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CryoLife, Inc. (NYSE:CRY)

Lazard Capital Markets 8th Annual Healthcare Conference

November 15, 2011, 15:00 p.m. ET

Executives

Steven Anderson - Chairman, President and CEO

Ashley Lee - EVP, COO and CFO

Analyst

Patrick Donnelly - Lazard Capital Markets

Patrick Donnelly - Lazard Capital Markets

Let’s get started here. And thanks for coming. I’m Patrick Donnelly, I work on a Med Tech team here at Lazard. I’m happy to have Steven Anderson and Ashley Lee with us from CryoLife, will present for about 15 minutes and have some time for Q&A as well. So, pass it over to you.

Steven Anderson

Thank you, Patrick. I’m Steve Anderson, and I’m the Founder and CEO of CryoLife. And with me today is Ashley Lee, the company’s Executive VP and CFO.

Our first line today outlines our forward-looking statements and is available in the copy of the presentation that’s posted on our Investor Relations website and I encourage you to review the forward-looking statements and other risk factors as detailed in our Form 10-K, which was filed on December 31, 2010.

CryoLife is a medical technology company, focused on products that address complex cardiac and vascular reconstruction. We have a diversified business composed of mature cash generating products and tissue preservation services and surgical sealants which are complimented by a number of earlier staged products that provide us with significant and high growth market opportunities. We have a strong sales organization with well established relationships with cardiac and vascular surgeons throughout the world.

The company’s physician relationships are further strengthened by our physician and surgical training programs. We are leveraging this unique position to expand utilization of our emerging products. And finally we believe we have a tremendous opportunity to further leverage our existing core business, our sales force and infrastructure to drive growth of additional new products in the cardiac and vascular surgery space. We are using our strong balance sheet to actively search for potential acquisitions and invest in research and development to advance our internal pipeline of products and accelerate our growth.

This slide provides an overview of our current product portfolio which extends across tissue processing, medical devices and surgical sealants and hemostats. We have market leading products, deep clinical and R&D expertise and strong operational experience in each of these areas. We have strategically build our business around these complimentary product lines with the goal of driving growth in the lower two circles and also building out our product offering in these categories through business development.

We also are working to expand the market opportunity for existing products and services, such as those offered by Cardiogenesis and PerClot by investing in clinical trials to gain incremental geographic or indication approval.

Over the past 18 months, we have been on an aggressive campaign to identify and buy undervalued or underfinanced products or companies that are focused on cardiac and vascular reconstruction. We are particularly interested in products that address complex cardiac and vascular repair. We are interested in products or companies that have high gross margins and expensive market opportunities. We are also very interested in leveraging our worldwide distribution network that is focused on cardiovascular and vascular reconstructions specialist.

A criteria for this includes innovative products and technologies that will accelerate our top line growth with a focus on cardiac and vascular surgery, products or technologies that we can integrate into our global sales force and achieve leverage with our commercial and clinical infrastructure and above all transactions that have a clear path to shareholder value.

Internally, we are also focused on growth primarily through investments and R&D, expanding the market opportunities for our existing products and continuing to position CryoLife as a leader in each of these product areas.

This slide outlines the company’s business development activity over the past 18 months. Each of these milestones has advanced our growth strategy and has given us access to market leading or potential market leading products in some expensive markets. The Starch Medical transaction gives us worldwide rights to a second generation hemostatic agent PerClot, that we believe has tremendous potential and will carry gross margins north of 80%.

The launch of BioGlue in Japan expands the products market potential and sales there have exceeded our prelaunch expectations. PerClot and BioGlue give us the opportunity to sell these two broad products together in European markets and we are doing so successfully. Cardiogenesis was a significant transaction with great potential for incremental revenue growth through leveraging our global sales channels. Cardiogenesis fits perfectly into the company’s strategy to focus on products that are involved with complex cardiac reconstruction.

The ValveXchange transaction gives us an equity stake and right to acquire a novel potential life time heart valve replacement platform that is highly complementary to our cardiac and tissue processing business. We estimate the prosthetic heart valve market to be 800 million worldwide.

CryoLife’s existing market opportunity which includes BioGlue in the U.S., Europe and Japan; Cardiogenesis in the U.S. and Europe; BioFoam and PerClot in Europe; and our domestic allograft tissue business is currently about $1.1 billion. Over the next four years, these existing opportunities are expected to expand to $1.5 billion and we are well positioned to gain market share in several of these areas as our growth initiatives come to fruition.

One of CryoLife’s advantages in the market is our sales force, we currently have 50 sales reps in the United States that are focused on cardiac and vascular surgery markets, including the addition of 8 reps from the Cardiogenesis acquisition. We have relationships with more than a 1000 cardiac and vascular surgeons providing excellent coverage and the opportunity to cross-train our reps across product lines to further maximize their productivity.

Outside of the U.S., we have direct reps in Germany, the UK and Austria. And a network of independent distribution partners that gives us coverage in over 70 countries. And all of our customers have the opportunity to benefit from our world-class surgeon training programs, which drives significant surgeon attendance throughout the world and enhance our customer relationships.

BioGlue and BioFoam are based on CryoLife’s unique protein hydrogel technology. BioGlue is a dominant adhesive and sealant for cardiovascular surgery with more than 650,000 procedures performed worldwide. It overcomes air and fluid leakage that can occur with sutures or staples, and has four to five times the tensile strength of fiber and sealants. Similarly BioFoam is used as a surgical adhesive but it is applied as the soft foam. It is currently approved in Europe for parenchymal organ sealing and we recently initiated our U.S. feasibility study. After the feasibility study, we expect to enter a pivotal study with a potential approval timeline of about 2015.

PerClot is the next generation hemostatic agent that we believe has the potential to be a best-in-class product because of its rapid absorption of blood, its room temperature storage and ready to use formulation. The hemostatic agent market is $1.3 billion on a world-wide basis growing to $1.9 billion by 2015. We expect to be approved in the United States by late 2013 or early 2014. In Europe, we have done successfully bundling PerClot with BioGlue and BioFoam demonstrating the potential of these three products together once approved in other markets.

CryoLife is the dominant player in the cardiac allograft tissue market with more than 50% market share. Our product offering includes preserved heart valves, SynerGraft process, pulmonary heart valves and CryoPatch material for cardiac reconstruction. We also have a broad product offering for vascular allograft tissue including preserved human saphenous veins, femoral veins, femoral arteries and aortoiliac grafts. These tissue grafts are used for among other things helping the salvage limbs in patients with significant vascular disease and can provide better performance below the knee versus synthetic grafts.

The Transmyocardial Revascularization or TMR procedure is a unique technology for patients with severe angina, it's an intraoperative procedure most commonly performed during CABG procedure. The TMR procedure is reimbursed by Medicare and commercial insurers.

We acquired the TMR technology through our acquisition of Cardiogenesis in May. The acquisition gave us immediate entry into the $175 million TMR market opportunity and Cardiogenesis also has the next generation device called the PHOENIX that incorporates biologics that could expand this market opportunity to over $700 million. We believe we can accelerate the growth of TMR in the United States by integrating a product into our sales force and increasing physician training.

The next generation PHOENIX system utilizes the autologous stem cells to enhance revascularization results. It is approved in Europe and we expect to begin a small 30 patient study in Europe in early 2012 to gain clinical experience and data. We also expect to commence U.S. clinical trials for PHOENIX in the U.S. in 2012.

ValveXchange is a privately held company that has developed the potential life time heart valve replacement technology. The ValveXchange system features exchangeable leaflets that can be potentially or potentially be replaced via a minimally invasive transapical surgery. ValveXchange also has a transapical implantation version of the device under development which would make the entire platform minimally invasive.

The heart valve market is the 1.5 billion worldwide market and TAVI or transapical implantation is one of the most exciting and high growth segments of the medical device market. We have a 19% stake in ValveXchange and we have right of first refusal to acquire the company.

This is a very busy slide, but it is telling of the many recent and upcoming product introduction milestones that the company has for present or going forward. Our historical and potential revenue trajectory is shown here. We are expecting revenues in 2012 to be in the neighborhood of about 130 million and approximately 140 million in 2013. We have a strong cash position and have made several recent investments in our business. Our core business generates strong cash flow and we intend to continue utilizing this cash to invest in growth opportunities.

As you can see from this slide, we have enormous potential to grow our market opportunities as our respective product markets expand and we had new products to our platform. He left hand circle represents our existing 1.1 billion market opportunity that I’ve already shared with you, and the pie chart on the right includes the expansion of this existing opportunity to $1.5 billion plus the expected new markets we will enter with FDA approval of PerClot, BioFoam and the PHOENIX EMR system.

By 2015, we anticipate our market opportunity will be upwards of $3.5 billion with CryoLife gaining share in our medical device and sealant and hemostat product categories. And this $3.5 billion does not include the potential from ValveXchange or any other business development, transactions that we may enter. We feel very good about the portfolio of products that we develop, and we are confident that we have the operational expertise to capitalize on these growth opportunities.

And at this time, I’d like to open this meeting for questions.

Question-and-Answer Session

Patrick Donnelly - Lazard Capital Markets

I guess just to start, [so why not] BioGlue doing so well in Japan? And can you talk a little bit about what’s driving the strength there and what you have to do to keep the momentum going?

Steven Anderson

Okay. The question is that BioGlue is doing very well Japan and what can we do to keep the momentum going? Our original forecast for Japan was that we would sell about $600,000 worth of BioGlue during the first 12 months was on the market in Japan and that number is closer to 1.5 million. We are doing far better there than we expected. And it's part of the early sales we are probably filling distribution channels but because of the volume and the fact that we have something life 160 physicians using it already. They have to be using it off label, which of course is their discretion. But it is a very versatile product, and it's excellent for different kinds of sealant that you need for surgical procedures and they are evidently doing that. The last order we received was in October, and my recollection is that was like number between 4 and $500,000 worth of product.

Unidentified Analyst

(Question Inaudible).

Steven Anderson

The question is that, the market for our present product is over $1 billion and we are only at 140 million in round numbers. And are the product lines so competitive that we are not doing a very good job, is what you are saying. I think that includes the markets for the hemostatic agents which are new to us and by that I mean PerClot in Europe only and then of course, BioGlue has just been introduced in the Japan. Some of our product areas are very competitive and there are lots of competitive products in the space. So, for sealants and glues, I’d label that as crowded space and very competitive. For tissues, we only have one competitor in the United States and we feel we are the technology leader and we have a 50% or better market share. So, it really just depends on what part of the company you are talking about.

Unidentified Analyst

(Question Inaudible).

Steven Anderson

The question is how is pricing then over the last two years and what are we seeing [eligible] price increases or decreases. We are seeing a lot of pressure on prices, particularly in the United States, and we also are seeing that the purchasing agents are having a lot more to say about what products are purchased than they used have or used to be, that cardiac surgeons could use pretty much whatever they wanted to use, and that’s definitely changing. So, we are seeing price pressure in our heart valve and vascular tissue products and we are seeing some price pressure in our adhesive markets. No question about it particularly in the States.

Unidentified Analyst

(Question Inaudible).

Steven Anderson

The question concerns BioGlue and growth pattern that has been done a little last couple of years, and the gentlemen asking the question is where the patent will expire in a couple of years, and how am I going to address that issue? First of all and I don’t mean to minimalize this, I mean the patent will expire. But it really is a $50 million product at the moment. It really isn’t big enough for someone else to come into the market in an aggressive way, if it were a much bigger product presently I’d expect people to be more aggressive. But because of the nature of the product, if they came into the market in the United States they have to do an IDE-PMA, they couldn’t do a 510(k), because of the nature of the product that are used for cardiac reconstruction. So, that would be a lengthy process. I’d estimate that for a new player to be 4 year process.

We also have developed two or three new cross-linkers in our R&D section that can be used with the bovine serum albumin, so you should expect to see one or two new BioGlue type products in the next few years. They will definitely be introduced in European markets earlier, because the regulatory process there is more reasonable often here. But eventually they will end up on the market here as well. So, I’m thinking going forward with our focus on hemostats and surgical adhesive type products, I’d think that that would continue to be 50% of our business going forward.

Unidentified Analyst

(Question Inaudible).

Steven Anderson

There is a BioGlue type product that’s in Germany that has been approved, but we don’t see it very often which is puzzling to us. And it is definitely weaker, much weaker than BioGlue, and BioGlue is, one of its biggest attributes is how strong it is. So, if you glue an aorta back together with BioGlue you can put 4 to 5 times normal blood pressure on that aorta before it will burst. And the competitive product that’s in Europe isn’t nearly as strong as that. We haven’t seen it in the United States, it doesn’t mean that they aren’t testing it, but I’m not aware of it in the States.

Unidentified Analyst

(Question Inaudible).

Steven Anderson

The company has been pretty committed to cardiac and vascular reconstruction. Complex reconstruction and there are number of reason, your average cardiac surgeon doesn’t participate in complex cardiac reconstruction because of the skill set that’s required. And they generally know that, so we are focused on the (inaudible) that are playing the game at very, very higher levels and that are doing wonderful things with neonates and infants than reconstructing other hearts, but we have found recently with the PerClot product in Europe that Neurologist are very keen on that product. And so I think going forward you are going to find PerClot and CryoLife’s focus shifting into general surgery. That product PerClot has a lots of versatility and we have been demonstrating that today in our one-on-one sessions and everybody that we have met with which is about 4 or 5 people, so far today has really focused in our med.

Let me just try to describe it you, if you take a tumbler and fill it half full of water, and then put in a gram of PerClot and wait for 30 seconds to a minute and then turn the glass upside down, there is no water that comes out of it. And so gel has completed stopped just like that. So, a tremendous amount of interest in that product from the surgeons that have seen it and it's doing well in Europe where it's marketed.

Unidentified Analyst

Do you expect that will be in 2014?

Steven Anderson

At the latest. There is a good reason to believe it might be earlier but we are putting a conservative date on that.

Unidentified Analyst

(Question Inaudible).

Steven Anderson

It's a lot bigger than BioGlue, so BioGlue is a 50 times bigger than that. I don’t know whether I want to take a stab at it, but we use it for any (inaudible) nifty about it is, it stops blood immediately, I mean stops bleeding immediately and then it disappears in 48 hours completely biodegradable. So, from the standpoint of a very useful product, it will give a surgeon I guess a lot of comfort particularly healing with a lot of bleeders. I will give you one instance about BioGlue, BioGlue has been on the market in the States for maybe 8 years. It's been on international markets longer than that, but let’s say 8 years, I have never ever gone to a medical convention and worked my booth that I haven’t had at least one doctor walk up to me and say, I saved somebody’s life with that product. And generally it's more than one doc. So, when they get their backs up against a wall in a difficult situation that type of product be it PerClot or BioGlue is very helpful to them.

Unidentified Analyst

(Question Inaudible).

Steven Anderson

Yes, and PerClot can be used on an active bleeding field, and BioGlue can be used to seal suture lines after you stop the bleeding, but and then it's also used if someone has ruptured aorta, I’m giving that as an example, you can glue an aorta back together and it will stay glued. It is easier to use the glue than it sutures really more reliable.

Patrick Donnelly - Lazard Capital Markets

We are out of time, so thank you very much Steve.

Steven Anderson

Okay. Thank you for your questions.

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Source: CryoLife Management Presents at Lazard Capital Markets 8th Annual Healthcare Conference - Conference Call Transcript

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