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RTI Biologics, Inc. (NASDAQ:RTIX)

Q3 2009 Earnings Call

October 28, 2009 9:00 am ET

Executives

Wendy Crites Wacker - Director of Corporate Communications

Brian Hutchison - Chairman and CEO

Tom Rose - EVP and CFO

Analysts

Shaun Fitz - Stephens

Matt Dolan - Roth Capital

Bill Plovanic - Canaccord Adams

Greg Brash - Sidoti & Company

Jayson Bedford - Raymond James

Brooks West - Craig-Hallum

David Turkaly - SIG

Matt Arens - KOPP Investment Advisors

Operator

Welcome to the RTI Biologics Q3 earnings conference call. As a remainder today’s conference is being recorded. At this time I’d like to turn the conference over to Wendy Crites Wacker. Please go ahead.

Wendy Crites Wacker

Good morning and thank you for joining RTI Biologics for our third quarter 2009 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 result.

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.

Brian Hutchison

Thanks Wendy, good morning everyone. As you saw in this morning's press release we've exceeded great consensus in revenues and income for the third quarter. We've achieved quarterly revenue of $42.8 million, a new record for RTI Biologics. We've also achieved net income of $2.3 million or $0.04 per diluted share for the quarter. This result represented the third consecutive quarter of increasing revenue.

As we review the quarterly highlights please note the following. Sports medicine revenues increased 8% in the third quarter and 4 % for the first 9 month compared to the same period last year. The quarterly revenues were impacted by the seasonality we see in Sports medicine in the third quarter of each year as fewer surgeries occur during the summer months.

In addition, we began seeing evidence of some softening in sports medicine surgery. We are attributed this to the continued economic slow down, high unemployment rate and related delayed surgeries.

We finished the third quarter with about 36 direct distributions staff, plus a small numbers of independent distributors. We continue to actively monitor and invest in areas where coverage is needed to ensure that we best meet our surgeons need. Over the past quarter our expanded distribution personnel added more than 150 new accounts.

We plan on adding personnel as needed during the fourth quarter and into the first half of 2010 to provided additional coverage around the country. Surgical specialties have been the strongest area of growth for the company for the entire year. Revenues were $8.4 million for the third quarter, which is a 61% increase over last year and a 32% increase sequentially over the second quarter of 2009.

For the first nine months, revenues of $19.6 million represented 41% increase on pro forma basis. For the third quarter and first nine months, the most significant growth rates in our domestic surgical specialties line are in hernia repair, with a 151% growth over the third quarter of 2008 and 148% growth over the first nine month of 2008 on a pro forma basis.

Our ability to improve tissue supply to Davol our distributor in this area has led to exceptional growth every quarter since our merger with Tutogen last year.

In July we announced that we expanded our distribution and supply agreement with Davol a subsidiary of C.R.Bard. The agreement extends Davol’s exclusive worldwide distribution rights for dermal allografts for use in hernia repair for 10 years with options to renew. Under the agreement, we are supplying Tutoplast sterilized dermal allografts for exclusive worldwide distribution by Davol for breast reconstruction application.

In the third quarter, we shipped initial launch quantities to Davol and increased breast reconstruction revenues more than 66% over Q3 in 2008. Our bonegrafts substitute's revenues were up 29% for the third quarter. The increase related to higher export orders from international distributors and a successful launch with Stryker.

International revenues, which include export revenues and distribution from our German and French locations are up 8% for the third quarter and up 10% on a constant currency basis. In the third quarter our German subsidiary, Tutogen Medical GmbH has dealt with challenges resulting from some article in the international media that significantly misrepresented information about their operation. This is a prime example of the sensational journalism that the industry occasionally faces due to lack of knowledge and understanding.

Tutogen operates under very strict regulation in the countries in which it operates. The Company is in inspected regularly by both European and American authorities, including US FDA and they remain in good standing with all of the organization.

Although all these articles are troublesome, due to Tutogen’s excellent long-term reputation, we have not seen a significant impact from these articles on our international business or on our ability to help patients with safe, sterilized tissues around the world.

At this point I will let Tom discussed our financial results.

Tom Rose

Thank you Brian. Revenues for the third quarter of 2009 were $42.8 million, an increase of 11% over the prior year. Revenues for the first nine months were $122.6 million an increase of 12% compared to the prior period. On a pro forma basis reflecting Tutogen Medical revenues for the entire nine months, revenues increased 4%.

Third quarter net income was $2.3 million or $0.04 per share based on 55 million fully diluted shares outstanding. This compares to the $388,000 or $0.01 per share in the prior year, based on 55.7 million fully diluted shares outstanding.

Net income for the nine months was $4.4 million or $0.08 per share based on 54.7 million fully diluted shares outstanding. This compares to net income of $2.5 million or $0.05 per share in the prior year, based on 50.4 million fully diluted shares outstanding.

Spine revenues were $10.9 million for the third quarter and $31.5 million for the first nine months, representing a decrease over 1% and an increase of 6% respectively compared to the prior year period.

On a pro forma basis Spine revenues were up 5% for the first nine months. During the quarter and nine month period unit volumes were down 7% and 2% respectively. The decrease in quarterly revenues in unit volumes compared to the prior year reflects shipments of initial launch quantities of new implants totaling $550,000 to two distributors in Q3 2008.

Sports medicine revenues were $9.5 million for the third quarter 2009, and $29.2 million for the first nine months, representing increases of 8% and 4% respectively, compared to the prior year period. Unit volumes increased 16% and 3% respectively.

We saw an abnormally high season of decline in surgery in July and August. Last September came in close to our expectations.

Dental revenues was $7 million in the third quarter 2009, and $21.6 million for the first nine months, representing a decrease of 11% compared to the prior years quarter and decrease of 12% on a pro forma basis for the first nine months.

Our declines in dental are closely related to the performance of our exclusive distributors. In general most of the decline is related to fewer implant procedures being performed at patients the first surgery.

Surgical specialty revenues were $8.4 million in the third quarter 2009 and $19.6 million for the first nine months, representing increases of 61% and 67% respectively compared to the prior year period.

On a pro forma basis revenues increased 41% for the first nine months. The increases were substantially driven by a higher amounts of tissue available for distribution, as well as favorable mix in price increases. Unit volume increased by 7% for the quarter and 32% for the nine months period.

Brian had previously commented on a significant growth rate with Davol during the quarter as we entered the expanded relationship with them for hernia and breast reconstruction implants. During the quarter, there were stocking orders by Davol for both businesses that we estimate to be in the $2 million range.

Revenues for bone graft substitutes were $3.9 million in the third quarter 2009 and $11.5 million for the first nine months, an increase of 29% and a decrease of 2% respectively compared to the prior year revenues.

Unit volumes for the period increased by 21% and 27% respectively, but were offset by unfavorable changes in product mix. The increase in volume include a launch in the quarter of a new BGF implants for Stryker and the significant change in product mix reflects our new paste implants in dental, which range from 1.5cc to 2cc units with very low ASP.

Revenues for general orthopedic implants were $1.9 million in the third quarter and $5.5 million for the first nine months, similar to the prior year levels for the quarter and an increase of 2% on a pro forma basis. The largest component of general orthopedic revenues is non-dental distributions throughout Europe via our international operations.

During third quarter, we saw a seasonal slow down in orders from European distributors and continued price pressures from competitive products, which negatively impacted revenue.

Our combined international revenues include export distribution as well as distribution from our German and French location. International revenues were $5.4 million in the third quarter and $17.2 million in the first nine months, representing an increase of 8% for the quarter and a decrease of 6% on a pro forma basis for the first nine months compared to the prior year. Currency exchange fluctuations had a negative impact of $229,000 on revenues in a quarter and $1.5 million in the first nine months compared to the prior year period.

Gross margins for the third quarter 2009 was 48% compared to 47% for the same time period last year. As we have discussed in the past our highest gross margin contributors are dental and sports medicine where we have direct distribution to end customers.

The next highest contributor to the gross margin was the outside US distribution of our German location. As these distribution declined as the percentage of the total revenues in Q3 as they have done throughout the year, we see a negative impact on gross margins. Changes in product mix during the quarter resulted in a 2% decline in gross margin compared to Q3 of 2008.

In the third quarter operating expenses totaled $17.1 million, a 1% decrease over 2008. During the quarter fixed costs included in marketing, general and administrative expenses totaled approximately $10.7 million, representing a decrease of 2% compared to the prior year.

During the quarter variable incentive compensation was $250,000 and variable distribution commissions totaled $3.9 million.

Research and development expenses for the quarter totaled $2.2 million compared to $2.1 million in the prior year. The increase in R&D spending for the period was primarily driven by the timing of expenses on various research studies and process. During the quarter we recognized a loss on FX translation for $221,000 as the euro stands against the dollar.

Lastly our tax rate for the quarter was 27%. The quarterly tax rate was [totally] impacted by a non-recurring adjustment to our research and experimentation tax credit. We estimate the full year tax rate will be 33%.

While reviewing the balance sheet at the end of the quarter, compared to December31, 2008; and cash flow for the first nine months of 2009, please note the following, our cash position at the end of the quarter was $20.4 million compared to $20.1 million at December 31, 2008.

Accounts receivable increased to $16 million as compared to $14.7 million at December 31, 2008.The sales outstanding was 37 at the end of the quarter.

Inventories increased to $92.3 million compared incurred to $75.2 million at December 31, 2008. Inventories to day outstanding on total inventory with 340 at the end of the third quarter. At September 30, 2009, unprocessed donor tissues totaled $27.2 million, tissue in process totaled $43.5 million and implantable donor tissue totaled $28.1 million.

During the quarter, we recognize an increase in inventories, totaling $3.6 million, unprocessed donor tissue increased $2.3 million, primarily related to tissues for surgical specialties and general revenue categories. In addition implantable donor tissue increased by $1.3 primary related to sports medicine implants.

Working capital at the end of the third quarter totaled $105.7 million, an increase of $15.5 million from December 31, 2008. Total debt is approximately $11 million.

At September 30, 2009 we had approximately $5.2 million available under lines of credit. For the remainder of 2009, we plan to be cash flow positive from operations and we are confident that with the current cash balances and the available credit we've adequate liquidity to support future operation.

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

Brian Hutchison

Thanks, Tom. I would like to reiterate our original guidance for the full year revenues for 2009 should be in the $166 to $168 million with earnings per share expected to in the range of $0.11 to $0.13. EPS is based on 55.1 million fully diluted shares outstanding.

Our diversified distribution model allows for more stability in our overall business as we had anticipated. As we're seeing this year, the diversity of our line of business allows for greater balance of slowdowns in some markets while grow in others.

We are completing our planning cycle for 2010 and we remain cautiously optimistic as we keep an eye to the progression of healthcare reform and the proposed medical device tax, as well as the health of global economy.

At this time let's open up to questions. David?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We will take our first question from Shaun Fitz with Stephens.

Shaun Fitz - Stephens

Brian, Tom, just as we think about surgical specialties, obviously a great quarter here. We’ve heard some commentary from your largest competitor that they are in a supply constraint situation as it relates to demand and so is it safe for us to assume that you all are benefiting both on the supply and demand side, as they grapple with some of those issues and if so how sticky due you think those relationships are on both the supply and demand side?

Brian Hutchison

Well, one the supply side, this is Brian, on those supply side I think that RTI is in the best position it's ever been. You seen our inventory climb all year long and that has been reflective of us bringing in additional donated tissue that will help us in future quarters and near. So I feel very good about that and I feel very good about our position as it relates to our relationship with our supply going forward. So I feel we are in the best position we've ever been in there.

On the demand side it varies. We feel very, very good about the demand that’s going on in many of our market, but we are also a little cautious and we certainly are the one of the most cautious where it's dental. The economy has not turned around there yet, unemployment still very high underemployment is high. So we are not seeing that come back yet. It appears to be stabilizing but not coming back yet.

On the sports side we have that on the watch list there all time. So we are watching that carefully at this time. So everywhere else we are being able to line up supply with demand at this point in time. So, we feel pretty good.

Shaun Fitz - Stephens

Okay, okay. Thanks Brian. Then just on the sports medicine segment Brian, you guys talked about kind of double whammy here, a bit of normal seasonality and then may be something a little beyond that is function of the micro economic environment. Could you may be just flush out, what it is that you are seeing, that you think is attributable to kind of the micro situation and then may be provide some commentary in terms of the pace of your business, you've seeing through October and how that relates to what you saw in the third quarter?

Brian Hutchinson

Sure, what we are seeing in our, what I will call, deferrals, where patients are, they know they have an injury, they know they need to fix it, but they are either worried about taking time off or even just worried about their health insurance situation. So, they are basically telling the doctor yes, I know I am injured, but we are going to wait and we’ll have to wait till things improve or until if they are outdoor workers, until the weather turns such that they can do their outdoor work and then they'll get the surgery done. So, it’s not that, we are not losing cases that are not going their way. These are people who are just differing surgeries and we are seeing it everywhere.

On the longer term cycle, as Tom said in his comments, July and August were soft, September looked to be a nice comeback and October appears to be fairly good as well. So, we are going to continue to watch it through the fall and see how things go. The next time when we’ll see any kind of impact would be the holiday time and we will just have to keep an eye on it.

Shaun Fitz - Stephens

Okay. Thank you, Brian. Then last question, I guess as we think about 2010, the biggest wildcard I guess continues to be dental. We are seeing some commentary from some of the larger dental players that suggest the procedural volumes had stabilized. Is it safe to assume that kind of what we saw in the third quarter from a dental revenues standpoint is maybe a base that you guys can build off that as we progress into 2010

Brian Hutchison

That’s what I am hearing as well Shun, so that would be nice if that were the case.

Operator

We move on to our next question from Matt Dolan with Roth Capital.

Matt Dolan - Roth Capital

Just a follow up on the breast role out, it sounds like there was two million of stocking orders for both breast and hernia. So first of all should think about that base as two million less then why you reported in terms of modeling going forward and then, secondly may be just a question on initial phase of the breast role out, what are you hearing from the end user level and in terms of possibility to get in there with their general surgery cover point.

Tom Rose

Matt this is Tom and I think the as you look at the base to work out from, obviously that’s the reason we mentioned what are our estimates were of that stocking order in Q3. So your assumption there is correct. With respect to the how Bard and Davol is doing in the breast area right now, we obviously have dialogues with the company, but now they did have quite a bit of several comments in their conference calls, which indicated that they were having a very positive reception in the market place and more optimistic about it. So I guess, I am just going to echo their comments on that, but they are committed obviously to that market and so also the synergies between hernia and breast reconstruction as they're dealing with the purchasing areas of the hospitals were part of the potential going forward.

Matt Dolan - Roth Capital

Okay great, and then on the sports side of thing, are you still planning on adding five to ten reps into the end of the year?

Brian Hutchison

Yes at this time yes.

Tom Rose

I would say, probably that the end of the year its that the end-year is pretty close or probably five is the approximate number we will be able to add and as we go to next year Brian had mentioned that we will continue to add next year. That’s where we'll probably looking at another five may be a size ten for next year.

Matt Dolan - Roth Capital

Okay, and then Tom maybe some more commentary on gross margin. You gave some in your prepared remarks but going forward the gross margin appears to be one of the big components of driving earnings over the long-term. Can you talk about just a trajectory there? What you are expecting to see relative to mix, in Q4 then into next year?

Tom Rose

Well, the trend and mix that we are seeing for first nine months, will probably continue in to Q4, and we hope as we do our planning for '010 that obviously with down markets hopefully getting to a growth level versus a decline will help and, we continue to be very optimistic about our sports medicine business.

So, as we look out our goal as we talked about in the past is to see continuous improvement in gross margins in the next few years and the primary drivers was continue to be the leverage on the fixed cost as top-line grows. We have additional opportunities to improve the gross margin percentages as we improve yields specifically in the surgical specialties area. So, again the goal continues to grow gross margin and but the key driver as we go forward, as you mentioned, one is mix but also is, the leverage of the fixed cost.

Matt Dolan - Roth Capital

Right and then just finally a broader question, on your long-term growth outlook, you mentioned you’re cautiously optimistic about 2010, if you just maybe take a step back and think about the Tutogen merger, I think we discussed improvements or acceleration in revenue growth rates once the businesses were integrated. Clearly, there’s been some headwinds on '09 but can you, maybe update us or talk about your long-term growth outlook and what the real underlying growth rate should be for your business barring any major macro events?

Brian Hutchison

Sure Matt, this is Brian. When we did the merger, I really believe that in the environment we were in, the 20% plus growth on the top line was achievable. I would say based on those, a macro environment and the prognosis of what that looks like going forward not just for next year but for future years, I would temper my growth rate down to 10% to 15% depending on the markets you’re in, as being good, because we just don’t know exactly what’s going to happen now. There will be spots like right now in hernia where we are seeing great growth, I think that will continue but I think in more established markets like spine and some of the other markets. In fact we see what these impacts have on those surgeries, but at this stage, I would say our blended rate could certainly be between 10% and 15%.

Operator

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

Bill Plovanic - Canaccord Adams

Good morning. I will focus here on surgical specialties. A couple of questions, first of all did we assume that the stocking orders shift mix was probably half to hernia and half to breast. Is that a fair assumption?

Tom Rose

I mean that’s a good estimate.

Bill Plovanic - Canaccord Adams

Okay. Then can you give us a little more color on, you mentioned that while revenues were up, units were only up, I think, 7% year-over-over. Can you just explain the difference why, what exactly is going on with shift?

Tom Rose

Sure. Well in both the hernia and the breast reconstruction market, a key driver of growth and market shares for the distributors is the ability to deliver large size pieces of tissue and even though we had success in growing that business since the merger with Tutogen, it wasn’t till our sourcing efforts of late last year and early this year, kicked in where, you know what, we now have the ability to meet the demand for these large sizes and as Brian mentioned, we are very comfortable with the sourcing activity that we have right now and how they match to the market place, but the reason for much higher volume with lower unit revenues all has to do with the size of the pieces of tissue that created the mix for that quarter.

Bill Plovanic - Canaccord Adams

At this point, we if we look at the larger sizes are 30% of the units driven from the bigger sizes, 50%, 80%. I am trying to figure out where we are in this cycle on shift to the larger sizes?

Tom Rose

I would say that you know probably, 58% or 70% are large sizes now.

Bill Plovanic - Canaccord Adams

Okay and good, and then how should we expect this to play out, you start for the breast now, and the sales ramp up, are they minimum purchase orders that you have or is this going to be kind of lumpy the first quarters out of the box for this?

Brian Hutchison

Bill this is Brian, my guess is that it is not going to real smooth as we get going, but throughout the next two quarters, I think you will start to see the base line established as we together, determine how they attack the end market. So I guess the translation is a bit lumpy but I think the projections for the next year are very strong.

Bill Plovanic - Canaccord Adams

Are there any minimums built in to those contracts?

Tom Rose

Yes there are Bill, and we haven’t discussed those publicly but the minimums for the next couple of years are well above the market growth rates.

Bill Plovanic - Canaccord Adams

By that, the minimums I would assume are a annual not a quarterly, is that fair?

Tom Rose

That is correct.

Brian Hutchison

That is correct.

Bill Plovanic - Canaccord Adams

Okay good and then just a last, typically you share with us how large your largest distributor, what percentage of your revenues your largest distributor is? I was wondering if you would be willing to share what that is?

Tom Rose

Yes, I am going to draw it down to just our spine business first, our largest distributor was about 80% of the spine business in the quarter, and overall for the quarter, let's see, because I don't have that number but I think I kept in the computer. It's about 80% for the quarter.

Brian Hutchison

80% of the spine revenues, so they are still the dominant distributor overall.

Operator

Next we will go to Greg Brash with Sidoti & Company.

Greg Brash - Sidoti & Company

Just curious, you wanted to start the OEMs in Ophthalmology space, Symmetry Medical. We're seeing some of the distributors cutting back inventory in the last several weeks. You are maintaining guidance here, so is safe to assume you are not seeing any of this.

Brian Hutchison

This is Brian, I've been in orthopedics for a longer time and at this point of time and I've always said if you want to get a guidepost to want is going to happen in long-term large joint orthopedic companies, bought Symmetry its because sort of a leader in that space in terms of what is going to happen.

We are not seeing a inventory pushback but that's the caution that we continually listen for, especially when you get to the end of the year and that it can happen at almost anytime. So our ears are open for it, we're listening for it. We've not seen yet, but we know that all our distributor and partners are talking about inventory reduction plan. We know that it's out there.

Greg Brash - Sidoti & Company

Okay. Is pricing holding up? I know, I mean why are these distributors are facing pressure on their own end. Do you have contracts in place? Is there is no chance on renegotiations in 2010 that you made, lose a couple of percentage points on price?

Tom Rose

Pricing is holding is up. Most of the pricing is, as you just mentioned in place, at least for the next year. So, in all the areas in the US markets were seen pricing, I did mention in my comments that where see some competition which was causing some price competition in Europe, but now as we go forward and look out our plans for next year, our major renegotiation for next year is going to be with Zimmer dental. That contracts expires late in Q3 of next year and we hope that we will be able to improve our pricing position through that renegotiation. That’s one of our goal.

Greg Brash - Sidoti & Company

Okay and then on sports med side, just curious how the transition perhaps is progressing. Any trouble redirecting your tissue supplier or retaining all the accounts that you were using through the independent distributors or is some of the weakness we are seeing now, is that just pretty much all deferrals?

Brian Hutchison

No it's all deferrals. The transition is going very, very well at this point. We are just continuing to add people strategically and we’ve been able to projecting that to our portfolio of customers and it's gone very, very well.

Greg Brash - Sidoti & Company

Okay, one final question just on your inventory. Obviously you have sort of some extra supplier out there that you are able to take hold of and it's your surgical specialties business. Do you look at this point, has it leveled out, you try to grow your free cash flow are you are just going to keep bringing in some of the supply because the demand is there?

Brian Hutchison

That’s a great question and I’ll tell you that for 2010, so were the rest of this year and for all of next year, I would say for the next 18 months, we are going to put on a major product, major program inside the company to actually reduce overall inventories. So we believe our inventories have gotten too big and we need to work it back down somewhat. So, we will be doing some of that. Nothing draconian, nothing to too rapid, because a [blitz] on either of the revenue side are doing well, but we are going to be putting in programs in place and management will guide it to try to do everything we can to try to turn some of that into cash.

Operator

Next we’ll go to Jayson Bedford with Raymond James.

Jayson Bedford - Raymond James

Good morning. Just, a couple of follow-on questions. Just, sports medicine, are you confident that you are not losing any share?

Tom Rose

Yes, we’re really not.

Jayson Bedford - Raymond James

Okay, so it is pretty much a procedural issue more than any thing else?

Tom Rose

We are monitoring that city by city and that's what it is.

Jayson Bedford - Raymond James

Okay, on the SG&A line, you’ve showed some nice leverage growth year-over-year and sequential. I am just wondering, where to that leverage come from. Did you take cost out from somewhere or it was 2Q just kind of bloated due to other expenses?

Tom Rose

Well, I think the part of the leverage we’ve even mentioned in the last couple of quarters that we had some fairly significant litigation cost, primarily related to patent litigation and that was significantly less this quarter. I think, the leverage though in the operating expenses we are seeing and then again I focused on the fixed cost versus the variable, which is primarily distributor commissions.

We are seeing quarterly and year-over-year declines and part of that Jayson has to do still with some of synergies, filtering in post merger that we know are going come in this year. On the other hand, as we look in to the fourth quarter, we look into the 2010, as we discussed in the past we still believe we can significantly leverage those fixed operating expenses and try to hold them to with little growth as possible for the next few years.

Jayson Bedford - Raymond James

Tom, the legal expenses you mentioned. Are those now finished or it will those kind of kick up again going forward?

Brian Hutchison

We hope they don’t kicked up, we hope they are finished. Of course you never know when something is going to come at you, but we expect that we’re in pretty good position right now.

Jayson Bedford - Raymond James

Okay. On a dental business US versus OUS growth are you seeing one geography exceed the other?

Brian Hutchison

Not really and I did see what Zimmer reported in their numbers but we’re really not seeing that at this point of time. We are just seeing, what I would say is stabilization in both market.

Jayson Bedford - Raymond James

Okay. Then lastly from me, just looking on at the kind of the implied fourth quarter revenue guidance, what would make you achieve the top 10 in that, meaning where would we see the acceleration?

Brian Hutchison

Sport and pick up in dental bigger than what we expect, that would do it.

Operator

Next we’ll go to Brooks West with Craig-Hallum Capital.

Brooks West - Craig-Hallum

Brian on Medtronic with their product refresh in Spine, can you update us on what new products you’re seeing there and how that might play out going forward?

Brian Hutchison

We’re actually not able to tell you what products we launched with them, based on our relationship with them. They prefer us not to do that. So we’re really, we’re working on new products. Some have gone out, some will go out, but we can't say anything more then that.

Brooks West - Craig-Hallum

Okay, and I mean that has been your oldest almost stale product line and so it does sound like that the [refreshes] is starting?

Brian Hutchison

It’s well underway.

Brooks West - Craig-Hallum

Okay. Then on the going back to the inventory questions with the last ortho partners, inventory management has been a consistent theme with all the large companies over the last couple of quarters. Do you really feel like this a lot of downside left for you in terms of taking the inventory down in some of your distribution partners?

Tom Rose

As we talked about in the last 18 months Brooks, almost all of the larger distributors have been reducing inventories and they are down to historically low levels. So there’s not much more room for them bring down but, on the other hand [we added on a new year piece systems] and managing the inventories we continue to see, we continue to have discussions with them on an inventory levels and where they have to be in this part of the business.

Brooks West - Craig-Hallum

Okay, are you seeing a greater focus in any one product category I mean spine versus bone paste to anyone else or is it kind of across the board?

Brian Hutchison

We are seeing it everywhere, everyone even on our direct businesses we are seeing pressure to have lower level stored anywhere.

Brooks West - Craig-Hallum

Okay. Brian on the sports medicine you continued to have reps. Do you feel like there are running a big holes in your sports medicine coverage whether geographic or otherwise?

Brian Hutchison

There are nothing I would describe as big, but there is a lots of opportunities that we’re not seeing yet. There's just a bunch of territory that we are not in right now, that we have opportunities and so we will continue to progress with due caution and try to be as prudent as we can, but we want to keep moving forward.

Brooks West - Craig-Hallum

Okay. Then last for me, Zimmer, can you give some update on the progression of the bone paste launches there?

Brian Hutchison

Well, Toms as in his remarks, definitely, the general line is moving and moving well which drives a lot of units and not a lot of dollars per unit. So the good news is out there and it is working quite well. The rest of their business is launching product now and through the first quarter. We really don’t know exactly how far it’s penetrated, their groups and truthfully, the real thing to watch for will be what happens in 2010.

So far, the entire product line is there, it’s ready to go. We just want to see how fast our reps get trained across all of their businesses.

Tom Rose

Yes. Brooks, as I mentioned in my comments, our most significant event in the quarter in bone graft substitute, was launching the first bone graft substitute product with Stryker. We’re hoping that product and material will lead to an expanded portfolio on bone graft substitute products with Stryker, as we go forward. So we are excited about that.

Operator

We do have time for one final question. We’ll take our final question from David Turkaly with SIG.

David Turkaly - SIG

Just quickly, can you tell us about your mix from xeno was actually in the quarter?

Tom Rose

Dave, the mix internationally, which we talked about the past continues to be in the range of 35% to 40% of the business overseas. In the US for the quarter, our xenograft revenues were probably in the range of 3%.

David Turkaly - SIG

Could you remind us of any of the products that may come here near-term or in 2010?

Tom Rose

In the xenograft area we continue to get approvals from the FDA on bovine pericardium product for a number of different applications and we have some 510-Ks with the FDA right now. So, that’s the primary focus of introducing new products. We had a product approved in the quarter up again bovine pericardium for ear, nose and throat applications, which again is a starting point That the one material that we distribute a significant amount of in European area, but other than in dental we're not distributing that in the United States today. So I think that’s our primary focus. We have no other products in development but that what's going for the next 10 or 12 months.

David Turkaly - SIG

Then just last, just the ENT agreement, how many reps are actually selling that or will sell that product now?

Tom Rose

You know, ENT agreement right now is with an emerging company, calls ENTrigue. I can't tell you the exact number of reps they have. The ENT revenues is their first under that agreement late last year. We are developing new products with them for the portfolio, they design applications and so I guess. I can't tell you the exact number of people they have in the field, it's not that significant.

Operator

We do have one more question from Matt Arens with KOPP Investment Advisors

Matt Arens - KOPP Investment Advisors

Good morning, first of all congratulations on a nice quarter. I wanted to ask two questions if I could. One, I just want to really clarify on this point about what you are seeing in sports medicine, what we are hearing from other companies in this area, and I think what we are hearing from you, is that through July and August things remained challenging, you saw improvement in September and October. I just want to make sure, are you seeing a worsening in the environment, are you seeing stability?

I am just trying to figure out if it is, what we are hearing from you, is consistent with what we are hearing from other people that things are not certainly firing on all cylinders and that things are stable and we may be setting up for some improvement as we go forward?

Brian Hutchison

You're read is correct Matt, we are seeing it stable, and the early indicators are that it is going to get better.

Matt Arens - KOPP Investment Advisors

Great okay good. My another question in a different area here, last year you had provided a slide with some interesting R&D projects, and some things you are working in that areas. We haven’t seen an update on that in a while. Is that just from a communication stand point, you are not choosing to update some of those earlier projects that could lead to revenues down the road?

Are you seeing, those products continue to move forward and are those things that we are going to be hearing more about? Obviously the put side of that is, have some of those products been discontinued and killed and that’s the reason we aren’t having an update there , may be you could just speak to any thing that you can update on that area and how you are going to communicate developments in the pipeline going forward?

Brian Hutchison

Thanks for that Matt, I would say number one, we have not stopped working in products development. In fact we've added to it throughout 2009 and we have focused it.

We've intentionally not talked about things publically for a number of reasons, one being that our industry is full of very, very fast followers and we've provided lot of innovation in this industry and dropped a lot of good ideas to other people, so we're trying not to do that right now.

We are deeply in discussion with some new partners, on some new products. We are very close; I would describe it as close to launches on some of our newer products. In terms of some of our [deeper science], we've made tremendous progress in 2009. We're extremely excited about it internally, but one of the things as you know we struggle with, is communicating it to the street without sharing too much information.

So, we're working on something that we've plan to, used to talk about this more in Q1 and Q2 of next year but I would say it's a work-in- progress in terms of the communication tool.

We are in animal studies with various products. We're in doing some small human case studies with some products. We are doing a variety of things but none of the developments have stopped and some of these things are pretty exciting for us.

Matt Arens - KOPP Investment Advisors

Great and I was hoping that was the case. Thanks for taking my question.

Operator

I feel sure we have no further questions at this time and I'll turn the call back over to Brian Hutchison for any additional comments or closing statement.

Brian Hutchison

Thank you and thank you all for joining us this morning and as always you can find out more information about RTI by contacting our IR department. Thanks, take care.

Operator

That does conclude today’s conference and we thank you for participating.

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Source: RTI Biologics, Inc., Q3 2009 Earnings Call Transcript
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