Minrad International Inc. Q4 2007 Earnings Call Transcript

Minrad International Inc. (BUF)

Q4 2007 Earnings Call

March 31, 2008 4:30 pm ET

Executives

Charles Trego - Chief Financial Officer and Executive Vice President

William Burns - Chairman and Chief Executive Officer

Analysts

Stuart Cope

David McCarthy - Citigroup

Rick Hodin

Matt Barber

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to the December 31 earnings release conference call. (Operator Instructions) Without further ado, it is my pleasure to turn the floor over to your hosts, Chuck Trego and Bill Burns.

Charles Trego

Good morning, everyone and thank you for joining us today for our fourth quarter and year end earning conference call. My name is Chuck Trego, and I am the new Chief Financial Officer with Minrad as of March 3, 2008.

I will comment this afternoon on our financial performance for the fourth quarter and 2007 and turn the floor over to William Burns, our Chairman and President to speak to you about other issues that impacted our operating results for 2007.

Revenue for the fourth quarter was $3 million, a decrease of $2.8 million or 49% compared to $5.8 million for the same period in 2006. Revenue was $12.9 million for 2007, a decrease of $3.4 million or 21% compared to $16.3 million in 2006.

This decrease in revenue for both the fourth quarter and the year for 2007 is primarily attributable to a decline in domestic sales due to disruptions in our manufacturing operations, which limited production output and sales, which resulted from the addition and startup of a new independent sevoflurane manufacturing line in the first week of December 2007.

In effect, we only had 2.5 weeks of production on the new line in the fourth quarter of 2007. Prior to the startup of the new line, production in the fourth quarter of 2007 was also very limited due to our observance of safety concerns during the changeover operation.

International sales were relatively flat between 2007 and 2006.

Our anesthesia and analgesia product line generated 96% and 99% of revenue respectively for 2007 and 2006. Sevoflurane sales in 2007 were $8.4 million, a decrease of $2.1 million or 21% compared to 2006.

Isoflurane sales in 2007 were $3.2 million, a decrease of $1.1 million when compared to 2006. Sales to OEMs which are included in our U.S. sales increased from $1.2 million in 2006 to $1.4 million in 2007 due to the availability of sevoflurane as a product of choice in addition to isoflurane and enflurane.

Gross profit was a loss of $1.7 million and a loss of $6 million for the fourth quarter of 2007 and total year 2007, respectively, compared to gross profit of $1.3 million and $5.6 million for the same period since 2006.

The reduction in gross profit for both the fourth quarter and total year 2007 was driven by a decrease in revenue and an increase of cost of goods sold both, of which are attributable to disruption in operations, which limited production, output and sales resulting from the addition and startup of our new independent sevoflurane manufacturing line in 2007 as discussed previously.

A reduction in gross profit also resulted in the fourth quarter and 2007 from the charge to cost of goods sold of $2.5 million to establish a reserve for work-in-process inventory to cover supplier-related issues that have unfavorably affected product yield.

It is the company’s intent to resolve these issues in an expedited manner and recover some of the cost incurred associated with these yield losses.

Gross margin was a loss of 55% and 4% for the fourth quarter of 2007 and total year 2007, respectively, compared to a gross margin of 21% and 34%, respectively, for the same period since 2006.

A couple comments on our operating expenses. Sales and marketing expenses for 2007 were $8.4 million or 65% of revenue, compared to $5.1 million or 31% of revenue in 2006. The increase was driven primarily by an expansion of our sales organization both domestically and internationally to accommodate anticipated expanded sales growth.

Research and development expenses for 2007 were $5.4 million or 42% of revenue, compared to $2.9 million or 18% of revenue in 2006. The increase was primarily due to an expansion of our research and development efforts related to our anesthesia and analgesia product lines, real-time image guidance and conscious sedation.

Finance and administrative expenses for 2007 were $4.4 million or 34% of revenue, compared to $4.6 million or 28% of revenue in 2006. Increases in depreciation and office rental expenses in 2007 were offset by decreases in employment expenses.

For 2007, the company reported a loss of $18.8 million or $0.39 per common share. This compares with a loss of $7.3 million or $0.20 per common share the company reported in 2006.

And now I will turn the call over to William Burns.

William Burns

Good afternoon. I’m going to focus on the five questions I’ve been asked most frequently as we finished up our year-end.

The most frequent question is, clearly, what is the status of production shipping from Bethlehem? I am happy to say production is building on a monthly basis.

We ended 2007 with approximately $12 million in backlog. This has been substantially reduced and the sevoflurane order book is presently essentially current, a major improvement since the year-end.

The second most popular question is how’s Rx Elite doing with the GPOs and vaporizer placement in the United States? We’ve seeing consistent growth from our Rx Elite and thus far they have announced two GPO contracts: a multisource award with Premier and also the HealthSouth Surgery Center network.

We’ve also seen increasing vaporizer placement and some shortening in both vaporizer placement time and time to initial order.

The third most frequent question is about our cash flow: just how tight is cash and when will we see it improving on an operating basis? As we reported in our press release as a subsequent event, first quarter sales were between $11.5 and $12 million. This is roughly 90% of all of last year.

At the end of 2007, we had an account receivable balance of $3.3 million. With the sales ramp up we’ve achieved in the first quarter, we’ve seen a substantial increase in working capital.

As we collect our first quarter revenue, we will begin to match raw material cost and expenses, probably in the May/June period. As most of you know, we sell substantially overseas; we have to ship by boat; there is about a 30 day lead time there plus the terms that are consistent in the marketplace.

So we are really going to recoup efforts that we made in January and early February in the May/June period. We’re also studying a number of bridge and longer term financing alternatives to supplement internal operations and relieve the stress that our growth has created on our vendors.

Bottom line, the company now has a steady order book, a functioning production system, and we simply need to convert raw materials to finished goods, ship and collect.

The fourth question that I’ve gotten is, what is the status of new products and product approvals? We’ve reported filing our A&D on (inaudible) and are presently awaiting FDA notification that the application has been accepted for review.

We plan to file our conscious sedation 510(k) in the second quarter. Regarding product approvals, we continue to meet our goals of following filings in 2006 and early 2007. In the first quarter we’ve received three new sevoflurane approvals, which brings our total of 15 countries that have approved Minrad sevoflurane.

Final question, and mainly just because you haven’t had a chance to ask me yet is, what should we read into the organizational change in the appointment of DiGiacinto as my successor?

Personally, I think all shareholders should view this positively. As evidenced by our first quarter revenue we’ve now switched to the execution phase versus strategic plan. Having someone that’s proven themselves in the industry as an Operation’s Manager should accelerate our plan and margin improvement.

Second, we’ve built our whole business on personal relationships. We’re now selling in 50 countries and the reality is we need to be in the field both in the United States and internationally working with our customers. And you simply can’t be in two places at once.

I believe we’ve built a very strong management team over the last several years and adding Dave to our core management group of Kirk Kamsler, Dennis Goupil and Charles Trego positions the company very well to maximize 2008, 2009 performance.

2007, the most charitable thing we can say about it was ugly. The best thing we can say about it is it’s over. But if you look at the revenue as we approach the first quarter I think that for most of you, you will see the light at the end of a tunnel here.

Martina, Chuck and I and Bill Rolfe and Kirk Kamsler are open to take questions.

Question-and-Answer Session

Operator

The first question is from Matt Barber.

Matt Barber

What is the estimated sales for 2008 and what is the estimated earnings for 2008?

William Burns

We don’t have an earnings estimate. What I can tell you is I gave a talk at the World Congress of Anesthesia where we posted our revenue expectations for 2008. It’s on the Minrad web page, on the front page under, I believe, Investor Discussion, and we are looking for revenue in 2008 in excess of $50 million.

Operator

Next question comes from David McCarthy - Citigroup.

David McCarthy - Citigroup

In the previous conference call, you said that you’d be profitable in December. Were you?

William Burns

With the exception of the reserve that we established for the chemical, we were operating profitable following the startup of our plant.

David McCarthy - Citigroup

And can you give us an idea of what sort of margins we can expect you to have achieved in the first quarter?

William Burns

We’re slow to do that, David. What I can say is they’re going be substantially better than you’ve seen in the past, reflecting the fact that we have higher volume and better overhead absorption. We’re looking at a sharply reduced yield variance, and we’d actually have some positive product mix in the first quarter.

We don’t give out margin information specifically. And I will say that we believe over the first two or three quarters, it will continue to build as we increase the volume and work the kinks out of the plant as we work improvements in different operating stages. But I don’t think there’s going to be any negative surprises here.

David McCarthy - Citigroup

Can we expect that the fourth quarter was very much an anomaly and at a minimum, we should look at the previous quarters as guidance, or an estimate of margin?

William Burns

I hope not. No, we’re going to be improved substantially. I’m not trying to dodge your question, David; we just don’t provide that information. But we see it coming up sharply in the first quarter reflecting the volume increase and yield improvements.

David McCarthy - Citigroup

You said that you managed to work off and you’re pretty much current on sevoflurane…

William Burns

Right.

David McCarthy - Citigroup

And the backlog. So what run rate are you looking at now that you’ve worked off the backlog? Because you started with about $10 million in backlog, didn’t you?

William Burns

Right. We still have backlogs on two other drugs, enflurane and isoflurane. Isoflurane, the plant is running efficiently but our order rate has being quite good and it’ll probably take us into early May to mid-May to catch up there.

Enflurane, it will probably take us the second quarter to catch up. We do have future orders David, that are in our order book, but it’s a little bit like good cholesterol and bad cholesterol. When the order book looks at the future that’s good cholesterol; when it’s past due it’s bad cholesterol.

I think when you look at us saying that we’re going to do $50 million-plus in 2008, you’re getting a pretty good idea the run rate and its sustainability beyond the opening backlog.

Operator

Next question comes from Rick Hodin.

Rick Hodin

I just have a couple of quick questions, partly a follow-on from the last question. You’re talking about good cholesterol, bad cholesterol. How much good cholesterol actually is there in the system here?

William Burns

That was good question. There’s more good cholesterol than there was at the beginning of the first quarter.

Rick Hodin

Will that be shipped in the second quarter…?

William Burns

On an ongoing basis in the anesthesia and analgesia side of the business, naturally for a plant you’d want three- to four-week order book at any time, even if some of it’s forward order book, so you could produce orders at a steady phase.

We have slightly over that right now, and we believe based on what we’ve seen from our distributors and at the World Congress, we’ll see that the order rate pick up in the May-June period pretty significantly, but where we are now we’ll be able to handle that increase because the plant is able to produce.

So my goal is really to try to keep it at three to four weeks forward orders, and balance the production in the packaging, which right now packaging tends to be the bottleneck in our facility.

But we don’t provide specific numbers. We did at year-end so that people would understand where we were and could gauge the fact that the plant was actually producing.

Rick Hodin

So that means you would be comfortable with $12 to $13 million in sevo revenue in the Q2?

William Burns

Not sevo revenue, no. In the first quarter, sevo revenue was maybe 75% to 80% of those numbers, and I think it’s going to be 75% to 80% as we go forward.

In the second quarter, one thing everyone should realize, and this doesn’t affect the ongoing business, but in shipping the backlog in the first quarter, we have some digestion at our customer level that they’ll be digesting the inventory we’ve shipped, and some of them were cautious when we had problems; increased their safety stock.

We think that over time those safety stocks will come down simply because they are looking at a more consistent supply. So no, my comments on the second quarter are more in totality than on any individual product line.

But obviously sevo is going to be the biggest product line, Rick, but I think $12 to $13 million, I’d love to see that but I think you are going to have to wait a quarter or two to get there.

Rick Hodin

Okay. Rx Elite recently announced a couple of pretty large and what would appear to be pretty important contract wins with Surgical Care and Premier in the States.

William Burns

Yes.

Rick Hodin

Those are basically for anesthetic gases? Are any of those numbers incorporated into your forecast, your expectations for Q2?

William Burns

No, not in Q2. We will begin to see some of the volume in June. The way these contracts work and they are very significant. As I said we were seeing real progress here. After you sign a contract, you then have to put vaporizers into the each institution. This can be a process that will take anywhere from a week to four weeks.

Then after they place the vaporizer, it’s generally roughly 60 days to the account orders from Rx Elite. And this is a function of hospitals are not going to keep a short supply of anesthetic gases, and so they won’t order until the vaporizers are replaced.

So it’s generally between 60 and 90 days from the time you win a contract and place it in the hospital to when you get volume. Volume is growing in Rx Elite from these two contracts, which have been announced, I think you’ll see volume really spike in the June period at Rx Elite which means we would see it more in the third and fourth quarter in our orders from them, because they too will be balancing their inventory out.

And there are more GPOs to be awarded and we are hoping that Rx Elite continue to do as well as they have.

Rick Hodin

Okay. Given the changes at the management level, can you just briefly address what the future for conscious sedation is? Is it going to meet its timelines you were originally talking about, May/June, going to volunteer study Phase III in July/August (inaudible) December of this year, is that likely still going to hold?

William Burns

I’m one of the inventors of the conscious sedation and so I can spend more time on it. Rick, we showed conscious sedation at the World Congress and it was very well received. We plan to file the 510(k) in the second quarter. I think the first volunteer studies will be done by the end of the third quarter.

We probably won’t start a major study in the July/August period because of resident changeover and vacation. But we’re still targeting year-end to file our supplemental NDA; that’s our target.

One of the two or three things I’m really going to focus on is to get this across the finish line. The company is very encouraged by the response we’ve gotten…

Rick Hodin

So, it hasn’t lost any priority in your…?

William Burns

Oh, no. If any thing has picked up the priority, and I think it will benefit from having an expanded management cadre, so we can put more resources, not just myself, but Dennis Goupil and some of the other people here on the project. It hasn’t lost any priority at all.

Rick Hodin

Okay. That’s good to hear. I am going to put you on the spot. I got just my one final question here, when do you feel comfortable that you will report your first profitable quarter?

William Burns

I think that I’ll be willing to answer that at the end of the first quarter when we see where the actual margins come out in each operation in the plant; we only ran some of the operations a couple of times before the end of the fourth quarter.

We have 22 different operations and Rick I’d really like to look at each operation because even if your get a bad result in one operation you may be able to say ‘oh I can fix that’ and it may be even more immediate.

But I’d like to see that information on more granular level at the plant because versus just general number deploying into that, but we’re making very good progress and either David DiGiacinto or I will very shortly be telling you we made a profit, but I want to see those numbers before I make a commitment.

Rick Hodin

Okay. Thank you Bill, I really appreciate your time.

Operator

We do have another question from David McCarthy - Citigroup.

David McCarthy - Citigroup

First of all you mentioned that you’re looking at an alternate sources of financing; you did a reasonably large financing there recently and obviously revenues picked up and it’s not the best of environments to do a financing. So what level of financing do you feel you need going forward?

Charles Trego

That’s a good question. The best answer and the correct answer is that the execution of our business plan for 2008 as developed by our senior management and approved by our Board cannot take place without access to cash flow outside the company.

And that’s because the timing of the ramp up of sales for our company and the continuing output of our Bethlehem facility, primarily based on our new line that went into effect in December. The timing of when those cash flows take place, we can’t execute our plan without the infusion of some external cash.

So as I said in my comments, as we say in our 10-K also that we’re filing today, is that we have a number of sources that we’ve been talking to, to provide the interim financing we’re going to need. And we feel very comfortable that those sources are going to be available and we’ll have access to that financing in the second quarter and be able to execute our plan as developed and approved by our Board.

There is a lot of noise in the marketplace right now, as a result of all the events that have taken place. But we feel confident based on discussions with potential providers of capital that we will have access to that capital and we’ll be able to best execute our plans for 2008 that Bill talked about earlier.

David McCarthy - Citigroup

But it’s a question of how dilutive that will be? So do you expect warrants to be a part of this?

Charles Trego

Yes.

David McCarthy - Citigroup

So that is the issue. Another question is, you were talking about opening another packaging line back in December, did you do so?

Charles Trego

Talking about opening another packaging line, what I was indicating is that we were going to work overtime until we open a new packaging line, we’re going to build the packaging building adjacent to the plant. And yes, the plant has been working 50, 60, 80-hour weeks in packaging to go through the backlog.

And to be honest, I think that Tom Callari, (Jamie Noel?), Gary (inaudible) and Mike Rob, those guys just did a terrific job to work through the backlog so that we are now more contemporaneous with what our customer needs.

We will have to probably go through a second shift permanently in the fall, but for the second quarter, we’re hoping we can get by with one shift in overtime.

David McCarthy - Citigroup

The work in progress, that’s the rework. How much of the $2.5 million should we expect that you can recover?

Charles Trego

We don’t have a firm answer for that. It was a very good question. We don’t have a firm answer for that question at the present time. We’re conducting a lot of testing to determine that answer and technical type of testing. And we just don’t have an answer for that question.

We booked a reserve at the end of the year almost based on a worst-case scenario in terms of very low recovery. But our hope is it’s better than that, but we can’t answer your question without any degree of information at the present time, which we don’t have.

William Burns

I’m going to add a little bit more candor, David. I don’t want to answer your question because we are expecting to file an insurance claim against the supplier and their provider. And I think that it would not be in the company’s interest for us to provide guidance as to what kind of settlement we might get.

David McCarthy - Citigroup

Okay.

William Burns

Not a Minrad source problem, is what we’re telling you.

David McCarthy - Citigroup

Okay. I’m a bit stupid, but I can read a little bit between the lines. And the inventory build that you talked about. Can you give us an idea of the size of that? It’s very much like the semiconductor industry where if something is in short supply, people double order.

William Burns

Yes. I think that we actually talked to each of our customers and we just had 55 together at the World Congress. We have about five customers that put in a strong safety stock. Four of them we see getting back into the order stream by June, David, and those are four international customers.

There’s one customer, it will be dependent on a tender in their country that won’t be awarded for another two or three months. So I can’t tell you which way that’s going to go. But by June, we think we’ll be through the digestion and be in a normal processing.

Yes, we do have these (inaudible) fortunately, our organic growth rate has been very good in our international market. And so they actually ended up with less safety stocks than they plan, but we do have five customers that Kirk Kamsler and I are looking at very closely.

David McCarthy - Citigroup

And would any of those be 10% customers?

William Burns

Yes. One would be.

David McCarthy - Citigroup

Okay. Thank you very much.

Operator

And we do have a question from Stuart Cope.

Stuart Cope

I’d like to know how and what company is going to finance the vaporizers, is that Rx or is that Minrad?

William Burns

That’s an Rx Elite program and they have been working on a series of programs to finance vaporizers. We’ve been very happy with the rate of increase of vaporizer placement.

Now, we do finance some vaporizers, but it’s largely at teaching institutions then tied to our marketing program and we expense them, but it is less than 5% of the vaporizer expense in total. Our distributors place the vaporizers around the world.

Operator

It appears that was the last question.

William Burns

Thank you very much. Again I really appreciate your support in MINRAD. As I said, I think, we’re joining in a new day here and the first quarter is going to be very attractive. Thanks again.

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Comments

[davemcc3300:]

This week's 10.6% share price increase came after announcing (1) a
losing quarter (a production disruption resulted in a drop in sales);
(2) hiring of a new CEO; and (3) dribbling out news that Q1 sales will
be about 40% higher than all of 2006! BUF fans saw this coming.

And I still say that $6.50 by the end of 2008 is "likely", and $10/
share is "possible" if a big pharma acquisition is in play. Look at
the new CEO's background:


"David DiGiacinto has been named as president and chief operating
officer, effective April 1, 2008, when he will take over the day-to-
day operations of the Orchard Park company (AMEX: BUF). Plans then
call for DiGiacinto to become chief executive officer on Jan. 1, 2009,
replacing William Burns Jr.


DiGiacinto is joining Minrad from Spencer Trask & Co., a New York City-
based private equity firm, where he served as a Senior Managing
Director. Spencer Trask invests primarily in early stage companies
with technologies in a variety of market segments. DiGiacinto is
familiar with Minrad as an early stage investor in 1999 and provided
the primary financing to Minrad through 2002. He also spent 18 years
at Pfizer Inc." [bizjournals.com]


Dave

2008 Apr 08 01:53 PM

[buffalo:]

What a nice "misexpectation" $ 6,50 by the end of 2008.
Share-price has reached § 0,60 alredy by the end of October.
Good Luck.



On Apr 08 01:53 PM davemcc3300 wrote:

> This week's 10.6% share price increase came after announcing (1)
> a
> losing quarter (a production disruption resulted in a drop in sales);
>
> (2) hiring of a new CEO; and (3) dribbling out news that Q1 sales
> will
> be about 40% higher than all of 2006! BUF fans saw this coming.
>
>
> And I still say that $6.50 by the end of 2008 is "likely", and $10/
>
> share is "possible" if a big pharma acquisition is in play. Look
> at
> the new CEO's background:
>
>
> "David DiGiacinto has been named as president and chief operating
>
> officer, effective April 1, 2008, when he will take over the day-to-
>
> day operations of the Orchard Park company (AMEX: BUF). Plans then
>
> call for DiGiacinto to become chief executive officer on Jan. 1,
> 2009,
> replacing William Burns Jr.
>
>
> DiGiacinto is joining Minrad from Spencer Trask & Co., a New York
> City-
> based private equity firm, where he served as a Senior Managing
>
> Director. Spencer Trask invests primarily in early stage companies
>
> with technologies in a variety of market segments. DiGiacinto is
>
> familiar with Minrad as an early stage investor in 1999 and provided
>
> the primary financing to Minrad through 2002. He also spent 18 years
>
> at Pfizer Inc." [bizjournals.com]
>
>
> Dave
>
>

2008 Oct 31 09:59 AM