Thermogenesis' CEO Discusses F1Q13 Results - Earnings Call Transcript

Nov.13.12 | About: Cesca Therapeutics (KOOL)

Thermogenesis (NASDAQ:KOOL)

F1Q13 Earnings Call

November 13, 2012 5:00 p.m. ET

Executives

Matthew Plavan

Analysts

None

Operator

Welcome to the Thermogenesis first quarter fiscal 2013 conference call and webcast. Before we begin the call, we remind you that the statements made during this conference call that are not historical facts and are forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in these statements, including but not limited to, certain delays beyond the company’s control with respect to market acceptance of new technologies and products, delays in testing and evaluation of products, initiation and successful completion of clinical evaluations and trials for new claims on existing products, regulatory approvals where required, the outcome of potential litigation, capital resources to fully execute business plans, and other risks detailed from time to time in the company’s filings with the SEC.

[Operator instructions.] For your information, this call is being recorded, and a replay of this call will be available for seven days by dialing 877-344-7529, and using conference ID 385107. I would now like to turn the call over to Matthew Plavan, chief executive officer. Please proceed, Mr. Plavan.

Matthew Plavan

Thank you, operator. Welcome everyone, and thank you for joining me today. Although it has been just a short while since our last call, we’ve continued to realize progress with our growth strategy and to execute on our business plan.

Our core strategy has three fundamental objectives: First, capitalizing on our revived global sales organization to build our presence in the cord blood market; second, optimizing our human and financial resources to drive greater sustainability; and third, developing technologies for future cord blood and regenerative medicine market opportunities.

We’ve also seen solid momentum in the regenerative medicine space, with an increasing number of positive clinical results reported from clinical trials, which continue to move a number of key cell therapies even closer to FDA approval. Positive clinical results using stem cells and PRP in treating damaged tissue, generating bone for spinal fusion, and creating angiogenesis for vascular conditions have been highly encouraging.

In addition, we continue to position the company as a leading provider of cell processing and storage solutions. With our increasing momentum toward this end, we are convinced the strategy represents our greatest opportunity for value creation and shareholder appreciation.

Although the global downturn has extended the timeline to reach our objectives, we have either achieved them despite these market challenges, or have adapted our strategies to remain on course. For example, in geographies where growth has stalled, we put additional focus on taking share from competitors and converting manual systems to automation, particularly in international markets beginning with Asia, but also in Europe, the Middle East, and Latin America.

Given the importance of the emerging cord blood market in China, we recognized early on the critical nature of establishing the company as a first mover in the region. We set our sights on Golden Meditech as a primary means to do so, and have secured our lead position through our agreement signed this past quarter.

The market influence we have in China and Southeast Asia, through their affiliation with Cordlife Group Limited and to establish the AXP as the gold standard is compelling. The strategy has also resulted in new integrated distribution agreements for other geographies we have completed in recent months, and the additional investment in customer service initiatives.

In addition to delivering on our plan to close new business in cord blood processing, we’ve been demonstrating through reduced cash burn the benefits of focusing our efforts on tools used in cell separation and new indications. The divestiture of the noncore businesses has not only brought $3 million in cash to the company at an important time of fundamental rebuilding, it’s allowed us to trim over $2 million in annual costs from the burn so far.

As I have indicated in the past to investor calls, I believe that as we continue to streamline our operational processes to be more in line with the needs of a repurposed organization and focused organization, that we will see greater cost optimization and be able to do more with less.

We expect to continue to add new revenues from our bone marrow and PRP products, in parallel to growing the cord blood business. However, ensuring we grow our cord blood business, which tends to be recurring and therefore more predictable, provides us a stable, self-sufficient base from which to expand the company.

Although we believe growth potential in the bone marrow PRP markets is greater overall than cord blood, the evolving regulatory requirements for point of care treatments and predicate regulatory submissions and approvals, make predicting the timing of revenues more challenging.

Turning now to AXP product purchase and distribution agreement with Golden Meditech, they are ramping up activities quickly, and we expect to have a number of cord blood banks in China up and running in early calendar 2013. As a result, we will record initial purchases from Golden Meditech during this current quarter. Golden Meditech is also aggressively targeting and initiating marketing efforts with additional licensed banks that represent potential new customers for the AXP.

As a reminder, under this five-year agreement, Golden Meditech will have annual minimum purchase commitments beginning with 60,000 bag sets a year and an exclusive distribution right for the AXP system in the People’s Republic of China. This excludes Hong Kong and Taiwan, but includes Singapore, Indonesia, India, and the Philippines, as we receive regulatory approvals in those geographies where we do not yet have them.

The minimums called for in the contract exceed volumes from any of our current cord bank blood customers, and based on both the direct sales and distribution opportunities we believe this relationship could generate up to $30 million in revenue over the initial five-year period. This assumes Golden Meditech achieves its goals and objectives, and it also assumes we certainly get regulatory approval on a timely basis.

As we mentioned in our last call, we expect the relationship with Golden will facilitate our regulatory approval efforts for the AXP in China. Their aggressive ramp up of the AXP is a reflection of their confidence in the approval occurring within the near future. We have provided responses to all the questions received from China’s State Food and Drug Administration, or the SFDA. We expect to hear back from them with a registration approval in China by the end of this current quarter.

Our other international market development programs in cord blood are making good progress. The new integrated distribution arrangements we announced earlier this year with Concessus in Europe, HVD in Europe and in the Middle East, and CEI in Latin America are gaining traction, and we have a number of AXP and BioArchive evaluations underway in these geographies.

As we indicated in our last call, we believe these new arrangements will provide stronger, local presence in these important international markets, and serve our long term goal of implementing a more customer-centric organization that provides marketing, customer service, and technical support to both serve existing customers and also to facilitate our strategy to capture market share gains from competitors and replace manual systems with the high-level automation represented by the AXP.

We continue to work with Arthrex in connection with its regulatory submissions as they implement their program for marketing the private label rescue system for use in the preparation of platelet-rich plasma, or PRP, from whole blood, and bone marrow concentrate that will be used at the point of care. We believe they’re on track to receive regulatory approval next quarter, and expect an initial order from them in advance of this launch.

We’re seeing increased interest in the regenerative potential of PRP, particularly as a replacement for the current standard of care for the treatment of tendon or ligament damage. This includes cortisone, which is used for pain management, but has no regenerative properties. As a result, we expect to see increased clinical activity involving PRP, which should help further define the market opportunity and facilitate the development of this market.

With respect to a quick update on our clinical evaluation programs, next month our clinical partners in Naples, Italy will report the results from their Phase I clinical study involving our MXP. Just as a reminder, this study used the MXP platform to produce cell concentrate for treating patients with peripheral artery disease (PAD) and critical limb ischemia, or CLI. As we reported to you in the past, the early outcomes from this trial have been encouraging with respect to improved blood profusion in affected limbs after 6- and 12-month followups. We look forward to discussing the Phase I data from the study on our next call.

Before turning to our financial results, I want to speak briefly to the complaint filed by Harvest related to the Res-Q system. It’s important to understand that we have not received any further details beyond the fact that they’ve filed this complaint. Clearly, we will vigorously defend our product position as necessary.

Turning to our financial results for the quarter, revenues for the quarter were $4.1 million versus $4.5 million in the prior quarter, and $4.9 million a year ago. While disposable revenues from our core businesses, the AXP, BioArchive, and Res-Q experienced a modest decline of $300,000 versus the prior year, our Res-Q disposable revenue itself increased by 23% over the prior period. Now, the biggest contributor to our financial performance was a decline in the BioArchive system sales, as we sold three fewer devices than in the prior year.

As you know, the global economy has tightened capital budgets, and this has impacted our BioArchive system sales. However, based on customer activity and their current outlook, we expect to experience a nice rebound in the BioArchive sales through a mix of existing and new customers during this current quarter. Gross margins in the quarter were 39%. That’s in increase of 7 basis points versus 32% in the prior quarter, and compared to 41% in the first quarter a year ago.

We are pleased with this sequential increase in the margins, driven by the noncore business divestitures we’ve completed over the past several quarters, and improved operating efficiencies and product quality.

Operating expenses in the quarter, before reporting a gain on sale, were $2.6 million versus $2.5 million in the prior quarter and $3.2 million in the prior year. The decline from the first quarter of fiscal 2012 reflects $500,000 decrease in SG&A expenses due to lower personnel and bonus cost related to our restructuring in January.

As I mentioned, we recorded a $2 million gain related to the sale of our CryoSeal product line to Asahi. As a result, we recorded a net income $1 million, or $0.06 per diluted share, versus a net loss of $1.2 million, or $0.07 per share in the same quarter a year ago. Excluding that $2 million gain, we would have reported a loss of $1 million, or $0.06 a share.

Our balance sheet at the end of the quarter reflects the $2 million in cash we received during the quarter related to the CryoSeal disposition, and we ended the quarter with $8.8 million in cash versus $7.9 million at the end of fiscal 2012.

Use of cash for operations in the first quarter of fiscal 2013 was approximately $800,000. Our Backlog at the end of the quarter was $700,000. I’m pleased with our ability to better manage our cash resources and operate the company on a more efficient basis. Given the global economic environment, we continue to keep a vigilant eye on market trends, but as I indicated earlier, we are guardedly optimistic about our competitive prospects through both AXP and the BioArchive.

We’ll continue to capitalize on opportunities to replace existing competitors’ automated systems, and to convert banks from manual processing to automated systems, while also addressing the manual cord market with new cord blood products for cord blood processing. Our recently signed distribution agreement should also serve this strategy in international markets.

There’s an increasing level of cord blood clinical activity, including more than 250 trials underway, and the Sutter Neurosciences Institute and Cord Blood Registry are launching the first FDA regulated clinical trial to assess the use of a child’s cord blood stem cells to treat patients with autism. This is an important study, and we’re excited that the AXP platform will be the system used to support this study in this very important area of research.

We’re also continuing to pursue new indications with our bone marrow and PRP technologies, including osteoarthritis, where the use of PRP could represent an alternative to knee replacements.

In the bone marrow area, we are targeting critical limb ischemia and other vascular treatment opportunities.

Now, as we move forward, we remain focused on the fundamental objectives of our core strategy. And those include, as I mentioned early on, capitalizing on a revived global sales organization to build our presence in the cord blood market. We believe that these opportunities as they come to fruition could add $5-7 million in new annual revenues each year.

The second is the optimization of our human and financial resources to drive greater sustainability. And the third, again, is developing technologies for future cord blood and regenerative medicine market opportunities.

With respect to the outlook for our financial performance in fiscal 2013, I expect Q2 revenues to exceed revenues from Q1, and that we can grow quarterly revenues on a sequential basis during fiscal 2013.

With additional streamlining being implemented during the current quarter, and the cost savings projected from expanded subcontract manufacturer relationships, we expect to lower our quarterly revenue breakeven level to between $5 million and $6 million. This will be our lowest level in recent history, and one that intersects with our near term projected cord blood revenue growth. This breakeven level does not assume any significant cost associated with the Harvest potential litigation.

This increased efficiency will be complemented by the highest product quality levels, the largest global customer support organization, and the most active business and product development activities than ever before.

In closing, we continue to be encouraged by the role our technology played in improving patient lives, and the potential of our products to facilitate new and potentially powerful regenerative stem cell therapies coming to market.

Despite the difficulties incumbent to an emerging market, we are encouraged by our progress and believe we are on a clear path to greater value creation for our business partners and shareholders.

Thank you again for joining us today. I will now open up the call to questions.

Question-and-Answer Session

Operator

[Operator instructions.] Mr. Plavan, at this time I am showing no questions, and would like to turn the conference back to you for any closing remarks.

Matthew Plavan

Okay, great. Well, thank you everyone for joining me again, and we look forward to reporting our progress to you on future calls. Have a great day.

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