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Vascular Solutions, Inc. (NASDAQ:VASC)

Q1 2014 Earnings Conference Call

April 22, 2014 04:30 p.m. ET

Executives

Phil Nalbone – Vice President, Corporate Development

Howard Root – CEO

James Hennen – SVP Finance & CFO

Analysts

Tom Gunderson – Piper Jaffray

Jeff Chu – Canaccord Genuity

Ben Haynor – Feltl and Company

Larry Haimovitch – Haimovitch Medical Technology Consultants

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to Vascular Solutions’ First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session (Operator Instructions) As a reminder, ladies and gentlemen, this conference call is being recorded today Tuesday, April 22, 2014.

I would now like to turn the conference over to Phil Nalbone, Vice President of Corporate Development at Vascular Solution. Mr. Nalbone, you may begin.

Phil Nalbone

Thank you, Jessica. Good afternoon everyone and thank you for joining us. We issued two press releases this afternoon. The first announced our agreement with the United States Army to develop and commercialize the freeze-dried plasma product for battlefield applications. The second press release reported our financial results for the first quarter of 2014.

On today’s call, our CEO Howard Root will review the topline results and other key factors behind our first quarter performance. He will also provide some details on our freeze-dried plasma development program. Then our CFO, James Hennen will go through the financial details of the first quarter and provide guidance for the second quarter and full year of 2014. After that, we’ll open the call to your questions.

Before we get into the details, I’ll read the necessary preamble. This conference call is being webcast to the public and is completely open to members of the media, Vascular Solutions’ shareholders and other interested parties. Today’s conference call is a proprietary Vascular Solutions presentation and is being recorded by Vascular Solutions. No other recording, reproduction, transmission or distribution of today’s call is permitted without Vascular Solutions’ consent. This call is being audio simulcast on the Internet via our company website at www.vasc.com. A replay of the conference call will be available on the Internet shortly after this call is concluded through Tuesday, April 29. To listen to the replay, visit the Investor Relations section of our website.

Forward-looking statements made in the course of this conference call and webcast are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words used such as may, will, expect, continue or other similar expressions. There are certain important factors that could cause the company’s actual results to differ materially from those anticipated by the forward-looking statements as described in our Annual Report on Form 10-K and other recent filings with the Securities and Exchange Commission. Forward-looking statements are made based on our analysis as of today’s date and we undertake no duty to update the information provided on this call.

I’ll now turn the call over to Howard Root.

Howard Root

Thanks, Phil. Vascular Solutions delivered another very strong topline performance during the first quarter with 15% revenue growth which provides an excellent start toward our goal of delivering 11th consecutive year of double-digit growth in 2014. Our first quarter net revenue of $29.9 million was a new record for us and was in the middle of our guidance range for the quarter of between $29.5 million and $30.5 million.

Our geographic mix of product sales was 84% U.S. and 16% international with both our U.S. and international sales teams turning in very strong results. Our U.S. sales grew by 14% to $25.1 million while our international sales grew by 18% to $4.8 million.

In our largest product category of catheter products, first quarter revenue increased 15% to $19.2 million led by sales of our GuideLiner catheter. First quarter sales of GuideLiner increased 40% to $6.7 million. During January, our distribution partner Japan Lifeline began the market launch of GuideLiner in Japan.

As we had previously reported, in December, Japan Lifeline received both regulatory approval and a favorable reimbursement designation for GuideLiner with both taking effect January 1. We are very pleased with a strong uptick of GuideLiner during the early days of its launch in the substantial Japanese market.

Also during January, Japan Lifeline launched our SuperCross Microcatheter in Japan with a favorable reception which contributed to a 29% increase in SuperCross sales in the first quarter. In addition to the GuideLiner and SuperCross, other catheter products that contributed significantly to our strong first-quarter performance were the Guardian Hemostat valve and related Flamingo inflation device which grew 34% and recovery from the recall of these products that we had in the first quarter of 2013.

Our specialty guidewires for interventional procedures which grew 20% and our micro introducer kits which grew 16%. The Venture Catheter, which we acquired from St. Jude Medical during 2012, was relaunched in the U.S. in April of last year and in overseas markets in August. During the first quarter, Venture contributed $430,000 in sales.

Also in catheter products, after nine straight quarters of stable performance, sales of our Pronto extraction catheters experienced renewed competitive pricing pressures, particularly in overseas markets, which led to an 8% revenue decline during the first quarter to $4.7 million.

Our second-largest product category is Hemostat products which includes our thrombin-based patch products, D-Stat Flowable, and radial products. During the first quarter, hemostat product revenues increased 4% to $6 million. This growth was driven by our two newest products in this category, the Vasc Band radial hemostasis device and the Accumed wrist positioning splint both of which address the rapidly growing radial artery access market in the US. Combined, these radial products contributed just over $1 million in sales during the first quarter, an increase of 73% from last year’s first quarter.

Our third product category, vein products and services had a first quarter revenue increase of 31% to $4.7 million. Similar to last year, the driver of growth in vein products was our reprocessing of Covidien’s ClosureFAST varicose vein treatment catheter which contributed $2.7 million in revenue during the first quarter, which was an increase of 81% from $1.5 million in the first quarter of 2013.

In addition to our overall 15% revenue growth in the first quarter, we also continued to grow our operating leverage, which is inherent in our business model with our earnings-per-share increasing by 26%. While that was very good, we had projected even better earnings growth in Q1. However part of that leverage was offset by higher than expected legal expenses.

During the first quarter, our legal expenses were a total of $850,000 which was more than doubled what we had budgeted for the quarter. That variance cost us $0.02 per share on the earnings line. So without the over-budget legal costs, our earnings would have matched the top end of our guidance and the Street’s consensus estimate. The schedule for litigation activities is always uncertain which makes predictions of legal expenses very difficult to make. While we have always focused on containing legal costs, in the first quarter the work associated with our two complex legal matters occurred at the same time and therefore became more expensive than we originally estimated.

One of those legal matters is the patent infringement lawsuit that we filed in May 2013 against Boston Scientific for infringement of our patents related to our GuideLiner catheter. Obviously it is important to us to defend our intellectual property rights associated with our largest selling product against a clear imitation product.

As we reported in December, the U.S. District Court granted our petition for the highly unusual remedy of a preliminary injunction which stopped Boston Scientific's U.S. sales of its infringing Guidezilla catheter beginning on April -- or beginning on January 13. Boston Scientific as expected appealed this injunction and on April 15, the Federal Circuit Appeals Court vacated the injunction by ruling that the record is too incomplete at this stage to support the extraordinary remedy of a preliminary injunction.

The Federal Circuit ruling has no impact on the merits of the underlying litigation, which is currently scheduled to be ready for trial in March 2015. The appeal of the preliminary injunction and the start of discovery both occurred in the first quarter which resulted in legal expenses associated with the Guidezilla patent infringement lawsuit coming in higher-than-expected. Because of the accelerated timeframe of this litigation going forward, we now expect that higher legal expenses will continue through the remainder of 2014.

Concerning the related issue of the expected effect of Guidezilla’s return to the U.S. market on our GuideLiner sales, it's important to note that we faced Guidezilla competition for essentially the entire last half of 2013, and our sales force performed very well by continuing to grow our GuideLiner sales throughout the year.

In addition, our financial guidance for 2014 GuideLiner sales was set before the preliminary injunction was issued and therefore our sales guidance is unchanged by the recent Federal Circuit decision.

The second legal matter involves the whistleblower lawsuit initiated in 2010 and intervened in by the US Attorney’s Office for the Western District of Texas involving the Short Kit version of our Vari-Lase vein product. As we reported in February, we agreed to settle the civil lawsuit by agreeing to make a one-time payment of $520,000 while making no admission of fault or liability.

The written agreement memorializing the settlement has not yet been completed and signed and therefore the $520,000 payment was expensed in the fourth quarter of last year but remains on our balance sheet at the end of the first quarter as an accrued expense.

In addition to the expenses associated with working to settle the civil litigation, in the first quarter we incurred substantial expenses associated with the related criminal investigation, which is unaffected by the settlement of the civil litigation and is continuing. We have cooperated fully with every request by the US Attorney's Office, including providing approximately 1.5 million pages of documents and multiple employees to interview and provide testimony.

We obviously do not control this investigation and therefore this criminal investigation will have to run its course which we expect to continue with substantial expenses through 2014. Therefore for the full year, we now project that our legal expenses will be $4 million which is $2.3 million above our original forecast. This in turn will reduce our earnings per share for the year by $0.08 to $0.09 as James will describe in more detail later on this call.

Finally, regarding new products in development, our pipeline continues to be full. Our goal during the last few years has been to launch around 10 new products each year and right now we have approximately 40 new devices in various stages of development. As we indicated on last quarter's call, we have 12 new products that we intend to launch this year, all from our internal pipeline.

We also continue to pursue reprocessing of a second cardiovascular medical device with our reprocessing partner and we continue to view this as a significant commercial opportunity beginning in 2015. But we have no update on the status of this new reprocessing product at this time for competitive reasons.

The latest development in our new product front is a very exciting long-term opportunity. As we announced in a separate press release today, we've entered into an agreement with the United States Army to commercialize a freeze-dried plasma product for battlefield treatment of severe haemorrhage. This development program leverages Vascular Solutions expertise in the lyophilization of biologic products, a capability that has been built up over more than a decade and has already led to the commercialization of successful market-leading products such as our D-Stat and Thrombix topical hemostats.

Using that expertise, over the past two years, our Biologics R&D team has independently developed methods for freeze-drying and packaging human plasma and we have filed a U.S. patent application related to our system. In 2013 we presented the results of our development efforts to representatives of the U.S. Army and yesterday we signed a cooperative research and development agreement with the Army to bring the product to market.

Under the terms of this agreement, Vascular Solutions is responsible to establish manufacturing operations for the new product and provide chemistry, manufacturing and control information to support an investigational new drug application to the FDA.

On the other side, the U.S. Army is responsible to sponsor, manage and fund all preclinical and clinical studies for FDA regulatory approval. We expect the freeze-dried plasma to be viewed as a blood product under a biologics license application or BLA, and the U.S. Army is targeting a BLA submission in the 2018 to 2019 timeframe.

Once our freeze-dried plasma has been approved by the FDA, the Army will continue to purchase – will purchase quantities from Vascular Solutions and Vascular Solutions will have full commercial rights to sell the product to other branches of the military, to other government agencies and to private sector entities.

As background, currently the only plasma product available in the U.S. is fresh frozen plasma, otherwise known as FFP, which is difficult to handle and store in remote locations. As a result, the Army has made the development of a freeze-dried plasma, a major R&D priority for uses in locations such as military field hospitals and in battlefield situations. Early administration of plasma significantly reduces mortality in trauma patients and the deployment of freeze-dried plasma will undoubtedly save lives in military campaigns.

With respect to the civilian market, currently in the U.S. each year over 4 million units of fresh frozen plasma are being transfused in a wide variety of clinical settings. Principal civilian markets for a freeze-dried plasma product are, first-responder organizations such as lifelike [ph] providers and ambulance service companies with advanced life support capabilities and remote institutions such as rural hospitals and clinics.

Using conservative assumptions, we project that a freeze-dried plasma product could represent a $100 million in annual revenue opportunity for us with operating margins significantly higher than our corporate average. More broadly speaking, the Army collaboration agreement is a tremendous affirmation of our creative process in our development abilities. We are very proud to have been selected for this important undertaking and we remain committed to bringing to market a freeze-dried plasma product as well as a wide variety of additional important clinical solutions in all of our markets.

While we pursue these longer-term objectives, our business model is fundamentally sound and we believe we will continue to drive strong revenue growth and earnings leverage for the near term and for a long time to come.

With that, I’ll turn the call over to James.

James Hennen

In the first quarter, our gross margin was 68% and increased from 66.6% in a year ago quarter of 2013 as well as an improvement on a sequential basis from 66.5% in the fourth quarter of 2013.

Note that the reported gross margin in year ago first quarter included the impact of $550,000 in expenses associated with recall of our Guardian product. Excluding the impact of the Guardian recall, our gross margin in year ago first quarter would have been 68.7%. For the remainder of 2014, we expect the gross margin to be in the range of 67.5% to 68.5%.

Our first quarter operating income was $4.4 million, representing an operating margin of 14.6%. Without the impact of the $430,000 in over-budget legal expenses, our operating margin would've been just above 16% which is more consistent with our ongoing trend of strong operating leverage.

In the year ago first quarter, our operating income was $2.9 million which represented an operating margin of 11.1%. The year ago first quarter included the impact of our Guardian product recall. With that impact, our operating income would've been $3.7 million, corresponding to a 13.9% operating margin.

Looking ahead, we expect our operating margin to be around 17% in the second quarter and to average approximately 60% for the full-year. Those operating margin assumptions for the full-year now reflect our expectation of $4 million in legal expenses compared to our previous expectation of approximately $1.7 million.

During the first quarter, G&A expenses were $2.9 million or 9.6% of revenue compared to $2.2 million or approximately 8.6% of revenue in the year-earlier quarter. We expect G&A to remain at approximately 9% during the rest of the year, subject to variability and litigation developments.

Note that in recent years a typical level of G&A spending for us has been in the range of 6% to 7% and we’d expect to below these traditional levels once our litigation activities return to a more normal pace.

Sales and marketing expenses were $7.7 million or 25.9% of revenue compared to $7 million or 26.7% revenue in the year ago first quarter. Sales and marketing expenses remain a key leveraging point for improving our operating margin over time as more products are added to our relatively fixed cost structure of our US sales force and international distributor network.

At the end of the first quarter we had 96 field sales and sales management employees in the U.S. , a level that has remained quite steady since the beginning of 2008. We estimate that sales and marketing expenses as a percent of revenue will be approximately 24% in the second quarter and approximately 24% for the full year.

Research and development expenses were $3.3 million or 11% of revenue compared to $3.4 million or 13.1% of revenue in the first quarter of 2013. For the second quarter and full year we expect R&D as a percentage of revenue to be approximately 11.5% to 12.5%, including the cost of their freeze-dried plasma project.

Clinical and regulatory expenses were $1.3 million in the first quarter or 4.3% of revenue compared to $1.2 million or 4.5% of revenue in the year ago quarter. We expect clinical and regulatory expenses as a percent of revenue to remain relatively constant at around 4% in each of the remaining quarters of 2014.

The medical device excise tax was $345,000 during the first quarter compared to $317,000 in the year-earlier quarter. Amortization expense in the first quarter was approximately $412,000, and increased from $367,000 in the year ago quarter. We expect our quarterly amortization expense to remain at approximately $410,000 for the balance of 2014.

Income tax expense was $1.6 million on pretax income of $4.4 million representing the effective tax rate of 36%. In the year ago first quarter, our income tax expense was $763,000 on pretax income of $2.9 million reflecting the effective tax rate of 26%. The reduced effective tax rate in the first quarter of last year was due to the recognition of $300,000 in research and development tax credits that had been deferred from 2012.

For both the second quarter and full year of 2014, we expect the income tax rate to be 36%. For the full year we expect the income tax expense to be between $7 million and $7.3 million. Of this, we expect to be able to utilize $2.4 million of deferred tax assets to offset our tax payments, resulting in the use of between $4.6 million and $4.9 million in cash to pay state and federal taxes in 2014.

First quarter net income was $2.8 million, an increase of nearly 32% from $2.1 million on a GAAP basis in the year ago quarter. Net income in the year ago first quarter adjusted for the impact of the Guardian recall was $2.6 million.

Earnings per fully diluted share was $0.16, an increase of 26% from the year-earlier $0.13 on a GAAP basis which included the effects of the Guardian recall. Without the overbudget legal expenses, earnings-per-share in the first quarter would have been $0.18, we had guided to $0.17 to $0.18.

The total number of shares used in calculating fully diluted earnings-per-share were 17.5 million in the most recent first quarter compared to 16.7 million a year ago.

Turning to the balance sheet and cash flows. During the first quarter, we generated just under $4 million in cash from operations. We used cash of approximately $1.3 million for capital expenditures, and $1.8 million to purchase shares that vested under outstanding restricted stock awards to satisfy income tax withholding requirements.

In 2014, we expect to generate cash from operations of just over $19 million. We estimate that capital expenditures for the year will be approximately $15.6 million, including our previously announced plans to acquire our manufacturing facility later this year for $7.2 million and $3.5 million in improvements to that facility. We expect the facility acquisition will reduce our annual cost of occupancy by around $350,000 on an after-tax basis starting in 2015, resulting in approximately $0.02 per share of earnings accretion.

Our days inventory in hand at March 31 was 150 compared to 141 at the end of December. We expect our days inventory in hand to remain in the range of 140 to 150 days during the remainder of 2014, with a projected inventory balance of approximately $16 million at the end of the year.

Accounts receivable days sales outstanding were 51 at March 31 compared to 48 at the end of December. We expect our days sales outstanding ratio to remain at this level for the remainder of 2014.

Now I’ll turn to the financial guidance. Starting with the full year we're maintaining our revenue guidance of between $121 million and $125 million. At the midpoint of that range, our growth would be approximately 12% over the $110.5 million in net revenue we reported in 2013.

Due solely to the legal expenses, we're revising our full-year EPS guidance to a range of $0.71 to $0.75 per share which at the midpoint represents growth of just over 12% from 2013 GAAP earnings-per-share of $0.65. Previously our guidance range was $0.79 to $0.83 per share. We are projecting a 36% income tax rate in 2014 compared to 31% last year. A lower tax rate in 2013 was a result of high level of stock option exercises and the recognition of R&D tax credits that have been deferred due to congressional delay at the end of 2012.

Included in our EPS projections for 2014 are $3.6 million of non-cash stock-based compensation, $1.6 million in amortization of intangibles and between $1.4 million and $1.5 million for the U.S. medical device excise tax.

For the second quarter, we expect revenue of between $30.2 million and $31.2 million. At the midpoint that represents growth of 12% compared to the $27.4 million reported in the second quarter of 2013. Our EPS guidance for the second quarter is to be between $0.18 and $0.19 per diluted share compared to $0.17 in the second quarter of 2013.

Included in the EPS projections for the second quarter are $1 million in legal fees, $800,000 of non-cash stock-based compensation, just over $400,000 in amortization of intangibles, approximately $370,000 for the U.S. medical device excise tax and a 36% tax rate.

With that, I will turn the call over to the operator for the question-and-answer portion of our call.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Tom Gunderson with Piper Jaffray.

Tom Gunderson – Piper Jaffray

My two questions are in the same umbrella and it’s on the Army contracts. I am just curious on two points; one, how does it if at all affect the income statement for 2014 going forward, do you have to hire any new people or are there capital expenses et cetera and as well as cash flow in the income statement? And then second is on the BLA, you said that the Army will submit that, the Army’s BLA, how does the contract work that you can sell this commercially to civilian enterprises if it’s the Army's BLA?

Howard Root

Okay, well let me take the second one first on the BLA. So it's a cooperative development agreement and so what we have done is that, here is what Vascular Solutions is going to do, here is what the Army is going to do. And what we do is develop the product and do the bench testing for the product. The Army agrees to do all the preclinical testing, the animal testing and what else is required, and then the clinical testing, not only do they fund it but they also actually have to contract that out for someone to perform that, and then that module along with our module goes into the BLA which is filed with the FDA but it will be Vascular Solutions filing the BLA, so it will be our approval.

And beyond that actually there is -- that's for the battlefield trauma indication not to quote it exactly but it's in that area. The Army has also agreed to do a Phase IV study to actually sponsor and pay for that, that allows us to broaden the application to all civilian use, there’s another broader indication after that. So with the original approval we will start selling it to the Army and the Army will contract to purchase a certain minimum number of units every quarter. We will also be able to sell it to the other branch of the armed forces and homeland security, as you can imagine there is other uses for this in the military and government. And we will be able to sell civilian for that indication and then we get the broader indication, we would be able to go for broader sales. But Vascular Solutions owns all commercialization rights, we own the product and the government, the Army is performing that clinical study for our behalf. And the Army will be there at the FDA as on our side of the table arguing, or not arguing but presenting for the IDE and then the BLA.

On the first part of that, keep in mind that we’ve been working on this for two years. I mean sometimes we don't say everything that goes in the R&D. So our biologics guys have been working on it for two years and that R&D cost is already in our R&D expenses over the last two years each quarter. Going forward we look at this as being no more than $100,000 of expenses per quarter and we’ve been expensing somewhere in that range already. So this will not be a material or even a noticeable increase in our R&D expenses, then when we get to the clinical study again the government is performing all that, the animal study as well. We have the submission fee which is a couple hundred thousand dollars for that in the 2017-18 but that’s pretty far out. And then in 2016-2017 we will have some capital expenditures to scale up. We already have all the equipment purchased for the small-scale for doing the bench testing and the clinical study. So we’ve got all the capital equipment already purchased here and we’ve set up the facility here to do that and then it will be the commercial scale with a new facility that would have to be in that 2016-2017 timeframe.

Operator

We will go next to Jason Mills with Canaccord Genuity.

Jeff Chu - Canaccord Genuity

Hi, this is actually Jeff Chu filling in for Jason. Thanks for taking the questions. My first question is related to your sales force, so if I heard correctly, I heard you are at about 96 sales personnel at this point. I was wondering as you move through the year and add more products to the product bag, I heard about 12 for this year, what does the productivity per rep look like? And I guess the question is when you get to a point where you need to add more sales personnel?

Howard Root

Well let me answer kind of the strategic, and then James could give you the numbers on that one. As far as the hiring a little bit of increase, we have hiring classes, we had a hiring class in March, so we hire and then there's some attrition throughout the year. So we have been in that 90 to 95 range and there is no intent to bring that up right now for the foreseeable future but it will fluctuate, might get to 96, 97, might go down to 91 or 92. The number of products we launch, as long as they are all to the same target markets, the same sales force will cover it and we purposely not try to go into a new physician specialty, like we’ve got vein practices, we’ve got cardiology, radiology, electrophysiology and that's pretty much the target markets and all those products we have in the pipeline are being sold into those markets. So there is really no need for us to do it and there is really no plan for us to do it.

As far as the productivity for sales rep, James, you can give those numbers.

James Hennen

Right, so in the most recent quarter, our productivity was $300,000 in US sales per US sales rep which was an increase of about 10% over Q1 of last year. So we would expect, as Howard said, we’re going to remain at about that sales force levels. So we’d expect to continue our productivity even though as we add more products on there, we’d expect the sales force to continue to sell those number of products and increase the productivity on a quarter over quarter basis.

Howard Root

The productivity is per sales rep, quota carrying sales rep, the 94 includes our field management as well. So if you do the numbers, there is regional managers and a few retail specialists in there as well. My mistake, sorry about that.

Jeff Chu - Canaccord Genuity

Great. I guess my second question is related to your hemostat business. Just wondered if you could talk a little bit more about the radial products, particularly Vasc Band and Accumed you mentioned about $1 million in combined sales or just over million dollars, just a incremental increase sequentially from last quarter and just wondering how we should think about the trends in these products going forward and for the balance of 2014?

Howard Root

Yes, I think of all our markets the radial access market is probably the fastest growing, we did a million in combined sales of wrist splint and Vasc Band and that was a 73% increase from first quarter of a year ago. We have some new versions of the Accumed wrist splint coming out, we’re just kind of in initial evaluations of those and we have some other ones probably towards the end of the year. We think that will grow that product. We’ve also continually improved our Vasc Band with more sizes and more features on that and we’ve done a nice job with that. We went through the litigation obviously with the Vasc Band that set us back a little bit and now we made a new push going forward as that's all settled and taken care of.

So at a million a quarter, 4 million a year, we look at this, it should be a $10 million product mix for us, we have some other products going into that as well, not by the end of this year but we still see above average percentage growth for the rest of the year. And I think that will continue into 2015 as well.

Operator

(Operator Instructions) And we will go next to Ben Haynor with Feltl and Company.

Ben Haynor – Feltl and Company

Just on the $100 million figure that you referenced for the potential market, for those new plasma products, does that include the civilian use as well, or is that just solely the military use?

Howard Root

No, that includes our expected civilian use. The current U.S. market for fresh frozen plasma is 4 million units and so that’s a little larger than the $100 million market but we understand and everybody knows that freeze-dried plasma will only take a part of that, and actually will grow the market for plasma because in cases where they can't use, they only have freezers, where they can’t wait 30 minutes in order to thaw the frozen plasma, we just don't use plasma. So we will be expanding that. So we’re taking a portion of the civilian market, a small portion we’re figuring and increase the civilian market for the rural hospitals and military, airlift transportation ambulances and the life support helicopters and planes. And then another good chunk of that is military starting with the Army and adding the other branches, all U.S. obviously, no international. But the $100 million includes both civilian and military applications of the product.

Ben Haynor – Feltl and Company

And then on the assumptions for the pricing of the product, would it be pretty similar for both – or the multiple parties that you would be selling into the military and then all civilian use market?

Howard Root

It may be similar, and we haven’t really gotten any fine-tuning and we are not going to give out pricing for products six years in advance or five years in advance. But there may be some differences between the civilian and military market as well. The Army has really fast-tracked this and they are really pushing it. I mean one thing that’s impressive is how quickly the Army has turned around – not turned it around but turned around any request we’ve had for information and worked collaboratively with us in order to get this on. So they are -- it's a top priority. I mean keep in mind, if you go to the history of freeze-dried plasma, the U.S. Army had this time and 1969 was the last time they had it, that was in the Vietnam War obviously. They pulled it off the market because hepatitis had crept into the U.S. blood supply and as a result, there was just unacceptable risk of hepatitis transmission through the use of freeze-dried plasma into the pool source, they took one big batch and they made it in freeze-dried plasma. What we've been able to do is figure out how to do single source donor units and we've also been able to do some screening obviously of the plasma to make sure that communicable diseases aren't in the supply.

And then our guys have figured out how to do the freeze-drying. So when we look at all that the Army sees value in that and we’re going to negotiate first with the Army on the price for the purchase of the freeze-dried plasma. And then we will be looking at the civilian market secondarily to set a price that’s acceptable for that, and the Army knows that it's all acceptable. So we’re going to have a two-step approach on pricing.

Operator

And we will go next to Larry Haimovitch with Haimovitch Medical Technology Consultants.

Larry Haimovitch - Haimovitch Medical Technology Consultants

So Howard, or maybe Phil or James, doesn’t matter I guess, talk a little bit more about the potential for GuideLiner in Japan, obviously you’ve got the approval now, I have seen they’re off to a good start. I don’t know if you mentioned in the conference call, is pricing higher as typically through in Japan compared to the US and how do you view the market potential of Japan versus the US?

Howard Root

If we look at it – I will take it -- if you look at the Japanese market, it's the third largest market for interventional cardiology products in the world and it’s a substantial market particularly for products used in challenging interventions. As you know the Japanese market has an aversion to open heart surgery. So any case that can be done percutaneously is done percutaneously and the GuideLiner is used in challenging interventions. So those are the ones where you're going to get a lot of cases in Japan.

Our distribution partner who we worked with and dealt with for 10 years now, on other products, little products and now this is the first real opportunity, it’s a real good match for us and they’ve done full training, we’ve sent our people over there and they approach the market in the right way. The first quarter sales, we’re getting things started, I think it was February when the first cases were being done or maybe late January, and we’re just getting started and getting it out through that distribution system. You also I am sure know the Japanese system is fairly fragmented with distributors and sub-distributors and lots of people involved in the process. So we’re just barely getting started and did nice things in the first quarter.

Where we see that growing is that I don't have a number for you but I can say this is where it should be. But definitely that's going to be the number one driver for GuideLiner here through the rest of this year in terms of additive sales on top of an already established US presence and continuing to grow in other international markets as well. As far as pricing go, the Japanese market used to be the Cadillac market, they've come down quite a bit in pricing and since we have a distributor it's more in the realm of normal distributor pricing. So there's no windfall there by any means for selling into Japan as there may have been 20 years ago with heart valves or other products that I was aware of.

Larry Haimovitch - Haimovitch Medical Technology Consultants

And then a follow up question, is there a competition, like is Boston in that market for example?

Howard Root

Yes, right now we’re the only guide extension product in Japan, there is obviously with the Guidezilla product back on the market and coming back in the U.S. I’d expect to see that some time I mean soon or if not, as soon within this year and we’ve built that into our forecast model as well. But it's nice to have the monopoly in an exciting, almost clinically needed product. It happens very rarely, we’ve had it for three or four years. But our organization is well-suited to dealing with competition and that's what we expect to do with the GuideLiner here in 2014.

Operator

(Operator Instructions) Mr. Root, at this time I am showing no further questions. Please continue with your closing remarks.

Howard Root

Well, I want to thank everyone for participating on the call. As a reminder, we have our annual shareholders meeting next week, for everyone in Minneapolis who can make it to that, as well as you can tell from this call that we’re extremely excited about the freeze-dried plasma. It’s a great project for us, not only for the business and for the financial but I think most importantly for what it can do and the benefit it can bring to the U.S. Army. So it's a great testament to what we’ve built the Vascular Solutions and I look forward to continuing doing these kind of things for as long as -- as long as we can and we will continue to do it for many years to come. So thanks and we will talk to you soon.

Operator

Ladies and gentlemen, that concludes the conference for today. Thank you for participating in Vascular Solutions first quarter conference call. You may now disconnect.

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