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Executives

Joe Kaufmann - President and CEO

Wendy DiCicco - CFO

Doug Evans - COO

Analysts

Sean Bevick - SIG

Charley Jones - Barrington Research

Presentation

Kensey Nash Corp. (KNSY) F4Q08 (Qtr End 06/30/08) Earnings Call Transcript August 21, 2008 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Fiscal Year-End 2008 Earnings Release. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. The instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded.

I’ll now turn the meeting over to our host, Mr. Joe Kaufmann, President and CEO. Please go ahead, sir.

Joe Kaufmann

Thank you. Good morning, everyone. Welcome to the Kensey Nash fourth quarter fiscal year-end ‘08 conference call. Joining me today are Doug Evans, our Chief Operating Officer, and Wendy DiCicco, our CFO. Before we get started, Wendy will present the Safe Harbor.

Wendy DiCicco

Good morning, everyone. The statements made by Kensey Nash and its representatives in this conference call today will contain certain forward-looking statements, including financial forecasts that are based on the current beliefs of management as well as assumptions made by and information currently available to the management. Wherever possible, we will try to identify these forward-looking statements by using words such as believe, expect, anticipate, forecast, and other similar expressions.

Please note these words are not the exclusive means for identifying such statements. Also please see today’s news release and Kensey Nash’s SEC filing, including our annual report on Form 10-K for the year ended June 30th, 2007, particularly the information under the caption “Risk Factors” for a discussion of risks, uncertainties and other factors that could cause actual results in the remainder of our fiscal 2009 and beyond to differ materially from those expressed in or implied by our forward-looking statements.

Joe Kaufmann

Great. Thank you. Today, I will center my comments around, primarily, the fourth quarter results, and all my comments regarding our earnings per share will be based on the adjusted or pro forma earnings that we reported today.

Obviously, I’m very happy to report the results that we put out on the Street today, for both the fourth quarter and the fiscal year. I believe these results reflect a very successful fourth quarter and also a very strong fiscal year performance by Kensey Nash and all the people within Kensey Nash for fiscal year ‘08.

We achieved record revenues of $22 million in the fourth quarter. This represents a 29% increase year-over-year and also 7% growth sequentially. Included in our total revenues are net sales. And the net sales for the quarter were $15 million. Net sales were up 42% year-over-year and 6% sequentially.

And another piece of our total revenue is royalty income. The royalty income was $7 million and this increased both, 8% year-over-year and sequentially, and this was certainly somewhat higher than we had expected as the royalties from both Angio-Seal and our partner in the co-develop products, the Vitoss products, Orthovita, were very, very strong.

Our adjusted EPS for the quarter of $0.35 increased 218% year-over-year and 25% on a sequential basis. Again on the EPS, this reflects the strong top-line growth and also the changes that we made recently reflecting the sale of the endovascular unit, which I’ll talk a little bit about towards the end of the call here.

I want to talk first about the biomaterials group. Our biomaterials sales in the quarter were $13.3 million. These sales were up 37% year-over-year and 6% sequentially. The growth year-over-year was across all of our major business areas including the cardiovascular products, which primarily include the Angio-Seal components that we make for St. Jude and also the sports medicines spine products.

On a sequential basis, our sports medicine products were up 21%. The other products on a sequential basis were down slightly as we expected, and this reflects more of timing in terms of orders placed by our customers. But as you can see from the results today, the year-over-year performance and the total year performance in all of our business areas was very strong, and we expect that we are going to see that trend continue into our fiscal year 2009.

I also believe that if you look at the biomaterials business, you are going to see the results reflect the success of the strategy that we have within this business in terms of developing products with our various partners, along the way, also developing products independently within Kensey Nash, and then going out and partnering with some of the major players and some of the smaller companies in various arenas, primarily in the orthopedic sector.

And the success of these products in the end-user marketplace, I think, obviously, the Angio-Seal has been one of the biggest success stories in cardiology over the years and continues to be an outstanding product and the market leader.

But if you also look at the performance of the products as an example with Orthovita and the strong results that they have delivered consistently quarter-over-quarter, year-over-year with the building of their sales force and the dedication of the team in that space has done very well in working very closely with our development team at Kensey Nash. Most recently the launch, the successful launch of the bioactive product by Orthovita certainly contributed to the fourth quarter royalties and the strong performance within that space.

Now, our royalties were actually higher than we expected for the fourth quarter. Angio-Seal royalties were $5.7 million and they increased 5% year-over-year, but also increased 8% sequentially. So, we are very happy about what we are seeing with the Angio-Seal device and the ongoing execution on that side of our business. The royalties from Orthovita products were $1.2 million and these royalties were up an impressive 21% year-over-year and 11% sequentially.

Now, before I get into some of the other areas or topics on our guidance in the endovascular, Doug Evans is going to comment on some of our R&D activities that we have ongoing at Kensey Nash and talk a little bit about the 2009 and the future regarding some of these programs. Doug?

Doug Evans

Okay. First project we’d like to talk about is the cartilage program, and at this point in time we are wrapping up our preclinical study, which would support our cartilage IDE. And we are anticipating an FDA IDE submission sometime in early 2009 that would be essentially in the January to March timeframe.

We are expecting that we would begin our U.S. clinical trail then in the first half of calendar 2009, and that trail will probably consist of a couple of hundred patients, maybe on the order of 200 to 300 patients, which should take about a year, a year and half enrollment time with about two years of follow up.

On the international side for the cartilage project, we anticipate receiving a CE Mark approval to sell our cartilage product by the end of fiscal year ‘09. And at this point in time for the cartilage technology we are in discussion with potential marketing partners.

Moving then on our extracellular matrix technology or what we term as our ECM technology, this is relatively new area for Kensey Nash. It is essentially a natural tissue engineering scaffold, which has fairly powerful regenerative capabilities. And these are materials that contain natural proteins and growth factors that actually help promote the natural wound-healing process when they are used in surgical procedures.

This technology is something similar to that portfolio, which Lifestyle used to have before they were acquired by KCI. The products that we will be developing will go into markets such as general surgery for applications like hernia, uro/GYN applications for procedures such as incontinence and public floor repair, and also into areas such as reconstruction surgeries or tissue augmentation. And we expect the first of these products to launch in the next 16 months, and we are currently looking at potential partners to distribute those products.

In the endovascular area, I think, as we have discussed before, we are wrapping up the development process for our next-generation ThromCat. This is a fairly exciting product for us. It will have significant advancement in the ability to remove more thrombus, based upon our laboratory tests. And we expect this product to launch in early calendar 2009.

In addition to that, on the SafeCross side, we have a new technology which is being incorporated into that guidewire, which allows it to essentially see a little bit further as well as an improved graphical user interface, which should help the physician interpret the information from that guidewire a little bit more easily and readily, and we expect that technology to launch with our partner Spectranetics also in early 2009.

Joe Kaufmann

Great. Thanks, Doug. Just a little bit discussion on the transaction that we completed with Spectranetics in May of 2008, which was disclosed previously. We completed this transaction of selling our endovascular business to Spectranetics in the fourth quarter. As a result of this transaction, we eliminated our direct sales force, and obviously, the related expenses. But we continue to manufacture these products for our partner and also are continuing the R&D efforts for the next-generation of ThromCat and SafeCross, as Doug just talked about.

The R&D efforts are on track. We are working very closely with Spectranetics. And the expectations are that these products will be launched in the second half of our fiscal year 2009, which would be in the first half of calendar year ‘09. And I will say that the execution on the deal was outstanding by members of both teams, the teams at Kensey Nash and Spectranetics and the relationship is very, very positive. And we are for certainly an ongoing relationship, very successful relationship between the two companies.

To give you a little more information in terms of the financial disclosure as far as our results between the adjusted earnings per share, Wendy will talk a little bit about the reported results and the gap earnings. Wendy?

Wendy DiCicco

Hello, everyone. I think, if you looked at the 8-K that we filed, there was a detail of the $10 million proceeds that we received upfront related to the transaction and the various assets and liabilities; assets that were written off or sold to Spectranetics and liabilities that were incurred related to the transaction. In the earning release today, we reported that we took a net charge of $8.1 million or $0.44 tax adjusted during the fourth quarter, and that was just $300,000 different than our initial estimate when we filed the 8-K.

And in summary, I think maybe the two important facts are that of that $8.1 million, just over $5 million was cash-related charges, primarily severance and liability incurred related to the transaction and assets transferred to Spectranetics in the deal, hard assets. Accounts receivable, inventory, and equipment were about $4.7 million.

Some of the intangibles were items such as goodwill that was written off for $6.3 million, some patents and intangibles that were on Kensey Nash’s book for $1.3 million. And as I mentioned the specific details were filed in our 8-K, and remain substantially the same as what was filed in those details. And any other questions, I would be happy to answer if you wanted to give me a call after this call.

Joe Kaufmann

Great. Thank you. Well, as you can see, again, by the performance in the fourth quarter and the total year, fiscal year ‘08, and also looking at where we are today with our business units, the outstanding performance, the ongoing outstanding performance with the biomaterials group, and the efforts and the progress that we’re making on the endovascular side of the our business. And certainly, what we are seeing with our various partnerships across a broad spectrum of markets that we now believe that we can raise our guidance that we had previously estimated for the first fiscal quarter ending September. Our original guidance was $0.34 to $0.36 a share, and in the press release today, we have raised that guidance to $0.37 to $0.38 a share.

In addition, we are also raising our fiscal year ‘09 guidance from the previous estimate of $1.57 to $1.65 range. We are raising that now to $1.60 to $1.67. We feel that with our ongoing investments that we’re making in the program that Doug previously described, particularly with the cartilage program, the ECM and in the endovascular space, that we have Kensey Nash a very, very bright near-term future, but also we’re planning for the success of this organization, not only short-term but also long-term with these various projects and the ongoing relationship with our partners.

If you look at our balance sheet you will see that we have over $60 million in cash at the end of June. We are certainly are anticipating in fiscal year ‘09 that we will continue to generate positive operating cash flow that will as a result of strength of our operations here. We also believe that our operating margin as we told this you previously will be in excess of 30% in fiscal year ‘09. So, all in all, the message today from Kensey Nash is one of, again we take an excellent performance in the fourth quarter total year fiscal year ‘08, strong contributions from all the employees of Kensey Nash, lot of optimism about certainly the first quarter of fiscal year ‘09, the total year of ‘09 and certainly beyond that.

And with that I would like to turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We have a question from the line of Sean Bevick with SIG. Please go ahead.

Sean Bevick - SIG

Good morning, guys.

Joe Kaufmann

Good morning.

Sean Bevick - SIG

It appears you guys captured some sort of premium on Orthovita’s Bioactive product, is that due to a higher transfer price or a higher royalty as result of the product having a higher ASP?

Joe Kaufmann

No, I think, if you look at the Bioactive product along with the other products is very consistent with Orthovita’s the royalty rates are very good, but in terms of comparison between the products essentially the same. I just think it’s a reflection of the success of the launch of the product by Orthovita, and the increase in units, and also the continuous success of the other products.

Sean Bevick - SIG

Okay. And that with your OsseoFit product on the orthopedic side, how are the sales ramping up there?

Joe Kaufmann

Well, the OsseoFit product is sold by Biomet and that product is doing fine in the marketplace. Again when we look at the long-term use of this particular technology we are certainly looking at an expanded indication down the road. That’s where we think the future is with that particular product more so with the cartilage indication than with the current indication. So, we are doing fine with the product and we haven’t disclosed sales on that particular product at this time.

Sean Bevick - SIG

Okay. Of the $1.6 million in vascular sales this quarter. Can you tell us how much of that was from Spectranetics?

Joe Kaufmann

Spectranetics, was approximately $500,000 and that was just the one month, the month of June.

Sean Bevick - SIG

Should we be looking at that kind of run rate for the year? Are you expecting it to ramp-up?

Joe Kaufmann

It’s a little early for that because included in there, part of the deal, we sold off the QuickCat product and we are continuing to manufacture the QuickCat which we will do for some period of time, probably just till the end of this calendar year, and then of course, the plan with the ThromCat and the Safe-Cross product currently Spectranetics is selling those two products ThromCat and Safe-Cross to existing customers to support the sales in that arena, but the real opportunity down the road is what the next generation products that we have been working on here in Kensey Nash. So, I think that, it will be more reasonable to expect sales to increase in the latter part of 2009, and that’s what we have built into our guidance, and I would caution everyone to be very modest during this period of time, the first six months of fiscal year ‘09 just from the standpoint of transition and the standpoint of really waiting for the next products to be launched.

Sean Bevick - SIG

Okay. And then finally what kind of tax rate are you guys looking out for fiscal ‘09?

Joe Kaufmann

Wendy?

Wendy DiCicco

At the moment we are forecasting around 34%, and we will continue to do so unless the research and development tax credit is re-approved by Congress and then it would come down a couple of basis points.

Sean Bevick - SIG

34% in ‘09?

Wendy DiCicco

Yes, 34 to 35.

Sean Bevick - SIG

Okay. Great. Thanks, guys.

Operator

(Operator Instructions). And we have no one queuing up, so please continue.

Joe Kaufmann

Well, that’s --

Operator

Excuse me; we do have one other person queuing up.

Joe Kaufmann

Okay.

Operator

Okay. I will go to the line, excuse me, one moment here. Our line of Charley Jones with Barrington Research, your line is open.

Charley Jones - Barrington Research

Hi, Joe. Hi, Wendy.

Joe Kaufmann

Charles, how are you?

Charley Jones - Barrington Research

I figured out I would ask the question, since nobody else has. It seems like there is some interesting stuff going on. I was hoping if you could go a little bit more into detail about the timeline of this IDE product for the tissue cartilage and talk a little bit more about what that opportunity is there?

Joe Kaufmann

Sure. I will let Doug talk a little bit about the timeline in second, in terms of the opportunity for a cartilage product, it is an area in medicine of great need, we don’t think or believe that there is a real good alternative. Today there are various procedures that are done by the sports medicine docs to repair cartilage and some other products in this space, but its still one of the areas where physicians and patients are looking for better outcomes that will allow certainly a quicker repair, quicker recovery and Kensey Nash has been working in this space for a number of years now, and we think the opportunity -- we don’t want to give out specific numbers in this space, but if you look at just overall markets and indications where this product for this area you are looking at potentially a grand market, not just certainly I am not trying to give a number for Kensey Nash, but procedure wise its several hundreds of thousands procedures a year that could be available here.

Doug, do you want to comment on any?

Doug Evans

Yes. As far as the timing goes, it does require a clinical study in the United States. As I mentioned before, we are wrapping up the pre-IDE studies. That will go into the FDA in the very early part of calendar 2009. Then given a typical review time, we expect that we will be enrolling patients by the end of this fiscal year. We are expecting, again, about a year, 1.5 year enrollment time for the patients required with about a 2 year follow-up for that product. Then again, on the international side, we expect approval with this product by the end of our fiscal year ‘09. So by the end of June next year, we are anticipating having that indication.

Charley Jones - Barrington Research

Do you have any feel for how many patients you’re going to have do?

Doug Evans

Right now, we are looking at about 200 to 300 patients for this trail.

Charley Jones - Barrington Research

And then is the cost going to be, can you give us an idea of a cost per patient at all?

Doug Evans

It might be a little bit early at this point in time. We’ll have a better feel for that once we engage in some of the discussions with FDA I think.

Charley Jones - Barrington Research

And then on the extracellular matrix, are there vascular applications here for you, Doug?

Doug Evans

Well, there are for some of these products, certainly in the cardiovascular space, although those are not the ones that we are targeting initially. There are other opportunities that we think will get into the market more quickly, such as hernia repair, pelvic floor repair. Those types of products have a pretty nice straightforward pathway through FDA, minimal clinical trial burden and they are very well accepted in the community. There is certainly a lot of buzz about these ECM materials. And then as you pointed out there are some opportunities on the cardiovascular side but does will probably come little bit later.

Charley Jones - Barrington Research

So what would be the timing for say, not a hernia specifically but a product in that type of area.

Doug Evans

The very first product, you mean in the cardiovascular space?

Charley Jones - Barrington Research

No, I am sorry, in the hernia repair for example?

Doug Evans

Yes, the first product which will be likely for hernia indication, we expect in about 16 to 18 months.

Charley Jones - Barrington Research

Great. I guess, Joe, can you just characterize maybe more of the traditional not Kensey Nash but your (inaudible) maybe in some other orthopedic portions of your business, just how healthy it is and I think you gave us an outlook a couple of years ago, but you had some pretty good insight over the next 12 to 18 months. I was wondering if you could give us an update on where you think your general orthopedic business is outside of Kensey -- outside of Orthovita?

Joe Kaufmann

As you can see by the results for the fiscal year, and also for the fourth quarter, we are very optimistic. We think that the sports medicine business, that we are in today and our major customers in that space, has done again an outstanding job and continues to be one of the market leaders. And as far as what we can see in terms of the business prospects, the order rates that we are seeing, we certainly expect the double-digit growth in fiscal year ‘09 in the 10% to 20% kind of range in that space. You commented on Orthovita and we’re very optimistic about what’s happening with the products in that organization, how they are growing the business.

If you look at the cardiovascular space and Biomaterials, we were looking at the low single-digits for Angio-Seal. That’s still somewhat what we expect to take place in that market, although in the fourth quarter this year, it certainly exceeded our numbers slightly. So, overall in orthopedics, we think we are very well positioned not only with the customers I just mentioned or those markets but also with some of the other players that we work with, people like Medtronic, Zimmer, and a few others in that space that we are optimistic about ‘09. Obviously, our numbers reflect that and we think that, with the new products that we have in development, that we see great opportunity for Kensey Nash beyond ‘09.

Charley Jones - Barrington Research

Thank you. I look forward to following up with you.

Joe Kaufmann

Great, thank you.

Operator

And we go back to the line of Sean Bevick with SIG. Please go ahead with your question.

Sean Bevick - SIG

Hello, again, just one other quick on the NGO sales, is there anything new going on there such as maybe some geographies or ASPs?

Joe Kaufmann

As far as new geographies, Angio-Seal, for example, is available in China. There was an approval announced by St. Jude several months ago about the approval for the SPS product in Japan. In terms of ASPs, we generally don’t comment on that other than to say that they have been -- certainly hasn’t been any real change that we have seen in those numbers. The international numbers have gotten stronger that you would expect that over the year with the currency, but that’s basically what we see with the Angio-Seal.

Sean Bevick - SIG

Okay. Thanks.

Operator

(Operator Instructions). And we have no one queuing up at this time, so please continue.

Joe Kaufmann

Okay. Well we appreciate everyone taking the time to join us for the call. Any questions people may have certainly can contact us and we look forward to speaking with you again in October. Thank you.

Operator

Thank you. And ladies and gentleman, this conference call will be made available for replay starting today August 21st at 11’o clock am Eastern time. The replay of the conference runs for one week until the date of August the 28th at mid night Eastern Time. You may access the AT&T Teleconference replay system by dialing 320-365-3844. Please enter the replay access code 956292. That dialing number again is 320-365-3844 and the replay access code 956292. Well that concludes our conference call for today. We thank you for your participation and for using AT&T’s Executive Teleconference service. You may now disconnect.

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