Power Medical Interventions, Inc., Q1 2009 Earnings Call Transcript

Power Medical Interventions, Inc. (PMII)

Q1 2009 Earnings Call

May 13, 2009 5:00 pm ET

Executives

Michael Whitman – President and Chief Executive Officer

Brian Posner – Chief Financial Officer

Analysts

Unidentified Analyst – Jefferies & Co

Presentation

Operator

Welcome to the Power Medical Interventions, Inc., first quarter 2009 financial results conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I’d like to turn the call over to Ms. Stephanie Diaz.

Stephanie Diaz

With me from management are Michael Whitman, President and Chief Executive Officer, and Brian Posner, Chief Financial Officer. Before I turn the call over to management, I would like to remind everyone that during this call, as in the company’s press release, management will make forward-looking statements that are intended to fall within the Safe Harbor Provisions of the Private Securities Litigation Reform Act. As set forth in the press release, forward-looking statements are subject to risks and uncertainties including those described in the company’s press release, the company quarterly report on Form 10Q for the quarterly period ended March 31, 2009, and annual report on Form 10K for the year December 31, 2008, that may affect the company’s business prospects. Actual results may differ materially from the forward-looking statements.

Now I’d like to turn the call over to Michael Whitman.

Michael Whitman

Thank you Stephanie, and good afternoon everyone. Power Medical implemented a restructuring plan during the fourth quarter of 2008. The plan was designed to improve Power Medical’s operations and to optimize our manufacturing processes. The intent was to enhance the quality of our intelligent surgical instruments and to improve our financial performance.

Today, we’re pleased to report continued progress with our financial performance. We believe this positive financial trend builds on the foundation established in the fourth quarter creating a scalable business model which will ultimately lead to profitability. We believe Power Medical Interventions is once again positioned to expand on our distribution footprint which will lead to an increase in revenue and shareholder value.

We also made great strides in new product development, pursuing new indications for our technology and in our joint development program with Intuitive Surgical. I’ll address each of these achievements in greater detail, but first, Brian Posner, our Chief Financial Officer, will provide you with an overview of our first quarter 2009 financials.

Brian Posner

As Michael mentioned, Q1 2009 was another strong quarter for PMI, demonstrating growth in product sales and margins, as well as a significant decrease in operating expenses. Sales in the three months ended March 31, 2009, were $2.7 million, compared with $2.2 million during the corresponding period in 2008, an increase of 23 percent. This also represents a 16% increase in product sales as compared to fourth quarter 2008. Reload revenue, which is a key driver of our revenue model, was approximately $1.3 million in the first quarter of 2009, compared to $0.5 million in the first quarter of 2008.

Excluding a charge for obsolescence, the company's gross margin was $0.8 million, or 28 percent of sales for the first quarter, compared to a gross margin of 20% of sales during fourth quarter of 2008. Excluding a charge for obsolescence, the company's gross margin improved 20% compared with the comparable quarter in 2008. The improvement in gross margin is largely attributable to improvements we have made in our manufacturing process, including use of the Reload automation machine which began utilization in the second half of 2008.

Total operating expenses for Q1 2009 decreased by 39 percent to $6.9 million from $11.4 million during the corresponding period in 2008. First quarter 2009 sales and marketing expenses decreased 49 percent to $3.5 million from $6.8 million during the first quarter of 2008. Research and development expenses for the first quarter of 2009 also decreased 49 percent to $0.8 million from $1.6 million in the corresponding 2008 period. G&A expenses for the first quarter of 2009 decreased 13 percent to $2.6 million from $3 million in the corresponding period of 2008. These reductions are largely a direct result of the cost-cutting measures implemented as part of the restructuring plan in late 2008.

Net loss for the first quarter of 2009 was $6.9 million, or $0.41 per basic and diluted share, compared to a net loss of $12.2 million, or $0.71 per basic and diluted share, for the corresponding period in 2008.

The company's unrestricted cash and cash equivalents balance as of March 31, 2009, was approximately $4.7 million, compared to $8.4 million as of December 31, 2008.

I would now like to discuss our efforts to strengthen our balance sheet. To say the least, these are challenging times for the capital market. PMI has been affected by these challenges. We are pursuing a number of initiatives to raise additional capital. We are committed to increasing shareholders value over the long-term through the execution of our business plan.

Before I turn the call back over to Michael, I’d like to once again highlight the significantly improved financial results that PMI has achieved since the implementation of our restructuring plan in 2008. In this short period of time, we’ve seen immediate improvements in product sales and gross margin. At the same time, our operating expenses have decreased in a very meaningful way. By any measure, these results demonstrate a very positive financial trend, and we’re committed to building up on these successes going forward.

This concludes the financial results overview. I’ll now turn the call back over to Michael.

Michael Whitman

The company is focused on three primary objectives—increasing sales, expanding indications, and maximizing the opportunity inherent in our relationship with Intuitive Surgical. As Brian mentioned, PMI continues to see quarter over quarter revenue growth and improvements in gross margins. The encouraging trends speak for the value inherent in PMI’s intelligent surgical instruments and the growing interest among surgeons. We are very pleased with the increasing sales momentum, and we remain focused on building sales channels in the US and abroad.

Upon the successful of a capital raise, an important use of proceeds will be the expansion of our salesforce in the US. In addition, we are actively pursuing qualified distributors to market our products in Europe, Asia, and South America. We remain committed to new product innovation as an important means of increasing revenue. PMI continues to develop new surgical instruments for our product pipeline.

Earlier this year, PMI announced the FDA cleared our patented i60R intelligent surgical instruments and submitted a 510K application for our closure device. It’s our plan to commercially launch of them for applications throughout the digestive tract this year as soon as commercially viable. PMI recently announced that it has filed a special 510(k) with the FDA requesting marketing clearance for the company’s iDrive Intelligent Power Unit or IPU and our iConsole monitor. iDrive IPU represents the culmination of 8 years of development for intelligent surgical instruments. The iDrive/iConsole combination provides surgeons with the world’s first wireless computer mediated platform which will enable PMI suite of intelligent surgical instruments with unprecedented capabilities such as wireless video processing, internet access, patient record interface, and controlled tissue compression software. The iConsole is a proprietary wireless device that communicates directly with the iDrive IPU during surgical procedures and provided auditory and visual feedback that allows surgeons to make real-time critical decisions that may ultimately lead to improved patient outcomes.

All of this is wrapped up in a value proposition which has the potential to be significantly less expensive than manual surgical stapling devices. This breakthrough allows all of PMI’s proprietary intelligent surgical instruments to be driven by a single power unit. The iDrive IPU eliminates the need to purchase multiple instruments for given procedures.

Hospitals will now be able to acquire PMI’s advanced technology platform at less than half the current cost. We estimate that this lower price point may lead to price leadership in the surgical stapling segment, greatly enhancing the potential for PMI to increase market share. The iDrive/iConsole technology will be ready to ship upon FDA market clearance. We believe that these first of their kind products will contribute significantly to our future revenue stream as well as strengthen PMI’s position as a leading innovator in the surgical stapling field.

PMI Japan is a wholly owned subsidiary presently marketing our circular and right angled linear cutter stapling devices in what is the world’s second largest surgical stapling market. Approval for PMI’s i45 and i60 in Japan continues to be pending with the Japanese Ministry of Health, Labour, and Welfare. Approval of our second generation i60 and i45 devices is greatly anticipated in Japan. We expect that this approval will have a material impact on future revenues.

I’d like to comment on our Quality is Caring Program initiated in the third quarter of 2008. Through a combination of automation relating to the instrumentation of our Reload automation machine and enhanced internal processes, PMI has achieved a significant improvement in product quality and will now three quarters of automated manufacturing experience under our belts, and now we’re better positioned to support the growing demand for our products.

I’d like to briefly discuss enabling new procedures. Vertical gastroplasty is an emerging procedure in bariatric surgery enabled by PMI’s patented i45 and i60 Mid Cut Reload. Five patients at three centers in the United States have undergone this procedure. This new minimally invasive approach in bariatric surgery may prove to be a successful treatment for obesity and in the emerging field of metabolic surgery for the treatment of type 2 diabetes. PMI’s i45 and i60 Mid Cut are only stapling devices available today capable of providing a staple line with the mid cut feature.

Four NOTES gastrectomies have been successfully performed in Japan using PMI’s i045 and/or i60XXL instruments. Surgeons in Japan used the company’s instruments to successfully move a gastric submucosal tumor through a patient’s vagina. This procedure is performed with only two 5-mm abdominal trocars. The patient experienced only minimal postoperative pain, required no medication, and was able to walk the day following the surgery. These procedures clearly demonstrate that NOTES while still an emergent field is possible with enabling technology. We believe this surgery has the potential to become the standard of care in Japan, and we’re very pleased to be the instrument of choice for the surgeons leading the way with this technique.

PMI’s patented i60R, the world’s first reverse pivot linear cutter, was designed to improve surgical outcomes by enabling greater access to difficult to reach anatomical sites. We’re in the process of designing a clinical study with the intent to demonstrate the effectiveness the i60R in the treatment of gastroesophageal reflux disease or GERD. The study will be aimed at proving the effectiveness of plicating the stomach in a minimally invasive surgically procedure, which may eliminate the need for long-term medical treatment for GERD. The proposed study will attempt to prove the safety and efficacy of the i60R in the treatment of GERD.

The third key objective that we’re focused on at PMI is building our collaboration with Intuitive Surgical. We’re working together to develop a first of its kind surgical stapling instrument based on PMI’s proprietary technology. The stapling instrument will attach to Intuitive Surgical’s Da Vinci surgical system providing surgeons with a robotic tool capable of cutting and stapling tissue in a broad array of surgical applications.

PMI received a $2.5 million payment from Intuitive in the first quarter relating to this development initiative. There are additional milestones totaling $5 million under the agreement. We continue to jointly advance the program, and we anticipate that we’ll successfully achieve the remaining milestones and receive the final milestone payments.

While our relationship with Intuitive Surgical clearly represents financial opportunity, it also represents an important validation of PMI’s technology in existing and emerging surgical applications. We’re very pleased to be aligned with Intuitive in the development of new instrumentation that we believe will enable improved surgical procedures and ultimately patient outcomes.

In summary, we’ve achieved great success in a short period of time with our initiatives. We’re committed to raising capital in the near term to secure and advance each of these initiatives. We continue to evaluate multiple financing options that will support and accelerate our current momentum as well as optimize shareholder value.

That concludes our prepared statements for today. Brian and I will now be happy to take any questions you may have. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Peter Bye with Jefferies & Co.

Unidentified Analyst – Jefferies & Co

I know you spoke on your collaboration with Intuitive Surgical. Can you provide any more color on where you are in terms of development? You mentioned the last time on this call that you had been doing a design to be completed by March to trigger that first milestone payment, but what has been the progress on that front? When do you expect to receive the next milestone?

Michael Whitman

The progress has been pretty much as expected. The collaboration continues to move forward along, pretty much what we had discussed in our last call, so there have been no surprises. We’d expect the next milestone sometime later this year with commercial launch sometime in 2010.

Unidentified Analyst – Jefferies & Co

It sounds like the strategic financing plan is going to involve a capital raise. Any time on that, details on size, etc.?

Michael Whitman

Obviously we’re working very hard on this, and we’d like to do it as soon as possible. I’d rather not get into terms of size or any specific terms at this point.

Unidentified Analyst – Jefferies & Co

Maybe you can just help us get an idea on what you guys are seeing in the market place with Covidien having an established footprint. Is that causing any difficulty in penetrating accounts and what do you guys see in adoption, and just to follow up on that, does the macroeconomic landscape inhibit surgeons or administrator decision makers from investing in a new technology in terms of capital equipment and then can you sort of rehash your value proposition that you offer hospital customers?

Michael Whitman

Yes, Josh. I think it’s well reported and understood that there’s a tightening of the belt across the board at all hospitals. Capital budgets are tighter; however, I did in my prepared comments mention that we’re about to launch the iDrive IPU. That special 510(k) was filed two weeks ago. We’re hoping for a quick review on that. Our specials have averages between 3 weeks and 60 days. That will almost virtually eliminate the cost of capital for acquisition of our technology. It would be a one handpiece acquisition of capital, and then the rest would be in the operating budget from the operating room. That plus our automation provides an opportunity for us to reposition our price point as our quality has dramatically improved.

Unidentified Analyst – Jefferies & Co

On that next evolution intelligent instrument platform, do you feel like any customers out there have been waiting for this, or has that been something that you’ve been telling your customers and them maybe holding off adopting the technology until the next generation is out there?

Michael Whitman

You can imagine that through key opinion leaders and other forums, there has been collaboration with surgeons in that way as is customary in this industry, so that may in fact be the case, though I can’t quantify that.

Unidentified Analyst – Jefferies & Co

It sounds like you guys have cut costs nicely with your restructuring plan. Have there been any modifications to that restructuring plan in terms of your cash position here and your liquidity?

Brian Posner

We consistently look at what we’re spending and how we’re spending it, and obviously in this climate, we have to look at it even with more scrutiny, so we’re looking at things before we commit to them. That’s for sure.

Unidentified Analyst – Jefferies & Co

Can you provide a breakdown of your US and international mix of sales, and you talked last quarter earnings call about your new Senior VP of Sales and Marketing from Siemens, has he taken on a strategy or is it still evolving? Also, you talked about pursuing qualified distributors in Europe, Asia, and South America. Any progress on that front or is it too early?

Michael Whitman

We’ll work backwards on that question. Joe Camaratta joined us from Siemens as I mentioned in the previous call. Joe has been working on the go-to-market strategy on the iDrive IPU which of course includes the pricing repositioning that I alluded to a few moments ago, so that is going very much to plan, and we’re very pleased with the progress on that front.

Brian Posner

In terms of the mix, North America domestic 69%, Europe 14%, and Asia 17%.

Unidentified Analyst – Jefferies & Co

You talked about the fact that it seems like there’s some pent-up demand in Japan. I know it’s hard to have a timeline for regulatory approval, but our expectations are still in the Q2 timeframe, and then any insight on your adoption expectations once approved?

Michael Whitman

I can tell you two things. One is that we’re responding to every request immediately. The requests that we’re seeing from MHLW are customary requests that we’re familiar with, and there’s nothing exceptional or unusual. It’s a lot of requirements. They reclassified these devices last year, so this may be one of the first submissions under the new classification category. We get the sense that maybe we’re both feeling our ways together, but like I said, the questions are very similar to FDA type questions and ones that we’re comfortable answering. We just don’t know when the end of the process will arise, so we just don’t have any insight into that, but we do have a feeling for pent-up demand. We have customer orders placed in the magnitude of hundreds of thousands of dollars that are not booked obviously, but they’re there waiting. I don’t want to say specifically because people remove when they don’t get their orders fulfilled, so it’s fluctuating a little bit, but it’s a large number.

Operator

With no further questions at this time, I’d like to return the program back over to Mr. Whitman for any additional or closing comments.

Michael Whitman

I’d like to thank everyone for dialing in and participating on the call today. We appreciate your continued support for PMI, and we look forward to reporting soon on our achievements for Q2.

Operator

That does conclude today’s call. Thank you for your participation.

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: [e-mail]. Thank you!