AGA Medical first-quarter net sales increase 15.4% to $51.3 million

AGA Medical Holdings, Inc. (AGA Medical) (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 first quarter ended March 31, 2010.

“By settling our patent litigation with Medtronic, we have eliminated the uncertainty and much of the expense associated with the litigation on the Jervis patents. We can now better focus our resources and efforts on developing innovative products that can change the standard of medical care for patients.”

Highlights of the first quarter of 2010 include:

• Received conditional Investigational Device Exemption (IDE) approval from the U.S. Food and Drug Administration (FDA) to evaluate the safety and efficacy of its AMPLATZER^® Cardiac Plug (ACP), which is designed to close the left atrial appendage. The trial is designed to demonstrate efficacy in preventing stroke in atrial fibrillation patients who are eligible to receive Warfarin, as well as safety of the device and the procedure;
• Settled a patent infringement lawsuit between AGA Medical and Medtronic, Inc. (Medtronic) relating to the January 2007 patent infringement action against the company, filed by Medtronic. AGA Medical will make payments over four years to Medtronic in the total amount of $35 million. This settlement covers all existing products, as well as any new products developed and commercialized by AGA Medical, using nitinol for the entire term of the patents in dispute, known as "the Jervis patents"; and
• Continued enrollment in its pivotal RESPECT clinical trial designed to study whether patent foramen ovale (PFO) closure is superior to medical management in preventing recurrent stroke, with 726 patients enrolled in the study and 1,352 patient follow-up years as of April 30, 2010.

Financial Results for First Quarter 2010 vs. First Quarter 2009

Net sales for the first quarter of 2010 were $51.3 million, a 15.4% increase over $44.4 million for the first quarter of 2009. On a constant currency basis, net sales grew 11.9% year over year.

John Barr, President and Chief Executive Officer of AGA Medical, commented, "With our first quarter results, we delivered a solid start to 2010. We achieved sales growth across all of our product lines, with particularly impressive performance from our vascular products in all distribution channels."

"We also continue to make significant progress in our clinical programs. Both receipt of FDA conditional approval to begin our ACP clinical trial in the U.S. and continued strong enrollment trends in our U.S. RESPECT clinical trial, are testaments to the strength of our clinical and regulatory capabilities," Barr further commented.

Gross margins for the first quarter of 2010 were 85.9% compared to 80.2% in the prior year period. 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 January 2009. Excluding this charge, gross margins would have been 85.6% in the prior year.

Total operating expenses for the first quarter of 2010 were $72.5 million, or $40.6 million excluding the $31.9 million one-time expense associated with the settlement of the company's patent dispute with Medtronic, as compared to $35.7 million in the first quarter of 2009. The $31.9 million expense is the discounted value of the $35.0 million settlement to be paid over four years. Selling, general and administrative expenses totaled $25.4 million in the first quarter of 2010 versus $22.7 million in the prior year period, an increase of 12.0%, related primarily to strengthening sales channels in Europe and North America. Research and development spending totaled $10.2 million in the first quarter of 2010, an increase of $2.3 million from the first quarter of 2009, primarily due to increased spending on clinical trials as a result of strong patient enrollment in the company's U.S. RESPECT clinical trial.

Barr commented, "By settling our patent litigation with Medtronic, we have eliminated the uncertainty and much of the expense associated with the litigation on the Jervis patents. We can now better focus our resources and efforts on developing innovative products that can change the standard of medical care for patients."

EBITDA (net income/(loss) before interest income, interest expense, provision/(benefit) for income tax, depreciation and amortization), excluding the one-time litigation settlement expense of $31.9 million, was $9.4 million in the first quarter 2010 versus $4.3 million in the prior year period. EBITDA margin, as adjusted for the litigation settlement expense, was 18.4% for the first quarter 2010, compared to 9.6% for the first quarter 2009.

The company reported net loss applicable to common stockholders of ($21.2) million, or ($0.42) per fully diluted and basic share, for the quarter ended March 31, 2010, compared to ($10.6) million, or ($0.49) per fully diluted and basic share, for the prior year period. Net income/(loss) for the quarter ended March 31, 2009 includes the dividends for Series A and Series B preferred and Class A common stock accrued in the first quarter of 2009. The accrued dividends on these securities and the securities associated with these dividends were converted into common stock in connection with the company's initial public offering in the fourth quarter 2009.

Non-GAAP adjusted net income applicable to common stockholders for the quarter ended March 31, 2010 was $4.2 million versus $3.4 million in the prior year period and non-GAAP adjusted net income per fully diluted share was $0.08 for the quarter ended March 31, 2010 versus $0.08 for the prior year period calculated using fully diluted shares outstanding of approximately 51.1 million and 41.0 million respectively. Weighted average common shares on a fully diluted basis were recalculated to reflect what they would have been had the company been in a net income position.

Cash and cash equivalents were $13.2 million as of March 31, 2010, representing an $11.3 million decrease from cash and cash equivalents of $24.5 million as of December 31, 2009. The decrease was primarily due to cash payments in accordance with the company's distributor conversion agreements of approximately $8.0 million, $5.8 million associated with lower working capital primarily due to payments to employees under the company's annual incentive compensation plans, and $2.8 million in higher restricted cash associated with certain litigation appeals processes.

As a result of its litigation settlement with Medtronic, the company has recorded a short-term litigation settlement liability of approximately $7.5 million to reflect the payment due to Medtronic in April 2010 and a long-term litigation settlement liability of approximately $24.4 million to reflect the discounted remaining payments due over the next four years.

Guidance for Fiscal 2010

Management affirms its previously issued guidance for fiscal 2010, excluding charges associated with the Medtronic litigation settlement. The company expects 2010 net sales in the range of $221 million to $226 million and gross margins to be approximately 85%. Excluding the litigation settlement charges with Medtronic, EBITDA is expected to be in the range of $56 million to $59 million and non-GAAP as adjusted net income per share is expected to be in the range of $0.49 to $0.54, with approximately 51 million fully diluted shares outstanding.

In addition to the $31.9 million one-time litigation settlement expense in the first quarter of 2010, the $3.1 million difference between that amount and the total $35.0 million settlement amount will be accreted to interest expense over the next four years. The company expects the accretion schedule to be approximately $0.8 million in 2010, $1.1 million in 2011, $0.8 million in 2012 and $0.4 million in 2013.