Bovie Medical's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.31.14 | About: Bovie Medical (BVX)

Bovie Medical Corporation (NYSEMKT:BVX)

Q4 2013 Results Earnings Conference Call

March 31, 2014, 4:30 pm ET

Executives

Rob Gershon - Chief Executive Officer, Director

Analysts

Russell Cleveland - RENN Capital Group

Alison Peck - Peck Wealth Management

Len Ruediger - Ruediger Trust Management

Clay Mahaffey - Venture Research

Operator

Good afternoon and welcome to Bovie Medical Corporation's fourth quarter and full-year 2013 earnings call. Hosting today's call will be Rob Gershon, Chief Executive Officer of Bovie Medical Corporation. As a reminder, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). For your information, today's conference is being recorded.

Before we begin, I would like to make the following Safe Harbor statement. Today's call will relate to Bovie's fourth quarter and full-year 2013 earnings release and will contain forward-looking statements regarding predictions about future events. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected.

Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that may cause actual results to differ materially and could impact the company and the statements contained in this news release can be found in the company's filings with the Securities and Exchange Commission including the company's report on Form 10-K for the year ended December 31, 2013. The company assumes no obligation to update or supplement any forward-looking statements whether as a result of new information, future events or otherwise.

I would now like to turn the conference call over to Mr. Rob Gershon. Sir, you may begin.

Rob Gershon

Thank you, operator, and thank you all for joining us for an update on Bovie Medical. I know many of you have been long time supporters of Bovie and others are new to the company. So we welcome you all to the call. I opened my presentation at our most recent board meeting saying that when I started in mid-December, I knew this opportunity would be great, but what I didn't realize at the time is just how exhilarating it is.

Since I joined the company as CEO in mid-December, I think it would be most productive for me to spend the allotted time today talking about the future strategy, rather than going through the details of the 2013 financials. We filed our 10-K after the close: today. So you will have access to additional financial details, and our CFO, Gary Pickett is sitting next to me and will be available to help answer any financial question at the end of this call.

Before we talk about our future strategies though, I have a couple of broad based comments on 2013. As you saw from the news release we issued after the close of the market today, our reported results included a number of special items, which we believed mask the stable, profitable performance of our core business. I won't spend too much time going into the details but I think it is important to note that our core medical device business which we define as sales of distributed, branded and private label products were $22.1 million in 2013, up from $21.8 million in 2012 and $20.4 million in 2011, representing average growth over those periods of 4.12%, in line with industry average for this sub-sector of the device market.

Also, I am pleased to report that in the fourth quarter we were able to capture additional OEM business. As you know, our reported revenue for 2013 were negatively effected by the expiration of two large OEM contracts, and while this new multi-year contract that we signed late last year will not offset all of the $4.3 million shortfall from last year, these new wins will enable us to recoup about one-third and we are working on bringing in additional OEM contracts this year.

In 2013, Bovie incurred legal fees and settlement and award cost of $2.9 million. The good news is that these costs are now behind us and we just settled the class action lawsuit that was brought against the company in 2011. There will be no related expenses to Bovie from that settlement as we were covered by insurance. While I was not at Bovie during the time that these legal issues arose, I can tell you that my career has been spent at large highly regulated and conservative companies which makes me highly unlikely to take legal risks that could be distracting or costly to the company.

So as we close the chapter on 2013 and open a new chapter in our company's history, I will now comment on what I know you are all most interested in, what is happening with J-Plasma, as that is what brought me to Bovie. As you know, my entire career has been spent in healthcare and my 12 years as a sales and marketing executive has given me good grounding in evaluating new products and understanding their potential.

With the benefit of a deep understanding and appreciation for this technology, I am fully convinced that J-Plasma has the potential to be a transformational product for surgeons across a broad range of specialties. I do not use the word transformational often as not many products genuinely fit this definition but J-Plasma does.

Why? Well, let me read to you the general description that you often see in print and then tell you what it means. So here it is. The gas ionization process that this product uses gives off a focused beam of ionized gas that can be controlled in a wide range of temperatures and intensities which gives the surgeon greater precision, minimal invasiveness and the absence of conductive currents through the patient during surgery.

So what does this mean? In the words of one surgeon customer, as I quote from an e-mail he sent us, "At first I realized that it, J-Plasma, allows me to achieve the same grade outcomes as other modalities but without the collateral tissue damage caused by high thermal temperatures, but then I realized it is much more than that. J-Plasma allows me to do things I wouldn't attempt to do with other devices. It gives me the confidence I need to feel safe around large vessels and around sensitive tissue. I think it will be a household name and the standard of care for GYN surgery."

These are powerful words that are typically only spoken when surgeons use technology that is indeed transformational. Our first target markets are gynecology, plastic surgery and dermatology, but J-Plasma can and will be used in other specialties including general surgery, colorectal surgery, oncology, urology and ENT.

So let me share with you where we stand today with respect to the commercialization of J-Plasma. At the end of the fourth quarter, J-Plasma was being used by surgeons at 12 sites and today, we are in over two dozen sites and have a strong pipeline of surgeon interest in the product. Right now, we have 10 sites that are ordering the product and we know this is just the beginning.

At another 17 sites, J-Plasma is in the VAC process which means the product is being evaluated by the hospital's value analysis committees. The good news here is that even when the product is in the VAC evaluation process we can still collect revenues through what is called scrub purchased orders, as long as our rep is in the operating room during the procedure. The hospital VACs generally take between three and four months to come to a purchasing determination at which time, if approved, the hospitals will place orders and reorders routinely. At outpatient surgical centers, the approval procedure is considerably shorter as it is done at regularly scheduled board meetings.

In order to capture the product's full potential, we are moving ahead with a comprehensive go-to-market strategy for J-Plasma. This involves investing in surgeon training and procedure development, building a world class direct sales team, generating strong clinical data and publication and driving awareness of J-Plasma. I will comment on each of these initiatives in a moment but before I do, I want you to know, as of today, there are over 30 surgeons in the pipeline that will likely begin usage within the next several months.

Let me spend a moment to define how we view our pipeline of surgeons as it is an important metric to understand in evaluating the future adoption of J-Plasma. Surgeon selection is critical because if it is done right at least eight out of 10 of those whom you interest in the technology move through the pipeline and become early adopters, utilizing the product routinely and recommending it to their colleagues. Throughout the process, we provide courses and hands-on laboratory training to our surgeons. In fact, just this past weekend, we held a full-day course for five surgeons in Missouri who are affiliated with one of the hospitals that already approved the use of J-Plasma.

In order to ensure that surgeon selection is being done most effectively, we are creating a hybrid sales force that, we believe, is the most effective way of gaining traction for the product over the short and intermediate term. This means that by the end of 2014, we expect to have a small direct sales force teamed up with established distribution reps that have relationships and broad experience in targeted specialties and geographies. We have already significantly pruned our distributor network for J-Plasma from 48 to 28, so that we can focus on those reps that will dedicate the majority of their time to this product, and we have contracted with a world-class sales training organization that will conduct the essential training that a sales force needs to optimize performance.

J-Plasma has substantial clinical benefits that can be effectively brought to light through clinical trials and publications. To that end, we expect to publish a minimum of five white papers or physician opinion papers, all of which are underway right now, that document surgeons experiences in working with the product. The number of patient procedures they detail can range from 10 or 20 to about 100. These reports are important to gaining broad-based acceptance for J-Plasma and approvals from VAC committees. And of course, we need to broaden our awareness of the product through marketing and branding campaign targeted to hospitals, surgery centers and surgeons.

To sum it all up, we are very enthusiastic about the future prospects of Bovie. We are convinced of the significant potential of J-Plasma and are succeeding in attracting an experienced group of professionals who share our vision and view. Notably, today we announced that Jack McCarthy, a former colleague of mine at Covidien has joined Bovie, effective immediately, as Chief Commercialization Officer. Jack's background in sales, marketing and new business development is a perfect fit for us and he will be instrumental in helping us design and execute on our growth strategy for J-Plasma.

You can expect additional new executive appointments at the company during 2014, as we take action to accelerate growth. They will be working together with our existing managers on a companywide campaign to build upon the growth areas of our core business, such as electrosurgical generators, electrodes and medical lighting and focus on innovation and new product development. As we execute our growth strategy, we will leverage the brand equity of the Bovie name and jump start market demand for J-Plasma.

At this point, operator, we would like to open the call to questions.

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions). Our first question will come from Russell Cleveland of RENN Capital Group.

Russell Cleveland - RENN Capital Group

Hello, Rob, and first of all, welcome to Bovie from many, many shareholders. We are very excited about you and your team and what we can do with J-Plasma and other things. So welcome.

Rob Gershon

Thank you, Russell.

Russell Cleveland - RENN Capital Group

Two quick questions. The first one is, and you alluded to this, are we getting traction now as we speak in J-Plasma? The second question is a broad one and that is are we going to have an investor relations program to acquaint investors and others about the progress of the company? So those are my two questions.

Rob Gershon

Yes. Okay, thank you, Russell. Very fair and thoughtful question. The answer to the first in terms of gaining traction now, unequivocally we are. We are in the early stages of assembling the requisite essentials to build sustainable and long-term growth, and in doing that we are getting some early wins. So I mentioned that we have 10 accounts right now that are ordering immediately right to this day, and there are several more in the pipeline.

In terms of going forward, from investor relations firm, we have a very important story to tell the industry and the marketplace about Bovie Medical and to do so effectively, we must partner with an investor relations firm. So I am taking this call right now from our investor relations partner and we will continue working with this organization on a go forward basis.

Russell Cleveland - RENN Capital Group

Good. Thank you.

Operator

The next question will come from Alison Peck of Peck Wealth Management.

Alison Peck - Peck Wealth Management

Hello, and thank you for the very informative call. My question is, what is the size of the J-Plasma market for the initial target markets that you are considering such as GYN, plastic surgery and dermatology?

Rob Gershon

Yes, our estimate is that this market size for those three specialties GYN, plastics and dermatology, is about $1.55 billion in the United States alone.

Alison Peck - Peck Wealth Management

And as far as competing technology, what can you say about that?

Rob Gershon

So there certainly are other competing technologies out there, you know, primarily the competing technology is the various CO2 laser companies. So that's the fairest comparison. This product also fits in unmet need of the marketplace. So some of the proprietary features of it doesn't exist in the marketplace today. So it meets an unmet need.

Alison Peck - Peck Wealth Management

Okay, one last question. The breakeven revenue level in the core businesses you are anticipating?

Rob Gershon

So your question is what is the breakeven in the core business itself? Or is this related to J-Plasma?

Alison Peck - Peck Wealth Management

J-Plasma. In the targeted areas, I should say.

Rob Gershon

In the targeted areas, so right now it's a little bit hard to say, because we are in the investment mode, in the early stages of commercialization. So I don't know if you have any additional --

Alison Peck - Peck Wealth Management

Right. I understand. As far as the margins, do you have a sense that you can share with us regarding the margins on the J-Plasma relative to your core business?

Rob Gershon

Yes. So while we are not breaking down our margins in the business, what I can tell you is the J-Plasma margins relative to the core business are significantly higher. So the hierarchy of margins for us is -- I guess I will leave it at that. I am sorry. So absolutely significantly higher than our core business.

Alison Peck - Peck Wealth Management

Good. Well, thank you very much.

Operator

(Operator Instructions). Our next question will come from Len Ruediger of Ruediger Trust Management.

Len Ruediger - Ruediger Trust Management

Yes. Again, a good update. I have a question concerning revenue per operating room. If hospital gives approval, I understand that they will go into usually one or two operating rooms first. What would be the continuing revenue first of all for the generator, obviously the generator has to go in first, and then how many procedures per day or per week? What would you look at as revenue to Bovie for each system that goes in?

Rob Gershon

You are exactly right. Initially, the generator goes in. The revenue stream, really will come, this is very similar to other types of energy-based devices. The ongoing revenue comes from the disposable handpieces.

Len Ruediger - Ruediger Trust Management

Right.

Rob Gershon

So those handpieces will be priced at about $325. That's the average selling price right now of the handpieces and a typical surgeon, and it really varies, will use handpiece per procedure, and perhaps will do as many as anywhere from two to six procedures a day that they operate. And the average GYN surgeon, for example, will operate about two to three days a week.

Len Ruediger - Ruediger Trust Management

Thanks. So your revenue stream then, if you have kind of a general number for that, will there actually be revenue for the generator going in and then the add-on of the handpieces?

Rob Gershon

Yes. So there will be modest revenue from the generator going in and like most capital equipment purchases, we will have a few different ways that a customer can get the generator into the hospital. So in some cases they may buy it outright and if they do it will be a one-time cost. In other cases, for budgeting purposes, some of our customers prefer to pay on a per use basis. So in those cases that's how they do it. So we would put a per use premium on each handpiece that we sell, so that they would simply utilize the generator that way. Then we will also have a lease to own option. So lease to purchase option. So there are different ways of doing it. But the real revenue stream, make no mistake about it, comes from the disposable handpieces, not so much the generator.

Len Ruediger - Ruediger Trust Management

So the razor blades are the key to your profitability. I guess my follow-up question would be, do you have any research firms that are currently writing research on Bovie? I have been very hard pressed to try to find any research other than things coming out of your own investor relations. Are there any like the RedChip Reporter or any of the regional firms like Raymond James or anybody like that, following the company?

Rob Gershon

Not at this time.

Len Ruediger - Ruediger Trust Management

Okay. So you are virgin territory right now.

Rob Gershon

Right.

Len Ruediger - Ruediger Trust Management

All right. Well, thank you very much.

Operator

Our next question today will come from Bill Bowerman [ph].

Unidentified Analyst

Hi, thanks for taking my call. I am really excited to hear what you have planned for Bovie. It's a really neat new role. And I am excited for that. So welcome aboard.

Rob Gershon

Thank you.

Unidentified Analyst

On the 12/24 sites that you are in end-of-year currently, are those production sites where the doctors are actually using procedures on the regular production or are they more test sites?

Rob Gershon

Yes. I am glad you asked that question. There are no test sites. Right now we are going full bore on commercialization. So no, these products are being used on patients, not in a test site forum.

Unidentified Analyst

Okay, great, and then the next question, I actually almost asked, I have two, and if you don't want to answer the last one that's fine.

Rob Gershon

Okay.

Unidentified Analyst

But direct sales model, I have always thought that it would be a better way than distributors, because it's hard to get distributors to push your product. Is that a reasonable model for a company of Bovie's size and do you feel that with the cash you have on the balance sheet today that you have enough to roll that out?

And then, in the press release, you talked about innovative products in the pipeline. If there's new products, if you can talk about anything about that, I would appreciate it. Thanks.

Rob Gershon

Sure, absolutely. So this product, J-Plasma is absolutely worthy of a being in the hands of a direct sales force. For us, we are at the early stages of building a direct sales force. Being in the early stages, it is important to continue building momentum in the marketplace and to do so, we will continue utilizing the independent distributor reps.

However, as I commented in the opening statement, we have done a critical review of these independent distributor reps and pruned them down from 48 to 28. And the 28 that remain are ones that focus on J-Plasma. This is their tip of the spear product, their A product in their bag, and that is very important.

Now I also mentioned that we are putting together a world-class training, and we are taking all of these reps through this training. So we are making an investment, and with respect to, can we fund it? We can, and that is in large part, you know what the infusion of capital from great point is being earmarked for, which is the full commercialization of J-Plasma.

With respect to the pipeline, there are a few J-Plasma related products that I will comment on. One is, we are getting ready to submit a 510K clearance on a new generator for J-Plasma. We are calling it at the moment, the hybrid. The hybrid actually combines the IDS-310 which is a newly 510 cleared generator, our top-of-the-line generator with the J-Plasma generator. So together in one box, we will have this new hybrid and it will be cleared, CE marked and so forth to sell worldwide.

In addition to that, very important for J-Plasma, is developing a new ergonomically designed handpiece. We call it the pistol grip and it is simply a ask of our surgeon customers that will really, really resonate with the surgeons in a big way. So those are two guys that we are prepared to comment on today.

Unidentified Analyst

Okay, can I quickly follow-up on that hybrid? Do you mean that it will be both electrocautery and J-Plasma? Is that what you are talking about?

Rob Gershon

That is correct.

Unidentified Analyst

Okay, great. Thank you. And I will jump ahead.

Rob Gershon

Yes, that's it.

Unidentified Analyst

Okay, great. Well, thank you and any day I am looking forward to seeing what you are able to do this year.

Rob Gershon

Okay. Thank you.

Operator

(Operator Instructions). Our next question will come from John Sheehan [ph]. Mr. Sheehan, your line is live.

Unidentified Analyst

Thank you. I would like to ask two questions. The first question, sir, would be, last year you said our revenues were $22 million or so. I was wondering if you could give us a ball park figure for this current year?

And my second question would be, I believe you said the market, worldwide market for J-Plasma is $1.5 billion. So what would be in a best scenario would be, how much of that could we capture ourselves, 10%, 5%, 20%? Thank you.

Rob Gershon

Okay. Thank you. With respect to revenue, at this time we are not giving guidance.

Unidentified Analyst

Okay.

Rob Gershon

So I won't comment on the revenue. The $1.55 billion is actually not a worldwide number, but that's a U.S. only.

Unidentified Analyst

Okay.

Rob Gershon

And that's our initial focus is U.S. and then certainly we are preparing ourselves for worldwide launch, but U.S. first. That's our priority. With respect to market share, it's hard to say at this time.

Unidentified Analyst

I know that. Yes.

Rob Gershon

What market we are going to capture. What we do know is this is a product that is worthy of a big commercial launch and we will see where it goes. It really meets a need in the marketplace and we expect it to grow quite significantly. It's just hard to say right now how significant that will be.

Unidentified Analyst

Okay, and the next question would be, how soon you think we would capture the Asian market and the European market or am I going to fast?

Rob Gershon

Yes. So right now our focus in commercialization is U.S.

Unidentified Analyst

Okay. Thank you.

Rob Gershon

Stay tuned for the oUS, outside U.S. markets.

Unidentified Analyst

Okay. Well, thank you so much.

Rob Gershon

Okay. Thank you.

Operator

The next question is from Clay Mahaffey of Venture Research.

Clay Mahaffey - Venture Research

Hi there. Very nice presentation and I am new to the company, but pretty interested in it.

Rob Gershon

Thank you.

Clay Mahaffey - Venture Research

You describe a lot of benefits for your product but could you briefly describe the problem with the current established mature products, say CO2 laser products that enjoy $1.5 billion in sales, I presume? And could you briefly describe the problem that you see with those existing products?

Rob Gershon

Right. So I think the best way to answer that is to talk about what J-Plasma can do that's different. So I will do it if you can indulge in a minute, I will do it with a clinical example. One of the most popular procedures, our biggest target area right now, is endometriosis. So for those of you familiar with this, there are lesions that exist on the uterus. The current modality for treatment, such as the CO2 laser is very effective and what it does is you simply take the lesions that you can see. So you see a lesion, you zap it and it's an effective treatment.

One of the outcomes and it's generally accepted in the principles of GYN surgery is because of the high thermal heat you do end up breaking through a layer called the peritoneum and at times you can do incidental damage to the uterus. Now this is generally accepted. It is not that problematic.

The difference with J-Plasma is it has very low thermal heat. So what that means is you are able to paint the uterus and go after lesions that you can see and lesions that you can't see very confidently without breaking through that thin layer called peritoneum. And that allows the surgeon to just do more than they would otherwise.

So I hope that example provides a little bit of insight.

Clay Mahaffey - Venture Research

I mean is there a better outcome for the patient because of the use of your device rather than the CO2 device?

Rob Gershon

So there are clinical studies that are underway that will do a comparison. So instead of me commenting on that, I would suggest that we all stay tuned and that is our first paper comparing J-Plasma to other modalities. That is very, very close to being published.

Clay Mahaffey - Venture Research

Okay, good. You know, I have seen in other medical devices, the papers that work best come from doctors that have used the device.

Rob Gershon

Right.

Clay Mahaffey - Venture Research

Is that your plan? Or you are going to write these inhouse?

Rob Gershon

Our plan exclusively is to have these written by surgeons. None of them are being written by Bovie.

Clay Mahaffey - Venture Research

Practicing, right. Okay, very good.

Rob Gershon

Yes, they are all clinical papers that are based upon clinical experience written by the surgeons that have performed the procedures.

Clay Mahaffey - Venture Research

Thank you. Very good.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Rob Gershon

Okay, thank you. Thank you all for your interest in Bovie Medical. We hope that our enthusiasm for the company and its products came through and we look forward to keeping you up-to-date on our continued progress.

Operator

Thank you. The conference has now concluded. We thank you for attending today's presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!