Artivion, Inc. (AORT) Q2 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to CryoLife Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A 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 Mr. Anderson, you may begin.

Good morning, everyone. This is Steve Anderson, CryoLife’s President and CEO, and I would like to welcome you to CryoLife’s Q2 2014 conference call. With me today is Ashley Lee, the company’s Executive Vice President, Chief Operating Officer and Chief Financial Officer. This morning we reported our operating results for the second quarter. Revenue has increased 3.5% over the same period in 2013 driven by increasing worldwide sales of BioGlue which were up 14% year-over-year and significant gains in our new products. PerClot and international markets was up 22% year-to-year and the HeRO Graft in the United States was up 20% year-to-year. The agenda for today’s call is as follows. Ashley will discuss the press release and on the earnings report in detail and by product. He will discuss the status of the PerClot IDE and the beginning of the clinical trial. He will also discuss certain regulatory issues. I will discuss the launch of PerClot Topical our powdered hemostat, which was cleared the 510-K regulatory perhaps in the U.S. We are planning to launch the U.S. marketing campaign for PerClot Topical shortly after Labor Day. I’ll discuss the size of the market as well as our approach to gain market share. I will also discuss the appointment of Pat Mackin, as CryoLife’s new President and CEO effective September 2nd as well as my changing role in the company. At this Ashley will discuss this morning’s press release and the results for the second quarter.

Thank you, Steve. To comply with the Safe Harbor requirements of the Privates 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 2014 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 and our Form 10-Q for the first quarter of 2014, and the Form 10-Q for the second quarter of 2014, which we expect to file shortly and in the press release that went out this morning. This morning we reported our results for the second quarter of 2014, we continue to make progress on executing our strategy to leverage our established sales force to drive growth of an expanding portfolio of high margin medical device products. We are pleased with our results from that perspective in the second quarter. We achieved record second quarter revenues of $34.7 million driven by 12% year-over-year revenue growth from our higher margin product segment. The following factors influenced our revenue performance. Our international revenues were up 21% for the second quarter of 2014 compared to the prior year. Our second quarter included 17% year-over-year growth in our European operations and a 30% increase in our international operations outside of Europe. Our domestic revenues were down 1% for the second quarter of 2014 compared to the prior year. This resulted from a decrease in tissue processing in TMR revenues, partially offset by increases in BioGlue and HeRO Graft revenues. I have more on that later in my comments. Worldwide BioGlue revenues in the second quarter were up 14% year-over-year. Domestic BioGlue revenues were up 8% on a 4% increase in volume. This was a fourth straight quarter that we’ve seen an increase in domestic volume year-over-year. International BioGlue revenues were up 22% on a 17% increase in volume. HeRO Graft revenues increased 20% to $1.7 million in the second quarter of 2014 compared to $1.4 million in the second quarter of 2013. This increase reflects the growing interest in the HeRO Graft as a long-term solution for hemodialysis patients who are out of access options. Internationally we continue with our launch into European markets. Overall we remain very optimistic about the prospects of the HeRO device. PerClot sales increased 22% for the second quarter of 2014 compared to the second quarter of 2013. The increase is due to growth in both new geographies and new indications including neurology and neurosurgery. We continue to remain very optimistic about the positive impact that PerClot will have on our business in the future. Although our revenues from our TMR product line decreased 9% in the second quarter of 2014 compared to 2013. TMR revenues increased 24% sequentially compared to the first quarter of 2014 on a 31% increase in handpiece shipments. Recall that we introduced a new handpiece design in the third quarter of last year. That transition adversely affected our year-over-year revenue comps in the second quarter. Tissue processing revenues were down 6% for the quarter compared to the prior year. During the second quarter, we voluntarily restricted the distribution of certain cardiac and vascular tissues, while we performed a review of our internal training programs. We gradually resume shipments of these tissues during the second quarter of 2014. Preservation Services revenues were negatively affected primarily during the first two months of the second quarter as a result of reduced tissue availability during this review. There are currently no restrictions on our ability to ship tissues and thus we don’t expect tissue processing revenues to be affected by availability in the second half of the year. However, we do not expect to make up the lost revenue in the second quarter over the remainder of the year. Our effective tax rate for the second quarter was 10%. In June the IRS completed an examination of certain of our income tax returns. As a result of the outcome of this examination we reevaluated our liabilities for uncertain tax positions, primarily related to our R&D tax credits and credit carryforwards. And based on revised estimates and the settlement of the examination we reversed $748,000 and uncertain tax liabilities and tax expense, lowering our tax rate for the quarter. We expect that our effective tax rate for the full year will be approximately 30% and we believe that it will be lower than 30% if the R&D tax credit is renewed for 2014. As of June 30th 2014, we had $36.8 million in cash, cash equivalents and restricted cash and securities. We had several large cash outlays in the first half of 2014. These included approximately $2.4 million for insurance premiums, $2 million for share repurchases, $1.6 million for dividends, $1.5 million for PerClot inventory purchases pursuant to our minimum purchase requirements, $1.4 million related to business development activities in particular for ProCol and $1 million for development milestones for PerClot. Despite these uses of cash, our balance sheet remains very strong. We continue to carry no debt and expect to continue to generate strong operating cash flow. We are pleased to be able to return a portion of our profits to shareholders, while continuing to build shareholder value, our dividend, our share buyback program and our investments in organic and acquisition of growth opportunities. With respect to the FDA, we continue to work to address their concerns. We have maintained an open dialog with the FDA Atlanta District Office and we will update you as appropriate when we have further information to report. Regarding the PerClot IDE as we discussed previously, we received an unconditional approval to begin our clinical trial. However, we have amended our study protocol to address some study design considerations recommended by the FDA. We expect to have the amended protocol approval from the FDA later this quarter. Patient enrollment would begin shortly thereafter. I also want to provide an update on ProCol. In our last call, we told you that Hancock Jaffe was in the process of validating its new manufacturing facility in preparation for restarting manufacturing. We’re pleased to report that they have in fact completed their validation work and has filed a 180 day PMA supplement with the FDA reflecting this manufacturing site change. We are both hopeful that the FDA will respond before the 180 day deadline, if we receive approval before the 180 day deadline we will be able to launch ProCol later this year or very early next year. Please refer to our SEC filings for detailed discussions the factors affecting our results of operations including our Form 10-Q that we plan to file shortly. Now I will turn it back over to Steve.

Right after the Labor Day weekend we intend to launch PerClot Topical hemostatic powder into the United States ENT market. We have been marketing PerClot in Europe and certain other international markets since September 2010. We will be augmenting our United States 25 person direct sales force with distributor reps that have previous expertise in selling hemostatic products. These additional sales representatives should bring our total domestic sales force up to 65 to 70 sales reps. We believe that the annual ENT market for a powdered hemostat to be approximately $100 million in the U.S. In previous conference call, we have told you about the significant advantages PerClot Topical has over Arista, but I would like to reiterate them today. In an ENT pre-clinical experiment PerClot Topical was significantly more effective and achieving hemostasis as compared Arista’s powdered hemostat. Furthermore in laboratory studies PerClot Topical has been shown to absorb four to five times more fluid than that competitive product. It also works in one half of the time Arista works and it has a much more robust clot. Based on these studies, management believes that we may a superior product; PerClot Topical is also easier for the physician to apply to the treatment area, because the package is easier for the physician to handle. We believe that PerClot Topical is more economical for the hospital to use than the competitive product as CryoLife’s price for 3 grams of PerClot Topical will be priced lower than the 2 grams of Arista. One of the most frequently asked questions I get about PerClot is what is your manufacturing capacity presently we have the capacity to manufacture a 105 packs a week. If we were to sell all of that production it would mean we would have in excess of $250,000 in sales per month. Beginning in September however, that is beginning in the September however in January or February we expect our capacity to increase to a 1005 packs per week. And that would be a tenfold increase in our capacity. Management believes that combined 2015 worldwide sales for PerClot and PerClot Topical will exceed $7.5 million and when at full production the product will have a gross margin north of 80%. On July 10th CryoLife’s Board announced that Pat Mackin has been appointed as President and CEO of CryoLife effective September 2nd. Pat has over a 20 years of experience in the medical device industry. For the last 12 years he has been with Medtronic most recently as President of their Cardiac Rhythm Management Division which is Medtronic’s largest operating division. Prior to joining Medtronic Pat was employed by Genzyme serving as their Senior Vice President and General Manager for their Cardiovascular Surgery Business unit. Pat received a Masters in Business Administration from Northwestern University’s Kellogg Graduate School of Management and a BS in general engineering from the U.S. Military Academy at West Point. I’m looking forward to working closely with Pat during this management transition and I will be assuming the newly created position of Executive Chairman of CryoLife on September 2nd. The Board and I envision that my responsibilities will be to assure a smooth transition for Pat into the management of the company. And I will work with Pat and Ashley on corporate development opportunities which there are plenty. I will also continue to serve on the Board of Directors at least until the next Annual Meeting in May of 2015. That concludes my comments and now I will turn the call over to Ashley so he can provide some financial guidance to you.

We now expect total revenues to be between a $144 million to $146 million down from the $146 million to $150 million we announced in conjunction with our fourth quarter 2013 results. Primarily due to reduced tissue availability resulting from the second quarter voluntary hold on certain tissues. This represents annual total revenue growth between 2% and 4%. We expect revenues from our higher margin product segment to increase in the mid to single digits on a percentage basis for the full year of 2014. We expect tissue processing revenues to be flat for the full year of 2014 compared to 2013. We expect R&D expenses to be between $11 million and $12 million in 2014, primarily reflecting our investments in our U.S. clinical trials for PerClot. We expect earnings per share for the full year of 2014 between $0.17 and $0.20. This includes the effects of the reduced revenue and tax rate guidance and the additional expenses as a result of the appointment of the new company President and CEO. It is important to note that our guidance does not reflect activities related to business development and potential share repurchases 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 growing and leveraging our sales and marketing platform and executing on business development opportunities. The acquisitions that we have made are producing accelerated revenue growth and we look forward to those contributions expanding as their revenue base grows. Looking forward we believe that we have several opportunities to expand the company’s market opportunity for higher growth, higher margin products. These include number one, continue to drive revenue growth in the HeRO Graft through the launch by our broader U.S. direct sales force, our CVP Summits and other marketing events aimed at raising product awareness and the market launch in Europe. Two initiate enrollment in our PerClot IDE clinical trial and drive the US adoption of PerClot Topical for ENT following our 510-K approval. Three drive adoption of the ProCol Vascular Bioprosthesis once Hancock Jaffe receives the FDA approval for their manufacturing location change. Four, seek expanded indications and approvals for BioGlue and PerClot. And five continue to evaluate and capitalize upon strategically appropriate business development opportunities. If we execute on these initiatives, we will be in a good position to drive top-line growth on our higher margin medical products and further leverage our operating infrastructure to improve profitability. That concludes my comments and I’ll turn it back over to Steve.

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

Thank you. [Operator Instructions] Our first question is coming from Tom Gunderson of Piper Jaffray. Please proceed with your question. Tom Gunderson – Piper Jaffray: Hi, good morning guys.

Good morning.

Good morning, Tom. Tom Gunderson – Piper Jaffray: So, the – a small question and a big question, the small question is I want to make sure I’ve got the PerClot near-term opportunity pegged right that’s a 510-K you’re working on a PMA for surgical approaches, but on the ENT on a topical that’s a 510-K and you have that already or don’t or expect it so?

Yes, we have approval for that. Tom Gunderson – Piper Jaffray: And the $100 million market is current market out there or that’s the opportunity that you think it is available (indiscernible)?

That’s the current opportunity in the ENT business.

Both for hemostats in general. Tom Gunderson – Piper Jaffray: Right. And are you calling on ENT’s right now or is that a new call point?

That’s a new call point. Tom Gunderson – Piper Jaffray: And that’s with the extra distributor reps for us all right?

Yes. Tom Gunderson – Piper Jaffray: To help with that, okay. I have got that, and I appreciate you bearing with me on that. Steve, the broader question is what’s your expectation for Pat as you hand over the reins and are you expecting business as usual continue with the plan is it a new look at the current operations and maybe a new strategy or adding in. How much of a change would you expect to see in this 6 to 12 months down the line?

I would expect big changes from Pat. Pat is very successfully, and he has been successful at every position he has had in different companies. And I know that he is very excited about his opportunity her at CryoLife. The one objective that he has told me to my face that he has immediately is he wants to grow the market cap to a billion dollars and I’m going to do everything I can to help him get there. Tom Gunderson – Piper Jaffray: Did he put a timeframe on that billion dollar market cap?

Well, his contract is for three years, he would want to do it in that timeframe. Tom Gunderson – Piper Jaffray: All right, thanks. We look forward to see in the new changes and what happens when you put all of your time on new business development.

Thank you. Our next question is coming from Jeffrey Cohen of Ladenburg Thalmann. Please proceed with your question. Jeffrey Cohen – Ladenburg Thalmann: Hi, guys, thanks for taking my questions.

Hello Jeff. Jeffrey Cohen – Ladenburg Thalmann: Hi, so firstly can we talk about HeRO a bit it looks like there a good object for the quarter, what’s the status of the launching development in Europe?

We are currently in 11 about 10 or 11 countries in the European region right now. I think one of the things that will need to continue to develop to further drive that opportunity is working on some reimbursement in each individual country. But right now we’re currently in about 10 or 11 countries and it seems to be going well. I think for the second quarter, we generated about a $170,000 in revenues in international market. So we were pleased with that and we continue to see that business development growth. Jeffrey Cohen – Ladenburg Thalmann: Okay. And could you talk a little bit about the market and the share; do you believe that you are picking market now or you picking up market as a result from others the overall market or some of the trends going away from fit to work?

Well, again, I think this is a product that is really for the patients that are really out of options and if you look at those patients who are out of excess options that have developed central venous stenosis. The HeRO Graft is really the only product on the market there that really meets the needs of the patient and the storage. And so it’s really not taking market share, but more developing the market. So its creating more product awareness, training surgeons and, we continue our efforts in those areas. Jeffrey Cohen – Ladenburg Thalmann: Okay. One more if I may could you talk about the vast (indiscernible) markets well it sounded like you had a little bit of a hiccup and as you had said it resumed, did was there any catch up associated with it resuming or is pretty much a missed period?

I think it was by in large a missed period, and especially in the month of April and May in the second quarter there were, we had limited tissue available for shipment and we’ve probably lost some of those cases to competitors. As our tissues came back online in the months of predominantly June and into July, our business is back to where we expected it to be. So, we’re very optimistic about, our ability to supply an adequate amount of tissues to our certain customers over the balance of this year. And the results in June and July so far have been very good. Jeffrey Cohen – Ladenburg Thalmann: Perfect. Thanks for taking the questions, I appreciate it.

Thank you. Our next question is coming from Joe Munda of Sidoti & Company. Please proceed with your question. Joe Munda – Sidoti & Company: Good morning, Steve and Ashley thanks for taking the questions.

Good morning.

Good morning. Joe Munda – Sidoti & Company: Steve, just real quick in your prepared remarks, regarding PerClot Topical and the capacity and your expectations is there going to be significant capital outlays to increase the capacity 10 times?

No, there won’t be. Joe Munda – Sidoti & Company: Okay.

We’ve already bought the equipment to do that and it’s a matter of validating it and getting our early production runs done with the much larger capacity equipment. But that’s here, it’s installed. Joe Munda – Sidoti & Company: Okay. And if I recall, you said $7.5 million for total PerClot in 2015?

Yes, I did. Joe Munda – Sidoti & Company: Okay, just wanted to double check with that. Ashley as far as CapEx was concerned for the six months where are you guys at?

We were a little over $2 million for the first half of the year Joe. I think that would probably will spend a little bit more than we’ve spent in the past couple of years to for some the work associated with our ongoing efforts with the FDA. But, I don’t think it’s going to be significantly more than what you’ve seen in the past couple of years. You may see it, in the $4 million range for the full year. But and maybe even to next year or two, but beyond that it should probably hopefully moderate after that. Joe Munda – Sidoti & Company: And I guess Steve as far as your commentary on sales force and the additions, what is the total size of the sales force you incorporate all lines of business as we speak?

With the addition of the new manufacturer reps about 70 people. Joe Munda – Sidoti & Company: 70 people, is that a number that is a good number to carry you into 2015 or do you envision adding more reps in 2015 as well?

We’re intending to have 70 reps carry us well into 2015. If PerClot sales are better than we expect and of course we’ll augment that. Joe Munda – Sidoti & Company: Okay. And then I guess my final question Steve and Ashley, I was wondering I wanted to get your take on the Medtronic acquisition of Covidien and any potential impacts positives, negatives opportunities that you guys may see as a result of that? Thank you.

I would expect that those that’s a very large organization, my understanding is there is not a turn of overlap. But I would expect it there would probably be some type of strategic review that was done of assets in that organization over the next year or two. And hopefully that may create some opportunities for us, it remains to be same as to whether it will or not, but hopefully it will. Joe Munda – Sidoti & Company: Okay, thank you.

Thank you. At this time I would like to turn the floor back over to management for any additional or closing comments.

Well thank you for joining us today. And we look forward to talking with you in the next quarter.