LMAT

Business Context and Reporting Period

Company: LeMaitre Vascular, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: LeMaitre Vascular is a global provider of medical devices and implants for the treatment of peripheral vascular disease. The company develops, manufactures, and markets vascular devices primarily to vascular surgeons. Its strategy focuses on building a worldwide direct sales force, acquiring complementary vascular devices, and enhancing in-house manufacturing. The company operates in three product categories: Endovascular, Vascular, and General Surgery.

Key Financial Metrics

Operating Cash Flow: Net cash provided by operating activities was $0.6 million in 2008, compared to a use of $2.1 million in 2007.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18% to $48.7 million, driven by a 34% increase in sales outside the U.S. and Canada, the full-year inclusion of 2007 acquisitions (LeverEdge, aSpire, EndoRE), and favorable foreign currency fluctuations.
• Margin Compression: Gross margin decreased from 74.1% to 69.6%. This was primarily due to the inclusion of the AlboGraft product line (lower margin), a $1.0 million write-off of excess and obsolete inventory related to stent graft improvements, and manufacturing inefficiencies.
• Profitability: While the company reported an operating loss of $2.9 million, this represented an improvement over the $4.3 million loss in 2007. The company achieved operating profits in the third and fourth quarters of 2008.
• Acquisitions: The company acquired Biomateriali S.r.l. in December 2007, which was fully consolidated in 2008. This acquisition added the AlboGraft vascular graft product line.
• Impairment Charges: The company recorded a $0.6 million impairment charge in 2008 related to intangible assets at the Biomateriali subsidiary and selected patents.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects to maintain profitability in 2009 excluding the impact of strategic transactions. However, the company anticipates significant expenses in 2009 related to the early termination of the AlboGraft distribution agreement with Edwards Lifesciences AG. The company plans to increase operating expenses in 2009 for research and development and clinical/regulatory affairs.

Unusual Items and Subsequent Events

• Edwards Lifesciences Termination: In March 2009, the company paid $3.5 million to Edwards Lifesciences to terminate their exclusive distribution agreement for the AlboGraft product line early. The company will transition to direct-to-hospital sales.
• Neovasc Distribution: In January 2009, the company entered a seven-year agreement to distribute Neovasc Inc.'s PeriPatch Biologic Vascular Patch, with minimum purchase requirements starting at $0.4 million in 2009.
• Endologix Breach: The company failed to meet minimum purchase requirements under its distribution agreement with Endologix, Inc. by $0.6 million in 2008. The manufacturer has the right to terminate the agreement, though no notice of default was issued as of year-end.

Risks and Contingencies

• Regulatory Challenges: The FDA issued a Warning Letter in June 2008 regarding deficiencies in the conduct of the UniFit Abdominal Stent Graft clinical trial. The company implemented corrective actions, but future FDA inspections could interrupt the trial.
• Capital Markets: The company noted that the volatile credit markets may make it difficult to renew its $10 million credit facility (maturing August 2009) or obtain additional financing on favorable terms.
• Foreign Currency: Approximately 45% of sales are denominated in foreign currencies (primarily Euro). Fluctuations in exchange rates significantly impact reported results.
• Intellectual Property: The company faces risks regarding patent oppositions (e.g., by Boston Scientific) and reliance on third-party licenses (e.g., C.R. Bard) for key stent graft products.

Investor Verification Checklist

• AlboGraft Transition: Verify the financial impact of the $3.5 million payment to Edwards Lifesciences and the success of the transition to direct sales for the AlboGraft product line in 2009.
• Regulatory Status: Monitor the status of the UniFit and TAArget stent graft clinical trials and any further FDA communications regarding the June 2008 Warning Letter.
• Credit Facility Renewal: Confirm the renewal terms of the $10 million revolving credit facility maturing in August 2009, given the tight credit environment.
• Endologix Agreement: Assess whether the company cures the breach of the Endologix distribution agreement or faces termination of this revenue stream.
• Inventory Management: Review future inventory write-downs, as the company recorded a $1.0 million charge in 2008 for excess and obsolete inventory.