Vascular Solutions, Inc. (NASDAQ:VASC)
Bank of America Merrill Lynch Health Care Conference Call
May 15, 2013 8:00 pm ET
James Hennen – Senior Vice President-Finance, Secretary and Chief Financial Officer
Corporate Access team at Bank of America Merrill Lynch. It’s my honor today to introduce to you James Hennen, Chief Financial Officer and Company Secretary of Vascular Solutions. Vascular Solutions is an innovative medical device company that focuses on developing unique clinical solutions for coronary and peripheral vascular procedures. The company’s product line consists of three major categories, hemostat products, catheter products and vein products.
Vascular Solutions delivers it’s proprietary and distributed product to interventional cardiologists, interventional radiologists and vascular surgeons through its direct U.S sales force and international distribution network.
And with that I’ll hand the presentation over to Jim.
Hello, thank you for that introduction and thank you Bank of America Merrill Lynch for the invitation again this year. Starting with the forward-looking statements. Who is Vascular Solutions? Well, we participate in niche product areas anywhere from $2 million to $20 million of sales is really the strategy of the company. We’ve launched over 75 products since 2003 and our call point is what we focused on, our call point is primarily cardiologists which is about 70% of our revenue base, radiologists, electrophysiologist and vein practices make up the other 30%.
Kind of our strategic position. Where do we find ourselves? Obviously, very large market segment about $26 billion when combined, and as far as capital come good, cardiologist, radiologists are our primary customers. Vein practices makes about 15%. But they all come together to do non-surgical vascular treatment and that’s really the space that we participate in.
Where do we fit; our competitors. We try to stay away from Medtronic, but average of the world. They generally focus on billion plus product opportunities. We generate or participating in like I said, $2 million to $20 million revenue to us. And then there is also startups, they have lack of distribution. We have a sales force of 91 people. So we can take their products, kind of orphan products, I mean go ahead and buy those products. So we can work out a distribution arrangement with them and distribute those products, so kind of finding ourselves in the middle of those two large and small groups and we were withstanding market pressures quite well, niche devices. So we’re not depending on overall procedure growth, procedure growth in our space is actually been declining. We don’t need that to grow our products because we’re essentially developing our own market of our niche type product.
Few competitive products, so that equals less price competition so about a third of our products have no competition. So we don’t get beat up on price on a daily basis in those products and we generally concentrate on medically necessary procedures.
Our number one asset of the company is our direct sales force. We have 91 people on the field. We have someone in Hawaii, we have someone in Puerto Rico and we break that down into 8 regions. That sales force of 91 people has been the same since 2008, that’s primary where the operating leverage of the company has been coming from. We keep launching about 10 products each year through that sales force which creates our leverage on the operating expenses.
International markets, we are going through distributors everywhere outside the U.S., we have 48 distributors which accounts for about 14% of our revenue. Our distributors generally mark up our products about 100%. So on a volume basis, that’s about 30% of our businesses done through international markets. Our primary markets are in Western Europe.
Annual revenue growth, single product strategy of Vascular Solutions, the company was founded on one product called the Duett. The Duett was launched in 1998. We had a little bit of international revenue in 1998, 1999. We got that up to about $12 million revenue. The product has been quirk as well, as our competitors’ product which was St Jude, Angio-Seal.
So instead of giving up and going home, I guess we decided to launch additional products. That’s where that strategy really started in 2002, took a couple of years to get those products approved and after that to revenue, but ever since then we’ve been growing right around $10 million per year, anywhere between 10% and 15% each year. The most recent year was a 13% revenue growth for us.
On a quarterly basis, generally nice stair-step growth, summer months for us, we can see some seasonality in our Vari-Lase business, also in the international front, but generally it’s a stair-step growth, but Q3 has been pretty level to Q2, and Q4 generally been a nice quarter for us.
We break our product categories our 75 products into three product categories; catheter products, the hemostat products and the vein products and services. I’ll be discussing a few of these products within each of these categories in the future slide. But the catheter products for us in Q1 grew 12%. That’s about 64% of our total revenue, just under $70 million in the most recent quarter.
Where do we get our product ideas? Some of our product ideas come from physicians. Probably right around a third of our products are coming from physician ideas such as the Pronto. The Pronto is our number one product, doing right around $20 million sales per year. We got that idea from a cardiologist. He came in. He licensed it in 3M. We paid him a 5% royalty back and we do all the development work. We get the 510(k) approval.
When a product like Pronto gets large enough, we go ahead and try to negotiate and buy that royalty stream back from that physician and we did that about two years ago on a Pronto line. We paid about $3.7 million to buy out that royalty rights.
Products like the Langston’s specialty catheter. The product actually was a Cath Lab Manager that came to us with that idea. Again we gave royalty back to that Cath Lab Manager and we go ahead and developed that product and launch it. Products like the Minnie, something we internally developed, we saw our competitor was launching a microcatheter. We thought we could do something very similar and better. We go ahead and developed that product and launch it.
Our product that’s developing the most interest in a company more recently is GuideLiner. This product is really putting us on the map as far as a clinical utility product. A lot of physicians are against Vascular Solutions due to the GuideLiner. Some physicians are saying it makes impossible cases possible. It’s a “mother and child” guide extension, the DCD and backup support. So, essentially physicians are using the GuideLiner to deliver catheters through tight stenosis areas.
When we first launched this product we thought it would may be $5 million to $10 million of revenue. We launched this as a backup support for catheter. Once physicians started using this catheter to lever strength, we reevaluated our market potential and we thought well, we can maybe do $15 million of device or more recently in 2012, we did just under $15 million revenue. In 2013 this will be our number one product in the market. It will surpass the Pronto, probably in the third quarter timeframe and it will be doing right around $20 million of sales for us in 2013.
Next product category I’m going to talk about is the hemostat products. This product category did just under $23 million in 2012, just under $6 million in Q1, pretty flat, 2% decrease on a quarter-over-quarter basis. This product category essentially deals with thrombin. We get our thrombin from Pfizer currently. We take that thrombin, so we could put it into a patch such as the D-Stat Dry, which is used to stop bleeding after a catheterization procedure in the femoral artery and we also can take that in a liquid format with the collagen, make a product called D-Stat Flowable.
So these products generally tend to be, there is the science that we need to know how to eternally sterilize these products and that’s really where our niche is in the hemostasis area, where we were able to figure out how to eternally sterilize, the biologic which is the thrombin and put it into a shelf-stable patch.
Where are the growth drivers? As I said, we declined 2% on a quarter-over-quarter basis. We expect to get the hemostat basis – hemostat products back to growth at some point in 2013 and how why we’re going to do that is by launching additional products.
We’ve been focusing on the radial artery access more recently with some of our acquisitions such as the Wrist Splint, the Accumed Wrist Splint. We also partnered with a hemostasis band. The radio access is generally growing in the US, currently it’s about 15% while procedures are done thought radio access versus thermal. We think that number could double with the next couple of years. So we’re focusing a lot of our R&D efforts on the radio access area and also we’ve been focusing on our acquisition, another area of growth within the hemostat area is embolization of tumors, EVM. This is very small on a revenue base for us currently but we do expect that to grow over the years, we are making our investments in that currently.
The third product category is the veins, it’s about 14% of our business. This had the biggest growth during the most recent quarter. It grew 21%, the reason for that growth is the new category that we entered into to, which I’ll get to in the end of slide. But the base business of the vein business is treating varicose vein. This is a very large market. It’s about a $200 million market that can be either treated with laser or it can be treated with RF electricity. VNUS currently dominates this market segment to do 100 million plus of that 200 million market size, and then the vein – on the laser side it’s us and AngioDynamics.
There is two parts of this business, we’re interested in the disposal piece which is about 95% of the vein business for us and we also sell the box or the laser in this case and generally the saturation of the lasers out there is just pretty saturated. At this point, we generally don’t sell lasers to replace lasers or to open up a second office say in a physician practice.
But the reason why we got back to growth in the vein business is due to reprocessing. Covidien, as I said is the market leader in the varicose vein area, doing a $100 million plus of revenue. What we did is just partly with a company called NES and we can take Covidien’s catheter in this case and we can go ahead and clean that up reprocess it and sterilize it again and send it back to the customer.
Our partner NES took about just under two years to get that approval of the FDA and in the most recent quarter we did about a $1.5 million of revenue and reprocesses. So for the full year 2013, we expect to do about $6 million in sales. The reason why the reprocessing works in this case is because the physicians generally hone their own practices. So every dollar you can save for the physician is a dollar in their pocket. So we see reprocessing continue to grow for us.
And to date we signed up over 400 accounts and about 65% of those accounts are new to Vascular Solutions. So we can go ahead and sell some of our other ancillary products at the same customer base. So it opens up quite a few dollars for us.
Some of our acquisitions more recently, is just the ones we started with 2010, 2011 we acquired the SmartNeedle. We have acquired Snare line and we acquired hemostasis valve called the Guardian. Generally for us when we purchase our product we generally move that product into our facilities in Minneapolis. We go ahead and manufacture it there and we sell it through our sales force.
But we generally pay a multiple of around two to maybe four times revenue each of these three cases, SmartNeedle is doing $3.5 million, so it’s under a 2x multiple. The snares for us is doing about a $1.5 million, so that will add 3x multiple, and that the Guardian is about $2 million revenue product for us to just over 2x multiple.
The more recent acquisition, the one we’re excited about this year, we just relaunched this in April of this year. We purchased the product called the Venture from St. Jude Medical. St. Jude has actually shutdown this product and they are manufacturing, that was too smart for them, it was doing about $3 million sales.
We learned about the shutdown of this catheter and we actually called them and said, well we can take that over, a lot of our customers are continuing to ask for this type of product. So we ahead, negotiated that purchase for about $3 million, in this case it was 1x revenue. At the time they were doing about $2 million in the U.S. and $1 million international. We relaunched this here, most recently in April on U.S. We expect to get it back in the market international in Q3, so we expect big things out of this product.
Now the acquisition we did, as I said, we’re focusing on the radial market. So we did the Accumed wrist positioning front. This goes ahead in hold arm in a physician, so the physician can go and get access to the radial artery. In this case we paid $1.5 million and we expect to do about 800,000 in sales this year. But this was to help us down the path and expanding our radial access market, which we think is growing quite nicely. As I said, it was about 50% of our cases currently. We think that can easily double in the next two to three years.
And another area, as I said, our focus, so the radial artery, obviously we need to seal that artery after the procedure. In this case, we would ahead and licensing the (inaudible) partners at China in pure medical. As we go ahead and license that in and go ahead and sell that through our sales force again. So in this case it doesn’t cost us anything at the upfront, but we have the rights to sell this in the U.S. markets currently.
This is a smaller product that we have a distribution rights, the Veinsite. What’s interesting is some of these Veinsite areas is now we have all Covidien’s customers to go ahead and show our products such as the Veinsite. We don’t expect big, big revenue out in this product, but it kind of feels the whole bag into those Veinsite to those vein clinics. They need to be able to see the vein and then this allows them to do that. So we don’t expect big things out of this product, but it allows us to fill our bag for the vein area.
So all added up, all together in 2012, we launched 11 products. So this slide here lists all the 11 of those products here and generally our state of goal is to launch around 10 products per year. The last two years, we’ve met that goal and then we are on track to launch 10 products here in 2013. Typically, the last two years about three of those products have been acquired or through distribution arrangement, seven have been organic or internally developed products.
Longer term – so, up to this point we’ve been launching products of $2 million to $2 million of revenue. Longer term, now that we have cracked $100 in sales, our 10% to 12% of R&D budget can go a little bit further. So we are starting to look at bigger market opportunities. The one we’ve been most excited about recently is the product called the Gel-Rope, so that’s the same varicose vein market, that Covidien currently has $100 million plus of that and laser guys have the other $100 million of revenue.
This is the product that uses gelatin to extensively destroy the great saphenous vein. It essentially cuts off the great saphenous vein by using gelatin. Currently, it is using our [outputs electricity] are using laser which is energy as well. We think it will be less painful to the patient, you don’t need to use anesthesia, only use the Gel-Rope.
So if this works, we think this could be market changing, but currently we just have it in animal studies. So it’s at least three years out before we see any revenue for a product like this. The other product that we have been bringing along is the [MgCl] and that would be participating in this femoral market, which is currently greater than $500 million dominated by Angio-Seal of St. Jude.
So that one takes the back seat to our Gel-Rope, because our size company will only want to be able to do one, can only really afford to do one clinical study at a time. So we are more excited about the Gel-Rope at this point.
We’ll go over some of our financials, the recent most quarter, just under $26.1 million of revenue. You can see on a gross margin line a nice increase, 68.7, the reason for that gross margin expansion in the most recent quarter is due to the GuideLiner, that grew for us 48% quarter-over-quarter and the GuideLiner for us has one of the higher margins in our portfolio. So that’s the biggest reason for the margin expansion in the most recent quarter.
And then you can see for us G&A expenses are increasing little bit. We have two legal litigation matters that are going on, that creep up a little bit in the most recent quarter, but getting down to an earnings of $2.6 million or $0.16. So our earnings compared to Q1, 2012 grew about 33% and out top line grew 10%. So we’re growing our bottom line a lot faster than our top line, that’s really due to the sales and marketing, we’re leveraging that 91% sales force which has been the same since 2008.
Our financial guidance; for the full year, we’ve been guiding $106 million to $110 million in revenue, which should be about 10% at the $108 million midpoint of that. In the Q1 conference call, we talked about having to do - recall in our Guardian product, so even though we did a recall on Guardian product and loss of about 350,000 of sales we could have had in the Q1 and we’re going t loose about the same in Q2, we didn’t change our guidance on the top line.
On the bottom line, adjusting for that $0.03 impact of the Guardian recall, we are still at $0.66 to $0.70 in the bottom line. So we do not adjust our guidance; on a GAAP basis that will be $0.62 to $0.66.
Other numbers there in white amortization, depreciation, stock-based comp and income taxes, we put those up there for analysts and investors to use to create EBITDA numbers and also to pay non-cash expenses. For us we have NOLs build up and so we are paying taxes. We are currently paying, of our $6 million expected taxes this year, we will pay about $2 million of that in cash and $4 million will be burn in our NOL.
Earnings growth; in 2013, our gross margin increasingly nicely mainly due I guess to the GuideLiner increase in sales, but an operating margin of 16%, had 16% last year and still we have some legal fees that’s in the 16% this year, that’s why it’s similarly to last year’s 16% but just two years ago that was 14%, so 2% growth on an operating margin basis. And earnings per share growth last year, we grew 33% in 2012. We expect to grow 13% this year and 10% revenue growth.
You can see the annual operating earnings in the chart down below, so half of our revenue base of $108 million, operating earnings to be about $17 million in 2013. We feel we’re unique in that space in the medical devices area, typically it takes around $200 million of revenue just to get a breakeven in medical device companies. We’ve been nicely profitable, 16% operating margin at around $108 million revenue expected this year.
Financial leverage; we’ve grown our operating earnings quite nicely and our operating margin almost 1% for the last four years. It was 13% back in 2010, 14% in 2011, 16% in 2012, and we expect to do about 16% this year as well. We can see most of that leverage is coming from the sales and marketing line back to 30% in 2010. We expect that to get that down to 25% this year and the reason we are doing that is, we have 91 people in the field and that has not changed. As we pay a little bit of more variable commission of that fixed cost of that sales force is in place currently.
We put a target number out there. People ask now that you got to $100 million, can you keep the same strategy and grow – you continue to grow your revenue. We think we can keep our same strategy in niche products that we’re launching around 10 per year at that $2 million to $20 million of revenue and achieve $200 million in revenue without having to change our operating structure.
As we target kind of a 66% to 68% gross margin at that level, R&D the 10% that we target, because that will be a bigger dollar amount than that $200 million, but really the leverage is coming from sales and marketing. We think we can get that down at 22% of that $200 million in revenue. And if that’s case happens, our operating margin will be somewhere between 23% and 25% at that $200 million revenue base.
Balance sheet; so very clean balance sheet, we have $14 million in cash. We have no debt. We also have $10 million line of credit. We can draw if needed and our shares outstanding 16.5 million fully diluted shares, 17.6 outside the options of 1.1 million to round off that 17.6 number.
So in summary, we like our diversification. We have this 75 products currently, that have been launched since 2003. Our direct sales force is really the number one asset of the company. We go through distributors outside the U.S. Revenue growth, we have had nine consecutive years of 10% growth. We expect this to be our tenth consecutive year and if once we achieve our $108 million which is projected for 2013 and nicely profitable. We expect 16% operating margin for the full year and we expect $19 million in operating cash flow. The reason why that $19 million is higher, as I said, we are not paying cash for our taxes, so that’s where we get a nice cash flow on an operating basis.
And then full pipeline, we’ve been launching 10 plus products in the last two years. We don’t expect that to decrease. We currently have 30 plus products in our pipeline. Each quarter, each six months we’re constantly re-evaluating which of those 30 products, we expect to be able to launch. Our system has been built to essentially launch 10 products per year, so we take those 30 that are kind of in an ideal stage and we juggle those to whichever we think is the best opportunity.
Acquisitions; now that we are nicely cash flow positive, we’re starting to do some nice tuck-in acquisitions. We completed seven since 2010 and distribution opportunities, we signed three since 2012. We just think it’s very successful and durable business strategy. We expect to get to that $200 million of revenue under our same strategy. The one thing we won’t change is our call point; the cardiologist, the radiologist call point. So every product opportunity that we evaluate have to be that call point, we won’t look at it.
And that’s my presentation. Thank you, Bank of America Merrill Lynch.
Do you have any questions? James, perhaps you can give us some more detail on your expansion into international markets like out to Asia-Pacific, Japan kind of area?
Sure, Yeah, so currently our number one, or assumed to be the number one product, the GuideLiner. We expect to get that into Japan at some point this year. For us to get a product in Japan, it takes multiple years, so we don’t give a specific date, but we do expect that in 2013 and we will continue to go through distributors. We currently have a distributor in Japan and would have a few of our catheters there. That will be one area for growth for us. We purposely stayed away from China. We’re taken a wait and see approach in the Chinese market. So until – that’s itself out, we are going to stay out of the Chinese market.
Yeah, so the question was how much larger does our sales force have to get to get the $200 million in revenue. We don’t think our sales force material have to increase to get $200 million in revenue. We’ve had the same number of people since 2008 and we really feel with our strategy that we can get to $200 million of revenue on previous 95 people, unless we launch a product that takes a lot of clinical training.
And up to this point, we’ve shied away from those type of products, because we have to be there for every procedure, then we’ll have to roll clinical specialist. It has to be a larger product opportunity for us to get into that type of product.
Any other questions? Okay, thank you very much.
All right. Thank you.
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