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| BLUD > SEC Filings for BLUD > Form 10-Q on 8-Jan-2009 | All Recent SEC Filings |
8-Jan-2009
Quarterly Report
Certain statements that the Company may make from time to time, including all statements contained in this report that are not statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and the safe harbor provisions set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by words such as "plans," "expects," "believes," "anticipates," "estimates," "projects," "will," "should" and other words of similar meaning used in conjunction with, among other things, discussions of future operations, financial performance, product development and new product launches, FDA and other
regulatory applications and approvals, market position and expenditures. Factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company include the following, some of which are described in greater detail below: increased competition in the sale of instruments and reagents, particularly in North America; lower than expected demand for the Company's instruments; lower than expected market acceptance of the molecular diagnostic products produced by BioArray; the decision of customers to defer capital spending; the inability of customers to efficiently integrate the Company's Echo instruments into their blood banking operations; product development or regulatory obstacles, including obstacles related to the development of an automated instrument for the molecular diagnostic products produced by BioArray, and regulatory approval of that platform as well as the products currently produced by BioArray; the failure to effectively integrate BioArray operations into the Company's overall operations; the inability to hire and retain key managers; changes in interest rates; fluctuations in foreign currency conversion rates; the inability of the Company's Japanese, French and United Kingdom subsidiaries to attain expected revenue, gross margin and net income levels; the outcome of any legal claims or regulatory investigations known or unknown, including the ongoing FTC investigation as well as intellectual property infringement claims against BioArray; the unexpected application of different accounting rules; and general economic conditions. In addition, the strengthening of the US Dollar versus any of the functional currencies in which we operate would adversely impact reported results. Investors are cautioned not to place undue reliance on any forward-looking statements. The Company cautions that historical results should not be relied upon as indications of future performance. The Company assumes no obligation to update any forward-looking statements. Additional information concerning these and other factors which could cause differences between forward-looking statements and future actual results is discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended May 31, 2008 as filed with the SEC on July 24, 2008.
Overview
Our Business
We develop, manufacture, and sell a complete line of reagents and automated systems used primarily by hospitals, clinical laboratories and blood banks in tests performed to detect and identify certain properties of human blood prior to blood transfusions. We have manufacturing facilities in the United States and Canada. We sell our products from these facilities and through our affiliates in Germany, Italy, the United Kingdom, Belgium, Spain, Portugal, France and Japan.
The U.S. Food and Drug Administration ("FDA") regulates all aspects of the blood banking industry, including marketing of reagents and instruments used to detect and identify blood properties. Our industry has been very labor intensive, but in recent years it has made noticeable advances in automating certain manual processes. We believe that companies that successfully introduced new technologies and automated products have seen their profitability improve.
We have introduced several instruments in the past, and we continue to focus on developing new instruments and improving our existing instruments. Our Galileo product, targeted at large hospitals and donor centers, received FDA clearance in May 2004. We are currently developing our next generation Galileo, which has a targeted release date of the end of calendar 2009. In June 2007, we received FDA clearance to market our latest instrument, Echo, which is a compact bench top, fully-automated walk-away instrument for small- and medium-sized hospitals, blood banks and transfusion laboratories. Echo uses Capture products, our proprietary reagents, and offers an extensive test menu and significant labor reduction while increasing productivity and patient safety. We expect to increase our market share and revenues from the sale of Echo, Galileo and Capture products in the near term. Instruments and Capture products currently account for approximately one-third of our revenues.
In fiscal 2009, we entered the field of molecular immunohematology with our purchase of BioArray Solutions.
BioArray Acquisition
On August 4, 2008, we acquired BioArray Solutions Ltd. ("BioArray"), a privately-held company based in Warren, NJ for an aggregate purchase price of $115.6 million in cash, including approximately $2.8 million of acquisition-related transaction costs. We have included the financial results of BioArray in our condensed consolidated financial statements beginning August 4, 2008.
BioArray has pioneered the development of molecular diagnostic systems which enable the DNA typing (genotyping) of blood for transfusion donors and recipients. BioArray has developed, patented and introduced its BeadChip™ system for molecular medicine, which uses arrays of proprietary microparticles to analyze DNA. Its recently launched transfusion genotyping system, which has not yet received FDA approval, is currently installed in a number of leading donor and transfusion centers for research applications. In this transaction we acquired the broad intellectual property portfolio BioArray has generated through its substantial investments in research and development, including approximately 100 issued or pending patents. BioArray will continue to be based in Warren, NJ and operate under the BioArray name.
Our acquisition of BioArray provides a new, strategic growth market for the Company. We believe that the acquisition will enable us to provide innovative molecular diagnostic solutions for the blood transfusion market that complement our current product line. Our leadership in blood banking industry automation and BioArray's leadership in molecular diagnostic systems for specialty transfusion applications should allow us to develop and deliver more precise molecular immunohematology solutions to enhance patient outcomes. We also believe our capabilities in providing automated platform solutions, FDA licensing experience, established distribution network and financial resources will facilitate a more rapid and extensive introduction of BioArray's BeadChip™ products than BioArray could accomplish on its own. We also believe that this acquisition will open up broader opportunities for us in transplantation and transfusion-related applications.
In connection with the transaction, BioArray formed a new company intended to commercialize BioArray's technologies in fields outside of blood transfusion and transplantation. The former equity holders of BioArray hold an 81% ownership interest in the new company, and Immucor, through BioArray and for no additional consideration, holds a 19% ownership interest.
Performance
Three Months Ended Change Six Months Ended Change
November 30, November 30, November 30, November 30,
2008 2007 Amount % 2008 2007 Amount %
($ in thousands) ($ in thousands)
Net sales $ 73,021 $ 61,924 $ 11,097 18 % $ 146,197 $ 125,556 $ 20,641 16 %
Gross margin 53,558 41,874 11,684 28 % 106,983 87,754 19,229 22 %
Gross margin percentage 73.3 % 67.6 % 73.2 % 69.9 %
Operating expenses 25,696 18,481 7,215 39 % 48,497 37,286 11,211 30 %
Income from operations 27,862 23,393 4,469 19 % 58,486 50,468 8,018 16 %
Non-operating income (expense) (721 ) 1,313 (2,034 ) -155 % (473 ) 2,150 (2,623 ) -122 %
Income before income tax 27,141 24,706 2,435 10 % 58,013 52,618 5,395 10 %
Provision for income tax 9,803 8,542 1,261 15 % 20,718 18,704 2,014 11 %
Net income $ 17,338 $ 16,164 $ 1,174 7 % $ 37,295 $ 33,914 $ 3,381 10 %
Earnings per share:
Per common share-basic $ 0.25 $ 0.23 $ 0.02 9 % $ 0.53 $ 0.49 $ 0.04 8 %
Per common share-diluted $ 0.24 $ 0.23 $ 0.01 4 % $ 0.52 $ 0.48 $ 0.04 8 %
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Revenue increased by 18% and 16% during the three-month and six-month periods ended November 30, 2008, respectively, compared to revenue earned in the corresponding periods of fiscal 2008. This increase was largely attributable to the price increases in our traditional reagents (reagents not using our patented Capture technology) in prior fiscal years.
In the second quarter of fiscal 2009, our operating expenses rose by 39%, while gross profit increased by 28%, which translated into a 7% increase in net income compared to the second quarter of fiscal 2008. In the six months ended November 30, 2008, our operating expenses rose by 30%, while gross profit increased by 22%, which translated into a 10% increase in net income compared to the corresponding period of fiscal 2008. For the three- and six-month periods ended November 30, 2008, the increases in operating expenses were primarily related to the newly acquired BioArray as well as our new operations in the United Kingdom and France, markets in which we used to sell through distributors but are now selling directly to the end users (e.g., hospitals).
United States operations, excluding molecular immunohematology, continue to generate the majority of our revenue and operating income.
As of November 30, 2008, we had received orders for a total of 602 Galileo instruments worldwide (an increase of 16 instruments in the second quarter of fiscal 2009), including 334 in Europe, 264 in North America and 4 in Japan, and approximately 559 of these Galileo instruments were generating reagent revenues. In the case of Echo, as of November 30, 2008, we had received orders for a total of 430 Echo instruments worldwide (an increase of 52 instruments in the second quarter of fiscal 2009), including 87 in Europe, 335 in North America and 8 in Japan, and at least 193 of these Echo instruments were generating reagent revenues.
Business Outlook
For fiscal 2009, our primary focus will be to continue to market the new Echo, which received FDA clearance in June 2007 to small- and medium-size customers. We will also continue to focus on placing Galileo instruments with larger customers. We are currently developing a next generation Galileo that will incorporate enhanced features and functionality. We expect to complete development and receive FDA clearance for the new Galileo by the end of calendar year 2009.
We continue to focus on driving automation in the blood bank. In the future, we expect the product mix of our revenue to shift gradually from traditional reagents to automated instruments and our proprietary Capture reagents used by our automated instruments. This change in sales mix may impact our gross margins during periods of heavy instrument sales if such sales are made on a traditional capital purchase basis versus a rental basis. In traditional capital purchases, we are required by EITF 00-21 to expense the cost of instruments up-front and then spread the revenue over the entire contract period for sales contracts with reagent price guarantees. In rental arrangements, both the expense and revenue are spread over the rental contract period, resulting in improved margins. Capture reagents have a higher margin than traditional reagents, which may help offset any margin pressure resulting from instrument sales made on a capital purchase basis. In addition, we expect increased competition, particularly in North America as a new competitor has entered the market, which may result in pricing pressure.
In BioArray, we are making an investment in a new, strategic product for the Company. Our principal focus for BioArray in fiscal 2009 will be the integration of BioArray operations into our overall operations, as well as beginning the development of an automated instrument for the molecular diagnostic products that enhances the capabilities of BioArray's current market-leading technology. From a sales standpoint, in the near term, as we develop our next generation automated instrument, our focus in the U.S. for the current BioArray instrument is on increasing the volume of routine tests performed in its installed base in the U.S. and our focus in Europe will be on selling instruments as BioArray was previously not in the market. We do not expect BioArray to make a material contribution to revenues in the near term, and we expect to spend a significant amount during fiscal 2009 on the development of the next generation automated instrument.
In France and the United Kingdom, we have taken steps to enable us to sell directly to the end users (e.g., hospitals). These locations operated at a loss for both the three- and six-month periods ended November 30, 2008. We expect fiscal 2009 to be an investment year in these markets with trends improving in fiscal 2010.
Results of Operations
Net Sales
Three Months Ended Six Months Ended
November 30, November 30, Change November 30, November 30, Change
2008 2007 Amount % 2008 2007 Amount %
($ in thousands) ($ in thousands)
Traditional reagents $ 47,229 $ 43,024 $ 4,205 10 % $ 96,502 $ 88,101 $ 8,401 10 %
Capture products 16,524 12,239 4,285 35 % 31,697 24,177 7,520 31 %
Instruments 8,609 6,471 2,138 33 % 17,188 11,581 5,607 48 %
Molecular immunohematology 659 - 659 100 % 810 - 810 100 %
Collagen - 190 (190 ) -100 % - 1,697 (1,697 ) -100 %
$ 73,021 $ 61,924 $ 11,097 18 % $ 146,197 $ 125,556 $ 20,641 16 %
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Of the $11.1 million total increase in revenues in the second quarter of fiscal 2009 compared with the prior year period, approximately $7.6 million came from price increases and approximately $2.7 million came from instrument volume increases in the
United States. Approximately $1.2 million of the increase in revenues came from sales increases, including instrument revenues, outside the United States and approximately $0.7 million of the increase came from the sale of molecular immunohematology products produced by BioArray. These increases were offset by a reduction of approximately $1.1 million which was attributable to foreign currency translation.
Of the $20.6 million total increase in revenues in the six-month period ended November 30, 2008 compared to the corresponding period of fiscal 2008, approximately $15.0 million came from price increases and approximately $5.2 million came from instrument volume increases in the United States. Approximately $3.7 million of the increase in revenues came from sales increases, including instrument revenues, outside the United States and approximately $0.8 million of the increase came from the sale of molecular immunohematology products produced by BioArray. Additionally, approximately $0.9 million of the increase was attributable to foreign currency translation. These increases were offset by a reduction of $3.3 million related to reduced reagent volumes. Also, during the second quarter of fiscal 2008, we discontinued manufacturing collagen products when our commitment to a third party expired. This action resulted in a revenue decrease of $1.7 million in the first six months of fiscal 2009 when compared to the prior year period.
The 10% growth in traditional reagent revenue in the three-month and six-month periods ended November 30, 2008, compared to the corresponding periods of fiscal 2008 occurred mainly as a result of price increases in the United States. Traditional reagent sales have historically been our primary source of revenue and still constitute roughly two-thirds of our revenues. We expect the significance of this line of products to gradually decline as we place more instruments in the market that use our proprietary Capture reagent products.
Sales of Capture reagent products increased by 35% in the three-month period ended November 30, 2008, compared to the corresponding period of fiscal 2008. For the six month period ended November 30, 2008, sales of Capture products increased 31% compared to the corresponding period of fiscal 2008. Approximately 70% of the second quarter and year-to-date increase related to increased volume, in part as a result of our new affiliates in France and the United Kingdom. The remainder of the period-over-period increases was attributable to increased prices. Sales of Capture products are largely dependent on the number of installed instruments requiring the use of Capture reagents. As we continue to place more instruments in the market, we expect revenue from Capture products to continue to increase.
Revenue from instruments increased by 33% and 48% in the three-month and six-month periods ended November 30, 2008, respectively, compared to the corresponding periods of fiscal 2008. Historically, revenue from instrument sales in the United States has been recognized over the life of the underlying reagent contract, which is normally five years. In the second quarter of fiscal 2009, $2.8 million of deferred revenue was recognized from previously placed instruments compared to $2.1 million recognized in the second quarter of fiscal 2008, and approximately $2.6 million of instrument sales were deferred in this manner, compared to $3.3 million in the 2008 quarter. In the first six months of fiscal 2009, $5.7 million of deferred revenue was recognized from previously placed instruments compared to $3.7 million recognized in the corresponding period of fiscal 2008, and in the 2009 fiscal period, approximately $4.7 million of instrument sales were deferred in this manner, compared to $6.1 million in the corresponding 2008 period. As of November 30, 2008 and November 30, 2007, deferred instrument and service revenues totaled $23.0 million and $22.6 million, respectively, which we expect to recognize over the next five years.
The sale of molecular immunohematology products produced by BioArray resulted in $0.7 million in revenue during the second fiscal quarter of 2009 and $0.8 million in revenue in the period from August 4, 2008, the date we acquired BioArray, through November 30, 2008.
We discontinued manufacturing collagen products in the second quarter of fiscal 2008 when our commitment to a third party expired. This action resulted in a revenue decrease of $0.2 million and $1.7 million in the three-month and six-month periods ended November 30, 2008, respectively, compared to revenue earned from these products in the corresponding periods of fiscal 2008.
Gross Margins
Three Months Ended
November 30, 2008 November 30, 2007 Change
Amount Margin % Amount Margin % Amount
(in '000) (in '000) (in '000)
Traditional reagents $ 38,169 80.8 % $ 32,153 74.7 % $ 6,016
Capture products 13,987 84.6 % 10,335 84.4 % 3,652
Instruments 1,118 13.0 % (505 ) -7.8 % 1,623
Molecular immunohematology 284 43.1 % - 0.0 % 284
Collagen - 0.0 % (109 ) -57.4 % 109
$ 53,558 73.3 % $ 41,874 67.6 % $ 11,684
Six Months Ended
November 30, 2008 November 30, 2007 Change
Amount Margin % Amount Margin % Amount
(in '000) (in '000) (in '000)
Traditional reagents $ 76,939 79.7 % $ 68,016 77.2 % $ 8,923
Capture products 27,144 85.6 % 20,436 84.5 % 6,708
Instruments 2,607 15.2 % (715 ) -6.2 % 3,322
Molecular immunohematology 293 36.2 % - 0.0 % 293
Collagen - 0.0 % 17 1.0 % (17 )
$ 106,983 73.2 % $ 87,754 69.9 % $ 19,229
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For the three months ended November 30, 2008, our overall gross margin increased to 73.3% from 67.6% achieved in the corresponding quarter of fiscal 2008, primarily due to improvements of margins in traditional reagents and instruments.
For the six months ended November 30, 2008, our overall gross margin increased to 73.2% from 69.9% achieved in the corresponding period of fiscal 2008, primarily due to improvements of margins in traditional reagents and instruments.
For the three months ended November 30, 2008, gross margins on traditional reagents increased to 80.8% from 74.7% during the corresponding quarter of fiscal 2008. For the six months ended November 30, 2008, gross margins on traditional reagents increased to 79.7% from 77.2% during the corresponding period of fiscal 2008. Margin improvements in both current year periods were primarily due to increased pricing as well as more favorable manufacturing variances when compared to prior year periods.
The gross margins on Capture products were in line with the prior year for both the three- and six-month periods. Capture gross margins were 84.6% and 85.6% in the three- and six-month periods ended November 30, 2008, respectively, compared to 84.4% and 84.5% in the corresponding periods in fiscal 2008.
For the three-month and six-month periods ended November 30, 2008, the gross margin on instruments was 13.0% and 15.2%, respectively, compared to negative 7.8% and negative 6.2%, respectively, for the corresponding periods in fiscal 2008. The gross margin improvement in both current year periods was primarily due to more instruments expensed in the prior year than in the current year. Where sales contracts have reagent price guarantee clauses, instrument costs are expensed when the sale is made, but the related instrument revenue is deferred and recorded as income over the term of the contract.
Operating Expenses
Three Months Ended Six Months Ended
November 30, November 30, Change November 30, November 30, Change
2008 2007 Amount % 2008 2007 Amount %
($ in thousands) ($ in thousands)
Research and development $ 2,896 $ 1,434 $ 1,462 102 % $ 4,777 $ 3,489 $ 1,288 37 %
Selling and marketing 10,713 7,844 2,869 37 % 20,182 15,413 4,769 31 %
Distribution 3,549 2,646 903 34 % 7,017 5,330 1,687 32 %
General and administrative 7,467 6,278 1,189 19 % 14,925 12,158 2,767 23 %
Restructuring expense - 192 (192 ) -100 % - 723 (723 ) -100 %
Amortization expense 1,071 87 984 1131 % 1,596 173 1,423 823 %
Total operating expenses $ 25,696 $ 18,481 $ 7,215 39 % $ 48,497 $ 37,286 $ 11,211 30 %
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Research and development expenses increased by approximately $1.5 million and $1.3 million for the three- and six-month periods ended November 30, 2008, respectively, compared to the corresponding periods of fiscal 2008. The increase for both current year periods is primarily due to the acquisition of BioArray, which took place in the first quarter of this fiscal year.
Selling and marketing expenses increased by approximately $2.9 million and $4.8 . . .
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