AGA Medical Holdings announces fourth-quarter and full-year 2009 financial results

Feb 16 2010

AGA Medical Holdings (NASDAQ: AGAM), a leading developer of interventional medical devices for the minimally invasive treatment of structural heart defects and vascular abnormalities, today reported financial results for the fourth quarter and full year ended Dec. 31, 2009.

“We believe the investments we have made in building our sales infrastructure in both Europe and the United States are essentially complete. With legal expenses expected to decline as our patent litigation cases conclude, we should begin to see operating leverage in our business going forward”

Financial Results for Fourth Quarter 2009 vs. Fourth Quarter 2008

Net sales for the fourth quarter of 2009 were $54.2 million, a 28% increase over $42.4 million for the fourth quarter of 2008. On a constant currency basis, net sales grew 25% year over year.

John Barr, President and Chief Executive Officer of AGA Medical, commented, “As our first full quarter as a public company, we are pleased to report that the fourth quarter was the strongest sales quarter in AGA’s history. Clearly, we are seeing the benefit of our investment in our sales channels with balanced growth across all geographies. In addition, our vascular business grew substantially, led by the European launch of our AMPLATZER^® Vascular Plug 4, which was a strong contributor to our highly successful quarter.”

Gross margins for the fourth quarter of 2009 were 85.9% compared to 82.3% in the prior year period. The increase in gross margin was due to higher average selling prices which were in part due to the distributor to direct conversions completed last year, as well as continued improvement in manufacturing efficiencies. In the prior year period, gross margins were unfavorably impacted as the company amortized the excess cost of inventory repurchased from distributors in territories that AGA Medical converted to direct distribution in 2008. Excluding this charge, gross margins would have been 84.5% in the prior quarter.

Total operating expenses for the fourth quarter of 2009 were $42.4 million, compared to $31.1 million in the fourth quarter of 2008. The expense increase was due to higher selling, general and administrative expenses of $8.8 million related primarily to the conversion of distributors that was largely completed in January 2009. In addition, expenses included investments made to expand the company’s U.S. sales force and some incremental investment in corporate infrastructure. Legal fees associated with ongoing patent litigation were approximately $2.0 million in the quarter. In addition, R&D spending increased by approximately $1.3 million due to a continued investment in the company’s R&D pipeline, which includes its clinical trials.

“We believe the investments we have made in building our sales infrastructure in both Europe and the United States are essentially complete. With legal expenses expected to decline as our patent litigation cases conclude, we should begin to see operating leverage in our business going forward,” commented Barr.

EBITDA (net income/(loss) before interest income, interest expense, provision/(benefit) for income tax, depreciation and amortization) was $12.3 million in the fourth quarter 2009 versus $8.7 million in the prior year period. EBITDA margin was 22.7% for the fourth quarter 2009, compared to 20.6% for the fourth quarter 2008.

In the fourth quarter of 2009, the company reported a charge of $2.7 million to interest expense for the write-off of the unaccreted discount associated with the $50 million subordinated debt that was paid off in October with the proceeds from the company’s initial public offering. In addition, the company recorded other income of $1.9 million associated with a payment received as restitution for damages suffered by the company in the shareholder dispute that was settled in 2005.

The company reported net income/(loss) applicable to common stockholders of ($0.3) million, or ($0.01) per fully diluted and basic share, for the quarter ended Dec. 31, 2009, compared to ($3.3) million, or ($0.15) per fully diluted and basic share, for the prior year period. The net income/(loss) includes the dividends for Series A and Series B preferred and Class A common stock accrued in the period. The accrued dividends on these securities and the securities associated with these dividends were converted into common stock in connection with the company’s IPO in the fourth quarter 2009.

Non-GAAP adjusted net income applicable to common stockholders for the quarter ended Dec. 31, 2009 was $7.3 million versus $7.4 million in the prior period and non-GAAP adjusted net income per fully diluted share was $0.17 for the quarter ended Dec. 31, 2009 versus $0.35 for the prior year period. The decrease in non-GAAP net income per fully diluted share was primarily due to the significant increase in the weighted average common shares outstanding as a result of the company’s IPO in the fourth quarter.

Cash and cash equivalents were $24.5 million as of Dec. 31, 2009, representing a $10.6 million increase from cash and cash equivalents of $13.9 million as of September 30, 2009.

Financial Results for the Full Year Ended December 2009 vs. December 2008

For the year ended Dec. 31, 2009, the company reported net sales of $198.7 million versus $166.9 million for the prior year period, a 19% increase. On a constant currency basis, net sales increased 21% year over year.

For 2009, gross margins were essentially unchanged at 84.3%, versus 84.0% in 2008. Excluding the cost of repurchased inventory from former distributors, whose distribution rights were acquired in 2009 and 2008, gross margins for the years ended Dec. 31, 2009 and 2008 would have been 86.2% and 85.1%, respectively.

Total operating expenses for the full year ended Dec. 31, 2009, were $153.1 million compared to $114.0 million in 2008. The expense increase over the prior year was primarily attributable to increased selling, general and administrative spending of approximately $26.6 million and higher legal fees of $6.6 million largely for patent litigation expenses. The higher selling, general and administrative expense represents strategic investments in the infrastructure to support the conversion of six distributors to direct, primarily in Europe, and the continued expansion of its U.S. sales force. R&D spending of $35.2 million increased $2.4 million, reflecting the company’s continued investment in its pipeline, including clinical trials. Amortization totaled $20.1 million, a $4.6 million increase, related primarily to intangible assets purchased as part of the company’s distributor to direct strategy of expanding the company’s sales force in several European countries. The company also incurred a one-time charge of $2.3 million in 2009 due to the write-off of an investment in an early-stage medical device company made in 2006.

EBITDA was $40.5 million, or 20.4% of net sales, for the full year ended Dec. 31, 2009 versus $45.2 million, or 27.1% of net sales, in the prior year period.

John Barr commented, “Our strong 2009 results were aided by successful new product launches and market share gains. We are also beginning to see the benefit of our investments in establishing a direct sales force in Europe, strengthening our direct sales force in the United States, and focusing more efforts on our vascular business. We continue to focus on EBITDA as a key metric of the profitability of our underlying business and are extremely proud of our 2009 EBITDA results.”

The company reported net income/(loss) applicable to common stockholders of ($15.4) million, or ($0.57) per fully diluted and basic share, for the year ended Dec. 31, 2009, compared to ($8.0) million, or ($0.37) per fully diluted and basic share, for 2008. The net income/(loss) includes the dividends for Series A and Series B preferred and Class A common stock accrued in the period. The accrued dividends on these securities and the securities associated with these dividends were converted into common stock in connection with the company’s IPO.

Non-GAAP adjusted net income applicable to common stockholders for the year ended Dec. 31, 2009 was $27.6 million versus $29.4 million in the prior period and non-GAAP adjusted net income applicable to common stockholders per fully diluted share was $1.02 for the quarter ended Dec. 31, 2009 versus $1.37 for the prior year period. The decrease in non-GAAP adjusted net income per share was primarily due to a significant increase in the weighted average common shares outstanding as a result of the company’s IPO.

Guidance for Fiscal 2010

The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. For a more detailed discussion of forward-looking statements, please see additional information below.

The company expects 2010 net sales to be in the range of $221 million to $226 million, representing 11% to 14% growth.

The company’s gross margins are expected to be approximately 85% and EBITDA is forecasted to be in the range of $56 million to $59 million. We expect this growth in EBITDA to result primarily from the company’s anticipated ability to leverage previous investments in its sales, marketing and corporate infrastructure, as well as its expectation of declining legal expenses.

Non-GAAP as adjusted net income per diluted share, which excludes amortization expenses, is expected to be in the range of $0.49 to $0.54, assuming approximately 51 million fully diluted shares outstanding.