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CryoLife, Inc. (NYSE:CRY)

Q1 2012 Earnings Call

April 26, 2012 10:00 am ET

Executives

Steve Anderson - President and CEO

Ashley Lee - EVP, CFO and COO

Analysts

Daniel Garofalo - Piper Jaffray

Jeffrey Cohen - Ladenburg Thalmann

Matt Dolan - Roth Capital Partners

Operator

Greetings, and welcome to the CryoLife First Quarter 2012 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, sir, you may begin.

Steve Anderson

Good morning everyone. This is Steve Anderson, CryoLife's President and CEO, and welcome you to CryoLife’s first quarter 2012 conference call. With me today is Ashley Lee, the company's Executive Vice President, COO and CFO.

This morning we announced all time record revenues for first quarter $32.3 million and delivered net earnings $991,000 or $0.04. This represents 7% growth over the comparable period a year ago including strong (inaudible) growth, higher margin products.

During the first quarter just concluded continued international sales of our powdered hemostat PerClot (inaudible) also continuing to progress. BioGlue sales were up 14% over the first quarter a year ago primarily as a result of strong sales in Japan of $1.3 million. Cardiogenesis sales were $2.1 million for the first quarter; international revenues were strong up 21% over the same period a year ago.

The agenda for today's call is as follows: Ashley will discuss this morning's press release in detail and will comment on our progress by product line. He will also bring you up to date on our continuing corporate development efforts. I will discuss the filing of our IDE for PerClot in the United States and outline the parameters and time table for the clinical trial and the approximate anticipated approvable date. I will discuss our HDE submission for the SynerGraft process decellularized aortic valves. After my comments are completed Ashley will return to update you on our guidance for the rest of the year.

At this time, Ashley will comment on this morning's press release.

Ashley Lee

Thanks Steve. To company with the Safe Harbor requirements of the Private Securities 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 ending December 31, 2011, and our subsequently filed Form 10-Q for the quarter ended March 31, 2012, which we expect to file shortly and in the press release that went out this morning.

This morning we reported our results for the first quarter of 2012. We achieved an all-time quarterly revenue record of $32.3 million driven by strength in the BioGlue business and the recent acquisition of Cardiogenesis.

Our gross margins for the quarter expanded 460 basis points compared to the prior year 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 repurchasing shares of our common stock.

As I previously mentioned we set an all-time quarterly revenue record of $32.3 million, up 7% year-over-year. The following factors influenced our revenue performance. Total international revenues were up 21% in the first quarter compared to the prior year. Total product segment revenues grew 14% to $16.5 million. Worldwide BioGlue revenues were up 14% for the first quarter. This increase was predominantly driven by volume increases early in Japan due to the recent launch of the products in April 2011. We continue to remain enthusiastic about the opportunity in Japan and have received positive feedback and new orders from our distribution partner.

PerClot sales for the first quarter was $644,000. We continue to experience some headwinds in the EU due to austerity programs and competition but we continue to expect growth in PerClot revenues in international markets over the coming years. This will be driven by geographic expansion in new international markets as we broaden our EU sales focus beyond cardiac and vascular surgery.

We have received positive feedback on the usage of PerClot in the EU for neurosurgery and prostate surgery and believe these are growth opportunities for us. Additionally, we are working towards the potential USPMA approval which we continue to expect no later than 2014. Steve will provide additional details on the PerClot timeline in his remarks.

Residents from the Cardiogenesis product line were $2.1 million for the first quarter. We continue to press forward with our TMR training programs and believe that we’ll see low double-digit growth for this business as we train additional surgeons.

We believe that BioGlue in Japan, Cardiogenesis, and PerClot represent attractive top line growth and margin expansion opportunities for the company this year and in 2013 and beyond.

Cardiac tissue revenues for the first quarter of 2012 increased 8% compared to the corresponding period in 2011. As compared to the prior year, unit shipments of cardiac tissues went up 1% for the quarter. Vascular tissue revenues decreased 6% compared to the prior year's quarter on a 3% decrease in units for the quarter.

Total gross margins were 66% and 61% for the first quarters of 2012 and 2011 respectively. Gross margin in 2012 were favorably affected by an increase in preservation services gross margins which was a result of increased manufacturing throughput.

Also contributing with a favorable product mix of surgical sealants and hemostats in the Cardiogenesis product line which carries an approximate 80% gross margin. The higher margin products combined became a larger percentage of our business.

General, administrative, and marketing expense for the first quarter for 2012 were $18 million compared to $14.3 million for the first quarter of 2011. G&A increased to support the sales personnel and ongoing operations of Cardiogenesis which we acquired in May 2011 plus additional cost associated with our national sales meeting and a heavy industry conference schedule.

The 2012 first quarter also includes approximately $1.7 million in cost related to ongoing litigations and an increase in reserves for lawsuits.

R&D expenses were $1.7 million and $1.8 million for the first quarters of 2012 and 2011 respectively. R&D spending in 2012 primarily focused on PerClot, BioFoam and Synergraft tissues and products.

Net income for the first quarter of 2012 was $1 million or $0.04 per basic and fully diluted common share compared to net income of $1.7 million or $0.06 per basic and fully diluted common share.

Litigation related expenses negatively impacted EPS by approximately $0.04 and $0.01 in the first quarter of 2012 and 2011 respectively.

As of March 31, 2012, we had $26.5 million in cash, cash equivalents and restricted securities compared to $27 million at December 31, 2011. This includes $1.1 million received from the DOD for the development of BioFoam and $5 million in restricted securities.

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

You can refer to our SEC filings for detailed discussions of factors affecting our results of operations including our Form 10-Q that we plan to file shortly.

Now I’ll turn it back over the Steve.

Steve Anderson

On March 30, we submitted our revised IDE application for PerClot powdered Hemostat to the FDA. The IDE protocol includes 300 surgical subjects across a maximum of 10 investigational centers randomized to receive an application of PerClot or Surgicel, which is the similar marketed haemostatic device. There will be a 150 subjects in the control group and a 150 subjects in the PerClot group.

The trial has been designed in order to support an approval for use of the product in multiple surgical disciplines. We expect that we will be able to enroll all 300 patients by the end of Q1 2013 and as the patient follow up time will be three months. This positions us to submit our clinical data in the third quarter of 2013.

Gaining FDA approval for PerClot will give CryoLife a next generation hemostat with high gross margins addressing the largest segment of the projected $1.5 billion worldwide market opportunity for powdered haemostatic agents in 2014.

In order to support the PerClot US clinical trial and potential approval, we are working to complete the technology transfer for Starch Medical and expect to initiate manufacturing of the product for our clinical trial at our headquarters facility in Georgia in approximately June of this year.

We expect a gross margin for PerClot to be north of 85% after we receive FDA approval in 2014.

PerClot is the perfect compliment to our surgical adhesive BioGlue as it controls active bleeding and then biodegrades within above 48 hours. By offering hospitals the opportunity to bundle BioGlue and PerClot we will have a distinct competitive advantage.

In February of this year, we submitted a humanitarian device exemption or HDE application to the FDA for our Synergraft process aortic valve which is intended to be used for the replacement of diseased, damaged, malformed, or malfunctioning native or prosthetic aortic valve in children from new born to 21-years of age.

We estimate that up to 1500 children per year could benefit from this technology if the company is successful in obtaining an HDE. We expect to have a response to this application from the FDA around June of this year.

We have marketed Synergraft processed pulmonary valves since they were cleared by the FDA in February of '08. Since that time we have had more than 1400 valves implanted.

We are currently conducting a post clearance study to collect long-term clinical data for the SynerGraft processed pulmonary valves. Previous studies have shown a reduced risk for generating an immune response to the valve. Hemodynamic results in published actuarial explant trends and continue to look positive, and the company believes the information obtained from the post-clearance study may help determine whether the CryoLife process also extends the long-term durability of pulmonary valve. Based on these results, we are encouraged by the potential role SynerGraft processed aortic valves may play in the treatment of aortic valve disease.

We will be holding our Annual Shareholders Meeting at our corporate headquarters on May 16th at 10 o' clock in the morning. All of the seven present directors have been re-nominated.

That concludes my comments. And now, I will turn the call back to Ashley for his financial guidance for the rest of the year.

Ashley Lee

We are reiterating our guidance for 2012. We expect 2012 revenues to be between the $126 million and $129 million, representing growth of 5% to 8% over 2011. This guidance includes revenues of approximately $500,000 related to the use of funds received from the US Department of Defense in connection with development of BioFoam.

Revenues from the tissue processing segment are anticipated to be flat in 2012, compared to 2011. Revenues from the company's higher growth higher margin product segment are expected to grow between 11% and 16% 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 $3.5 million and $4.5 million. We expect revenues from the Cardiogenesis product-line to be between $10.5 million and $11.5 million in 2012.

We expect R&D 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.

The company's earning per share guidance excludes expenses related to business development and potential share repurchases, which cannot currently be estimated. We have estimated litigation expense conservatively on the high end of the anticipated range of between $5 million and $6 million because litigation expenses are extremely variable and are 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 our own 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 a business development opportunities.

Internal investments include, maintaining and expanding the sales force with key personnel, establishing and expanding physician training programs for new products such as TMR, and repositioning the company as we expand our product portfolio to establish CryoLife as a more valuable and innovative part of the surgeon stool kit. 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 miles especially 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, initiate enrolment in our PerClot IDE clinical trial during the third quarter positioning us to potentially enter the US market with the next generation hemostat no later than 2014. Two, gain additional regulatory approval for PerClot in new international markets and commence commercialization. Three, expand our European sales and marketing coverage for PerClot to include surgical specialties in addition to cardiac and vascular surgery. Four, complete enrollment in the BioFoam IDE feasibility study in preparation for pivotal US clinical trial. Five, expand our TMR physician training and education programs and drive growth in system placements and procedure volume. Six, initiate a European study for the phoenix autologous stem cell TMR system. And seven, continue evaluating potential acquisitions that will allow us to enter large high growth segments of the cardiovascular market 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. We will now be conducting a question-and-answer session. (Operator instructions).

Our first question is from Daniel Garofalo with Piper Jaffray. Please proceed with your question.

Daniel Garofalo - Piper Jaffray

And just first off, congrats on the quarter. I just wanted first off talk about the product revenues, strong quarter there. Is this a catch up relative to last few quarters? Or did you notice any specific pickups in procedure volumes or this marketshare gains that took place? Can you just maybe give us a sense for what are some of the factors for that number?

Ashley Lee

Yeah, well, I think the primary factor contributing to the success that we have in the top line was the fact that we had BioGlue in Japan in the first quarter of this year compared to the first quarter of last year. In addition to that, we had Cardiogenesis in the first quarter of 2012; that’s compared to 2011 also.

The other areas of our business I think overall we're seeing maybe a slight uptick in procedure volumes that’s compared to what's going on over the last year or two. But I think more importantly that the results that you're seeing on the top line in 2012 are really a result of the strategy that we've undertaken in the last 18 to 24 months which is to gain additional approvals in geographic areas like we did in Japan and look on executing on business development opportunity as a means to accelerate the growth of the company. We think that we're beginning to see that.

Daniel Garofalo - Piper Jaffray

Great and just one follow up. You had mentioned TMR physician training and I was just wondering if you could expand on that and give us a sense for how that process is progressing?

Ashley Lee

Since we held our training session in November of last year we've trained a total about 15 surgeons. We have held additional meetings with surgeons, not official training session but meeting with surgeons, sharing the clinical data with them and informing them about the TMR procedure. We got four additional in-house training sessions scheduled for the balance of this year and it's going about as expected right. And we think that again as we continue this process that we will begin to see the type of low double digit growth that we thought we were going to get when we closed on the transaction.

Steve Anderson

We have monthly physician training classes here in our headquarters facility that are usually between four and eight physicians over a two-day period usually a Friday and a Saturday. And then we've also had many requests from teaching institutions to put our training efforts out on the road. And so, it seems that we’re having a resident training program at least once a month at a major institution in the United States and of course we're doing some training in our convention booth and this is a pretty, I would have to say, expensive time for medical congresses around this time of the year. So we're seeing a lot of doctors there. So the training function for physician is greatly expanding here at CryoLife and we're getting very good response to that.

Operator

Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

Jeffrey Cohen - Ladenburg Thalmann

Hi, thanks for taking my questions, just a few short ones. What was the timing of the Qs as far as being filed?

Ashley Lee

It will be before the end of the week.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Could you talk about the $1 million cost incurred for the technology transfer from Starch medical? Was the incurred in the quarter or is that next quarter or was that already incurred?

Ashley Lee

A portion of it was paid last year when we began the technology transfer agreement and the balance of the payment which is I think roughly $600,000 is going to be paid very shortly here or has just recently been paid. That will be capitalized and amortized over a period of time.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Could you talk about the anticipated trial with PerClot and Surgicel as far as any end points or is this a non-inferiority trial?

Steve Anderson

A non-inferiority trial. I was back in R&D yesterday for quite some time and observing the manufacturing process of PerClot and we have a pilot shop set up at the moment and that was going extremely well. And I think that by June of this year or sometime during June we're going to have a much larger facility set up over in building two over there. We have a fairly sizable clean room suite that will be converted into PerClot manufacturing, and so that will be running beginning in June to support our clinical trial.

Jeffrey Cohen - Ladenburg Thalmann

Okay, that’s helpful. Could you talk about the size of the sales force currently? Did it grow in the past quarter and are there plans to continue the growth rate forward?

Steve Anderson

Well, in round numbers we have about 50 sales reps. We have about 28 that sell BioGlue and vascular grafts and probably, I'd say, 12 to 15 do cardiac tissue and BioGlue. And then we have, we're direct in Austria, the UK, Germany and recently in Ireland. I think that there's a In Ireland. I think that there is a really good chance that we are going to expand our sales force in the United States sometime in this year and particularly if we are successful in making another acquisition then, generally speaking some salesmen will come along with that acquisition.

Jeffrey Cohen - Ladenburg Thalmann

Got it. Okay. Ashley, a comment on legal expenses. They are 1.7 for the quarter and you said previously potentially 5 to 6 for the year, so is that going to be loaded more toward the first three quarters, do you expect?

Ashley Lee

Yes. It will definitely be loaded more towards the first three quarters.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Got it. And lastly, I suppose you are not going to tell me, but will you or are you going to break up BioFoam as a on a revenue line on its own?

Ashley Lee

We have not done that in this particular quarter but the BioGlue revenues and BioFoam revenues for the first quarter were a little less than a couple hundred thousand dollars.

Steve Anderson

We're in the process of expanding the indication for BioFoam in Europe into a cardiovascular indication, and I don't really know when that will have but it's going to happen before the end of this year. And so, we will expand our CE mark to include cardiovascular procedures. Right now, it is approved for sealing parenchymal organs. And the reason that we did that initially was that it was quite an easy CE mark to get because suturing lacerated organs is very difficult and we found there was an unmeet need for a product like BioFoam in that area.

And then, some other physicians in Europe were using BioFoam in cardiovascular indications and we realized that it was strong enough to handle aortic type pressure, which surprised us, but we did some additional testing and we decided that we would go forward in it get a CE mark for the use of BioFoam in cardiac and vascular reconstruction. So, I would think that the volume of BioFoam would increase significantly towards the end of this year.

Jeffrey Cohen - Ladenburg Thalmann

Okay. And I would assume that at some point with potential revenue ramp you would break it out, but we see that in the future. So, lastly, gross margins and did you comment, I mean is this going to be a trend up at these levels? Do you think this is sustainable or is this seasonal?

Ashley Lee

At our current levels margins really can be affected by revenue mix and obviously, the higher percentage of our business that BioGlue and TMR are of our total business, the better our margins are going to be. Longer term, as we continue to grow our TMR business and we get PerClot approved in the U.S, we think that we have got the opportunity to continue expanding our gross margins on a long term basis.

Operator

Our next question comes from the line Matt Dolan with Roth Capital Partners. Please proceed with your question.

Matt Dolan - Roth Capital Partners

Hi guys, good morning.

Steve Anderson

Good morning. How are you?

Matt Dolan - Roth Capital Partners

Yes, thanks the first question is on BioGlue, obviously there is a strong -- when you talk about the guidance and the growth rate implied in the guidance, I think that we are doing the numbers right, it looks like the absolute revenue number for that product line is actually would average at a lower basis on what we saw in Q1, so was there anything abnormal about the first quarter or why would that be the case?

Steve Anderson

We are continuing to see momentum into the second quarter; the second quarter is going very well. With that being said we are one quarter into the year, we are very optimistic and excited about the revenue performance in the first quarter. If things continue to go well into the second quarter we will reevaluate our top line guidance and if we need to revise that upward, at the end of the second quarter, then we will.

Matt Dolan - Roth Capital Partners

Okay, that's great. And then secondly just to follow up on the gross margin question, I understand where you are headed long term and how you get there, but what should we anticipate in the near term, it sounds like BioGlue could remain strong and some mix could be consistent and therefore as mid or slightly above mid-60s doable for the rest of the year.

Steve Anderson

Yeah, we think absolutely for the balance of the year, you know mid-60s is absolutely doable.

Matt Dolan - Roth Capital Partners

Okay, and then you know I think we have got a good handle on legal as it relates to spend and the cadence through the year, maybe you can just help us on overall spend, I know you are investing in a number of programs this year, compared to what we saw in Q1 to how that kind of plays out throughout the remainder of 2012.

Steve Anderson

Okay, well, you know the litigation feature is obviously hard to predict, you know their maybe an opportunity to settle some of this litigation during the second quarter of this year, that remains to be same but, you know if we have the opportunity to do that, then obviously you would see a significant decrease related to legal spend for the balance of the year.

If you look at the first quarter of 2012 we think that there will probably up to close to a $1 million in expenses that are -- we think specific to the first quarter, we took the opportunity to update a lot of our hope at marketing materials due to the repositioning of the company over the last 18 to 24 months. So we incurred some cost to do that, and I think that you know you are not going to see those recurring throughout the balance of the year, so you know there is an opportunity that, you know absent litigation that our G&A expenses could and marketing expenses could be, you know three-quarters of a million to a $1 million lower on a quarterly basis going forward.

Matt Dolan - Roth Capital Partners

Okay, with saying that and the BioGlue dynamics has a good chance that you could also exceed on the bottom line it sounds like –

Steve Anderson

We always hope to.

Matt Dolan - Roth Capital Partners

Okay, and then finally Steve I think you eluded this a little bit but where are you on pursuing further business development activities at this stage and again how near term could things be?

Steve Anderson

We are engaged with president in talking with cardiovascular type company and I can't predict if we are going to close the deal or not, if we were to close it we probably close in the next 90 days.

Matt Dolan - Roth Capital Partners

Okay great, it was very helpful guys, thanks a lot.

Operator

Mr. Anderson have no further questions at this time, I would now like to turn the floor back over to you for closing comments.

Steve Anderson

Well, thank you everyone for joining us and we look forward to talking with you after the second quarter.

Operator

Ladies and gentleman this does concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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