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Synovis Life Technologies, Inc. F1Q09 (Qtr End 1/31/2009) Earnings Call Transcript

February 25, 2009 | about: SYNO

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Synovis Life Technologies, Inc. (SYNO)

F1Q09 (Qtr End 1/31/2009) Earnings Call

February 25, 2009 11:00 am ET

Executives

Richard W. Kramp – President & Chief Executive Officer

Brett A. Reynolds – Vice President of Finance, Chief Financial Officer & Corporate Secretary

Analysts

Stan Manny – Manny Family Investors

Gregory Brash – Sidoti & Company

Ernest Andberg – Feltl & Company

Matthew Pommer – Roth Capital Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 Synovis Life Technologies Incorporated Earnings Conference Call. My name is Jerry, and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Richard Kramp, President and Chief Executive Officer and Mr. Brett Reynolds, Chief Financial Officer of Synovis Life Technologies. You may proceed gentlemen.

Richard W. Kramp

Thank you, Jerry. Good morning. Welcome to Synovis Life Technologies’ 2009 first quarter conference call. Brett Reynolds, our CFO, and I will present the highlights of this record quarter. As we bring you the latest news about the company’s performance, please keep in mind that forward-looking statements made in the course of this phone conference are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words such as should, could, may, will, expect, believe, anticipate, estimate, continue, or other similar expressions.

There are certain important factors that could cause results to differ materially from those anticipated by the forward-looking statements made during the course of this conference, and the company has no obligation to update its forward-looking statements, references made to the company’s annual report in Form 10-K for the year ended October 31, 2008, and all public filings made by the company thereafter.

Results presented today are for the continuing operations of the company and for the current quarter unless otherwise specified. Comparisons are always to the same period of the prior fiscal year unless specified differently.

Brett will begin by providing the financial overview for the quarter. Brett?

Brett A. Reynolds

Thank you, Rich, and good morning everyone. Thank you for participating in our first quarter conference call. In light of the abundance of negative news in these tough economic times, we are very pleased with our financial results for the first quarter of fiscal ’09, and believe these results position us well as we look forward to the remainder of the year.

Key financial themes for the quarter include the following. We had record revenue in the quarter and meaningful top line growth from both a quarter-over-quarter perspective, as well as a sequential quarter basis. Our gross margins remain strong and are in line with our expectations and reflect the efficiency of our operation and expected product mix.

Our SG&A expenses grew at a rate slower than revenue growth in the quarter due to managed cost containment in light of the current economic environment, as well as variability in the timing of project activities and initiatives, as some expenses related to these activities and initiatives are now expected to occur later in the year than initially thought.

Our current quarter R&D expenses grew at a rate faster than revenue, as we continue to invest in various R&D projects. And we executed the planned first quarter expansion of our sales force by adding six new representatives in the quarter. Four sales reps that will sell our surgical products and two that will sell our microsurgical products. All of which will enable us to drive revenue growth later in the year.

I will now comment on our first quarter financial results in greater detail. Revenue totaled a record $13.4 million in the first quarter of fiscal '09, an increase of 19%, or $2.1 million when compared to Q1 of last year. Approximately $1.7 million of the increase in revenue came from higher worldwide unit volume sold, driven by higher unit sales of Veritas and Peri-Strips. This increase is primarily attributable to our direct sales force growing product sales, increased market acceptance of Veritas in the domestic hernia and general surgery markets, and significant growth of Peri-Strips in Europe.

The remainder of the revenue increased of approximately $400,000 was due to higher average net selling prices. On a sequential quarter basis, our Q1 revenue of $13.4 million represent an increase of $700,000, or 5.5% over the fourth quarter of fiscal '08, even though there were approximately 8% fewer shipping days in Q1, when compared to Q4.

From a product line perspective, Q1 revenue is summarized as follows. Peri-Strip revenue totaled $4.9 million in the first quarter, an increase of $1 million, or 25% from the year ago period. Our direct sales force effectively communicating the benefits of Peri-Strips has allowed us to capture market share, as well as convert surgeons who historically have not used a buttress.

In addition, we continue to see strong performance in Europe due to both procedural growth of gastric bypass, as well as strong adoption of our remodelable buttress, which was introduced to the EU market in late fiscal '07. On a sequential quarter basis, Peri-Strip revenue increased by $200,000, or 4.4% when compared to Q4 of '08.

Revenue from our biomaterial patch products, which include the Tissue-Guard product line as well as Veritas Collagen Matrix totaled $5.3 million in the quarter. This represents an increase of $1 million, or 24% when compared to the first quarter of fiscal '08.

Veritas revenue surpassed $1.5 million in the quarter, up 86% from a year ago and up 28% sequentially, primarily due to unit volume growth. Tissue-Guard revenue was slightly more than $3.7 million in the quarter, an increase of 9% from Q1 of a year ago due to solid growth both domestically and internationally.

Revenue from our microsurgical product line was $1.8 million in the quarter, essentially flat quarter-over-quarter and down 11% sequentially. We believe several factors impacted our sales of microsurgical products in the quarter.

First the Coupler is more likely to be inventoried by our customers than most other products we sell. And it appears hospitals partially utilized existing inventories of the Coupler, during the quarter in consideration of the economy thereby slowing orders.

In addition, we believe that reduced capital purchases by hospitals, slowed sales of the premium S&T instrument line that we distribute. From an internal standpoint, we had turnover during the quarter and two of our microsurgical territories, which represents a meaningful portion of total domestic sales coverage.

Our microsurgical products have had significant growth over the past number of years, and we believe the issue that impacted revenue in the first quarter are temporary, that the procedures in which these products are used are growing and that the value proposition for using our microsurgical products remain strong.

As such, we expect to see meaningful revenue growth in this product line for the full fiscal year 2009. Our gross margin was 70.4% in the quarter, up three percentage points from Q1 of last year. The margin improvement is attributable to increase sales of higher margin Veritas and Peri-Strips, improved manufacturing efficiencies and utilization, and higher average net selling prices.

On a sequential quarter basis, our Q1 gross margin of 70.4% was up slightly from the gross margin of 70.2% in the fourth quarter of fiscal '08.

SG&A expense during the first quarter totaled $6.3 million, an increase of nearly $700,000, or 12%, from the same period of year ago. The SG&A increase was due to the expansion of our direct sales force by six sales representatives in the quarter, as well as investments in new business development, clinical affairs and information technology.

In addition, our current quarter non-cash stock-based compensation was almost $200,000, or a penny and a half per share, up from $112,000 in the year ago period.

Looking forward, we expect stock-based compensation to be approximately $250,000 per quarter, or $0.02 per share. As a percent of revenue, SG&A costs were 47% in the current quarter, compared to 50% in the same period of last year. On a sequential quarter basis, Q1 SG&A costs were up approximately 10% from Q4, primarily due to the sales force expansion and higher clinical and regulatory costs.

R&D expense totaled $854,000 in the quarter, which is an increase of $170,000, or 25% from the prior quarter. The increase was due to higher costs related to developing the Flow Coupler along with continued expenditures on activities focused on expanding the indications for our Veritas technology, as well as improving the delivery system of our Peri-Strips.

Operating income was $2.2 million in the quarter, with an operating margin of 16.7%. Operating income was up 75% over Q1 of last year, when our operating margin was 11.3%. Interest income decreased to $339,000 in the first quarter, compared to $585,000, a year ago, despite us having comparatively higher investment balances in the current quarter. The recent and rapid decline in interest rates significantly lowered our interest income in the current quarter.

We continue to maintain an investment policy with the primary objectives of preserving principal and maintaining liquidity and to a lesser extent maximization of investment yields. To put the decrease in overall market rates in perspective, our money market accounts were earning on average slightly less than 1% at the end of this quarter. We were earning over 4% at the end of the first quarter last year, and we’re earning about 2% at the end of the fourth quarter.

Our income tax expense for the quarter was $916,000 at an effective rate of 35.5%, which is what we expect for the full year. Q1 net income was $1.7 million, or $0.14 per share, as compared to net income from continuing ops of $1.2 million or $0.09 per share last year.

And now the balance sheet, our balance sheet remains very strong. We have total assets of over $87 million, net working capital of $57 million and no debt as of January 31.

Of our total assets, we had $29 million in cash and equivalents, as well as $3 million of restricted cash and $33.1 million in investments. These total to $65.1 million in cash and investments, which is $5.65 per share, and it's down from $74.8 million at the end of fiscal '08. The $9.7 million decrease in our cash and investment balances during the first quarter of '09 is primarily due to the following.

First, we used $8.1 million to repurchase 496,000 shares of our common stock in the quarter. And with these purchases, we have completed our authorized 1 million share stock repurchase program. Second, the fair value of our six auction rate securities decreased to $5.3 million as of the end of the first quarter, down from $6.6 million as of the end of fiscal '08.

And third, our operating cash flows were close to break-even in the current quarter, which is in line with our expectations, as we use $2.7 million to pay year-end accruals, which included amounts for sales commissions, incentive compensation and stock repurchases that occurred right at the end of fiscal '08.

Last year, operating cash flow from continuing operations was near break-even for Q1, while we finished the year with more than $5.7 million in operating cash flow. We expect our fiscal '09, operating cash flow cycle to follow the same pattern with significant cash flow expected to be provided by operations for the full year.

Our accounts receivable are in excellent shape with day sales outstanding at the end of the quarter of 44 days, as compared to 45.5 days at the end of fiscal '08. Inventory levels at the end of the first quarter were consistent with levels we carried at the end of fiscal '08.

And now an update on our auction rate securities. Included in our total investments of $33.1 million are six auction rate securities, which at the end of the first quarter were recorded at their estimated fair value of $5.3 million. This fair value was estimated based on both an external valuation by a third-party valuation firm, and various internal valuations.

The par value of these securities is $9 million and as such we have recorded an impairment of $3.7 million as of January 31. The estimated fair value of our auction rate securities decreased by $1.3 million in the first quarter of '09. The significant decrease in the estimated fair value is due to the higher value placed on liquidity by the financial markets in response to the further deterioration of the economy in our first quarter, as well as the issuer of one of our security defaulting on its January interest payment.

In response, the January interest payment was made by the monoline insurer of the security, and we presently expect to continue to receive all interest payments when due from either the issuer of the security or the insurer. The issuers of our other auction rate securities have all continued to meet their interest payment obligations when due.

The distributing broker dealer who sold us our auction rate securities is a subsidiary of one of the largest five banks in the U.S., with this bank being the only one in that group that has not announced the settlement with its customers over the sale of auction rate securities.

During our first quarter, the State of Washington filed charges against our broker dealer, alleging violation of State Securities Laws as it relates to their sale of auction rate securities. The State of Washington is demanding among other items restitution at par value for all customers who purchased auction rate securities through our broker deal.

As to be expected, our broker dealer is disputing these allegations. While the future timing and outcome of these procedures is unknown, we view the actions of the State of Washington as an important step in any possible settlement to be made by our broker dealer. We believe the estimated fair value adjustments of our auction rate securities of $3.7 million is temporary, rather than permanent and recorded this adjustment as an accumulated other comprehensive loss in the equity section of the balance sheet.

As such, the fair value adjustment had no impact on net income or earnings per share in the quarter. The company continually assessed that the fair value of its auction rate securities, and the classification of the fair value adjustment as temporary. Based on facts and circumstances known at each balance sheet date, but these facts and circumstances could change materially in the future.

And now looking forward, as most everyone knows, we do not provide formal earnings guidance. However, in our conference call last quarter, we did provide our high level thoughts about fiscal ’09, and I would like to comment further at this point. We previously stated that we expected fiscal '09 revenue to grow between 20% and 25% over fiscal '08. While our Q1 growth rate was just shy of this range, we continue to expect revenue growth for the full year to be between 20% and 25%.

We expect all product categories to participate in this growth with the highest expectation of percentage growth being from Veritas. This growth expectation assumes that we are not impacted by the economic times any differently than we were in our first quarter and that the competitive landscape does not unexpectedly or materially change.

We continue to expect gross margin to be slightly about 70% for the full-year, largely depended upon product and geographic mix. We continue to expect operating expenses to grow in fiscal '09 at a rate similar to the revenue growth.

In our Q4 conference call, I stated that we expected the growth of these expenses to be waited towards the beginning of the year, but we now expect them to occur more ratably over the full year. We have been aggressive in managing expenses in our first quarter in light of the economy, but have spent where needed to further those efforts required to help grow revenues.

Key times driving expense growth in fiscal '09 will include the further expansion of our sales force, higher clinical costs throughout the year as we started variety of clinical studies and higher research and development costs. One quarter ago, we expected fiscal '09 interest income by quarter to be similar Q4 levels of about 485 brand, but this was based an interest rates holding at levels they were in the fourth quarter.

We now believe our interest income will be lower than previously thought, due to market interest rates decreasing significantly in the quarter as I have previously discussed. In the current quarter, our tax rate was 35.5% and we now expect the full-year tax rate to be in the range of 35% to 36%.

We remain committed to investing in our technologies and our sales force with the end goal of increasing our share in each of our main product markets. This will require a variety of investments here in '09, but should continue position Synovis very well for the future.

Now, I’ll turn the call back to Rich. Rich?

Richard W. Kramp

Thank you Brett. My discussion today will focus on the following five points. First, we have just finished a very strong quarter and are off to a good start for 2009. Second, the economy is a factor for every business including Synovis. However, procedures in which our products are used have not been significantly affected by the economy thus far. Third, the bariatric market is large and attracting new procedures and new products and get our Peri-Strips hit an historical high revenue mark this quarter.

Fourth, Veritas in the hernia market is moving ahead briskly, and we are investing in clinical studies to support future growth. Fifth and last, Synovis is moving ahead as planned, but cautiously evaluating the business environment and the reaction of our customers and markets we serve to the economic changes.

We are happy to report that Synovis started 2009 with first quarter revenue, which grew 19% and operating income up 75% over the year ago period. It was in fact, the largest revenue quarter in the history of the business. Yes, the times are challenging, but our people are meeting the challenge and performance was strong. This first quarter is the tenths record revenue quarter in the last 11 quarters.

The economy is on the mind of every investor and likewise on the mind of every business manager. It goes without saying that we are in challenging times and some businesses are more vulnerable than others. Brett and I have been traveling quite a bit to visit institutional investors and fund managers to tell the Synovis story. But also to hear what other companies are saying about the economy and what they are doing to safe guard and grow their respective businesses.

In general, we have been hearing that medical companies are faring better than non-medical companies. Also medical companies, which are not heavily dependent on purely elective surgical procedures, are doing quite a bit better than those that are.

Finally, medical companies that are selling primarily cost effective, therapeutic implantables and disposables as opposed to diagnostic devices or capital equipment items seem to be a least impacted by the slowing economy. The products of Synovis fall largely into this last category, and through the first quarter Synovis has experienced only minor effects on this business from the economic downturn.

For example, we are focusing our Veritas patch sales efforts on the complex ventral hernia market, although, we see also growth in the hiatal and breast reconstruction applications. Complex ventral hernia is by definition a recurrence of our previous repaired hernia, which has became infected and reherniated. It is one of the most challenging hernia repair procedures, but also one of the least elective.

Patients with the complex ventral hernia essentially must have it taken care of or face severe complications or even death. Therefore, this procedure is minimally if at all affected by a weak economy. With significant emphasis being placed on the sale of Veritas were complex ventral hernia; revenue hit an annualized rate of $6 million, up 86% quarter-over-quarter and 28% sequentially.

Our largest competitor in this market and the market is leader is LifeCell now a part of KCI with its human skin product AlloDerm. Cadaveric human skin has been used in hernia repair and commercial quantities for at least eight years. Therefore many clinical papers have been published in peer-reviewed medical journals documenting its performance. These papers point out both the strengths and weaknesses of processed human skin and reveal that it has a very high failure rate in cases where the implanted patch must bridge avoid in the abdominal muscle wall. Two papers put this failure rate at 80% and one concludes that AlloDerm should not be used in cases where bridging is required.

Veritas in this same application bridging an abdominal wall muscle void succeeds 85% of the time according to a clinical study, which we expect to be published in mid summer. This level of performance gives the surgeon a viable solution to a very difficult surgical problem. Clinical data published in peer-reviewed journals is an important adjunct to the [array] of tools, a sales person needs to appeal to the majority of surgeons who perform complex ventral hernia repair.

As a company, we are actively supporting the efforts of surgeons who have experienced with Veritas to assemble and submit the outcomes of those patients for a publication in medical journal. Furthermore, we are in the early stages of sponsoring a long-term prospective clinical study of Veritas for ventral hernia, a study, which will be conducted over the next two to three years with some interim reporting opportunities. We are also sponsoring shorter-term studies of Veritas in the hiatal and breast applications. We expect these studies will result in a powerful endorsement of Veritas for these applications.

Also to demonstrate the performance of Veritas relative to biological substrates of several of our competitors, we have undertaken a long-term in vivo study with intermediate check points to chronicle the remodeling characteristics, as well as compare the overall performance of the competitors patches to Veritas. We are making these investments because we believe Veritas is a superior product for ventral hernia repair and can gain significant position in this market.

Now, we will take a look at another of our growth products for this quarter. Our staple-line buttress material Peri-Strips Dry also known as PSD. As you know the main application for Peri-Strips is in gastric bypass surgery for morbid obesity. This is a large and growing market; however, the question of how we will be affected by the current economy is also important. Is obesity surgery elective or is it necessary. The answer is not as clear or straightforward as it is for complex ventral hernia, to be eligible for reimbursement for bariatric surgery a perspective patient must have a body mass index and index, which takes into account the persons weight as well as their height of at least 35 and must also have at least one comorbidity.

A body mass index also known as BMI of 40, qualifies the patient for surgery even without comorbidities. To give you an idea of what this means a person 5 feet 10 inches tall would have to be 90 pounds overweight to have a BMI of 35, or 130 pounds overweight to have a BMI of 40. Comorbidities [hosted] by the Centers for Medicare and Medicaid Services as associated with morbid obesity. Our type II diabetes, hypertension, coronary artery disease, osteoarthritis, sleep apnea, breast, colon, uterine, and skin cancer.

A study from the prestigious McGill University Health Center in Montreal, Canada, which was published in June of 2008, show that obese patients who had gastric bypass surgery had an 85% lower incidence of breast cancer, or 70% lower incidence of colon cancer, there were also lower rates for skin and uterine cancer, Non-Hodgkin's Lymphoma, type II diabetes, and heart disease.

A patient contemplating bariatric surgery would have to take into account all of these serious risks before making the decision to postponed or forego bariatric surgery. Further, a study published in the American Journal of Managed Care in September of 2008, reported that the cause of laparoscopic gastric bypass surgery was fully offset in 25 months by the cost of treating the comorbidities.

This is important information for insurance companies, but also important for patients who maybe concerned about the copay associated with the surgery. Since, the treatment for any comorbidities will likely result in comparable copays. In the final analysis, we do not know how may patients with expect the risks post by the comorbidities and postponed their surgeries, but we are inclined to believe that it would be a small percentage.

In addition to the economy, there are other dynamics in the bariatric market that are worth mentioning. Synovis manufacturers buttresses fit staplers made by Covidien and Ethicon Endo-Surgery. Historically both stapler manufacturers have taken is somewhat take it or leave it approach to the need for a buttress to be used with their staplers.

However, Covidien has just recently started selling a combination stapler cartridge with a buttress with the trade name Duet. Their buttress is a synthetic polyester material, which deteriorates when implanted in the body loosing much of a strength after the first two weeks of implant. Since gastric fluid leaks occur up to three or more weeks after surgery. This buttress would not seem to be addressing the most important purpose for a buttress namely to stop extremely costly gastric fluid leakage.

Although, we do not believe this buttress will meet the performance requirements needed to fortify a staple seem to prevent gastric fluid leaks in the stomach or air leaks in the lungs, a certain number of surgeons will try it due to the convenience of having a premounted buttress. We believe any impact on our buttress business will be temporary as surgeons experience inferior results compared to Peri-Strips.

The potential upside of this situation is that it is now apparent that a major stapler company as moved away from their neutral position and acknowledged that staplers alone cannot reliably create a leak free staple line. This may lead traditional non-buttressers to start using buttresses in their procedures.

On another point, reason press articles have reported on a procedure for creating a reduced stomach pouch in which instruments are introduced into the stomach through the mouth and the esophagus requiring no external incision. Once in the stomach the surgeon would grasp the wall of the stomach in several places with the intent of making a reduced stomach pouch thus mimicking the action of a gastric band, which is placed outside of the stomach.

This is one of the many new approaches to try to achieve the efficacy of the Gold standard Roux-en-Y procedure less invasively. Since this is a new procedure, it will be sometime before its long-term performance good or bad is clinically proven, at best it would seem to have many of the limitations of the gastric band, but it would avoid in external incision.

We do not see this as a threat to our business for the foreseeable future. As Brett reported our microsurgical business MCA was nearly flat this quarter, compared to a year ago. As you know this is unusual for micro, which has delivered many quarters of 30 plus percent revenue growth.

We feel the major factors affecting this quarter's results include inventory buildup of our micro and anastomotic couplers by many of our customers during this summer and fall months of 2008. We believe this was a reaction to are being and back order during that time due to an injection molding problem we had, which affected a plastic part which holds the coupler during shipments and in surgery.

That inventory buildup was then followed by the downturn in the economy, which motivated hospitals to reduce their on-hand inventory of disposable items to levels even lower than normal. The burning off this inventory together with a noticeable slowdown in the opening of new micro programs and hospitals around the country, and the lack of associated initial stocking orders had a dampening effect on the growth of the Coupler business in the quarter.

We would inventory levels of Coupler’s and hospitals to reach reorder levels during the second quarter. The economy may still have a slowing effect on the opening of new micro programs, but increased procedure volumes in existing programs may offset much of this lost sales opportunity.

The positive side of this remains, that the underlying driver for the Coupler business, namely the perforator flat procedure for breast reconstruction in cancer victims continues to grow. This is another procedure, which we would believe to be isolated from the general economic conditions. After all here is a patient who has just battled cancer and won, has certainly paid their deductible in the process and now wants to complete their cure and feel whole again.

Looking at another factor affecting the first quarter revenue, MCA represents a high-end microsurgery instrument line, which sells for premium prices because it is better than other instruments. It is however treated more like a capital item than a consumable item and as purchased out of what is known as an instrument budget in the hospital. That budget is often very low or fully depleted towards the end of the calendar year and as again funded in January allowing new purchases to be considered, this together with a delay and the availability of the manufacturer’s new catalog has contributed to a sharp decline in instrument sales in the first quarter.

The funding of the instrument budget maybe affected by the economy, but the instruments will still be needed and sales are expected to recover as the new designs become available. This is not a large part of our business, while we considered an important product line for our micro surgeon customers.

We have completed the plant additions to the micro sales force and expect to fill two other physicians by the end of March created by turnover in the first quarter. We will then have nine full-time direct sales people in the field together with a full-time sales manager. We believe the increased coverage provided by the expanded micro sales force will result in top line growth and profit contribution in the last half of fiscal 2009.

Normally, we do not say much about our Tissue-Guard product line in these quarterly updates. And I will not deviate too much from that today. These products represent steady reliable revenue and have done so for many quarters. They have a well-established clinical history and a reliability record second to none. I mention that now because the procedures in which they are used, brain operations for Dura-Guard carotid endarterectomies for Vascu-Guard and finally septal defect closure in the heart as well as pericardial closure around the heart for Peri-Guard are all necessary non-elective procedures. We therefore expect these products to continue to generate revenue inline with a respective market growth rates.

Looking at the company as a whole we are fortunate that the majority of the procedures in which our products are used are life sustaining or life saving procedures and they either save time or money or both for our customers. Synovis laid out plans for growth in 2009 and we have executed well this first quarter.

Our new sales people are on Board and initial training is complete and ongoing training is in full swing. We expect these new additions to our sales team to become fully productive during the third quarter after about six months of learning and relationship building, as have their predecessors.

We are making progress with our in vivo hernia studies and we will have some ex-plans to study early in the third quarter. We are preparing the protocol for the clinical hernia study and identifying potential centers and surgeons. We have taken a little more time with this effort to be sure we can centers with the efficient research capability and have a protocol with which all can comply and which will capture the data to give a clear picture of product performance. Progress in our manufacturing and shipping areas is really exceptional.

Lean techniques are being implemented and are positively affecting gross margins. Working on R&D group is increasing and we’ll continue to do so as we explore new applications for Veritas and continue to support in vivo studies of product performance for quality, regulatory and sales needs. Our regulatory and clinical groups are also very active supporting the clinical studies already mentioned and seeking approvals of our products in new geographic markets.

Our CE Mark submission for hernia was submitted during the first quarter and we are anticipating a response in the third quarter of this fiscal year. This approval will open up European market to our Veritas patch products. We remain interested in augmenting organic growth through acquisition of synergistic products or businesses; a significant effort is being devoted to discovering a good opportunity at a reasonable price.

At this time the low valuations placed on many companies are not comparable with the higher expectations of their owners or managers. However, we remain hopeful that the economic additions may bring the two into alignments in the next few quarters. The AV fistula and the Flow Coupler are making good progress, albeit a little behind plan and each program has achieved some important milestones in the past quarter.

The expected submission dates for the fistula application in the Flow Coupler are now in the third quarter. Work on the myocardial patch projects enters a new phase this year, as we start testing in an in vivo model, which mimics the patient’s heart post heart attack. We have initiated discussions to potentially carry on in vivo studies in Europe and parallel with those being conducted in the United States with intent of being positioned to pursue approvals according to the mandates and schedules of the respective regulatory authorities when the time comes.

That concludes our update for the first quarter of 2009, we would be happy to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from line of Stan Manny from Manny Family Investors. You may proceed.