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LMAT > SEC Filings for LMAT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for LEMAITRE VASCULAR INC

Form 10-Q for LEMAITRE VASCULAR INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements other than statements of historical fact contained in this Quarterly Report, including statements about:
the impact of previous Prohibition Notices and testing requirements of our AlboGraft sales; the impact to our gross profit in 2013 and 2014 as a result of our Xenosure acquisition and related manufacturing transfer; and the adequacy of our cash reserves for the next twelve months.These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by such forward-looking statements. Moreover, the forward-looking statements represent our estimates and assumptions only as of the date hereof. Forward-looking statements are subject to risks and uncertainties; our failure to manage the anticipated growth of our business; and the unavailability of additional, required capital on acceptable terms. Further information on potential risk factors that could affect our business and financial results is detailed in Part II, Item IA. "Risk Factors" in this Quarterly Report on Form 10-Q. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included in this report and our other SEC filings, including our audited consolidated financial statements and the related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 27, 2012.

Unless the context requires otherwise, references to "LeMaitre Vascular," "we," "our," and "us" in this Quarterly Report on Form 10-Q refer to LeMaitre Vascular, Inc. and its subsidiaries.

LeMaitre, AlboGraft, LifeSpan, and the LeMaitre Vascular logo are registered trademarks of LeMaitre Vascular, and UnBalloon is an unregistered trademark of LeMaitre Vascular. This Quarterly Report on Form 10-Q also includes the registered and unregistered trademarks of other persons.

Overview

We are a medical device company that develops, manufactures, and markets medical devices and implants for the treatment of peripheral vascular disease. Our principal product offerings are sold throughout the world, primarily in the United States, the European Union and, to a lesser extent, Japan. We estimate that the annual worldwide market for all peripheral vascular devices approximates $3 billion, within which our core product lines address roughly $750 million. We have grown our business by using a three-pronged strategy:
competing in niche markets, expanding our worldwide direct sales force, and acquiring and developing complementary vascular devices. We currently manufacture most of our product lines in our Burlington, Massachusetts, headquarters.


Our products are used by vascular surgeons who treat peripheral vascular disease through both open surgical methods and endovascular techniques. In contrast to interventional cardiologists and interventional radiologists, neither of whom are typically certified to perform open surgical procedures, vascular surgeons can perform both open surgical and minimally invasive endovascular procedures, and are therefore uniquely positioned to provide a wider range of treatment options to patients.

Our principal product lines include the following: balloon catheters, biologic patches, carotid shunts, contrast injection device, laparoscopic cholecystectomy devices, non-occlusive modeling catheter, radiopaque marking tape, remote endarterectomy devices, valvulotomes, vascular grafts, and vessel closure systems. We divested our aortic stent grafts in June 2011 and terminated our distribution of the Endologix products in August 2011.

We evaluate the sales performance of our various product lines utilizing criteria that varies based upon the position of each product line in its expected life cycle. For established products, we typically review unit sales and selling prices. For newer or faster growing products, we typically also focus upon new account generation and customer retention.

To assist us in evaluating our business strategies, we regularly monitor long-term technology trends in the peripheral vascular device market. Additionally, we consider the information obtained from discussions with the medical community in connection with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the peripheral vascular device market and our manufacturing capacity requirements.

Our business opportunities include the following:

the long-term growth of our sales force in North America, Europe and Japan, sometimes in connection with terminations of certain distributor relationships in order to expand our sales presence in new countries;

the addition of complementary products through acquisitions;

the updating of existing products and introduction of new products through research and development; and

the introduction of our products in new markets upon obtainment of regulatory approvals in these markets.

We are currently pursuing each of these opportunities.

We sell our products primarily through a direct sales force. As of September 30, 2012 our sales force was comprised of 79 sales representatives in North America, the European Union and Japan. We also sell our products in other countries through distributors. Our worldwide headquarters is located in Burlington, Massachusetts. Our international operations are headquartered in Sulzbach, Germany. We also have sales offices located in Tokyo, Japan, Madrid, Spain, and Milan, Italy. In 2012, approximately 95% of our net sales were generated in markets in which we employ direct sales representatives.

In recent years we have experienced comparatively greater success in product markets characterized by low or limited competition, for example the market for valvulotome devices. In these markets, we believe that we have been able to increase selling prices without compromising market share. There can be no assurance that we will not meet resistance to increased selling prices in the future. In contrast, we have experienced comparatively lesser success in highly competitive product markets such as polyester and ePTFE vascular grafts, where we face stronger competition from larger companies with greater resources. While we believe that these challenging market dynamics can be mitigated by our strong relationships with our vascular surgeon customers, there can be no assurance that we will be successful in highly competitive markets.

Because we believe that direct-to-hospital sales engender closer customer relationships, and allow for higher selling prices and gross margins, we periodically enter into transactions with our distributors to transition their sales of our medical devices to our direct sales organization. In October 2012, we entered into a definitive agreement with Schaublin Medica SA (Schaublin) to terminate its distribution of our products in Switzerland and to acquire certain assets and rights from Schaublin effective as of January 1, 2013 for $0.2 million. The purchase price is due


in three equal installments with the first paid in October 2012 and the remaining two payments due in January 2013 and January 2014. We anticipate that the expansion of our direct sales organization to Switzerland may result in increased sales and marketing expenses during 2013.

Our strategy for growing our business includes the acquisition of complementary product lines and companies and occasionally the discontinuance or divestiture of products or activities that are no longer complementary:

In June 2011, we divested our TAArget and UniFit stent grafts to Duke Vascular, Inc. for $0.6 million. In addition, Duke Vascular, Inc. assumed our future obligations for the associated UNITE and ENTRUST clinical trials.

In August 2011, we terminated our distribution of Endologix's aortic stent graft products in Europe in exchange for $1.3 million.

In October 2012, we acquired manufacturing and distribution rights of the XenoSure biologic vascular patch from Neovasc Inc. for $4.6 million. We paid $4.3 million at the closing and the remaining $0.3 million is payable on October 31, 2013. Previously, we were the exclusive distributor of the XenoSure biologic vascular patch through January 26, 2016 and held an option to purchase the manufacturing and distribution rights. Additionally, we have entered into a supply agreement with Neovasc while we transition manufacturing to our Burlington facility.

In addition to relying upon acquisitions to grow our business, we also rely on our product development efforts to bring differentiated technology and next-generation products to market. These efforts have led to the following recent product launches:

In November 2011, we launched the second-generation of The UnBalloon Non-Occlusive Modeling Catheter.

In December 2011, we launched the Over-The-Wire LeMaitre Valvulotome.

In addition to our sales growth strategies, we have also executed several operational initiatives designed to consolidate and streamline manufacturing within our Burlington, MA facilities. We expect that these plant consolidations will yield improved control over our production capacity and our direct labor force as well as reduce redundant costs over the long-term. Our most recent manufacturing transitions included:

In October 2010, we adopted a reorganization plan that was designed to eliminate redundant costs resulting from our 2007 acquisition of Biomateriali and to improve efficiencies in manufacturing operations. We have completed the transition of AlboGraft vascular graft manufacturing to our existing corporate headquarters in Burlington, Massachusetts.

In May 2011, we adopted a reorganization plan that was designed to eliminate redundant costs resulting from our 2010 acquisition of the LifeSpan vascular graft and to improve efficiencies in manufacturing operations. We have completed this transition to our existing corporate headquarters in Burlington, Massachusetts.

AlboGraft Recall and Sales Prohibition

In October 2011, we received complaints of two AlboGraft device failures which resulted in a voluntary recall of one production lot of our AlboGraft Vascular Graft. In February 2012, we received complaints of two additional AlboGraft device failures, which resulted in a voluntary recall of one additional production lot. We believe that we isolated the root cause of these device failures and implemented corrective actions beginning with lots produced in November 2011. Subsequent to the February 2012 recall, we received four additional complaints regarding our AlboGraft Vascular Graft. Although the investigation was inconclusive, we believe these complaints were unrelated to the product failures which resulted in the recalls and were isolated manufacturing defects. In October 2012, we received a fifth complaint regarding our AlboGraft Vascular Graft. We believe this complaint was unrelated to the product failures which resulted in the previous recalls and was an isolated manufacturing defect, which we have subsequently addressed through corrective actions implemented in April 2012. However, there can be no assurance that these product failures and manufacturing defects will not reoccur or that other problems related to our AlboGraft Vascular Graft will not develop in the future. In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA or foreign equivalent could require us to implement a recall of, any of our products and, if someone is harmed by a malfunction or a product defect, we may experience product liability claims for such defects. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital and may harm our reputation and financial results. Future recalls or claims could also result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future. As a result of the recalled lots, we recognized $0.2 million of inventory write-offs, which we recorded to cost of sales during the year ended December 31, 2011.

As a result of the complaints described above, in March 2012, the relevant regulatory agency in the United Kingdom issued a Medical Device Alert advising doctors to use caution when implanting our AlboGraft Vascular Grafts. In April 2012, the relevant regulatory agencies in the United Kingdom and France issued Prohibition Notices, which prohibited our ability to sell AlboGraft Vascular Grafts in these countries pending our ability to address the concerns of these regulatory agencies. The United Kingdom and France represented approximately 40% of our AlboGraft Vascular Graft sales volume and sales of AlboGraft in these countries were $1.0 million for the year ended December 31, 2011. As a result of the Prohibition Notices, we recognized $0.1 million of inventory write-offs, which we recorded to cost of sales during the three months ended March 31, 2012. In July 2012, the French regulatory agency rescinded its Prohibition Notice without qualification, and the United Kingdom regulatory agency rescinded its Prohibition Notice with the qualification that all AlboGraft devices must be tested prior to implant. The United Kingdom regulatory agency has indicated that as of January 1, 2013, it may remove the prior test qualification in the United Kingdom, although there can be no guarantee that this will occur. Additionally, there can be no assurance that additional countries will not also issue their own prohibitions against sales of our AlboGraft devices. Although the Prohibition Notices have been lifted and sales have resumed in the United Kingdom and France, they will likely continue to adversely affect sales in these countries. As of September 30, 2012, we have approximately $2.3 million of inventory and $0.5 million of intangible assets related to the AlboGraft Vascular Graft.


Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro, affect our financial results. For the nine months ended September 30, 2012, approximately 32% of our sales were from outside the Americas. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing, and administrative costs related to these sales are largely denominated in the same respective currency, thereby partially mitigating our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is moderated. However, most of our foreign sales are denominated in local currency, and if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases we will receive less in U.S. dollars than we did before the rate increase went into effect.

The following table indicates the impact of foreign currency fluctuations and strategic changes to our business activities for each quarter during 2012 and the two most recently completed fiscal years:

(amounts in thousands)

(unaudited)
                                                    2012                                             2011                                                    2010
                                       Q3            Q2            Q1            Q4            Q3            Q2            Q1            Q4            Q3            Q2            Q1
Total net sales                       13,645        14,361        13,928        13,411        14,564        15,112        14,598        14,431        13,656        14,158        13,815
Impact of currency exchange rate
fluctuations (1)                        (481 )        (470 )        (146 )          15           431           669            10          (420 )        (418 )        (336 )         314
Net impact of acquisitions and
distributed sales, excluding
currency exchange rate
fluctuations (2)                          -             -             -            260           319           335           328           156            -             -             95
Net impact of discontinued
products, excluding currency rate
fluctuations (3)                      (1,109 )      (1,342 )      (1,584 )      (1,904 )        (370 )         (76 )         (45 )        (100 )        (105 )         (65 )          -

(1) Represents the impact of the change in foreign exchange rates compared to the corresponding quarter of the prior year based on the weighted average exchange rate for each quarter.

(2) Represents the impact of new sales of acquired products or businesses and newly distributed sales of other manufacturers' during the current year period, measured for 12 months following the date of the event or transaction.

(3) Represents the impact of sales related to discontinued and divested products, and discontinued distributed sales of other manufacturers' products,during the comparable prior period, measured for 12 months following the date of the event or transaction.


Results of Operations

Comparison of the three and nine months ended September 30, 2012 to the three and nine months ended September 30, 2011.

The following tables set forth, for the periods indicated, our results of operations, net sales by geography, and the change between the specified periods expressed as a percentage increase or decrease:

                                               Three months ended September 30,                     Nine months ended September 30,
                                                                              Percent                                             Percent
(unaudited)                                  2012               2011          change             2012               2011          change
                                                                                 ($ in thousands)
Net sales                                $     13,645       $     14,564            (6 %)    $     41,934       $     44,274            (5 %)
Net sales by geography:
Americas                                 $      9,279       $      9,567            (3 %)    $     28,429       $     27,984             2 %
International                                   4,366              4,997           (13 %)          13,505             16,290           (17 %)

Total                                    $     13,645       $     14,564            (6 %)    $     41,934       $     44,274            (5 %)

Net sales. Net sales decreased 6% to $13.6 million for the three months ended September 30, 2012, compared to $14.6 million for the three months ended September 30, 2011. Sales decreases for the three months ended September 30, 2012 were primarily driven by the 2011 divestiture of our stent graft product lines which accounted for $1.1 million of sales during the three months ended September 30, 2011, a $0.2 million decrease in polyester graft sales, and a weakening of the Euro which negatively impacted sales by $0.5 million. These decreases were partially offset by higher average selling prices across nearly all product lines, increased sales in biologic patches of $0.5 million, and increased sales of radiopaque tape of $0.2 million.

Net sales decreased 5% to $41.9 million for the nine months ended September 30, 2012, compared to $44.3 million for the nine months ended September 30, 2011. Sales decreases for the nine months ended September 30, 2012 were primarily driven by the 2011 divestiture of our stent graft product lines which accounted for $4.0 million of sales during the nine months ended September 30, 2011, a $0.6 million decrease in polyester graft sales, and a weakening of the Euro which negatively impacted sales by $1.1 million. These decreases were partially offset by higher average selling prices across nearly all product lines, increased sales in biologic patches of $1.4 million, and increased sales of catheters of $0.5 million which was partially driven by selected pricing discounts in new geographies.

Direct-to-hospital net sales were 95% for the three months and nine months ended September 30, 2012, compared to 91% and 93% for the three months and nine months ended September 30, 2011, respectively.

Net sales by geography. Net sales in the Americas decreased $0.3 million for the three months ended September 30, 2012. The decrease was primarily driven by the divestiture of our stent graft product lines which accounted for $0.4 million of sales during the three months ended September 30, 2011, a decrease in the sales of shunts of $0.2 million, and a decrease in the sales of remote endarterectomy of $0.2 million, and was partially offset by higher average selling prices across nearly all product lines, increased sales of biologic patches, and increased sales of radiopaque tape of $0.2 million. International net sales decreased $0.6 million for the three months ended September 30, 2012. The decrease was primarily driven by the divestiture of our stent graft product lines and a decrease in polyester graft sales, and was partially offset by increased sales of biologic patches of $0.3 million which became available for sale in Europe in July 2011.


Net sales in the Americas increased $0.4 million for the nine months ended September 30, 2012. The increase was largely the result of higher average selling prices across nearly all product lines, as well as increased sales of biologic patches, increases of radiopaque tape of $0.3 million and increases in catheters of $0.3 million. The increase was partially offset by the divestiture of our stent graft product lines which accounted for $0.5 million of sales during the nine months ended September 30, 2011. International net sales decreased $2.8 million for the nine months ended September 30, 2012. The decrease was primarily driven by the divestiture of our stent graft product lines and a decrease in polyester graft sales, which was partially offset by increased sales of biologic patches of $0.8 million, which became available for sale in Europe in July 2011 and catheter sales to international distributors.

In April 2012, the regulatory agencies in the United Kingdom and France issued Prohibition Notices which prohibited us from selling our AlboGraft polyester grafts in those countries until further notice. In July 2012, the regulatory agencies substantially rescinded the Prohibition Notices allowing the products to return to market. See "Overview" above for a further discussion regarding these notices. Sales of AlboGraft in France and the United Kingdom were $0.1 million and $0.3 million for the three and nine months ended September 30, 2012 and were $0.2 million and $0.7 million for the three and nine months ended September 30, 2011. Sales of AlboGraft in France and the United Kingdom were $1.0 million for the year ended December 31, 2011.

International direct-to-hospital net sales were 86% of total international net sales for the three months and nine months ended September 30, 2012, compared to 87% for the three months and nine months ended, September 30, 2011, respectively.

                                                 Three months ended September 30,                             Nine months ended September 30,
(unaudited)                                                                         Percent                                                     Percent
                                         2012          2011         $ Change        change           2012          2011         $ Change        change
                                                                                       ($ in thousands)
Gross profit                           $ 10,015      $ 10,183      $     (168 )         (1.6 %)    $ 30,430      $ 30,704      $     (274 )         (0.9 %)

Gross margin                               73.4 %        69.9 %             *            3.5 %         72.6 %        69.4 %             *            3.2 %

* Not applicable

Gross Profit. Gross profit decreased 1.6% to $10.0 million for the three months ended September 30, 2012, while gross margin increased 3.5% to 73.4% in the same period. The gross margin increase was largely the result of favorable product and geographic mix driven largely by our exit from stent grafts, increased selling prices across most of our product lines, and a reduction in costs associated with the 2011 manufacturing start-up and transition activities related to the AlboGraft and Lifespan product lines. The gross profit decrease was a result of our exit from the stent graft product lines which generated $1.1 million of revenue during the three months ended September 30, 2011, and was partially offset by our higher gross margins.

Gross profit decreased 0.9% to $30.4 million for the nine months ended September 30, 2012, while gross margin increased 3.2% to 72.6% in the same period. The gross margin increase was largely the result of a reduction in costs related to the closure of our factory in Brindisi, Italy in March 2011, a reduction in costs associated with the 2011 manufacturing start-up and transition activities related to the AlboGraft and Lifespan product lines, favorable product and geographic mix driven largely by our exit from stent grafts, and increased selling prices across most of our product lines. The gross margin increase was partially offset by additional inventory write-offs associated with our AlboGraft product line and manufacturing inefficiencies. The gross profit decrease was largely the result of our exit from the stent graft product lines which generated $4.0 million of revenue during the nine months ended September 30, 2011 and was partially offset by the increase in gross margin.

In October 2012, we entered into a definitive agreement with Neovasc, Inc. to acquire the manufacturing and distribution rights of the XenoSure biologic vascular patch which we expect will negatively affect gross profit in 2013 as we transition production to our Burlington facility. We expect to realize efficiencies which may improve gross margins on our XenoSure biologic vascular patch beginning in 2014.


Commencing in 2013, we will be subject to a medical device excise tax of 2.3% on sales within the United States. We estimate this tax to negatively affect income from operations by approximately $1.0 million.

                                                  Three months ended September 30,                           Nine months ended September 30,
(unaudited)                                                                          Percent                                                  Percent
                                         2012           2011         $ change        change          2012         2011        $ change        change
. . .
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