Cardica's (CRDC) CEO Julian Nikolchev on Q2 2016 Results - Earnings Call Transcript

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Cardica, Inc. (CRDC) Q2 2016 Earnings Conference Call February 4, 2016 4:30 PM ET

Executives

Julian Nikolchev - President and CEO

Bob Newell - CFO

Analysts

Tao Levy - Wedbush Securities

Charles Haff - Craig-Hallum Capital

Operator

Good day, ladies and gentlemen and welcome to the Q2 Fiscal Year 2016 Cardica Financial Results Conference Call. My name is Whitney, and I'll 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 would now like to turn the conference over to your host for today, Mr. Bob Newell. Please proceed.

Bob Newell

Good afternoon and thank you for participating in our fiscal 2016 second quarter financial results conference call. This conference call will include forward-looking statements, including all statements regarding continued clinical and other developments, future product features, future regulatory approvals, commercial launch and use of products in our planned MicroCutter product line, including our MicroCutter XCHANGE 30, including the timing thereof and our expectations regarding future support for and sales of our MicroCutter products and automated anastomosis products. The words expect, believe, plan, continue, intend, will 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 Current Report on Form-10Q for the quarter ended, September 30, 2015 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.

At this time, I'd like to turn the call over to Julian Nikolchev, Cardica's President and CEO for a corporate update.

Julian Nikolchev

Thank you, Bob. Good afternoon and thank you for participating on our call. We have made significant strides in our business, commercially, operationally and clinically, and I am excited to talk about our progress today.

Beginning with our commercial advancements; as we previous disclosed in January, we received 510-k clearance for the MicroCutter XCHNAGE 30 for the transection and resection in open or minimally invasive thoracic, pediatric and urologic procedures including vascular tissue. This complements the existing indications for use in surgical procedures in the small and large intestine as well as the appendix. This is a significant accomplishment for the Company and allows us to enter the U.S. market with a surgical stage when we are currently selling in euro today. Our MicroCutter XCHANGE 30 with the white cartridge.

While are excited about this opportunity, we believe it is important to be diligent in the way we approach the U.S. market. We are currently targeting on the key opinion leading surgeons with specific surgical specialties to understand the value of our surgical stapler provides. While we believe the potential market opportunity for the MicroCutter is broad, our initial commercial efforts will focus on specific market opportunities for procedures where our clinical balances are compelling and where a majority of these cases are concentrated within high volume centres. We expect our focus for the next six months will be to set the stage for a successful commercialization with our Generaion 4 surgical stapler, which we expect to introduce later this calendar year.

Successful commercialization of our disruptive technology will depend on three key components; clinical performance; successful early adoption by key opinion leaders who can participate in a broader training and education initiatives; and development and execution of an effective market awareness and surgeon training program.

As we execute on these three components of success, we are focused on developing relationships with surgeons who perform video assisted thoracic surgery or VATS. Specifically, procedures like microlobectomy, which we will discuss in more detail later in the call and pediatric cases. Once we achieve continued performance and tangible clinical adoption in these market segments, we intend to expand the scope of our market outreach. By remaining focus on our initial targeted opportunities, we believe our sales team will be more efficient and effective.

We intend to go deep within an account rather than spreading our efforts over a large number of surgical specialties. Within these accounts, our initial objectives will be to demonstrate reliable performance and growing clinical adoption. We’re target 5 to 10 centers in the U.S. and similar number of high volume centers in Europe.

To highlight an example of how our EU physicians can build awareness in the United States. Dr. Joel Dunning is a thoracic surgeon practicing in the UK who has embraced an adapted to MicroCutter to create a new procedure called microlobectomy. In January he gave presentation at The Society of Thoracic Surgeons on this innovative surgical technique.

The reception of this presentation was positive and encouraging to all of us, with host of thoracic surgeons scheduling sessions to learn more about this procedure. In addition, Dr. Dunning has posted numerous videos performing his microlobectomy procedure on CTSNet, the largest online thoracic surgical community in the world. His videos remained among the most popular videos over the last six months. We believe this is an excellent example of how our innovative surgical stapling technology can enable new procedures to benefit patients through a less invasive technique that reduces recovery time and shortens lengths of stay.

In December, we were pleased to announce that we signed a national innovative technology contract with Novation, the country’s leading healthcare services company with more than 5,200 health system members, including such prestigious names as VHA, UHC, Children’s Hospital Association and Provista. This three year contract with the MicroCutter XCHANGE 30 complements our commercial efforts by enabling Novation members and affiliates to quickly navigate the purchasing process with a designated contracting pathway within their hospitals and health systems.

The MicroCutter received Novation’s committed innovative technology award which identified recipients as improving patient care and differentiated from existing surgical products. We believe this contract will be particularly beneficial to Cardica once we expand our efforts beyond our near term focused commercial efforts. It is noteworthy that more than 200 clinicians within the Novation network reviewed the MicroCutter XCHANGE 30 and determined that our device provided incremental benefit of their over other products or reduce the risk of harm to patients and care givers.

Turning to performance on our currently marketed device. Data from the second half of calendar 2015 shows that out of 158 deployments the bleed rate requiring intervention is less than 2%, and we are confident the device is working reliably and consistently. We expect the Generation 4 surgical stapler, which is designed to deploy both the blue and the white cartridges in a wider range of tissue thicknesses to achieve this level of performance as well.

We have completed initial burst pressure and tissue thickness testing for the Generation 4 device, and we are now focused on design, validation and verifications. We expect to begin clinical evaluation in the third calendar quarter of 2016.

Concurrently, we continue to develop the supply chain for the manufacturing of the MicroCutter. We’re working with our key suppliers to improve our manufacturing processes to become more scalable in production of key components. We have evaluated a number of potential options and have made progress on this front, but there is still more to accomplish. Our objective is to have a stable and scalable supply chain using the most appropriate technologies.

Moving to business development. In January, we amended our license agreement with Intuitive Surgical initially signed in 2010. Under the terms of new agreement we received $2 million upfront and Intuitive is now conducting a feasibility evaluation for the period after six months to evaluate the MicroCutter technology. Once Intuitive completes the evaluation, they will have the option to initiate a joint development program for an 8 millimeter surgical stapling cartridge for use with robotic applications.

If Intuitive elects to move forward with the development, we would receive further funding as well as unit based royalty on commercial sales. We’re working closely with Intuitive as they evaluate our technology, and we look forward to the completion of their evaluation. As you can see, we have accomplished great deal in the last several months, and look forward to reporting future achievements in the months ahead.

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

Bob Newell

Thanks Julian. During the second quarter of fiscal 2016, we sold the MicroCutter primarily in Europe. Our net sales were impacted by the voluntary withdrawal of the remaining 225 blue cartridges in the market. There were no reported clinical events or patient injury related to this issue with the blue cartridge and the MicroCutter XCHANGE 30 with the white cartridge remained in the market throughout this voluntary recall. Revenue from the MicroCutter totaled $108,000 for the second quarter fiscal 2016 versus $185,000 reported last quarter. We expect the current quarter to be one of transition as we are beginning to introduce the MicroCutter with the white cartridge into selected U.S. accounts.

For the fiscal 2016 second quarter, total revenue was $700,000 compared with $657,000 for the same period of fiscal 2015. Product sales for fiscal 2016 second quarter were $683,000 compared with $639,000 in same period of fiscal 2015. During the fiscal 2016 second quarter, we shipped 975 passport systems, bringing cumulative worldwide shipments of our passport systems to over 42,500 units. We shipped 71 seaport systems during the quarter with cumulative worldwide shipments now over 14,875 units. Cost of product sales was $889,000 for fiscal 2016 second quarter compared with $944,000 for the same period of 2015. Cost of product sales includes approximately $107,000 for scrap and obsolete inventory cost for the MicroCutter in the recently finished quarter.

R&D expenses were $1.6 million for fiscal 2016 second quarter compared with $1.8 million for fiscal 2015 second quarter. Selling, general and administrative expenses for fiscal 2016 second quarter were approximately $2.2 million this compares with approximately $3.2 million in the same period of fiscal 2015. Total operating cost and expenses for the fiscal 2016 second quarter are approximately $4.7 million compared with approximately $6 million for the same period in fiscal 2015.

Net loss for the second quarter of fiscal 2016 was approximately $4 million or $0.05 per share compared to a net loss of $5.4 million or $0.06 per share for the same period in fiscal 2015. Cash, cash equivalents and investments at December 31, 2015 were approximately $18.5 million compared to $21.9 million at September 30, 2015, with cash utilization of $3.4 million during the quarter.

Looking forward for the fiscal 2016 third quarter, in contrast to the 400 to 500 passport units per quarter, we’ve been shipping to Century consistently, we expect to ship approximately half that number of passport systems, allowing Century to reduce their current inventory. Century continues to value the passport systems for use in less invasive procedures, and our size in the market for beating heart surgery in Japan has contrasted slightly.

Also want to note that the $2 million payment due from Intuitive Surgical at the end of the quarter, which are since been paid, and we will be recognizing a portion of the payment as revenue in the current quarter and amortizing the balance over succeeding quarters. Finally, the Board has approved a reverse stock split at the ratio of 1:10. We intend to effect this split during February.

I would now like to turn the call back to Julian.

Julian Nikolchev

Thank you, Bob. We’re very excited for the remainder of the year. Our key objectives during calendar 2016 are to continue selected introduction of the MicroCutter XCHANGE 30 with the white cartridge in the United States, increase clinical adoption of this device in Germany, and to a lesser extent, the UK. For both EU and the U.S., we will demonstrate clinical adoption for VATS and pediatric procedures by the third quarter of the calendar in select group of centers. We intend to complete the Intuitive Surgical evaluation phase by the end of the second quarter of calendar 2016.

Turning to product development. We expect to complete the first evaluation cases with the Generation 4 device in the third quarter of calendar 2016 with a selected launch target for the fourth quarter of calendar 2016. By the end of the year, we tend to have an improve supply chain, using the most appropriate technologies. Finally, we expect to announced our product pipeline moving forward into 2017.

In summary, we have a new leadership team in place with a proven medical device track record, and we are well positioned to achieve several value creating milestones during 2016. At this time, we are ready to open the call for questions.

Bob Newell

Operator?

Question-and-Answer Session

Operator

We will now take questions from our analysts [Operator Instructions]. And our first question comes from the line of Tao Levy with Wedbush. Please proceed.

Tao Levy

So, just a couple of quick questions on my end. So, on the Novation announcement, either does this -- will this change the VAC timelines down the road when you fully commercialize the product?

Julian Nikolchev

The contract, it doesn’t necessarily change the process, but it speeds it up. Just because the Novation associated hospitals already have this approved in their product lines, so the VAC still has to review the product but the process is a lot faster.

Tao Levy

And in terms of -- as you start to go after some of the KLOs, when do you think you will in a position to think about adding to your sales force or starting to bring people on?

Julian Nikolchev

Our focus for the first half of the year really is getting into the right centers and getting the right adoption cycle, and understanding that cycle. And I think we can cover that with our current folks in the Company. So the likelihood is going to be the second half of this year.

Tao Levy

And then just last question, the relationship that you recently announced with Intuitive, what since here to want to see during this evaluation period? Obviously, no enough time to put it in certainly into the robot. But what are some of the features you’re looking for?

Julian Nikolchev

I think mainly they want to see the performance of the device they have not been in touch with us and close to us for the last couple of years. So I think they’ve heard about hte performance, they’ve been, and the third that we’ve done in animal study for the FDA filing. And so they just want to understand where the product is. They also understand that there is some development that needs to be done. So, we’re just in the process actually fine tuning that.

Tao Levy

But they can just -- you’re using it in humans, so they don’t really need the animal data [multiple speakers] it won’t be as important.

Julian Nikolchev

The animal data was because we excise the samples where the firing happen, so we were able to provide a little more specific data of the staples worked.

Tao Levy

And then just lastly, again, dodge us on that topic. You talked about an 8 millimeter robotic staplers what the end game could in terms of that relationship? Is there an opportunity to develop a non-robotic version of that 8 millimeter and could that have any potential benefits above and beyond what you see now?

Julian Nikolchev

Absolutely I look at this relationship as a jump starting our 8 millimeter development effort for a non-robotic system. And the exciting part of our debt is that we can probably go to a green staple.

Operator

Your next question comes from the line of Charles Haff with Craig-Hallum. Please proceed.

Charles Haff

Just following up on Charles’ earlier question, so the Gen 4 device that will be 5 millimeter device, is that right?

Julian Nikolchev

Correct, yes.

Charles Haff

And so in order to get the green you would need to go 7 millimeter or higher, right?

Julian Nikolchev

Exactly, yes.

Charles Haff

And then the Gen 4 you made some comments in the press release about additional steps that need to be done, and what you’ve done so far. So you mentioned the supply chain. Is that really the big hurdle that needs to be overcome, or are there other major hurdles that we should maybe be looking for that’s still need to be completed before the clinical evaluation?

Julian Nikolchev

I think it's really the answer is on both fronts. I think on the development side-edge nearing side, we’re still -- we have frozen the design, we have looked at its performance in a prototype farm right now. But as you know, when you move from prototype to more of a production that’s when you actually starting to see the supply chain effect as well as the design effects and we really starting to evaluate that and that’s an intermediate process. So, we’re in that phase now where both effects are being considered and evaluated.

Charles Haff

And then the rolls that you’re using for the white cartridge device that’s approved? And those KOLS the similar cave wells that you used in the first generation of the XCHANGE 30 or these KOLs mostly different from that group?

Julian Nikolchev

It'sa combination, it's a mix some of them are some of the KOLs that we’re using in the first evaluation, and they were excited to hear that we have the device in hand and we also want to expand into some newer ones that are specific canters where we think that can -- we’ll see good visibility and use, higher visibility and use.

Charles Haff

And I think correct me if I am wrong. But I thought you mentioned 158 deployments in the quarter. Did I hear that right?

Julian Nikolchev

Yes...

Charles Haff

And 2% leak rate was shown. Is that leak rate you think equivalent to what changing Covidien have or Superior, or any color on that you could say?

Julian Nikolchev

It's hard to say since the informations that we have about our competitors is not very clear. Published informations is above 2% on the competitive products. But in the feedback we received from our surgeons that we are competitors and they are -- they feel that this is where it should be.

Charles Haff

And then just to get a little bit more color on the question that Tao asked about the sales people that maybe added in. Did you say that was going to be the second half of this calendar year, you may do that? Or did I miss through that.

Julian Nikolchev

That’s exactly right. When the Generation 4 is up and running, I think that’s the time for us to start thinking about aim to the sales force.

Operator

There are no further questions in queue. I’ll now turn the call back to Julian Nikolchev for closing remarks.

Julian Nikolchev

Thank you. And thank you for joining us on the call today. We are very excited to communicate our progress in the months ahead. We hope to see some of you at the Source Capital Group 2016 Disruptive Growth and Healthcare Conference in New York on February 10th or in Utah at the BTIG MedTech Conference on February 25th. Thank you. And we look forward to seeing you.

Operator

Ladies and gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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