ThermoGenesis' CEO Discusses F4Q12 Results - Earnings Call Transcript

Sep.20.12 | About: Cesca Therapeutics (KOOL)

ThermoGenesis Corporation (NASDAQ:KOOL)

Q4 2012 Earnings Call

September 20, 2012, 05:00 pm ET

Executives

Matthew Plavan - CEO & CFO

Analysts

Jeffrey Cohen - Ladenburg Thalmann

Operator

This is the chorus call operator. Welcome to the ThermoGenesis fiscal year 2012 fourth quarter results conference call and webcast.

Before we begin the call, we remind you that the statements made during this conference call that are not historical facts and are forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in these statements including but not limited to certain delays beyond the company’s control with respect to market acceptance of new technologies and products, delays in testing and evaluation of products, initiating and successful completion of clinical evaluations and trials for new claims on existing products, regulatory approvals where required, capital resources required to fully execute business plans and other risks detailed from time-to-time in the company’s filings with the SEC.

As a reminder, all participants will be in listen-only mode. There will be an opportunity to ask questions at the end of today’s presentation. (Operator Instructions) For your information, this conference is being recorded.

I would now like to turn the call over to Matthew Plavan, Chief Executive Officer. Please proceed Mr. Plavan.

Matthew Plavan

Thank you, operator. Good afternoon everyone and thank you for joining me today. As you have seen from our recent announcements the past several months have been quite productive for ThermoGenesis adding several key milestone accomplishments to those realized since our fiscal 2011 year-end call. We have accomplished much of what we set out to do in building the company for long-term sustained growth.

Taking stock of these advances let me summarize the highlights as follows: First, we secured new business. We signed two new landmark deals; the Arthrex and Golden Meditech agreements together with which we estimate will be worth initially $5 million to $6 million in annual revenues growing thereafter to an estimated $50 million in revenues over their five year terms.

Second, we streamlined and focused our business for success. We accomplished this two ways; we divested and wind down non-core products including the sale of CryoSeal product line for over 2.5 times its average annual revenue run rate. And in early January we realigned the management and streamlined the organization to reduced costs and are in a position to achieve additional savings in fiscal ‘13.

Third, we opened new markets by obtaining regulatory approvals for our AXP, BioArchive and Res-Q in key geographies primarily in Asia.

Fourth, we improved customer satisfaction and our competitive strength. We achieve this in three specific ways. We began an initiative to enhance the effectiveness of our cord blood distribution efforts with the fundamental realignment of our distribution network including two new agreements we announced yesterday to include sales, service for both the BioArchive and the AXP products within a single distributor per region thereby optimizing our competitive strength in cord blood sales while providing better service to our customers.

We also began the implementation of a field depot in Asia, South America and Western Europe for quick responsiveness to customer repair and maintenance needs and we continue to improve the quality of our products specifically the AXP disposables through continuous customer feedback and hands on manufacturing improvement initiatives.

Fifth, through clinical studies we successfully demonstrated the safety of our bone marrow processing devices for use in cell therapies. Furthermore, the early data from a couple of these studies demonstrated compelling early clinical results. And lastly, we repositioned the company towards the significantly greater addressable market in therapeutics.

Now before covering our financial results and updating you on our long term strategic initiatives, several of our accomplishments warrant some elaboration. Beginning with the Golden Meditech agreement announced several weeks ago. As we indicated in our announcement, this is a broad AXP product purchase and distribution agreement. In addition to being a leading developer of blood related medical devices and a major player in China’s regenerative medicine arena Golden Meditech is affiliated with the first and largest umbilical cord blood bank operating in China, that’s China Cord Blood Corporation.

In fact, we are delighted to know the announcement earlier this week of an agreement under which Golden Meditech intends to invest $50 million in China Cord Blood to support its expansion and to capitalize on China’s fast growing in healthcare services industry. Their press release noted that the demand in cord blood banking services in China is flourishing and the number of new subscribers is continuing to rise. China Cord Blood also indicated that it’s building new storage facilities in Guangdong and establishing a storage facility to serve the Xinjiang market.

Under a five year agreement, Golden Meditech will have annual minimum first commitments and exclusive distribution rights for the AXP systems that they will be selling in the Peoples Republic of China; this excludes Hong Kong and Taiwan. They will also be selling in Singapore, Indonesia, India and the Philippines as we receive regulatory approvals in those geographies where we do not currently have them. While receiving these regulatory approvals is an important first step, this agreement represents significant revenue potential for the company and the minimums called for in the contracts exceed current volumes from any of our other cord blood bank customers.

And based on the growth potential beyond these minimums in terms of direct sales and the opportunities through Golden Meditech distribution efforts with other cord blood banks, we believe this could generate up to $30 million in revenues over the five year period based on again receiving approvals in timely fashion.

We are also hopeful this agreement will facilitate our regulatory approval efforts for the AXP in China; when I was there a month ago to finalize the Golden Meditech agreement, I met with our regulatory advisors and the process appears on-track. We are hopeful that they will have completed our registration approval by China’s SFDA by the end of calendar 2012.

This agreement represents a major accomplishment in our strategy to realize a leadership position in Chinese cord blood market as well as other Asian markets and complements our existing distributor relationships. As we have mentioned in our last call, we have several banks in China currently evaluating AXP, so we are confident that our new distribution arrangement with Golden Meditech will enable us to capture these banks business in the coming quarters.

Now as we have discussed in the past, we believe the cord blood market in the region while relatively earning in its development today could experience significant growth this decade as the market gains a better appreciation for the regenerative capabilities of cord blood stem cells to drive greater collection activity and in turn demand for our automated processing.

Another important milestone in our international market expansion efforts occurred with the signing of our integrated distribution agreement. Some two weeks ago we announced a new agreement for Europe with Concessus covering both the AXP and the BioArchive systems. This four year agreement covers France, Spain, Switzerland Benelux, Lichtenstein and the Nordic countries.

Concessus is a nearly 50 year old company involved in the cord blood market for more than two decades and has been distributing the BioArchive for the past two years. I should note that they previously represented Sepax; it’s a BioSafe product and our primary competitor in automated cell processing. We believe they will provide a significantly stronger presence for the AXP in these geographies.

To that end, we currently have several European banks in early evaluation stages for the AXP which could represent meaningful revenue opportunities for us. We expect to close at least one of these accounts by early calendar 2015.

Then yesterday, we announced two similar integrated channel partner agreements for the AXP and the BioArchive. The first is what HVD Biotech, providing exclusive distribution rights in 10 European countries including Germany, Austria, the Czech Republic as well as 13 Middle Eastern countries, including Egypt, Saudi Arabia and United Arab Emirates.

So we are really getting a broader swap of distribution across these different countries. The second agreement was with CEI which has been distributing the BioArchive manual cord by cord blood processing and storage sets in Latin America for more than a decade.

So we will now have exclusive distribution rates for both AXP and the BioArchive in nine Latin American countries, including Mexico, Brazil and Argentina. These agreements are very important for two reasons. First, we believe these organizations will provide us a significantly stronger presence in these geographies. And second, these agreements represent an important step in this long-term goal of implementing a more customer centric and highly integrated sales and marketing strategy for the cord blood markets that incorporates marketing, customer service, customer support to not only better serve our existing customers but also to facilitate our strategy to capture market share gain from competitors and replace manual systems with the high level automation that the AXP represents.

The other significant accomplishment since our last call was the completion of our transaction with Asahi Kasei for the sale of the CryoSeal Fibrin Sealant System that’s wound care product line. As a result of their exercise of the first option, Asahi paid us $2 million in cash. The payment was received in late August. So it won’t be reflected in our year end balance sheet.

We’re very pleased to have completed this divestiture, not only do the proceeds provide us a nice infusion of cash but we can use this to fund our self therapy initiatives and this transactions also are going to enable us to achieve some savings in our operating expenses by allowing us to further streamline and optimize the organization. But also frees that management and corporate resources to address our more significant strategic market opportunities in the regenerative medicine space.

A key focal point of our business development efforts is our agreement with Arthrex which I mentioned earlier, which is a private labeled marketing for the Res-Q system in the preparation of PRP from whole blood which is platelet rich plasma and bone marrow concentrate that will be used at the point of care.

You have no doubts seeing to the increased media coverage regarding the use and benefits of PRP for sports related injuries. Due to the regenerative potential of PRP, it’s being used in place of a current standard of care for treatment obtained in ligament damage. (inaudible) for example, is primarily prescribed as a treatment for pain management but it has got no regenerative potential.

So with the surge in visibility, the interest in positive outcomes from PRP we are expecting that the investment in clinical efficacy studies for PRP to increase and that this can further define this market opportunity for us.

We believe that the composition of PRP determines its effectiveness and that the most effective therapeutic recipes will be born out in the near future with continued clinical use and testing. So we are going to keep our eye in that market and continue to direct the Res-Q towards those opportunities. Arthrex is readying launch plans and we continue to have ongoing discussions with the Arthrex management about expanding relations between our two companies, while utilizing the Arthrex agreement as a model for discussions with other potential business partners.

Our first priority however is to maximize the impact of this initial launch which we expect to see in the second fiscal quarter following the receipt of our 510-K approval. With respect to our clinical evaluation programs, we are continuing to move those along with partners and the goal is to generate meaningful safety and performance data which we've been doing. Just a quick refresher and an update in our in (inaudible) which is using the MXP to treat critical Limb Ischemia. We've got 20 patients that have gone through the initial treatment regiment and 10 of those have under gone second treatment.

The initial data is very promising and the final analysis and the assessment is underway. We hope to have some initial data reported by the end of this quarter in the form of a journal publication. We've also got study going on with the Res-Q for CLI patients in India with our partners (inaudible), they completed enrollment in fact the last patient was rolled in May of 2012 which means our final data report will be compiled and released next July. The interim says report was represented to the IRB this past July and no safety concerns were noticed. So that’s very positive.

One other CLI trails that's underway using the Res-Q is in Beijing by doctor Chang and they have enrolled about fourth of the patients that they plan to enroll, enrollment in the study has been a little bit slower and therefore they have reduced the patient enrollment overall, but we would expect to complete that enrollment by the end of this calendar year and hope to see positive results in that as well.

So, each of these studies will provide useful information in marketing the safety of the sell output for our products for existing and future customers. In addition, positive safety data should accelerate early stage development efforts by our collaborators in other therapeutic areas. So turning for a moment now to our financials results for the quarter, the macro economic environment has continue to repeat the growth of cord blood collections for our customers as well as suppress the capital equipment purchases which has significantly impacted the sales of our BioArchive throughout the year. So revenues for the quarter were $1.4 million versus $5.4 million in the fourth quarter a year ago and $4.9 million in the third quarter of 2012.

This decline year-over-year was due to the fact that we sold four BioArchives Systems a year ago. For the full year more than half have declined compared to the prior year was due to the lower BioArchive device sales. Fiscal 2012 revenues were $19 million versus $23.4 million a year ago or decline of $4.4 million.

However, our disposable revenues for AXP BioArchive and Res-Q products remained essentially consistent throughout the year compared to the prior year. We think that we will see improvements in revenue for these products in fiscal ‘13 which I’ll address in more detail in a moment.

Turning to gross margins in the quarter, there were 32% versus 35% in the fourth quarter a year ago and 24% in the third quarter of fiscal 2012. The return to more normal levels in the fourth quarter reflects the one time impact of the increase in cost of goods sold related to CryoSeal and ThermoLine divestitures in the prior quarter.

The divestitures of this non-core businesses and the continued optimization of our infrastructure provide us a strong base for gross margin leverage as our quarterly revenues trend upward with the launch of this new business in this coming year. Operating expenses during the quarter were $2.5 million versus $3 million a year ago and $2.9 million in the prior quarter.

We have made a very good progress in reducing our SG&A cost while maintaining our investments in research and development. Total operating expenses for the year were $11.7 million consistent with fiscal 2011. However, it’s important to highlight that we have less than two quarters of this cost reduction impact in fiscal 2012 from our reorganization.

Turning to net loss for the quarter, it was about $740,000 or $0.04 a share versus a loss of a $1.2 million or $0.07 a share in the same period a year ago. We did experience a one -time benefit during the quarter reflected on the P&L in interest and other income, the total $327,000 for final amortization of the deferred revenue R&D support from the Asahi contract.

Therefore, excluding this benefit our net loss for the quarter would have bee $1.1 million. However, in view of the difference in revenues versus the prior year, our bottom line results demonstrate the impact of our cost reduction programs.

Our net loss for the year was $5 million or $0.30 a share versus $2.6 million or $0.17 a share in fiscal 2011. While we continue to see improvements in the management of operating expenses, our results for the full year reflected the impact of the decline in the cord blood related activity and the afore mentioned impact on gross margins related to the trials in the ThermoLine divestitures.

With respect to the balance sheet, we ended the year with the cash of $7.9 million versus $8.5 million at the end of the prior quarter and $12.3 million at the end of fiscal 2011. Use for cash for operations in fiscal 2012 was $3.9 million and approximately $630,000 for the fourth quarter.

I am pleased with the success of our cash management initiatives during the year. I think we did well against what we’ve intended to do. At the end of the year, our backlog was $1.5 million.

Looking back, we made meaningful progress in this past year and looking forward I am encouraged with our physician to realize a great deal of our progress in fiscal 2013. The management team and employees are focused on our core strategies and committed to realizing them.

And with our recent divestitures and through improved manufacturing efficiencies, we are also strong with respect to the management of our financial resources. More specifically, surveying our prospects for growth in fiscal 2013 in the context of the ongoing economic malaise, we’re being cautious about setting expectations for the potential of the cord blood market returning to a stated growth, be either capital purchase activity or customer cord collections. Instead, we're targeting to grow our business by one, replacing competitors existing automated systems. Two, converting banks from manual processing to automated systems. And three, gaining shares in the manual cord blood markets through the introduction of new cord blood processing steps to leverage our leading intellectual property. The new distribution agreements we have realized over the past couple of weeks should serve our mission in these key geographies of Asia, Europe and Latin America as well.

Now dialing back to launch for a moment and focusing on the macro market dynamics in regenerative medicine, an encouraging sign for us is the increased clinical trial activity using cord blood stem cells to treat disease and injury, which is according to clinicaltrials.gov. There are over 250 clinical trials underway using umbilical cord stem cells for the treatment of a number of medical conditions that include, there is a lot of them but some major ones are graft versus host disease, hearing loss, juvenile diabetes, many forms of leukemia, traumatic brain injury, cerebral palsy.

Now over half of these are in Phase II or later but perhaps the most significant is the Sutter Neuroscience Institute in Sacramento, California, which is right here in our backyard and cord blood registry which as you know, is the largest blood bank in America and our customer. Those two are launching the first FDA regulated clinical trial to assess the use of a child’s own cord blood stem cells to treat select patients with autism.

This first of its kind, placebo controlled study is important because one out of 88 children in the U.S. are diagnosed with autism spectrum disorders each year. This is a number I think you will agree is alarming and disconcerting. This trial will evaluate the ability of an infusion of cord blood stem cell help improve the language and behavior. As you can imagine, to the extent that these trials demonstrate efficacy we would expect that the cord blood collections market worldwide is going to experience a surge in growth.

So now moving to the bone marrow and PRP programs, we are pursuing new indications in existing and new territories. For example among others, we believe osteoarthritis or degenerative arthritis is a significant market opportunity for the company. There is over 400,000 knee replacements in the U.S. alone including an increasing number of younger patients and we believe that PRP represents an colugos regenerative alternative that can differ or even eliminate the need for a knee replacement in a significant portion of the population.

As for the bone marrow (inaudible) applications at the point of care, we are targeting CLI and other vascular treatments based upon the angiogenesis properties of mesenchymal stem cells that are abundant in bone marrow. But most of all however in the emerging markets that represent out greatest launch or potential for growth.

As I discussed last time, a key aspect of our strategy is to evolve beyond the design and commercialization of enabling tools to become a more and integrally involve in the delivery of therapies by expanding the value we provide as a point of care and we can do this in a number of ways including the provision of proprietary treatment protocols, providing best-in-class tools beyond those that we are currently providing the process and separate itself that would expand in surgical kits that are being used for the discovery in the developing stem cell based therapies and we do this in exchange for becoming embedded technologies in these approved therapies.

Activities percolating among a number of fronts including spinal and cardiovascular therapies, orthopedics and potentially cord and adipose tissues. It is clear that our cell process handling and preservation skills presents significant potential to clinical oriented organizations focused on the development and delivery of therapies as a point of care and helping them to commercialize and scale production of these. This is where we are focusing our business development efforts and have a number of encouraging discussions underway.

So over the next 24 months, our key milestones include growing our share of the cord blood market by leveraging our first move or position in China and other markets in Southeast Asia. Replacing existing competitors systems in Europe and converting manual processing banks to automated systems and positioning the company for a rebound in the US and Europe. We anticipate that this could generate between $5 million and $7 million in new revenues annually once implemented and fully operational.

Also ramping up our PRP and bone marrow programs with Arthrex and launching two to three new point of care applications in such areas as osteoarthritis, orthopedics, spine, cartilage those kinds of areas and then collaborating with new distribution partners to address new indications in geographies. We believe that this could generate between $4 million and $6 million annually at full capacity. And then furthering our presence in cell therapy with new collection and administration tools, propriety kits or protocols and product placements in select clinical trials while expanding the volume of clinical data around our own offerings and enhancing our platform capabilities. And then lastly achieving further cost optimization to enhance the manufacturing efficiencies and related initiatives.

And in terms of our overall financial performance for fiscal 2013, given the Golden Meditech agreement and the initiation of sales under our program with Arthrex and our recently signed international cord blood distribution agreements, we would expect revenues to turn upward during the year beginning in the second half of the year, perhaps earlier and gross margins will improve accordingly. As mentioned earlier, we’ll benefit from lower SG&A expense run rate than the prior year, offset in part by investments in R&D or business develops where we see these growth opportunities emerging.

In closing, our management and financial resources are now closely aligned with company’s overall strategic goals, our likely near term revenues and the timing of new market opportunities. Our vision is to leverage our based platforms and leading edge technology into new areas of regenerative medicine, get all thing automated G&P products that unable our mission to practice cell therapy at the point of care in the lab and focus those strategic alliances that we have best leveraged against our organic capabilities and positions as well in the high value therapeutic markets.

So we look forward to reporting to you on our progress during the year. We thank you for joining us today and I will turn the call over now to the operator for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Jeffrey Cohen of Ladenburg Thalmann.

Jeffrey Cohen - Ladenburg Thalmann

Are you going to be adding a CFO this year?

Matthew Plavan

I believe I will, yes.

Jeffrey Cohen - Ladenburg Thalmann

So on the guidance side, you are saying [upward] revenue of fiscal 2013 over 2012 and higher gross margins for the same time period those are the only two metrics?

Matthew Plavan

Correct. Yes.

Jeffrey Cohen - Ladenburg Thalmann

Got it and could you talk a little bit about your agreement with Arthrex and just repeat I missed a portion of it. So you are expecting a 510-K in Q2, can you tell us a little bit about the sales cycles as far as who or what size the sales force in what area or Arthrex is going to be selling the Res-Q system?

Matthew Plavan

Sure, two questions. So we are seeking 510-K approval for two versions private label version of the Res-Q, one is for PRP and one is for bone marrow that will be exclusive to Arthrex and expectation is that those approvals will come towards the end of the year and they will launch the product soon thereafter, they have a sales force of over thousand persons in various geographies throughout the world and they will be funneling this product through that sales force. The volumes that they are projecting are multiples of the volumes we do today and so there are minimums in the contract and I would say that 10,000 and above is a pretty good place to start with respect to those minimums and what their estimates for volume are once they are up and running. The launch they have already started their internal campaign so that they educated their marketing and sales folks about the product and of course the launch, once they got approval and the products is available. I explained at that time but there is also a big portion of the [AOS] which occurs in March every year and so that’s kind of their Super Bowl. I expect them to launch prior to that but we would also expect a big kick when they get to the [AOS] meeting.

Jeffrey Cohen - Ladenburg Thalmann

Okay, that’s March 2013 you are referring to?

Matthew Plavan

Correct. That’s when, that’s one of the biggest shows they have.

Jeffrey Cohen - Ladenburg Thalmann

Right. Do you have an estimate as far as PRP versus BMC on what the expectations are of share between the two?

Matthew Plavan

I think it will be weighted towards PRP, maybe 60-40 in the beginning and probably continuing on through the term of the contract, close to half and half or 60-40, one way or the other. They don’t expect one to dominate the other.

Jeffrey Cohen - Ladenburg Thalmann

Okay, and are those both under the same 510-K?

Matthew Plavan

No, they will be separate.

Jeffrey Cohen - Ladenburg Thalmann

Separate? And they have been filed already?

Matthew Plavan

Yes.

Jeffrey Cohen - Ladenburg Thalmann

Okay, recently I am assuming.

Matthew Plavan

Yes.

Jeffrey Cohen - Ladenburg Thalmann

Okay and one more. I am not trying to lead you to water but so trailing 12 months revenues about [$19 million]. You were talking about the two business add ons over 24 month period one potentially producing 7ish million, and one potentially producing $4 million to $6 million?

Matthew Plavan

What I was referring to is when we look out at the cord blood market and the business that we believe is available with regard to the size of the banks and the volumes that they are generating; I would say that there is about $10 million in addressable available revenue on the processing side and we have scoped out the banks that comprise that $10 million. We have targeted competitively and we have targeted some competitive opportunities and then some conversion to automation opportunities when we add those up and look at what we think we are going to do over the next 24 months. We could see garnering $5 million to $7 million out of that $10 million opportunity.

The other number I have mentioned was as we sign new deals that are likely Arthrex deal, if we are successful in signing two to three of those based on the size of those deals individually, we could be adding another $4 million to $6 million to the top line by doing that. That’s what I was referring to.

Jeffrey Cohen - Ladenburg Thalmann

Okay, I got it I should look at the [cumulative] number as a revenue number 24 months out?

Matthew Plavan

What I would see is by the time 24 months transpires, we should have closed that level of business moving into ‘13 at least for those two parts of the business.

Operator

(Operator Instructions) Showing no further questions, I would like to turn the conference back over to Mr. Plavan for any closing remarks.

Matthew Plavan

Thank you everyone for calling in and listening today and we look forward to reporting to you our progress going forward, and I look forward to seeing you when we are out visiting with investors on the street. Take care.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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