Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Joe Kaufmann – President and Chief Executive Officer

Wendy DiCicco – Chief Financial Officer

Doug Evans - Chief Operating Officer

Analysts

[David Turkaly] - [Susquehanna Financial Group]

Spencer Nam - Summer Street Research

James Sidoti - Sidoti and Company

Bill Plovanic - Canaccord Adams

Presentation

Kensey Nash Corp. (KNSY) Q1 2009 Earnings Call October 23, 2008 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to First Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session with instructions given at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I’ll now turn the conference over to our host, President and CEO, Mr. Joe Kaufmann. Please go ahead.

Joe Kaufmann – President and Chief Executive Officer

Thank you and good morning everyone. Welcome to the Kensey Nash first quarter fiscal year-end ‘09 conference call. With me today are Doug Evans, our Chief Operating Officer, and Wendy DiCicco, our CFO. And, Wendy will start out with the Safe Harbor.

Wendy DiCicco – Chief Financial Officer

Good morning everyone. The statements made by Kensey Nash and its representatives today in this conference call today will contain certain forward-looking statements, including financial forecasts that are based on the current beliefs of management as well as assumptions made by and information currently available to management. Wherever possible, we will try to identify these forward-looking statements by using words such as believe, expect, anticipate, forecast, and similar expressions.

Please note these words are not the exclusive means for identifying such statements. Please see today’s news release and Kensey Nash’s SEC filing, including our annual report on Form 10-K for the year ended June 30th, 2008, particularly information under the caption “Risk Factors” for a discussion of risks, uncertainties and other factors that could cause actual results in the remainder of fiscal 2009 and beyond to differ materially from those expressed in or implied by our forward-looking statements.

Joe Kaufmann – President and Chief Executive Officer

Thank you. I first would like to comment on the press release regarding the announcement that Wendy, our CFO will be leaving Kensey Nash. Wendy has decided to leave our company to pursue other opportunities. Wendy joined Kensey Nash in 1996 and was appointed CFO in 1998. Wendy has made many contributions over the years to the financial success of our company and she also has been the leader of a team that has ensured the integrity of our financial statements over the years. I personally want to thank Wendy for her dedication and service to the company and wish her well on her future endeavors. The Board of Directors of Kensey Nash also wants to extend their well wishes also for Wendy in her future endeavors also.

Wendy will continue in her role through November 15th and will be available for any questions you may have after the call or certainly through November 15th. So again, we all like to thank Wendy for all her years of service with the company and the outstanding work and accomplishments she has achieved over the years with Kensey.

With respect to our first quarter results, I am pleased to report the results of what I think is an excellent quarter of performance by the people at Kensey Nash. Our total revenues of 20.1 million increased 14% year-over-year and the revenues were at the high end of our guidance. Our net sales of 13.5 million increased 17% year-over-year. This increase was the result of our biomaterials growth of 25%. Within the biomaterials group, orthopedic sales increased 30%; and within the ortho group, spine products increased 38%. Sports medicine increased 18% and our cardiology products, which are primarily Angio-Seal component, they were up 4$ year-over-year.

The increase in spine was due to the strong performance of Orthovita with the VITOSS(NYSE:R) FOAM products and the new VITOSS(R) Bioactive products which are doing very well in the marketplace and continues to be a very strong relationship between the two companies and the overall success of these products that are being demonstrated consistently quarter-over-quarter and year-over-year. So we are very pleased with the performance with our group and certainly with the partnership with Orthovita. It’s been an excellent relationship that continues to grow and prosper for both companies.

Our Endo product sales of approximately $800,000 were down on a dollar basis as expected as a result of the transaction that we did back in May with Spectranetics due to the transfer pricing. But unit sales during the quarter were actually up. This is primarily due to the sales of QuickCat product, the manual aspiration catheter, Spectranetics. Now the Spectranetics situation, last night it was reported that John Schulte, their CEO has resigned and there has also been reports or actually there is an ongoing investigation by the FDA. And certainly this has impacted I think the overall team and where the Spectranetics sale have been impacted down the road.

However, the relationship between the company is still very strong. You will note that we did achieve our first milestone we reported in early October with the Safe-Cross product where we received $1 million milestone payment. We also expect that we are going to be completing a second milestone payment before the end of our fiscal year '09. And again this transaction that we’ve completed was done for several reasons. One, certainly to make our company, Kensey Nash, more financially sound and grow our earnings and reduce our cash expenditures. But also we were looking at the future of these products and that the deal and the structure of the deal was really build about next generation products. And the launch of those products which we expect will occur later on in fiscal year '09, but we hopefully what we see is in fiscal year '10, fiscal year '11 and beyond with the success of Spectranetics and working through some of the issues that we are going to both prosper with this relationship as we have with many others with companies in the biomaterials field.

Our royalty income of $6.7 million increased 10% year-over-year and exceeded the high end of our guidance by approximately $200,000. Angio-Seal royalties increased 4% year-over-year and the Orthovita royalties increased 38%. The increase in Orthovita royalties are due to the factors I stated previously regarding the ongoing success of the VITOSS(R) FOAM products and new Bioactive.

The Angio-Seal royalties were inline with our expectations for the quarter. I also would like to note that St. Jude recently launched at the CCT Conference in October a new version of the Angio-Seal, called the Evolution. This is another iteration of Angio-Seal of many iterations that have taken place over the years with St. Jude since 1999 and we think that this product is going to have certainly success in the marketplace, and Angio-Seal will continue as it has for many year as the leader in the vascular closure marketplace and today I believe that the Angio-Seal now has been placed in approximately 12 million patients, again has the best data in the marketplace. Certainly there is a reason why the Angio-Seal continues to lead throughout the world as Vascular Closure product. The bar has been set very high in terms of both clinical data, ease of use, and we expect that the Angio-Seal will continue to maintain this leadership position.

Moving on to EPS. EPS for the quarter was $0.43. This represents 169% year-over-year increase and exceeded the high end of our guidance. The previous guidance was $0.38 a share. Also on a sequential basis, our EPS increased 23% from our fourth quarter pro forma of $0.35. The $0.43 EPS did include approximately one penny related to -- in other income related to a state grant. But the real increase in EPS, the growth in EPS was accomplished by several factors. One, strong sales particularly obviously in the biomaterial sector, higher royalties than we expected reflecting the overall end-user strong performance of our products in the marketplace with our strategic partners, and also expense savings in the quarter. These are expense savings that came primarily from the elimination of our sales and marketing organization but also I think very good controls within our organization in both the R&D and also in the manufacturing area and also improved effeciencies.

You will note that our operating margins for the quarter is 38% compared to 16% in the prior year. This is a significant improvement and certainly is ahead of our target of operating margins in excess of 30%. Our EBITDA for the quarter was $9.1 million versus 4.5 million last year again a significant increase year-over-year.

Operating cash flow for the quarter was 10.3 million, and our cash and investments increased by $13 million in the quarter and we now stand with approximately $83 million of cash and investments on our balance sheet.

Looking ahead to the second quarter and beyond in terms of our guidance, we expect that for the second quarter that sales would be in the range of 13.4 to 13.8 million representing a 2 to 5% increase from the prior year. Royalties are expected to be 6.9 to 7 million or 6% to 8% increase from the prior year. And our total revenues are expected to be 20.4 million to 20.9 million and this will include the recognition of about 100,000 in milestone revenue. And this relates to the SafeCross milestone I previously mentioned.

Our earnings per share for the second quarter are expected to be 40 to 42% an increase of 90 to 100% compared to the prior year pro forma earnings of $0.21. Again this is a significant improvement from the prior year and is true to the Biomaterial sales and royalties coupled with the elimination of the endovascular sales and marketing expenses and of course we are continuing to invest in our R&D primarily in the Biomaterial space in both cartilage and in ECM and certainly supporting all of our other product lines that have led to what we believe is the financial success of Kensey Nash. We also will continue to invest in the next generation products for the endo. However, a significant amount of that cost, we do recover through the milestone achievements as we have with the SafeCross, $1 million payment and as I mentioned earlier, we expect that we are going to achieve another milestone before the end of the fiscal year.

Looking at the total fiscal year June of '09, despite the fact of the -- as we all know the uncertain market conditions or economic climate that we are all faced with, we expect that our earnings are going to be in the $1.62 to $1.69, which is slightly higher than our previous guidance. We expect that our net sales are going to in the range of 55 million to 56 million and royalties will be in the range of 28 million to 29 million.

At this point in time, I would like to take questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question comes from [David Turkaly] with [Susquehanna Financial Group]. Please go ahead.

David Turkaly

Thanks for taking my question. I just have one, and that is I wonder if you could just briefly explain -- looking at it correctly, it looks like you dropped the top line guidance for fiscal '09 about 3 million and let say I am not looking at this correctly. Can you explain why that the case if it is?

Joe Kaufmann

I think if you look at the top line guidance, its down somewhat, but its down primarily or not primarily, all attributed to the endovascular. With some of the points that I mentioned earlier in terms of the recent events that have taken place at Spectranetics, we felt that it would be wise for us to take the guidance down somewhat on the top line. Now this doesn’t affect our bottom line as we have noted before that in terms of the transport pricing of these products we don’t earn any margin on those products. Again this is a deal that we are looking at for the future and not for the current year. So we did take the top line sales down but again strictly on the endo side, but it had no impact on our EPS as you can see, in fact the EPS is, we are maintaining the guidance and raising it slightly.

David Turkaly

Got it. And have you previously mentioned what your estimates for the endovascular business and what they now are as a result of what's been going on?

Joe Kaufmann

Well we hadn’t mentioned specifically what it was, but its in the area right now in terms of for endovascular for the year, we expect its going to be in the range of about 2 or $3 million somewhere in that range.

David Turkaly

Got you. Thanks for taking my questions.

Joe Kaufmann

You are welcome.

Operator

Thank you. And the next question comes from Spencer Nam with Summer Street Research. Please go ahead.

Spencer Nam

Thanks for taking my questions. Just I had a one quick question about the orthopedics. To strengthen the orthopedics business, I was just curious kind of how you guys look at that over the next couple of years, what sort of opportunities you are looking at, how you know, you have a very strong growth in the quarter, I was wondering what kind of things you are looking at in terms of growth trajectory over the next 12 to 24 months?

Joe Kaufmann

We are very positive about that sector of our business. If you look at the product launches that we have gone through specifically with or particularly with Orthovita and success of those products, and also in the sports medicine field with [Art Rest], our leading customer in that space. We also are certainly as we have mentioned before, certainly some other programs that we have in place here at Kensey Nash, one is with cartilage program and also another one with ECM, extracellular matrix product and those products of Kensey Nash has -- and I will let Doug Evans actually our Chief Operating Officer talk a little bit about where we are in terms of those specific programs and how we are progressing and how they can lead to potentially additional partnerships similar to what we have in place with our current partners. Overall, we do believe that the orthopedic markets of business will increase. We believe that the partnerships that we have in place will grow and that’s we are optimistic in the orthopedic space both through this binary and also in the sports medicine field. Doug, why don’t you comment on those programs?

Doug Evans

Sure. The cartilage program is progressing very nicely. The status of it right now, is that we are wrapping up our preclinical studies, which would support the IDE submission. And at this point that data looks very good. We recently held a physician advisory panel meeting to review our clinical trial protocol and we expect to submit for IDE approval in early 2009. This would probably lead us to starting the clinical trail in the first half of calendar 2009 and I think that we've discussed before the couple of hundred patient trails about a year and half enrollment time with the two year followup for some cohort of the patient. And with this technology we also believe that there is potential for getting a CE mark approval for our cartilage device by the end of this current fiscal year.

Moving over to the ECM business, just to give you a little bit background, what Kensey Nash has done is about -- what we believe is the novel biomaterial technology which is ideally suited for this new field of regenerative medicine. And the material derived from what is needed for a sign tissue, which is termed extracellular matrix called ECM, and this is similar to the technologies, if you are familiar with what ViaCell has done which is acquired recently by KCI. And what we have created is natural tissue engineering scaffold and it has very powerful regenerative capabilities. And this is a material that contains part of natural proteins, proteoglycans, glycoproteins and other factors, it actually helps stimulate the natural healing process. And it functions an ideal scaffold to really orient and direct cells when they move into a wound in the body and helps kick start that healing process. Now this technology is moving along very rapidly for us. We expect the first product to be approved, wait, later this year, especially in calendar year 2009 and we are in discussion with a number of partners for those products.

So to summarize, Spencer, answering your question here in terms of just the organic growth that we expect to achieve coupled with the recent introductions of new products that I mentioned previously along with the programs that we have in place and Doug mentioned potentially a CE Mark approval for cartilage in fiscal year '09, VECM approval calendar year late '09 so that would be our fiscal year 2010. The growth prospects for both of those types of products we think are very big particularity with the cartilage, and then down the road when you looking at cartilage beyond the EU approval and how that's going to impact us in fiscal year ’10 and ‘11 along with filing on with hopefully a US approval, we are very optimistic about the growth of our biomaterials business.

Spencer Nam

I appreciate the details. Just one quick followup question and then I have another quick followup. The ECM side, what kind of material, I don’t know if you mention this, I may have missed it, but is this say cellular matrix that’s based on animal or is it a human made, how do you guys -- what's the science behind this?

Doug Evans

It’s derived from pore size tissue.

Spencer Nam

And your understanding is that based on the data so far that it does not have the issues with the rejections or any sort of the complications associated with theoretic products, is that (inaudible) right now?

Doug Evans

That correct.

Spencer Nam

Okay, got it. And then question on your CFO situation, with Wendy’s departure, I am saying you will be looking for replacement, what kind of timeframe you are looking at for that?

Joe Kaufmann

Well, we would hope to have someone on board as soon as possible. But we will certainly make sure that we are trying – we want to make sure that we are obviously filling position with the highly qualified person. And so as soon as we can find that individual, we will be bringing that person on board, but Wendy will be here through November 15, certainly continuing to perform at the high level she always has with the -- in organization and she has build a solid team, financial team at Kensey Nash, so that's the plan.

Spencer Nam

Thank you very much.

Joe Kaufmann

You are welcome.

Operator

And the next question comes from James Sidoti with Sidoti and Company. Please go ahead.

James Sidoti

Good morning. Can you hear me?

Joe Kaufmann

Yes, we can.

James Sidoti

Joe, there has been a lot of chat (inaudible) about new competitors Angio-Seal getting into the market, specifically Vascular Closure, our vascular solutions for them, they were going to have a new product coming in? (Inaudible) or your conversations with St. Jude, are they seeing any impact from new technologies?

Joe Kaufmann

Well, I think Jim when you look at the Angio-Seal and you look at the numbers that were posted in our fourth quarter and in June and the numbers for this quarter which were certainly inline with our expectations and how the market is growing, I think the Angio-Seal continues to certainly be the market leader, not where no indication or my end of any loss in market share. There has always been people that are trying to enter this market. It’s a very large market that’s been dominated by the Angio-Seal over the years. I would point people to the data and I would look at the data that basically when you look at the Angio-Seal, the Angio-Seal labeling coming through clinical trials, performance in the field where you have a product that has immediate spaces for diagnostic patients that has labeling for 20 minute ambulation. I don't think there is anyone close to that. I think some of the data that I see that we have looked at for some of the competitive products, you are looking at ambulation data or a product for example, one of the new entries people talk about is the mix and I think the ambulation for that product for diagnostics is $2.5. We have discharge date for the diagnostic patient who are Angio-Seal as one hour. I think the discharge data again that I have seen is $35 complication. So 12 million patients for the Angio-Seal, I don’t – you can take all the other products that are in the market – that have been in the market add more up and it will come close to that number. So ease of use innovation, prudent performance, clinical data is the reason why its some market leader, and I think that somewhat of a – when I hear some of things about new competition or this will be competition that it’s a – it was helping at – we certainly book at as a compliment that if you are always trying to knock off the Angio-Seal, you are trying to knock off the best product in the marketplace. That’s my sense of the Angio-Seal.

James Sidoti

So, based on the number so far you haven't seen any of these competitors having impact to date?

Joe Kaufmann

I would say nothing that I see of significance because again the numbers are growing, the number are improving and again over the year a lot of potential Angio-Seal killer come to mind and not to say that there wont be other products and other technology along the way they are all with this, but the Angio-Seal have a pretty well in the marketplace and continuous to do so.

James Sidoti

And then pushing over to biomaterial, Biomet, actually I mentioned the OsseoFit in their call a couple of weeks ago. Are you seeing – they mentioned me one of the growth driver going forward. Are you seeing those sales yet or is that something we should expect over the next quarters and will they be helping at all with the clinical trial?

Joe Kaufmann

Well, the OsseoFit with Biomet is basically for a bone void filler indication and the backfill. So the real potential, the real growth for that product is down the road with the cartilage indication, and the cartilage is the one that’s going to be I think a – it has the potential to be a game changer. And so, those details and those financial, the economics of where we are going with the cartilage and potential partnership, that has to be worked out. But we are very, very comfortable with where we are with that technology, as Doug mentioned earlier the progress we are making, the data that we are seeing form animal studies, the prospects that we are seeing talking with physician and are seeing that we have assembled to help Kensey Nash with this program. I see it and obviously your Kensey Nash think that the prospects are very promising for the OsseoFit. So it’s – I can’t get into the specifics about the clinical trial, who is paying for what, but we certainly are planning or moving forward in getting this product into the marketplace as soon as possible.

James Sidoti

Okay. But it sounds like the sales numbers for this quarter weren’t impacted that heavily by Osseo?

Joe Kaufmann

No, and we didn’t expected to be and it’s a – it’s still early and again the real prospects for OsseoFit is really with the cartilage that’s the big driver there. The dominant player in the bone void filler segment is Orthovita and early guys that are big player and the guys that we have worked with over the years to develop Orthovita the VITOSS and the Bioactive has been very successful in that space and they continue to do so.

James Sidoti

Okay. And then just switching over -- with their acquisition of Abbot’s business, have your expectations changed regarding sales (inaudible)?

Doug Evans

The expectations haven’t changed the way you can see. I view that as being positive transaction from our perspectives that this could certainly help drive additional sales for the (inaudible) but just wait and see until they close the deal, the transition and then we will see it transpires but certainly for the future I think it’s promising for Kensey Nash.

James Sidoti

And then my last question I had is on -- you talked about almost $6 per share in cash now. You didn’t buy any stock back in the quarter, which makes me think you are probably looking at acquisitions and if that’s the case, would you be working from products that you can sell to your existing customer base or would you be looking to a whole new area?

Doug Evans

Well, we are always looking. We evaluate a lot of different opportunities and I think to fairly answer that question is it will depend. I mean we would look at potential acquisitions of companies or products that are currently in the marketplace that would help drive the top line growth of Kensey Nash and certainly the bottom line. But we also are looking at always expanding the technology base for Kensey Nash. We have a great team internally, but also one where that we are certainly one we are always looking at possible expansions that could take place to that technology. So, we take a broad look at the acquisition opportunities and if there is something that’s appealing then we are well positioned with our balance sheet to execute transaction.

James Sidoti

And Joe, I missed the first couple of minutes of the call, but I was surprised. No savings comment, no outlook on Angio-Seal?

Joe Kaufmann

We are saving that for the end.

James Sidoti

Okay.

Joe Kaufmann

I didn’t want to upset anybody who is calling in from Florida or New York or anything.

James Sidoti

All right.

Operator

And the next question comes from Bill Plovanic with Canaccord Adams. Please go ahead.

Bill Plovanic

Hey, thank you. Good morning.

Joe Kaufmann

Good morning

Bill Plovanic

Actually just a question relative to the cartilage program. Is that co-sponsored or are you working with a partner on that and just like may be pre-senses on what exactly you are trying to do?

Joe Kaufmann

Well, I will let Doug answer that question.

Doug Evans

Well, right now that program is self sponsored and the idea for the technology, it is a completely biomaterial product. It is what’s called a [bi-plated] device. Other is a portion which is designed to regenerate the subchondral bone and there is a portion of the device that is designed to regenerate the cartilage and they are separated in a unique fashion which sort of keeps those two cell types and encourages them to grow in their respective areas. And we use a combination of bio resorbable synthetic polymers like the PLAs or the PGAs with ceramics as well our material to use that device. And at this point we are funding the pre-clinical trials and are planning on funding the clinical trial and looking down the road potential different opportunities to get that device in the marketplace.

Bill Plovanic

So the concept that will be done but actually with the bi-plated device instead of a single device and actually going after the primary indication rather than back filling indication?

Doug Evans

Yes, this program is geared completely towards that primary indication.

Bill Plovanic

And at this point, are you loading any growth factors on to that or are you still using (inaudible)?

Joe Kaufmann

Right now the plan is to use bone-marrow aspirate in the device which can be readily during replacement procedure prior towards implantation, but other than that there are no growth factors added to the product.

Bill Plovanic

Okay, great. That’s all I have. Thanks so much.

Operator

And this time, there are no further questions. Thank you. Please continue.

Joe Kaufmann

Okay. Well, I first would like to thank everyone for participating in the call. Again, we are very pleased with the quarter and certainly very optimistic about our second quarter and the full year prospects for Kensey Nash and beyond what we have our play today also with the potential that we have beyond fiscal year ‘09 with some of the programs that Doug has mentioned here. And just one final comment we had a great quarter, [Phyllis] had a great gain last night and we are certainly very optimistic about the Phyllis also in the World Series, but I am not forgetting the Eagels also, we are back with the Eagels as well. Probably this will be a great year for Kensey Nash and the Phyllis sports teams. Thank you.

Operator

Ladies and gentleman, this conference call will be made available for replay after 11 a.m. today until October 30th and midnight. You may access the AT&T Executive Playback Series at anytime by dialing 1800-475-6701 and entering the access code 965196. International participants may dial 1320-365-3844. And again those number 1800-475-6701, international is 1320-365-3844 and entering the access code 965196. And this concludes your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Kensey Nash Corp. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript
This Transcript
All Transcripts