CryoLife, Inc. (NYSE:CRY)
Lazard Capital Markets 9th Annual Healthcare Conference Call
November 13, 2012 3:00 PM ET
Marie Thibault – Lazard Capital Markets
Steven Anderson – CEO
D. Ashley Lee – COO, CFO, Treasurer
Thanks for joining us this afternoon. My name is Marie Thibault. I’m one of the associates on the med tech research team here at LCM. Make sure I want to hear from CryoLife. And today, we have with us Steven G. Anderson, the President and CEO, as well as D. Ashley Lee, Chief Operating Officer, CFO, and Treasurer. Take it away.
Thank you. Good afternoon. My name is Steve Anderson and I’m the Founder and CEO of CryoLife. With me today is Ashley Lee, the company’s Executive VP and COO and CFO. Our first and last slides outline our forward-looking statement, and I encourage you to review our forward-looking statement disclaimer and other risk factors as detailed in our Form 10-K filing for year ended December 31, 2011. I want to remind everyone that this is being webcast, and so, if you’re going to ask a question at the end of the presentation, the moderator here will have to bring you a mike.
CryoLife is an implantable medical device company focused solely on products in the $1 billion market for complex cardiac and vascular reconstruction. We have a diversified business composed of material, cash generating products, intrusion [ph] preservation services and surgical sealants. These are complemented by a number of early stage products that provide is with significant and high-growth market opportunities. We’re driving growth of these higher-margin products by leveraging our established sales infrastructure and relationships, which should translate into improved operating leverage and profitability.
Our business generates substantial cash flow, which we are returning to shareholders through a dividend and a share buyback program, while also selectively targeting additional business development opportunities. In our most recent quarter, we reported strong financial results, including revenue growth of 13% to $33.4 million and EPS of $0.06. We also raised our guidance with expectations for full-year 2012 revenue to be up 10% to 11% and EPS to be in the range of $0.25 to $0.27.
This slide provides an overview of our current product portfolio which extends across cardiac surgery, vascular surgery and surgical sealants and hemostats. Our products of each of these areas address patients across the age spectrum, from pediatric to geriatric populations. We have market-leading products, deep clinical and R&D experience, and strong operational experience in each of these areas. We have strategically built our business around these complementary segments as a market.
We also are working to expand the market opportunity for existing products, such as our hemostat product PerClot, by investing in clinical trials to gain incremental approvals. CryoLife’s existing market opportunity is currently around $1.4 billion and over the next four years, these existing opportunities are expected to expand to $1.8 billion, and we are well positioned to gain market share in several areas as our growth initiatives come to fruition.
This slide outlines the company’s business development activity over the last few years. Each of these milestones has advanced our growth strategy and has given us access to market leading or potential market leading products in some expansive markets. The Starch Medical transaction gave us worldwide rights to a next-generation hemostatic agent PerClot that we believe has tremendous potential and will eventually deliver gross margins over 80%.
The launch of BioGlue in Japan expands the product’s market potential and sales have exceeded our prelaunch expectations. PerClot and BioGlue give us the opportunity to sell these two products together in European markets, and we’re doing so successfully.
Cardiogenesis was a significant transaction with great potential for incremental revenue growth through leveraging our global sales channels. Cardiogenesis fits perfectly into the company’s strategy to focus our own products that are involved with complex cardiac reconstruction.
The ValveXchange Investment gives us an equity stake and the right to acquire our novel potential lifetime heart valve replacement platform that is highly complementary to our cardiac tissue processing business. We estimate the prosthetic heart problem market to be $800 million worldwide.
The Hemosphere acquisition provides entry into the glowing $250 million worldwide end-stage renal disease market for the patent-protected, high-margin medical device, the HeRo Graft. The HeRo Graft is complementary to our existing vascular tissue business and we expect this business to benefit from expanded sales coverage provided by our sales team.
We have a significant opportunity to accelerate our growth with each of the recent development I just outlined. Our growth will be driven by a combination of the expanding population of aging baby boomers that will utilize our products, combined with specific growth initiatives for each product.
Briefly, we are driving TMR growth by focusing our new system placement direct to physicians and establishing a clinical registry for stem cell therapy that we believe will track important data about the clinical utility of TMR and potentially place more opinion-leading surgeons on the podium talking about this procedure.
For the HeRo Graft, we are still early in the integration of the Hemosphere acquisition. We believe we can accelerate growth by leveraging our sales force, cross-sell our vascular tissue and continue to train physicians on the procedure. Longer-term, we believe we have an opportunity to expand the HeRo graft internationally.
For our PerClot, the main opportunity is expanding into new geographies. In the United States, we expect to begin our PMA clinical trial in early 2013, and outside the US, we are focused on expanding to Brazil, Canada, and Japan.
Finally, for BioGlue, we are working with our distribution partner in Japan to expand the product’s indications. BioGlue has been very successful in Japan, with a narrow indication and we believe expanded indications would further benefit sales.
Now, I’ll provide a more detailed review of the products starting with our surgical sealants and hemostats. BioGlue and BioFoam are based on CryoLife’s unique protein hydrogel technology. BioGlue is the dominant adhesive and the sealant for cardiovascular surgery, with more than 750,000 procedures performed worldwide. It overcomes air and fluid leakage that can occur with sutures and staples, and it has four or five times the tensile strength of fiber and sealants.
Similarly, BioFoam is used as a surgical sealant, but it is applied as a soft form. It is approved in Europe for parenchymal organ sealing and, hopefully soon, for cardiovascular reconstruction.
PerClot is our next-generation hemostatic agent that we believe has the potential to be a best-in-class product because of its rapid absorption of blood, room temperature storage, and ready-to-use formulation. The hemostatic agent market is $1.3 billion on a worldwide basis, going to $1.9 billion by 2015. We expect to initiate our US clinical trial for PerClot in early 2013 and we’re optimistic that we can get it approved in the United States sometime in 2014.
In Europe, we have been successful bundling PerClot with BioGlue and BioFoam demonstrating the potential of these three products together once approved in other markets. We are also hoping to gain regulatory approval for PerClot in other international markets such as Brazil, Canada and Japan. Next, I’ll cover our products for cardiac surgery.
We are the dominant player in the cardiac allograft tissue market with more than 50% market share. Our product offering includes preserve human heart valves, xenograft process, pulmonary human heart valves and CryoPatch material for cardiac reconstruction.
These tissues are primarily used in children, young active adults, woman or child-bearing age and patients with endocarditis. The transmyocardial revascularization procedure is a unique technology use to treat patients with severe angina by revascularizing the cardiac tissue. It is an intraoperative procedure most commonly performed during CABG procedures. The TMR procedure is reimbursed by Medicare and commercial insurers.
ValveXchange is a privately-held company that is developed a potential lifetime heart valve replacement technology. The ValveXchange system features exchangeable leaflets that can be potentially be replaced via a minimally invasive surgery. They have initiated a European CE clinical trial and we have EU distribution rights for their product.
ValveXchange also has a suture-less and a TAVI-like version of the device under development which would make the entire platform minimally invasive. The heart valve market is a $1.5 billion worldwide market in TAVI or trans-apical implantation is one of the most exciting and high gross segments of the medical device market. CryoLife currently has a 19% equity safe in valve exchange.
Next I’d like to cover our products for vascular surgery. We have a broad product offering for vascular allograft tissues including preserved human saphenous things, femoral veins and arteries and aortoilliac grafts. This tissue grafts are used for helping to salvage lungs [ph] in patients with significant vascular disease and provide better performance below the knee versus synthetic grafts.
Importantly our vascular business provides a significant platform for the HeRO Graft business which I will discuss next. The HeRO is utilized in end stage renal disease patients who have developed central vein stenosis that inhibits conventional hemodialysis access through grafts officially [ph]. Prior to the HeRO Graft most of these patients achieved access with panel dialysis catheters which are associated the high rates of infection and less productive treatments.
The HeRO Graft provide these patients with a new option that reduces infections compared to tunneled dialysis catheters, improve the adequacy of the dialysis and enhances patient quality of life since the system is fully subcutaneous.
As you would imagine these benefits are highly aligned with health care reform goals of improving clinical outcomes and reducing cost. We think the HeRO is one of the very few medical devices that is highly aligned with this focus of CMS and hospitals. Combined with excellent clinical data we believe the HeRO is positioned for strong adoption as more health care providers are educated on its benefits.
This slide provides an overview of the significant opportunity we have to leverage our sales force to drive adoption of the products I have just covered. In the United States we have a team of 36 cardiovascular and dialysis therapy reps selling BioGlue, our vascular tissue and the HeRO Graft. We also have a team of 20 cardiac specialist selling BioGlue, TMR and our cardiac and vascular tissues.
Outside of the United States we have 12 reps and a network of distribution partners that sell our products in over 70 countries. You can see the opportunities we have to fully leverage the sales force with the potential in United States FDA approval of PerClot and launching the TMR and HeRO Graft outside of the United States.
Our historical and potential revenue trajectory is shown here. We’re expecting revenues in 2012 to be in the neighborhood of about $132 million which is the midpoint of our guidance. On a quarterly basis we are driving good year over year revenue growth of our most recent quarterly result of $33.4 million up 13% compared to the prior year. This slide shows our adjusted operating income and EPS over the last seven quarters beginning in 2011.
In the third quarter of 2012, we delivered adjusted operating income of $3.9 million in adjusted EPS on $0.08. We believe we are well-positioned to drive operating leverage and increase profitability as we expand our mix [ph] of sales of our higher growth, higher margin products.
These next slides provide a reconciliation of GAAP to perform operating and GAAP, to perform a net income on EPS. Our business generates strong cash flow from operations which we are using to invest in growth opportunities such as prototype, TMR, the HeRO Graft and ValveXchange. We are also using our cash to return value to our shareholders to our recent and initiated quarterly dividend and our stock buyback program.
At the end of the third quarter, we had a strong cash position of $13.1 million and a $20 million unused credit facility and no debt. As you can see from this slide, we have an enormous potential to grow on market opportunities as our respective product markets expand and we add new products to our platform.
The left-hand circle represents our existing $1.4 billion market opportunity that I’ve already shared with you. The pie chart on the right indicates the expansion of this opportunity to $1.8 billion plus the expected new markets we will enter with the FDA approval of PerClot and the potential launch of the TMR procedure with adjunctive stem cells.
By 2015 we anticipate our market opportunity will be upward of $3.7 billion with CryoLife gaining share on medical device and [inaudible] product categories. And this $3.7 billion does not include the potential from ValveXchange or any other business development transactions that we may enter. We feel very good about the portfolio products that we brought together at CryoLife. And we are confident that we have the operational expertise to capitalize on these growth opportunities.
So to summarize, we have a strong portfolio of tissue and medical device products addressing a growing billion dollar market opportunity. We were delivering robust financial results with sales in the most recent quarter up 13% year over year and EPS of $0.06. For the full year, we expect revenue growth of 10% to 11% and EPS of 25% to 27%. Over the next several years, we will be focused on leveraging our sales force and product’s specific initiative to accelerate our revenue growth and profitability while maintaining a study-based business that generates substantial cash flow.
We are investing this cash and business development opportunities to further accelerate growth also returning a portion of our profits to our shareholders to a quarterly dividend and a stock repurchase program. Overall, we believe we are well-positioned to deliver on our growth and profitability objectives and continue building value for our shareholders.
Thank you for your interest in CryoLife. And we’ll now open up the floor to questions.
Yes, I have a couple questions. You mentioned PerClot US trial couple times. I know you said 400 patients. Can you tell us anything about the trial design and how much that might cost?
You want to answer it?
D. Ashley Lee
Sure. Of course, this is subject to getting approval from the FDA and we just recently resubmitted the IDE and hopefully we’ll get good news. But if it goes as planned it would be a 400-patient study, 200 in each group over a broad range of surgical specialties. If all goes well, we will begin enrollment early next year with an anticipate approval date hopefully in late 2014 or early 2015. From here going forward we think that the trial will cost somewhere in the neighborhood of maybe $6 million, $7 million to $8 million somewhere in that range to complete it.
The endpoint might look like.
D. Ashley Lee
It’s going to be hemostasis at certain time intervals. Right now we’re looking I think two, three and five minutes but again all that is subject to approval from the FDA.
At a great [inaudible] around $250 million, $300 million market.
I’ve only acquired a company that only had seven sales reps and all the sales reps were located east of the Mississippi. So, we’ve been holding training classes with our present sales force and expanded that coverage over the whole United States. And I would think that in a reasonably near future we can double that business into the $15 million, $16 million a year category.
When we bought the company they had 150 leads west to the Mississippi that they had never been to follow-up on. So, I think that as our sales force gets more confident with the product and gets out knocking on few doors that we’re going to do well with that. We’ve also seen significant increase in our allograft vascular sales because our sales force is seeing positions that they could never see before. And I’m very encouraged by that.
North of 80. Yes.
After the HeRO acquisition, are you interested in anything else in the [inaudible] trial disease?
I’m very much interested.
Okay. Do you have words of criteria that you can talk about?
We’ll I’d like to have few more tuck-in products that we can tuck-in around it. I have few more things in our little red wagon when we go to call and adapt [ph] the panels [ph] types of patients and when we’re in conversations with two other small companies that have very interesting products in that general area that we think will help us a great deal.
One of the things about the present economic situation that we’re all in is it appears to me in a way that single product implantable medical device companies can’t make it. They can’t find adequate financing. They’re running out of money. And I only give you a guess that Ashley [ph] and I have talked face to face with at least 20 companies in the last two years, that we’re seeking to survive, wanted to sell themselves or interested in positioning their products with the company that was larger and better financed. And so we’re going to keep up those corporate development activities. I don’t have anything eminent but I am talking to two groups at the moment.
Okay. Great. I guess the last question from me; you’ve talked about Asia-Pac expansion. How long do you expect to take to find distribution partners over in China, the Southeast Asian countries that something you can --
We’ve identified a partner in China and we’re using our – and this is primarily for BioGlue. We’re using our American FDA application data to present that to the Chinese regulatory authorities. That is a three-year process in China, and so it will take a while but we’re trying to get a reasonably broad clinical indication.
We have hired a contract sales representative to handle Southeast Asia; he just joined us. He’s got a very good background in implantable medical devices. And he is going to focus on Thailand, Vietnam, Australia, Singapore and that general area where there is very good medicine but we haven’t had representation there that was consistent and easily accessed by the doctors. They do have a very good business in Australia.
Okay. Great. Thanks so much.
If there are no further questions, thank you for attending. It was enjoyable.
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