Given Imaging's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 7.12 | About: Medtronic plc (MDT)

Given Imaging Ltd. (GIVN) Q3 2012 Earnings Call November 7, 2012 9:00 AM ET

Executives

Fern Lazar - Lazar Partners Ltd.

Homi Shamir - President and Chief Executive Officer

Yuval Yanai - Senior Vice President and Chief Financial Officer

Analysts

Jeremy Feffer - Cantor Fitzgerald

Bryan Brokmeier - Maxim Group

Operator

Good day and welcome, ladies and gentlemen to the Given Imaging Third Quarter 2012 Financial Results Conference Call. As a reminder, today's call is being recorded. All participants are in a listen-only mode.

At this time, I'd like to turn the call over to Ms. Fern Lazar of Lazar Partners. Please go ahead, ma'am.

Fern Lazar

Thank you and good morning. Thank you all for joining us. With us today from Given Imaging are Homi Shamir, President and CEO and Yuval Yanai, Chief Financial Officer.

Before we begin, I'd like to read the following regarding forward-looking statements. During the course of this conference call the company may make projections or other forward-looking statements regarding future events or the financial performance of Given Imaging.

We wish to caution you that such statements reflect only the company's current expectations and that actual events or results may differ materially. You're kindly referred to the risk factors and cautionary language contained in the documents that the company files with the Securities and Exchange Commission, including the company's Annual Report on Form 20-F filed March 7, 2012. The company undertakes no obligations to update any projections or forward-looking statements in the future.

In today's call, the company will make reference to certain non-GAAP financial measures including adjusted net income, adjusted net income per share, adjusted EBITDA and adjusted operating expenses. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's third quarter earnings release, which is posted on the Given Imaging site.

I'll now turn the call over to Homi Shamir, President and CEO of Given Imaging.

Homi Shamir

Thanks, Fern, and good morning. Thanks to all of you on the line for joining us today. Before we start with the review of the quarter, I wanted to say that we hope that for those of you impacted by hurricane Sandy things are slowly getting back to normal.

In the third quarter, we generated revenue of $45.4 million, which is slightly higher than revenue achieved in the third quarter in 2011. Revenues were driven by 6% increase from the Americas region based on a strong 37% rise in sales of functional GI diagnostic product. We now have achieved three consecutive quarter of sales growth in the America region, which is our largest single market and expect to continue this trend.

In the EMEA region, PillCam capsule sale in the third quarter increased by 2% to 14,100 capsules. In addition, sales of our functional GI diagnostic product increased by 4%. However, revenue in the region in dollar terms was lower due to currency related effect. If we excluded the impact of foreign currency translation, revenue in the EMEA region would have increased by 3%.

In the APAC region, I am pleased to report that sales in Japan grew by robust 30%, compared to last year due to the effort of our direct sales force. Overall, sales in the region were 6% lower than the same period last year mainly due to lower sales in China and the fact that third quarter revenue last year were unusually strong on higher sales in China.

Our focus on the improving profitability resulted in a strong increase in net income in the third quarter. On a GAAP basis, net income increased 60% to $6 million, or $0.19 per share. On a non GAAP basis, net income increased 48% to $7.9 million or $0.25 per share on a fully diluted basis. Yuval will provide additional detail shortly.

Last month, we acquired the asset related to SmartPill GI Monitoring System from SmartPill Corporation. The SmartPill System measures gastric emptying and total GI transit times and is used to evaluate motility disorders like gastroparesis and constipation. This acquisition strengthened our leadership position in functional GI diagnostic. We believe that we have built the most comprehensive and clinical unique portfolio of GI diagnostic product.

We plan to leverage our sales force to increase awareness for this procedure and the benefit it deliver to patient. The integration of SmartPill is going according to plan and we are pleased with the feedback received composition at the at the recent ACG and UEGW meetings who were writing the Given Imaging acquires SmartPill and how it complement our COLON portfolio.

Effective January 1, 2013, this product will benefit from a Category 1 CPT code with the value of $870, compared to the Category 3 CPT code in a much lower investment value previously. We believe this development will facilitate higher sales of SmartPill capsules in 2013 and beyond.

Turning now to PillCam COLON 2. Yesterday, in our press release, we announced that we recently had the positive meeting with the FDA to discuss our planned submission for market clearance of PillCam COLON 2 for visualization of the COLON.

In our view, this meeting reaffirmed our belief that the result of the PillCam COLON 2 trial in the U.S. can support its use for visualization of the COLON, particularly in patient unable undergo colonoscopy or in case of incomplete colonoscopy. Base of this meeting, we plan to submit PillCam COLON 2 for FDA clearance under the direct de novo route within the next few weeks.

Filing a direct de novo application could shorten the time for the clearance by a few months. Just to remind you, PillCam was also originally clear to the de novo path. Since we believe that this is important for the data to appeal first in peer review setting, we are not planning to publish any data at the time of the submission to the FDA. Ideally, we are targeting DDW as a setting full publication.

In September, we filed for PillCam COLON regular approval in Japan. The submission to PMDA include the result of 72 patient PillCam COLON 2 pivotal clinical trial, which was designed to evaluate the PillCam COLON 2 as a tool to visualize the mucosal layer of the agnostics of colonic pathologies.

I would like to reiterate that we believe that this all submission provide a significant opportunity for Given Imaging with some addressable market estimate to be $1.7 billion in our main market [comprise] 3 million procedures annually. This include 1 million procedures in the U.S. and 1 million in Japan. Also, it's worth pointing out that bio clearances for PillCam capsules have also been visualized in detection of abnormality.

At the recent UEGW meeting in Amsterdam, there were several positive abstract about PillCam COLON with supportive use as a complimentary tool to colonoscopy in EMEA.

I will now turn the call over to Yuval, who will provide some additional details on our third quarter results.

Yuval Yanai

Thanks, Homi. As Homi mentioned, we achieved revenues of $45.4 million in the third quarter of 2012. Total PillCam SB sales were 58,200 capsules in the third quarter of 2012, the level similar to the same period in 2011.

In the Americas region PillCam SB sales in the third quarter increased nominally to 35,000 capsules. PillCam SB sales in the EMEA region increased by 2% to 14,100 capsules, while PillCam SB sales in the APAC region decreased by 10% to 9,200 capsules on lower sales to China.

Worldwide sales of functional diagnostics products increased by 5% to $13.2 million in the third quarter of 2012, compared to 12.6 million in the same period last year. In the Americas region, functional diagnostics products revenue increased by 15% in the third quarter of 2012 to $10.8 million, compared to $9.4 million in the same period last year. Functional diagnostics revenue in the EMEA region was $1.8 million, while revenue in the APAC region was $600,000.

Gross margin on a non-GAAP basis in the third quarter of 2012 was 78.3%, compared to gross margin of 77.6%in the same third quarter of 2011. The increase was due primarily to product and geographic mix in the quarter. We believe that we can continue generating high gross margins in the foreseeable future.

On a GAAP basis, operating profit was $6.5 million, compared to $4.1 million in the third quarter of 2011. Non-GAAP operating profit was $8.5 million, compared to $5.8 million in the third quarter of 2011. We are pleased with the high double-digit operating margin of over 19%. It is worth noting that cash generated from operating activities correlates nicely with our non-GAAP operating profit. This quarter cash generated from operating activities totaled $9.8 million.

We achieved a strong increase in both, GAAP and non-GAAP earnings together with another quarter of strong cash flow. Net income on a GAAP basis for the third quarter of 2012 increased 60% to $6 million, or $0.19 per share, compared to $3.8 million, or $0.12 per share in the same quarter last year.

On a non-GAAP basis, net income for the third quarter of 2012 increased by 47% to $7.9 million, or $0.25 per share on a fully diluted basis, compared to $5.3 million or $0.17 per share on a fully diluted basis in the third quarter of 2011.

Tax expenses remain at the same level as projected. The reconciliation between GAAP and non GAAP earnings is available in our third quarter press release, which is posted on our website.

Moderator, you may now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we'll take our first question from Jeremy Feffer with Cantor Fitzgerald.

Jeremy Feffer - Cantor Fitzgerald

First just on COLON 2, I wanted to be clear on the new pathway of going de novo. Is that something that the FDA suggested after you met with them, or how did you come to this new decision?

Homi Shamir

Jeremy, good morning. Homi. Yes. We got to the recommendation of the FDA to file a direct de novo to people who are not familiar direct de novo is the new procedure relative to a new path with the FDA. They started recommending to use it less than a year ago. Previously, you used to go at 510(k), and later on with the 510(k), you can get a NOC letter and then go to direct de novo. Now, in a way they streamlined the process and basically sending you directly to a de novo process while you are doing the sometimes, say, 510(k) filing.

Jeremy Feffer - Cantor Fitzgerald

So, you think this reduces approval time by a few months? Do you think this could take six to nine months now?

Homi Shamir

We believe, all the time we say that we believe that after filing it's better for you. We believe that I could remain a evil. We believe that actually, we have some opportunity here we say basically the FDA trying to be more efficient here in filing to do it a little bit faster. And, I think we will know in the next couple of months how things are progressing.

Jeremy Feffer - Cantor Fitzgerald

Okay. Then I wanted to follow-up on a comment Homi you made, so now you don't plan to publish data when you submit to the FDA? What's the reasoning for that?

Homi Shamir

Mainly because we would like to publish it in a peer review and we believe we will have a much better headlines when we publish it in a peer review, and the best way to do it hopefully will be DDW on Podium Presentation.

Jeremy Feffer - Cantor Fitzgerald

Okay. And then just quickly on the quarter. So, I noticed that Asia-Pacific was probably still a little lighter than you were hoping. How is the conversion to the distributor direct model going? Was that cause for some of the weakness there or what was behind some of that?

Yuval Yanai

Hi, Jeremy. This is Yuval. Well, it's a combination of the stipulation in both, in Japan and China. In China, I'll talk with China, because last year the third quarter was unusually strong in China, and this quarter was, I can't say unusually weak, but was not strong enough from the beginning of this year we had discretion issue over there. We believe that we have probably overcome all of them or at least most of them and it looks like the future looks much better in China. However, yes, China one of the main reason for the weak revenues in China.

In Japan, finally, we completed the transition from a full distribution market into a hybrid one, meaning that approximately 70% of revenue is now generated by our own sales force. It took a little bit more time than before. We generated about 30% in terms revenue more than the same quarter of last year and we also believe that we can generate in the second half of this year probably twice the revenue we achieved in the first half of the year, so we are doing good progress in Japan, yet we are not where we targeted our sales, but once again it's a good progress.

Jeremy Feffer - Cantor Fitzgerald

Okay. That's helpful. I'll jump back in the queue. Thank you.

Yuval Yanai

Thank you.

Operator

(Operator Instructions). We'll take our next question from Bryan Brokmeier with Maxim Group.

Bryan Brokmeier - Maxim Group

Hi, everyone. Just, I guess, back to the direct de novo process. It's my understanding that this is actually adding time to the submission and previously, you were planning to go with 510(k) approvals. I guess, it's not clear to me. I mean, you can explain it again a little more on how is it going to reduce your time. Is it adding something on to just filing the 510(k)?

Homi Shamir

Again, filing a 510(k), it could take six to nine months or even a year. Now there is no really timeline with the agency, and also we say this all along Bryan that there is a good chance that the 510(k) will continue into de novo. The agency in order to streamline the de novo approach, and that is actually also the 510(k) created now a new way, which is direct de novo. So, instead of us waiting for them to go through the 510(k) process coming back to us eventually with the request to go to a de novo, we are starting what we call direct de novo from the beginning.

So, we believe, and again we build our internal timeline, but obviously with some advice from our legal counsels who are very familiar with the process. We believe that the process and all along we said the submission will take a year. Now, we believe it could take a year at the most, but it could be also shorter than that.

Bryan Brokmeier - Maxim Group

Okay. So, if you brought it into your 510(k) clearing submission and what has not been successful in that and then put it into de novo process and gone back into the 510(k). How it work?

Yuval Yanai

Not at all, I'll have to repeat what Homi said before. When we announced our report before, we said that it is more likely that we will have to go through the de novo, and de novo is involved in first fighting 510(k) and then going into the de novo and I think that we should be happy that the FDA enabled us to go direct to de novo and therefore the process maybe even a little bit shorter than we planned before.

Bryan Brokmeier - Maxim Group

Okay. And, so on the data, everybody has been waiting for the data and I guess it's not that common to hold off and releasing the data until you can give it bigger headline (Inaudible). Could you explain a little bit more? I mean I don't see why you would want to wait so many months to release the data when everyone launched to see what it is to determine how good the data is.

Homi Shamir

Again, obviously we have the investor, but we have also the GI community who are eventually are the people who will use the capsules and if we sold you with spec I need to convince them, because the money and the revenue will come from them and the patient. And, the best way to do it and release it is to try to do it on a major GI confidence where we and especially our lead physician in this trial who is very well known in the industry will speak hopefully on the podium and release the data to them. Because, end of the day, I need to convince them and not anybody else.

Bryan Brokmeier - Maxim Group

Okay. Thanks. Then just lastly, on your gross margin, you had a really good gross margin in the quarter above 78%, which I don't believe you've actually ever done before and you said that you expect it to remain high for the foreseeable future. Does that mean that you are expecting it to remain above 78% for the foreseeable future? Maybe you could talk a little bit about what's allowing you to have such a strong gross margin now and could we continue to see that climb?

Yuval Yanai

Hi, Bryan, this is Yuval. First of all, I am not sure this is the first time that we exceeded 78%. I think it happened before. Maybe, I think, even last quarter slight I think with 71.1% or 71.2%. So, yes, we are enjoying our relatively high gross margin. First of all, there is a dependency on a geographic and product mix, but on the other hand, we think that the recent efforts on improving profitability of a relatively new acquired business, the Bravo and Sierra bearing fruits, and we can see gross margin of this product improving.

It takes some time, because once we acquired those products and at the time of the acquisition the gross margin was between 40% to 55%. We transferred most of the production to Israel and improved profitability and now we are working on I can call it incremental improvement in the bill of material and efficiencies. And as I said before, it bared fruit, we are now close to 65% on both products. We intend to continue efforts to improve and assuming no major significant changes in the market, which we don't expect right now, there is no price pressure, we believe that we can maintain relatively high gross margin.

Now, 78% is an average. Within one quarter it can be 78.3%. The other one 77.7%, depends once again on product mix and geographies, but generally speaking we can maintain this relative high gross margin.

Bryan Brokmeier - Maxim Group

Okay. Thank you very much.

Yuval Yanai

Thank you, Bryan.

Homi Shamir

Thanks, Bryan.

Operator

(Operator Instructions). We have no further questions in the queue. I will now turn the call back over to Homi Shamir for closing remarks.

Homi Shamir

Thanks, everyone for joining us today. Yuval will be presenting at the JPMorgan SMid Conference in New York on November 29th. We look forward to see many of you then. Thank you.

Operator

And this does conclude today's conference call. Thank you all for your participation.

Homi Shamir

Thank you.

Yuval Yanai

Thank you.

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