RTI Biologics Inc. Q4 2008 Earnings Call Transcript

Feb.20.09 | About: RTI Surgical, (RTIX)

RTI Biologics Inc. (NASDAQ:RTIX)

Q4 2008 Earnings Call

February 20, 2009; 9:00 am ET

Executives

Brian Hutchison - Chairman & Chief Executive Officer

Tom Rose - Executive Vice President & Chief Financial Officer

Wendy Crites Wacker - Director of Corporate Communications

Analysts

Dave Turkaly - SIG

Keay Nakae - Collins Stewart

Matt Dolan - Roth Capital

Bill Plovanic - Canaccord Adams

Brooks West - Craig-Hallum Capital

Jayson Bedford - Raymond James

Operator

Good day and welcome to the RTI Biologics Inc., fourth quarter 2008 results conference call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Ms. Wendy Crites Wacker, Director of Corporate Communications. Please go ahead ma’am.

Wendy Crites Wacker

Good morning and thank you for joining RTI Biologics for our fourth quarter and year end 2008 conference call. Today we will hear from Brian Hutchison, Chairman and CEO, who will discuss operational highlights and future activities for the company, as well as Tom Rose, Executive Vice President and Chief Financial Officer who will provide an overview of our financial results.

Before we start, let me make the following disclosure about forward-looking statements. The earnings and other matters we will be discussing on this conference call will involve statements that are forward-looking. These statements are based on our management’s current expectations, but they are subject to various risks and uncertainties associated with our lines of business and with the economic environment in general.

Our actual results may vary from any statements concerning our expectations about future events that are made during the course of this meeting and we make no guarantees as to the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward-looking statements.

Now I will turn the call over to Brian Hutchison.

Brian Hutchison

Good morning everyone. I’m sure most of you’ve seen our press release this morning and many of you also joined us for our preannouncement on January 16. 2008 has been a very challenging year for many, including RTI Biologics as we spent most of our efforts completing our merger with Tutogen Medical and concentrating on a successful integration.

We have achieved quarterly revenues of $37.4 million, slightly better than what was announced in our January call. Primarily due to a non-cash impairment charge to our goodwill, we reported a net loss for the quarter of $102.5 million or $1.89 per fully diluted share, based on 54.1 million fully diluted shares outstanding.

As a result of recent external economic conditions and related volatility of organic stock prices, as well as the decline in our market cap, we performed a goodwill impairment test as of December 31, 2008. This test resulted in a non-cash charge in the fourth quarter of $103 million. When excluding this impairment charge along with purchasing line adjustments and restructuring charges, adjusted net income was $1.1 million or $0.02 per fully diluted share.

For the full year ended December 31, 2008 we achieved revenues of $146.6 million as we stated in our January call. Again, primarily due to the non-cash impairment charge to our goodwill, we reported a net loss for the year of $100 million or $2 per fully diluted share based on $49.9 million fully diluted shares outstanding. If you remove the purchase accounting adjustments, restructuring charges and the impairment charge, we achieved an adjusted net income of $5.1 million or $0.10 per fully diluted share.

Certainly the macroeconomic climate, as well as slower growth anticipated in the medical device industry is a concern for many investors. As a company, we are taking action by controlling our expenses and we have no major investments required and we do not need to raise cash in the near future.

Earlier this month we announced almost $12 million in new financing agreements with Mercantile Bank. The new financing agreements consist of a $1.8 million term loan and a $10 million line of credit facility. For these reasons and more, we believe we’re in a relatively strong position to weather the economic storm and execute on our plan.

Let’s drill down on each of our major lines of business a little further. Spine results were good for the fourth quarter, but were disappointing for the year. However, we did achieve a significant diversification in our portfolio. Our largest buying distributor represented 85% of spine revenues in 2008 compared to 94% in 2007.

To further this diversification, last week we announced a new development and distribution agreement with Aesculap Implant Systems for spinal Implant. With each of our spine distributors, we are evaluating our already developing additional new spine grafts, which will launch in the next 12 months.

As we discussed in our January guidance call, based on conversions with our customers, the uncertainties anticipated in this area will be somewhat offset by new implant offerings on target for launch in the year. Sports medicine although down for the fourth quarter achieved more than 30% growth in revenues, compared to the previous year, significantly exceeding market growth rate for that area.

As we have mentioned, while we have a third quarter and a first two months of the fourth quarter of 2008 were challenging, we saw a strong performance in sports medicine segment in the month of December, which contributed significantly to overall fourth quarter. These results were positively impacted by our recent efforts to address the distribution model in this area. While we are encouraged by this activity, we will continue to monitor the current macro challenges that exist in the overall market.

In a past quarter, we have brought on five new direct representatives, ending the year with the direct force of approximately 30 people. An estimated 72% of sports medicine revenues in the fourth quarter of 2008 came from the company’s direct force, compared with only 50% in the first half of 2008.

It is expected that these representatives will make an increasingly positive impact on distribution of sports medicine implant over the first half of 2009. That being said, we’re very pleased that the sports medicine business continues to turn in above industry growth driven by superior implants and strong demand by our surgeon customers.

Dental revenues have been impacted as a result of the unprecedented weakening of the global economy. We are pleased with the overall performance in our dental business, compared to current industry trends that are down across the board.

As we said in January, despite our Biologics franchise begin a bit more insolated than overall general dental businesses, we are taking a conservative approach to our outlook. Should for some reason, our cautious outlook in this area proved to be conservative, we have the tissue available to meet any upside in demand that is outside of our current projections. In full context this access to tissue is in contract to some tissue constraint experienced up until the end of 2008.

Surgical specialty revenues were $3.6 million for the fourth quarter, which is comparable to pro forma fourth quarter 2007, from Tutogen as a standalone company. For the full year of 2008 surgical specialty revenues were $17.5 million compared to $12.5 million pro forma for 2007.

In the fourth quarter, we announced new agreement with ENTrigue for ear, nose and throat market, a new market for RTI’s sterilized membrane tissues. According to the agreement, RTI will process soft tissue allograft and xenograft implants to help patients in ENT application for distribution by ENTrigue. Long term, the two companies will co-develop non-novel biologic solutions for ENTrigue’s surgeons and patients.

Our bone graft substitute’s revenues were disappointing for the year as key launches were delayed in 2008 and we saw a decline in orders for our first generation bone paste implant. The ready-to-use BGS implant for spine, dental and trauma was efficiently launched by our distributor across the board at the international sales meetings in the first quarter of 2009.

This year we planned to launch new bone graft substitutes with both Stryker and Wright Medical. While the bone graft substitutes market is not without its challenges, the company’s encouraged to be launching implants with two new strong distributors who are building their Biologics business as part of their overall growth objectives, as well as meeting the needs of our long standing distributors.

Our ability to go into new markets and meet the demand for allografts implants in 2009 is a result of many successes of the RTI Donor Services and our tissue recovery personal in Europe over the past year. We were able to increase our tissue supply significantly over the course of the year, which is an investment that will allow us to help even more patients with biologic implants through all of our implant categories.

We have seen growth potential hindered in the past because we did not have an enough tissue available. Now we know and we have the potential to grow our business as opportunity and demand allow.

At this point, I’ll let Tom discuss the financial results.

Thom Rose

Thank you, Brian. Revenues for the fourth quarter of 2008 are $37.4 million, compared to revenues of $25.5 million for the prior year. Revenues for the combined company equate $2.2 million, compared to pro forma results in the fourth quarter of 2007. Revenues for the full year 2008 were $146.6 million, compared to $94.2 million in 2007. Compared to pro forma revenues in the full year 2007 for the combined company, revenues increased 4%.

Fourth quarter net loss was $102.5 million or $1.89 per share compared to a net loss of $2.6 million or $0.09 per share in the prior year. Net loss for the full year was $100 million or $2 per share, compared to a net loss of $2.1 million or $0.07 per share in the prior year.

However, as Brian mentioned, when excluding purchased accounting adjustments, restructuring charges and the impairment charge, adjusted net income was $1.1 million or $0.02 per fully diluted share for the fourth quarter and $5.1 million or $0.10 per fully diluted share for the full year. Profitability for the fourth quarter and year end were significant improvements over 2007 result.

Spine revenues were $12.1 million for the fourth quarter and $41.8 million for the full year, compared to $10.3 million and $41.1 million respectively in the prior year. Spine revenues increased in the fourth quarter as a result of new product launches and inventory adjustments by distributors.

Sports medicine revenues were $8.4 million for the fourth quarter of 2008 and $36.3 million for the full year, compared to $9 million and $27.7 million respectively for the prior year period. Sports medicine revenues in the fourth quarter were negatively impacted by the transition from a network of primarily independent distributors, to direct biologic distribution representatives. December revenues for sports medicines were $3.1 million, demonstrating a healthy sequential gain and January ran a similar track.

Dental revenues were $7.9 million in the fourth quarter of 2008 and $27.4 million for the 10 months of combined operation, compared to $7.7 million and $25.7 million respectively, compared to the prior year revenues of Tutogen on a standalone basis. In the fourth quarter, U.S. dental revenues were up 6% and international revenues were down 28%. Dental revenues outside the U.S. for the fourth quarter, continued to be negatively impacted by the weakening of the global economy.

Sports specialties revenues were $3.6 million in the fourth quarter of 2008 and $15.4 million or 10 months of combined operation compared to $3.5 million and $10.2 million respectively, compared to the prior year revenues of Tutogen on a standalone basis. Surgical specialty revenues for the full-year reflected strong domestic performance, with growth rate of 257% for hernia, 76% for breast reconstruction and 32% for urology.

Bone graft substitutes revenues were $2.6 million in the fourth quarter of 2008 and $14.4 million for the full year, compared to $3.9 million and $17 million respectively in the prior year period. Bone graft substitute revenues in the fourth quarter and full year were negatively impacted by delays in launching new products and reductions in inventory levels by distributors.

Gross profit margins for the fourth quarter of 2008 were 47%, compared to 44% for the same time period last year. Gross profit margins for the year were 47%, but after excluding the step-up adjustment to Tutogen’s inventories; gross profit margins were 48% on an adjusted basis. This compares to 2007 gross margins of 40%.

In the fourth quarter, operating expenses excluding non-cash impairment charge and asset abandonment’s totaled $15.8 million, an increase of $5.1 million over 2007. The increase was primarily due to the merger with Tutogen. During the quarter, fixed marketing, general and administrative expenses totaled approximately $10 million. This was a significant improvement compared to $11.4 million in Q3.

Variable incentive compensation was reduced by $300,000 during the fourth quarter and variable distribution commission totaled $3.5 million for the quarter. Fourth quarter full year results include a $103.9 million non-cash impairment charge relating to intangible assets.

Impairment charge is primarily the result of an evaluation of our recorded goodwill, injunction with statement and financial accounting standards 142, goodwill and other intangible asset guideline; hence the impairment reflects our current stock price and the general negative market environment.

In addition, fourth quarter and full year results include asset abandonment of 482,000 related to the write-off of the remaining value of assets of our inactive cardiovascular facility and certain other non-productive assets. As a result of our continued progress on identifying expense synergies, our final estimate of annual savings resulting from the merger with Tutogen is approximately $8.3 million, of which $4 million was recognized in 2008.

Now reviewing the balance sheet at the end of the quarter, compared to December 31, 2007 and cash flow of 2008, please note the following. Our cash position at the end of the quarter was $20.1 million compared to $18.6 million at December 31, 2007, an increase of $1.5 million. Accounts receivable increased to $14.7 million as compared to $9.8 million at December 31, 2007. The day sales outstanding of the combined company were 35 at December 31, 2008.

Inventories increased to $75.2 million compared to $39.8 million at December 31, 2007. Inventory days outstanding for the combined company were 294 at December 31, 2008. At December 31, 2008 on process donor tissue totaled $28.1 million. Tissue process totaled $39.4 million and implantable donor tissue totaled $13.1 million. We have seen significant increases in our process donor tissue throughout the year, which positions us well for future growth.

Tissue process has increased partially as a result of the build of intermediate for two new bone graft substitute implant, which will launch in 2009. In addition, we have increasing finished good levels for most of our implant lines, to better meet the demand of our distributors. We have sufficient levels of inventory to support our 2009 growth goal and we are actively managing inventory levels as we enter the New Year.

Working capital at December 31, 2008 totaled $90.9 million, an increase of $20.3 million since December 31, 2007. Total debt is approximately $9 million at the end of the year. In January we completed our new debt agreement providing us with a $1.8 million term loan, a $10 million line of credit secured by accounts receivable and inventory. This agreement provides us an added level of liquidity as necessary.

I’ll now turn the call back over to Brian.

Brian Hutchison

Thanks, Tom. I’d like to reiterate that we are still confident in our outlook for 2009 revenues and EPS. We anticipate that full year revenues for 2009 will be in the range of $166 million to $168 million with earnings per share expected to be in the range of $0.11 to $0.13. The EPS is based on $55.1 million fully diluted shares outstanding.

We know that this difficult economic environment achieving growth will not be easy. However, our management team believes that the rebound in our sports medicine group, new product launches planned for 2009 and a significant increase in tissue supply will allow us to achieve this level of growth in the coming year.

We hope to see many of you at our upcoming analyst reception and investor conferences. We’ll be holding our annual analyst reception prior to AAOS on February 24 from 5.30 to 7 pm in Las Vegas. We will also be presenting on February 24, at 11:00 am at the Canaccord Adams Conference in Las Vegas. Additionally, we are presenting at the Raymond James conference in Orlando on March 11, as well as the Cowen conference in Boston on March 16.

At this time, let’s open up to questions. Matt.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We’ll take our first question from Dave Turkaly from SIG.

Dave Turkaly - SIG

Thanks a lot. When we look at the new products that you guys have slated for this year, I know you’ve discussed some of them on the call, but in terms of the timeline in them, maybe which you think could contribute most quickly as we progress through 2009 in terms of overall size?

Brian Hutchison

Dave this is Brian. We haven’t talked in detail about any specific product launches; there are a number of them. If I would have to say what’s most critical, we would say on the BGS side, we would call that critical to accelerate the products with our new partners in those spaces throughout the year, as well as all of the spine grafts that are on the joint board, those are all line extension type things that we hope to get out.

In the sport side, we’ll be talking at academy live about some of the new things that we’ve been working on, but certainly our Fresh OC program, accelerating growth there, our cartilage plug, as well as the new product that we’re talking about called matrix HD, which is actually a membrane technology for sports; we’ll be talking about that as well.

Dave Turkaly – SIG

Okay and then I know that it’s tough giving all your partners, but to know their inventory levels and how they adjust the orders quarter-to-quarter. Again we’ve seen a couple of quarters where there might have been that impact in (Inaudible); the distributor might be tightening what they carry in inventory. Do you think we’ve stabilized now for that impact on the most part or do you have any kind of programs that you guys are into with some of these partners to kind of smooth that out let’s say as we look into 2009?

Tom Rose

Dave, I think the inventory distributors probably in Q3 and Q4, we saw adjustments most of them downwards and as a source again here in 2009, we think the inventory levels at distributors are fairly optimal. I don’t think we’re going to see a lot of fluctuations impacting our quarterly revenues this year. On the other hand, the one thing we’ll see, I think that will still be an issue for us in this year, but on a positive basis is launches from quarter-to-quarter can impact the levels, whether its spine or surgical specialties.

Dave Turkaly – SIG

Great, thanks a lot.

Operator

We go next to Keay Nakae with Collins Stewart.

Keay Nakae - Collins Stewart

Yes good morning; a couple of questions for you. First in terms of BGS, with the launch of Zimmer, how does that affect your sales as it relates to their stocking? Are you seeing any bonus in Q1?

Brian Hutchison

Dave, this is Brian. We built that into our planning. We started shipping these products last year and we are seeing increases in the first quarter, but not on a real significant level.

Tom Rose

We don’t expect them on to be building a lot of inventory in that product. The initial shelf length on that product is about a year and so as we look at their orders for the year and for selling their orders, probably low stocking levels and kind of a JIT basis coming from RTI to meet their needs.

Keay Nakae - Collins Stewart

Okay and with respect to the proposed launches for BGS, with Stryker and Wright at what point of the year should we expect those to come onboard?

Brian Hutchison

We’re going to say second-half on that Keay.

Keay Nakae - Collins Stewart

Okay and in surgical specialties, to what extent are you seeing the economic environment impact that business?

Tom Rose

Keay, as you mentioned we had a good year this past year in hernia, breast reconstruction and urology. We’re expecting another strong year in those categories this year. Similar to our assessments of the fusion market and sports medicine market, at this point in time we’re not seeing significant impacts of the particular slowdown in the surgical specialty areas.

Brian Hutchison

The other thing I would add to that Keay is that our partners have been tissues starved in those spaces. We don’t have nearly enough tissue for them yet to slowdown.

Keay Nakae - Collins Stewart

Okay, so at least seven weeks into the New Year that business is holding up, compared to how its been growing for you?

Brian Hutchison

That’s correct.

Keay Nakae - Collins Stewart

Okay, great thanks.

Operator

We’ll go next to Matt Dolan with Roth Capital.

Matt Dolan - Roth Capital

Hey guys good morning.

Brian Hutchison

Good morning Matt.

Matt Dolan - Roth Capital

A question on sports medicine; can you maybe give us a little more clarity on the transition to the distributors? Where are those four to six territories in terms of the transition maybe are they fully up to speed in terms of productivity and if not when do you expect them to get that?

Brian Hutchison

Matt, Roger Rose happens to be with us. I’m going to let him answer that question.

Roger Rose

Matt, I really don’t want to give you all the specifics of where our people are around country; suffice it to say that where we had distributors that represented other lines that we don’t have any longer, every single one of those territories is built and the ramp up of our folks really being fully productive takes about six months, but they’re supported also by inside resources.

One of our values that we’ve been able to pull forward is that we know where the tissue was going through those other the distributors. So, we’ve been able to take care of a lot of our surgeons and hospitals and they’re really coming up speed quickly.

Matt Dolan - Roth Capital

Okay, great thanks and then secondly, just a broader question on the revenue guidance, it sounds like you haven’t seen anything in sports or surgical specialties relative to procedure volumes, but how have you factored in that potential concern out there into your revenue outlook as it stands today?

Brian Hutchison

Well, when we built this model we talked to all of our customers and we did our own research and internally we believe that we have an understanding of what to expect and we believe we’ve taken that all into consideration.

Obviously, we can’t predict the further in this economy and what happens with unemployment rates and thus insurance rates, but for the most part we feel like we’ve got it right and we’ve got the tissue to deliver the results. We’re working with all of our partners and our direct distribution folks and this February we feel pretty good.

Matt Dolan - Roth Capital

Okay, so to recollect, the guidance reflects the scenario that you see today.

Brian Hutchison

Yes it does.

Matt Dolan - Roth Capital

Okay, moving to the cost side Tom, just two question I guess. Gross margin, your long term target is towards the mid 50%, how much progress do we make on that this year?

Tom Rose

Matt, you’re correct. As we’ve discussed publicly many times, we believe that as we increase the revenues and the throughput to our facilities we can obtain the 50% gross margin, compared to where we ended up on adjusted basis at 48% this year.

As you review the results for this year, combine the two companies’ on a pro forma basis we ticked up about two or four percentage points, from 46% to 48% on the gross margin line. I would say most of that improvement was due to synergies, because we weren’t able to take advantage of leveraging our fixed costs, with significant sales growth.

So just reflecting on that, we think as we go into this year, our guidance reflects our gross margin in the range of 49% to 50%. So, if we achieve the forecasted revenues that we provided to the street, we should be able to pickup another two percentage points this year.

Matt Dolan - Roth Capital

Okay, great, very helpful and then finally the SG&A line, you had a pretty good down tick there in Q4. Can you just talk a little bit about cost control; anything that should build on that in ’09 would be helpful? Thanks a lot.

Brian Hutchison

As we mentioned on our January guidance call, we said publicly now our integration is complete, the recognition of the $8.3 million cost savings relating to integration, we’re finished with that and now we’re moving on to process improvements, other cost savings measures as we got these two companies together.

It’s still too early to give estimates of reduced expenses. Just like everybody else in this economy, we are looking for these significant cost savings as we go throughout the year and so I think as we just go quarter-to-quarter, I’ll be able to give a better update on our success as we look for these additional cost saving.

Matt Dolan - Roth Capital

Okay, great thank you guys.

Brian Hutchison

Thanks Matt.

Operator

We’ll go next to Bill Plovanic with Canaccord Adams.

Bill Plovanic - Canaccord Adams

Hi, thank you good morning.

Brian Hutchison

Good morning Bill.

Bill Plovanic - Canaccord Adams

A couple of questions here, so just on the asset impairment charge, does that impact the P&L in any way going forward?

Tom Rose

It does not Bill. The goodwill, that was not being amortized, and it’s a one time charge, so no impact in the future.

Bill Plovanic - Canaccord Adams

Okay and then on the MG&A line, I think you said you’re down to $10 million from $11.4 million on the fixed portion of that and the $10 million is the base that we use going forward in 2009, that’s correct?

Tom Rose

That’s correct and just working through with some level of inflation and added costs to support the higher revenues.

Bill Plovanic - Canaccord Adams

So, it will pick up nominally, but revenue should go up faster is what your saying.

Brian Hutchison

That is correct.

Bill Plovanic - Canaccord Adams

Okay and then, in terms of guidance you’ve given us for the year, but for Q1, I’ll ask the question two ways, are you willing to give Q1 guidance?

Brian Hutchison

This is Brian and that answer is no.

Bill Plovanic - Canaccord Adams

Okay, then secondly to ask this is could we view that the Q4 ‘08 is the goal point in terms of revenues and it will be improving from here forward?

Brian Hutchison

That answer is likely, yes.

Bill Plovanic - Canaccord Adams

Okay and then relative to the J&J acquisition of Mentor, did that have any impact on spinal specialty or surgical specialties in the quarter or what you see an outlook for that impact in the surgical specialties business?

Brian Hutchison

We’re in the process of connecting with Mentor, so at this of point time preliminarily indications are they still want to work with us. We needed to go and meet with them, physically sit down and talk it through.

Bill Plovanic - Canaccord Adams

Okay, so at this point you don’t now.

Brian Hutchison

Correct

Bill Plovanic - Canaccord Adams

Okay and then surgical specialties was significantly lower, in the fourth quarter which was it, the hernia repair, the breast recon or the urology. I mean something really did not perform and which piece of that was it?

Tom Rose

I would say that each of those distributors had lower orders in Q4 primarily due to inventory adjustments, because there is no change in external demand for these areas. Probably the one that was most significant would have been in the breast reconstruction area.

So, as we asses that, we obviously as we talked about before, are cautiously watching our distributors there, just because of the merger with J&J, but as we enter the first quarter for all of the areas in surgical specialties, we are seeing the orders bounce back to kind of plan levels.

Bill Plovanic - Canaccord Adams

So, in the first quarter it is bouncing back.

Tom Rose

Yes, including breast reconstruction.

Bill Plovanic - Canaccord Adams

Okay and then as we just walk through, so on the sports medicine you said that you’re tracking at 3.1 in January. You’re roughly that in December and then equivalent roughly in January. So, your direct sales reps are gaining traction. Remind us of the 30 in place, how many were in place at the end of the third quarter and how many where in place in the end of the fourth quarter?

Brian Hutchison

We hired five additional in the fourth quarter and obviously in the third quarter there was significant ramp up as well and as Roger said a little while ago, it takes on average six months for one of these territory people to get up to speed fully. So, they’re all ramping up.

Bill Plovanic - Canaccord Adams

Okay and then on the BGS, I think you mentioned that was really low in the quarter as well. When you have one distributor that is continually kind of whittled down, is that whittling down more so or is that some of the other guys?

Tom Rose

I think in Q4, in bone graft substitutes, we did see inventory adjustments similar to what we saw in surgical specialties. I think we’ve talked about in the past the 15% or 20% of our bone graft substitutes go to our international distribution as well as our domestic distribution folks. So, we saw the impact international that we saw in dental in bone graft substitute.

So, it’s a combination of inventory adjustments I think with the U.S. customers just the slowing down in international. We also have viewed significant distributions of our new products to them on the quarter, because they were lining up for the Q1 launches.

Bill Plovanic - Canaccord Adams

Brian, this is a general question. With the international distributors, it sounds really across the board in the fourth quarter, you saw challenges there. We’re hearing that part of these distributors are having a difficult time giving credit to finance these purchases. Have you seen any loosening of that in the first quarter; if not are you going to step up to the plate and help them on this? Just kind of give us an outlook of how you think this might play out over the next quarter or so?

Brian Hutchison

Well, I’m watching it very close Bill and I’ve actually been here twice and I would say that the feeling of optimism is stronger and the results are showing it, things are improving. Now, I’d be hesitant to say they are through it, but they’re certainly getting better and optimism is gaining there.

Bill Plovanic - Canaccord Adams

Last question is, in the spine, I mean that 12.1 number, that was a big number, those are really good numbers considering what the trends have been there lately and you’ve mentioned that new product launches and then the inventory adjustments by the distributor; was it more the launches that was helped you go up that much sequentially or is that kind of across the board there as well?

Tom Rose

Our launches in Q4 were about $1 million. So that had a pretty significant impact. I think if you look at Q3 to Q4, the trend was up and interesting in the spine area, we had distributors some increase in inventory levels, we had others reducing their inventory level.

Brian Hutchison

We saw them go both ways.

Tom Rose

But, I think the most significant part of the increase was the launches.

Bill Plovanic - Canaccord Adams

Okay, fantastic, great. Thank you very much and we look forward to seeing you on Tuesday.

Brian Hutchison

Thanks, Bill.

Operator

We’ll go next to Brooks West with Craig-Hallum Capital

Brooks West - Craig-Hallum Capital

Good morning.

Brian Hutchison

Good morning. How are you doing Brook?

Brooks West - Craig-Hallum Capital

Good. Tom, a couple of quick balance sheet questions here; just on the inventory levels and you give some detail, but are you guys reaching a point where this is becoming too much inventory or too much cash tied up here and how are you looking at kind of managing that going forward without potentially damaging some of your tissue sourcing out in the field?

Tom Rose

So, it’s an excellent question. Inventories at the end of the year, as we’ve mentioned several times, are more than adequate to support our 2009 plans. Last year, probably one of our major goals in addition to the merger was our increased sourcing activities across the board, especially in the membrane areas and we’re very successful with that.

As we entered ’09, our goal really is to maintain inventories exactly where they are right now and hopefully bring them down a little bit. So, the way we do that is just work very closely with our sourcing groups and give them enough lead time to adjust there transfers of tissue to us.

Brooks West - Craig-Hallum Capital

Okay and then the other thing on the current assets, I noticed our prepaid bucket shot up sequentially; is that just timing and what’s in that bucket?

Tom Rose

Well, it is timing for a lot of our prepaid such as insurance and some of those costs, but we recorded the license agreement with LifeNet that we announced in the fourth quarter; we recorded that as a gross assets and gross liability for the seven year life of that license. So, that added about $5 million to that category and also in that category is deferred tax assets and there can be some movements there, but the most significant change is the LifeNet license that we capitalized.

Brooks West - Craig-Hallum Capital

Okay and so, I guess just to finish out that thought, as you look at your balance sheet, looking at working capitals and opportunity maybe to drive some cash flow, is that one of the things that gets you confidence in hitting that bottom line guidance for the year?

Tom Rose

Well, the current balance sheet gives as we’ve mentioned in the call, takes the procurement risk out of the equation for meeting our forecasted revenues. Our biggest opportunity from a cash workflow stand point is reducing inventories, but just like on the procurement side where it takes us quarters to build momentum in that area, it takes us quarters and some very significant planning to bring down those levels as well, but as I mentioned before, inventory management is going to be a major issue for us as we go through 2009.

Brooks West - Craig-Hallum Capital

Okay great and then shifting over to spine, any way you could quantify how big the new escalope relationship might be?

Brian Hutchison

We haven’t given any specific dollar ranges, but we expect it to be one of our smaller players. If you look at their market shares you can sort of draw correlations between them and some of our other smaller partners.

Brooks West - Craig-Hallum Capital

Okay and then also in spine, Medtronic on their call talked about a totally new spine platform coming out here in the new future. Have you guys had conversations to know how much of a part of that are you and is there opportunity there for RTI?

Tom Rose

We’ve had significant conversations with the spine folks in Medtronic and we feel really good about the further of that. We can’t go into any real specifics about where our role would be with them, but we feel better about that relationship than we did a year ago.

Brooks West - Craig-Hallum Capital

Okay and then lastly, just kind of circling back on some of the guidance thought. I know you don’t give quarterly guidance, but as you look at where the consensus numbers are for Q1 in particular, but the kind of quarterly projections, are you comfortable with those numbers?

Tom Rose

I’m going to resist saying anything expect I’m comfortable with annual guidance at this point in time.

Brooks West - Craig-Hallum Capital

Okay, great. We’ll look forward to seeing you guys next week.

Tom Rose

Thanks.

Operator

We’ll go next to Jayson Bedford with Raymond James.

Jayson Bedford - Raymond James

Good morning, thanks for taking the questions. Just a couple quickies; on spine the inventory adjustment, was it the net downward or upward, inventory adjustment in the fourth quarter?

Tom Rose

In Q4 it was actually net upward Jayson.

Jayson Bedford - Raymond James

Okay and then when we look at sports medicine, I think you commented earlier regarding the strength in January was similar to December, what’s driving this? Is it the new sales force or is it a catch up from say October, November?

Brian Hutchison

No, it’s not catch up. This is the new group of people contributing and what I didn’t say earlier, I’ll say that we expect to add an additional eight to 12 people this year on top of what we have. So, we do have confident that we have supply and we have opportunities out there.

Jayson Bedford - Raymond James

Okay and then just jumping to dental side. I think you seemed to imply that you were supply constrained up until the end of ’08. I’m just wondering is there any way to kind of quantify the delta between what you could have sold and what you ended up selling.

Brian Hutchison

It’s a difficult question and the answer is we don’t know. We do know that, we were on that quarter with our only partner in that space, a significant chunk of 2008. We just began to clear those in very late Q4 and we’re optimistic about 2009 as are they.

Jayson Bedford - Raymond James

Okay and then just lastly, the membrane product for the shoulder, is that the Matrix HD?

Brian Hutchison

That’s correct.

Jayson Bedford - Raymond James

And then is that being sold solely through your sports med group?

Brian Hutchison

Yes, that’s true.

Jayson Bedford - Raymond James

Okay, that’s it from me. Thank you.

Brian Hutchison

Thanks, Jayson.

Operator

We’ll take our final question is a follow-up from Keay Nakae with Collins Stewart.

Keay Nakae - Collins Stewart

Yes, just a follow-up question on spine. What type of follow through are you seeing in Q1 thus far in terms of inventory adjustments on the positive side, following through what you saw in Q4?

Tom Rose

Again, just coming back as said it earlier Keay, I think with the spine distributors they seem to albeit fair at these optimal levels from their perspective and so I don’t think we’re seeing any significant upward moves and again to repeat what I said earlier, again I don’t think inventory adjustments per say are going to be a significant issue as we go though 2009.

Keay Nakae - Collins Stewart

Okay, thanks.

Brian Hutchison

We’ll thank you all for joining us this morning and as always you can find information about RTI by contacting our investor relations group. Thank you.

Operator

That does conclude today’s call. Again, thank you for your participation. Have a good day.

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