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Executives

Joseph Kaufmann – President and Chief Executive Officer

Michael Celano – Chief Financial Officer

Douglas Evans – Chief Operating Officer

Analysts

David Turkaly – SIG Capital

Spencer Nam – Summer Street Research

James Sidoti – Sidoti & Company

Ben Forrest – Summer Street Research

Presentation

Kensey Nash Corporation. (KNSY) F3Q09 (Qtr End 3/31/09) Earnings Call April 22, 2009 9:00 AM ET

Operator

Ladies and gentlemen thank you for standing by, and welcome to the Kensey Nash Third 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 and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, President and CEO, Joe Kaufmann. Please go ahead.

Joseph Kaufmann

Thank you. Good morning, everyone. Welcome to the Kensey Nash third quarter fiscal year ‘09 conference call. Joining me today, Doug Evans, our Chief Operating Officer, and Mike Celano, our CFO. Mike will start out with the Safe Harbor.

Michael Celano

Thanks, Joe. Good morning, The statements made by Kensey Nash and its representatives in this conference call will contain certain forward-looking statements, including financial forecasts that are based on the current beliefs of management as well as assumptions made by information currently available to management. Wherever possible, we will try to identify those forward-looking statements by using words such as belief, expect, anticipate, forecast, and similar expressions. Please note these words are not the exclusive means for identifying such statements.

Please see today’s press 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.

Joseph Kaufmann

Great, thank you. Well, I’m pleased to report the strong performance of our company this quarter particularly in light of the difficult economic environment that we all are certainly well aware of. Our topline was solid for the quarter, inline with our expectations. Our bottom line EPS was certainly at the high end of our expectations and I think reflects to the very strong performance of the employees at Kensey Nash.

I will start out with the revenue line and give some highlights of the performance of our company. Bear in mind that our revenue line consists of both product sales and royalty income.

Total revenues for the quarter were $20.6 million, or comparable to the prior year and as I mentioned earlier inline with our guidance for the quarter. When we look at our net sales for the quarter, sales of biomaterial products were $12.9 million. This represents an increase of 3% year-over-year. Within this biomaterial segment, we have cardiovascular products, which are primarily Angio-Seal component sales. These sales increased 6% year-over-year and our spine medicine products increased 11% year-over-year.

However, our spine products decreased approximately 8% year-over-year and this was primarily driven by just a shortfall in some bone void filler products from couple of our customers. If you look at the - within the Biomaterial segment, the cardiology products were again very strong and actually better than we expected for the quarter. The sports medicine products, again another excellent quarter. We do expect thought that looking out into the fourth quarter for sports medicine that we expect a decline for several reasons. One, we’ve had several consecutive very good quarters in sports medicine. So we do think that we’re going to see in fourth quarter because of the economic climate, somewhat of a decline in sales and the deterioration in the space.

That being said, we also have a very difficult comp in our fourth quarter. Last year, in fiscal year ’08 we did about $5 million in sports medicine. So, looking out into the fourth quarter we do expect to see a relatively significant decline in year-over-year sales. On the spine side sales, as I mentioned earlier, we’re down for the quarter about 8%, but we do expect to see this increase in our fourth quarter. We expect to see somewhat of a rebound there for several reasons one, we obviously have in-house orders for this quarter and we expect to see some of the customers that have not been ordering at certain levels to increase the orders for the next quarter and again we continue to see very strong performance by our major customer Orthovita, as reflected in our royalty income for the various vitas and bioactive products.

Looking at our sales of endo products, again it’s important to keep in mind that we shifted from a direct sales model to a partnership with Spectranetics. So we sold this division or this group of assets to Spectranetics in May of 2008 and so the transfer pricing of these products is certainly at a much lower level than it was when we had our own direct sales force, but obviously we eliminated a - virtually all of the sales and marketing expenses. So the sales of endo products decline 39% year-over-year and again this was related directly to the difference in the transfer of pricing, if you look at a unit basis overall, the products actually have increased year-over-year and on a sequential basis in terms of dollars, our endovascular sales increased 20%.

So, we’re seeing some positive swings there. Again we don’t expect to see any significant improvements or changes in this endovascular business until our fiscal year 2010 and beyond as we get the next generation products into the marketplace with Spectranetics and gain additional indications through the various regulatory authorities.

Moving on to royalties, total royalty income was $6.7 million, increased 4% year-over-year. However, our Angio-Seal royalties were negatively impacted by foreign exchange, when compared to prior year by approximately $300,000. If you exclude the impact, the negative impact of the foreign exchange, our total royalties would have increased approximately 9% on constant currency basis.

Orthopaedic royalties of $1.5 million, which are primarily from Orthovita, increased 27% year-over-year, again reflecting the continuing strong performance of the products in Orthovita in the marketplace. So we’re very happy with the ongoing success of our relationship with Orthovita and the success that they continue to have in the marketplace with the products that have been co-developed by the two companies.

Angio-Seal royalties were $5.3 million or flat year-over-year. Again, this is due to the negative impact of foreign exchange. If you exclude the negative impact, the actual estimate of royalties would have increased by approximately 7% year-over-year. Again unit sales were up year-over-year and I think that's important to keep in mind in looking at the performance of the Angio-Seal and the performance of St. Jude with these products in the marketplace and the ongoing strength and of the product as it continues to dominate in this sector.

Earnings for the quarter were $0.42 This reflects a 50% increase year-over-year. This was driven primarily by the elimination of the sales and marketing expenses associated with our Endovascular division of approximately $2.9 million. And this savings was partially offset by an increase in R&D expenses of approximately $700,000. The R&D expenses, as we noted on previous calls have increased and will continue to increase due to our investment in two significant programs.

The extracellular matrices products that we are developing here at Kensey Nash and also the cartilage product that we are also developing here at Kensey Nash. These are two key programs for the future growth of our company. We expect that in 2010. We will get approval in the U.S. and in Europe with the ECM products and we will have a partner in place for the distribution for 2010. On the Cartilage side, Kensey Nash, as we noted earlier this year in our press release, we have filed with the FDA to begin a clinical trial to that indication in the U.S. We have heard from the FDA. We do have some questions, which we anticipated. We also expect that we will have a couple of rounds of questions, which is not an unusual with these type products. And we hope to start this trial sometime later on this summer, at the end of the summer most likely.

Again this is a key project for our future growth of Kensey Nash. We don’t expect the product to be into the marketplace for several more years in the U.S. We do expect it to be in the European market, hopefully by the end of calendar year 2009, which would be about half way through our fiscal year 2010.

If you look at our EBITDA for the quarter, it was $9.2 million and this reflects an increase of 29% year-over-year. Our operating margin continued to be strong at 37%, versus last year operating margin of 26%.

Moving on to guidance for our fourth quarter. We expect our sales for the fourth quarter to be in the range of $13.1 million to $13.5 million. Included in those numbers are both our endovascular and our biomaterial sales. We do expect again that endovascular will be down year-over-year because of the reduction in the transfer of price and this will be last quarter where we have this situation where the comps aren’t exactly on an equal basis.

Biomaterial sales, we do expect to be in the range of about $12 million to $13 million. This will be down year-over-year, and again it will reflect the decrease in the sports medicine that we anticipate in the fourth quarter, reflecting a softness in the business along with the very difficult comp last year, we did about $5 million in sports medicine and this year we expect that number to be down sequentially in the area of about $3 million to $3.5 million.

We do expect that our cardiovascular products year-over-year will be up and we also expect that the spine products will be up year-over-year at somewhere in the neighborhood of 15% to 20%.

So overall fourth quarter, we feel confident with our guidance at this point in time and we're very pleased with the progress of the organization with our R&D programs.

Looking at royalties for the fourth quarter, we expect the royalties to be - total royalties to be $6.7 to $7 million and this includes Angio-Seal royalties of approximately $5.2 to $5.4 million. Now, again these will be negatively impacted by the foreign exchange difference between the fourth quarter and fiscal year '08 versus our fourth quarter and fiscal year '09.

On a constant currency basis, if these were adjusted - this would actually be an increase we are anticipating because of a growth in unit sales of somewhere between 2% and 5%. On the Orthovita, or orthopedic royalties primarily, it is more than Orthovita but, Orthovita makes up the majority of our - of our orthopedic royalties. We expect that these royalties will be in the neighborhood of $1.5 to $1.6 million, which would reflect a 15% to 20% increase year-over-year.

On the earnings, our earnings for the fourth-quarter EPS is expected to be $0.38 to $0.41. This is compared to a reported EPS loss of $0.09 last quarter. However, on a pro forma basis, EPS last year was $0.35. So we expect, comparing our current estimate of $0.38, $.41 to the pro forma number of $0.35 last year, that the earnings will be up somewhere between 9% to 17%. As noted it also in our press release our cash from operations continues to be strong. We don’t anticipate any major changes occurring in the fourth quarter. We have a – I think executed very well in terms of the operations for the year and are looking forward to finishing out the fourth quarter on a very strong note.

With that I’d like to turn it over to questions.

Question-and-Answer

Operator

(Operator Instructions) And our first question is from Dave Turkaly from SIG Capital. Please go ahead.

David Turkaly – SIG Capital

Thanks, and thanks for the detail. Could we just quickly go through the timeline of a new products, either on a fiscal kind of quarter basis, or a calendar basis. I know you mentioned the extracellular matrix I know you have you have a new ThromCat that go into Spectranetics. Can you give us, maybe a specific quarter for those two? And then I’ll followup with a question on OsseoFit. Thanks.

Joseph Kaufmann

Okay. Thanks Dave. On the ECM products, we’re expecting to get approval by the end of calendar year ’09. We would also expect that we would have a distribution partnership arrangement in place, certainly prior to these products available for the market. So we’re very confident about that. So, you can - I think you could look at this and say that expect a launch of these products to take place in the second half of our fiscal year 2010. And regarding the Spectranetics and partnership there, we would hope that we would have the ThromCat, the new ThromCat next generation product approved in the European Union CE Mark approval by the end of this fiscal year, the current fiscal year 2009. That would be in by the end of June of this year and that Spectranetics would do a launch of that product, hopefully shortly thereafter in the international marketplace which would be in our first quarter or second quarter of fiscal year 2010. We don’t expect the new ThromCat to be in the U.S. market until we get through. We will have to do some clinicals there. So we are not expecting that until 2011. So, hopefully that answers your questions. And one other thing Dave, by the way, the SafeCross product that we had approved back in October of 2008, Spectranetics is actually doing a soft kind of a launch with the in the marketplace currently, and we expect that that product will be available in a much broader basis if everything goes well with the soft launch, that we expect that’s going to be available for the majority of the fiscal year 2010 in both the U.S. and Europe.

David Turkaly – SIG Capital

Great, and then the OsseoFit I know you said you’ve got CE Mark, when could we expect a distributor for that?

Joseph Kaufmann

Well in terms of the OsseoFit or the Cartilage indication that’s something that we are, we really can’t provide you with any further insight into that situation at this time. The OsseoFit is a bone void filler. It’s currently distributed by Biomet both in the U.S. and the European Union. However, for the Cartilage indication, that product continues to be under the domain and control of Kensey Nash. So, hopefully we will be able to provide some further information on that by our next conference call if not sooner.

David Turkaly – SIG Capital

And lastly the – you mentioned the bone void filler, in the quarter to spine and some of the bigger partners you didn’t get your reflection on the market in general in spine or is there something going on specifically with bone void fillers in on – at your lines with some of those bigger players that would lead for a little bit of a slowdown now and a bounce back next quarter?

Michael Celano

I think just - there is a couple of things. One certainly, if you look at the – look at our products and you look at the royalties for example, from Orthovita, certainly they continue to do an outstanding job in the marketplace and those products are continuing to grow year-over-year. So, I think that’s a good indication of how well the products are doing. Couple of other players, the larger players that aren’t doing as well. I can’t really say for certain, whether that’s a reflection of the what’s happening in the marketplace in terms of procedures. I think it is based on what we have read with some of the other players and what they have disclosed publicly. So, I think we have some of that happening. And also, again these products are relatively smaller and significant for these bigger players. So, I’m hoping that we are going to see the bounce back in our fourth fiscal quarter and I think we will. And then going into 2010, hoping that we are going to see, a better performance by some of these players.

David Turkaly – SIG Capital

Thanks

Operator

Thank you. And our next question is from Spencer Nam of Summer Street Research. Please go ahead.

Spencer Nam – Summer Street Research

Thanks for taking my questions. Excuse me, just couple of quick questions. First of all, on the Angio-Seal, I was wondering if you could give us any color on the competitive dynamics right now with the Angio-Seal evolution out there? And how definitions are comparing Angio-Seal versus some of the passive closure devices? Are you seeing any change in the – how physicians are preferring one part of another recognizing that Angio-Seal does have the super majority of the market at this point?

Joseph Kaufmann

I can only give you my view of this world. I certainly can’t speak for St. Jude. And I really don’t have a lot of information on Evolution. As far as the – how that product is doing specifically in the marketplace. But I can tell you in terms of what we see or hear in the marketplace is that, with a product like Angio-Seal and the reason why it continues to do so well and continue to dominate the market is, because quite frankly it’s a very good product. It has great, great clinical data, great labeling, it’s easy to use. The passive devices and always has been our position at Kensey Nash is they don’t work. They are – they become relatively expensive band-aids as opposed to doing the job that closure devices are intended to do. So, that’s why we think we have been able to or St. Jude has been able to command such great market share in a continuing large market share. So, I’m sure there is always going to be other competition that comes into the market and we will, - we could do well for either a short period of time or may somewhere down the road come up with a better idea, but I haven’t seen it yet.

Spencer Nam – Summer Street Research

Thanks for that. And then, with respect to St. Jude agreement that you guys have, have you guys had any discussion with St. Jude in terms of extending the joint venture beyond 2010 or is that still too early to discuss?

Joseph Kaufmann

I think it’s too early to discuss at this time. I think the agreement you’re referring to is the supply agreement for the Collagen, which expires December 2010. So, we really don’t have any information available to the public or anyone else at this time.

Spencer Nam – Summer Street Research

And then on the Orthopedic side, are you seeing any impact from the economy, with products that you guys are working with Orthovita? Is there any sort of sensitivity out there right now?

Michael Celano

Well, to-date, again we’re somewhat a little bit removed from the end-user marketplace, but some of the discussions we’ve had with some of our partners and also with just some direct discussions that we have had. We haven’t seen too much of an impact other than what we think may happen in sports medicine where the elective procedures may decline due to the obvious facts that everyone knows the high unemployment, lack of insurance, the cost of deductibles and that sort of things. So, I think we can – or certainly expect to see that occurring throughout the rest of the - certainly the calendar year 2009, but on the, as far as the other procedures particularly with Orthovita, and those products they continue to do very well and are being well received in the marketplace.

Spencer Nam – Summer Street Research

Thanks very much.

Michael Celano

Welcome.

Operator

Thank you. And our next question is from James Sidoti from Sidoti & Company. Please go ahead.

James Sidoti – Sidoti & Company

Good morning, Joe. Can you hear me?

Joseph Kaufmann

Yes, I can.

James Sidoti – Sidoti and Company

On the ECM products, can you give us a little more color on what the strategy is there? It sounds like you’ve got a couple different applications, so that do you plan to announce – toward from one partner for all the different applications that you think you’ll break it out by market?

Joseph Kaufmann

Well, I would say what, I think Doug, who certainly hits up of the – all the operations and R&D efforts here and I’ll let Doug comment on that.

Douglas Evans

Hi, Jim with the ECM, the strategy is to try to take it into a variety of different markets. And currently, we are looking at a number of different partners for each of those specific areas. The first product that we’re going to launch is that maybe our Matrix and that's going to be for ventral hernia repair. And as Joe described earlier, we are expecting to get that into the market in our fiscal year ’10. And at this point in time we are having discussions with several parties, which we think will do an excellent job, and since we have more information on that, we will disclose that to the public. Following that launch for the ventral hernia application, we expect to get approvals to use the products also, for breast reconstruction and then we are going to target some of the other large markets for these ECM materials such as in the OB/GYN areas and also for dermal wound repair applications.

James Sidoti – Sidoti and Company

So what’s, when do you think the earliest you would be able to announce some kind of distribution arrangement could be?

Douglas Evans

As soon as we have one in place.

James Sidoti – Sidoti & Company

And, do you think that could to happen anytime between now and 2010 or?

Douglas Evans

Oh absolutely, yeah. I think Jim, it’s a one, where we’re having ongoing discussions as Doug alluded to and we feel pretty comfortable how things are progressing with the various partners and discussions we’re having. I would hope, I think it’s realistic to expect something to occur by the summer – somewhere in that timeframe.

James Sidoti – Sidoti & Company

Okay. And then on the income statement, just can you remind me the other income line, what’s going into that?

Michael Celano

Well, there is interest income, interest expense and then some amount of other income that was related in that category.

James Sidoti – Sidoti & Company

Okay. So, I assume you’re not getting much interest income off of your cash balance right now?

Michael Celano

Yeah, I mean it’s roughly in the normal money market rates. We would get some money that’s in some safe general obligation municipals, but it’s generally in the 1% range.

James Sidoti – Sidoti and Company

So, assuming the interest rate stay where we are, we should think that line item - that line will stay about where it is?

Michael Celano

Yeah the performance you saw in this quarter would be indicative of going forward.

James Sidoti – Sidoti and Company

Okay, unless we see interest rate starts to pick up again.

Michael Celano

Right

James Sidoti – Sidoti and Company

Okay. All right, thank you.

Michael Celano

Sure.

Operator

Thank you (Operator Instructions) And our next question is from Ben Forrest with Summer Street Research. Please go ahead.

Ben Forrest – Summer Street Research

Thanks. My questions have actually been asked and answered. Thanks a lot.

Operator

Thank you and at this time there are no further questions in queue.

Joseph Kaufmann

Great, well again I’d like to thank everyone for listening in today. And we look forward to the fourth quarter results for Kensey Nash and hopefully whatever else in terms of what we mentioned today, in terms of potential deals, along the way with our biomaterial products and also potentially some additional approvals on the endovascular side of our business. So, again thanks everyone. And I will talk you next quarter.

Operator

Thank you, and ladies and gentlemen this conference will be made available for replay after 11 O’ clock today until April 29 at midnight. You may access the AT&T Executive Replay System by dialing 1800-475-6701 and entering the access code 995293. International participants can dial 320-365-3844. Again the numbers are 1800-475-6701 and 320-365-3844 with the access code 995293. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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