sidoti & Company LLC: Okay, that’s helpful. And you also spoke about India, what type of potential do you see for BioGlue in India as far as market opportunity?

Yes, it’s a little bit too early to set some expectations now at this point, Joe. But as you know, India is a very large country, and there is certainly a large subset of the population there that has access to good healthcare. So as we get a little bit closer to that approval, we will get more information on what our expectations are in that market going forward. But it’s certainly a market that is attractive and we’re pursuing. Joseph Munda – Sidoti & Company LLC: Okay. And then I just some housekeeping items here, as in your guidance with the R&D spend, can we expect some of it’s be front end loaded with the initial enrollment or do you see a thing more spread out evenly over the quarters?

I think it’s probably going to be a little bit more back-end loaded. As Steven mentioned earlier, we’re hoping to get the trial underway in the second quarter. I would expect that the third and fourth quarters are going to be more of a heavy spend as that enrollment ranks up. Joseph Munda – Sidoti & Company LLC: Okay. And Ashley what was CapEx for the year?

I believe it was around $4 million to $4.5 million. Joseph Munda – Sidoti & Company LLC: Okay. And then I guess my final question Steve, Singapore what – I mean the cost to open an office in Singapore, I know Ashley spoke about single-digit, mid single-digit growth in G&A. But is there any charges or anything we’re going to see one-time from that opening of that office in Singapore, I don’t mean charges, but some expenses that maybe bigger initially?

We’re not expecting that. Joseph Munda – Sidoti & Company LLC: Okay. Okay, thank you, guys.

Mr. Anderson, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

All right. Thank you everyone for joining us. And we look forward to speaking with you after the completion of our first quarter.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.