MINRAD International, Inc. Q1 2008 Conference Call Transcript

MINRAD International, Inc. (BUF)

Q1 2008 Earnings Call

May 13, 2008 4:30 pm ET

Executives

William Burns Jr. - Chairman of the Board, Chief Executive Officer

David DiGiacinto - President, Chief Operating Officer, Director

Charles Trego Jr. - Chief Financial Officer, Executive Vice President

Analysts

Rick Hoyden

Lauren Gross

Rick Cohen

David McCarthy

Ken Garner

Presentation

Operator

Welcome to the March 31 earnings release conference call. (Operator Instructions) It is my pleasure to turn the floor over to your host, Bill Burns.

William Burns

. I have Dave DiGiacinto our President and Chief Operating Officer, and Chuck Trego our Executive VP and Chief Financial Officer with me.

What we are going to do today is follow the procedures we have in the past to talk a little bit about the financials. We will then try to answer the questions for you that we get asked most frequently and then we will open the floor to your questions, to answer any items you have about our first quarter performance.

I'm going to turn it over at this point to Chuck Trego and let him take you through what we did in our first quarter which is up pretty substantial than prior quarters.

Charles Trego

Our first quarter of 2008 performance demonstrated solid improvement in revenue and gross margin over the first quarter of 2007. Revenue for the first quarter of 2008 was $11.8 million, an increase of $8.9 million or almost triple the revenue reported in the first quarter of last year. The primary driver of the change in revenue was an increase in sevoflurane sales in the United States. The increase in sevoflurane revenue accounted for a little over 80% of the $8.9 million increase in revenue for the first quarter of this year compared to last year.

Gross profit for the first quarter of 2008 was $4 million an increase of $3.3 million or 471% compared to the three months of a year ago. The increase in gross profit really was driven by two factors. One, the increase in absolute revenue for the quarter and lower costs of production achieved at company's Bethlehem, Pennsylvania manufacturing facility driven primarily by the startup of our new independent sevoflurane production mine that we have talked about in December of 2007.

Gross margin also increased significantly in the first quarter of this year compared to last year. Gross margin this year was 33.5% of revenue compared to 23.5% of revenue in the first quarter of last year, that’s an increase of 1000 basis points.

Selling and marketing expenses for the quarter were $3.7 million or 31% of revenue compared to $1.9 million or 65% of revenue for the first quarter of last year. As Bill will talk about later, the $1.8 million increase in sales and marketing for the first quarter was primarily driven by $1.4 million expenditure related to the World Congress of Anesthesia an event that’s held once every four years. These expenses will not reoccur in the future quarters of 2008. Excluding the letter, our selling and marketing expenses increased $400,000 to support an $8.9 million revenue increase.

R&D expenses were essentially flat for the quarter compared to last year, $1.1 million in both quarters. Finance and administrative expenses were $1.7 million or 15% of revenue for the first quarter of this year compared to $1.2 million or 41% of revenue for the first quarter last year. The increase in F&A expenses was primarily driven by a little higher incentive compensation related to our results for the first quarter and the non-cash stock option expense increase.

Our operating loss for the first quarter of this year was $2.6 million 22% of revenue compared to 43.5 million or 119% of revenue for the same period in 2007. Interest expense was up slightly $600,000 for the quarter and really relates to the interest we took on in the long-term debt in the second month of February for the first quarter of this year. When all that is added together our net loss for the first quarter was $3.2 million compared to $3.4 million in the first quarter of last year.

So that is a summary of our income statement for the first quarter compared to last year.

William Burns

I'm going to go through the five questions that we get most frequently from you and share where we are today. All three of us will be taking part in the responses here. I will start with the first one.

The question I get most frequently is; how do I feel about our $50 million revenue guidance for 2008? Let me just say right now we see no reason to change our guidance. We did $11.8 million in the first quarter and we have been very encouraged by the new order flow as we’ve gone through the months. What’s unknown is the cadence in new approvals, our forecast includes of entries in numbers in markets which will continue to monitor as the year progresses, but right now there is nothing that would tell us that we should change our guidance.

The second question relates to margin. When are our margins going to approve and in what rate and Dave DiGiacinto, our Chief Operating Officer is going to address that.

David DiGiacinto

First off before I get into that, I’d like to say that I’m brand new to the operation here. For those of you who don’t know me, I joined back in late March and I’d been familiar with the company and part of the company’s growth over the last eight years while at Spencer Trask a private equity firm and I believe it is the tremendous opportunity. I’ve watch the company go through it’s through the paces. I believe is that, the excellent base line that has been built and now in the execution phase, I’m hoping to use my combined experience of private equity in life science and healthcare arena plus my 18 years of Pfizer managing businesses to help this company through its plan.

Getting back to the point that Bill brought up on the margin improvement, I think its safe to say that we saw some very good margin improvement just month to month in the first quarter through January, February and March based on our volume increase and obviously overall we have seen improvement from the prior quarters based on our first quarter number. We are not where we want to be or we hope we would be at this time, and in this regard we’ve established a four points or four step programs to look at yield improving yields during the year 2008.

First off, we are looking at material price improvements, raw material purchase price improvements and we are targeting roughly the third quarter for that improvement. Volume, obviously share movement of volume through that facility will absorb cost and give us a better performance and look in for third quarter on that. Yield improvement, that’s a constant target of ours to improve our yield and that, should be taking place over the whole remaining three quarters as we produce.

The final step and the final point is, it’s just overall and something that manufacturing is continually looking at is process improvements. It is a multi step process of all the three products that we produce right now and there are process improvements in all of these. We’re targeting and I do mean targeting a run rate of 50% margin, that’s again something we’d like to achieve and some words of caution on that is we do have to consider while we are achieving this target, how we sell the products with regards to mix because each product has a various components of cost and also where we sell the products because of our pricing. So that’s pretty much hit on the margin.

William Burns

Thanks Dave, and by the way that target is by year end, it is in right away everybody. We’d like to get there, but it’s not going to be that quick. The third question, we have and I’m going to ask Chuck to respond is following your fund raising with same about this, do you feel you have sufficient capital to execute your business plans.

Charles Trego

Thank you Bill, Yes Bill our balance sheet now has $20 million in cash and also $20 million in current receivables at inventories. Further, our convertible debt that we executed and completed a few days ago had to out for us up to $10 million that we can put in place working capital financing should our growth requirements. The bottom line as we now have the funds available to execute our business plan for the balance of 2008 and beyond.

William Burns

The next most frequent question is what is the status of new products and product approvals and I’ll handle that. There is really three pieces here, the first piece is sevoflurane. I’m happy to say we now have approval in 18 countries and our selling in 13 countries. I just want to take you back to the end of 2007, we only had approval in 12 countries and we are selling in seven. So this is one of the drivers of our growth and maintaining this momentum is critical as we go forward to reach our goals. Second, we reported that we filed our drug claim NDA and we are presently waiting for FDA notification that the applications are accepted for review.

Now we well continue to monitor this, but it’s moving as we would accept to the FDA channel. Conscious sedation, we’ve had some software issues. We had a very warm reception to the product line at the World Congress of Anesthesia, but it will be the end of third quarter, early fourth quarter before we feel that we have the reliability we are looking for in a life support product to be able to file our file 510K. Our portion just had to deal with reallocation of resources to our manufacturing in our plant in Bethlehem and also to our [Inaudible] project program. We are focused on this and I think all of you know no one is interested in conscious sedation as I am.

The final question we get relates to our American business. How is RXElite doing and what’s their present capital position? Dave and I and Kirk Kamsler just spent time with RXElite, just a couple of weeks ago and Dave will handle this one.

David DiGiacinto

Yes, I did in mid April, had a chance to visit with the combined sales teams of U.S sales teams of MINRAD and RXElite and Boise. I didn’t have as much exposure to the RXElite team as I did the MINRAD team, but I did had interactions with RXElite management over the last couple of months. I feel comfortable, all are motivated to get the job done and they know what they need to get it done and we are going to support from our end both sides as necessary. I like to first say that RXElite is current in their obligations with MINRAD and second as you will hear on their earnings call this Thursday. The quarter over year buy in growth parallels -- as paralleled on our own. Moving forward, we have continued to make inroads with GPOs and free-standing surgery groups and RXElite is presently taking actions to ensure that they are positioned from a capital perspective to exploit whatever market opportunities should service us.

William Burns

Obviously we have to be careful here. Reflecting that they are a public company and they will be having their call later this week. Martin, I would be willing to entertain questions from our investors, if you can handle them for us.

Question and answer session

Operator

(Operator Instructions) And the first question comes from Rick Hodin.

Rick Hodin

I spoke to you at the end of the fourth quarter and on the conference call and you mentioned at that time that you had a three to four week order book. You also said that based on what you were seeing coming out of the World Congress and from your distributors that you figured that that order, the order rate would pickup pretty significantly as you moved into the second quarter. So I’ve got two questions here. One, have you seen the pickup that you expected and has it matched your expectations? And secondly what is your order book now?

William Burns

I’m going to answer the first question. I’m not going to answer the second question. First, the order book, we are very happy with that after the World Congress. We’ve seen two real important things. We’ve seen our order book pickup; we’ve also seen the sell through at the end user level pickup dramatically in March and April following the World Congress in terms of our rate of penetration and we see an order book that now extends well beyond four weeks, but its extending now as people put planning orders into future quarters.

I did mention on the last call, I mentioned it again, as we ship particularly in March, the rest of our sevoflurane backlog we did anticipate a reduction in some volume in the second quarter and picking up again in the third quarter and that trough will occur just as I indicated at the end of the March 31 call, but I’ll take you back to my first comment Rich that we are not changing our guidance for the year because we are happy about our order book.

The actual volume in our order book, we’ve debated about this, but it’s something we don’t want to be producing every quarter. It changes with tenders, it changes with how people make planning orders, but we are very comfortable with where we are.

Rick Hodin

Well it may not be a bad idea given the phase of growth that you are in and supporting investor expectations to provide some guidance on the revenue side as you are going forward through this.

William Burns

Well let me tell you one of the issues here, I want to go back to the comment I made about 18 sevo approvals and 13 countries. We have order book; for some countries we haven’t announced approvals in and for competitive reasons, we want to be very careful because of the time it takes, from the time we get an order till we order, packaging, inserts, labels and get that first shipment out that we don’t trigger a competitive response.

I think that there will be a point where we provide order book and quarter-to-quarter information, but I just think right now we are vulnerable to competitive information because of the rate of our new approvals in market entries and we will review this on a monthly or quarterly basis, but we basically double the number of countries we are selling in just three or four months and it puts us in a situation where we’ll be telegraphing where we were selling. I hope you can understand we are not trying to hide anything from our investors, but we are trying to be prudent managers in terms of the competitive marketplace.

Rick Hodin

I totally understand that. I think you have to balance those expectations with I guess the requirements of shareholders that have stuck with you guys; you’ve taken them for the last little while and in terms of their expectations is something that you should keep in mind.

William Burns

Right and I think that’s why we are providing our annual guidance. We never did before so that you would understand where we thought we were going without getting into pinpointing and telegraphing into our competition just where we are in a month-to-month.

Rick Hodin

That’s fair enough. You are kind of half way through Q2 now, do you anticipate Q2 is going to measure up against Q1 or it sounds like it might be a little on the weaker side, is that fair?

William Burns Jr.

Well, we don’t provide guidance quarter-to-quarter. What we’ve done is we’ve told people here’s what we are going to do for the year, but I would take the comments I made in the last call and the comments I just made in context, in judging the transition as we move forward to the third and fourth quarter which traditionally are more robust.

Rick Hodin

Has the 510K for conscious sedation been filed?

William Burns Jr.

No, it is not been filed, it’s been prepared, but we are still working through software issues.

Rick Hodin

And basically you think in your opinion, in your mind CS is still pretty much on schedule?

William Burns Jr.

Well this is behind schedule now that we are working on the software issues, but my experience is to get the reliability done upfront rather than face problems and go through, reexamination and reapplication. By the way, this is parallel with our stability studies which will also be done about the same time, so even if we had our 510K sooner we couldn’t be doing our testing until the stability and the proprietary CS packaging is complete. There’s a growth component to this as well as a device component.

Rick Hodin

I asked you on the conference call at the end of Q4, and you said at that time that you probably be willing to answer it after you had seen the results from Q1. So I'm going to put you on the spot one more time and ask you again. When do you feel comfortable that MINRAD will reports its first profitable quarter?

William Burns Jr.

During the second half.

Operator

Next question comes from Lauren Gross.

Lauren Gross

In reading the proxy statement I think I saw something in there about unpaid mechanics lien. May I assume that that’s been taken care of with the placement of the new capital?

William Burns Jr.

Yes, that mechanics lien was in the proxy disclosed in our 10-K you might be referring to. That has since been satisfied with the financing that was just completed two weeks ago.

Operator

We have another question from Rick Cohen.

Rick Cohen

Once you get the conscious sedation of 510K filed, roughly how long is it expected until you receive your approval?

William Burns Jr.

Okay, here is the process. This is both the device and the drug and you can’t test two new products at the same time. So we need to get the device accepted, then do the drug trials. This will be a supplemental NDA and the drug trial should take four to six months including data analysis and that really still needs to be finalized with the FDA and trust me until the last minute we will be going through negotiations on that.

Rick Cohen

Yes, like sevo approved.

William Burns Jr.

Historically the FDA time table is eight months. In something like this, which is a larger opportunity I would look at a year similar to what you’d see for a basic ANDA.

Operator

Next question comes from David McCarthy.

David McCarthy

In last quarter, you said that there was the potential that there was going to be a claim because of raw material issues; you were going to file an insurance claim?

William Burns Jr.

We are still investigating that David and finishing up the analysis and its part of our process improvement program and because of the issues with the different manufacturers I am not going to say anything on that at this time as we are working through how to resolve this issue. This is right at the top of our list.

David McCarthy

Because you were talking about it previously?

William Burns Jr.

We are still working on that and working with the provider.

Operator

Next question comes from Ken Garner.

Ken Garner

My first question had to do with the insurance claim, so I’ll move beyond that. Looking at the gross profit as it stands today and moving forward with some incremental improvements, do you have an estimate that you could give us as what the break-even revenue might be?

Charles Trego Jr.

We don’t go into that. I’d refer to my comment that we think we will be profitable some time during the second half. Dave DiGiacinto covered this a little bit earlier. When he talked about the change that can be three to be five points and the sales mix in the quarter between the different customers and the products we are shipping and so we don’t have a linear number where we’d say “gee if we have a 50% margin, here is the magic number.”

That can switch dramatically quarter-to-quarter, it’s easier to predict over a year but between tenders and shipments, break-even could move $1 million to $2 million between quarters. What we can tell you is what I said in my comments in the press release; in the absence of the World Congress of Anesthesia which was extremely successful for us, we trained our distributors there. That’s 1.4 million that won’t be repeated. We are going to get operating leverage as well as gross margin leverage going forward and hope we will contribute to us being able to show an operating profit in the near-term. That handled your question Ken or I can give you a black and white answer.

Ken Garner

Have you spoken about the status of the image guidance systems and what the outlook is for it?

Charles Trego Jr.

Well, no we have not. Image guidance, the comparison was up significantly year-over-year because our basis in the first quarter of 2007 was pretty low. Having said that we are seeing growth particularly in the international markets that was well received in the World Congress but we are not a critical mass there and I just want to refer you to the fourth quarter call. The time table to get approvals on image guidance is not as long as pharmaceuticals, it will take 12 to 24 months but in many cases it’s six to 12 months.

In a number of key markets we are still waiting on approvals to sell the customers that have already signed contracts. So we would expect to see that building particularly internationally over the balance of the year. It’s not that we are discouraged at all and I want to make sure that people understand that, the response particularly from the World Congress is very good but when you are looking at sevoflurane growth of 450% on a higher base we are putting all our effort to getting the sevo volume up and getting the margins on sevo through that to where we want them to be.

Operator

It appears that there are no questions at this time.

William Burns Jr.

Thanks very much everyone. I think this is the first quarter and it amounts to a very exciting year. Thank you for participating.

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