Vascular Solutions, Inc. (NASDAQ:VASC)
38th Annual dbAccess Health Care Conference Call
May 30, 2013 8:00 am ET
Phillip Nalbone – Vice President, Corporate Development
Okay, good afternoon everybody. I’m Phil Nalbone, I’m the Vice President of Corporate Development at Vascular Solutions, and our thanks to Deutsche Bank for inviting us to present at this conference. I’ll be making forward-looking statements throughout this presentation, so here is the standard disclaimer.
Vascular Solutions is as our company name suggests in the business of finding solutions to disorders of the Vascular System. Our products are minimally invasive in nature and they are used in the treatment of coronary and peripheral vascular disease, approximately 70% of our sales are to interventional cardiologists and the remainder to a mix of other specialists including interventional radiologists, electrophysiologist and the physicians such as Phlebologist who practice in vein clinics in the treatment of varicose veins disease.
Over the past decade Vascular Solutions has launched more than 75 products into this channel. Here is a busy slide, but I think it tells the story behind our markets and our business strategy pretty well. In the upper left quadrant, worldwide the markets for the treatment of cardiac and peripheral vascular disease represent more than $25 billion in annual sales to focus that quite a bit downward, the product categories in which Vascular Solutions currently participate represent more than $3 billion in annual sales opportunities.
Our call points are very clearly defined and involve the interventional specialties, practitioners involved in non-surgical vascular treatments. We target niche products. Our products are clinically necessary, but often they are too small to attract the interest of the larger players in the medical device industry.
The big players in the Cath Lab market such as Boston Scientific, Medtronic and Abbott Lab, tend to focus on products that have multi hundred million dollar sales potential in order to contribute to their growth. We on the other hand are quite happy with products that address a few million dollars worth of annul revenue potential, but the key to our strategy is that we launch a lot of these specialty products.
One of the greatest assets that Vascular Solutions has is our large direct U.S. sales force, we have about 90 reps covering the U.S. market that gives us coverage of pretty much every Cath Lab in the country, we have had this size of sales force in place now since around 2008 and as I’ll describe later in this presentation, this has been the main source of our operating leverage for the past few years and we’ll continue to be a driver of improved profitability for some time to come. Outside the U.S. we rely on a network of independent distributors in nearly 50 countries, our international sales represented 14% of our total revenues during the first quarter of this year. This distributed network serves us very well it is very profitable for us and we have no plans to go direct anywhere in the world anytime soon.
Vascular Solution started as a single product company back in 1997, the product was called Duett and it was an arterial puncture sealing device that competed against the likes of St. Jude Medical and Angio-Seal and the Perclose device that is now part of Abbott Vascular.
Duett did not live up to expectations and peaked at around $12 million in annual sales, so management decided to focus the strategy away from that single product and toward multiple products, clinical niche strategy beginning in 2003, you can see the positive results on our topline performance from the adoption of that strategy.
In 2012, we recorded our ninth consecutive year of better than 10% revenue growth. And here is the sequential progression over the past 16 quarters, typically, there is some seasonality in the third quarter the usual summer effect, but generally you see a nice upward slope in our topline performance. In Q4 of 2012, we crossed the $100 million in annualized revenue milestone and in Q1 of this year we reported record quarterly revenue of $26.1 million representing 10% year-over-year growth.
We divide our products into three broad categories catheters, hemostats, vein products and services. Combined, these products play into markets that represent more than $3 billion in annual revenue potential. Our largest category is catheter products, these are minimally invasive tools used to gain access and perform treatments in blood vessels and body cavities, these products represent about 64% of our total sales and the business grew 12% in the most recent quarter.
Here is a representative sample of our catheter products and I think they reveal the variety of sources from which we have typically obtained our product ideas. Pronto, is an aspiration catheter, it’s used to extract clot from the coronary arteries in patients suffering from heart attack, it is our largest product, it was designed by a physician and licensed by Vascular Solutions.
Langston is one of a kind product, it’s a dual lumen catheter used to measure the pressured gradient on each side of the aortic valve, it’s a very useful tool in the diagnosis of aortic valve stenosis, it was designed by a Cath Lab technician and licensed by Vascular Solutions. And Minnie support catheter is a good example of an internally developed product, this device is used to pass therapeutic devices to the treatment side.
For the past couple of years now, one of the main drivers of growth for our company and particularly in our catheter business line has been a device called the GuideLiner this was development internally, in fact, it was conceived by our CEO Howard Root and patented Vascular Solutions thus invented an entirely new product category in interventional cardiology known as guide extension. This is a device that provides deep seating and back-up support for guide catheters and tricky anatomies and physicians have found it to be especially useful for delivering stent in challenging cases.
In fact one prominent interventional cardiologist has said that the GuideLiner “makes impossible cases possible.” GuideLiner has consistently exceeded expectations and very soon it will overtake Pronto as our largest single product. Hemostats which are devices that are used to control bleeding after medical procedures represent our second largest product segment at 22% of total sales, sales in this segment were down 2% on a year-over-year basis in the first quarter that were gradually turning this business around and reversing a trend that we have seen over the past few years, we expect to restore growth to this category during the current year. And we are doing that through the introduction of new products.
Our traditional hemostat business has involved the use of thrombin, it’s a biologically active agent that naturally controls bleeding. We buy the substance from Pfizer and then we formulated it into different products, for example D-Stat Dry, which you see in the middle photo is a bandage that’s placed over the arterial puncture in the groin to instigate the clotting cascade within the tissue tract after the interventional procedure has been completed. And over there on the right you see, an example of the D-Stat Flowable, this is a gel that is squared into the pectoral pocket to control bleeding after the pacemaker or implantable defibrillator implantation.
Now the Hemostat patch market is a matured category, there is a lots of competition and pricing pressure and another trend that has been working against us, over the past couple of years is the movement away from femoral artery puncture in the groin, toward the use of the radial artery in the wrist for the access side in interventional procedures.
So, through our focus on new products we intend to restore growth to this Hemostat business of ours, the first area of focus relates to radial artery procedures, we’re catering to this growth trend, radial access is less traumatic than thermal access, it benefits the patients and hospitals outside the U.S., it’s a common practice and in the U.S. we’re just starting to catch up.
The second area of focus is embolization of tumors and arteriovenous malformations, so this is the intentional inhibition of blood flow to these abnormal structures. We use a natural gelatin material to achieve this treatment objective and last year we’ve launched the first of several embolic formulations that we have planned for the interventional radiology market.
Our third category is vein products and services, this represented 14% of our sales during the first quarter, and it was our fastest growing business segment. Our focus is on endovenous therapy, the use of catheter based devices to the treat the underlying cause of varicose veins, a condition that efflux around 40 million people in the United States alone.
Our treatment uses a laser based system to treat venous reflux disease, it’s a razor blade business model for us, we sell the consoles used to generate the laser energy and we sell the single use laser fibers and other disposable accessories, use to perform the laser ablation procedures. Currently 95% of our sales are of the single use disposables this two is matured market with a lot of competition and pricing pressures. For example, AngioDynamics is the largest player in the laser ablation category and Vascular Solutions occupies the number two position in this market. In addition to lasers, there is another method of treating the great saphenous vein, the use of radiofrequency ablation and this is the dominant method used today and it’s the domain of Covidien.
Vascular Solutions has found a way to participate in the radiofrequency ablation segment of the market as well through our reprocessing service for Covidien’s popular ClosureFAST catheters and in launching this service, we have revitalized our vein treatment segment of our business and added a very important dimension of our overall corporate growth.
We started this service in January of last year and it very quickly restored growth to our overall vein business and as I mentioned, is a major driver of our overall business, more than 400 U.S. vein clinics have signed up for this service to-date, more than 65% of those accounts are entirely new vein clinic customers for Vascular Solutions, so I has allowed us to expand our footprint in the market and it has created a nice opportunity for us to expand the sales of our ancillary products used to treat varicose veins.
To-date, more than 20,000 ClosureFAST catheters have been successfully reprocessed and returned to vein clinics for re-use that saving our customers substantial amount of money and dramatically reducing medical waste. The vast majority of our products have been developed internally, either through ideas generated by clinicians and then developed by us or by ideas generated by our own employees, but we have made a few small opportunistic acquisitions since turning profitable and tuck-in acquisitions will be part of our growth strategy in the future.
So just a quick history here in May of 2010 we paid $5.5 million to add $3.5 million in annual revenues with the product called SmartNeedle a hand-held ultrasound system for helping to gain vascular access and two of these cases we started out as the distributor of products and then decided to acquire them to improve the margin opportunity, in October of 2010 we paid $6.4 million to acquire a line of interventional snare products from Radius Medical and in January of 2011 we paid $4.3 million for the Guardian hemostasis valve from our collaborator Zerusa Limited.
More recently in August of last year, we acquired an important device called the Venture catheter from St. Jude Medical. Venture was too small to be relevant to St. Jude, but it is just perfect for us, it’s exactly the sort of clinical niche product that addresses a clear interventional need.
Venture is a one of a kind device that has a tip that bends or deflects up to 90 degrees for a precise placement of Guidewires in really challenging cases, such as where, you have a very severe angulation at the side branch or a condition known as stent-jailed side branches or where you have very tight stenosis that need the extra backout support that the Venture catheter can provide.
The product was generating $3 million in annual sales for St. Jude, we are able to acquire it from St. Jude for $3 million, we integrated manufacturing into our own facility and just last month relaunched the product into the U.S. market and are anticipating in overseas launch in August. Another acquisition for us last year was the Accumed Wrist Positioning Splint it’s used in radial artery access procedures.
Tuck-in acquisitions are important to us, but they aren’t the only way that we have to supplement our internal development efforts, we also will broaden our product offerings through select distribution agreements. For example we have partnered with Lepu Medical of China to offer the VASC Band Radial Hemostat Device.
In the vein treatment category, we have partnered with VueTek Scientific to distribute the Veinsite vascular imaging system, this device is a headset that uses near infrared energy to allow practitioners to see veins beneath the skin surface, it improves treatments for varicose veins such as sclerotherapy and phlebectomy.
Each year our goal is to launch at least 10 new products, last year we launched 11 and it was a very good mix among internally generated products and products that we acquired and brought in through distribution agreements. So of these 11 devices that you see on the screen, 6 were internally developed, 2 were acquired and 3 came to us under distribution agreements.
And then finally on the product front, I will mention a couple of products in the long-term pipeline. Most of our products have followed the 510(k) pathway through the FDA. But we also two PMA products that could be long-term opportunities for us. We hope to initiate first in human studies this year for Gel-Rope a catheter based approach to treating the great saphenous vein. This would be an alternative to the laser and radiofrequency approaches that I talked about earlier and could represent to breakthrough in patient comfort and convenience in particular by eliminating the need for tumescent anesthesia.
And then about a year behind Gel-Rope in terms of starting clinical work is MgSeal in arterial puncture sealing device that uses a little pop-rivet of magnesium which is resort by the body over a period of week, so that nothing is left behind in the tissue tract on a long-term basis.
On to the financials, our recent quarterly results show a nice progression in revenues, stable or improving gross margins and continual improvement in our operating margins. I should mention that Vascular Solutions has been profitable now since 2008 when we had an annual revenue base of just over $61 million, so we’re a bit of a rare breed in the medical device industry having achieve profitability at such a relatively early stage of our sales development cycle.
As I mentioned, earlier we had nine consecutive years of 10% or better sales growth and we hope to make 2013 10 years in a row, our revenue guidance for the year of $106 million to $100 million would represent 10% growth at the midpoint of that range on an adjusted basis our EPS guidance in a range of $0.66 to $0.70 would represent 13% growth at the midpoint of the range.
I think that we’ve done a good job with improving our gross margins and our operating margins and as this slide shows most of that operating leverage has been coming from the sales and marketing line.
Other operating expense lines are being held relatively constant as a percentage of sales, but the fixed cost basis associated with our large direct U.S. sales force and our extensive overseas distributed network that have been in place for quite some time now allow us to keep lowering the sales and marketing expense as a percentage of revenues and as we add more and more products every year you see the nice benefits on the operating margin line. And I think the good news here is that we think this infrastructure is sufficient to get us to the $200 million annual revenue level, we recently just crossed the $100 million annual milestone, we think we can double that without having to change our call points, our business strategy or really our cost basis in any meaningful way.
So, we think that by the time we get to that $200 million annual revenue mark and we’ll have to leave it to you to define when we’re going to get there, but we think at that point our operating margins will be in the 23% to 25% range, up from the 16% that we expect this year. Our balance sheet is clean with a little over $14 million in cash and no debt at the end of the March quarter.
So to summarize, we offer intervention list more than 75 products that we have launched since 2003, a major asset is our 91% U.S. direct sales force and our overseas distributor network covering 50 countries, we think we have proven the efficacy of our business model with nine consecutive years of double-digit topline growth and unlike the vast majority of medical device companies our size were profitable and we’re cash flow positive and we expect 16% operating margin this year and to generate $19 million in cash from operations.
As I mentioned earlier each year our goal is to launch at least 10 new products, right now the pipeline is full with at least three years worth of products at various stages of research and development. We know we have numerous opportunities to buy products or to distribute them to augment the growth that comes from the internally generated products and perhaps most important we think this is a very durable business model. We believe we can double the revenue base without having to change the way we do business or our cost structure. And as a result, we think that investors can continue to look-forward to better operating leverage going forward.
That’s it and I think we have some time.
Yeah, thank you Phil. So, we’ve got about 10 minutes for questions and I’ll lead them if there are any in the audience, [keep] the microphone floating around, so please feel free to ask them. So, Phil you talked about 30 new products in the pipeline, thinking about launching 10 a year, can you kind of classify the products as which are new products or what percentage maybe are addressing new markets versus what percentage of products are next generation products in a space that you are already at.
Yeah, that’s a good question. So just to look at the pipeline for this year, we’ve told the Street that we expect 11 new products again this year, probably two of those would come from the outside and would really be entirely new products for us although they would cater to our existing call points, I think that’s a very important point to underscore here. We have clearly defined call points and no desire to change that. So if it’s a product that can be used by an interventional cardiologists, radiologists, electrophysiologist or one of the vein clinic practitioners that’s our area of interest.
So again the 11 products that we expect this year perhaps 2 would come from the outside, handful would be kind of next generation products. And then the balance would be sort of completely new categories, we used to give a lot of information about what was in the pipeline, we found that we were hurting ourselves competitively, we would rather maintain an element of surprise. So we don’t get too specific. But I would say right now we feel pretty good about our internal pipeline, we are in a great position considering what’s going on in the outside world, there is lot of venture financing in this category, small companies with great products, that have perhaps already received 510(k) clearance, need distribution partners, are they need to be acquired, so at any given time we have the benefit of being able to evaluate a number of opportunities.
That’s good. I mean I think another question, you mentioned the, I don’t know the outside world, but in my mind I am thinking we’re in the hospital, we are seeing volumes drop in the Cath Lab, we’re seeing interventional procedures or just inpatient procedures go down. How is Vascular Solutions able to continuously post these 10% type growth numbers, double-digit growth numbers in light of all these types of challenges?
Well, on purpose, we’ve tried to avoid commodity like products, so we have no interest in offering stents, whether they are bare-metal or drug-eluting we have no interest in doing PTCA balloons. So we really want to avoid the commodity like products that would clearly be harmed during a downturn in procedure volumes or hurt by the ongoing efforts of hospitals and other providers to drive down cost. So when you look at our business strategy, it’s really more about our ability to create a market for our niche products rather than having to kind of ride the coattails of market growth.
So, we’ve been saying for a quite some time that we thought the macro environment was going to get ugly it did, it’s remained ugly. Some of our peers in the group, the larger players in the industry have talked about procedure volumes being down somewhere around 5% to 7% on a year-over-year basis in the most recent quarter.
We certainly don’t disagree with that assessment. In some areas of our business, we would certainly have an easier time of it, if PCI volumes were growing, but we’re not going to be a victim of that macro market environment.
That’s fair. So there’s been some consolidation around competitors are becoming more comprehensive. I know the Vascular Solution sales force is kind of a crown jewel within the company. I mean, is it becoming more difficult to sell into accounts, I mean or is the product differentiation really just helping you maintain and grow your business?
Yeah, that’s the key, it really is about the differentiation, it really is about the ability to maintain that niche strategy. We’ve certainly had to adapt to a more challenging sales environment, not only due to pricing pressures and procedure volumes. But, also the increasing role of the administrative side of the hospitals, we have to spend more time with purchasing managers and materials people.
So that they understand, what our products are and why they’re differentiated and why often times they appear to have premium pricing. But I think that for us that’s kind of old news, we’ve adapted to that and I think our ongoing performance reflects that.
One thing, on the P&L and you’ve kind of talked about it through your conference calls Guardian. Is there any update on Guardian, can you maybe provide us with the re-launch and how you expect to re-launch into the market?
Sure. Of course, so for those who are not familiar with the Guardian issue, Guardian is a hemostatic valve it’s part of our catheter business and we implemented a recall of that product a couple of months ago, we’re working now to resolve the issue that led to that recall and there was a change of vendors, so we’re kind of validating the process now and I think we’re now looking at kind of the September timeframe re-launch for the Guardian hemostasis valve.
Okay, and I have a one last question or maybe two, but the I mean from a banking perspective, we’re consistently seeing more aggressive buyers in the space and assets are being bid-up quite a bit, I mean, is that something that you are seeing, is it becoming more difficult to find these inorganic opportunities or I mean, is there enough low hanging fruit that you don’t really see any problems over the near term?
There are many dimensions to that answer the first is that we wish the bankers would stay out of the whole thing that would make life easier for us. Yes, a lot of assets are being bid-up and that does create a challenge for us. However, as I alluded earlier, it’s a very tough environment for small companies, financing is difficult to come by and so we have the opportunity to look at a lot of acquisition opportunities and a lot of distribution opportunities.
On the acquisition front, at least initially, we encounter a lot of perhaps optimistic expectations about valuation, but we’re very disciplined, we’re going to stick to that discipline and we’re going to kind of wait that out we’ve already seen some indications that management teams that had kind of lofty expectations, just a short-time ago, when confronted with the harsh realities of the market environment kind of steer back to us eventually.
Good. And I have just one last question, there has been some talk about, not talk, I mean you’ve got a, I guess an ongoing patent infringement suit against, with Boston Scientific…
Is there any update that you can provide us?
No, just a background for those who may not be familiar on May 16 Vascular Solutions announced that we had filed a patent infringement suit against Boston Scientific in U.S. District Court in Minnesota the allegation is that Boston Scientific infringes three of our patents on, the Guideliner product, the next step will be the preliminary injunction hearing that’s probably a couple of months of. So, that’s really the only update there as that we’re certainly moving toward the injunction hearing.
That’s good, are there any questions from the audience we have probably time for one or two more? No, okay, well, with that thank you Phil. Thank you everyone.
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