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Executives

Joseph W. Kaufmann - President, CEO

Wendy F. DiCicco - CFO

Analysts

Shawn Bevec - Susquehanna Financial Group

James Sidoti - Sidoti & Company

William Plovanic - Canaccord Adams

Charley Jones - Barrington Research

Kevin Livingston - Consonance Capital

Kensey Nash Corporation (KNSY) Q2 2008 Earnings Conference Call January 25, 2008 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter earnings release conference call. (Operator Instructions)

I would now like to turn the conference over to our host, Mr. Joe Kaufmann, President and CEO. Please go ahead.

Joseph W. Kaufmann - President, CEO

Thank you. Good morning, everybody. Welcome to the Kensey Nash fiscal second quarter conference call.

Joining me today are Doug Evans, our Chief Operating Officer, Wendy DiCicco, our CFO, and Holly Harrity, our VP of Business Development.

We'll start out today with the safe harbor.

Good morning everyone.

The statements made by Kensey Nash and its representatives in this conference call will contain certain forward-looking statements, including financial forecasts that are based on the current beliefs of management as well as assumptions made by and information currently available to management. Wherever possible, we will try to identify these forward-looking statements by using words such as believe, expect, anticipate, forecast and similar expressions. Please note these words are not the exclusive means for identifying such statements.

Please see today's news release and Kensey Nash's SEC filings under our annual report on Form 10K for the year ended June 30, 2007, particularly the information under the caption Risk Factors, for a discussion of risks, uncertainties and other factors that could cause actual results in the remainder of 2008 and beyond to differ materially from those expressed in or implied by our forward-looking statements.

Joseph W. Kaufmann - President, CEO

Thank you.

Well, I am very pleased to report today both strong top line and EPS performance for our second quarter.

Total revenues of $19.6 million exceeded our previous guidance of $18.7 to $19.5 million, and our EPS of $0.21 exceeded our guidance of $0.18 to $0.20.

Looking at our second quarter revenues compared to prior year, our total revenues increased 14% year-over-year and also 12% sequentially.

If you'll exclude the new product sales resulting from our recent or most recent acquisition from the MacroPore Biosurgery group, revenues increased 11% from last year and 14% sequentially.

So that was excellent performance overall in terms of our top line.

Digging a little deeper into the sales line, you'll see that our sales of $13.1 million increased 17% from last year and 14% sequentially, excluding, again, the new product sales that I previously mentioned. We experienced an increase of 13% over last year and 19% sequentially.

Royalties of $6.5 million increased 7% from last year and sequentially, so that was an overall very good performance for royalty income. This was generated by both strong Angio-Seal sales and also sales of products from one of our strategic partners, Orthovita.

The Angio-Seal royalties increased 5% year-over-year and 7% sequentially. Royalties from our co-developed products with Orthovita increased 11% year-over-year and 5% sequentially.

EPS of $0.21 increased 62% year-over-year and 31% sequentially when you compare it to your adjusted EPS from the fourth quarter of $0.16.

This increase in EPA year-over-year was the result of solid sales performance in both Endo and Biomaterials, royalty growth of 7% coupled with a reduction in our operating expenses, primarily in the R&D area, more than offsetting the relatively small increases in our SG&A.

I'd like to talk a little bit about our various business segments and get into that a little bit before we get into questions and also talk about our guidance.

On the endovascular front, endo sales of $1.7 million increased 36% year-over-year and 22% sequentially. Our thrombus removal products - the QuickCat and ThromCat, increased 42% year-over-year, and we also had significant growth with our Safe-Cross products that are used to cross chronic total occlusions.

On a sequential basis, sales increased 22%. This was driven by 15% growth in the thrombus products and 78% growth in our Safe-Cross.

International sales, as we pointed out in the press release, were very impressive. They were actually up 120% year-over-year. And U.S. sales, despite the fact that we've had a less than full sales complement of people out in the field during this portion of the fiscal year, our U.S. sales increased 13%.

Now, we also mentioned in the press release about the strategic alternatives that we previously announced regarding endo and, as we noted in the press release, we really don't have any comments other than to say that after the evaluation and review is completed, we will then notify everyone the results of this review sometime in the future.

Moving on to bio, bio was truly also very impressive in this quarter. Our bio material sales increased 15% year-over-year and 13% sequentially.

This reflects the outstanding growth of our orthopaedic business, which increased 67% year-over-year and 18% on a sequential basis. This more than offset our anticipated decline of sales in our cardiology group, the biomaterials cardiology group, which is primarily Angio-Seal components.

Again, the decline in the Angio-Seal components was anticipated as our strategic partner, St. Jude's, reduced inventories, but it's very important to note that the Angio-Seal end-user sales as reflected in our royalties did increase both sequentially and year-over-year, and this is not a reflection of the performance of the Angio-Seal in the field or the growth of the Angio-Seal product in the marketplace. The Angio-Seal continues to be the dominant player in puncture closure or vascular closure technologies.

Our spine and sports medicine business was up very nicely, reflecting both growth of our current products and also some new product introductions or launches that will be made by our partners very shortly.

So we're very pleased with what we're seeing in our biomaterials business as it continues to be a stellar performer within our organization.

Looking out to the guidance for the quarter, for the third quarter we expect sales will be in the range of $13.7 to $14.2 million, royalties $6.6 to $6.8 million, and total revenue $20.3 to $21 million, and EPS $0.25 to $0.27.

Looking at the guidance and comparing that to what we would expect if we hit these numbers year-over-year, the sales increase would be a 9% to 13% increase year-over-year and would also reflect a 4% to 8% sequential growth. Royalty income would be 5% to 8% growth year-over-year and 2% to 4% on a sequential basis. Total revenues, this reflects a 7% to 11% growth year-over-year, and a 4% to 7% growth on a sequential basis, all very strong numbers.

And for earnings per share, the EPS would reflect a 29% to 40% growth compared to our EPS last year as reported of $0.19 a share. On a sequential basis, EPS would grow 17% to 26%.

So a combination - again, the story of the second quarter of sales increasing and growing in all our business segments along with continued growth in our royalty business and also a reduction of our operating expenses, certainly primarily in the endovascular R&D space.

So all in all, I think an excellent quarter for Kensey Nash. Very strong performances by both Endo and Biomaterials, and we expect that this is going to continue for the remainder of our fiscal year as we see the business in Bio and the ongoing strength in the Endo and the success of the products in the field.

So at this point in time, I'd like to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from the line of David Turkaly from SFG. Please go ahead.

Shawn Bevec - Susquehanna Financial Group

Good morning. This is Shawn Bevec in for Dave.

Joseph W. Kaufmann - President, CEO

Good morning.

Shawn Bevec - Susquehanna Financial Group

You mention in the PR that endovascular sales growth was hampered by the size of the sales force, which was smaller by about 35%. Can you explain what's going on here? Did you not hire as many as you originally projected or were some of the sales reps leaving?

Joseph W. Kaufmann - President, CEO

It's a combination of the two. We obviously, as we mentioned previously with our situation in terms of looking at strategic alternatives, this has certainly created some uncertainty in the sales group, so we weren't able to have the full complement of salespeople during the first half of our fiscal year.

So we do have some open territories, and those territories we continue to operate our business based on the fact that we are going to build territories when we can. And so this obviously had an impact on our business.

However, despite that, I think you can see in the numbers that the products continue to grow and perform very well. And not only in the U.S. but also you can see in the numbers, particularly outside the U.S., the outstanding performance by our international team, the direct sales force in the German operation and also the distribution network that we have established primarily in the European theater but also expanding into other areas.

Shawn Bevec - Susquehanna Financial Group

Thanks, and one other thing.

Can you talk more about some of the - a little bit more about the second generation endovascular products and how that might affect -- I know R&D has come down the last two quarters. Should we expect that to continue with the development of these second gen products?

Joseph W. Kaufmann - President, CEO

Well, R&D expenses - we announced last year at the end of our fiscal year that we were eliminating our embolic protection projects and discontinuing that particular product line.

Last year we had expended quite a bit in terms of clinical trials within that product category, so we had savings we're seeing this year.

Moving forward for the rest of this fiscal year and looking at the R&D expenses, we certainly have not changed in terms of our efforts in producing or generating second generation products with the ThromCat, certainly ongoing improvements, second generation for us at Kensey Nash with the Safe-Cross product, and then also looking at expansion of the QuickCat line.

So those are areas where we continue to invest R&D efforts, and that won't change.

In looking out into the next quarter or so in terms of R&D expenses, I would expect that overall on a sequential basis R&D expenses will increase, but it will be an increase that will take place not only with what I just commented on as far as endovascular, but also in our biomaterials.

Our biomaterials R&D today is taking up, as it should, a greater percentage, greater share of our R&D expenses as we have not only our current products that we continue to expand and grow, new customers that we are working with. We announced back in the December timeframe, November timeframe, the recent commercial launch of a product called OsseoFit with Biomet as a result of our expansion in our biomaterials group.

But also we have several projects that are longer term and we're very excited about, including cartilage repair, annulus repair that we've mentioned several times, and those are ongoing programs that are continuing to invest R&D dollars.

So yes, R&D will increase sequentially. That's reflected in our guidance, reflected in the EPS numbers that I previously mentioned.

Shawn Bevec - Susquehanna Financial Group

Thanks.

Operator

(Operator instructions) We do have a question from the line of James Sidoti from Sidoti & Company. Please go ahead.

James Sidoti - Sidoti & Company

Good morning, Joe. Good morning, Wendy.

Joseph W. Kaufmann - President, CEO

Good morning.

Wendy DiCicco - CFO

Hi, Jim.

James Sidoti - Sidoti & Company

On the orthopaedic side, you mentioned you had sales to Biomet during the quarter. Now, I know historically when a new customer orders, the sales tend to be rather large at the beginning as they start to fill their distribution channels. Is this the case with Biomet, or do you think Biomet will actually pick up over the next couple of quarters?

Joseph W. Kaufmann - President, CEO

It is not the case with Biomet. It's a situation where the product has had a very, very limited launch at this point in time. There has been no pipeline filling at this time.

We think the product is going to be very successful for us and also for our partner in this space, but the numbers for the second quarter do not reflect any significant, relatively significant dollars in terms of pipeline filling.

James Sidoti - Sidoti & Company

And then on the endovascular front, how many sales reps do you think you do need to add to adequately cover the U.S.?

Joseph W. Kaufmann - President, CEO

Well, we have said many times that the tight numbers that we were looking at this year and where we wanted to be was in the 20 range for sales reps.

James Sidoti - Sidoti & Company

And I assume that, because of the comments you made earlier, you're well below that at this point?

Joseph W. Kaufmann - President, CEO

That's correct.

James Sidoti - Sidoti & Company

Okay. All right. Thank you.

Operator

You have a question from the line of Bill Plovanic from Canaccord Adams. Please go ahead.

William Plovanic - Canaccord Adams

Canaccord Adams. Good morning.

Joseph W. Kaufmann - President, CEO

Good morning.

William Plovanic - Canaccord Adams

Just a kind of run off of the last question, the growth of the business, you know, that was a very strong quarter in the biomaterials, but what's the growth of the business excluding the stocking?

Joseph W. Kaufmann - President, CEO

There wasn't any stocking in the quarter. If you look at our business for this quarter, we don't have any stocking with our products for our customers in this quarter. There isn't anything that we're certainly aware of in terms of any stocking that would take place.

William Plovanic - Canaccord Adams

Okay, and then in terms -

Joseph W. Kaufmann - President, CEO

Bill, we're always getting orders certainly from our customers where we may have some new product launches and they have initial quantities, but looking at our business for this past quarter, there isn't anything of significance that I could point to that say that we had what we would consider large one-time orders that we won't see repeat orders down the road. That's not the case here.

William Plovanic - Canaccord Adams

Okay. All right, that's all I had. Thanks.

Joseph W. Kaufmann - President, CEO

Okay.

Operator

(Operator instructions) We have no further questions at this - I'm sorry, we do have one from Charley Jones from Barrington Research. Please go ahead.

Charley Jones - Barrington Research

Hi, Joe. Hi, Wendy. Congratulations on the turnaround here.

Joseph W. Kaufmann - President, CEO

Thank you.

Charley Jones - Barrington Research

I had a couple questions.

One, I was wondering if you could talk about which products really grew nicely in Europe? Can you talk about some areas of strength there specifically?

Joseph W. Kaufmann - President, CEO

Sure. I assume obviously you're referring to the endovascular group.

Charley Jones - Barrington Research

Right.

Joseph W. Kaufmann - President, CEO

In Europe, it's been the ThromCat and the QuickCat.

Currently, we are still awaiting the CE Mark approval for the Safe-Cross, so we haven't sold Safe-Cross in the European communities. So we have had some relatively small sales of Safe-Cross in some other countries that don't require CE Mark approval, but it's been the QuickCat and the ThromCat is where the significant growth has occurred.

Charley Jones - Barrington Research

And then lastly, on the spine side, can you go into a little bit more depth about where you're seeing the strength here? Is it from new customers or is it really more from existing customers?

Joseph W. Kaufmann - President, CEO

Primarily our existing customers.

We have several important relationships that we have talked about - companies like Orthovita, Medtronic, Zimmer  and those are the companies that we see business is doing very well and growing. These are products that I think all those companies are making very nice headway in getting these products into the marketplace. And performance that we're hearing, feedback that we're getting from these partners has been very positive.

So that's something we're pleased with, and how we're seeing the growth in the space obviously reflected in the numbers here.

And also we think down the road, with the new relationships we have talked about, the expansion outside of the spine area with biomed and sports medicine.

Also in the numbers that we reported today, you see the sports medicine numbers were up very nicely. And it's not just the biomed but it's also one of our longstanding great customers, Arthrex, where we're seeing a nice rebound in business with not only the current products but also some new products.

So it's a pretty broad kind of expansion in growth that we're seeing in biomaterials, and I think that's important that understand that, that these are not numbers that are - where we're seeing one-time sales or pipeline filling.

This has been something that we have been watching and monitoring over certainly a long period of time, and this reflects a growth in our business and certainly, I think, is a testament to the capabilities of Kensey Nash but also the strong partnerships and the strategic partners that we have in place and their ability to generate enduser sales with these products.

Charley Jones - Barrington Research

So would you say the resurgence in your sports medicine business, is that, you know, can you continue that here over the next several quarters? Is this a trend you're seeing, or do you think it will continue to be choppy?

Joseph W. Kaufmann - President, CEO

I think that you're going to see in our business, as we've mentioned many times, there are going to be periods where there'll be some choppiness.

But overall, we see the sports medicine is going to continue to grow and grow very nicely, not only because of our current customers but you have to remember we're in a very early - relatively early - phase with a company like Biomet, and so our expectation there is that things are going to grow from the very small levels that we're at today. And obviously that's certainly contingent on success in the marketplace with these products, expansion of indications, all those sorts of things.

But we're expecting to see biomaterials continue to grow very nicely.

Charley Jones - Barrington Research

And then finally, your spine growth, would you characterize that growth as being strong across all three companies or was it more heavily weighted to one or two of them? I know the relationships with Medtronic and Zimmer are more recent than Orthovita.

Joseph W. Kaufmann - President, CEO

With all three, it was very good. I mean, obviously within those numbers there are some, in terms of timing of orders and that sort of thing that takes place, relative comparisons to year-over-year, but I think the message that people should take away from this call is that it's really looking at the end-user sales of our partners and the growth that's taking place among all three of our major partners in this particular space.

And so I think it is a - I would characterize it as being a broad growth of our product sales with all of our customers.

Charley Jones - Barrington Research

Thanks, Joe. Thank you very much, Wendy.

Joseph W. Kaufmann - President, CEO

You're welcome.

Operator

You do have a question from the line of Kevin Livingston from Consonance Capital. Please go ahead.

Kevin Livingston - Consonance Capital

Hey, good morning, Joe. Good morning, Wendy.

Just a quick question on the cap structure with the mortgage drawdown in this quarter.

So can you talk about how you think about the balance sheet now with the $60 million in cash and debt on the balance sheet, and maybe in the context of new business development opportunities as well as the remaining capacity on your share buyback? Thanks.

Joseph W. Kaufmann - President, CEO

Well, we think we have certainly a very strong balance sheet in that we have generated cash. Operating cash flow has been very strong in both of our quarters - first quarter and second quarter.

As this business is growing, we are still generating cash. We have, I think, great control in terms of looking at the capital budget or capital expenditures within Kensey Nash.

We have spent quite a bit of money over previous years in building an infrastructure that is capable of allowing us to grow and expand our business, and that's in place now.

And I think a great example of how we've capitalized on that is with this acquisition that we did last year with the products from MacroPore Biosurgery. That has helped us grow our business, and certainly we were able to take advantage of that because of the infrastructure we had put in place.

So looking at the buyback, the numbers that we placed in the press release, that certainly was, I think, a very active plan. We don't comment on what our plans are in the future in terms of any buyback, but very pleased with the strength of our balance sheet and also the capabilities that we have put in place here to continue to grow this business.

And if there is a - we don't comment, obviously, on acquisitions or things like that other than to say that if there's something that makes sense for Kensey Nash and it's strategic and it fits our business model, then we will look at it and we will execute on those transactions if it makes sense for Kensey Nash

Kevin Livingston - Consonance Capital

Thanks, Joe.

Operator

We have no further questions at this time.

Joseph W. Kaufmann - President, CEO

Great. Okay. Well, again, I thank everyone for listening in on the call today, and I think the message from Kensey Nash here is a strong performance for the second quarter.

We expect that the third quarter's going to show, again, a very, very strong performance on a sequential basis and year-over-year, and I look forward to speaking with everyone in the future. Thank you.

Operator

Ladies and gentlemen, this conference will be available for replay after 11:00 a.m. today until February 8, 2008 at midnight.

You may access the AT&T Executive Playback Service at anytime by dialling 1-800-475-6701 and entering the access code 905138. International participants may dial 1-320-365-3844. Again, those numbers are 1-800-475-6701 and international 1-320-365-3844, and the access code is 905138.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: Kensey Nash Corporation F2Q08 (Qtr End 12/31/07) Earnings Call Transcript
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