Orthovita, Inc. Q3 2008 Earnings Call Transcript

Orthovita, Inc. (VITA) Q3 2008 Earnings Call Transcript November 4, 2008 8:30 AM ET

Executives

Anthony Koblish – President and CEO
Albert Pavucek – CFO

Analysts

Vivian Cervantes – Rodman and Renshaw
Michael Matson – Wachovia
Charley Jones – Barrington Research
Dale Provanik [ph] – Canaccord Adams
Matt Dolan – Roth Capital
David Turkaly – SIG

Operator

Good morning, my name is Emily and I’ll be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions)

Anthony Koblish, President and CEO, you may begin.

Anthony Koblish

Thank you, Emily. Good morning and welcome to Orthovita’s third quarter 2008 conference call. I am Anthony Koblish, President and CEO of Orthovita. Orthovita’s Chief Financial Officer, Al Pavucek joins me for today’s call. Today, we will review 2008 third quarter and year-to-date financial performance followed by a review of the company’s operational performance and strategy, as well as an update for our 2008 guidance.

I will now turn the meeting over to Al to review the Safe Harbor and the company’s financial performance.

Al Pavucek

Thank you, Tony.

I remind you that our discussion today will contain forward looking statements of the company, including but not limited to discussion about potential products regulatory clearances, market acceptance of our products, future product sales and operating results, expected results of our pivotal US clinical trial for our Cortoss Bone Augmentation Material, development of our sales network, liquidity, uses of cash and other aspects of our business, all of which involve risks and uncertainties and may constitute forward looking statements within the meaning of the Private Securities Litigation Form Act of 1995. Further information about these risks can be found in our filings with the SEC including but not limited to risks described in our most recently filed Form 10-K under the caption Risk Factors and we undertake no obligations to publicly update any forward-looking statements.

I will now review our third quarter and September year-to-date 2008 financial results.

Product sales for our third quarter 2008 increased 42% to $20.6 million as compared to $14.5 million for Q3 2007. Product sales for September year-to-date 2008 increased 32% to $56.1 million as compared to $42.5 million for the same period in 2007. Sales growth for the reported periods in 2008 was primarily attributed to increased sales of our Vitoss Foam and VitaGel product platforms in the U.S. as we further develop our U.S. field sales network. Approximately 65% and 62% of our product sales during each of the third quarter and September year-to-date periods of 2008 were from products based upon our Vitoss Foam platform co-developed with Kensey Nash Corporation, as compared to approximately 62% and 61% of sales during the same period in 2007. Of the 65% of product sales contributed by Vitoss Foam products during the third quarter of 2008, approximately 20% was from sales of the Vitoss Bioactive Foam strip product that was fully launched in the second quarter of 2008. VitaGel contributed approximately 23% and 24% of product sales for Q3 and September year-to-date 2008 as compared to approximately 20% of sales during the same period in 2007.

Gross profit for Q3 2008 and Q3 2007 was $13.9 million and $9.6 million respectively. As a percentage of sales, gross profit was 68% and 66% for Q3 2008 and Q3 2007. Gross profit for September year-to-date 2008 was $37.2 million as compared to $27.8 million for the same period in 2007. As a percentage of sales, gross profit was 66% for both December year-to-date 2008 and 2007. The increase in the gross profit margins for the third quarter 2008 as compared to the same period in 2007 primarily reflects more favorable product mix and lower VitaGel royalty expense as a percentage of product sales.

Operating expenses for Q3 2008 and 2007 were $15.1 million and $11.9 million, respectively, representing a 27% increase in operating expenses as compared to a 42% increase in product sales and a 44% increase in gross profit. For the September year-to-date periods of 2008 and 2007, expenses were $45.7 million and $36.3 million respectively, representing a 26% increase in expenses as compared to a 32% increase in product sales and a 34% increase in gross profits. The increase in operating expenses for the three and nine month periods in 2008 was primarily due to higher selling and marketing expense, including salary and benefit costs incurred by expanding our field sales team in order to continue the growth of U.S. product sales, as well as higher commissions paid as a result of increased product sales. The number of our direct sales representatives increased from 82 at September 30, 2007 to 89 at September 30, 2008.

The operating loss for Q3 2008 decreased to $1.2 million from $2.3 million for Q3 2007. The operating loss for September year-to-date 2008 and in 2007 was $8.5 million. The decrease in operating loss for the Q3 2008 period as compared to Q3 2007 primarily resulted from increased sales and gross profit, partly offset by increased selling and marketing expenses.

The net loss for Q3 2008 decreased to $1.7 million from $18.9 million for Q3 2007. The net loss per common share for Q3 2008 and 2007 was $0.02 and $0.27, based upon 75.8 million and 70.7 million common shares outstanding. The decrease in the net loss for Q3 2008, as compared Q3 in 2007, was due to the net loss for Q3 2007 included a one time charge of $16.6 million for the repurchase of our revenue interest obligation from Royalty Trust and increased sales and gross profit in Q3 2008. The net loss for September year-to-date 2008 and 2007 was $9.5 million and $25.0 million. The net loss per common share for September year-to-date 2008 and 2007 was $0.13 and $0.39, based upon 75.8 million and 64.5 million common shares outstanding. The net loss for September year-to-date 2007 included a one time charge of $16.6 million as described above.

Cash and investments were $36.9 million at September 30, 2008 in comparison to $48.4 million at December 31, 2007. We ended Q3 2008 with a working capital position of $52.9 million. For the nine months of 2008, the net cash used in operating activities was $11.7 million, compared to $9.3 million for the same period in 2007. Net cash used in operating activity for the first nine months of 2008 increased as compared to the same period in 2007, primarily due to an increase in accounts receivable.

I will now turn the meeting back over to Tony for additional comments on the company’s strategy, operations, and performance.

Anthony Koblish

Thanks, Al.

The third quarter and the first nine months of 2008 were record sales periods for the company, with strong acceleration of growth and perk order sales of $20.6 million, which represents about a 7% sequential improvement over the second quarter of 2008, and as stated earlier, a 42% improvement over Q3 ‘07.

A breakdown of sales from all of our selling entities is as follows. Third quarter 2008 U.S. sales were about 94% of the total of all U.S. sales were about 6% for the same time period. In the U.S., sales from our PSR came in at about $14 million for the third quarter 2008 and grew about 70% in comparison to Q3 2007. Overall sales from our independent selling entities were up about 4% in Q3 ’08 versus Q3 ’07. Our team of PSRs contributed 72% of overall U.S. sales in Q3, a new record. We anticipate and look forward to the continuing productivity and development gain of our direct sales force.

At the end of Q3 ’08, our direct specialized orthobiologic and biosurgery sales teams consisted of 89 direct employees. We are pleased with the growth attributable to our PSR group and we view this strong performance as another indicator of the maturity developing with our PSR organization. This will self-drive and improve future performance and the effectiveness of any U.S. launch of Cortoss.

We plan to add a small number of additional sales reps by the time Cortoss launches in the U.S. to reach a total of approximately 100. We do not anticipate hiring PSRs above this level, and so sometime after the launch of Cortoss in the U.S. market, an overall company profitability is attained. The PSR group will be frozen at about 100, plus or minus 10, to allow for continued focus on productivity and leverage of the organization. The sales team size at about 100 allows us to take maximum advantage of our new Vitoss Bioactive home strips product launched in April, VitaSure Hemostat product launched in July, and Vitoss Bioactive Foam pack product launched at the end of September, and also gives us greater confidence in the launch and commercialization of Cortoss in the U.S. market if 510(k) clearance is obtained.

In the U.S. markets, our basic (inaudible) forms of Vitoss Bone Graft substitute products contributed about $1 million in third quarter ’08 sales. Vitoss Classic Foam and VA foam product together contributed about $13 million in sales, which is about 50% growth for Q3 ’08 as compared to Q3 ’07. Vitoss VA alone contributed about $4.1 million in Q3 2008 sales and consisted primarily of VA strip sales with VA pack contributing after its launch at the end of September.

VitaGel sales came in strong at about $4.6 million for the third quarter, which represents about 63% growth from Q3 ’07 to Q3 ’08. The numbers continue to reveal that the core strength of our business resides in our U.S. Vitoss Foam and VA products at 50% growth and VitaGel at 63% growth in our direct sales organization at 70% growth. This dictates a solid foundation for our company to continue to build from and grow as we evolve.

Next topic. I will now review our Cortoss Vertebral Compression Fracture clinical program. We submitted our Cortoss VCF 510(k) regulatory filing with the FDA on January 15, 2008 with primarily one year follow up to the base clinical data. The status of the Cortoss VCF regulatory filing is that the process and pathway after two rounds of official FDA interaction remains class 2 and thus will continue to be at 510(k). The second round of collection has been received in the SEC. We plan to answer the second efficiency letter in the first quarter of 2009. We anticipate that our Q1 2009 filing will contain all two year follow up clinical data. The FDA may have additional questions about our Cortoss VCF 510(k) filing, and we would expect to receive these comments and respond to them within customary periods as we progress through the regulatory process. Accordingly, as I am sure you’ll understand, we cannot predict if or when we would obtain regulatory clearance for Cortoss VCF.

We are also making some adjustments to our final full year 2008 guidance. We are raising full-year 2008 sales guidance to about 30% growth over 2007 from previous guidance of 20% to 25% growth. This raise in guidance is based on the performance of our DSRs and our current sales expectations from three new product launches this year. We are also lowering our net loss guidance for the year from a previous guidance range of about $12.5 million to $13.5 million to $11 million to $12 million.

In conclusion, we feel confident that Orthovita is well positioned for the future and that growth can continue from our well-staged product portfolio, driven by the classic Vitoss Foam franchise, the addition in April of the new premium Vitoss Bioactive Foam strips product, the July edition of the new VitaSure product, the September edition of Vitoss Bioactive Foam pack and by the continued growth of the VitaGel franchise. We believe the commercial launch of our three new products in 2008 will add to the leverage and productivity of our direct sales organization. We continue to pursue regulatory clearance for our Cortoss Bone Augmentation for VCF in the United States, which remains on the 510(k) pathway. We expect to file the full two-year data package with the FDA in Q1 2009. Our sales organization continues to mature and will be the same sales organization that would sell a cleared Cortoss VCF product, creating a further opportunity for strong leverage and growth.

I hope this review has been informative and I would now be pleased to answer any questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Vivian Cervantes of Rodman and Renshaw.

Vivian Cervantes – Rodman and Renshaw

Hi. Good morning. Thank you for taking the question. Nice performance on the Vitoss platform. Can you give us a little bit of color on the strength in that performance, maybe rate that by what contributed most, is it the FDA issue with BMP, is it the clinical data, if you could just provide any color on that, that would be helpful.

Anthony Koblish

Well, from the beginning, when we launched the Vitoss product in approximately 2002, we decided to take a very fundamentally sound approach to the product. That is to say to validate as completely as possible the nature of the performance of the base Scaffold technology and we decided that we would continue to add value to that base Scaffold technology by creating new form that we co-developed with Kensey Nash and also with our physician customers to make sure that we’re getting in the hammering properties and the forms that they require. And we also had continually invested in the basics of post market surveillance clinical data. Some of the strongest of that data is just starting to come out, and I think in terms of the announcement that we made a month or so ago regarding the continued presentation of our A-list data for Vitoss for Bone Marrow Aspirate versus BMP and also we have myriad of cervical base data using Vitoss and BMA. So I think that the foundation that we built is strong based on good technology, good clinical data, and a highly focused sales organization and I believe it is that foundation that is serving us well right now and will continue to serve us well.

Vivian Cervantes – Rodman and Renshaw

Thanks. So you didn’t see any push back into the top macro on the premium pressing or anything of that nature?

Anthony Koblish

The VA product is priced at a premium and we have not seen what I would consider to be an appreciable amount of discounting beyond normal pricings in areas that we see as very impossible. Our pricing has always held pretty firmly on the A cost product range in general and we can continue to see that trend thus far.

Vivian Cervantes – Rodman and Renshaw

Do you see any benefits at all from the infuse issue and is that – maybe any commentaries from customers that you may have spoken with?

Anthony Koblish

I am reluctant to comment on other companies and their products. However, I will stand behind my commentary on the foundational aspect of the product that we have developed. The new VA technology is exciting; it is interesting, it creates a mechanism of action and biologically an interesting story that our physician customers are certainly interested in with our clinical data package and our handling forms. We believe that we have an extremely strong product portfolio. We have positioned the product extremely well based on clinical data as a cost effective alternative and I do believe that we are seeing some headwind with that cost effective alternative positioning, especially in today’s economic climate and certainly the clinical data strength of the brand, strength of the technology, have all played a role in that.

Vivian Cervantes – Rodman and Renshaw

Okay, great. I’m going to shift gears and talk a little bit about Cortoss. Can you sort of provide any color on the deficiency letter, the second one that we got from the FDA; are the questions fairly standard easy to respond to, anything that sort of stands out to you for (inaudible) response?

Anthony Koblish

Any feature of the second deficiency letter remains the completion of full two year follow up. That was the main feature on the first deficiency letter on the first round of questions. It remains the main feature of the second round of questions. So I would consider the line of questions to be very similar to the first round.

Vivian Cervantes – Rodman and Renshaw

Thank you. I’ll get back into queue.

Operator

Your next question comes from the line of Michael Matson of Wachovia.

Michael Matson – Wachovia

Hi. I guess we talked some really good cost management in the quarter and I was just wondering if you think that this new base of expenses is sustainable out into the fourth quarter and 2009.

Anthony Koblish

We believe so. I think what we can do is break down the expense structure as we stand today. The expense structure is driven by the cries of the sales force, which shows I indicated in my comments will oscillate in the plus or minus around 100, we happen to be at the lower end of that census today, but certainly the cost structure of the sales force should remain fairly consistent. The performance of the sales force is doing nothing but improving. It’s getting better and better. So I think that’s a driver – that is the main driver of where we are.

If you look at the other main feature on the expense structure, it really has to do with the efficiency and use of our manufacturing facility and absorbing that overhead for the Ascio commercial Cortoss plant, but we did a very, very good job in building that overhead, primarily with VitaGel manufacturing in Q3. And then the other feature on the expense structure would be that clinical and regulatory expense. So the only, I say, variable that we see going forward would be related to Cortoss and they would certainly be around the efficiency and use of the plan. I think that we will do a good job of smoothing that manufacturing overhead absorption out as we go forward and give us a great chance to stay roughly where we are today, plus or minus within some noise and shout.

Now, with sales cresting above that $20 million per quarter mark, that sort of gets us in the zone to be able to handle that expense structure that we have in place on the plan on the clinical and regulatory expense and fairly the sales force should take care of it resulted as it keeps going. So our plan as a company is to give 2009 guidance on our next earnings call and we will be prepared to do that, but as of now, the goal right now is to continue to use the fundamental on both top and bottom line to take advantage of keeping the expense structure and the sales growth working in the right way for us going forward.

Michael Matson – Wachovia

Okay and just a related question on R&D. I think there’s a percentage of sales that looks like it was at an all time low and I understand you’re probably getting some leverage there as your top line grows but is that going to – as your Cortoss trial trails off, is that going to stay lower than we’ve seen it in the past?

Anthony Koblish

I think right now we’re going to assume that it’s going to stay fairly flat to where it is today. We do have another biomaterial and orthobiologic program that is starting to get some traction. It is a course Cortoss program. I’ve mentioned it in general terms. I’m unable to mention what it is in specific terms yet. We have some preclinical milestones that we need to reach by the end of this year. Depending on the outcome of some of that work, we may be able to begin to discuss that somewhere in the future, but we certainly expect to continue to invest in new product ranges, whether it is lifecycle management, new owners of our Vitoss product, whether it is this new product, whether it is new devices related to VitaGel, etc. So I don’t think any of those programs in a single form will reach the scope, scale, and expense of the clinical Cortoss program. However, in aggregate, there may be enough of those programs where the R&D expense may still stay relatively flat.

Michael Matson – Wachovia

Okay and you mean the dollar expense and not the percentage of sales?

Al Pavucek

Correct. I think Michael instead of that you can trim the 7% to keep that flat. There is some leverage there with the top line sales growing, but as Tony mentioned, we will be investing more dollars back into R&D.

Michael Matson – Wachovia

Okay. All right. And then on the new Vitoss VA product, how much of that is – the sales are cannibalizing the existing Vitoss product versus expanding to new users or new customers in general? I don’t know if you can answer that but –?

Anthony Koblish

Well I can answer that, sure, in general terms. Right now, as of today, we have not seen a decline in what I called the classic foam franchise. It is growing more slowly, but it is not being eroded. So if you look at that metric and stack on top the bioactive product, right now, the ratio is weighted more heavily for it being incremental. Now, we don’t expect that to hold forever. Obviously, in classic life cycle management, we’ve done this in the past with our transition (inaudible) to classic foam. We do expect that that erosion will start to come over time. But each time we do this, we do see an expansion in the overall business, driven by the premium product and also aided by the slow degradation of the product that’s behind it. And so we expect that same cycle to play itself out here at the point in time where we are today, we have not seen a deep increase in the cost of the classic foam franchise yet, although growth has slowed down.

Michael Matson – Wachovia

Okay and then just one quick question. Can you give us the VitaSure sales for the quarter?

Anthony Koblish

The VitaSure sales were above $200,000 for the quarter. The product was launched in mid July.

Michael Matson – Wachovia

Okay. That’s all I’ve got. Thank you.

Anthony Koblish

Thank you.

Operator

Your next question comes from the line of Charley Jones of Barrington Research.

Charley Jones – Barrington Research

Good morning. Congratulations on the nice quarter and project related leverage on your new line. I guess my first question is can you break out for us the difference between pricing mix for Vitoss?

Anthony Koblish

Difference in pricing mix?

Charley Jones – Barrington Research

Yes. If you’ll look at your Vitoss Foam growth over your Vitoss growth, can you kind of breakdown what percentage of that growth is due to pricing and what percentage of that was due to premium rate?

Anthony Koblish

Premium pricing on VA is in the upper teens to 20%. I think that’s pretty much what we’re realizing on that product as a premium.

Charley Jones – Barrington Research

Okay, great. You’re holding that level? It seems like your volumes are also stronger than they have been in years past, is that true?

Anthony Koblish

Yes, that’s correct. Our volume is up. Our number of new hospitals that we’re in is up. But it’s not up in inordinate amount our usually new open hospitals look like. I think where we are right now is we’re diving deeper into those hospitals where we currently have relationships and still volume, and I think that it is reflective in the productivity of our sales force, they get more productive as they sell deeper and more horizontal, if that makes any kind of sense. I think for the hospital across the bone across that is the tooth platform and the biosurgery platform was VitaGel and now VitaSure.

Charley Jones – Barrington Research

Even with the higher sales number – the model that you have been generating with your commission that you kind of really pay on extra sales really didn’t seem like it was paid up. Have you kind of changed the structure of that a little bit where you’re paying people less on the additional sales that they make or with the SG&A leverage coming from different places?

Anthony Koblish

We do not change our commission structure at all. We remain committed to a very consistent approach with our commission structure. So coming from somewhere else, I think it’s just coming from the overall top line of that and into a zone right now, where it has been more and more possible to cover the expense structure that we have in place.

Charley Jones – Barrington Research

Yes. There’s a great quarter. Can you discuss the effect of this, in maybe some stock each had under his belt and then also a part of that question, can you just compare VA Pack to VA Foam and how that’s being received compared to VA Foam?

Anthony Koblish

First question, there is zero stocking in Q3 performance. We don’t – we do not have a sales model that is capable of accepted stocking. It’s primarily a scrubbed deal model, the products that is used and scrubbed deal comes in; so very little stocking. In terms of the performance of the VA Pack versus the VA Strip, one of the things that we did do when we launched the VA Strip is we had the VA Pack already on the price list so that when we went through the new product committees for the VA Strip earlier in Q2, we made sure that we got the VA Pack behind it, even though the product wasn’t going to come out until September. So with that said and with the level of comfort that our sales force is gaining with the VA story, I do think that the VA Pack is doing at least as well as or perhaps even better than the VA Strip in terms of rollout, given the fact that we do have some nice VA infrastructure or platform or whatever you want to call it in place that didn’t exist when the VA Strip was initially launched.

Charley Jones – Barrington Research

Very well said. One more question. Can you just remind us, I’m sorry if I missed this in your prepared remarks, but how many reps did you start with, cut at, and then list again in pre-quarter things?

Anthony Koblish

We ended with 89 reps. I’m not sure – 92 we started with – we continue to prune the non-performers and focus our energy on the performers to expand their sales and obviously we have another statistic I guess; fully 50% of our sales force was above an annualized line run rate of $800,000 for Q3, which is a nice step up and then the other half of the sales force was averaged at about $400,000 maybe even a little better than that, which is also is a step up for those newer greener reps. So I think we’re starting to see the new products work hand in hand with the majority of the sales force.

Charley Jones – Barrington Research

Again, great quarter. Thanks again.

Operator

Your next question comes from the line of Dale Provanik [ph] of Canaccord Adams.

Dale Provanik – Canaccord Adams

Great. Thank you. Good morning.

Anthony Koblish

Good morning.

Dale Provanik – Canaccord Adams

Couple of questions here. On the Cortoss, are there any more data questions outside of the two year follow up that they are looking for and any more incremental studies or anything in particular they are looking for?

Anthony Koblish

Nothing new that we didn’t see in the first round of questions, Dale. As I said, the primary feature and I think it is the governing feature here, is that the FDA is going to want to see every patient through that two-year follow up point. I do remain firmly committed and believe that that is the main issue that remains. That is not to say that there isn’t some pre-clinical work that they want to see. We continue to chip away at that, but I would consider that to be strictly secondary in nature in comparison to the full look at the entire two year set.

Dale Provanik – Canaccord Adams

And will all that pre-clinical work be ready when you submit that final response in the first quarter?

Anthony Koblish

Yes. That is the plan. Now that doesn’t mean that if we get the next round of questions in the customary timeframe that there are not more questions asked of different types. However, it is our intention and we will call it at the end of Q1 of 2009 to have that filing to be as complete as possible based on what we know today within question round 1 and question round 2.

Dale Provanik – Canaccord Adams

Okay. And then just, Al, from a revenue standpoint, any one time tracking from loophole that are in any of the other customers in the quarter?

Anthony Koblish

No, Dale. There were zero, none of that.

Dale Provanik – Canaccord Adams

Okay, and then when is your next training class going to be for the sales reps?

Anthony Koblish

Last week.

Dale Provanik – Canaccord Adams

Pardon me.

Anthony Koblish

We had it last week, Dale.

Dale Provanik – Canaccord Adams

So how many new reps did you bring in and start training?

Anthony Koblish

I would say it was less than 10, maybe 7 or so, and the results of some distributor reps and ISR reps there as well, so the overall number was larger but the direct class was about 7. Some of those are already included in our 89 number. They have been out there for a month or so. Some of them may be incremental to that. As I said, the guidance on reps, sizing the sales force will be about a 100 within our plus or minus 10 range depending on where we are in our cycle of evaluating performance.

Dale Provanik – Canaccord Adams

Okay. And then Al, just on the geographic mix outside the US. You know the Cortoss, Vitoss, and VitaGel mix, now that VitaGel is launched, just a little color on that please?

Al Pavucek

Okay the overall mix is about a half between Cortoss and Vitoss, with very little VitaGel.

Dale Provanik – Canaccord Adams

Okay. And this decline of VitaSure, Tony, if you from the initial response you’ve seen, a couple of hundred grand were pretty impressive considering what the revenue price plan is on that product. How much of a contribution can this give and do you think that you will get 50%, 60%, or 70% penetration relative to use with VitaGel and what does that 10%, what does that equate to in annualized dollar rate and 20% just for above any out there?

Anthony Koblish

Well I think that you’ve got to remember that our territory for VitaGel is really around spine and orthopedics. So it is not the full Gen 1 hemostasis field. However, that said the combination of VitaGel and VitaSure is a very nice hemostasis biosurgery product portfolio. That is up quite well with our competitors. At the Gen 1 and Gen 2 products, it’s a mix of price points, approximately $200 versus upper $400, in that ballpark for VitaGel and we use them at different points in the procedure. Gen 1 products is typically used intraoperatively while the procedure is being done and the Gen 2 product, VitaGel, is pretty much used at the end of procedure as you’re closing with airbrush. So it gives us a nice style of surgery portfolio. That said, I think the growth and expansion of VitaSure is going to look more like VitaGel in its early days than what the bone graft substitute platform looks like. So the nature of the biosurgery business is different.

The nature of that business is really based on getting the product into different surgeries in an array of customers whereas the orthobiologic bone grafting business is more driving into a specific procedure and growing deeper and broader. So it’s a little bit of a different sales strategy. And so I think with VitaGel we saw that grow a nice base over time and really start to gain hold as it got broader and broader and broader and we expect VitaSure to do a similar type of penetration as well. But I think right now it’s too early for me to get as specific as what you ask. However, given our experience, I think with VitaGel I do feel confident in the way that it is rolling out, and right now I’d say we’re in learning mode and that learning is in the process of being set back into the sales force. We probably got to go through a few more of the feedback loops and cycles to see where we are and it takes a little bit more time. However, I agree with you. We started cold. We didn’t slip any business that was already out there, that first 200K was all Orthovita new relationships. So I do think there is great potential with that business and I do think that it will behave similarly with VitaGel over time.

Dale Provanik – Canaccord Adams

Okay and then from the guidance. You are saying guidance for about 30% on the top line. If my math is correct, that equates to about $19.4 million in revenues for the fourth quarter, which is down sequentially and then obviously operating loss between a $1.5 million and $2 million in the fourth quarter is basically in line of where we were in the third quarter. I guess the comment is more relative to the fourth quarter revenue guidance or was there an extra week in that, any extra days in third quarter? Is October slowing down, why would you have a down sequential quarter?

Anthony Koblish

Well I think the word approximately is the operative word. I think you look at where our year-to-date growth rate is; it is about 32%. So then I think we can get somewhere in that range if you look at the year in its entirety, sure Dale. The seasonality, structure of our business has always been that we have a stronger fourth quarter than in the third quarter and in essence the fourth quarter is usually your strongest quarter. So we need to play this out a little bit further. We did have a big, big step up from Q2 to Q3 as you know. We do have the VA Pack entering in the fourth quarter. So I do like our chances to be able to exceed as you have rightly pointed out. However, the month where the holidays fall is a little bit different than usual. November is always a short selling month and it is a very short selling month this month. However, we do have the added momentum of our Pack performance in the new VA product. So your points are well taken, Dale.

Al Pavuchek

There are two less selling days in Q4 versus Q3.

Dale Provanik – Canaccord Adams

Just for the clarification and this is my last question. The month of October we’re through it, we are a couple of days into November here, and will we see the strength of the third quarter continue on into October as just you look into November and December and the fewer selling days and all the holidays that you are just trying to be conservative?

Al Pavucek

Yes. I mean we have seen that any fourth quarter has got to be anchored by October, given that it is your longest month.

Dale Provanik – Canaccord Adams

Okay. That’s all I have. Thanks a lot.

Al Pavucek

Thank you.

Operator

Your next question comes from the line of Matt Dolan of Roth Capital.

Matt Dolan – Roth Capital

Hey guys. Good morning.

Al Pavucek

Good morning.

Matt Dolan – Roth Capital

I guess a follow up on the outlook here – we’ve heard a lot especially since September 30, a lot of noise around procedure volumes and so forth. Are you seeing anything that side of (inaudible) of having on premium price purely on the procedural side? Are you hearing or seeing anything in your own business that’s slowing down and, I guess, even to the context of looking out a little bit longer term into 2009? What do you expect the market for synthetics to grow at next year?

Anthony Koblish

We haven’t seen a slowdown in procedure volumes thus far. That’s dead. Many of the spine procedures that are being gunned today perhaps have been scheduled for three months or six months etc. Right now I think given the size of our penetration, it is the size of the overall market and given the positive environmental effect that I’ve discussed and our clinical data and new products. You know right now we’re just not seeing it. We certainly are vigilant. We are asking our sales team almost weekly to kind of assess what they’re seeing, what they’re feeling out there. We certainly are looking for the larger orthopedic players, even if it is in the knee base to see what their commentary is on procedure volumes and we’ll certainly watch that closely. Perhaps I’ll have the opportunity to give a little bit better guidance on that for 2009 on the next call, when we do give 2009 guidance. But right now our expectation is that procedure volumes are fine. Spine surgery is an elective procedure for sure, however, when you need it you need it and when you need it you need it to go work. So I think perhaps there’s a tie end for the unemployment rate. We have to just keep monitoring that. We don’t expect to see procedure volumes affect our business to the reps for this year. However, we will monitor it going forward.

Matt Dolan – Roth Capital

Okay. Good and very helpful. It’s more of a qualitative question, as we look at your bioactive launches, can you give us a breakdown within Foam, how much is strip and how much is pack today so you can think about when bioactive kind of cannibalizes some of that?

Anthony Koblish

Too early to give a mix of VA strip versus VA pack.

Matt Dolan – Roth Capital

Just on the Foam business today as it stands.

Anthony Koblish

Oh, the Foam business. Okay. The classic foam – well the VA Foam was 20%. The classic foam was 42% or 43%.

Matt Dolan – Roth Capital

Within classic foam, maybe excluding Q3. Your run rate – what was strips and what was packs?

Anthony Koblish

All right. I see a classic strip versus VA strip would be the most appropriate measure given the VA strip has been out there now for a full quarter and I would say it’s roughly 50, 60 maybe shaded slightly higher to the VA side, but roughly 50, 60.

Matt Dolan – Roth Capital

Okay. Great and then finally on Cortoss, it sounds like you’re going to be providing incremental data in the first quarter that the FDA hasn’t seen in the past. Because of that new cohort, should we expect another round of questions because they will be looking at the patients they haven’t seen in the past and maybe help us with your updated timeline on Cortoss? We talked about this year as the most recent update. Thanks.

Anthony Koblish

I think that’s very possible that the clinical data package has been reviewed certainly once and partially the second time. However, there will be another rotation with full two year follow up, so it will be the complete final clinical data set. There are no more rotations to follow after two years. That’s the end of it. So it will be the first review of the entire set. So that said, it is clearly possible that there could be additional question or questions that we haven’t seen before that are related to the entire set. FDA seems to be working quickly. The review on our second filing was maybe approximately 40 days, maybe a little less. So I do expect that there will be some more questions, some more discussion after this next filing. We do believe that the timeframe will be more like we just saw and it should go put us on track for around mid year, that’s still our best estimate. Is it possible that the questions could be deeper and require a little bit more time? Sure. That’s not a 0% chance. However, our best estimate right now remains on track to about mid year.

Matt Dolan – Roth Capital

Okay. Thanks a lot guys. Nice results.

Operator

(Operator instructions) Your next question comes from the line of David Turkaly of SIG.

David Turkaly – SIG

I always thought there was a there was a benefit to the 510(k) versus the PMA here, but I guess the two years right now that’s the entire – is that now the PMA protocol?

Anthony Koblish

Well it’s the IDE protocol and to start either a 510(k) with clinical or a PMA with clinical, you have to get an IDE. So the amount of work, the depth and breadth of the clinical data set, the size of the filing etc. is at this point on par with the PMA. That is our opinion. However, the timing of review, turn, interaction, etc. is on the 510(k) set, which certainly is preferable at this point. So every once in a while there is a 510(k) with an IDE in a clinical package that rises to that level of a PMA-like filing and I think we certainly have attained that level.

David Turkaly – SIG

Which reminds us as we think about the future with Cortoss out there, – and I don’t think it’s a big capacity strength for your guys, but given where you are now at VitaGel on these costs and from your partners that are making things for you, and you see Cortoss ramping, do you need to do anything or do you have enough capacity there for what you kind of consider year or two of Cortoss or probably you’re thinking about that eventual launch?

Al Pavucek

The Cortoss’ manufacturing facility is scaled for commercial scale. Right now if you look at sort of what our forecast assessment is, it is big enough to carry us pretty far into the future, 2012 or beyond. The scalability, the way the facility was designed from the beginning, is based at commercial scale, that is significant and to be able to scale that even greater within roughly the same footprint by reeling in different sides of equipment. So I feel pretty good that the Cortoss scale is going to be sufficient to carry quite some delay. In fact that’s part of our overhead absorption issue, is that this facility was built at scale long ago and it’s something that we’ve been dealing with ever since, but it will change over and become quite an important aspect once Cortoss is approved in the US.

David Turkaly – SIG

Great. Thanks a lot.

Operator

At this time, there are no further questions.

Al Pavucek

All right. Thank you for attending our third quarter 2008 earnings conference call. This is the conclusion of the call and we look forward to speaking with you again next quarter. Have a good day everybody.

Operator

This concludes today’s conference call. You may now disconnect.