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Cardica, Inc. (NASDAQ:CRDC)

F4Q12 Earnings Call

August 2, 2012 4:30 p.m. ET

Executives

Robert Newell - Chief Financial Officer and Vice President, Finance

Bernard Hausen - President, Chief Executive Officer and Co-Founder

Analysts

Akiva Felt - Wedbush Securities

Ed Arce - McNicoll, Lewis & Vlak

Operator

Good day, ladies and gentlemen and welcome to the Q4 2012 Cardica Financial Results Conference Call. My name is Claire and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference call. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Bob Newell, Chief Financial Officer. Please proceed, sir.

Robert Newell

Good afternoon, and thank you for participating in our fiscal 2012 fourth quarter and full year financial results conference call. Earlier today we issued press release setting forth our financial results, so please refer to the release for a complete detail.

The conference call will include forward-looking statements, including all statements regarding the continued clinical and other developments, products features regulatory approval, and commercial launch and use of products in our planned MicroCutter product line, including our MicroCutter XCHANGE 30, XCHANGE 45, and XPRESS 30, including the timing thereof and our expectations future support for and sales of our automated anastomosis product.

Any statements contained in this conference call that are not historical facts may be deemed to be forward-looking statements. The words anticipated, expect, continue, will, can, potentially, may, plan, planned, beginning, would, will, intend, look forward and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including those set forth in our press release of today as well as other risk detailed from time to time in our reports filed with the U.S. Securities and Exchange Commission, including our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2012.

We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement. You are encouraged to read our reports filed with the SEC, available at www.sec.gov. This all is a property of Cardica and any rebroadcasting of this call without the express written permission of Cardica is prohibited.

At this time I would like to turn the call to Bernard Hausen, Cardica’s President and CEO for corporate update.

Bernard Hausen

Thank you, Bob. Good afternoon, everyone. Thank you for joining us on our call today. Over the course of the last several months we have made tremendous progress on the path towards commercialization of our Cardica MicroCutter XCHANGE 30, a cartridge-based device with a 5-millimeter shaft diameter and articulation of up to 80 degrees. We announced last week that we have resumed the European clinical study of the MicroCutter and it is going very well. Prior to the resumption of the trial, more than 30 surgeons performed over 80 procedures with more than 250 deployments in total over the course of the last three months.

MicroCutter has been used in appendectomies, intestinal resections, lung resections, vascular transections and a host of other gastrointestinal procedures. Already, surgeons have used the XCHANGE 30 to treat ten patients in or clinical trial. Many of these patients have been discharged and to date we are not aware of any serious adverse events associated with the use of the MicroCutter.

One of the highlights of the last week was a seven-year old patient who needed an appendectomy. This procedure was performed flawlessly with the MicroCutter system, which allowed the surgeon to resect the appendix with our stapling device through a 5 mm trocar port. Avoiding larger torcars with their associated prevalence for surgical complications, pain and discomfort in children is considered when they have very appealing features of the MicroCutter XCHANGE 30. Therefore, as the MicroCutter is used by more surgeons, we believe there will be an increasing number of pediatric applications.

Other surgical applications that may benefit from the availability of the MicroCutter include vascular transaction, all forms of (inaudible) surgery including liver, kidney, spleen and lung resection. It is probably safe to assume that with this significant change in size and articulation, stapling may find its way into procedures where stapling is currently not an option today.

In the ongoing clinical study, four sites have enrolled patients to date. Initially, our clinical plan is to limit the number of enrolling sites with approximately 30 surgeons trained to deploy the MicroCutter XCHANGE 30. Depending on the enrollment rate and the adequacy of patients of follow-up, according to the study protocol we have the ability to expand the number of enrolling sites to a total of ten. The study protocol calls for the enrollment of 160 patients followed for 30 days after their procedure. We expect to complete the clinical trial enrollment for protocol by the end of the calendar year. We may expand the sample size to approximately 200 patients to increase statistical power of the study.

With this plans larger study sample size, we expect to complete enrollment in the first quarter of calendar 2013. We plan to use the clinical data from this trial for our 510(k) regulatory filing with the FDA in the second quarter of calendar year 2013. We anticipate that we will begin booking commercial sales with XCHANGE 30 in the second half of calendar 2012. We are increasing our manufacturing capacity for both XCHANGE 30 devices and cartridges in order to meet the demand of the clinical trial sites in our initial European commercial customers.

We have hired a director of sales for Europe with significant sales and marketing experience, introducing both stapling and sealing surgical devices to the European market. We will be targeting a select crew of key opinion leaders from all specialties known to employ surgical staplers. This will allow us to determine procedures where small staplers, such as the XCHANGE 30, offer the most benefit through what Cardica may expect with market penetration. This may include niche market or areas where surgeons traditionally have had to proceed without the use of surgical staplers due to space and size constraint.

I would like to take a minute to note that for the next two quarters, we do not expect meaningful sales from our commercial efforts in Europe as our constant focus would be to make sure that each surgeon has consistent positive experience in using the MicroCutter doing a wide array of surgical procedures.

In addition, we will focus on key accounts. Initially in Germany, where we have the deepest exposure to thought leaders. Beyond Germany, we expect to introduce the XCHANGE 30 into Belgium, The Netherlands, the UK and Italy and France during next year, and then other countries throughout Europe. In Japan, Central Medical our distributor in that market, will be taking the MicroCutter through the regulatory process. They are eager to introduce the device in Japan. We continue to believe that we have a tremendous market opportunity outside the United States for MicroCutter XCHANGE 30, and that we will be able to convincingly prove the value of this novel product.

Turning to our cardiac products. As Bob will outline in a moment, our sales have been stable and in addition to routine users, we continue to develop new accounts that we hope to return into long-term adopters. The benefit of our PAS-Port and C-Port systems in terms of their role in facilitating less invasive cardiac procedures is unquestionable in our opinion and continued exposure of cardiac surgeons through our product world, we believe, in the longer term will results in increase sales volume.

These products are mature in terms of product reliability with low device related adverse event rate and excellent product yield. We are implementing new incentives to focus sales efforts on obtaining new accounts who will become clinical adopters of our PAS-Port, C-Port Anastomosis Systems.

At this time I would like to turn the call over to Bob for a discussion of our financial results. Bob.

Robert Newell

Thanks, Bernard. For fiscal 2012 fourth quarter total revenue was approximately $946,000, compared to approximately $1.1 million for the same period of fiscal 2011. Total product sales for fiscal 2012 fourth quarter were approximately $844,000 compared to $949,000 for the same period in fiscal 2011. During the fiscal 2012 fourth quarter we shipped 1200 PAS-Port systems, bringing cumulative worldwide shipments of our PAS-Port system to over 28,500 units. We shipped a 182 C-Port systems during the quarter with cumulative worldwide shipment of C-Port systems now over 13,000 units.

Cost of product sales were approximately $755,000 for fiscal 2012 fourth quarter compared to approximately $847,000 in the same period of 2011. R&D expenses for the fiscal 2012 fourth quarter increased to approximately $2.2 million compared with $1.7 million in the comparable quarter last year. Due to additional development efforts, clinical preparation for our clinical trial and parts expense for the MicroCutter XCHANGE 30.

Selling, general and administrative expenses for fiscal 2012 fourth quarter were $1.5 million compared to $1.3 million in the fiscal 2011 fourth quarter. Total operating cost and expenses for fiscal 2012 fourth quarter were approximately $4.4 million compared to $3.9 million for the same period of 2011. For the fiscal 2012 fourth quarter, our net loss was $3.6 million or $0.10 per share compared to $2.8 million or $0.11 per share in the comparable last year.

Cash and short-term investments at June 30, 2012 are approximately $14.6 million compared to $18 million at March 31, 2011. At this time I would like to turn the call back to Bernard.

Bernard Hausen

Thank you, Bob. To provide an update on our product on our anticipated product development and commercialization timeline, we expect to begin booking commercial sales in Europe for the XCHANGE 30 in the second half of 2012. In addition, we continue to make progress on longer-term design modifications to our MicroCutter XCHANGE 30 and advanced development of our MicroCutter XCHANGE 45, a second cartridge based device that allows for the larger [green] staple lines necessary for bariatric, gastric and other procedures.

And finally, we expect to complete enrollment of our European clinical study with an expanded sample size in the first quarter of calendar 2013. We look forward to reporting our progress in the months ahead. At this time I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Akiva Felt with Wedbush Securities.

Akiva Felt - Wedbush Securities

Good afternoon, guys, and thanks for taking the question. Just have a few questions here. First, have to been able to get any initial feedback on the recent design modification.

Bernard Hausen

Yes. So there is constant improvement in the device that we have been testing over these patients and the ten patients that are enrolled in the study. And the changes that we have made have been generally very favorably taken.

Akiva Felt - Wedbush Securities

You still see this is an iterative process or is the design mostly finalized here?

Bernard Hausen

I think it’s still an iterative process. The important part of the this product the staple line and that is finalized. Have been from day one of testing. This is more about modifications to handle, to user interfaces, reduction of forces where necessary etcetera. So it doesn’t affect the end product phase and the patient value. It’s basically (inaudible).

Akiva Felt - Wedbush Securities

Okay. Great. And then I apologize if you explained that, but the trial, is there a trigger where you would increase the target enrollment from 160 to 200 patients or has that decision already been made.

Bernard Hausen

No, that’s a good question. There is no trigger right now. This is something we are assessing with statisticians to see if it’s necessary to do that or if would be beneficial to do. It’s not a final decision yet. On that point we reported in the call the way we did and we will keep you guys up to date of how we are going to final decide on that matter.

Akiva Felt - Wedbush Securities

Okay. And then one last question. Regarding the commercial launch, I realize that the roll-out is going to be done in phases. But just thinking more broadly, considering the geographies and types of procedures that seems targeted here, how exposed is this market to the European economic climate?

Bernard Hausen

That’s a good, very general question. I can't speak to how in general stapling is effected by the climate. We do know that patients get sick even in the downturns of the economy. This stapling is such an established form of treatment. It is just the gold standard of doing it that I doubt that any type of economical downturn would affect that. In addition we are not planning to charge premium through our product. So we see on par with every other product being used in this [universe] I am not quite sure how the downturn would really negatively affect us, especially on the scale that we are looking at.

Operator

(Operator Instructions) Your next question comes from the line of Ed Arce with MLV and Company.

Ed Arce - McNicoll, Lewis & Vlak

Actually I just had sort of a follow-up on Akiva’s question. With the European trial slated to complete on first quarter of calendar 2013, and if I understand it correctly, you have got about ten patients enrolled now. And the target depending on the final data analysis would be either 160 or 200. I am just wondering, in terms of that timeline, could there be potential delays from the iterative improvement process, or any other interim event that might cause that to maybe push back a bit.

Bernard Hausen

Yeah. That’s an excellent question. Obviously that can always be something that delays it. Right now we are in the middle of summer, and as you know in Europe that’s a major factor for everything. Yet, we have the experience of 80 cases, 250 deployments, that already give us big, big chunk of confidence that we are on the right track with most of the major changes already being implemented. We can't really foresee what could go wrong in the future just around there. There could be something but we are quite confident that we could meet the timelines that we have (inaudible) there.

Ed Arce - McNicoll, Lewis & Vlak

Okay. And with regard to your plan for the rollout in the various countries throughout the EU, just curious as to how you came about prioritizing that order and what were the decisions behind that?

Robert Newell

Of course, we are doing our trial in Germany so we have a lot of relationships in Germany. Also the German economy is one of the stronger, if not the strongest, in Europe. So certainly that’s a target for us. We also are working with our director of sales in Europe who has been through this process a number of times with other stapling products and surgical sealing products. And he has some very strong relationships with some distributors in key markets like the Benelux countries, Belgium and the Netherlands, I think he markets. And then UK and France and Italy will be a follow-on after. Germany and Benelux would be the first two targets.

Operator

There are no further questions. I would now like to turn the call over to Mr. Bernard Hausen for closing remarks.

Bernard Hausen

Thank you all for joining us today. We hope to see some of you at the Wedbush PacGrow Life Sciences Management Access Conference in New York on August 14. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.

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