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CryoLife, Inc. (NYSE:CRY)

Q4 2011 Earnings Call

February 16, 2012 10:00 am ET

Executives

Steve Anderson - President & CEO

Ashley Lee - EVP, CFO & COO

Analysts

Chris York - Roth Capital Partners

Raymond Myers - Benchmark

Operator

Greetings, and welcome to the CryoLife Fourth Quarter and Year-End 2011 Financial 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.

It is now my pleasure to introduce your host, Steve Anderson, President and CEO for CryoLife. Thank you. Mr. Anderson, you may begin.

Steve Anderson

Good morning everyone, and welcome you to CryoLife’s Q4 and fiscal year 2011 conference call. This is Steve Anderson, CryoLife's President and CEO, and with me today is Ashley Lee, the company's Executive Vice President, CFO and COO.

This morning, we reported record revenues of $119.6 million and earnings $0.26 for the year ended December 31, 2011. We achieved these results while also making substantial investments in business development and in our share buyback program, and we still achieved our sixth consecutive year of solid profitability.

The agenda for today's call is as follows: Ashley will discuss this year's financial performance in detail. He will comment on the progress being made in the stock buyback program. I will comment on the technology and corporate acquisition that we made during the year. After my comments have been completed Ashley will return with financial guidance for 2012 that will include top line and bottom-line projections for this year.

At this time, Ashley will discuss this morning's Q4 and year-end 2011 earnings release.

Ashley Lee

Thanks, 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 the statements made as to the company’s or management’s intentions; hopes; beliefs; expectations or predictions of the future including the guidance for 2012 that I’ll provide in a moment.

Additional information concerning risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company's SEC filings, including the Risk Factors section of our previously filed Form 10-K for the year-ended December 31, 2010, our subsequently filed Form 10-Qs, our Form 10-K for the year ended 2011 which we expect to file shortly and in the press release that went out this morning.

On the call today, I will discuss certain non-GAAP financial measures. You can find the comparable GAAP measures and a reconciliation of these non-GAAP measures to the applicable GAAP measures in the press release that went out this morning, a copy of which is contained on the Investor Relations portion of our website.

This morning, we reported our results for the fourth quarter and full year of 2011. Before getting into the details a few highlights of the quarter and year. We continued executing on our strategy to position the company in higher growth in larger addressable market opportunities. Achievements to this end include the launch of BioGlue in Japan, our ongoing integration of the Cardiogenesis acquisition completed in May 2011, our investment in ValveXchange and continued progress in rolling out PerClot in international markets, while preparing for our IDE to being U.S. clinical trails.

We achieved an all-time revenue record of $30.4 million, driven by strength in the BioGlue business and the recent acquisition of Cardiogenesis. Our gross margins for the fourth quarter expanded approximately 350 basis points compared to the prior year, which combined with prudent expense management contributed to solid bottom-line results and our strong balance sheet continues to position us to pursue business development opportunities to potentially accelerate the growth of our business while at the same time repurchase shares of our common stock.

As I previously mentioned, we set an all-time quarterly revenue record of $30.4 million. The following factors influenced our revenue performance. Total international revenues were up 6% in the fourth quarter compared to the prior year and up 21% for the full year compared to the prior year. We saw strength across all parts of our international business on a full year basis compared to the prior year, with tissue processing revenues increasing 17%, combined BioGlue and BioFoam revenues increasing 19%, and powdered hemostat revenues increasing 23%.

Worldwide BioGlue revenues were up 3% for the fourth quarter and up 4% for the year. These increases were predominantly driven by volume increases, particularly in Japan, due to the recent launch of the product in April 2011. We continue to remain enthusiastic about the opportunity in Japan. Total sales in the fourth quarter in Japan were $869,000 and 2011 sales in Japan were approximately $2 million.

PerClot sales for the fourth quarter were $617,000 and were $2.5 million in 2011. We will continue to expect growth in PerClot revenues in international markets over the coming years, as new international markets are opened up. Based on the feedback we’ve received from customers, we are optimistic that PerClot will be favorably received once we complete the registration and approval process in other countries. Additionally, we are working towards a potential PMA approval, which we continue to expect no later than 2014.

Revenues from the Cardiogenesis product line were $2.4 million for the quarter and $5.7 million since we acquired the product line in mid May this year. We held our first TMR training session in November of 2011, and showcased the product line at the recent STS Meeting in Fort Lauderdale. Based on the feedback we’ve received, we continue to remain excited about this opportunity, and believe that as we’re able to conduct more training sessions later this year, we will be able to achieve the low double-digit growth on an annualized basis that we predicted when we acquired Cardiogenesis.

We believe that Cardiogenesis, PerClot, and BioGlue in Japan, represent attractive top-line growth opportunities for the company in 2012, 2013, and beyond.

Vascular revenues increased 17% compared with the prior year’s quarter and increased of 5% for the full year. The growth was driven by 14% increase in unit shipments for the quarter, and 3% increase in units for the year.

Cardiac revenues for the fourth quarter of 2011 decreased to 6% compared to the corresponding period in 2010, and decreased 5% for the full year. As compared to the prior year, unit shipments of cardiac valves and patches were down 7% for the quarter and down 3% for the year.

Total gross margins were 64% and 60% for the fourth quarters of 2011 and 2010 and were 63% and 58% for the years ended 2011 and 2010. Gross margins for both 2011 periods were favorably affected by an increase in preservation services gross margins primarily resulting from decreased unit cost associated with increased manufacturing throughput. Also contributing was a favorable product mix of surgical sealants and hemostats and the Cardiogenesis product line, which in aggregate became a larger percentage of our business. Cost of products for 2010 included a $1.6 million write down of HemoStase inventory.

General, administrative and marketing expenses for the fourth quarter of 2011 were $14.6 million compared to $12.2 million for the fourth quarter of 2010. General, administrative and marketing expenses for the full year of 2011 were $57.3 million compared to $49.1 million for 2010.

The full year of 2011 included approximately $4.2 million in cost related to our acquisition of Cardiogenesis and other business development activities. G&A also increased in the fourth quarter in full year to support sales personnel in ongoing operations of Cardiogenesis. The fourth quarter and full year of 2011 include approximately $842,000 and $1.9 million respectively in cost related to ongoing litigation. We expect our G&A expenses to be higher than they have historically been due to the addition of the Cardiogenesis sales and service personnel that we acquired in May 2011 and ongoing litigations spending which is expected to increase in 2012 as compared to 2011.

R&D expenses were $1.8 million and $2 million for the fourth quarters of 2011 and 2010. R&D expenses were $6.9 million and $5.9 million for the full years of 2011 and 2010. R&D spending in 2011 primarily focused on SynerGraft tissues and products, PerClot, BioFoam and BioGlue.

Net income for the fourth quarter of 2011 was $1.9 million or $0.07 per basic and fully diluted common share compared to a net income of $2.1 million or $0.08 per basic and diluted common share. Net income for the full year of 2011 was $7.4 million or $0.26 per basic and fully diluted common share compared to net income of $3.9 million or $0.14 per basic and fully diluted common share for 2010.

Excluding pre tax transaction and integration expenses of $4.2 million related to our acquisition of Cardiogenesis and other business development activities, non-GAAP adjusted net income for the full year of 2011was $10 million or $0.35 per fully diluted common share.

As of December 31, 2011, we have $27 million in cash, cash equivalents in restricted securities. This includes $1.2 million received from the DOD for the development of BioFoam, $5 million in restricted securities and reflects $1.4 million in the stock buyback purchases made during the fourth quarter. For the full-year the company bought back $2.9 million of the company stock underscoring our enthusiasm for the company’s strategic initiatives and growth opportunities. The company’s net cash flows provided by operations were $16.8 million for the full-year of 2011.

Our balance sheet is strong and we remain well-positioned to leverage our capital resources and cash flow from our more mature business segments to invest in complementary products and technologies in high-growth areas of cardiac and vascular surgery.

You should refer to your SEC filings for detail discussions the factors affecting our results of operations including our Form 10-K that we plan to file shortly.

Now, I will turn it back over the Steve.

Steve Anderson

Over the past 20 months or so Ashley and I have been involved in acquisition and present product-line growth initiatives. Our core tissue and surgical adhesive business produces excellent cash flow, and our intent is to acquire innovative products or technologies with compelling market opportunities in the areas of cardiac and vascular surgery where we can leverage our commercial and clinical infrastructure.

In September of 2011, we announced the finding of a worldwide distribution and manufacturing agreement for PerClot, a novel second-generation powered surgical hemostatic agent manufactured by Starch Medical of San Jose, California. PerClot which has received a CE mark for distribution with the European Union in a perfect complement to the company’s BioGlue surgical adhesive and we will have gross margin of around 80% when commercial sales begin in United States.

PerClot stops bleeding quickly and is fully biodegradable within 48 to 72 hours. PerClot, BioFoam and BioGlue enable our European marketing team to bundle our surgical adhesives to hospital buying groups and effectively give the hospital a one-stop shopping opportunity for surgical adhesives and hemostatic agents.

International sales of PerClot in 2011 were $2.5 million. We are forecasting sales of between $3.5 million and $4.5 million in 2012, a 50% to 75% increase over 2011 sales. And we anticipate filing or IDE application with the FDA within the next several weeks. We expect rapid enrollment in the trial followed by potential FDA approval and U.S. launch in 2014. We estimate the worldwide market for a powdered hemostat like PerClot to approach $1.5 billion by 2014.

In April 2011, we announced the Japanese regulatory approval for BioGlue. Japan is the second largest market in the world for surgical adhesives and hemostats. We initially estimated our Japanese sales for the first nine months that BioGlue is on the market in Japan to be about $600,000. Instead, we sold approximately $2 million worth of BioGlue to our Japanese distributor in the first nine months it was on the market, and sales have continued to be strong in the first weeks of 2012.

Based on the strong reception for BioGlue in Japan, we are working with our distribution partner to gain additional indications for the product in order to expand the Japanese market opportunity. We expect 2012 sales of BioGlue in Japan to exceed $4 million. BioGlue has a gross margin of 80%.

In May of 2011, we announced the acquisition of Cardiogenesis, a manufacturer of lasers and single use fiber-optic hand-pieces used in cardiac surgery for Transmyocardial Revascularization or TMR of patients with severe refractory angina.

This product line fits perfectly into our focus on products and therapies for complex cardiac reconstruction procedures. This acquisition was accretive in 2011, excluding acquisition and integration cost and provides an attractive growth opportunity for a product with gross margins of approximately 80%.

Sales of Cardiogenesis products for the seven and a half months we were selling it in 2011 were $5.7 million. Sales in the fourth quarter were $2.4 million. In 2012, we are forecasting sales of between $10.5 million and $11.5 million driven by increased physician training programs on the TMR procedure and further cross-selling by our integrated cardiac sales force.

Outside of the United States, we plan to initiate a multi-center study in Europe to evaluate the effective injecting autologous stem cells into the myocardium in conjunction with the TMR procedure. If the study shows that the addition of biologics enhances the clinical results, we will have made a major first step in expanding the market opportunity for TMR from $175 million to nearly $700 million with Biologics.

In July of 2011, we announced 19% equity investment in ValveXchange, a heart valve technology platform that is a spinout from the Cleveland Clinic. What is unique about the ValveXchange heart valve is that it consists of a Docking Station that is sewn into the valve orifice and the actual leaflet set is then snapped onto the Docking Station. If the leaflets need to be replaced in the future, the surgeon can access the Docking Station and with an instrument set snap out the original leaflets and snap in a new set of leaflets.

In September 2011, ValveXchange successfully performed their first in-man surgeries; E3 implants were performed in Paraguay by a group of local and American surgeons. All patients are progressing as expected. They anticipate at initiating a European clinical trial beginning in Q2 2012, which will be used to support a future CE mark application. CryoLife has the right of first refusal to acquire ValveXchange and the right to negotiate for distribution in Europe.

Ashley and I are still involved on a day-to-day basis in additional corporate development activities, with a particular focus on innovative technologies focused on cardiac and vascular surgery. Those product areas hit are technical and distribution suite spots and we would expect them to generally have gross margins in excess of 80%.

We are particularly interested in LVAD mitral valve repair, AFIB, transcatheter, and wound closure devices.

That concludes my comments and now I’ll turn the call back to Ashley for his 2012 financial guidance.

Ashley Lee

We expect 2012 revenues to be between $126 million and $129 million, representing growth of 5% to 8% over 2011. This guidance includes revenues of approximately $500,000 from funds received from the U.S. Department of Defense to develop BioFoam.

Revenues from the tissue processing segment are expected to be flat in 2012 compared to 2011.

Revenues from the company’s higher growth, higher margin product segment are expected to grow between 10% and 15% for the full year of 2012.

We expect combined BioGlue and BioFoam revenues to increase in low to mid single digits on a percentage basis in 2012 compared to 2011 and PerClot revenues to be between $3.5 million and $4.5 million in 2012. We except revenues from the Cardiogenesis product line to be between $10.5 million and $11.5 million in 2012 which represents growth of 9% to 19% if you annualize our fourth quarter 2011 revenues. We expect research and development expenses to be between $10 million and $12 million in 2012 in order to support the clinical and regulatory advancement of BioFoam, PerClot and Cardiogenesis.

We expect earnings per share of between $0.14 and $0.18 in 2012 which includes the increased R&D expenses along with increased legal expenses related to the company's ongoing litigation of medical work. The company's earnings per share guidance excludes expenses related to business development and the effect on earnings per share and potential share repurchases which cannot currently be estimated.

We have estimated litigation expense conservatively on the high end because litigation expenses are extremely variable and not easily predicted.

Going forward, we expect a normalized tax rate in the mid 30% range excluding the effects of any business development activities.

We believe we are successfully executing on our strategy of positioning the company for accelerated revenue and earnings growth by investing and expanding our addressable market opportunities through internal R&D, expanding sales and marketing, and executing on business development opportunities. Internal investments include maintaining and expanding the sales force with key personnel, expanding position training programs for new products such as TMR and rebranding the company as we expand our product portfolio to establish CryoLife as a more valuable and innovative part of the surgeons' product offerings. We believe these internal investments in the sales and marketing infrastructure and pipeline will generate accelerated top-line growth over the next several years.

Looking forward, we have several key milestones that we expect to complete in the upcoming months that will demonstrate progress in our strategic initiative to expand the company's market opportunity with higher growth higher margin products. One, refile our PerClot IDE and begin clinical trials later this year positioning us to potentially enter the US market with a next generation hemostat no later than 2014. Two, gain regulatory approval for PerClot in additional international markets and commence commercialization.

Three, initiate a European study of the phoenix autologous stem cell TMR system. Four, complete enrolment in the BioFoam IDE feasibility study in preparation for a pivotal US clinical trial. Five, expand our TMR physician training and education programs and drive growth in system placements and procedure volume, and six, continue evaluating potential acquisitions that will allow us to enter large, high growth segments of the cardiac and vascular surgery markets and accelerate the growth of the company.

That concludes my comments and I will turn it back over to Steve.

Steve Anderson

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is coming from Matt Dolan from Roth Capital Partners. Please proceed with your question.

Chris York - Roth Capital Partners

Hey guys, this is Chris on line for Matt. How are you doing?

Steve Anderson

Hey, Chris, how are you?

Chris York - Roth Capital Partners

Good. Just looking at your EPA -- EPS guidance for next year, we understand the impact of your incremental R&D investment but if we just stop the one-time charges associated with the Cardiogenesis deal, it looks like you’re losing some leverage on the SG&A line as well. Just wanted to know does that all stem from higher legal expenses, by which our math looks like around $3 million in added cost for the year or are there some other investments in that SG&A side that we should think about for the year?

Ashley Lee

The two primary factors that are increasing G&A year-over-year, one, is we’re going to have a full year of fully staffed Cardiogenesis sales force with CryoLife. So that’s one thing that’s driving the growth and the expenses there. And the other, quite frankly is the litigation. We have included a -- what we think is a very conservative budget for litigation expenses in 2012, which has resulted in what we believe as conservative EPS guidance for 2012.

Chris York - Roth Capital Partners

Okay. And then, in terms of the cadence of investments, you generated $0.07 in the fourth quarter. Guidance assumes a quarterly run rate of $0.04 at the midpoint for next year. How should we think about the progression of these investments and therefore EPS throughout the course of the year?

Ashley Lee

Okay. We believe that the second and third quarters will be a heavy spend quarters for us, as it relates to the litigation. The discovery process is starting to ramp up right now. And we think that a large part of the increase, incremental increase in litigation expenses will incur during the second and third quarters of this year. As it relates to everything else, it should be fairly ratable throughout the year, as it relates to the additional cost for the Cardiogenesis sales and marketing infrastructure.

Chris York - Roth Capital Partners

Okay. And then last question, given all you have going on in the R&D front here and considering you’re buying back some stock, are you still looking at acquisitions this year I know you kind of mentioned that in your comments. And if so, what is the timing and your financial capacity to execute on a deal?

Steve Anderson

We’re still looking at additional acquisitions and we’re in the early stages of evaluating two other acquisitions. I couldn’t give you an idea of the timing, those things kind of move ahead on there own timeframe. But I would expect that we would probably do one more acquisition this year.

Operator

Thank you. Our next question is coming from Raymond Myers from Benchmark. Please proceed with your question.

Raymond Myers - Benchmark

Thanks for taking the questions. Ashley maybe if we could press you a little more on the litigation expense, could you give us some sense of what your EPS guidance for 2012 would be if you were not spending anything on litigation?

Ashley Lee

Well I’ll tell you what we have conservatively budgeted for litigation for this year. We could spend as much as $5 million to $6 million on litigation this year. So, if an opportunity presented itself to settle some of these issues on terms that are acceptable to us that number could prove to be very conservative.

Raymond Myers - Benchmark

Excellent that’s very helpful that number. Next maybe Steve could outline a little bit more about the clinical trial program for BioFoam. What progress have we made in the last say six months and what exactly are the milestones like going forward to get BioFoam in the market?

Steve Anderson

Well we have only recently began enrolling patients in the United States. And I would think that the enrollment process will take a good part of this year. And I think then that we should expect that product to get approved towards the end of 2013, early 2014.

Raymond Myers - Benchmark

Okay. And what is the expenses budgeted for BioFoam clinical trials?

Ashley Lee

That’s going to be largely variable rate this year and highly dependent upon enrollment rate. Right now, I mean, it could be as high as a couple of million dollars for the remainder of this year, if that we do end up spending that much, then the grant revenue associated with that particular project would be substantially higher than the $500,000 that we guided towards.

Steve Anderson

We didn’t expect that BioFoam would be strong enough to handle cardiovascular pressures, and it has turned out that a few physicians in Europe have used it for cardiovascular indications. And so, we are in the early stages of setting up an expended indication to our regulatory body in the UK -- I mean not the UK but Europe to get us a cardiac indication for that product, and if we are successful in doing that the potential for BioFoam expands greatly.

Raymond Myers - Benchmark

Okay, excellent. What specifically is the next step to get in the BioFoam US IDE pathway?

Steve Anderson

They have to complete the enrollment of the initial patients.

Raymond Myers - Benchmark

How many patients are involved now and how many do we need, and when do we expect that to be complete?

Ashley Lee

We are currently in the feasibility pilot study right now, Ray, we got a couple of people enrolled right now. We are going to enroll up to 20 patients in the pilot study. One key event that we are looking towards that will, we believe, significantly accelerate enrollment is we have an amendment that, we believe, an amendment to the protocol that we believe will be implemented in April of this year. And once we get that amendment implemented we think that the enrolment is going to increase significantly.

Raymond Myers - Benchmark

Then that’s the critical step I think that we are looking for. That in April and then we accelerate enrolment and hopefully complete the study within a few months after that, is that correct?

Ashley Lee

Yeah. Right now, the FDA has indicated that we need to follow-up these patients to an extended period of time related to the, what they want to see which is the degradation of the particular product. We are hopeful that they are going to allow us to shorten the follow-up not have to wait for the full follow-up period to begin the favorable study. So we expect to make some progress during this year in the BioFoam IDE.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any further or closing comments.

Steve Anderson

All right. Thank you for joining us for this conference call and we look forward to speaking with you again to discuss our first quarter 2012 results.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.

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