Cardica's CEO Discusses F3Q2014 Results - Earnings Call Transcript

May. 1.14 | About: Dextera Surgical (DXTR)

Cardica, Inc. (CRDC) F3Q2014 Earnings Conference Call May 1, 2014 4:30 PM ET

Executives

Bernard A. Hausen – President, Chief Executive Officer and Co-Founder

Robert Y. Newell – Chief Financial Officer and Vice President-Finance

Analysts

Tao L. Levy – Wedbush Securities, Inc.

Dan D. Trang – Stonegate Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2014 Cardica Financial Results Conference Call. My name is Jasmine and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the conference over to your host for today, Mr. Bob Newell, CFO. Please proceed, sir.

Robert Y. Newell

Thank you. Good afternoon and thank you for participating in our fiscal 2014 third quarter financial results conference call. Earlier today we issued a press release including our financial results. So please refer to the release for complete details.

This conference call will include forward-looking statements, including all statements regarding the continued clinical and other developments, future product features, future regulatory approval and commercial launch and use of products in our planned MicroCutter product line, including our MicroCutter XCHANGE 30 and XCHANGE 45, including the timing thereof and our expectations regarding future support for and sales of our automated anastomosis products.

The words expect, believe, plan, continue, intend and similar words are intended to identify these forward-looking statements. Any statements contained in this conference call that relate to future events, results or predictions are forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including those set forth in our press release of today, as well as other risks detailed from time-to-time in our reports filed with the U.S. Securities and Exchange Commission, including our quarterly report on Form 10-Q for the year ending December 31, 2013 under the caption Risk Factors.

We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements. You are encouraged to read our reports filed with the SEC, available at www.sec.gov.

This call is a property of Cardica and any rebroadcasting of this call without the expressed written permission of Cardica is prohibited.

At this time, I’d like to turn the call over to Bernard Hausen, Cardica’s President and CEO for corporate update.

Bernard A. Hausen

Thank you, Bob. Good afternoon and thank you for participating in our call today. It’s an exceptionally busy and exciting time for Cardica as we launched our MicroCutter XCHANGE 30 in the United States and build on our capabilities in Europe. As you know, for the last several years we’ve been working to develop and commercialize MicroCutter XCHANGE 30, the world’s only broadly applicable surgical stapler with a diameter shaft of less than 12 millimeters.

The XCHANGE 30 provides articulation of 80 degrees in each direction cross-sectional area nearly six times smaller than market leading staplers. With more flexibility, lower deployment forces and improved accessing vision, we continue to hear from surgeons that this device is facilitating existing procedures and aiding new procedures in a manner not feasible with conventional surgical staplers.

We are pleased to report progress this quarter, both in the commercialization of the MicroCutter in Europe and the U.S. and solidifying our balance sheet with the recent financing. We have a product that’s performing very well in the field and we are laying the groundwork for growth both in Europe and the United States. Beginning with Europe, surgeons are using the XCHANGE 30 for a wide variety of the procedures.

European sales for the quarter resulted primarily through our distributors in Holland, Belgium, Switzerland and Italy, with the MicroCutter being used primarily in thoracic surgery for the transactional among vessels and for various gastrointestinal procedures. I’d like to give you three examples. During lung resection, the vascular structures need to be carefully transacted avoiding tears and unnecessary bleeding. The pulmonary veins and arteries are small and delicate. The small size of the MicroCutter allows the surgeon to limit the amount of dissections around the vessels, thereby avoiding unnecessary trauma to adjacent tissue structures. Importantly, the 80 degrees of articulation provided by the MicroCutter further improves access in the limited space inside the chest cavity.

Similarly, hepatobiliary surgeons have found the microcutters to be very beneficial in partial liver resection. This is the procedure where surgeons have typically not used staplers due to the larger size of conventional staplers. With the small diameters of microcutters, these surgeons can transact liver, veins and arteries as well as part of the biliary tree with ease.

Finally, neurologists see major advantages during robotic prostatectomy. In these procedures, vascular structures needed to be divided, but the limited space in the pelvis prevented the use of conventional staplers and forced these surgeons to revert to the use of clips. The microcutter has now been successfully used to replace these clips thereby offering surgeons a safe and reprehensible method to transact the necessary structures.

We’ve established reference accounts in several countries, which now service the valuable resource of future customers. As we shared last quarter, we plan to market product directly in Germany due to pricing pressures and expect to hire sales manager in the current quarter. Turning to the United States, during the quarter we received 510(k) clearance from the U.S. FDA for the XCHANGE 30 device both the blue and white staple cartridges and a changing material for the cartridge.

In the United States, the microcutter is indicated to use in multiple open or minimally-invasive surgical procedures for the transection, resection and/or creation of anastomoses in small and large intestine, as well as the transection of the appendix.

At the end of March, we began shipping devices for clinical evaluation to several key opinion leaders with our sales representatives working with them to illustrate the features and benefits of the device.

While we are in early days of our commercial presence with the microcutter in the United States. We are encouraged by the feedback, interest we received to-date. As a result of this early positive feedback our sales representatives are beginning to work with key surgeons in a variety of gastrointestinal and appendectomy cases, where the microcutter is truly enabling the physician to perform a less invasive procedure.

Recently a surgeon at a leading children’s hospital performed a single incision appendectomy typically appendectomies require three surgical infusions for trocar placements, one is required for the camera, the second for grasper and a larger one for the currently existing 12 millimeter conventional staplers. In single incision procedures such as this a single larger trocar is placed with multiple access channels for the camera, grasper and stapler in order to minimize the size of the incision each instrument must be as small as possible.

In this setting the 5 millimeter shaft diameter of MicroCutter is ideal. It has a single point of piercing in the umbilicus a large degree of articulation provided by the MicroCutter offers the surgeon a much better angle to transect the base of the appendix avoiding any unnecessary resection of adjacent intestinal structures such as the cecum. At the end of the procedure the inflamed appendix has been retrieved in the specimen bag two just single incision.

As we surgeons experienced first hand the value of the MicroCutter during surgical procedures, we believe that they will then become advocates with their colleagues and within the hospital system. As you know when the new device is to be introduced to a U.S hospital the Value Analysis Committee needs to approve product evaluation. In most hospitals this process takes approximately 30 to 90 days. Foreign FDA clearance of the white cartridge along with the change in the tube of the cartridge Cardica immediately started working with surgeon advocate and hospital system to initiate this process.

As of March 31, five VACs have approved the XCHANGE30 for product evaluation and following successful clinical application some of these have already resulted in purchases of the MicroCutter. Importantly, we have initiated the process in numerous additional hospitals during the last month and we expect to initiate more in the future.

Taking the step back, we believe there is a very large market opportunity for the MicroCutter. There are approximately 2.5 million surgical procedures in the United States annually focusing on our current indications for youth, appendicitis accounts for 320,000 procedures each year. A variety of other gastrointestinal procedures where the use of the MicroCutter could be considered beneficial, account for at least another 150,000 to 300,000 procedures.

In addition, there is a large number of additional pediatric surgeries annually. Cardica intends to work with pediatric surgeons as they see the size advantage of the microcutter for the small patients.

Turning to operations, currently we’ve two MicroCutter sales representatives in addition to our Vice President and the Sales and the marketing calling on U.S physicians daily. In addition, during the current quarter we plan to train our three cardiac surgical representatives on the MicroCutter to expand our reach into their current sales regions.

As we build a solid customer base and begin to see revenue growth we plan to add three to four sales representatives per quarter. For manufacturing with the product performing low to daily, we will work to increase our weekly production capacity to 250 devices and thousand cartridges per week by the end of 2014 and drive our cartridge gross margins to more than 75%.

Moving to Japan, our partner Century Medical continues to work with the Ministry of Health to enable potential market clearance of the XCHANGE 30 in the significant market. Century anticipates market clearance within this calendar year. Our product development we are working to expand the MicroCutter product line so that this device can be used in additional surgical procedures moving forward.

We were developing XCHANGE30 with a short shaft handle, which we believe will be ideal for procedures in more confined spaces. We expect to introduce the short shaft handle in the third quarter of calendar year 2014. We’re also working on the development of XCHANGE 45, which is designed with an eight-millimeter shaft. Similar to the XCHANGE 30 this new product was also articulated up to approximately 80 degrees in either direction.

We see both the reduced size and increased articulation to be clearly differentiating features when compared to existing products. In addition, XCHANGE 45 works with a larger green cartridge necessarily to staple bigger tissue like that of the rectum or stomach. Pending PDA clearance from XCHANGE 45 will expand the total available market for the MicroCutter line.

Today we have working prototypes of the XCHANGE 45 and plan to begin animal studies by the end of this summer. Once we complete animal studies we believe we can begin using the product in humans by the end of the calendar year 2014.

Our eventual goal is to offer surgeons a full product line of surgical staples that will totally avoid the need for 12-millimeter trocar, thereby reducing the invasiveness and the risk for abdominal hernias associated with the use of 12-millimeter trocars.

Our significant proprietary position is ideal to offer surgeons less invasive solutions across a wide range of surgeries performed today and to enable the use of our staples and surgeries that do not currently utilize it because they are too large or do not articulate enough.

Turning to our cardiac business. The PAS-Port system continuous to generate consistent sales, particularly in Japan and Germany, and we experience an increase in C-Port system purchases during the quarter. We plan to continue to support existing cardiac surgery customers. Our focus will remain primarily on building our MicroCutter business however.

At this time, I’d like to turn the call over to Bob for a discussion of our financial results. Bob, please?

Robert Y. Newell

Thanks, Bernard. For the fiscal 2014 third quarter, total revenue was approximately $934,000, compared to approximately $868,000 in the same period of fiscal 2013. Total product sales for fiscal 2014 third quarter were approximately $916,000, compared to approximately $760,000 for the same period fiscal 2013. Total worldwide sales for the MicroCutter XCHANGE 30 were approximately $100,000 in the quarter with nearly all coming from Europe.

Moving forward beginning next quarter we intent to report specific values on a quarterly basis to provide metrics by which to measure the commercial launch. We will provide total worldwide sales for the microcutter device and cartridges, the number of value-added committees in the U.S. that have approved the MicroCutter and the number of U.S. hospitals that have ordered MicroCutter.

During the fiscal 2014 third quarter we shipped 1,151 PAS-Port systems bringing cumulative worldwide shipments of the PAS-Port systems to over 36,000 units. We experienced an increase in C-Port systems shipped during the quarter with 200 units shipped and cumulative worldwide shipments of C-Port now over 14,275 units. Note that we have now reached a milestone of over 50,000 PAS-Port and C-Port systems shipped.

Cost of product sales was approximately $1.4 million for the fiscal 2014 third quarter compared to approximately $1.1 million for the same period in 2013. R&D expenses for the fiscal 2014 third quarter were $1.7 million compared to approximately $2 million in the fiscal 2013 third quarter.

Selling, general and administrative expenses for the fiscal 2014 third quarter were approximately $2.1 million compared to $1.6 million in the same period of fiscal 2013. Increase in SG&A expense was primarily due to the hiring of our VP Sales and Marketing, hiring our MicroCutter sales representatives and increase in MicroCutter demo and sample expense as part of our training efforts, increased marketing efforts for the MicroCutter and stock compensation expense related to the amortization of the fair value options.

Total operating cost and expenses for the fiscal 2014 third quarter were approximately $5.2 million compared to $4.7 million for the same period 2013.

For the fiscal 2014 third quarter our net loss was approximately $4.4 million or $0.09 per share compared to approximately $3.9 million or $0.10 per share for the comparable period last year. Cash and short-term investments at March 31 2014 were approximately $2.9 million compared to $6.5 million at December 31, 2013.

As Bernard mentioned at the beginning of the call, we raised approximately $44.5 million in net proceeds through an underwritten public offering of 37, 375,000 shares of Cardica's common stock, offered at $0.85 per share and 191,474 shares of Series A convertible preferred stock, at a price of $85 per share.

At this time I’d like to turn the call back to Bernard.

Bernard A. Hausen

Thank you Bob. Looking ahead, we expect to continue to book revenue from commercial sales of XCHANGE 30 in Europe and book initial sales in the United States. We expect to further refine and improve and expand the MicroCutter product line in the months to come with the short shaft MicroCutter XCHANGE 30 which we expect to introduce in the third quarter of calendar year 2014.

We plan to submit regulatory documentation for the XCHANGE 45, for both 510(k) and CE Mark clearances, and begin use in humans by the end of 2014, and we expect market clearance of MicroCutter XCHANGE 30 in Japan in the second half of calendar 2014.

We look forward to keeping you apprised of our progress in the months ahead. It’s an exciting timing for Cardica.

At this time, we’d like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Tao Levy with Wedbush. Please proceed.

Tao L. Levy – Wedbush Securities, Inc.

Hi guys.

Bernard A. Hausen

Hi Tao.

Robert Y. Newell

Hi Tao.

Tao L. Levy – Wedbush Securities, Inc.

Hi, so couple of questions here. This is for clarification so the XCHANGE 45, you said that you are going to file and beginning to file provide 510(k) as well as beginning human uses. Does that assume that you want have to submit clinical data for the 510(k)?

Bernard A. Hausen

The initial clinical usage will be in Europe based on the CE Mark where we know we won’t have to file and what we will need for the U.S. approval remains to be seen. My current assessment is that it should not require clinical data that clinical data was about the staple. We provided that information that’s what the basis for the clearance of the XCHANGE 30 and the staple is identical in the XCHANGE 45, could that would be XCHANGE 30.

Tao L. Levy – Wedbush Securities, Inc.

Okay perfect. And then did you want to give a maybe some sort of – as a target or some metric in terms of the how many of the valued hospital committees you plan to reach this quarter?

Bernard A. Hausen

What we are doing is we are balancing the introduction of this product and trying to create meaningful revenue with the early phase of the product in a market that has not been exposed to this product and what we are doing is trying to get two key opinion leaders within our indications that will serve as reference account to then take it further in the following quarters.

Tao L. Levy – Wedbush Securities, Inc.

Gotcha. And let’s see, the express product I didn’t hear you talk about in quick some time, I was just wondering where does that stand sort of in your cadence of next generation pipeline products?

Bernard A. Hausen

We are going to continue to focus on the XCHANGE because it’s the base product that we believe we can sell the quickest without a lot of technical risk and when we are done with the development of the XCHANGE 45, and maybe even add-on a larger XCHANGE 60, we then will focus on the Express, so it’s a little bit further down the line and..

Tao L. Levy – Wedbush Securities, Inc.

Okay and then just for my understanding, in the cases where you’ve used in the XCHANGE 30 in combination with the da Vinci prostatectomy procedure. The reason why they would prefer a staple versus using a clip from a surgeon standpoint, either patient too?

Bernard A. Hausen

Yes, so I could go in quite some detail, I’m going to try to keep this too as layman as possible there as vascular structures that connect the prostate to the vessels around and the small pelvis they need to be divided. The way they do that right now is by placing numerous clips. They basically dig out the structures and then create a little opening on the back and place called wet clips, fairly large clips too. Then be able to transect now there is so little space that on the side, facing the prostate they sometimes are not quite often have to just cut-off the vessel instead of clipping the opposite side as which is how you would typically do just because there is no space.

So we use a 5 millimeter MicroCutter, you can achieve both, you can divide it without having to dissect it out and have secured the vessels on both sides of your transaction, so there is no back bleeding. That is clearly advantageous.

As far as we understand from neurologists, who have been following us, there is a significant time saving. They yield a quite a number of clips up to the number I heard yesterday was up to 20 maybe 10 to 20 clips, which are not cheap and the time savings especially with the robotic procedure we’ll probably be very strongly driving the use of our products and it’s procedure.

Tao L. Levy – Wedbush Securities, Inc.

Great. Thank you very much.

Bernard A. Hausen

Thanks Tao.

Operator

(Operator Instructions) And your next question comes from the line of [Darrell Walker] (pH). Please proceed.

Unidentified Analyst

Yes, thank you for taking my questions. Did I understand correctly that the product sales of the MicroCutter 30 for this quarter was about $100,000 and most of that revenue came from sales to Europe?

Bernard A. Hausen

Yes, that’s correct.

Unidentified Analyst

Okay and you always started shipping some kind in the middle of March?

Bernard A. Hausen

No, we shipped in Europe in beginning of January.

Unidentified Analyst

Okay. But you already started shipping to the United States market in middle of March, is that correct?

Bernard A. Hausen

We shipping in the U.S. market on for evaluation purposes.

Unidentified Analyst

Okay, so you are not invoicing those shipments?

Bernard A. Hausen

That’s correct.

Unidentified Analyst

Okay, thank you.

Bernard A. Hausen

Thank you.

Operator

And your next question comes from the line of Dan Trang with Stonegate Securities. Please proceed.

Dan D. Trang – Stonegate Securities, Inc.

Hi, thanks for taking my question. I was wondering if you could give some color behind the feedback regarding feedback I mean would the work from key surgeons that are working with MicroCutter.

Bernard A. Hausen

Yes, it really depends on what type of specialty obviously in Europe are CE Marking allows us to go after every procedure that uses stapling or procedures that haven’t been using. I gave you some color on urology with prostatectomy (indiscernible), in appendectomies we gave an example in the script that we in the presentation we gave beforehand, where you now can perform a total appendectomy with a single incision or by just placing 5 millimeter trocars avoiding 12 millimeter trocars.

Thoracic surgery just the fact that you are far less traumatic, it can be much more focused and much more detailed in what you dissect, what you don’t have to dissect because the stapler is so small, and the type of feedback that we’re getting. And I think with this product in the market, we are going to see a lot of new types of use because they just never had a tool like this before, and hopefully in the earnings call to come we can just give you some more color on what are the new types of procedures, we are now using staples where they haven’t done so in the past.

Dan D. Trang – Stonegate Securities, Inc.

Okay, and you said the specific values to measure the commercial launch, those metrics will be released when?

Robert Y. Newell

On each quarter we’ll give you those metrics.

Dan D. Trang – Stonegate Securities, Inc.

Okay, all right, thank you.

Bernard A. Hausen

You are welcome.

Operator

And I’d like to turn the call back over to Mr. Hausen for any closing remarks.

Bernard A. Hausen

Thank you for joining our call today. We look forward to seeing you, some of you at the Craig-Hellum investor conference later this month. Thank you very much, bye.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. You all have a great evening.

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