Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cryolife Inc. (NYSE:CRY)

Q1 2014 Earnings Conference Call

April 29, 2014 10:00 AM ET

Executives

Steven Anderson – Chairman, President and CEO

Ashley Lee – EVP, COO, CFO and Treasurer

Analysts

Tom Gunderson – Piper Jaffray

Jeffrey Cohen – Ladenburg Thalmann & Company

Joe Munda – Sidoti & Company

Operator

Greetings and welcome to the CryoLife Corporation First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your hot Steve Anderson. Thank you, sir. You may begin.

Steven Anderson

Good morning, everyone. This is Steve Anderson, CryoLife’s CEO, and I would like to CryoLife’s Q1 2014 conference call. With me today is Ashley Lee, the company’s Executive Vice President, COO and CFO.

Today the company reported record revenues of $35.7 million for the first quarter of 2014. Earnings for the first quarter were $0.04 per share, HeRO Graft sales were up 26% year-over-year. Cardiac allograft revenues were $7.2 million an increase of 8%.Vascular allograft revenues were $9.1 million an increase of 1%. Ashley we’ll get into the details of these numbers during his financial remarks.

The agenda for today’s call is as follows. Ashley will discuss the company’s first quarter results by product. He will discuss the completion of the distribution agreement and purchase option with Hancock Jaffe for their vascular graft product that compliments the HeRO Graft. Ashley will comment on the recent FDA inspection and the result and Form 483 that we received.

I will discuss the filing of our motion for a declaratory judgment to obtain the courts confirmation that PerClot technology does not infringe on Bard patent. I will discuss the FDA clearance of our 510-K application for PerClot Topical and the marketing launch date this Topical product in the US.

I will discuss the IDE PMA clinical trial for PerClot to use internally. I will also discuss the opening of the sales and service center in Singapore. At the conclusion of my comments Ashley will return to give you some financial guidance for the rest of the year.

At this time Ashley will review and comment on today’s earnings release.

Ashley Lee

Thank you Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement. Comments made in this call that look forward in time involve risk and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, including the guidance for 2014 that I will provide in a moment.

Additional information concerning risk and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company’s SEC filings, including the Risk Factor section of our Form 10-K for the year ended December 31, 2013 and our Form 10-Q for the first quarter of 2014 which we expect to file shortly and in the press release that went out this morning.

This morning we reported our results for the first quarter of 2014, we continue to make progress on executing our strategy to leverage our established sales force to drive growth of an expanding portfolio of high margin medical device products. We are pleased with our results from that perspective in the first quarter.

We achieved record first quarter revenues of $35.7 million driven by 26% year-over-year revenue growth from the HeRO device and 4% growth in tissue processing. The following factors influenced our revenue performance.

Our domestic revenues were up 3% for the first quarter of 2014 compared to the prior year period led by a 23% increase in HeRo revenues. And a 12% increase in cardiac tissue processing revenues. Our international revenues were down 7% for the first quarter of 2014 compared to the prior year period primarily due to the timing of shipments to international distributors.

More specifically Japanese BioGlue revenues grew over $800,000 higher than the first quarter of 2013 as compared to the first quarter of 2014. For the full year of 2014 we expect BioGlue shipments to Japan to exceed those in 2013.

Our first quarter revenues included 8% year-over-year growth in our European operations. Our international operations outside of Europe were down driven primarily by the timing of orders from our Japanese distributor.

Our international markets continue to represent an attractive growth opportunity for the company and following our expansion into Asia-Pacific and South America, we will be going direct into Switzerland in the second quarter. Domestic BioGlue units shipments increased year-over-year for the third straight quarter. For the first quarter of this year BioGlue domestic revenues increased 5% on a 2% volume increase.

Revenues from the sale of the HeRo graft increased 26% to $1.6 million in the first quarter of 2014 compared to $1.3 million in the first quarter of 2013. The increase reflects the growing interest in the HeRo Graft as a long term solution for hemodialysis patients who are out of access options.

In March we hosted our third symposium focused on durable dialysis access in patients with central venous stenosis. We have about dialysis professionals attending this event. We believe this symposium will help to continue to drive interest in the HeRo Graft over the course of the year although it had limited impact on the first quarter results due to the timing.

Internationally we continue with our launch into European markets. Overall we remain very optimistic about the prospects of the HeRo device. PerClot sales increased 6% for the first quarter of 2014 compared to the first quarter of 2013. The increase is due to growth in both the new geographies and new indications including neurology and neurosurgery.

We continue to remain very optimistic about the positive impact that PerClot will have on our business in the future. Tissue processing revenues were up 4% for the quarter compared to the prior year despite the limitations placed on our ability to ship tissues into the EU.

Our tax rate for the first quarter was infected by the non renewal of the federal R&D tax credit. If the credit is renewed this year we expect that our effective tax rate for the full year will be in the mid 30% range.

As of March 31 2014 we had $38.4 million in cash, cash equivalents and restricted cash and securities. Our balance sheet remains very strong, we continue to carry no debt and generate strong cash flow.

We are pleased to be able to return a portion of our profits to shareholders while continuing to build shareholder value through our dividend, our share buyback program and our investments in organic and acquisition growth opportunities.

I also have some additional comments. As we previously disclosed in our 2013 10-K in February and March of this year the FDA re-inspected our main headquarters manufacturing and processing facilities. Following this re-inspection we received Form 483. We responded on a timely basis to the FDA. And while we believe we’re well positioned to address their concerns we are taking these observations very seriously. We have follow-up meeting with the FDA within the next couple of months to review our response. We will update you as appropriate when we have further information.

We will incur some additional cost but operating in capital as part of our response to address the FDA’s concerns but don’t believe that this cost will have a material impact on our financial statements. We also believe that the changes we have and will implement will adequately address the FDA’s observations.

In March we announced that we had obtained the distribution rights and a purchase option for ProCol Vascular Bioprosthesis from Hancock Jaffe Labs. ProCol is a biological vascular graft derived from bovine mesenteric vein that is used for vascular access in patients undergoing hemodialysis.

It is one of two biological vascular grafts improved for distribution in the US. As a remainder ProCol provides vascular access for earlier stage ESRD patients while HeRo is designed for patients with limited access options in central venous obstruction.

As part of this transaction we obtained a limited number of ProCol grafts for distribution. We will use that inventory to support current customers while we wait for Hancock Jaffe to complete the FDA requirements for their new manufacturing facility. When they have completed those requirements they will be in a position to deliver newly manufactured product to us. And we will have a full commercial launch in the US.

We expect that to occur during the second half of this year when that occurs we will update our financial guidance as appropriate. Please refer to our SEC filings for detailed discussions and factors affecting our results of operations including our Form 10-Q that we plan to file shortly.

Now I will turn it over to Steve.

Steven Anderson

On April 3rd the FDA cleared our 510-K submission for PerClot Topical powdered hemostat. This clearance allowance CryoLife to begin commercialization of PerClot hemostatic powder throughout the United States. The approved intended usage for PerClot include used as a topical dressing for the temporary treatment of a mildly bleeding wound such as surgical wounds for the treatment of mild bleeding from topical EMT surgical wounds. And for the control of bleeding from the skin at percutaneous needle access, vascular access and percutaneous catheter access sites.

I like to reiterate some points I’ve made in the past regarding the comparison of the CryoLife product PerClot Topical with the bard product Arista. PerClot Topical absorbs four to five times the amount of water Arista absorbs.

PerClot also absorbs water twice as fast as Arista and PerClot forms a much more robust gel than Arista does. There is a film on our website that confers the activity of each product in a head-to-head timed experiment using water. I would encourage you to look at the film. We will market PerClot through our 54 person direct sales force in the US. These sales force will be augmented by manufacturers, reps, who previously sold hemostatic powders.

This will give us a unique hybrid in sales force. We will be focusing initially on the E&T market with PerClot Topical. We estimate the US market to be about a $100 million for a product with the indications of PerClot Topical.

In the future we expect to realize the gross margin north of 85% for PerClot Topical once manufacturing is fully ramped up. We intend to launch this product in the US on June 1st of this year. It is important to note that we also have an approved IDE for the clinical evaluation of PerClot for use as an internal hemostatic agent.

PerClot Topical and PerClot powdered material are the same but are regulated differently because of how they will be used. The IDE trial will be conducted at up to 15 centers throughout the US and includes multiple therapeutic areas. There will be 324 patients enrolled in the trial.

The FDA suggested that we have 162 patients in the PerClot test group and a162 patients in an Arista control group. This is the head-to-head prospective randomized trial. We are currently working toward institutional review board submissions to initiate enrollment in July of 2014.

We could potentially receive PMA approval from the FDA by the end of 2015. We believe that the US market for a powdered hemostat that addresses internal surgical uses is currently about $780 million a year growing to approximately $915 million by 2016.

Over the past few months we have also received import licenses for PerClot in Panama and South Korea. In 2012 Metaphor notified us that they believed our PerClot technology infringed on a patent they had on powdered hemostat technology. As a result of that company’s subsequent to Bard, their patent on powdered hemostats now belongs to Bard.

Given Metaphor’s previous allegations and the recent positive developments regarding PerClot we made the decision to file an action asking United States district court in Delaware to confirm our strong belief that sales of PerClot will not violate the Bard patents or in the alternative that the Bard patterns are invalid.

Declaratory judgment patent proceedings are expensive and sometimes lengthy and we would expect that it would take two to three years for the court to rule in this case. We expect 2014 expenses for this litigation to be approximately $1 million to $1.5 million. For more information on this issue please consult our 10-Q.

In March we announced that we had opened a regional headquarters which will serve as a sales and service center in Singapore. This is in response to our growing business in Pacific Rim countries. This office run by Richard Gridley of our staff will support our business in Southeast Asia, Australia, Japan, Indonesia and direct our joint venture in China with BioGlue Surgical Adhesive.

That concludes my comments. And now I will turn the call back to Ashley for some financial guidance going forward.

Ashley Lee

We are reiterating our guidance for the full year of 2014 with the exception of the effects of the previously mentioned declaratory judgment action we filed with respect to PerClot. We expect total revenues to be between $146 million and $150 million. This represents annual total revenue growth of 4% to 7%. We expect revenues from our higher margin product segment to increase in the mid to high single-digits on a percentage basis for the full year of 2014.

As a reminder this does not yet conclude any consideration from the ProCol agreement. We expect tissue processing revenues to increase in the low single-digits on a percentage basis for the full year of 2014 compared to 2013 including the voluntary discontinuation of the allograft tissue shipments into Europe beginning in April of this year.

We expect research and development expenses of between $11 million and $12 million in 2014, primarily reflecting our investments in our U.S. clinical trials for PerClot. We expect earnings per share for the full-year of 2014 of between $0.17 and $0.20 down from our previous range of $0.21 and $0.24 per share. The decrease compared to our original guidance is primarily due to the estimated anticipated legal expenses related to the declaratory judgment action.

The decrease in EPS as compared to 2013 is primarily result of the increased R&D spending on our PerClot clinical trial which we expect to begin enrollment in, in the near future as well as the litigation expense. It is important to note that our guidance does not reflect activities related to business development and potential share repurchases which are difficult to predict.

We believe that we’re continuing to execute to service successfully on our strategy of positioning the company for accelerated revenue and earnings growth by expanding our addressable market opportunities through internal R&D expanding and leveraging our sales and marketing platform and executing on business development opportunities such as the ProCol transaction.

The acquisitions that we have made recently are producing accelerating revenue growth and we look forward to those contributions expanding as the revenue base grows. Looking forward we believe that we have several opportunities to expand the company’s market opportunity for higher growth, higher margin products. These include one, continue to draw revenue growth in the HeRo device through the launch by our broader US direct sales force, our CVP Summit and other marketing events aimed at raising product awareness and a market launch in Europe.

Two initiate enrollment in our PerClot IDE clinical trial and drive the US adoption of PerClot Topical for ENT following our recent 510-K approval. Three drive adoption of the ProCol Vascular Bioprosthesis once Hancock Jaffe completes the FDA’s requirements for manufacturing. Four, seek expanded indications for BioGlue and PerClot in international markets. And five continue to evaluate and capitalize upon strategically appropriate business development opportunities.

If we execute on these initiatives we will be in a good position to drive top line growth on our higher margin medical products and further leverage our operating infrastructure to improve the profitability.

That concludes my comments. And I’ll turn it back over to Steve.

Steven Anderson

At this time I will open up the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from the line of Tom Gunderson with Piper Jaffray. Please proceed with your question.

Tom Gunderson – Piper Jaffray

So first just a housekeeping one Ashley on BioGlue I think you said it was up 5%, 2% on volume. Did you have a price increase at the beginning of the year or is that product mix differences?

Ashley Lee

That was 5% domestic increase Tom. And we did have a price increase on July 1, of last year. It was more the volume obviously helped us with the revenue increase but I don’t think there was really a big change and product mix, it was just more volume driving it along with the price increases.

Tom Gunderson – Piper Jaffray

Got it thanks. And then more to the point the PerClot headline kind of surprised this morning and then you figured out it’s not the PerClot that you are seeking a PMA on. It’s a Topical in your description you said it’s the same product. Is it packaged the same, delivered the same, is it, if you had PMA approval would it be 1 SKU on the shelf or would it – does it look different to the customer?

Steven Anderson

It will eventually look different, the package that’s on the shelf right now says PerClot Topical. And however it is packaged the same and it is really the same product it’s just that the FDA regulates it differently depending on where you use it. So, since if you’re going to use it internally they expected us to do an IDE PMA. Interestingly they consider ENT surgery to be topical. So that’s an area that we’re very keenly interested in.

Tom Gunderson – Piper Jaffray

So Steve some of the competitors in that zone deliver the hemostatic agent through gauze or a plug or some sort of thing that can go up into the sinuses of which part of ENT surgery is, is that something that would be done in the – or by doctor are you thinking of maybe delivering it sometime in the future through other methods?

Steven Anderson

It would be done by the doctor but I know that in the ENT a surgery along the post operative care is done by the physician’s assistants. So both parties would be using the product, it comes in a small bellows and the powder can be ejected out of the bellows by squeezing the bellows. We also have extender tips that go along with it extender tips of different lengths so you can access the sinus cavity with those extender tips quite easily.

Ashley Lee

Tom the existing configuration of PerClot has been used successfully many times in ENT surgeries in Europe.

Tom Gunderson – Piper Jaffray

And so just go back to the beginning I want to make sure my assumptions are right but this is FDA regulations 510-K, PMA topical versus internal but essentially the FDA are at least one arm of the FDA said that PerClot this configuration is a safe product to use on the human body so I’m thinking –

Steven Anderson

They have – they are not commercially used in the United States.

Tom Gunderson – Piper Jaffray

Got it I mean if they had any safety issues they would have brought them up and so the assumptions that investors might or could make is at least from a safety standpoint. Your PMA is a little bit more visible as far as approval today than it was last week.

Steven Anderson

Yeah Tom on the IDE PMA for the surgical product that’s really going to be focused on both the safety and the effectiveness. The 510-K clearance all over the pre-clinical animal work and we’ve been testing that we submit it to the FDA suggest that they made the determination of the product that’s safe to use and so we will again commercializing on June 1st.

Tom Gunderson – Piper Jaffray

Got it, thanks. And then last you didn’t mention whether, I’m just curious whether the bad weather that we experienced this winter –

Steven Anderson

Yeah we had big problems in Atlanta. In other areas of the United States, we think that causes probably $750,000 in lost sales.

Tom Gunderson – Piper Jaffray

Sales Steve, sales that you’ll make up or sales that are just on?

Steven Anderson

Hard to know.

Tom Gunderson – Piper Jaffray

Okay thanks. That’s it for me guys.

Operator

Thank you. And your next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann & Company. Please proceed with your question.

Jeffrey Cohen – Ladenburg Thalmann & Company

So just as one follow-up on the Topical approval would that be a separate line item or that will just following the PerClot as one-line item?

Ashley Lee

It will probably follow new PerClot.

Jeffrey Cohen – Ladenburg Thalmann & Company

Could you talk a little bit about the revascularization line item in revenue for Q1 and any general trends you’re seeing?

Ashley Lee

Depending obviously the number was below where we expected it to be. If you compare it to the fourth quarter of 2013 Jeff our handset volume was actually relatively flat compared to the fourth quarter of ‘13. We actually benefited from some laser console sales. And the fourth quarter of ‘13 but excluding that the first quarter was relatively flat compared to the – fourth quarter 2013. Now with that being said the business is not where we wanted to be.

We think that, we lost some momentum with the product line when we had and when we introduced a new handset in July of last year. And quite frankly we are, we had not yet recovered some of that momentum that we had. If you look at the month of April of this year it’s been pretty strong in regards to handset purchases and volume. So we’re optimistic there that we’re going to get the business turn back around.

Jeffrey Cohen – Ladenburg Thalmann & Company

Okay turn back around meaning I know you don’t provide specific guidance but turn back around meaning revenues in excess of 2013 for 2014?

Ashley Lee

For handsets the answer is yes. I think that we guided, I’m going to give specific guidance on TMR but we’re expecting that revenues will increase year-over-year.

Jeffrey Cohen – Ladenburg Thalmann & Company

Okay so for ProCol do you anticipate for Q2 that you’ll have a new product line item working out for ProCol specifically because I’m assuming you have a couple of few hundred veins and valves ready to be sold?

Ashley Lee

That is correct now some of that is short dated inventory but we are beginning to distribute ProCol reps in the second quarter. We don’t anticipate that we are going to have a significant volume of revenues until Hancock Jaffe has gotten their PMA supplement and we get newly manufactured product. And we can have a full commercial launch. We don’t anticipate that to happen until the second half of this year. it depends on how material the product line becomes as to whether or not we have a separate line item in our financial statements that we filed with the SEC but we will be reporting on our progress with ProCol in our full year conference call. So you’ll have some insight on a quarterly basis as to what our progress is.

Jeffrey Cohen – Ladenburg Thalmann & Company

Sure and maybe under other until it becomes its one line item.

Ashley Lee

That’s correct.

Jeffrey Cohen – Ladenburg Thalmann & Company

Okay and you do expect that the Hancock Jaffe manufacturing facility will be up and running and turning our product by the end of ‘14?

Ashley Lee

That’s our expectation. Yet again they have to get a PMA supplement from the FDA they have recently restarted their manufacturing and as we, when we get to our next quarterly conference call hopefully we’ll have more insight as to what the exact timing is, as to when we expect to launch that product but we think it’s a great opportunity for the company. It’s very complimentary to both of allograft vascular program as well as the HeRo device if you look at the other competitive product that’s out there in space right now, the other biological graft according to IMS they, they had over $11 million in revenues last year, shipped over 10,000 grafts and the business grew at 30% on the top line. So we think it’s a very pretty attractive market for us to be in.

Jeffrey Cohen – Ladenburg Thalmann & Company

And one more if I may if you could discuss little bit about the PMA status and timeline. So you’re expecting that the trial for PerCoat will start at July. And could you walk us through number of centers as the –

Steven Anderson

Yeah there are 15 centers and there are multiple indications for that and cross multiple specially. So I’m of the opinion that the enrollment will move pretty quickly.

Jeffrey Cohen – Ladenburg Thalmann & Company

Pretty quickly is six months approximately?

Steven Anderson

I do, I think the enrollment that we started July when we surprised finished with enrollment by the end of the year.

Jeffrey Cohen – Ladenburg Thalmann & Company

Okay and will you be discussing an realizing data to talk about prior to filing?

Steven Anderson

We really hadn’t made that determination yet Jeff it just depends on the progress that we make.

Jeffrey Cohen – Ladenburg Thalmann & Company

Okay but at this point no change in the timeline you’re still looking for a PMA approval by the end of ‘15?

Steven Anderson

Yes.

Operator

Thank you. And our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed with your question.

Joe Munda – Sidoti & Company

Just a quick follow-up on ProCol I was just wondering if you could give us some sense of what possibly the gross margin could be when the production is ramped up at the facility? Any sense of that would be very helpful.

Ashley Lee

Initially Joe we are going to be distributing the product and then we have an option to purchase the product line beginning in month 25 of the agreement. So –

Joe Munda – Sidoti & Company

Yeah you have that three year, you have a three year window and then it says in options for each year afterwards is a one year option correct?

Ashley Lee

That’s correct. It’s to renew the distribution agreement. So during the distribution phase of the agreement we think our margins are going to be in the mid 50% range based on the transfer price that has been established. If we are successful with the product line and we exercise our purchase option and bring the manufacturing in house, we believe that at some point we could easily see 70 plus percent gross margins for the product.

Joe Munda – Sidoti & Company

Okay and as far as the quarterly payments of $2.3 million. I’m a little confused here when is that going to occur and how is that going to accoutered for?

Ashley Lee

Okay. We are going to be paying approximately $2.3 million in quarterly installments. And we have a budget essentially that we’re utilizing to guide us, us to what the amounts that we’re going to pay on a quarterly basis. The payments that we’re making are by and large prepayments for inventory. So where you’re going to be seeing those payments manifest itself in our financial statements is predominantly in inventory.

Joe Munda – Sidoti & Company

Okay that’s helpful. And then Steve as far as the patent infringement, I know you guys spoke a little bit here about that. And you gave us some good guidance as far as what the litigation you expect to pay in ‘14 of 1, 2.5 million is that number a baseline number to work off for 2015 or do you think it could ramp higher as we progress?

Steven Anderson

It might ramp higher. That’s our best estimate for this year. But I have been told its quite expensive going forward in patent litigation.

Joe Munda – Sidoti & Company

Okay and then I guess my final question as far as what went on Japan. You guys are saying that it was basically just timing issues and those sales should recover going forward is that correct?

Steven Anderson

Yeah absolutely it’s just the ordering patterns from out distributor based on – our discussions with them. And we totally believe that the ‘14 revenues to Japan are going to be higher than the ‘13 revenues?

Joe Munda – Sidoti & Company

Okay. Thank you.

Operator

Thank you. And that does conclude today’s Q&A session. I would now like to turn the floor over for closing comments.

Steven Anderson

Thank you everyone for joining us. And we look forward to meeting with you at the end of the second quarter.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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!

Source: Cryolife's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts