Kensey Nash Corporation F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

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Kensey Nash Corporation (KNSY) F2Q09 (Qtr End 12/31/08) Earnings Call Transcript January 28, 2009 9:00 AM ET

Executives

Joe Kaufmann – President and CEO

Ryan Lake – Interim CFO

Doug Evans – COO

Analysts

Sean Bevick – SIG

James Sidoti – Sidoti and Company

Julie Hoggatt – Noble Financial

Howard Madenburg [ph] – Stifel Nicolaus

Ben Forrest – Summer Street Research

Bill Plovanic – Canaccord Adams

David Schneider – Hoover Investment

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to be given at that time. (Operator instructions) And also as a reminder, today’s teleconference is being recorded. And at this time, I will turn the call over to our host, Mr. Joe Kaufmann. Please go ahead, sir.

Joe Kaufmann

Thank you. Good morning, everyone. Welcome to the Kensey Nash second quarter fiscal year ‘09 conference call. Joining me today are Doug Evans, our Chief Operating Officer, and Ryan Lake, our Interim CFO. We’ll start out today with – Ryan, with the Safe Harbor, please.

Ryan Lake

Thanks, Joe. Good morning, everyone. The statements made by Kensey Nash and its representatives in this conference call will contain certain forward-looking statements, including financial forecast 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. These words are not the exclusive means for identifying such statements.

Please see today’s news release and Kensey Nash’s SEC filings, including our Annual Report on Form 10-K for the year ended June 30, 2008, particularly the 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 year 2009 and beyond to differ materially from those expressed in or implied by our forward-looking statements.

Joe Kaufmann

Great. Thanks, Ryan. I’m pleased to report another strong quarter for fiscal year ’09. We had a very good quarter, particularly with our biomaterials business again and also with the strong performance of our strategic partners, particularly Orthovita and also St. Jude, with the Angio-Seal sales continue to do very well. Overall, our total revenues of $20.8 million increased 6% year-over-year. Included in revenues were product sales of $14 million, which increased also 6% year-over-year and royalty income of $6.8 million, which increased 5% year-over-year.

Our Angio-Seal royalties were $5.4 million. These royalties were adversely impacted by approximately $200,000 in the quarter due to the unfavorable foreign exchange impact. If we were to exclude the negative impact of the foreign exchange, our total royalties would have been in line or at the high range of our guidance and our total revenue would have exceeded the high end of our guidance. Our total revenue of $20.8 million came in at $200,000 below the high end of our guidance of $20.9 million with the $200,000 impact we would have actually have exceeded total revenue guidance.

Biomaterial sales of $13.1 million increased 14% year-over-year and 3% sequentially. Cardiology products, which primarily are Angio-Seal components that we sell to St. Jude, increased 48% year-over-year. This was anticipated in our quarterly results based on the ordering patterns that we have received or appeals that we have received from St. Jude. Now, it also reflects two things; one, the ordering pattern, but also again the good unit growth that we are seeing in the Angio-Seal product line.

We do expect that in our third fiscal quarter, as a result of this strong quarter in terms of ordering product for components that the cardiology products will decline sequentially by about 20%, but again for the total year this would be a very good year for the Angio-Seal components actually increasing significantly year-over-year. And again as the year goes on, this will more accurately reflect the increase in the unit sales that are taking place of the Angio-Seal worldwide.

Our sales of sports medicine products increased 18% year-over-year while our spine products declined 15%. As we noted in our press release, the Orthovita royalties were very strong and our product sales also were very strong to Orthovita. We did have one of our products in the bone void filler area where less than we expected. We think that this will continue to be soft in terms of year-over-year comparisons with this particular product, but we hope to see this rebound later on in the calendar year as we get through this difficult time in terms of the overall economy. We also believe that the strong performance of Orthovita with the bioactive product may also be impacting the sales of this other particular product.

The sales of our endovascular products in sales dollars declined 47% year-over-year. Now, this was due simply to the shift from a direct sales force model that we had last year to the strategic partnership we have with Spectranetics in our current fiscal year, as we have lower transfer pricing to this partner than we did with a direct sales force. On a sequential basis, I’d like to point out though that our overall revenue for endovascular products increased 11%.

Royalty income was $6.8 million. This represents an increase of 5% year-over-year. Angio-Seal royalties of $5.4 million were up 1% year-over-year. Again because of the negative impact of foreign exchange, the actual increase, if you add back the $200,000 negative impact of foreign exchange, it would have reflected a 6% increase year-over-year. So we still see very good increases in unit growth on the Angio-Seal, as it continues to be the dominant player in the marketplace. We expect that that’s certainly going to continue going forward, again as the Angio-Seal with the best clinical data, the easiest to use product in the market and a partner St. Jude that has a dominating position in the space.

Our Orthovita royalties increased 28% year-over-year, again reflecting the very strong VITOSS bioactive products that were co-developed by Kensey Nash with Orthovita. And this performance, again, was right in line with what we had targeted.

As far as EPS and earnings, our EPS for the quarter was $0.44. This represented an increase of 110% year-over-year, also it has exceeded our high guidance, which was our guidance previously was $0.40 to $0.42 per share. EBITDA was $9.3 million for the quarter and our operating margin was 37%. Operating cash flow was $4.7 million and our cash in our balance sheet as of the end of December is now in excess of $71 million. And this is after we completed a stock purchase – repurchase of about $10.4 million in the quarter.

Now I’ll ask Doug Evans to give a little recap of what’s going on in terms of our new product development and where we are with some of our programs. Doug?

Doug Evans

Okay. Thank you, Joe. Good morning, everyone. First, on our cartilage program, our development team continues to make good progress. We have – as we mentioned in the press release, we have wrapped up our pre IDE study work at this point. The data looks very good. We’ve assembled a clinical advisory panel, which is working with our in-house (inaudible) group in preparation for the IDE submission, which we expect to occur by March of this year.

We are in the process right now of identifying clinical sites, and we expect that we will begin at least the first enrollment hopefully by the end of this fiscal year. Again, for the details of the study, we expect it to involve about 300 patients. Again, we are looking at about a year and a half enrollment time, about two years follow-up for these patients, and then we would make the submission to the FDA.

With respect to launching the product in the international markets, we are anticipating that we will file the design dossier for this product with our notified body in the fourth quarter of this fiscal year, potentially with the approval of that product by the end of 2009.

So moving on to ECM product, as everyone knows, this is a new technology which we’ve been talking about. It’s a material that we are deriving from porous sign tissues. It’s, let’s call it, an extracellular matrix. It’s a material that will be used as an alternative to some of the products that are out there generally in the surgical mesh area in the marketplace. With these products, we are going to be going into markets such as hernia repair, women’s health applications for GYN [ph] procedures as well as in reconstructive procedures.

Right now, we are wrapping up our preclinical testing with these technologies and we expect the first 510(k)s for the surgical mesh is based upon our ECM materials to occur in the fourth quarter of this fiscal year. And we are expecting our first product to be approved late in calendar year 2009 with launches by the end of 2009 as well.

And finally, just a little bit of an update on our endovascular programs. Our development teams continue to make good progress with our partner Spectranetics. As we mentioned in the press release, we’ve wrapped up the development work for the milestone related to the next generation Safe-Cross technology. This work will allow for what we believe an easier and more effective device in the market.

Essentially what we’ve done is we upgraded the ability of the system to see perhaps further down in the blood vessel gives the physician better guidance when operating the device, as well as we’ve incorporated an improved user interface, which will help represent the data from that guidewire to the physician allowing them to maybe more easily and more rapidly make some decisions and have them navigate through the total chronic occlusions. Our partner is in the middle of some customer evaluations with this next generation Safe-Cross technology, and we expect it to launch into the market sometime in the first half of 2009.

And then with respect to the ThromCat product, we continue to work on our next generation ThromCat technology. This will provide us with, we believe, a thrombus removal device that will perhaps have ten times as much thrombus removal as our current product in the marketplace. So this is a fairly significant step forward. We believe that it will also be easier to use than the current practice in the marketplace. And we anticipate that this product will get into the international market sometime in the next two quarters, and we are excited to see the performance of that hopefully with our partner Spectranetics.

With that, I’ll turn it back to Joe.

Joe Kaufmann

Great. Thanks, Doug. Looking at our guidance for the third quarter and for the total year of fiscal year ’09, we expect in the third quarter that our sales will be in the range of $13.5 million to $14.0 million. Royalty income we anticipate $6.9 million to $7.1 million, and EPS of $0.40 to $0.42.

For the fiscal year ’09 total year, our net sales ranges $55 million to $55.5 million, and our royalty income we’re anticipating is going to be $27 million to $28 million. As noted in the press release, that guidance is down – the royalty income guidance is down about $1 million from the prior quarter directly related to, again, the foreign exchange deterioration of the euro. So that has had a significant impact. However, with the ongoing programs that we have in place at Kensey Nash in terms of cost and expense controls and improvement, we feel confident that we’ll be able to offset the royalty reduction and that we are maintaining our previous EPS guidance of $1.62 to $1.69 for the year.

Our cash flow, as noted also in the press release, we expect that we will finish the year with operating cash flow in excess of $25 million. So all in all, we are very pleased with our quarter, very excited about the back half of our fiscal year ’09 with the ongoing strength of the biomaterials business, the strong performance of our partners in terms of the sales of both the Angio-Seal and also certainly the very strong performance of Orthovita.

In addition, as the products continue to go through the regulatory process on the near-term with Spectranetics and our internal development team, we are optimistic that we are going to see nice growth, particularly fiscal year ’10, as these products get launched into the marketplace of next generation products along with some of the other products from the biomaterials side of our business for fiscal year ’10, as Doug pointed out, particularly the ECM products and the cartilage product in the European market.

With that, I’d like to turn it over for questions from the audience.

Question-and-Answer Session

Operator

(Operator instructions) And the first question will come from the line of Sean Bevick with SIG. Please go ahead.

Sean Bevick – SIG

Good morning, guys. I got a couple questions about St. Jude. Can you describe a little bit your relationship with them? And I believe they are locked up through 2010 with you guys. Is there any way that they can get out of that contract for the Angio-Seal component?

Joe Kaufmann

No, there is a – we do have a contract for a supply contract with St. Jude that expires in December 2010, and that’s for an exclusive arrangement for 100% of the collagen and for a smaller portion of the anchors. And no, we are not aware of any reason or certainly there aren’t any provisions that allow for that contract to be terminated other than non-performance by Kensey Nash. But we have been a great vendor, a great partner. We have supplied – the only person – only company that supplied collagen for this particular device since its existence. So we’re feeling pretty good about the contract and we certainly are aware of the fact that St. Jude made an acquisition this past summer. But again, with our technology and our position in the collagen world, we feel pretty good about our capabilities and hopefully that contract will continue beyond 2010.

Sean Bevick – SIG

Okay. And is there any new buybacks on the horizon given the current stock price?

Joe Kaufmann

With our cash position and – certainly we want to continue to maintain a strong balance sheet, but our Board will on an ongoing basis continue to look at potential buybacks, but we also want to make sure that we’re in a good position if there is an opportunity for us to do a strategic acquisition that fits for Kensey Nash. We also want to maintain that flexibility. So it is something that we will continually monitor and look at, and if it’s appropriate, our Board will make that decision.

Sean Bevick – SIG

Okay. And one last one I just wanted to clarify. For the cartilage product you said there is going to be a 300 patients study, 1.5-year enrollment and two-year follow-up. Is that correct?

Doug Evans

That’s correct, yes. From the – and again, these are estimates on the patients and we’ll have more further clarification for that as we get probably by the – by our conference next time we’ll have more details on that, but that’s what we’re looking out for the US.

Sean Bevick – SIG

Okay. Very good. Thanks, guys.

Doug Evans

Thank you.

Operator

Thank you. Next in queue is the line of James Sidoti with Sidoti and Company. Please go ahead.

James Sidoti – Sidoti and Company

Good morning, Joe. Good morning, Doug.

Joe Kaufmann

Good morning.

Doug Evans

Good morning.

James Sidoti – Sidoti and Company

Could you remind me when you (inaudible) got the approval for the Angio-Seal collagen, what was the product that fills, your PMA or 510(k)?

Joe Kaufmann

That’s PMA product.

James Sidoti – Sidoti and Company

And how long was the follow-up on that? Would you do the initial studies?

Joe Kaufmann

On the follow-up on the patients for the PMA, I am looking at Doug right now. It’s a long time ago, but not quite sure, Jim, how long the follow-up was on those patients.

James Sidoti – Sidoti and Company

But you would think for St. Jude that if they were to find a replacement source, it would require a similar type of group of process and a considerable amount of time to get to their process.

Joe Kaufmann

Well, I don’t know what their expectations are or how they – how if they plan to, what they plan to do on that aspect of the business at this time. So I really can’t comment on what their thought process is or the amount of time they think it would take in order to, number one, develop a collagen that would work with an Angio-Seal type product and also the regulatory path and deal any potential performance issues. So, again, we are very well known I think in the biomaterials world as one of the leading experts in collagen, and I feel that we’re very confident that we state that obviously with our history, with the Angio-Seal and with collagen and developing that collagen specifically for that project – or that product that I don’t think anybody knows more about that type of collage and the collagen that’s in that product and the people here at Kensey Nash.

James Sidoti – Sidoti and Company

And I just want to clarify. You said unit growth for Angio-Seal in the quarter was around 5%, is that right?

Joe Kaufmann

I said that our royalty dollars would have been up 5% if we added back the impact of the foreign exchange, which was $200,000. I would comment and say that if you look at the unit growth, which we typically don’t disclose, but I would say it’s in the mid-single digit, that sort of thing, which I think is very good in terms of the overall market and actually has been doing very well in the marketplace overall. So we don’t actually disclose the unit numbers because St. Jude doesn’t disclose those.

James Sidoti – Sidoti and Company

Okay. All right. Can you give us an update on the status of the search for new CFO?

Joe Kaufmann

Sure. We are – Ryan has done a great job during this time frame, and we are near the end in terms of our search and we would hope that we would have a candidate, a final candidate selected very, very shortly. So we think that it could be just a matter of weeks now before we make any announcement.

James Sidoti – Sidoti and Company

Okay. And then just a follow-up on the stock buyback, it seems with $70 million in cash and earning very low interest rate, the stock buyback might be in the near-term at least much clear [ph] why to use that cash. When will you and the Board review it again?

Joe Kaufmann

Don’t have a specific date, Jim, but it’s something that we discuss on a, what I will call, fairly regular basis. So we will be looking at and talking about it very, very soon.

James Sidoti – Sidoti and Company

Okay. All right. Thank you.

Joe Kaufmann

You’re welcome.

Operator

Next question in queue that will come from the line of Julie Hoggatt with Noble Financial. Please go ahead.

Julie Hoggatt – Noble Financial

Hey, guys, thanks for taking my question. I was hoping you could give us an update on were you also partnered for the extracellular matrix used primarily for hernia repairing, please?

Joe Kaufmann

Yes, I – we have had ongoing discussions with potential partners in that space. And it’s something that we can’t give you a specific name or time frame, but it’s suffice to say that it’s ongoing and we hope that we’ll be able to provide further clarification in the near-term if and when we are able to put a deal together related to this by technology. So we’re very excited about it. We think it’s going to be a great technology for Kensey Nash and provide us another revenue source in the biomaterial space in fiscal year ’10 and beyond. So it’s just an ongoing process, Julie, and something that’s taking place on a regular basis with our business development team and our technology people and the potential partners.

Julie Hoggatt – Noble Financial

Okay. And I jumped on just a couple minutes late. Did you say that you had filed an IDE for the cartilage repair matrix?

Joe Kaufmann

No, we said that we are in the process of finalizing the IDE. And we expect that we will file within the next couple of months, Doug? So that’s where we are.

Julie Hoggatt – Noble Financial

Okay. Could you expand just a little bit on the bone void filler, the decline that we saw? And then can you just a little bit on whether or not it was mostly economic or it was due to competition?

Joe Kaufmann

Not really sure, because as you know, we sell through partners here and we do have to be careful with – in terms of the competitive environment. I tend to think that it isn’t a result of the economic conditions because we’ve had – as you can see with the Orthovita results and the product line there, it’s done very well, continues to do well. This particular product was down from where we expected. So I’m not – I can’t really say that I can attribute it to the economic conditions today. It may be somewhat attributed to that, but I can’t definitely say that. I do think it may have been impact, quite frankly, by the strong performance of Orthovita, may have had some impact there, but I can’t give you a really good answer. I don’t know the answer at this time.

Julie Hoggatt – Noble Financial

Okay. Thanks so much.

Operator

Thank you. The next question in queue will come from the line of Howard Madenburg [ph] with Stifel Nicolaus. Please go ahead.

Howard Madenburg – Stifel Nicolaus

Good morning, Joe. A question on the cartilage repair. Is that going to be – do you have any idea if that’s going to be indicated for soft (inaudible)?

Joe Kaufmann

We had not finalized the indications that we’re going for at this point in time in the clinical trial.

Howard Madenburg – Stifel Nicolaus

All right. Is it a possibility? How about for soft or hard cartilage? Or is –

Doug Evans

Basically we’re going to focus the trial on cartilage in the knee.

Howard Madenburg – Stifel Nicolaus

Cartilage in the knee.

Doug Evans

Yes.

Howard Madenburg – Stifel Nicolaus

Okay. Thank you very much.

Operator

Next in queue is the line of Ben Forrest with Summer Street Research. And your line is open.

Ben Forrest – Summer Street Research

Thanks for taking the question. A quick question on the porous sign based [ph] tissue product. I’m wondering – do you plan to have two separate products, one for hernia and one for breast-free construction? And how do you see your products competing with anything else that may be out there?

Joe Kaufmann

Doug?

Doug Evans

Yes, sure. Well, we do anticipate targeting our ECM technologies towards in essentially all of these markets, starting with the soft tissue surgical markets, which include hernia repair, some of the women’s health procedures, OB/GYN types kind of procedures and then reconstructive surgery, moving into other areas like dental repair and those kinds of areas. So we have actually two different versions of our technology, both based on porous sign tissues. They have different characteristics from a handling perspective. Both of them have, what we believe, very successful, regenerative capabilities to those tissues. And we’ll target each one specifically to the market where they work fast. As far as comparison to the technologies that are out there, we are in the process of doing some comparative, basically, pre-launch studies, which will be used in the marketed literature when the products are sold and put into the marketplace. And once those studies are completed, we’ll be sharing some of that information with you.

Ben Forrest – Summer Street Research

Great. Thanks a lot.

Operator

Thank you. (Operator instructions) And we’ll go to our next question in queue from Bill Plovanic with Canaccord Adams. And your line is open.

Bill Plovanic – Canaccord Adams

Great, thank you. Good morning.

Joe Kaufmann

Good morning.

Bill Plovanic – Canaccord Adams

Couple of questions. First, relative to the bone void fillers, remind us who your partners are outside of Orthovita in that area?

Joe Kaufmann

Sure. We have Medtronic, Zimmer, and Biomet.

Bill Plovanic – Canaccord Adams

Okay. And –

Joe Kaufmann

And also Helios, which is a J&J product.

Bill Plovanic – Canaccord Adams

Okay. And then just relative to the cartilage product, as you push through on the IDE, I mean, at any point in time, with any of these new development projects, any plans that you would market those directly yourselves or is it continue to keep it as more of an R&D shop?

Joe Kaufmann

There aren’t any plans to date, Bill, for us to do any direct marketing. The plan today is for us to continue with our business strategy with the model we have in place. That being said, if there is a – we’ll look at it from the standpoint of whether we can put together what we believe is a deal, a fair deal that makes sense for Kensey Nash, the best deal for us and a potential partner. And if that makes sense with our model and that makes sense going forward, then obviously we’ve been very successful with the – working with strategic players and that’s our preference today. But we’d like to keep all the options open.

Bill Plovanic – Canaccord Adams

So is it fair to say then if you do do an acquisition, it’s more likely to get a sales and marketing presence in it than market (inaudible)? And do you protest?

Joe Kaufmann

I’m sorry, I missed part of that question. It’s fair to say if we did an acquisition it would be what? Sorry.

Bill Plovanic – Canaccord Adams

It would be basically a sales force rather than by a technology?

Joe Kaufmann

No. I think that if we were to – we’re looking at various acquisitions and acquisitions ranging primarily with the technology area that would add additional skill sets to Kensey Nash. If we seen an opportunity in terms of something in the biomaterials space that would be an acquisition that had a sales force that wasn’t in conflict with any of our current partners. We wouldn’t exclude ourselves from doing that. But again, we don’t have any plans at this point in time to get into anything that’s going to have a direct sales and marketing force.

Bill Plovanic – Canaccord Adams

Okay. And then is it fair to say, with the closing down of the cardio product to direct sales there and then that Ramius is selling that we will not see anything else out of them at this point in time? (inaudible) or how would you view that if you can comment on that?

Joe Kaufmann

As far as something on Ramius?

Bill Plovanic – Canaccord Adams

Yes.

Joe Kaufmann

I don’t anticipate anything, but I can’t speak for Ramius. And they have been selling. They have been a seller for a long period of time now. But they do have two Board seats. And so we will – we feel that the company is certainly executing and we have a Board of – totals nine people, of which they represent two seats. So I just don’t have any further comment on that.

Bill Plovanic – Canaccord Adams

Okay, thanks.

Operator

Thank you. At this time, there is no additional questions in queue. Please continue. Actually, we do have one question just coming into queue and that will come from the line of David Schneider with Hoover Investment. And your line is open.

David Schneider – Hoover Investment

I haven’t calculated the numbers for the quarter you just reported, but for previous quarters, for several quarters sequentially, your days inventory outstanding went up sequentially each quarter. For example, in the March quarter it was 139 days and 143 days in June, 155 in September. I haven’t gone through December yet. What’s the reason for the days inventory outstanding just ticking up like that?

Joe Kaufmann

Ryan, you want to take that question?

Ryan Lake

Sure. Our inventory from year-end has increased primarily related to an increase in some of our polymer raw materials and finished goods. This is related to customer demand and taking advantage of some year-end pricing discounts. And I think we would expect this to decrease over the remainder of the fiscal year.

David Schneider – Hoover Investment

Okay, thanks.

Operator

Thank you. (Operator instructions) And I’m showing no additional questions at this time. Please continue.

Joe Kaufmann

Right. Well, I’d like to thank everyone for listening in today and look forward to the next conference call at the end of the third quarter. And I also just like to leave you with this. I know on previous conference calls I mentioned (inaudible) Jim Sidoti has pointed out many times. And I think we wrapped our quarter up a little bit better than they wrapped our season up. So – but there’s always next year. Anyway, thank you and we’ll talk to you soon. Bye.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 11 AM Eastern Time today through February 4, 2009 at midnight. You may access the AT&T Teleconference replay system at anytime by dialing 320-365-3844 using the access code of 981228. Again that phone number is 320-365-3844 with the access code 981228. That does conclude your conference for today. We thank you for your participation. You may now disconnect.

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