Kyphon Reports Both Rising Sales and Rising Legal Activity
BY ROBIN R. YOUNG CFA, NOVEMBER 3, 2004
You can always tell what managers are really thinking by the order of their comments on conference calls. For the quarter just ended (September 30/2004) Kyphon reported a 59% jump in net sales $55.8 million. Earnings soared to $6.1 million, or $0.14 per fully-diluted share. International sales doubled. Management raised guidance. But none of those items led the quarterly call. Instead CEO Rich Mott led with the patent infringement lawsuit against Disc O Tech.
Kyphon is suing tiny Disc O Tech over 6 patents. The court, according to Mott, has scheduled hearings for the first two weeks in June - the earliest available date. Furthermore, later this quarter, the court will rule on Kyphon's request for an injunction against Disc O Tech. The cost to Kyphon? $1.0-1.5 million per quarter. $2.8-3.0 million annually. The cost to Disc O Tech, incalculable. Maybe infinite.
The following are some of the highlights from Kyphon's 3rd quarter:
- Total Sales:
- $56 million in the third quarter, up 59% from last year
- $151 million for the nine months, up 65%
- International Sales: $6.2 million, up 108%
- Market penetration:
- 6% of VCF market so far
- 300,000 diagnosed osteoporotic vertebral compression fractures annually
- 400,000 un-diagnosed osteroporotic vertebral fractures annually
- 45,000 balloon procedures annually - 6.4% penetration rate
- Over 300 direct sales reps worldwide. $1.2-1.5 million sales quota per rep.
- 150 sales territories in the U.S. Goal is 165 by year end.
- 65 direct sales reps outside U.S.
- Strongest country outside U.S.: Germany
- Average selling price: $4,200-4,300 per case. 10% less overseas
- 700 new surgeons trained outside the U.S.
- 5,300 total surgeons trained by end of 2004
- $73 million spent on sales and marketing (up 52%) year-to-date 2004
- New Products:
- KyphX HV-R bone cement, which received FDA approval this past April, is now being used in 80% of Kyphon's cases.
- KyphX bone cement is a PMMA compound which is the first specifically indicated cement for osteoporotic fractures.
- New Markets:
- Rich Mott will give his eye teeth for market share in Japan. At least, we thought we heard that on the conference call.
- Interventional radiologists now comprise about a third of all new surgeon trainees. This is a natural market for Kyphon's technique. Interventional radiologists can provide Kyphon even faster uptake into the VCF market.
- Reimbursement
- An ICD-9 code has now been established for Kyphoplasty
- 30 states are covering Kyphoplasty via private pay insurers like Blue Cross Blue Shield
Finally, in a bit of a surprising comment, CEO Mott mentioned that patients with vertebral compression fractures have an 8 times higher risk of pulmonary death than patients in the same general demographic but with no vertebral compression fractures. Rich indicated that there will soon be information emerging that gives more details.
Earnings for the year to date are $15.6 million, or $0.36 per fully-diluted share, as compared to $8.1 million, or $0.19 per fully-diluted share, for the comparable period in 2003.
Kyphon now has the largest direct sales force in spine that is exclusively focused on minimally invasive procedures.
