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Vascular Solutions, Inc. (NASDAQ:VASC)

Barclays Select Growth Conference

November 18, 2013 2:50 PM ET

Executives

Phillip Nalbone – Vice President, Corporate Development

Analysts

Matt C. Taylor – Barclays Capital, Inc.

Matt C. Taylor – Barclays Capital, Inc.

Thanks for attending Radio Cellular 250 Presentation. We’re really pleased to have Vascular Solutions here with us today and we have Phil Nalbone, who is the VP of Corporate Development. So for those of you who don’t know Vascular Solutions is a medical device company that based in Minnesota and their business model really focuses on providing clinical solutions for diagnostic and interventional Vascular procedures. And they have done a great job of continuing growing the top-line year in and year out and creating some operating leverage by both bringing in a little technologies and developing themselves.

So that Phil tells you a little bit more about that. And with that take it away.

Phil Nalbone

Okay, well thank you to Barclays and to Matt Taylor for inviting Vascular Solutions to this conference. I’ll be making forward-looking statements. So here is the standard disclosure associated with those forward-looking statements. Now, there is nothing mysterious about our company name, Vascular Solutions. We developed multiple clinical solutions for vascular diseases. We target the treatment of both coronary and peripheral vascular disease and our call points are very clearly defined.

We focused on the specialties that deliver minimally invasive therapies. Our customers, our physicians who use catheters and image guidance to navigate those minimally invasive tools within the blood vessels and body cavities, these are the cardiologists, interventional radiologists, electrophysiologist and vein practitioners. We’ve launched nearly 80 devices into that channel over the past decade.

This is a busy slide that I think it’s useful in understanding Vascular Solutions business model and our operating environment. In the upper left, we’re in a segment of the medical devices industry with a very large in growing patient population and in which more than $25 billion has spent each year worldwide to treat diseases of the heart and blood vessels. The upper right, our focus is not on surgical treatments, but on catheter based interventions, procedures that are performed in the catheterization labs.

In the lower left in terms of our products strategy, Vascular Solutions is really doing its own thing. We are really unusual within the devices industry right now. The giants of the industry, companies like Medtronic or Boston Scientific or St. Jude Medical are focused mainly on really big products. We’re very different and that we focus on multiple small products. And that’s beneficial because almost nobody else is these days and there is really nobody else coming up behind us to do what we’re doing.

Actually take a look at the lower right I’ll make one more point on this slide. I mentioned that the operating environment has gotten a lot more challenging growth for the industry at large is hard to come by. Hospitals are driving big price reductions. Payers concerned about cost and over utilization on restricting access. Doctors are becoming employees of the hospitals. So they’re telling the line on cost reductions. Treatments in the cardio Cath Labs are at best flat on a year-over-year basis. And frankly, there is not much basis to believe that the operating environment is going to get much better anytime soon. But the good news here for Vascular Solutions is that we are really much more about building markets for our numerous niche products rather than needing to ride the coattails of market growth.

It’s really up to us to continue to create products that doctors want to use and to sell those products effectively. In terms of how we sell those products, in the United States, we rely on a direct sales force more than 90 highly trained people, who call on pretty much every Cath Lab in the United States, this is one of our greatest assets as a company and the source of ongoing leverage in our financial model as I’ll explain in a little bit more detail later.

Outside of the United States, we rely on a network of independent stocking distributors. We’re in nearly 50 countries, nearly 180 sales reps employed by our distributors, focus on our products and these sales to our distributors currently represents about 15% of our total sales. Growth is the theme of this conference and growth is what Vascular Solutions has delivered very strongly and consistently for many years now, in fact 2012 was our 9th consecutive year of revenue growth about 10%. This year will be our 10th year of double digit top-line growth. We don’t think that many other companies have shown this record of growth particularly in this market environment that is increasingly challenged for growth.

Here is a look at the revenue progression over the past 11 quarters. You see a nice stair step pattern here with usually some seasonality in the third quarter. In the most recently reported quarter, the third quarter of this year, we grew revenues by 14% to $28 million, exceeding the top-line of our own guidance by $0.5 million and beating street expectations by around $900,000. We divide our sources of revenue into three product categories.

First, catheters, the hollow tubes that are inserted into veins and arteries to diagnose and treat diseases in those vessels, hemostat products, these are used to stop bleeding after the catheters have been removed and then vein products and services. And here our focus is on the devices that are used to treat venous reflux disease, the underlying cause of varicose veins. Our largest category, catheters 64% of revenues, grew 17% in the most recent quarter. This slide demonstrates the range of products in this category and the various ways that we come by those products.

Pronto is currently our second largest product in terms of sales, its an extraction or aspiration catheter used to remove the clot that’s causing a heart attack and this is a product that came to us from a physician. Langston is one of a kind device that dual lumen catheter used to make pressure measurements at the aortic valve to diagnose valvular disease. This came to us from a Cath Lab technician named Phil Langston and the many support catheter is an example that’s something that was conceived and developed entirely internally.

Our largest product right now is the GuideLiner, doing a little over $20 million in annualized revenues. When we launched this product in late 2009, we created an entirely new category of practice within the cardiac Cath Lab called guide extension. The objective here is to provide deep seating of the guide in the vessel to prevent guide backup and to allow optimal stenting. It’s become a very useful tool in challenging interventions. It’s a perfect example of the kind of device that Vascular Solutions aims to offer to provide a clinical solution.

Hemostat products represent 21% of our revenues. Two quarters ago, we’ve restored growth to this category after nearly three years of flat or negative comparisons. We did this through a focus on new products. Many of our hemostat products rely on the use of a substance called thrombin, this is a biological agent that occurs naturally and helps to control bleeding. We acquire the substances from Pfizer and then we formulate it into different products in the middle photo, for example, you see the D-Stat Dry patch, this is freeze-dried thrombin on a gauze pad that’s used to control bleeding at the catheter puncture site. And over on the far right, you see D-Stat Flowable which is thrombin formulated into the consistency of a paste or a gel and this is screwed into the pectoral pocket in the chest that’s created when you’re doing an ICD or pacemaker implantation.

And these are the new products that helped us to restore growth in the hemostat business. First, Vascular Solutions has been an early mover in the effort to provide new solutions for radial artery access. Now many of you are familiar with how these procedures are performed. And you know that traditionally that puncture is made in the femoral artery in the groin. And increasingly these procedures are being done through the radial artery in the wrist and it should come as no surprise that patients really prefer a puncture in the wrist as opposed to groin. It’s much more comfortable. There were fewer complications and it’s far less expensive for providers.

Just three years ago, radial access in the United States represented less than 5% of all procedures. Today, it’s around 20% and we think that that’s likely to double over the next three years. Just as a reference point, many of the other developed countries utilize radial artery access to a much greater extent. Canada, for example is north of 50%. So we think there is a lot of room to run here in the radial market. Second, we’ve been focused on leveraging our biologics expertise to provide new solutions in therapeutic embolization and this refers to the use of materials to intentionally inhibit blood flow to disease regions of the anatomy. Our approval is for use with hypervascularized tumors and arteriovenous mal- formations in the peripheral vascular term.

Vein products and services represent 15% of our revenues. And again, here our focus is on treating the underlying medical condition that causes varicose veins. This is a serious medical condition that needs to be treated and reimbursement is available for those treatments. There are two methods of treating the great saphenous vein pain. One method relies on laser energy, the other method relies on radio frequency energy and right now Vascular Solutions is involved with both modalities.

We sell the complete range of products to perform laser oblation, classic sort of razor, razor blade business model. These days it’s a very mature category. It’s highly competitive and very price sensitive. And this is simply not a growth area for Vascular Solutions any longer. However, we have restored growth to the entire category of vein products and services with a move into reprocessing. We now offer a reprocessing service for our competitors, radiofrequency ablation catheter. RF is the leading method of vein ablation. It’s the exclusive domain of Covidien, one of the large players in the medical device industry.

Reprocessing is one of the fastest growing categories within medical products today. It caters to hospitals and clinics desires to save a lot of money and to cut down on medical waste. We’ve been very successful with this since launching this service in January of last year. To date more than 30,000 ClosureFAST catheters have been successfully reprocessed and returned to the vein clinics for reuse.

Over the years most of the companies growth has been from internally developed products whether those have come to us as ideas from physicians or Cath Lab Techs or our own engineers, the basic model has been to develop those products, get them approved by the FDA and then launch them into the U.S. market and wherever relevant into the overseas markets as well. But we do want to bring in products from the outside and we do have the cash flows to support the strategy of doing tuck-in acquisitions and we also evaluate a lot of opportunities to distribute other companies’ products.

I think one of the best acquisition examples is the Venture catheter, which we were able to acquire last year from St. Jude Medical. This was a device that’s critical in challenging interventions, truly one of the kind device that St. Jude decided to discontinue and a lot of the doctors who do really tough cases were upset by that and prevailed upon St. Jude to keep it on the market by selling it to us.

We were able to buy it for $3 million and immediately capture a $3 million annual revenue opportunity. We’ve relaunched this product in United States in late April and have just really begun the rollout recently in the overseas markets, but it’s a very clinically necessary device and an example of exactly the kind of thing that we want to develop ourselves or acquire.

Another good example of an acquisition that has been meaningful for us is the Accumed wrist positioning splint, obviously a part of our effort to assemble numerous products for the radial access market. Vasc Band has been a very important product for us since launching it in the United States late last year, once again catering to the growth opportunity in the radial access market. Another distribution opportunity is the Veinsite, a Vein Viewing Headset that’s an adjunct to the treatments that are performed in the vein clinic. We have been leveraging our growing footprint in the vein market with products such as this.

Our goal has been to launch around 10 new products each year. And year-to-date, we’ve launched 8 new products. So we’re very much on track with our objectives. Right now, we have 40 projects internally at various stages of designer development. So again with this goal of launching around 10 new products each year, we think that we’re in very good shape to sustain our product momentum for the next few years.

Now, we’re not particularly big on themes, but there are a few areas of strategic focus for the company right now because they’re just too significant to ignore. I mentioned radial artery access, so we’ll continue to develop and in-license products to cater to this big growth opportunity in the United States. I mentioned reprocessing, we see this as definitely a waive of the future. We mentioned on our most recent conference call that we have identified as secondary processing opportunity.

We have and identified what it is except to say that it’s an already used medical device that will fit perfectly with our call points and we hope to see this on the market late next year or early in 2015. Another theme and this is consistent with our launch of the Vasc Band is to look for devices that are manufactured outside of the United States and it can be brought into this market cost effectively. Our collaborator for the Vasc Band is China’s Lepu Medical.

We think the most sensible China strategy is to look for good products there and bring them here, so that we can compete successfully on price. And then, while most of our products are 510(k)s, the products that can reach the market relatively quickly. We do have the interest in and the ability to develop much more challenging products, products that we call transformational in nature, products that could reasonably be expected to generate $100 million in annual revenue and we’re working on some of those in the pipeline as well.

In terms of the financials, here we see positive trends in revenue growth, gross margin improvement, operating margin improvement and EPS growth. We work very hard to provide thoughtful guidance, realizing that performance relative to Wall Street’s expectations is what moved stocks. We guide in detail for the coming quarter and for the full-year for Q4 of this year. The midpoint of our revenue guidance range would represent 13% year-over-year growth to the full-year. The midpoint of that guidance range would represent 12% growth.

The EPS numbers would represent 17% to 18% growth. I’ve included the Street’s 2014 forecast. We have not provided guidance for 2014, but we did indicate on our most recent conference call that we’re aware of these numbers and right now we’re comfortable with them certainly the growth rates represented here are what we aim for on an annual basis.

I’ll skip to this slide and point out that we’re very focused on maintaining our leverage at the operating line and bringing more to the bottom line. As this slide shows most of that leverage has come from the sales and marketing line. Basically, as we look at what it’s going to take to essentially double our annual revenue base the $200 million level. We’ve concluded that we do not need to alter our business strategy. We do not need to move beyond our existing call point or our multiple niche product strategy. We don’t need to significantly change our cost structure.

We’re comfortable with the number of sales representatives we have. We’re comfortable maintaining the overseas distributor network and not going direct. And we believe very strongly that if we just stick to what we’ve done so successfully for the past decade, we’ll be able to drive continued operating leverage as we double that revenue base and we’re looking at an operating margin approaching the mid-20s as we achieve this level on the top-line.

So in terms of the balance sheet, very clean, at the end of the September quarter, we had a little over $24 million in cash. We have no debt. So to sum it up quickly, we offer very broad range of products that address large vascular market. We’ve launched more than 75 of these products since 2003. One of our biggest assets is this large direct sales force and we operate a distributor network globally that works very well for us. We’re coming off of nine consecutive years of double-digit top-line growth. We expect this to be our 10th.

We’re profitable and cash flow positive. Those of you who know the medical device industry well know that it’s actually pretty rare for a medical device company to be this profitable at the $100 million annual revenue mark. We’ll do 16% operating margin again this year that’s flat year-over-year, but you have to factor in the medical device tax, if that weren’t for that and we would have shown another couple of points of improvement in that operating margin. And we expect to generate cash flows from operations this year of around $20 million.

The pipeline is full with 40 plus products in that pipeline. And we’re very focused on our strategy of integrating tuck-in acquisitions and doing more distribution agreements. And finally, we think that this has been not only a successful model, but – and it’s very durable and that by maintaining the current cost structure and relying on the existing distribution infrastructure, we’re going to be able to achieve the $200 million annual revenue opportunity without changing our strategy. That’s it.

Question-and-Answer Session

Matt C. Taylor – Barclays Capital, Inc.

Thanks for the presentation. Just I guess a couple, so first on the your path I guess doubling to $200 million, if you like laid out I guess you know the timeframe to kind of get there and when you think about doubling it is – that’s I think you do like the organic business without any other types of like tuck-ins. So how do you think about that?

Phil Nalbone

Yes, well, we don’t tell you when we think we’re going to get there, but it’s pretty simple Matt based on what you expect our top-line growth rate to be. We think that most of that will be organic growth or from internally generated products but we do expect to mix in a couple of distribution agreements or tuck-in acquisitions each year along the way. But the model is dependent mostly on just continuing to do what we’ve always done, which is cranking out multiple new products each year.

Matt C. Taylor – Barclays Capital, Inc.

Could you just elaborate on competitive landscape for different segments of the business and also touch on how you have such nice margins?

Phil Nalbone

Sure, the competitive question depends on the product category. It’s different for every product that we have. There are some that literally have no direct competition. For example the Langston dual lumen catheter that continues to be a nice growth driver for us. There is literally no other dual lumen pressure sensitive sensor catheter on the market. In other categories, it’s intensely competitive. For example, our Pronto extraction catheters ran into very challenging competitions a couple of years ago and our corporate objective have just been to keep that steady sequentially and we’ve done that now over the past six to seven quarters.

GuideLiner is a great example of product and a product category or a clinical category that we pioneered and had no competition whatsoever for the first couple of years and now we’ve attracted our first ever competitor in that area, Boston Scientific. Nevertheless, we showed 40% growth with that product on a year-over-year basis in Q3. The hemostat business is intensely competitive. And the way we were able to turnaround and no growth situation was by launching new products in clinically relevant growth areas. So we really reinvented that business over the past two years with a focus on radial access and embolization. And then in the vein market, as I mentioned, in the laser ablation category it’s a classically mature market with lots of competitors and very tough pricing competition. We’ve restored growth to that category with a focus on an entirely new area for us namely reprocessing. I hope that answers that question.

Matt C. Taylor – Barclays Capital, Inc.

How much of your revenue comes from distribution agreements and what’s the margin on that business like versus the rest of the portfolio?

Phil Nalbone

Right, well for example the biggest distributed product is the ClosureFAST reprocessing opportunity. So that did about $4.4 million in revenue last year, our first year on the market with that service. I think we’ve said publicly that we expected to do better than $7.5 million in revenue this year. The gross margin there is only about 50% well below our corporate average lightly of 67% or 68%. However at the operating line, it’s well above our corporate average of 16%. We’re much more focused at the operating line than the gross margin line. We would rather make money than not. So when it makes sense for us, we’re willing to do distribution arrangements that have lower gross margins, but higher operating margins.

Matt C. Taylor – Barclays Capital, Inc.

I just wanted to ask about your transformational projects, so you mentioned a few times in the presentation that to double to $200 million, just kind of keep doing what you’re doing with the structure that you have. I would imagine if one of those transformational products were to really takeoff that might not be the case anymore. So how do we sort of square those two comments or are those further out or lower probability?

Phil Nalbone

They’re further out. They’re definitely more challenging. Timing is very hard to predict with those development stage efforts and because we’d rather keep investors focused on our ability to meet our growth objectives with our current business model. We don’t talk a lot about those. In the past, we’ve mentioned what they were – Gel-Rope is a very novel method of treating venous reflux disease. MG Seal, a resorbable arterial puncture sealing device and then our Acolysis product which is actually in some markets overseas and that could be brought to the United States with some additional engineering work.

So we’re continuing our work on each of those. Gel-Rope the first inline but we’ll I think be a little bit more expansive about those things as they get closer to first in [indiscernible] studies or in the case of Acolysis, the meaningful U.S. development work that has to take place.

Matt C. Taylor – Barclays Capital, Inc.

Thanks. And I just wanted to follow-up on your reprocessing. It seems like you’ve been very targeted in what you’re reprocessing, is that the right way to think about it?

Phil Nalbone

Well, rule number one for us is that we’re going to do anything outside of our existing call points. Its how we’ve been able to be as profitable as we are and as disciplined as we are is by sticking to what we already know and sticking to where our sales force is able to go. So the rule for reprocessing as with any other product that we contemplate whether it’s internally developed or from the outside is it has to be consistent with that call point. So as we’ve indicated, we think we’ve identified a very big opportunity and reprocessing. It’s an existing product that fits that call point.

Matt C. Taylor – Barclays Capital, Inc.

Great, thank you.

Phil Nalbone

We run out of questions. That’s fine, actually perhaps one more at the back of the room.

Unidentified Analyst

Thank you. As you continue to grow toward that $200 million goal, do you need to make adjustments in your sales force either domestic or your international distributors or is that infrastructure set now…

Phil Nalbone

Yes.

Unidentified Analyst

To scale to that level?

Phil Nalbone

Right, we think that the infrastructure is there to scale to that level. We will likely add a few additional people in the United States as the need arises, but for the most part, the U.S. sales force has been in place since 2008 fairly stable and we think that’s what we’re going to need to get us to that next level. We’re very comfortable maintaining our network of independent distributors outside the United States.

We do not believe that we will go direct anywhere in the world until we’ve surpassed that $200 million mark. It’s a very profitable method for us to target the overseas markets. The operating margins associated with that business are actually better than the corporate average. We have just a few people presiding over that distributor network. So the cost structure associated with it is low and it just makes sense for us to keep that in place.

Unidentified Analyst

And can you just touch on sales force incentives and whether you’ve seen attrition or people trying to get out of your sales force if it’s a high value asset?

Phil Nalbone

Yes. Certainly people are always going after our sales force. I think the one thing that has helped us the most is the massive retrenchment within the medical device industry. It’s meant that there are not a lot of new company has been created that are trying to create sales forces on their own. The large companies are tending to scale back their sales forces rather than higher. There of course have been a couple of exceptions recently sort of small to mid-sized companies expanding their sales force. But net of everything that’s been going on in the industry, it’s actually quite beneficial for us to have a pool of talent that we can continue to draw on. Our turnover is really very low.

Unidentified Analyst

[Question Inaudible]

Phil Nalbone

No, it’s really the same compensation program that’s been in place for a while. With our annual growth, our sales reps are pretty much assured of making more money each year.

Matt C. Taylor – Barclays Capital, Inc.

Thank you very much.

Phil Nalbone

Okay, thank you very much.

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