Lombard Medical's (EVAR) CEO Simon Hubbert on Q4 2015 Results - Earnings Call Transcript

| About: Lombard Medical, (EVAR)

Lombard Medical Incorporated (NASDAQ:EVAR)

Q4 2015 Earnings Conference Call

February 22, 2016 10:30 AM ET

Executives

Jill Bertotti - IR, Pure Communications

Simon Hubbert - CEO

Bill Kullback - CFO

Analysts

Brian Marckx - Zacks Investment Research

Christian Moore - Jefferies

Larry Haimovitch - HMTC

Operator

Greetings, and welcome to the Lombard Medical Fourth Quarter and Year-End Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

With no further ado I’d like to turn the conference over to Jill Bertotti. Thank you, you may begin.

Jill Bertotti

Thank you, operator, good morning everyone and thank you for joining us for the Lombard Medical fourth quarter and year-end results conference call. On the call this morning to discuss the results and operational progress for the quarter ended December 31, 2015, are Lombard’s Chief Executive Officer, Simon Hubbert; and Chief Financial Officer, Bill Kullback. Simon and Bill will provide prepared remarks on the quarter and outlook, and that will be followed by a question-and-answer period.

I’d like to remind everyone that comments made by management and responses to questions today will include forward-looking statements. Those include statements related to our future financial and operating results, and our plans for developing new products. Forward-looking statements are based on estimates and assumptions as of today and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied by those statements, including the risks and uncertainties described in Lombard’s filings with the SEC, the Risk Factors section in our Annual Report pursuant to Section 13 or 15(b) of the Securities Exchange Act of 1934 filed on April 29, 2015, on Form 20-F, as well as other risks and uncertainties detailed in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.

With that, now I’d like to turn the call over to the CEO, Simon Hubbert for his opening comments. Good morning, Simon.

Simon Hubbert

Thanks, Jill and good morning everyone. Well 2016 has finally arrived and we are very excited to be talking to you just as we are launching our new and revolutionary AAA Stent Graft Altura into the two largest European markets. The team has been very focused on business integration during the fourth quarter and we hit the operational milestones that allowed us to launch Altura on-time in late January. Bill will cover the financial details, but as you know we are not a financial story today, we are a technology group story, a company that has taken the necessary steps to shed unproductive efforts and focused on taking market share in specific geographies and demonstrating the future potential of two great new products.

In July 2015, we acquired Altura Medical. We believe that this acquisition gives us an opportunity to revolutionize the AAA space. By providing solutions with market-leading simplicity, speed and accuracy in treating patients with standard AAA anatomy, which represents up to 80% of the over 2 billion worldwide market opportunity. We have taken the product from acquisition to launch in just six months and the ability of Altura to deliver significant advantages to the patient, physician and healthcare system, which clearly demonstrated at the LINC Congress in Germany just a few weeks ago.

During the first ever Altura live case demonstration Dr. Andrej Schmidt of Leipzig University Hospital commented that Altura is easy-to-use, can be repositioned and requires no time consuming cannulation. Adding the case planning is greatly simplified due to Altura's unique design and sizing option. Since the LINC meeting, we have now moved into the controlled launch phase in specific reference centers in our two direct EU countries Germany and the UK prior to a broader rollout in the second quarter. We remain convinced that Altura will drive growth and take significant market share in Germany and the UK this year and the early signs are very strong as we have completed Altura cases in multiple centers and putting future cases on the calendar every day.

Our other new technology is the innovative IntelliFlex LP Delivery System to the Aorfix platform. IntelliFlex offers a range of benefits for physicians including reduced catheter profile, inclusion of an exchange sheath to reduce vessel trauma, and what we believe will be market-leading deployment control, an important feature when treating patients with complex and highly angulated AAA anatomy. We continue to anticipate CE Mark and EU launch in the summer and we believe the combination of a revolutionary new system to treat standard AAA anatomy coupled with the first-class delivery systems the only AAA Stent Graft with global approval to treat neck angulation up to 90 degrees. Gives us the most competitive portfolio approach in the AAA market and will lead to significant revenue growth through this year and beyond. FDA approval and U.S. launch is now anticipated later in 2016 as the FDA has asked for some clinical data to support the submission of this category of delivery systems for approval.

To support these two new product launches, we've increased the number of European sales territories building out close to Germany and UK sales teams with experienced AAA and vascular sales people. In the U.S. we have streamlined the sales team to our most productive 10 sales territories, through which we will launch the IntelliFlex LP System and support the Altura IDE study into which we anticipate starting patient enrollment in 2017. The messages highlighting the benefits of our new technology will be the focus of our marketing strategy and we will be showcasing both Altura and Aorfix with IntelliFlex LP at the Charing Cross Symposium in London in April. At this important Global Vascular Symposium we'll have our largest ever presence including a training center where physicians can get hands on experience for simulated deployment on both stent graft systems.

Before I turn the call over to Bill, let me add that two of the key operational strategies for the company and the transfer of Altura manufacturing into our UK facility and the commencement of commercial manufacturing of the new IntelliFlex LP delivery system for Aorfix. Both initiatives are going well and are on-track to support the launch timeframe I've outlined on this call.

Now I'll turn the call over to our CFO, Bill Kullback for the financial review. Bill?

Bill Kullback

Thanks, Simon. Global Aorfix revenue in the fourth quarter of 2015 was $2.9 million compared to 4.8 million in the 2014 fourth quarter. Primarily contributing to this reduction was a large non-recurring distributor stocking shipment of almost $2 million recorded in Q4 of 2014 for our Japanese distribution partner. Note that even with this large Q4 variance, we were still able to show year-over-year growth in Japan of almost $1.5 million for the 12 month period. For the full year 2015, Aorfix revenue in total grew by 13.8% to $15.1 million compared to 13.3 million in 2014. Total Aorfix revenue growth in the year was 17.9% on a constant-currency basis.

From a geographic perspective on a year-over-year basis, the U.S. was up significantly at 42.1% or plus $1.4 million. To give a bit more color on these figures in the U.S. market revenue in the 2015 fourth quarter and full year was 1.2 million and 4.6 million respectively. Comparative U.S. revenue in the 2014 fourth quarter and full year was 1.2 million and 3.2 million respectively.

In Japan procedure rates continued to rise as physicians performed 128 AAA procedures with Aorfix in the 2015 fourth quarter compared to 92 in the prior year period. This represents more than a 6% share of Japan's market within five quarters from launch. For the full year 2015 Japanese procedures totaled 436 cases compared to 112 in 2014, up a full 289%. Additionally in Japan where Aorfix is sold through our exclusive distribution partner, revenue in the 2015 fourth quarter and full year was 490,000 and 5 million respectively compared to 1.9 million and only 3.6 million in 2014.

In Western European countries where we sell direct, including Germany and the UK, revenue in the 2015 fourth quarter and full year was 682,000 and 2.7 million respectively compared to 728,000 and 3.4 million in the prior year period. Revenue in international distributor market excluding Japan for the 2015 fourth quarter and full year was 605,000 and 2.8 million respectively compared to 922,000 and 3 million in the prior year period. While we were somewhat disappointed with 2015 performance in these markets, our expectations for 2016 are very optimistic on the heels of our forthcoming product launches of IntelliFlex and Altura and we are pleased to see fourth quarter UK business grow 30.4% versus the fourth quarter of 2014.

Gross margin for the 2015 fourth quarter and full year was 28.2% and 45.1% respectively compared to 46% and 43.2% for the prior year period. Gross margin for the 2015 fourth quarter was adversely impacted by reduced overhead absorption coupled with the start of manufacturing transition activities on the IntelliFlex LP delivery system. We also saw an impact related to launch preparations on 2016’s rollout into the EU and other OUS locations of our recently acquired Altura product line. Once both of these products are up and running in our UK-based factory we fully expect to see gross margin exceed the levels achieved in Q4 and 2015.

In terms of OpEx, total operating expense for the 2015 fourth quarter and full year was 12.8 million and 46.1 million respectively, representing an increase compared to 11.1 million and 41.9 million in the prior year period. As we look to 2016 however compared to 2015, we fully expect a meaningful year-over-year reduction given our recent activities to streamline our U.S. commercial operation, as well as other worldwide expense reduction initiatives. The net loss for the fourth quarter of 2015 was $11.6 million, or $0.58 per lost share, compared to a net loss of 8.3 million, or $0.51 loss per share for the fourth quarter of 2014. The net loss for the full year 2015 was 37.8 million, representing a $2.13 loss per share, compared to 34.8 million or $2.39 loss per share for the full year of 2014.

Lastly in terms of historical performance relative to the income statement, as mentioned previously in our year-over-year revenue growth discussion, on a constant currency basis, we were up over the prior year by 17.9% compared to the reported growth rate of 13.8%. Put another way, we saw a 537,000 loss in revenues due to a 2015 strengthening of the dollar relative to the euro and the pound on the 25% of our revenue that is denominated in those currencies. On the flip side of this however, as the majority of our operations are located in Europe, we saw a favorable exchange rate impact on cost and OpEx which approximated $2.4 million.

In terms of the Company’s balance sheet as of December 31, 2015 we had total cash and cash equivalents of $32.3 million. This included proceeds from a partial draw on our $26 million secured term loan facility entered into with Oxford Finance in April of last year. The total 2015 Oxford proceeds of $21 million included $4.5 million drawn on October 8th after the successful achievement of a trailing six month revenue milestone on September 30th.

Before turning the call back to Simon, we also want to take a brief moment to note recent stock purchases made by certain directors and senior management of the company. Since the beginning of the fourth quarter of 2015 through today directors and senior management have acquired 101,281 shares of Lombard’s stock in the open market, there were no sales. I think it was important to disclose this in our press release and now even the call because this information is not publicly available through SEC Form 4s given Lombard's reporting status as a bond issuer.

Now briefly turning to our guidance, supported by the launch of Altura and IntelliFlex in 2016, we anticipate achieving revenue growth for the year of approximately 20% over 2015.

With that I'll now turn the call back to Simon.

Simon Hubbert

Thanks, Bill. I’d like to conclude by summarizing the key objectives for the company in 2016. To demonstrate rapid adoption of Altura and successfully launch our portfolio of approach and Altura with a Aorfix and IntelliFlex in the EUs direct market. To gain FDA approval in successfully launch Aorfix and IntelliFlex into the U.S. market, to continue to take market share in Japan where we've been very successful since launching in late 2014 and to gain FDA approval for the Altura IDE study with a view to recruiting patients in early 2017. We believe the successful execution of these clear objectives will make us very competitive in the AAA market and lead to significant market share growth in focused geographies and build very significant value in the Company.

With that I'll turn the call over to the operator for questions, operator?

Question-and-Answer Session

Operator

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Marckx of Zacks Investment Research. Please proceed with your question.

Brian Marckx

Bill, in terms of the operating expenses that are related to Altura, in 2015 I think the Q4 filing notes that the run rate would have been $6.3 million, had acquisition been done at the beginning of the year. Can you kind of break those out in terms of what would be kind of ongoing fixed costs and then what would be related to just the acquisition itself?

Bill Kullback

So if we look at acquisition-related expenses in 2015, Brian we've got certain legal fees and certain accounting fees approximate about I would say $700,000, and then as we look at ongoing cost, we can't really look to 2015 what we incurred in 2015 is indicative of what we expect to see in 2016 and beyond as we are in the process now of integrating that business into Lombard. So, we were looking at approximately $700,000 a month in incremental expense in 2015 and that number will come down significantly in 2016.

Brian Marckx

Okay. And you mentioned, if I heard it right, that you expect operating expenses to come down relative to 2015 in 2016. Is that right?

Bill Kullback

We do expect that Brian, we spoke previously about our certain rationalization activities related to our U.S. salesforce and certain other operating expense areas of the Company, including general admin, marketing, engineering so, we took an across the board view from an expense reduction perspective, not just to take out cost and impart to take out cost, but also to redeploy certain resources Brian from the U.S. to our Altura launch in the UK and Germany.

Brian Marckx

Okay. So in terms of the U.S. salesforce, can you talk about your anticipated size of the U.S. salesforce in 2016 and then how that compares to average in 2015?

Bill Kullback

Yes, sure so 2015 we ended the year with 25 direct sales people in the U.S. and three regional managers, so 28 people in total. For the year we averaged a few heads more than that in the 30 to 32 head range and then our plan for this year includes for 2016 and we'll see this for the full year includes 10 U.S. direct people and one regional manager. So, again compared to year-end we ended the year with 25 direct sales people in the U.S., we took that down to 10 and then we had three regional managers, we took that down to one.

Brian Marckx

Okay, great. So in terms of the FDA's request for additional clinical data for IntelliFlex, can you talk about what the scope of the data is and what you need to do to gather and compile the data?

Simon Hubbert

Hi Brian this is Simon, I’ll take this one. So yes, so we submitted the -- for the approval for IntelliFlex under the FDA's -- the real-time 90 day approval and from our previous meeting they've indicated that that was -- it looked appropriate. However, as we got through the process what we learned was that more recently with delivery systems not specific to Aorfix or to us, but with the delivery systems across the board on implantable devices, that the FDA looking for some clinical data. We only found this out last week, so it’s a little bit early but we've had a subsequent call. We are going to submit a protocol to the FDA for a study just this week, and that should be approved fairly quickly and then we're probably looking at 20 to 30 patients with a 30 day follow-up ,so it's a really a very small number of patients in a quick study and we'll have that included pretty quickly and get the data back to the FDA and then we'll anticipate approval and launch in the U.S. probably in the second half of the year, probably towards the back-end of the year. And at that point I think to your previous question, we'll reevaluate what the size of the U.S. sales team should look like and as we start to get traction you basically start to scale up but that's likely to be later in the year or even into next year.

Brian Marckx

Okay. And in terms of IntelliFlex in Japan, can you remind me of what the status is?

Simon Hubbert

So, we believe it's going to be again later this year and they've continued to do a great job in Japan, they are about 6.5% market share in five quarters from launch. So, again there's news from the FDA it means we have to have a discussion with our Japanese distributor, we've a call this week, but we believe that they're on-track for approval at the back-end of this year and as you know we'll be launching through them, but we anticipate seeing their revenues continuing to grow and their market share continuing to grow with the Aorfix as they move through this year.

Operator

Our nest question comes from the line of Christian Moore of Jefferies. Please proceed with your question.

Christian Moore

This is Christian from Jefferies on for Raj Denhoy. We are just looking towards Altura for the launch in Europe. What kind of information are you guys going to be providing in terms of new account utilization of accounts for the Altura product as it gets rolled out through UK, Germany and then the rest of Europe through 2016? Thank you.

Simon Hubbert

Yes hi Christian it's Simon. So as you can tell we're really excited about the Altura launch and it's really early we did the first live-base case demonstration about three weeks ago and with two weeks into the launch, so we want to get as much information out as we can to demonstrate the traction and success we're getting but obviously balancing that out, we're not giving out too much intelligence to our competitors. So we will take a little bit of time and speak about what those metrics are going to be, but as I said previously we're launching in 20 centers in UK and Germany, 10 in each which we're using as reference centers. We're basically two weeks into the launch we've already activated five of those 20 centers in the first two weeks. And we've done multiple cases in most of those centers with one center doing as many as four cases, so we feel really good about where we're with adding cases to the calendar literally everyday so we're getting along really great case pipeline together and we'll figure out how to get the best metrics out to you as we go through this quarter and beyond.

Christian Moore

Okay. And then, who are you taking share from in Europe? What are your main competitors that you guys are seeing share gains from if you can provide that?

Simon Hubbert

So again I've probably asked this quarter to my Sales VP, and he made the same point as I'll make that we're two weeks into the launch, but I think the way to think about this is, this is a mainstream stent graft and if you think about what China said from Leipzig during the live case workshop that this isn't around the periphery, this is treating patients with normal anatomy better than our competitors and that’s where the advantages are. So now we're going after the mainstream competitors and there is three competitors who own almost 90% of the European market that's Medtronic, Gore and Cook so I would anticipate the market share coming from all of those.

Christian Moore

Okay, great. And then just last question. Are we going to see more data on the performance of the Altura graft? And when would we be able to expect that in 2016?

Simon Hubbert

Yes certainly so we're pulling the data together there is -- as I said before there is more than 100 patients implanted before we acquired the company and now clearly we are adding to that number. So we've got about 95 patients out at 12 months and the data looks really good. The headline data is being presented, 75% of those patients were treated in two centers so we're doing a -- we're pulling that data into to demonstrate a two center feedback and experience and where we're adding to that and presenting that at major conferences through the year. We're starting at Charing Cross and finishing at LINC in November. So we're very committed to making sure that the data because it's really good gets out there this year.

Operator

[Operator Instructions] Our next question comes from the line of Larry Haimovitch of HMTC. Please proceed with your question.

Larry Haimovitch

So I want to ask a little more about Europe. What is the anticipated pricing -- or what is the pricing for Europe with the Altura? And can you discuss reimbursement? Is the product now getting full reimbursement, or is it too early and you have to apply for that?

Simon Hubbert

Yes. The product is fully reimbursed in all the EU countries where we are launching, certainly in the UK and Germany. We didn't need to apply for special reimbursement, it comes under the existing reimbursement code and clearly we don't want to get into a price war with ourselves between Altura and Aorfix, so we're taking price out of the equation and we're selling Altura at the same prices as Aorfix which is somewhere between $8,500 and $10,000 between the two countries depending on the center we're dealing with, so a bit lower than the U.S. but very steady at that kind of level.

Larry Haimovitch

Okay, thanks. And then, Simon, do you expect over the next year or two that you will launch further countries in Europe, or will you go more slow and just see how Germany and the UK go?

Simon Hubbert

Yes so I think the plan right now is we are -- I said we're launching into 20 centers which I think will take us into the second quarter, we're relocating our manufacturing back into the UK moving it from outsourced manufacturing here in the U.S. We will have steady unconstrained capacity towards the end of the second quarter and at that point I think we'll have really strong experience and we'll be launching into more centers in the UK and Germany and through the second half of the year I think you will see us launch into some geographies outside the -- in EU but outside UK and Germany. But we want to take it slow get experience and make sure that everyone here is getting great results and now this is a device that I think can go really deep into some really big centers so we are -- the five centers that we have performed cases in already are big sizeable centers in the UK and Germany with big numbers so our anticipation is that our objective to go deep before we go wide.

Larry Haimovitch

Okay. And then, turning to Japan, Simon, I know you have been very pleased with the progress ending the year with the 6.5% market share. In less than five quarters is obviously tremendous. Do you continue -- do you expect to see the market share in Japan continue to grow? And where do you think realistically -- could it be a 10% or 15% market share kind of market for you?

Simon Hubbert

I know if the distributors were here they would be talking about numbers higher than that, but I would clearly be delighted if we were at 15% market share a year or two from now. I think what you are going to see is a continued steady market share growth as we go through this year and then even more dynamic market share growth as they introduce IntelliFlex either later this year or early next.

Larry Haimovitch

Okay. And I am assuming Altura would have to go through a lengthy approval process for you to get it into Japan?

Simon Hubbert

Yes it typically would be a FDA approval and then probably 12 months for a little bit more testing and submission to the PNDA, so a typically 12 month -- 6 to 12 month after FDA approval and FDA approval would be -- we’d be looking at late ’19 or early 2020 for FDA approval right now.

Larry Haimovitch

Okay. So you've got almost -- you have got about four years before we get full FDA approval?

Simon Hubbert

Yes I think -- but we are looking to -- we are working with the FDA to get the ID protocol approved. We will look to start recruiting patients early next year. So I think there is a lot of excitement about the device and I think we can do a fairly fast recruitment and that is really going to help. So through our salesforce in the U.S. it is clearly going to help our Aorfix business as well we get some increased customer engagement. So I think you will see some positive on the Aorfix side through 2017.

Larry Haimovitch

During the FDA clinical trial, Simon, will you be able to report revenues for those implants?

Simon Hubbert

We haven't really discussed that yet. In the Aorfix trial we did, we just want to make sure we get the trial right and I think the most important point is to get fast recruitment in the most appropriate and best centers that can do that, so whether we do or don't charge for the device is to be determined. We may do it.

Operator

There are no further questions in the audio portion of the conference. I would now like to turn the conference back over to Simon Hubbert for closing remarks.

Simon Hubbert

Thanks, Tim. I'd like to thank everyone for taking time to join the call today. We are looking forward to updating you on our progress with the Altura launch in the U.S. as we move through the first half of the year. And if any of you are at Charing Cross Symposium in April please drop by the booth and take a look at both Altura and IntelliFlex and catch up with me and members of the team. Have a very good day. Thank you and good bye.

Operator

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

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