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RTI Biologics, Inc. (NASDAQ:RTIX)

Q1 2010 Earnings Call

April 28, 2010 9:00 am ET

Executives

Wendy Crites Wacker - Director of Corporate Communications

Brian Hutchison - Chairman and CEO

Tom Rose - EVP and CFO

Analysts

Shawn Fitz - Stephens

David Turkaly - SIG

Brooks West - Craig-Hallum Capital

Bill Plovanic - Canaccord Adams

Greg Brash - Sidoti & Company

Neil Gagnon - Gagnon Securities

Operator

Welcome to the RTI Biologics Q1 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operations instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference Wendy Crites Wacker, Director of Corporate Communications. You may begin.

Wendy Crites Wacker

Good morning and thank you for joining RTI Biologics for our first quarter 2010 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'll turn the call over to Brian Hutchison.

Brian Hutchison

Good morning, everyone. As many of you saw in our press release this morning, we reported quarterly revenues of $37.8 million with a small net loss of $54,000, or breakeven per share.

Sports medicine and surgical specialties continued to be our fastest growing segments. We also saw an increasing growth in our bone graft substitutes and domestic dental offsetting declines in spine in international revenues.

Our direct sports medicine business continues to do very well. Revenues were $10.3 million, or about 27% of our overall revenue this quarter. Domestic sports medicine grew by 20%.

In the first quarter, we launched the next-generation of our BTB Select implant, which allows for precision, sized matching relative an intra-articular length of BTB allografts. The BTB Select is an exciting allograft solution that addresses an overall market shift toward shorter BTBs, which are more difficult to recover naturally.

This implant enhances our sports medicine line, addresses a significant clinical need and ensures that we maximize every gift of donation received. We are estimating revenues from these two implants to be approximately $1 million in 2010.

Surgical specialties grew 28% compared to first quarter last year, continuing its strong growth pattern. The most significant growth rate in our domestic surgical specialties line is in breast reconstruction for the growth of 75% over the first quarter of 2009. We are particularly pleased at how well our new distributor has worked with this product line.

U.S. hernia revenues have increased 17% over the same period last year, while urology and ophthalmology domestic revenues increased by 55% and 38%, respectively.

Our bone graft substitutes revenue were up 14% for the first quarter, the increase related to increased distribution orders, principally of products introduced in 2009, as well as an increased market penetration through our direct distribution force. BGS revenues, through our direct distribution channel, grew 14% over the first quarter 2009.

General orthopedics saw growth of 2% worldwide. This is also an area where we were able to leverage our direct distribution. General ortho revenues through our direct channel more than doubled over the first quarter of last year.

The growth at BGS and general orthopedics revenues illustrates the continued success of our direct distribution team. In addition to our sports medicine line in many territories, we are providing a total tissue solution to hospitals. We expect this business to grow.

Domestic dental revenues showed a slight increase of 2% over the previous year indicating some stabilization in the market.

International revenues, which include exports and distribution from our German and French facilities, were $4.8 million in the first quarter, down 24% over Q1 2009. These decreases were directly related to lower orders from several European countries, many of which are still suffering from poor economic conditions.

Over coming months, we will be focused on increasing our distribution network for better market penetration as well as initiating pricing and payment strategies to remain competitive in down markets.

Our spine revenues for the first quarter decreased 33% from Q1 2009 as a result of an inventory reduction of about $4 million by our largest spine distributor. This is a continuation of the reductions we saw in the fourth quarter and as we said last quarter we are working with all of our distributors to support their focus on inventory management and use of the cash in their business.

We anticipate a small reduction in the second quarter from our largest distributor then orders should normalize from the mid Q2 through the remainder of the year to bring spine revenues flat for the full year compared to 2009, which was our assumption in our original guidance for 2010.

As you know, we keep our R&D activities confidential until products were launched, but we do maintain a robust development pipeline of new implants for our direct businesses and our distributors. In the last quarter, we launched five new implants in four different markets spine, sports medicine, bone graft substitutes and general orthopedics. We are on track to launch a similar number of products in 2010 as we did last year.

Through leveraging our current distribution channels, launching new products and taking advantage of business development opportunities, we are confident that we have a business model in place that will allow us to meet our goals for this year and continue to grow our company.

At this point, I’ll let Tom to discuss the financials.

Tom Rose

As Brian mentioned, revenues for the first quarter were $37.8 million, representing a decrease of 2% compared to the prior year period.

First quarter net loss was $54,000 or break even per share based on 54.6 million fully diluted shares outstanding. This compares to the net income $1.0 million or $0.02 per share in the prior year period based on 54.5 million fully diluted shares outstanding.

Spine revenues were $6.5 million for the first quarter representing a decrease of 33% compared to the prior year period. As Brian mentioned, spine revenues were negatively impacted by an inventory reduction of approximately $4 million at our largest distributor.

Sports medicine revenues were $10.3 million for the first quarter 2010, representing an increase of 10%, compared to the prior year. Sports medicine revenues increased primarily as a result of higher unit volumes of 18%, and lower average revenue per unit of 6%, due primarily to changes in product mix.

Dental revenues were $7 million in the first quarter 2010, representing a decrease of 4% compared to the prior year period. Dental revenues decreased primarily as a result of the decrease in unit volumes to 2% and a decrease in average revenue per unit due to changes in product mix of 2%.

Surgical specialties revenues were $6.2 million in the first quarter of 2010, representing an increase of 28% compared to the prior year period. Surgical specialty revenues increased as a result of higher unit volumes of 6% and an increase in average revenue per unit of 21% due to changes in product mix.

Revenues for bone grafts substitutes were $4.4 million in the first quarter of 2010, representing an increase of 14%, compared to the prior year period. Bone graft substitutes revenues increased primarily due to higher average revenues per unit of 28% due to changes in product mix, which were partially offset by decreases in unit volumes of 12%.

Revenues for general orthopedic implants were $2.5 million in the first quarter, representing an increase 2% compared to the prior year period. General orthopedic revenues increases were primarily due to higher unit volumes of 8%, which were partially offset by lower average revenues per unit of 6%.

Gross margins for the first quarter 2010 were 45%, compared to 47% for the same period last year. The decrease in gross margins was due to lower production levels resulting from tighter inventory management. To ensure that inventories remained leveled or declined, which was our goal for the first quarter we had to slow down production, negatively impacting our gross margins.

As we had discussed in the past, quarterly revenues of $42 million results in gross margins of approximately 47% to 48%. As revenues increase beyond $42 million, we expect to see incremental gross margins in revenues of 60% to 70%. As revenues decline below $42 million for the quarter, we recognize declines in gross margins of slightly higher increments.

In late 2009, we commenced a long term initiative to implement a new inventory management system and new product testing that will ultimately result in significantly lower inventory levels and lower costs of product testing. In the past year, we have reduced our testing expenses by approximately $2 million. We anticipate reducing product testing expenses by an additional $1 million or more in the remainder of 2010.

In the first quarter, operating expenses totaled $17 million, a 1% increase over 2009. During the quarter, fixed costs included in marketing, general and administrative expenses totaled approximately $9.9 million, representing a decrease of 10% compared to the prior year period. During the quarter, variable expenses increased $210,000 as incentive compensation decreased $300,000 and variable distributor commissions increased $591,000 compared to the prior year.

The increase in commissions' results from a change in mix of domestic versus international business and additional BGS and general orthopedic revenues distributed directly. Research and development expenses for the quarter totaled $2.7 million compared to $1.8 million in the prior year period. The increase was primarily due to higher compensation and direct project expenses. Our R&D expenses were 7% for the quarter, we anticipate then to be approximately 6% for the full year.

Lastly our tax rate for the quarter was 39% compared to 28% in the prior year period. The increase was primarily as a result of research and experimentation tax credits being recognized in the prior year period with no comparable credits been recognized in the current period. Hopefully, in the prior years we will see an annual renewal of this tax credit in subsequent quarters.

During the quarter we made progress on improving our balance sheet. Our cash position at the end of Q1 was $17.6 million, a slight increase over yearend 2009. Accounts receivable decreased at $17.9 million as compared to $22.2 million at December 31, 2009.

Day sales outstanding were 40 at the end of the quarter. We used the proceeds from the decrease in accounts receivable to pay down accounts payable and accrued expenses by $2.7 million and bank debt by $1.0 million. Inventory decreased to $93.8 million compared to $93.9 million at December 31, 2009.

At the end of the first quarter, unprocessed donor tissue totaled $28 million and $1 million increase in the quarter. While tissue unprocessed was reduced by $1.5 million to $39.3 million and implantable donor tissue increased by $300,000 to $24.9 million.

As we look forward, we estimate that we will reduce inventories between $7 million and $10 million for the full year.

In closing, we are feeling very good about our liquidity position and our ability to generate cash and operating profits in 2010, and meet our operating goals for the year.

I will now turn the call back over to Brian.

Brian Hutchison

Thanks, Tom. In our press release this morning, we reaffirmed our expectations, our full year revenues for 2010 to be between $174.5 million and $177.5 million with EPS of $0.15 to $0.17 based on 55.7 million fully diluted shares outstanding.

For 2010, our goals for the company are as follows. Increased revenues between 6% to 8% over 2009, increased operating profit from 5.5% in 2009 to more than 8% in 2010, reduced investments in inventory by $5 million to $10 million and set the stage for future growth in revenues and improvements in profitability and increases in cash flow.

I'm pleased to report we're on track to reach each of these goals. As we stated in last quarter's call, our forecast for the year anticipates stronger revenues in the second half of the year, as we begin to seeing revenue growth from our new product launches and stronger orders from our distributors as we normalize orders from the inventory reductions of the first two quarters.

We are seeing positive growth in most of our US markets in line with our original guidance. Our Spine business will start to normalize by the end of the second quarter and we will continue to watch our international markets and work closely with our customers and grow market share, where we can through increasing distribution and changes in pricing and payment strategy.

We're very optimistic that we can meet our goals for 2010, and that the market stability that we're experiencing will allow us to focus on improving our profitability and generation of cash.

At this time, let's open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Shawn Fitz from Stephens.

Shawn Fitz - Stephens

I’m just trying to get my arms around the revenue objectives for 2010 and I think in your prepared comments, you talked about inventory work down in Spine in the second quarter than you guys saw in the first quarter. So, should we expect that to translate flattish to modestly down revenue in the second quarter? Specifically for Spine, Brian.

Brian Hutchison

For Spine that’s fair. We expect one more month of inventory reduction and then it should normalize.

Shawn Fitz - Stephens

If we juxtapose that possibility with your expectation that Spine will be flat year-over-year. It looks like it would require the second half of the year to, you need to generate about $28 million in Spine revenue. I guess I’m just trying to understand, where your visibility and confidence comes that happens?

Brian Hutchison

Well, we are going to reach an extremely low point in terms of inventory and we are now measuring expedites against that inventory position, as we've stated before, we think its going too low and we have very good visibility to what's going on in the end market. We have very good visibility to product launches. We feel very good about, where we are and we feel very good about the forecast for the balance of the year, from all of your distributors in Spine. So, net-net, we have strong confidence and we just reaffirm this again this week, we have strong confidence that our expectations for spine are still solid for the full year.

Shawn Fitz - Stephens

If we dig in to the surgical specialties, you guys obviously had a solid quarter there. Could you maybe just talk about the market dynamics in each of the end markets I guess I’m speaking specifically about the breast reconstruction market versus U.S. hernia repair, and just help us to understand what's really driving the growth in breast recon, kind of the competitive landscape and just your expectations for both of those segments as we think about the rest of the year.

Brian Hutchison

Overall, hernia is a bigger market today and hernia is split between human and xenograft. Right now there is a lot of excitement around what’s going on with xenograft, but it still very much split and I think allograft is still overall larger than xeno and still expanding and doing quite well.

On the breast reconstruction side, the xeno implants do not work as well. It's really allograft market and the opportunity for growth there is still very strong. We're still very early days in penetration, so we still feel very good about that and our partner Bard is continuing to add representations, specifically for that area so we feel very good about our opportunities there.

Overall, our surgical specialties group is performing quite well and we still think there is opportunity in ophthalmology and in neurology and all of the markets in that space.

Shawn Fitz - Stephens

Brian, I know Bard has discussed an objective for that product segment broadly, I think of somewhere around 50% growth year-over-year, am I correct in that recollection?

Tom Rose

John, it's Tom.

Shawn Fitz - Stephens

I guess, Tom, then my next question will be. I think that you talked about it one of the analyst meetings and I guess I’m just trying to understand if they hit that objective, should you all grow that revenue segment at a similar rate?

Brian Hutchison

We didn't see that 50% number, Shawn, so if you have it, present it to us.

Tom Rose

I think you really have to delve into the areas of growth that's in their business, and as Brian said earlier, we're still seeing high growth rates in breasts. We're seeing hernia grow above market growth rates is falling down a bit as far as the human and we see their xenograft product is really doing very, very well. Again, I think as you look at their overall growth rate for their, I think they referred to a surgical specialty; you really got to get into the different component.

Operator

Our next question comes from the line of David Turkaly from SIG.

David Turkaly - SIG

On the SpineTech, could you remind of the other partners there and do you have any color in terms of how they fared in the quarter?

Brian Hutchison

Sure. We have a number of other partners, Stryker, Zimmer, Orthofix, Aesculap and Exactech, so we have a number of other players in spine, and I would say the issues at Zimmer Spine are pretty well documented by them and what they are attempting to do, but Stryker seems to be doing very well. They are very, very focused and we have good expectations for them to meet our objectives for the year.

Not to say Zimmer won't, I just think it will come later in the year than early. The other players all seem to be right on cube. The way we built our plan is still right on track.

David Turkaly - SIG

Touch base at that actually Stryker numbers for the quarter were up versus the last year.

Tom Rose

Yes.

Brian Hutchison

Yeah. That is true.

David Turkaly - SIG

Orthofix, or Exactech as well or?

Tom Rose

I think the other groups when we lump them together, we are all up in total compared to the prior year. When you look at Medtronic's orders, although we had the inventory adjustment, the trends in the orders as it compares to their annual forecast are meeting our expectations.

David Turkaly - SIG

Then on the specialties side, can you just remind us, in terms of your color on the units. First, the price mix breakout? How does the two different products, the margin profiles of those differ for you guys between hernia and breast?

Tom Rose

The breast margins are slightly better, Dave. We don’t breakout the individual margins by product.

David Turkaly - SIG

Slightly better in midyear? What would you say; even possibly significantly better or just it's pretty trivial?

Tom Rose

It's slightly better, and it's not trivial, but it's not that significant. The pricing for all the products with Bard were adjusted when we did the new contract last year.

Operator

Our next question comes from the line of Brooks West from Craig-Hallum Capital.

Brooks West - Craig-Hallum Capital

Tom, can you breakout or quantify the earnings impact from the Medtronic inventory reduction?

Tom Rose

It's around $2 million of pre-tax, Brooks. That's our estimate, and you've got two components to that estimate. One is the traditional gross margin on those products, but you have to also calculate the impact on our processing and gross margin overall, so because of that reduction as I mentioned on the call, we had to slow things down, so partially the standard gross margin and component is inefficiencies in the plant by slowing down production.

Brooks West - Craig-Hallum Capital

That $2 million number captures all that or should there be a bigger impact?

Tom Rose

It's a good approximation. It could be slightly above that, but I think that’s a fair approximation.

Brooks West - Craig-Hallum Capital

Brian, you mentioned growth in BGS direct distribution. What's the size of that program? Is that being sold through your sports medicine channel and just a little bit more detail there?

Brian Hutchison

It is being sold by the same group of people. These products were launched to them at our national meeting in January and several of them are doing quite well with it. We do not have full penetration with all of our direct group working with the products yet, but we are seeing nice pick up in certain markets with them.

Brooks West - Craig-Hallum Capital

Did you give a size revenue amount for that direct program?

Brian Hutchison

We are not going to break out that yet.

Brooks West - Craig-Hallum Capital

Can you give us any approximation how big it might be?

Brian Hutchison

I would just use the word small yet.

Brooks West - Craig-Hallum Capital

You talked about making some moves in Europe to better compete in down market. Can you give us a little bit more detail there on what you might be doing is it just pricing, extending payments anything beyond that?

Brian Hutchison

There are certainly going to be pricing strategies as well as we are changing distribution and representation in some countries as well, working our way through a direct plan as many of you know. We took one of our very experienced U.S. distribution guys and sent him over there fulltime in the first quarter.

He has only been there for a couple of months and he is developing new strategies that will hopefully be sustainable even in down markets, and the biggest impacts are coming to us from Greece, Turkey, Italy. So we're working our way through those issues one by one.

Brooks West - Craig-Hallum Capital

Then circling back to some of the Medtronic questions, I guess, trying to gauge your level of comfortable, visibility and/or contractual obligation to them coming back up to a certain order level for the year, any help there would be great to get the spine back to [flat].

Tom Rose

The forecast that we have right now from them which we get 12-months forecast and. actually their volume levels that we'll see after Q2 are higher than the volume levels we saw last year.

Brooks West - Craig-Hallum Capital

Tom, again remind me, I have read on these contract several times or last couple of years, how much power do you have to enforce those order levels?

Tom Rose

We hope it doesn't come to that Brooks, what we're hoping is, based on the forecast we've been given and based on the low level of inventories they have and them sharing end market data with us they actually have to play, they have to increase orders to be able to meet surgeries and we're seeing that now in form of increased expedites, which means in between their weekly orders they are placing a lot more frequent smaller orders, because they're already having difficulty with surgeries. So the formula there is what we thought it would be and we suspect that the forecast, which ties very nicely to end market numbers that we're seeing, is accurate.

Operator

Our next question comes from Bill Plovanic from Canaccord Adams.

Bill Plovanic - Canaccord Adams

Just a clarification on Medtronic. So, bottom line is that we know their inventory is down, pretty much as lean as they can go at this point, they did a little more of that through April, but going forward, you are barely keeping up to with demand? Is that the read?

Tom Rose

That’s correct.

Bill Plovanic - Canaccord Adams

And then, just a point of clarification, is there a minimum on that contract that they have to be flat year-over-year or in line with what the forecast was?

Tom Rose

No.

Bill Plovanic - Canaccord Adams

Okay. You are basing that off on the end user demand.

Tom Rose

Correct.

Bill Plovanic - Canaccord Adams

Okay and then, what percentage of those spine revenues was Medtronic in the quarter?

Tom Rose

About 15%, Bill. But actually, excuse me, that's not correct. The Medtronic was 15% of our total business in the quarter. With respect to spine revenues, just hold on a second, I will give you that number.

Bill Plovanic - Canaccord Adams

But at this point, all Medtronics does, is spine, is it correct?

Tom Rose

That is about 75% in the quarter of our total orders.

Brian Hutchison

75% of spine orders, Bill.

Bill Plovanic - Canaccord Adams

And then, you mentioned on pricing in dental to be more competitive. Can you expand upon that please?

Tom Rose

Actually, I am not sure we said that, specifically. Brian was talking about pricing strategies overseas, not specifically related to dental. Dental, no changes in pricing there, slight changes in mix in the quarter but everything there is pretty much status quo from a pricing standpoint.

Brian Hutchison

The U.S. market is stabilizing, which is what we tried to point out and starting to grow. Internationally, we are seeing the same issues in the same countries that we are experiencing overall.

Bill Plovanic - Canaccord Adams

It’s more about whole product plan, when you talked about pricing rather than dental specific and its overseas. Is that correct?

Brian Hutchison

That is correct.

Bill Plovanic - Canaccord Adams

Any update on the negotiations with Zimmer over that dental contract.

Brian Hutchison

No update at this point.

Bill Plovanic - Canaccord Adams

Okay. When can we expect to hear something?

Brian Hutchison

I’m very hopeful it will be this quarter. I’m spending approximately 50% of my time on that space right now.

Bill Plovanic - Canaccord Adams

When does that contract end?

Brian Hutchison

Late August of this year.

Bill Plovanic - Canaccord Adams

What would be a positive outcome from RTI standpoint?

Brian Hutchison

Several things. We have talked about this before on call. Number one, we through the process that we go through we have a significant amount of tissue available for that market space. We think the market is there and the demand is there for some additional tissue. So, we would like to use more tissue for that market space.

Number two, we would like to improve the economics for RTI and we don’t see why that's not possible.

Number three, we want to build something that is sustainable and that we continue to have visibility in.

Bill Plovanic - Canaccord Adams

Just clarification, if I remember correctly, you actually shifted the end-users so you had visibility in end-user demand?

Brian Hutchison

We do.

Tom Rose

That’s correct.

Bill Plovanic - Canaccord Adams

Just on the business in general where they any price increases at year end?

Tom Rose

Not at year end, Bill. There is some price increases that will go into effect midyear at surgical specialties on the anniversary date of renegotiation with Davol. For the quarter, there were no significant price increases or price decreases in any of the product lines.

Bill Plovanic - Canaccord Adams

And people were asking this, I am dancing around this little bit, if your first quarter revenues missed by $3 million, $4 million whatever it is, why even if Medtronic does come back. They de-stocked on you for the first quarter and part of the second quarter, why wouldn't you lower your revenue guidance for the year by that amount? What's offsetting that that you're more confident about now from a revenue standpoint that offsets the Medtronic?

Brian Hutchison

When we built the annual guidance, and remember it's a function of our annual budget, these de-stocking programs were built into the budget. I can't claim that we had the accuracy when we built the budget that they will all happen in the first four months, but that is the reality of it.

In total, nothing has changed with our expectations for annual numbers and our forecast from distributing partners, from our channels checks in the market and from our own distribution groups are also winding up with our budget. So if our budget is intact, our guidance is intact.

Yes, it does indicate that the shipment levels would be significantly higher in third and fourth quarter, but we believe that is what will happen.

Tom Rose

Just a follow-up on that, Bill. As we talked in the past, their last year total revenues from new products were n the $9 million to $10 million range and we've stated that this year, we anticipated a similar level and in the first quarter, the revenues from new products were fairly insignificant. So, there are several spine grafts as we look at that line as an individual component that we are going to see benefits from in the second half of the year.

Bill Plovanic - Canaccord Adams

Okay, and last question, I promise and, I will jump back into queue. You mentioned five new products in the Q1 2010, BTB Select obviously one of the new products in Sports Medicine. What were the other four new products and what division?

Tom Rose

I think there was an announcement yesterday by Aesculap that we provided them a new bone paste putty product for their distribution. The other product were specific grafts in General Orthopedics that as we focused on leading to be on one-stop-shop I mean the hospitals with our direct distribution group, we needed to fill out the line in that area and so they were less significant than the other two.

Operator

Our next question comes from Greg Brash from Sidoti & Company.

Greg Brash - Sidoti & Company

On the Sports Med side, did you add any reps in the quarter and I didn’t catch Tom's remarks on unit versus price, but are you seeing procedure volumes come back at all or is the growth just coming from more direct sales in the face of that?

Tom Rose

During the quarter, the direct force was pretty stable compared to where we ended the year, last year. As Brian mentioned, we are still anticipating adding direct individuals rest of the year. With respect to the volumes, the unit volume was actually up 18% and there is a 6% decrease in average revenue per unit due to mix. So, the volumes were up nicely. As Brian mentioned the gymnastic sports was up in the 20% range compared to last year, which we are very happy about it. In our international area, there was fairly significant hit on the export revenues in sports that brought us down to 10% overall increase for the quarter.

Greg Brash - Sidoti & Company

You mentioned the mix on the ASP side, but why are you seeing more of your benefit on ASPs from being more direct than you were a year ago at this time.

Tom Rose

I think the mix it can fluctuate from period to period and so again next quarter we can see the 6% improvement in product mix. As we broaden the distribution, again we talked about in the past that you go back a couple of years, 70%-80% of the business was the patellar tendon, which is one of our highest price item. As we broaden the portfolio that’s down well below 50% of the total volume. So, I think the quarter just as a reflection of that trend.

Greg Brash - Sidoti & Company

That’s very helpful. On the surgical specialty side, could you just help me understand the in disc neck, I think Bard reported 75% growth in soft tissue sales, which I'm assuming is breast recon and hernia; you are much lower than that. Is that because some of your other markets that you are in Surgical Specialties are underperforming or is it a timing issue and when you are shipping to Bard?

Tom Rose

Again, as Bard looks at their numbers, you have to recall that last year really Q1, Q2, Q3 of last year; they were building inventory positions into the grafts. In addition, they introduced their xenograft products in Q3 of last year. So, I think their comps they are comparing to, I think are distorted a little bit by new products as well as just a lack of available tissue in the prior year. Our revenues from them, again as Brian mentioned, we're seeing strong orders as they continue to grow the breast below an excessive growth rates, and we see the hernia business starting to slowdown a little bit, but still growing excess of market level growth rates.

Greg Brash - Sidoti & Company

Any update on where you are with some of the xenograft products in your pipeline and specifically on the spine side?

Brian Hutchison

We're really not pursuing anything on Spine for xeno at the moment. With the availability of allograft tissue as strong as it is, that is the doctors' preference. So, that's where we're focused right now with all of our spine partners. As you remember, that's not a market, where we will plan to go direct. So, until our partners express an interest in it, we will not pursue it further.

Operator

Our next question comes from Jon Robohm from Gagnon Securities.

Neil Gagnon - Gagnon Securities

Neil. The question is, I think I heard you saying, Brian that your direct sales group is trying now starting to provide a total package of tissue to hospitals as opposed to just sports?

Brian Hutchison

That’s correct.

Neil Gagnon - Gagnon Securities

Tell us what's going on there and the bandwidth of your sales force to carry more than just sports?

Brian Hutchison

Well, as I said, we just launched this as a new offering in January and some of our people have relationships in hospitals, where they can, through their relationship with the hospital, actually offer all the sports tissue plus BGS plus general orthopedics. Now they are not bringing in spine tissues, but they are bringing in everything else for what would be general orthopedics, trauma, as well as sports and also some wound care products as well. Right now, I’d say it's limited, but as it continues to grow more of our folks would be interested in it and net-net it will allow us to actually hire some more people and make territories even more efficient as we go forward. So, we are pretty excited about it. This was part of Roger's strategy going back to the beginning and its just now starting to hit. So far, we like what we see.

Neil Gagnon - Gagnon Securities

Give some thinking about how this will allow you to expand your direct sales force possibly faster and what that means?

Brian Hutchison

Well, based on what we saw in the first quarter, and based on our plans for the rest of the year, remember, we said we were able to plan to hire five to ten this year. I would say, we were right on track to do that and feel good about it right now. If we continue to see even stronger success, we will accelerate the process of bringing out additional reps and cover additional territories.

Operator

I’m showing no further questions in the queue. I would like to turn it over to Brian for any closing remarks.

Brian Hutchison

Once again thank you for joining us this morning and as always you can find out more information about RTI in our website or by contacting in our IR department. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Have another great day.

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Source: RTI Biologics, Inc. Q1 2010 Earnings Call Transcript
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