Executives
Joseph Kaufmann – President & CEO
Mike Celano – CFO
Doug Evans – COO
Analysts
Josh Jennings – Jefferies & Co.
Dave Turkaly – SIG
Ben Forrest – Summer Street
James Sidoti – Sidoti & Company
Kensey Nash Corporation (KNSY) F3Q10 (Qtr End 03/31/10) Earnings Call Transcript April 22, 2009 9:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by and welcome to the third quarter earnings release. At this time all participants are in a listen-only mode. Later there will be an opportunity for questions. Instructions will be given at that time. (Operator instructions) As a reminder this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Joseph Kaufmann. Please go ahead.
Joseph Kaufmann
Thank you. Good morning, everyone. Welcome to the Kensey Nash fiscal third quarter conference call. Joining me today are Doug Evans, our Chief Operating Officer, and Mike Celano, our CFO. Mike will start out with the Safe Harbor.
Mike Celano
Thank you, Joe. The statements made by Kensey Nash and its representatives in this conference call will contain certain forward-looking statements, including financial forecasts that are based on the current beliefs of management as well as assumptions made by and information currently available to management. Wherever possible, we will try to identify these forward-looking statements by using words such as belief, expect, anticipate, forecast, and similar expressions. Please note these words are not the exclusive means for identifying such statements.
Please see today’s press release and Kensey Nash’s SEC filings, including our Annual Report on Form 10-K for the year ended June 30, 2009, and our other fiscal year Form 10-Qs, particularly the information under the caption “Risk Factors” for discussions of risks, uncertainties, and other factors that could cause actual results in the remainder of fiscal year 2010 and beyond to differ materially from those expressed in or implied by our forward-looking statements.
Joseph Kaufmann
Great, thank you. Well, I am pleased to report very solid financial results for the third quarter and also would like to take this time to thank all of our employees for the outstanding job that they have performed over the – this past quarter and past year during – earlier this year some maybe difficult times. However, I think it has – as the results reflect today, and what we see going forward, you can see the efforts and the fruits of all the hard work of the people at Kensey Nash.
Our total revenue of just under $20 million was 3% below prior year, but increased 5% sequentially. Total net sales of $13.2 million were 5% below prior year, but increased 6% sequentially. Our biomaterials sales, which exclude of the endovascular business that was sold to Spectranetics in 2008 were $13 million, a 1% increase from prior year and a 12% increase sequentially. Royalty income of $6.7 million was flat year-over-year, but increased 2% sequentially.
We were certainly pleased and encouraged to see the 12% sequential growth in our biomaterials business, and the strength of our overall business for the – as far as orders and also what we see as incoming orders for the fourth quarter. This sequential growth occurred primarily in our orthopedic business, specifically sports medicine, which increased 53% sequentially to $4.7 million. We believe this reflects an improvement in the overall healthcare environment and also recovery from depleted inventories of our customers and also at the hospitals. We expect our fourth quarter sports medicine will continue strong with sales in the same range as we had in the third quarter.
Moving on to our spine business, although it was – our spine business at $2.5 million were down 10% sequentially in the quarter, orders have improved dramatically and we expect our fourth quarter sales will increase over 30% sequentially, again, reflecting a dramatic improvement from where we have been over the past couple of quarters and also reflecting the improvement in the overall healthcare environment.
Cardiovascular products, largely Angio-Seal components, were at $4.9 million, increasing 8% year-over-year and 14% sequentially. We expect our sales in the fourth quarter will be in the approximate same range as our third quarter. Angio-Seal royalties of $5.2 million were flat year-over-year, but increased 4% sequentially and Orthovita royalties of $1.4 million were flat year-over-year and down 7% sequentially.
We do expect to see an improvement in our royalties from VITA in the fourth quarter. You may have notices that they published – Orthovita published their sales results, preliminary sales results for their quarter and pointed out that they have basically in the quarter there was an emphasis on the new Cortoss product that Kensey Nash is not associated with, but did have an impact on the products that Kensey Nash manufactures and co-develop with VITA. But we think that as they indicated in their press release that the emphasis, reemphasis on these products in the fourth quarter will help our royalties going forward.
EPS for the quarter was $0.46, a 10% increase year-over-year and a 7% sequential increase on a pro forma basis.
Our balance sheet continues to be very strong. Cash and investments at March 31st was $71 million. Operating cash flow on a year-to-date basis was slightly over $19 million and for the quarter was just under $10 million.
At this time I would like to make some comments about our collagen supply agreement with St. Jude Medical. Again, at this time we do not have an agreement in place beyond December, 2010. We have exchanged proposals, but I cannot provide any further information regarding terms, including units, pricing, or length of contract. We will continue to supply under our existing contract, and we’ll certainly like to continue to supply collagen going forward. Regardless of the outcome of this situation Kensey Nash is well-positioned to grow our business going forward.
We have positioned our Company in such a way with our new products, our new technology, and regenerative medicine that as can happen with any customer or with any product in terms of the product lifecycle, there is going to be changes. We hope that we will continue to have a relationship with St. Jude going forward with Angio-Seal and as far as the collagen supply agreement is concerned, and we want to continue to work very closely with them. On the other hand, we are confident in our ability to adjust and react to these situations and move forward and continue to grow our business.
Let me move on now and talk about our new technology, the extracellular matrices, the ECMs, and the cartilage technology. Kensey Nash has achieved some significant milestones during this current fiscal year. That will be growth drivers for our fiscal 2011 and beyond. With our ECM technology, we entered into a license agreement with Synthes and recently shipped the initial product for their near term sales launch in the U.S. In addition, as we noted in this press release, we recently received CE Mark Approval for this technology.
And also, this will be a product that will also be launched by Synthes in the near term. So, for 2011 and also for our fourth quarter with this technology, we are going to see increased revenue, we are going to see royalties going forward. So, again, we are well-positioned to grow our Company for the future.
We are also expecting in the near term approval from the FDA and also the EU for additional materials within this ECM technology platform that we have. This will allow us, as we have stated many times, to expand our partnership relationships in 2011. So, we are planning and expect to either, one, expand existing agreements or relationships, or add new partners and new indications, and new markets for this technology. This is a very exciting area in the medical field, one where Kensey Nash is well-positioned to participate in this exciting market. And this is going to be a substantial growth driver going forward.
On cartilage, we are pleased to report that we will initiate our cartilage pilot trial this quarter in the U.S. As we reported this year, we obtained CE Mark Approval also for this product and we also expect that we will partner in the EU in some form either through a partnership or distributors in the first half of our fiscal 2011 for the cartilage device. Now, again, this cartilage device in the EU has, we believe, the broadest indication of any device in the industry. And we will move forward with our U.S. trial, pilot trial and this again is going to be a significant growth driver for Kensey Nash in the years to come. It’s one of the largest untapped markets today in the orthopedic marketplace.
So, I want to move on to the guidance for the fourth quarter and I will speak about the fourth quarter. We certainly laid out the total year guidance and I think everyone can figure out what that represent. But for the fourth quarter, net sales for biomaterials, we expect to be in the range of $14 million to $14.2 million. This represents a 14%, 15% increase over the prior year and an 8% to 9% sequential growth.
For our total sales, we expect to be at $14.5 million to $14.7 million. This would represent 7% to 8% growth over the prior year and a 10% to 11% sequential growth. Royalties, total royalties we expect to be at $6.9 million to $7.1 million, which represent flat to 3% growth year-over-year, and 3% to 6% growth on a sequential basis.
Total revenue will be $21.4 million to $21.8 million, which is 4% to 6% year-over-year growth and 7% to 9% sequential growth. EPS, we expect to – an additional record performance in our fourth quarter with EPS in the $0.51 to $0.53 per share. This represents a 24% to 29% year-over-year growth and a 11% to 15% growth sequentially.
Prior to taking questions, I just want to point out that our Company has evolved and grown over the years. We have continued to deliver strong financial results, invested heavily in R&D, and we’ll continue to do so. We’ve expanded our technology into regenerative medicine very successfully. We have added and diversified our strategic partnerships and built a world-class manufacturing and R&D facility with world-class employees. We are well-positioned to provide substantial growth over the next five years as we continue to build this business and look forward to delivering strong results going forward.
With that, I would like to take questions.
Question-and-Answer Session
Operator
(Operator instructions) You have a question from the line of Josh Jennings, Jefferies & Co. Please go ahead.
Josh Jennings – Jefferies & Co.
Hi, thanks a lot. Good morning. Just – you narrowed your guidance range, removed the top and bottom line and thanks for providing the details in terms of where you think the specific lines are going to grow in Q4. I guess just a question on the top line, are you assuming any revenues from your ECM product launch with Synthes in the U.S. ?
Joseph Kaufmann
We are. We expect that to be – product is going to be launched during this quarter. I can say specifically when it will be launched, but obviously we have shipped products, so there will be some revenue there. It will be in the magnitude of a couple of hundred thousand dollars or so, somewhere in that range.
Josh Jennings – Jefferies & Co.
Great. (Inaudible) on the bottom line, I mean with your shareholder repurchase program, what is the share count that you are assuming with the new EPS range and how much of a sort of EPS benefit are you going to get from that continued share repurchasing?
Mike Celano
On a diluted basis, we are assuming a share base of about 10.4 million shares.
Josh Jennings – Jefferies & Co.
10.4, okay, great. And just on the endovascular side here, the 200,000 in sales, can you just again break out and remind us sort of where those sales came in, how your relationship with Spectranetics is going, are there any milestone payments left and may be just some more detail on your expectations for Q4? It looks like you are expecting in between 500,000 [ph] and 700,000 there for the Q4 sales. And what happened in Q3 and what do you expect it to return in Q4?
Joseph Kaufmann
Yes, that line includes a combination of products shipment and also recognition of revenue from milestone payment. So, going forward, we do expect that we are going to have some milestones achieve in the fourth quarter. That’s why the increase. Is that correct, Mike?
Mike Celano
Yes. There is one milestone, that’s correct.
Joseph Kaufmann
So, it’s a combination of product sales and milestone. The – we are not shipping much products, the QuickCat manufacturing has been transferred to Spectranetics. The Safe Cross product was discontinued. So we are shipping some ThromCat products for their EU sales, and also ThromCats that are used in element [ph]. There are many milestones that are still outstanding, and we hope that we will see those occur obviously one in our fourth quarter and a couple that will – 2011.
Josh Jennings – Jefferies & Co.
And are there any sort of pipeline products on the endovascular side that you are still developing?
Joseph Kaufmann
There is additional ThromCat products, different size, a smaller size product that’s being developed at Kensey Nash, and that’s about it.
Josh Jennings – Jefferies & Co.
And just any details on the Safe Cross discontinuation in terms of what happened there?
Joseph Kaufmann
Really, it was technology that – made the decision that they felt that the – that didn’t fit into their product offerings or the market wasn’t large enough so it was something out of our control and decision made entirely by Spectranetics.
Josh Jennings – Jefferies & Co.
Great. And then just in terms of your Angio-Seal business, if you look at your vascular closure number at St. Jude printed early in the week, included some other external compression devices, but it looked from your – had a nice uptick in your royalty by about $200,000 sequentially. Can you just sort of comment on the Angio-Seal. Can you just sort of comment on the Angio-Seal sort of sales in terms of was that an increase in volumes? Can you talk a little bit about where pricing is and some of the – any type of competition that you foresee going into the back half of or the rest of 2010 and into 2011?
Joseph Kaufmann
Well, from the standpoint of pricing, pricing has been consistent. It ahs been very stable over the last couple of years. They don’t see anything change there. A privy [ph] to their individual pricing that they have in the marketplace. Competition, there is always some new competition that’s coming into this. Angio-Seal I think over the years has proven to be a product that dominated and continues to dominate the space. But it is a mature market. So, a perspective – and I think St. Jude has indicated that it’s low single digit growth and that’s what we are planning on.
Josh Jennings – Jefferies & Co.
Okay, and then just last question from me is just I know you made some comments on the agreement with St. June in terms of the supply agreement and the licensing agreements that are being negotiated currently. Can you give us any color in terms of where you guys see sort of the best and worst case scenarios playing out with these negotiations?
Joseph Kaufmann
Well, I think that what we are talking about is the supply agreement–
Josh Jennings – Jefferies & Co.
Okay.
Joseph Kaufmann
There isn’t anything to talk about in terms of the license agreement that are in place. The supply agreement, obviously the worst case is that St. Jude tells us that they are not going to buy collagen from us, that’s the worst case. and going forward the upside is that they’ll be buying anything – something from us at some level. And I really can't give you any more color than I – we are preparing our business to certainly assist or supply product to St. Jude as they need and if we have an agreement in place that would be great. And if we don’t, as we have with many of our other customers, by the way, we have lots of products that we ship from Kensey Nash everyday that are not under any sort of supply agreement. So, if this transforms into a relationship without an agreement, we can live with that. We do that everyday and if we have an agreement, that’s fine. And we hope to put one in place. but I really don’t have any other information other than what I’ve said earlier.
Josh Jennings – Jefferies & Co.
Great. And just – sorry to sneak one more in here. But in terms of the sort of your IP protection around the licensing agreement with the Angio-Seal device, when is the last paten, when is the – in terms of your patent portfolio, when is [ph] the patent expire?
Joseph Kaufmann
It gets a little complicated when we – and we really don’t like to talk about the various patents that are in place on the Angio-Seal. We have a very powerful patent portfolio I think that everybody understands in the marketplace and that’s why the Angio-Seal has done so well. And there is always additional patent filings and claims. So, it’s just is very difficult for us to comment on that because it is a complex matter with many different patents, many different filings, and many different claims. So, I really can't give you a specific timeframe for that.
Josh Jennings – Jefferies & Co.
Alright, great, thanks a lot.
Operator
And the next question comes from the line of Dave Turkaly of SIG. Please go ahead.
Dave Turkaly – SIG
Thanks. In terms of that trial for the cartilage product, could you just remind us any of the parameters on that that you know of today?
Joseph Kaufmann
Do you mean in terms of size or–?
Dave Turkaly – SIG
Yes, size, follow-up.
Joseph Kaufmann
Okay. We’ll start off with the pilot trial, Dave. And this will be approximately a 30-patient trial at five sites. The follow-up will be somewhat flexible but in the range of – we’ll have numerous points where we’ll be doing MRIs on the patients I think all the way out to two years, and getting interim data on these patients. So, there will be pain scores and MRI essentially will be the end point.
Dave Turkaly – SIG
And I think you mentioned that you know you have the European clarity [ph] you might partner to that, is that – you had partner at one point that you may have bought the rights back to, but is this – would any agreement you sign be just specifically for Europe for that product?
Joseph Kaufmann
We did have a partner for the (inaudible) with Philips [ph], and we did buy all the rights back so that the technology there isn’t any confusion of any dispute over who owns what; we own everything. And when we look at the European market, we have the broad approval for the cartilage, so that will be handled independently of the U.S. at this time. But things could change. We’ll certainly evaluate the different partners and potential that we could have in this product going forward, whether it is going to be something on a grander, bigger scale will depend on the economics.
Dave Turkaly – SIG
And the claims, could you just – last one from me would be just what is the actual indication that you have there?
Joseph Kaufmann
Doug, why don’t you?
Doug Evans
Yes. It’s essentially for the repair and regeneration of articular cartilage.
Dave Turkaly – SIG
Thanks.
Operator
Question comes from the line of Ben Forrest, Summer Street. Please go ahead.
Ben Forrest – Summer Street
Thanks a lot for taking the questions. I am wondering on the extracellular matrix product, what’s the primary indication for that and how does that product compare to say a lifestyles [ph] product?
Doug Evans
Well, the product potentially have comparable indications in the marketplace. And based upon comparisons, we feel they compare very well against the lifestyle technology.
Joseph Kaufmann
So, the indications would be, for example, in the license we have with Synthes for abdomen, chest, and head and neck, which obviously would include the hernia repair.
Ben Forrest – Summer Street
Okay, great. And then could you talk a little bit more about the strategy for the launch for this product. I mean I know that Synthes will be doing the marketing, but do you expect the product to be sold more in the U.S. or more in Europe, and how – any talks on what will be done competitively for the product?
Joseph Kaufmann
Well, obviously the first approval that we received was in the U.S. and that will be the first market where the product will be launched. But I think shortly thereafter, relatively near term will be the European launch. As far as the strategy, we really not going to talk much about that. We know, and I think everyone knows what a great company Synthes is in terms of their marketing capability, their education programs, and the people that they have in that organization. So, we are very happy and satisfied with what they have certainly shown Kensey Nash and what they are doing in terms of their marketing plans and that’s something I think that can – we’ll let the markets speak for itself later on as they get this product into the marketplace.
Ben Forrest – Summer Street
Great. Thank you.
Operator
The next question comes from the line of James Sidoti of Sidoti & Company. Please go ahead.
James Sidoti – Sidoti & Company
Good morning, Joe, good morning, Mike.
Joseph Kaufmann
Good morning.
Mike Celano
Good morning.
James Sidoti – Sidoti & Company
Two questions, one, when you do start selling the ECM to Synthes where will those sales be reported, will that be called out separately or they go into general surgical sales?
Joseph Kaufmann
It will be part of the general surgery sales and it depends. We may be calling it out separately, but we’ll – we are not quite sure yet.
James Sidoti – Sidoti & Company
Okay. And then as far as the agreement with St. Jude goes, how much lead time do you need in order to supply to – secure your supply for the collagen?
Joseph Kaufmann
Well, say, the collagen is a – it’s a more complex product than – and processing than I think most people realize and that the lead times on collagen from just initiation to the production is generally about two to three months. But you have to understand that prior to that in terms of securing raw materials, again, these are all part of a closed herd, the timeframe goes out much greater than two or three months. So, we are in a situation now where it’s getting to the point that we have to manage our inventories, we have to prepare or whatever outcome maybe with this product. So, it’s, without giving a specific date, it’s getting close.
James Sidoti – Sidoti & Company
And just to verify, you are supplying well over a million units per year to St. Jude at this point, right?
Joseph Kaufmann
Yes, we have supplied all – the collagen that’s ever been used in the Angio-Seal since it has been developed has been supplied by Kensey Nash and I think that number now totals about 13 million patients with an incredible safety and performance record. And so when you look at the numbers approximately two million a year, so it’s in that range and, yes, it’s a big number.
James Sidoti – Sidoti & Company
Okay. So I mean one way or another St. Jude is going to have to secure enough collagen to manufacture over – close to two million a year of these products?
Joseph Kaufmann
That will be correct, yes.
James Sidoti – Sidoti & Company
So, you would think some type of decision needs to be made relatively soon?
Joseph Kaufmann
Yes, I would think so and I think obviously St. Jude is a well regarded, highly respected company that has sold 300 – they sell 350 million, 400 million a year of Angio-Seal. So, it’s a product that they certainly appreciate the complexity with collagen and I am sure will be a resolution or a decision made hopefully relatively soon.
James Sidoti – Sidoti & Company
Alright. Thank you.
Joseph Kaufmann
Okay.
Operator
(Operator instructions) There are no further comments from the phone line. Please continue.
Joseph Kaufmann
Okay. Well, I would like to than everyone for taking the time out to join us for this call and we look forward to the next call, which will be our year-end that will take place in August. And again thanks for listening in.
Operator
Okay, thank you. And, ladies and gentlemen, this conference will be made available for replay after 11’O Clock AM today until April 29th at midnight. You may access AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 entering the access code 152075. International participants dial 1-320-365-3844 and again that access code is 152075. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.
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