Transcript of conference call held on April 17, 2003
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CCBN StreetEvents Conference Call Transcript VMSIQ1 2003 Ventana Medical Systems Earnings Conference Call Event Date/Time: Apr. 17. 2003 / 9:00AM CT Event Duration: N/A |
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CORPORATE PARTICIPANTS
Christopher Gleeson
Ventana Medical SystemsPresident and CEO and
Director
Nicholas Malden
Ventana Medical SystemsVP and CFO
John Patience
Ventana Medical SystemsVice Chairman of the Board
CONFERENCE CALL PARTICIPANTS
Timothy Lee
Merrill
Lynch Global Securities
Frederick Wise
Bear Stearns & Co.
Ronald Opel
HC Wainwright & Company Inc.
Sara Michelmore
SG Cowen Securities Corp.
Blake Goodner
Kathy Waller
Nick Mallden
PRESENTATION
Operator
Good morning, ladies and gentlemen. And welcome to the Ventana Medical Systems first quarter conference call.
At this time all participants in a listen only mode. Following todays
presentation, instructions will be given for the question and answer session.
If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder this conference is being recorded today April 17, 2003.
I would now like to turn the call over to Miss Kathy Waller (ph) of FRB/Weber
Shandwick. Please go ahead, maam.
Kathy Waller
Thank you, Nancy.
Good morning, and thank you for joining us.
On behalf of Ventana
Medical systems I would like to welcome everyone to todays first quarter conference call. Hopefully youve all had a chance to review todays press release. However, if you did not, and you need a copy, you may call Karen Droba at
312-640-6771. Or you can visit Ventanas website at www.Ventanamed.com.
This call will follow a standard format with managements presentation followed by a Q&A.
But before we get started I would like to call your attention to the Safe Harbor statement.
The news release today and this conference call contain certain forward-looking statements within the meaning of Federal
securities laws. These forward-looking statements includebut are not limited tostatements regarding ability to grow sales, increase gross margins, future income, our R&D efforts, and general financial performance expectations.
Investors are cautioned that all forward-looking statements
involve risks and uncertainties that could cause actual results to differperhaps materiallyfrom those anticipated or suggested by such forward-looking statements.
These risks and uncertainties include without limitations risk associated with market acceptance of new automated histology
products, continued success in asset management, continued improvements in manufacturing efficiencies, on-schedule launches of our new products, currency exchange rate variability, competition and competitive pressures on pricing, and general
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VMSIQ1 2003 Ventana Medical Systems Earnings Conference Call |
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economic conditions in the
U.S. and in the region served by Ventana.
Those risk factors are
contained in our periodic reports including the Form 10-K for the year December 31, 2002 and all other SEC filings. Copies of the files made with the SEC are available through the SECs electronic data gathering retrieval
systemEDGARwhich is at www.sec.gov.
We undertake no
obligation following the date of this release to update or revise our forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements.
We caution you not to place undue reliance upon any forward-looking
statements., which speak only as of the date such statements are made. We can not guarantee any future operating results, activity or performance or achievement.
With that said, Id like to introduce management. With us today, we have Chris Gleeson, President and Chief Executive
officer; Nick Mallden, Vice President and Chief Financial officer and John Patience, Vice-Chairman of the board.
At this time I would like to turn the call over to Chris. Chris, go ahead, please.
Christopher GleesonVentana Medical SystemsPresident and CEO and
Director
Thanks, Kathy. And welcome to our first
conference call for 2003.
As usual, well go through a
format of about 20 minutes of prepared comments. And then well respond to questions.
The prepared comments will cover three topics. Firs, Nick and I will discuss operating results for the first quarter of 2003. Ill then provide separate updates on our anatomical pathology
business and out biotech tools business. And finally Ill provide an outlook for our business for the remainder of the year.
Consistent with last year, a primary objective for the company in 2003 is to continue to the strong top-line growth and improving profitability trends we
established in 2002.
Our sales for the first quarter were 29.3
milliona 32% increase over the same quarter in 2002, and well ahead of our expectations.
We were particularly pleased with the continued strength in our consumer business which grew 30% over the prior year quarter and 4% sequentially. We should note that this is the eighth consecutive
quarter that our reagent sales growths a exceeded 25%.
Recent
(ph) revenues posted very strong results, showing 40% growth versus last year due mainly to a much higher rate of placements converting to capital purchases versus our expectation of a progressive shift to reagent rentals and other forms of extended
purchase commitment.
Despite this near-term strength, we
continue to believe to the longer-term underlying trend is away from capital purchase, consistent with our initial projections. And Ill discuss this when looking at the 2003 outlook.
All geographies turned in strong performances. And our north American business continued the strong growth pattern
established over previous two years, while the international entities demonstrated strong growth in level currencies, and appear set for an excellent 2003.
We had anticipated a relatively weaker capital purchase environment in the drug discovery segment. And sales of our drug discovery systems to
pharmaceutical companies for their programs were broadly flat with last year, consistent with our expectation.
Importantly, however, reagent sales growth in this area grew 153% which is an encouraging indicator of a broadening recognition that Ventana is bringing to this category.
We continue to invest in this area on the basis that we expect to it develop
into a strong razorrazor blade business akin to our anatomical pathology business.
First quarter gross margin came in at 71% after 69% in the same prior year quarter, and is consistent with our expectations and certainly in line with our progress towards a longer term goal of 75%.
We continue to aggressively drive our product development programs. And as
such our R&D expenses for the first quarter increased 19% over the same prior year number to $4.3 million or 15% of sales.
As you are aware our 2003 focus on our two major platform development programs. Our next generation BenchMark, the XT, has been released and will be in
full commercial launch in early July. And our HPS (ph) or H&E Primary starter (ph)is slated for early showing in Q3 of this year and general commercial launch in the second quarter of next year.
In addition, were now heavily investing in our life sciences R&D as
we look to establish Ventana as a life sciences leader in the anatomical anthology segment of the IVD market. Ill discuss that with you shortly.
SG&A expenses as a percent of a sales were down 300 basis points in the first quarter, consistent with our broader strategy of leveraging expenses.
Although actual dollars spent increased by 25% toor $3 million versus the same period in Q1 of 2002. First quarter SG&A was impacted primarily by our investment in
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VMSIQ1 2003 Ventana Medical Systems Earnings Conference Call |
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marketing infrastructure
associated with capitalizing on our HPV products and Series XT (ph) opportunities, and ongoing spending in the legal area.
Q1 operating income was 1.3 million versus an operating loss of 400,000 in quarter one of last year. Net income for the quarter was 1.4 million or 9 cents
per share versus a net loss of $600,000 or 3 cents per share in 2002.
Let me now pass this across to Nick to discuss our balance sheet and cash flow for the quarter.
Nick Mallden
Thanks, Chris. And good morning, everyone.
We
finished the quarter with continued improvement across our balance sheet metrix. DSOs at the end of the quarter stood at 65 days, or 18 days better than the same period last yearalbeit a few days higher than the year end due to strong growth
in slower paying international markets.
We continue to believe
that we can maintain consolidated DSOs somewhere in a range of 65 to 75 days over time.
First quarter results were solid with regards to inventory management as well, as we began to sell off the BenchMark inventory built up over the course of 2002 consistent with our strategy to increase production in advance
of the XT launch. Indeed inventories were $1.5 million lower at the end of the quarter versus December 2002, with total days in inventory falling to 129 by the end of the period from 169 at the end of the last year.
We anticipate continued improvements in DSI during the remainder of 2003
towards our DSI goal of 90 days over the next 12 to 18 months.
Turning to cash flow, we generated $3 million of operating cash flow in the quarter versus using about $400,000 in operating cash of Q1 of last year, and have basically doubled our total cash position over the last 12 months to
nearly $21 million.
From a net cash flow perspective with
generated $2.2 in the quarter versus using $1.4 million over the same period last year. Indeed, net cash flow would have been $3 million except for our repurchase of approximately 40,000 shares during the quarter.
Its my expectation that well continue to repurchase shares in the
future on an opportunistic basis. We continue to believe that were on track to generate net cash flow in a range of $10 to $12 million over the course of 2003.
Chris?
Christopher
GleesonVentana Medical SystemsPresident and CEO and Director
Yes. Thanks, Nick.
A second objective for 2003 is going to be a continuity of our initiatives to leverage product superiority in clinical histology to secure market share
gains in advanced staining, which includes automated platfro0ms and reagent systems for immunistic (ph), in (ph) situ (ph) hybridization, and our special stains and FRVX (ph) products.
Last year, we made excellent progress in our advance staining business. And weve continued this in the first quarter of
2003. On a global basis, the BenchMark system which is clearly the gold standard in fully automated IHC and ISH testing continues to set new records for the company.
New placements of BenchMarks were strong in the quarter and continued to drive reagent revenues.
We were very pleased to see a greater than expected conversion of placements
to capital sales this quarter. And this helped drive the growth in instrument revenues compared to the prior year quarter. All geographies contributed this better than expected revenues in the instrument category.
Despite this stronger result in the first quarter, we remain cautious in
regard to the availability of capital via the hospital capital approval process. And as such are continuing to predict an increase in the number of reagent rental-type acquisitions.
Consistent with our last conference call Id like to cover two key metrics we introduced in that callthe change in
installed instrument base and the change in the annuity across that installed base.
I can tell you that our installed base stood at approximately 4,100 instruments at the end of quarter one of 2003. This result represents a 20% growth in our installed base of Q1 of last year. Q1 placements of 165 systems in
this year were 8% up versus 153 the total placements made in Q1 of 2002.
The majority of our first quarter placements were BenchMark systems. And they were a higher percentage compared to last year.
As you are aware, the BenchMark reagent annuity is more than twice the reagent annuity of our older systems. And thus the BenchMark and the BenchMark XT
in the future will accelerate the overall increase in our selling rate in our total (ph) reagentrun rate.
In addition to placements, a measure of the health of our business is the growth of annuity stream associated with our install baseor the average annual consumer annuity per placement. In the
main,
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VMSIQ1 2003 Ventana Medical Systems Earnings Conference Call |
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we would expect this
annuity value to increase over time as a reflection of our expanded reagent menu. And the generally higher reagent utilization experienced on our newer instruments and first quarter performance is indicative of that trend.
Our average annuity value increased 8% to $20,390 per installed instrument
from $18,830 per installed instrument at the end of Q1 last year, and $19,950 per instrument at the end of the 2002.
Again, these gains are being driven by the higher value BenchMark licensing advance staining segment and increased reagent utilization as new and existing
customers commit to BenchMark, Nexus and Special Stains (ph) platforms for the majority of the IHC, ISH and special stains testing needs.
Last year, we launched our confirmed antibody (ph) range of products, as well as two improved detection systems. And I mentioned that to you at that time.
These products contributed to our reagent growth in the quarter and reflect our increasing commitment towards attaining leadership in the anatomical pathology life sciences R&D area.
Since our last conference call, weve added another two key scientific leaders to our R&D organization. Im
confident now weve established the solid foundation in life science capabilities necessary to establish Ventana as a leader over time in the areas of protein and organic chemistry, monochronal (ph) antibody development, and molecular
diagnostics.
This quarter (ph) R&D will be singularly
focused on developing our world-class range of reagent products for anatomic pathology and research tools business.
Another very important growth area in advanced staining for our company is our TheraDx range of products. This segment focuses on the development of IHC
and ISH diagnostic tests to be used to admit patients to therapy and in some cases to monitor response to targeted cancer drugs being developed by biopharma and pharma companies.
As you are aware by now, the first example of this business model is Herseptum (ph), and its used in metastatic (ph)
breast cancer, where hereto our expression (ph) is evident. Other drugs under development for colon cancer and gastrointestinal stroma (ph) tumors will, it appears, require a tissue-based diagnostic for admission of therapy and monitoring of
therapy.
We have submitted our PMA for the diagnostic to be used
with the Novartis Stroke Glivick (ph) and its application in treating stroma (ph) tumors. And this admission is currently under review by the FDA.
In addition to the Novartis collaboration, we have also completed an exclusive agreement with Ilex Oncology to develop a diagnostic for use with their
drug Campath (ph). And we have agreements under consideration with four additional global pharmaceutical companies.
An important component of our TheraDx strategy is to be able to provide total service to pharma companies encompassing pre-clinical scientific
collaboration, clinical trials capability, and of course diagnostic kit development and global distribution of same.
Being the first choice for all pharma companies for co-development of our Ventata-branded TheraDx Companion Diagnostics continues to be our goal.
The thirdand a newly signaled out objective for
2003is to maximize the opportunity in the HPV diagnostic tissue and liquid-based testing market.
As youre aware certain types of Human Pathaloma (ph) Virus, or HPV as it is known, are considered to be the primary cause of cervical cancer. HPV testing is performed in both the histological
laboratory and the cytological laboratory (ph) where tissue and liquid based testing are carried out respectively.
While histology is our core business, the Cytology laboratory is a new and important area of future growth opportunity for us. Its a logical
extension of our business, utilizing strong intellectual property rights to glass slide technology, and has similar leads to the histology laboratory.
In 2001, we introduced the first slide-based DNA probe method for detecting high and low-risk sub-types of HPV tissue. And last year we introduced our
Inform HPV test for use with the CyTech Thin Print (ph) method.
In the first quarter of 2003 we launched a method with the Tri Pap Sure Prep(ph).
And in each case the overall customer response to our HPV products has been excellent. And we continue to believe that our slide based method of detection provides the level of sensitivity and
specificity required for the accurate diagnosis of clinical HPV infection. And data from studies completed to date supports this hypothesis.
Were confident that the culmination of our intellectual property rights and our unique in vitro(ph) hybridization slide based technology which
provides viral detection and seriomophology (ph) allow us to provide superior diagnostic testing methods to detect the required HPV subtypes that are deemed by medical experts as important in the early detection of cellular changes that can lead to
cervical cancer.
Both the tissue and liquid based methods are
fully automated on the BenchMark system. And we expect to see strong growth as the advantages of the slide based method become clearer from a clinical perspective and as the test becomes more broadly adopted.
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We do have a major
clinical study currently under review. And we expectand are quite confidentthis will be published later this year.
In addition, we have several other studies under consideration and expect to initiate several more clinical trials during 2003.
As a result of the outcomes of the clinical studies to-date and the
markets demand of our products, it is our intention to submit a PMA to the FDA. Subject to finalization of the clinical protocol, it is our plan to submit late this year or early next year.
While our current strategic plan only includes modest revenues from our HPV
testing methods, the potential for this product is significant, and we are currently reviewing our investment in this business consistent with this potential.
My final comments to you are on our core anatomical pathology business which consists of histology and cytology relate to the progress we are making in
the development of new text (ph) forms primary and advanced training.
Our next generation high capacity advanced staining platform, the BenchMark XT, has finished its product development. And the first customer installations have been completed. The feedback from key reference sites has been excellent.
And were up to double the productivity of the existing BenchMark system and ability to run immunistic (ph) chemistry and in situ (ph) hybridization on the one run, this product is truly the next generation in advanced staining.
While well continue to deliver and install systems during Q2, the
full-scale commercial launch of the BenchMark XT is planned for early Q3 of this year. And we do expect a positive reaction from the broader market. Our major primary staining platform for automated H&E staining is progressing well. And the
first fully developed systems are currently in use at our Tucson facility.
While we do have further development to complete, there are no major hurdles to overcome. And we expect to be able to have the next round of customer reviews of the product in Q3 of this year and the first customer in-lab evaluations
in late Q4 of this year.
This system will take Ventana into the
largest staining segment of the histology market. And we expect to drive revenue growth in 2004 and beyond.
A fourth objective for 2003 will be to continue to establish a strong competitive position in the research business, with a focus on micro-array and molecular pathology labs of both biotech and
pharmaceutical companies.
Our primary biotech tools platform for
this market segment continues to be the Discovery system which automates hybridization processes in micro-array analysis, gene expression profiling in tissue, and proteonics (ph) testing.
Youre all aware of the law of availability of capital spending in this market at the present time. And were not
immune to this phenomenon.
Despite the rather challenging market
conditions, we achieved good revenue results in the first quarter and achieved our global plan for this period.
During the quarter we obtained key placements of Discovery systems at Aventis, Glaxo SmithKline and AstraZeneca.
One of the most encouraging aspects of our first quarter results for this business was the 153% growth over the prior year in
our reagent sales.
With the company focused on a
RazorRazor Blade business model, growth in this component of the business is critical.
Shifting slightly here, we continue to make good organizational progress. Our manufacturing operations continue to improve. And our commercial organizations around the world demonstrate stability and
improved productivity.
Our R&D teams are skilled, motivated
and focused on the various product developments weve set for the year.
In 2003 we continue to expect the business momentum that we established in 2002 to continue to drive toward achievement of our desired profitability model. The model is characterized by compound annual revenue growth rates in excess
of 20%, gross margins of 75%, earnings expenses of 30% of sales, R&D in the area of 10 to 12% of sales, G&A spending at 10, and operating income margins in the 20 to 25% range.
As you look at the 2003 year, we could not be happier with the start that we have made. From our P&L perspective our
sales growth was strong, gross margin in line with plan, and net income above expectations.
On the asset management front we have DSOs are the best theyve been in some years. Our inventory reduction is ahead of plan. And cash flow from operations is better than expected. Indeed,
weve nearly doubled our cash on hand since the first quarter of last year despite growing the business at better than 20% over that 12 month period.
Combining these financial results with strong system placements and excellent product development progress, it has been a very good quarter for the
company.
Despite the relatively strong instrument sales forms
(ph) in Q1, we remain concerned with the industry wide issues surrounding the
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availability of funds for
capital purchases in both the clinical and the research markets and continue to anticipate a shift towards rental-style acquisitions as the year developments. As such, we are maintaining our existing full-year financial projections for 2003, as we
do not expect to see a repeat of the rate of instrument conversions to capital over the remainder of the year.
Indeed, we expect that revenue and earning in both Q2 and Q3 will soften a bit from the current consensus. The adjustments are primarily the impacts of some instrument capital conversions forecast for
Q2 and Q3, but now already realized in Q1, and the associated impact on earnings.
Net/net, we see year to year growth in Q2 of approximately 18% and operating margin of around 6%. Similarly in Q3, we see revenue growth of approximately 20% and operating margin in the 7% range.
Q4 remains broadly unchanged although we anticipate slightly higher earnings
in range of 3 to 4 cents above current Q4 consensus, with the net result being unchanged 2000 (ph) and EPS outlook.
Given the strong start to the year and potentialalbeit slightfor the higher than expected rate of capital conversions to continue past Q1, we
will revisit 2003 projections at the end of the second quarter when we have better visibility as to the market conditions and to the 2003 full year.
Thank you for your attention. Well be happy to entertain any questions at this time.
QUESTION AND ANSWER
Operator
Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed
by the one on your push button phone. If you would like to decline from the polling process press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are
received. If you are using speaker equipment you will need to lift the handset before pressing the numbers.
One moment please for the first question.
And the first question is from Timothy Lee. Please state your company name followed by your question.
Timothy
LeeMerrill Lynch Global Securities
Good morning. Its Tim Lee with Merrill Lynch. Just a couple of questions.
First in terms in your comments regarding the greater than expected capital sales of this quarter, could you just give a
sense of what percentage of the placements were rentals relative to capital sales where they were kind of fourth quarter? And where do you see that number going to going forward?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Sort of stepping back a bit, Tim, we had strong license last year. We would
expect a conversion rate of about 50% in the quarter going to 2003 and throughout the year in fact as an average.
I think what we saw in thewe saw a much higher percentage in the first quarter and thats what drove the numbers in that category. I think the
other thing is weve got, I think, also around the world now, very effective sales forces. And of course, theyre motivate to drive the numbers accordingly. And they really did a good job in being able to, you know, find the capital
budgets within the hospital and research environment and to execute against them.
I do think that were not coming off our expectation that there is a trend that would suggest that theres a lot more reagent rentals or (ph) acquisitions going forward. But I am happy to consider looking at the
numbers again in the middle of year to see how we did after Q2.
Timothy LeeMerrill Lynch Global Securities
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Just kind of following up
on your comments regarding lower instrument sales in Q2 and in Q3. Does that imply that with a great mix shift towards reagents we could see an up-tick in the gross margin line?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
I think at this stage, were holding our gross margin for the year in
terms of our forecast, so we havent predicted that. But if in fact that didif we did get a different mix of reagents you would see an up-tick. Yes.
Timothy
LeeMerrill Lynch Global Securities
And then just one last question. I had a chance to review your 10K and like. Just looking at the options, theres a fairly sizeable number, should option be expensed. Just give us your current thoughts on your option policy and
how it may change going forward.
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Nick, why dont you answer that?
Nicholas MaldenVentana Medical SystemsVP and CFO
Tim, weve done some benchmarking of Ventana against a like universe. And we dont have everyones information yet for 2002.
But if you look at 2001 and you look at our run rate on options versus the
universe, we are right about in the middle of the pack. Were about average for the folks we put into our world, which are folks like CyTech (ph) and IDX Labs (ph) and ChromaVision (ph) and Cardel (ph) and a couple of other companiesthat
were sort of right in the middle in terms of our option run rate. Our run rate is coming down year to year. We issued about 100,000 fewer options in 2002 than 2001. So we are looking at that. And the board is paying attention to the issue of
options.
So we think that over time our total option grants in
total will come down. But in terms of averages, we are in terms of total options granted below the average. In terms of run rate, just slightly above the average.
Timothy LeeMerrill Lynch Global Securities
Thank you.
Operator
Thank you. The next question is from Rick wise please state your company name followed your question.
Frederick WiseBear Stearns & Co.
Hi. Its Rick Wise, Bear Stearns. Good morning, Chris.
Christopher
GleesonVentana Medical SystemsPresident and CEO and Director
Good morning.
Frederick WiseBear Stearns & Co.
A couple of questions. First, you were kind enough to give us the reagent numbers in dollars and growth rates. I think if I heard you correctly you said
year over year reagent growth was up 8.3% (ph). And sort of to follow on Tims question, is it worth looking ahead to the full year versus last year, it sounds like we really should expect to see acceleration in that reagent sales average per
instrument? Is that a fair statement?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Yes. Thetheres two metrics. The actual reagent sales year over
year were 30% up. But on an opening store (ph) base it was a different number. It was eight (ph) up.
Nicholas MaldenVentana Medical SystemsVP and
CFO
It was 8%.
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
I think the important thing there is as we placethe majority of our placements now are of the higher value system such
as the BenchMark. And then when the BenchMark XT comes full online, well use even more reagents. You should see an up-tick in that particular metric going forward. Yes.
Frederick WiseBear Stearns & Co.
If were trying to forecast it, what kind of growth (ph) rate should we think sounds plausible for the next 12 months? Or 03? Or however you want to help us think about it?
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Christopher GleesonVentana Medical SystemsPresident and CEO and Director
I havent got the exact number on installed base growth rate per year, Rick. Ill have to look at what our overall growth rate for the reagents
is and then look at the installed base. But thats we can work with you on.
Frederick WiseBear Stearns & Co.
But it should accelerate, though.
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
It should accelerate. Yes. The situation is with the BenchMark, the BenchMark is in excess of twice the reagenthas
twice the reagent annuity of the existing old Nexus (ph) systems and ES (ph) systems.
Frederick WiseBear Stearns & Co.
Right.
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
And in fact when ISH systems are used it can be up to three times the run rate. When you look at the then you look at the XT
coming out with double the productivity and will go into some of the larger laboratories, all those will drive a much higher reagent annuity per system which will impact that per install base. It will roll (ph) to an up-tick bases, yes.
Frederick WiseBear Stearns & Co.
A couple of things I would like to expand on your comments a little bit.
The hospital budget issues and pressures. Can you just expand on exactly what
youre seeing. I mean, are you going in and sayingare your sales folks going in saying, wed like to you consider purchasing the machine. And theyre saying, no. Our budget has been cut?
Can you just help characterize the feedback thats making you come to
this conclusion that the outlook has changed?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Well, there are two aspects to it, Rick the first is the research market. And
you look at the research market. And everybody has had significant difficulty in that area of the business in regard to the availability of capital funds. Now thats very clear. And its stated by many companies.
What we see generally is a tightening of budgets overall in the clinical
market as well. And we took an estimate of what we thought that would be for the year. Weve seen over the last couple of years a gradual trend towards more reagent rental-type acquisitions. And so weve made an assumption for the year and
used that assumption in our numbers.
I think that there
arewhen you talk to hospital purchasing departments they will tell you that theyre under significant pressure to reduce cost in their hospitals.
Now I think whats happened is I think that the value that we bring to hospitals and the very proposition we have with our BenchMark system is so
significant over whatever else has used out there, that they prioritize in some cases their funds that they have available for capital purchase. And weve been able towith, I think, appropriately effective sales forcesto capitalize
on that.
But again, we dont want to give you the
impression this is an ongoing phenomenon because we want to wait and see what it looks like at the second quarter. And then we can give you a better perspective. But were very happy with the first quarter perspective in that regard. And
were just taking a cautious perspective going forward.
Frederick WiseBear Stearns & Co.
OK. And one last thing. If you can expand on your comments onI just
want to make sure I understand what youre saying when you were saying on that the HPV side that youre reviewing your investment opportunities?
Christopher
GleesonVentana Medical SystemsPresident and CEO and Director
Right. Yes. HPV testing is becoming a standard of care in the treatment of or the analysis and treatment of women with abnormal Pap smears. And there is a very limited number of companies that have
availability of products to market in this area.
We think
itsthe adoption of this testing will increase quite significantly over the next couple of years. And were really assessing, based on the results weve seen from our tests, which provide the viral detection and the morphology
(ph) which pathologists like. We think it gives it a potentially more meaningful and has more clinical utility. Were just trying to understand exactly what that means for us for the opportunity and
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how we should prioritize
and invest in that area based on our resources.
So were
just looking at it based on the performance of the product that were seen, which has been very good, and the sort of rather rapid adoption of this test and rapid adoption of our own method in this market as well.
Frederick WiseBear Stearns & Co.
So just trying to get at, does this sound like acquisitions? Or just stepped up internal investment ?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
No. Weve already made an acquisition last year, as you know. We bought the Beckman HPV business.
Frederick WiseBear Stearns & Co.
Sure.
Christopher GleesonVentana Medical
SystemsPresident and CEO and Director
So
the investment going forward is more from an internal perspective as we look to capitalize in the market place.
Frederick WiseBear Stearns & Co.
OK. Thank you.
Operator
Thank you. The next question is from Ron Opel. Please state your company name followed by your question.
Ronald
OpelHC Wainwright & Company Inc.
HC Wainwright. I have a couple of longer term questions. In your H&E standard thats under development at this point, what will be your positioning of the product in terms of the strongest areas of appeal to laboratories?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Good morning, Ron. TheI think one of the most significant differences
with our system is its fully automated. There is no fully ought might mated system on the market that takes it from the tissue on the slide to fully cover slip ready to go to an image analysis system and then to a pathologist.
In addition, it has fully integrated reagent systems on board which allow for
individual slide staining, and we think a betteractually a better stain than whats currently available today. We think with all the work weve done with focus groups and customers and now that theyve seen the system working in
its fully integrated version, its been a very, very strong response.
Ronald OpelHC Wainwright & Company Inc.
And Im assuming there are reagents associated with this. And if
thats the case, will the margins be comparable to what youre getting on the histology reagents now?
Christopher GleesonVentana Medical
SystemsPresident and CEO and Director
Yes.
The system, as you know, we, our business is a Razor Blade business. So we would not be investing in this system unless we were able to development a very strong reagent annuity. And in fact, the estimated reagent annuity for this system is higher
than any system we have today.
Ronald OpelHC Wainwright & Company Inc.
Yes. And concerning the objective of 20 to 25% operating margins down the road, is that a real world kind of thing say by
2005?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Well, we believe it is. Thats what were driving the organization
to. You know, weve built a really outstanding infrastructure in the company on global basis. And weve got a lot of capacity to leverage that. And when you start adding some of the high value systems with the reagent run rates that
were talking about and the new system that are coming to market, we feel very positive about our ability to achieve those numbers.
Ronald
OpelHC Wainwright & Company Inc.
OK. And just one more. I wonder if you would just give us a brief update on the legal situation particularly as it applies to Cytologix (ph)?
Christopher
GleesonVentana Medical SystemsPresident and CEO and Director
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Yes. Sure. Well, there is
not more to add from where we were before. The hearing date, forjust purely hearing date to talk about the issues is in the middle of August this year. As you know, the judge has put the case into several trials. And from our point of view,
its business as usual. And its just a matter of waiting to see what happens at that time.
Ronald OpelHC Wainwright & Company Inc.
OK. Thank you.
Operator
Thank you. The next question is from Sara Michelmore. Please state your company name followed by your question.
Sara
MichelmoreSG Cowen Securities Corp.
Yes. Good morning. Its Sara Michelmore from SG Cowen.
Just a quick follow up, Chris, on the instrument sales in the quarter. You had been expressing some caution going into this quarter on the capital sales environment. It sounds like coming out of the quarter you are as well. Just
wondering, the strong performance in Q1, did you guys provide incentives or any sort of promotion that caused that strong conversion?
Christopher
GleesonVentana Medical SystemsPresident and CEO and Director
No. We havewe obviously havein fact, the answer is no to anything abnormal. Our sales force is far more incented on reagent growth than it is on instrument capital. So, no. It just, I think
we were just, we have a lot of placements in the 2002 year. And the sales force, as I mentioned earlier, Sara, I think has just been very effective in their abilitynot just the U.S. but in Europe as wellto find where hospitals had
budgets and to help them, you know, getconvert to capital conversions.
Sara MichelmoreSG Cowen Securities Corp.
So no concessions to customers or anything else like that to get them to
convert?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
No. No.
Sara MichelmoreSG Cowen Securities Corp.
OK. Just a couple of housekeeping questions for Nick. Can you talk about what benefit foreign exchange provided in the quarter? The Euro was pretty strong year over year?
Nicholas MaldenVentana Medical SystemsVP and CFO
Yes. The foreign exchange in the quarter was $1.3 million on the top line and $300,000 on the operating income line.
Sara MichelmoreSG Cowen Securities Corp.
OK. And then can you break out what the sales were? Chris, you did talk that the growth was broad based, but particularly what the revenue and growth
rates were for North America versus international?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
I think the U.S. was about a 25% growth. And the
international was over 55% growth.
Sara MichelmoreSG Cowen Securities Corp.
OK. And then forit sounds like the if I heard you correctly the drug discovery business was relatively flat year over
year?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Thats right.
Sara MichelmoreSG Cowen Securities Corp.
OK. Thats great. Thank you very much.
Operator
Thank you. Ladies and gentlemen, if there are any
additional questions please press the star followed by the one at this time. As a reminder, if youre using speaker equipment, you would need to lift the handset before pressing the numbers. One moment please for the next question.
Ladies and gentlemen, once again if you would like to ask a
question, please press the star followed by the one.
The next
question is from Ron Opel with a follow-up question. Please go ahead.
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Ronald OpelHC Wainwright & Company Inc.
Yes. This question has to do with your automated imaging development activity.
Now you have an internal process thats going on. And youre collaborating with ChromaVision (ph). I just wondered if you could elaborate on
whats going on there? And if and when you expect to bring image analysis capability comparable to what ChromaVision (ph) and Applied Imaging are offering to the marketplace?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
We have do have a collaboration with ChromaVision (ph). And actually its working very well a well in regard to our HPV testing products.
Weve had an internal development program under way for a
couple of years now. And weveon a prioritized basis that will not been launched any earlier than late next year. But we see imaging as a very important part of the overall customer value proposition for advanced staining. And we will be
continuing to development our system accordingly.
Ronald OpelHC Wainwright & Company Inc.
Good. Thank you.
Operator
Thank you. The next question is
from Timothy Lee. Please go ahead.
Timothy LeeMerrill Lynch Global Securities
Its just a follow-up on your HPV investment. Could there be a scenario such that given the opportunity we could see a
marked up-tick on the SG&A line in 04 that could potentially impact the bottom line?
Christopher GleesonVentana Medical
SystemsPresident and CEO and Director
Theres no plan force that, Tim, at this stage at all.
Timothy LeeMerrill Lynch Global Securities
OK. Thank you.
Operator
Thank you. The next question is
from Blake Goodner (ph). Please go ahead.
Blake Goodner
Yes. I got on the call late. So I apologize if this question has already been asked.
But could you just help me understand a little bit more in terms of your HPV Inform test roll out?
I think you mentioned that it can now be used in conjunction with the CyTech
(ph) Pap smear and I think as of early 03 potentially used with the TriPath (ph) Pap smear as well.
Can you just go through those timelines of when the data thats going to be released and when youll file a PMA? And when this will be approved?
And then help me really understandonce the test is approved, does that
then allow you to officially be marketing the test, as opposed to now when it cant be marketed because its not FDA approved?
Can you just clear that up for me?
Thank you.
Christopher GleesonVentana Medical
SystemsPresident and CEO and Director
Sure. We have several HVP products on the market. The first test we launched was the tissue test for high-to-low (ph) risk types. And that was in 2001.
We then launched a method for the CyTech Thin Prep (ph) system in the middle of the last year. And in the first quarter of
this year, we launched a method for the TriPath (ph) system. So we havewere the only company that can offer a comprehensive range of HPV testing products through liquid-based methods and also in tissue.
The current products are released under the FDA regulated ISI ruling. And that
means that hospitals and laboratories can use these tests. They validate (ph) them in their laboratories. And then they can use them for routine testing and they can claim reimbursement against them.
We have severalwe have two significant studies completed counting in
front of journals for publication. We have already had
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several abstracts released
at different meetings which are available publicly today.
Soin addition to that, we expect to have three or four major clinical studies initiated during this year in support of what we think is a very good alternative to the current testing methodology in the marketplace.
In terms of marketing, we do not obviously market or make any
major claims about our outside that (ph). But we can provide appropriate published data. And were doing in regard to the abstracts.
The clinical laboratories that are using our testsonce they validate that system, they make those tests available to clientele or the OB-GYNs or
whoever theyre dealing with.
So we are progressing along
now in terms of were working with the FDA on finalizing a protocol for a particular filing. Whether that be PMA or 510 K, that remains to be seen. And we expect to have something more formal in that regard toward the end of the this year.
In the meantime, were able to marketto sell the
product today to labs. And theyre using it routinely. And we have quite a large number of labs that are using the test on a routine basis to provide appropriate results to patients.
Blake Goodner
OK. Sounds great. Thanks
very much.
Operator
Thank you. The next question is from Ron Opel. Please go ahead.
Ronald OpelHC Wainwright & Company Inc.
Yes. Further on HPV. Could you describe Ventanas
laboratory throughput capability for an HPV test? And relate that to the market leader DiGene (ph)? And explain whether or not part of the investment that youre contemplating would be to increase the throughput capability?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Well, the investment is notany investment were considering doesnt relate to our systems. The current
BenchMark system can produce HPV results the same day. And it is very competitive in sense of throughput compared to the current methodology of the major system thats out there today.
On the XT of course you will get twice the throughput. But it will be the same
sort of incubation time. So twice the number of tests in any one day.
We feel very comfortable with our ability in terms of the smallest right through to the largest hospitals based on the testing rates we predict will increase to in the next years with our current methodologies and our current
systems.
Ronald OpelHC Wainwright & Company Inc.
Is there any kind of patient profile where the laboratory is likely to use your system instead of the DiGene (ph) system?
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Well, ours is a very different test. We provide two very important pieces of
information to the physicianto the pathologist, the physician, and thus the patient.
We provide viral detection. So we detect whether the virus DNA sub type is present. And secondarily we provide morphology (ph) so you can look at the integrate of that virus into photoplas (ph) or into
the nucleus and also any other morphological (ph) changes that are important in giving a total pictureclinical picture to the pathologist. then to the physician, and then, of course to the patient. So the big differences are that we provide
more information. And were very specific in regard to the sub types.
Ronald OpelHC Wainwright & Company Inc.
OK. And when you say yourthe guidance for this year as of now is
remaining unchanged, the meaning there is unchanged from the 65 to 75 cents?
Christopher GleesonVentana Medical SystemsPresident and CEO and
Director
Yes. I think the con census is around
68 to 69 cents. Were saying the year will be exactly as you expect us to be. Well review it in the middle of the year after Q2, and see how the results look in terms of capital conversions, et cetera.
Ronald OpelHC Wainwright & Company Inc.
Great. Thank you.
Operator
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Thank you. Gentlemen,
there are no further questions at this time. Please continue.
Christopher GleesonVentana Medical SystemsPresident and CEO and Director
Well, thank you very much on behalf of Ventana for your
time this morning.
We are very pleased with the start to our
quarter with the performance in obviously our P&L and our balance sheet. And we are working very hard here to continue to improve that as we move towards the rest of the year.
Thank you very much.
Operator
Thank you, sir. Ladies and gentlemen, this concludes the
Ventana Medical Systems first quarter conference call.
If you
would like to listen to a replay of todays conference call, please dial 303-590-3000 or 800-405-2226 and enter the access code 534269#. Once again, if you would like to listen to a replay of todays conference call, please dial
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You
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