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CryoLife, Inc. (NYSE:CRY)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

Steve Anderson - CEO

Ashley Lee- EVP, CFO and COO

Analysts

Brooks West - Piper Jaffray

Matt Dolan - Roth Capital Partners

Raymond Myers - Benchmark

Joe Mondillo - Sidoti & Company

Operator

Greetings and welcome to the CryoLife Second Quarter 2011 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Anderson, President and CEO for CryoLife. Thank you. Mr. Anderson, you may begin.

Steve Anderson

Good morning, everyone. This is Steve Anderson, CryoLife’s CEO, and I would like to welcome you to CryoLife’s Second Quarter Conference Call. With me today is Ashley Lee, the company’s Executive Vice President, Chief Financial Officer and Chief Operating Officer.

This morning we announced CryoLife's second quarter 2011 operating results. Revenues were a record $29.4 million. These results are in line with our expectation, importantly our growth was led by our new recently acquired and launch product. During the quarter, we also continued to execute on our new products initiatives and made strong progress on the integration on Cardiogenesis, positioning as well for on going success.

The agenda for the call this morning is as follows: Ashley will review this morning’s press release and with discuss revenues by product. He will also discuss the recent investment that the company made in ValveXchange, an early stage prosthetic heart valve company. I will discuss the first full quarter of BioGlue sales in Japan. I will also discuss our early sales progress with PerClot the powdered hemostat that we licenses from Starch Medical late last year and that is approved for sale in Europe. I will also discuss our recent acquisition of Cardiogenesis and the integration of that company into CryoLife. After my comments are completed Ashley will return to give you some financial guidance for the rest of the year. After Ashley’s guidance comments are completed, we will open the call up for questions.

At this time Ashley will review this mornings press release that discussed CryoLife’s second quarter in year to date results.

Ashley Lee

Thank you. Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement. Comments made in this call that look forward in time involve risks and uncertainties in our forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include the statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, including the guidance for 2011 that I’ll provide in a moment.

Additional information concerning risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company's SEC filings including the risk factors section of our previously filed Form 10-K for the year-ended December 31, 2010 and our Form 10-Qs for the quarter-ended March 31, 2011 and for the quarter ended June 30 2011, which we expect to file shortly and in the press release that went out this morning.

On the call today, I will discuss certain non-GAAP financial measures. You can also find the comparable GAAP measures and a reconciliation of these non-GAAP measures to the applicable GAAP measures in the press release that went out this morning. A copy of which is contained on the Investor Relations portion of our website.

This morning, we reported our results for the second quarter and first six months of 2011. We set an all time second quarter revenue record $29.4 million. Importantly, gross margins expanded to 65% in the second quarter of 2011, compared to 61% in the second quarter of 2010. I will have more on the improvement in margins later in my comments.

As of June 30 2011, we had $25.1 million in cash, cash equivalents and restricted securities. This includes $1.5 million received from the DOD for the development of BioFoam and $5.3 million in restricted securities. Our balance sheet is strong and we remain well positioned to leverage our capital resources and cash flow from our more matured business segments to invest in complimentary products and technologies and high growth areas of cardiovascular surgery.

Net income for the second quarter of 2011 was $1.8 million or $0.07 per basic and fully diluted common share compared to $2.9 million or $0.10 per basics and fully diluted common share for the second quarter of 2010. Excluding pretax transaction and integration expenses of $1.4 million related to our acquisition of Cardiogenesis and other business development activities, non-GAAP adjusted net income for the second quarter of 2011 was $3.3 million or $0.12 per basic and fully diluted common share.

Net income for the first six months of 2011 was $3.5 million or $0.13 per basic and fully diluted common share, compared to net income of $4.9 million or $0.17 per basic and fully diluted common share for the second quarter of 2010. Excluding pretax transaction and integration expenses of $2.6 million related to our acquisition of Cardiogenesis and other business development activities, non-GAAP adjusted net income for the first six months of 2011 was $5.7 million or $0.21 per basic and $0.20 for fully diluted common share.

Revenues from the Cardiogenesis product line are tracking slightly ahead of plan and were $1.2 million for the second quarter. Revenues from sales of surgical sealants and hemostats, which include BioGlue, BioFoam, PerClot and HemoStase were $13.4 million for the second quarter of 2011, compared to $14.1 million for the second quarter of 2010.

Surgical sealant and hemostat revenues were $27.8 million for the first six months of 2011, compared to $28.1 million for the first six months of 2010. The decrease in overall revenues for the three and six-month periods for surgical sealants and hemostats were primarily due to a decrease in hemostat revenues. However, as compared to the prior year periods worldwide BioGlue revenues were up 4% for the second quarter and 2% for the six month period. These increases were due to a combination of changes in foreign exchange rates, increases in volume of milliliter sold and increases in average selling prices. Steve will provide additional detail on some of the early and promising results for BioFoam and PerClot.

Vascular revenues decreased 2% for the second quarter of 2011, compared to the second quarter of 2010, but increase 2% for the first six months of 2011, compared to the first six months of 2010.

As compared to the prior year unit shipments vascular tissues decreased 1% for the quarter and increased 1% for the six month period. Cardiac revenues for the second quarter of 2011 decreased 2%, compared to the correspondent period 2010 and decreased 4% for the first six months of 2011, compared to the corresponding period in June 2010. As compared to the prior year, unit shipments of cardiac tissues were up 2% for the quarter and flat for the six month period.

In July, we made an equity investment in ValveXchange, a privately held company that is developing a lifetime tissue valve replacement system. This agreement gives us the first right of refusal to acquire ValveXchange. This investment is consistent with our strategy to invest and differentiate a technologies that address large growing segments of the cardiovascular market.

Their first generation system is complementary to our cardiac tissue business and fits well with our expertise and sales channels in the surgical valve replacement markets. Additionally, ValveXchange also has minimally invasive tabi[ph] under development. The leverage is the same technology as the first generation system and has substantial promise.

As I previously mentioned, total gross margins were 65% and 61% for the second quarters at 2011 and 2010. Total gross margins were 63% and 60% for the first six months of 2011 and 2010. Gross margins for both periods were favorably affected by an increase and preservation services gross margins primarily resulting from decreased units sales associated with increased manufacturing throughput and increases surgical sealants and hemostat margins were resulting from product mix. The Cardiogenesis product line generated gross margins of 78% during the second quarter.

General, administrative and marketing expenses for the second quarter of 2011 were $13.7 million compared to $11.7 million for the second quarter of 2010. The second quarter of 2011 included approximately $1.4 million in cost related to our acquisition Cardiogenesis and other business development activities. We expect to complete the integration of the administrative and support functions related to our Cardiogenesis acquisition during the third quarter, at which time we expect to close our Irvine, California facility.

General, administrative and marketing expenses for the first six months of 2011 were $28 million compared to $25.5 million for the first six months of 2010. Expenses for the first six months of 2011 included approximately $2.6 million in cost related to our acquisition of Cardiogenesis and other business development activities. Expenses in the first six months of 2010 included approximately $550,000 in business development activities.

R&D expenses were $1.6 million and $1.2 million for the second quarters of 2011 and 2010. R&D expenses were $3.4 million and $2.5 million for the first six months of 2011 and 2010. R&D spending in 2011 primarily focused on PerClot, SynerGraft tissues and products, BioFoam and BioGlue.

The effective income tax rate for the second quarter of 2011 was 52% which primarily results from transaction expenses for the Cardiogenesis acquisition that are not deductable for tax purposes. You may refer to our SEC filings for detailed discussions and factors affecting our results of operations including our Form 10-Q that we plan to file shortly.

Now, I will turn it back over to the Steve.

Steve Anderson

Thank you, Ashley. Clearly we are making progress on our goal to expand our business in the high growth areas and drive to a also higher margin product such as BioGlue, PerClot and Cardiogenesis. We believe we have positioned the company for improved performance and our second quarter results are only scratching the surface in terms of reaching that potential.

I now like to give you an update on some specific results and milestones related to these products that are indicative of both our initial traction and growth potential.

As you will recall, we announced the BioGlue’s approval in Japan on October 7, 2010. We initially estimated that we would sell about $600,000 of BioGlue in Japan for the first twelve months that it was on the market. We are very pleased to tell you that during the first six weeks BioGlue was on the market in Japan, we sold over $500,000 of BioGlue to Century Medical, our exclusive distribution partner in Japan. This vastly exceeds our and our distributor's expectations.

Japanese BioGlue sales in early July continue to be strong and demonstrate that the product is being well received. BioGlue is also doing very well in Brazil where our distributor is on track by a $1 million during calendar 2011. Sales of BioGlue in Brazil have increased from $150,000 for 2005 to about $1 million in 2011. BioGlue is projected to comprise 40% of company’s sales in 2011.As you will recollect, BioGlue’s gross margins are in excess of 80%.

We are also very pleased with the early European market acceptance of PerClot. During the second quarter of 2011, sales of PerClot in Europe increased by 76% over the sales of HemoStase, a product we formally distributed for the same timeframe a year earlier. Sales of PerClot for the first six months of 2011 in Europe were $1,271,000 versus $721,000 of HemoStase for the same period in 2010.

In our opinion, PerClot is a more effective product than HemoStase. We believe that PerClot is a second generation powdered hemostatic agent and the doctors are genuinely pleased with what it does on the surgical setting. Sales in Australia have also been excellent.

During the first quarter conference call we stated that we had filed our US IDE for PerClot with FDA. The FDA had a number of questions and comments regarding our initial IDE submission. We have been addressing the FDA’s issue and are working on our responses. It’s important to note that HemoStase’s gross margin were 55%, and that when approved in the United States we will replace that product with PerClot whose gross margin will be an excess of 80%. I believe that PerClot sales will be a revenue and earnings growth engine for CryoLife going forward.

On May 17, we announced that we had completed the acquisition of Cardiogenesis Corporation of Irvine, California. Cardiogenesis markets a Holmium laser system, which includes the Holmium YAG laser council on single use, fiber-optic hand pieces for performing Trans-Myocardial Revascularization, a procedure known as TMR. TMR is used for treating patients with angina or chest pain that does not respond to the standard medication.

We believe that the acquisition of Cardiogenesis is highly complimentary to our vascular and cardiac reconstruction business. The assimilation of the experienced Cardiogenesis direct sales team has been completed and has served to nearly double CryoLife’s cardiac surgery specialist sales force. We have fully trained the CryoLife sales force on TMR, and our reps began selling the product in July.

In only six weeks of revenue contribution from Cardiogenesis through the end of June, we were able to generate $1.2 million with gross margins of about 78% putting us on track to meet our expectations for the remainder of the year, Cardiogenesis had sales of about a $11 million in 2010 and about $3.1 million in Q1 of 2011. We estimate that the total US market for Cardiogenesis products is about a $175 million.

Patients undergoing treatment with Cardiogenesis products have been shown to have angina reduction, longer event free survival, reduction in cardiac related hospitalization and increase exercise tolerance. The product and procedure are approved in the United States and Europe and it is Medicare reimbursable.

Cardiogenesis has also developed a PHOENIX combination delivery system, which is designed to combine the intramyocardial delivery of biologic materials with TMR. The synergy of injecting biologic, such as stem cells or growth factors with TMR may increase the angiogenic response and the associated clinical efficacy of TMR in treating ischemic heart disease. The stem cells would be recovered from the patients own bone marrow and then spun in a centrifuge to concentrate the cell prior to their being injected into the patient’s heart.

We anticipate conducting a 30 patient perspective single arm multi-center investigation at three to four sites in the EU. These patients will have class four angina with an injection fraction of greater than 30%. We believe that we will have the investigators selected by October of this year with an investigators' meeting to be held in December, 2011. We anticipate that the study will begin in April 2012 and that the enrollment will take approximately one year, with six month follow up.

In addition to the EU study we anticipate requesting a pilot IDC study in the United States some time in 2012. The pilot IDE study would be for up to 15 patients at three to four sites and would be followed by a larger pivotal study. We believe that the acquisition of Cardiogenesis is highly complimentary to our vascular and cardiac reconstruction business.

The new product line that we have added, PerClot and Cardiogenesis, all have gross margin near or greater than 80%. Both of these new products, passed the approval of BioGlue in Japan, places and markets that are expanding in low double digit and that will add expansion and muscle to our operating margins.

That concludes my comments and now I will turn the call back over to Ashley for his financial guidance for the rest of the year.

Ashley Lee

We are maintaining our expected total revenue guidance for the full year of 2011 between $122 million and $125 million which includes revenues of between $500,000 and $1 million related to the use of funds received from the US Department of Defense in connection with the development of BioFoam.

We expect tissue processing revenues to increase between low single and mid single digits on a percentage basis in 2011 compared to 2010; combined BioGlue and BioFoam revenues to increase most single to mid single digits on a percentage basis in 2011 compared to 2010; and revenues from powdered HemoStase, including PerClot and HemoStase to be between $5 million and $6 million. We expect revenues from the Cardiogenesis product line to be between $4 million and $5 million in 2011.

We expect R&D expenses to be between $10-$12 million in 2011. And we expect earnings per share of between $0.23 and $0.27 in 2011, excluding the effects of any potential acquisitions or other business development cost during the second half of 2011.

Excluding transactions and integration expenses related to the acquisition of Cardiogenesis and other business development charges that were approximately $.05 per share incurred in the first six months of 2011 and the effects of any potential acquisitions or other business development cost during the second half of 2011, we expect a non-GAAP adjusted earnings per share of the between $0.28 and $0.32 in 2011.

We expect the effective income tax rate for the second half of 2011 to be in mid to upper 30% range excluding the effects of any potential acquisitions during the second half of 2011.

We believe we are successfully executing on our strategy of positioning the company for accelerated revenue and earnings growth by expanding our addressable market opportunities through our internal development and business development activities.

Looking forward, we have several key milestones that we expect to complete in the upcoming months. One is re-filing our PerClot IDE and will begin with clinical trials late this year or early next year positioning us to potentially enter the US market with the next generation hemostat by 2014. Begin human trials in the EU using the TMR procedure in conjunction with autologous stem cells and continue evaluating potential acquisitions that will allow us to enter (inaudible) high growth segments of the cardiovascular market and accelerate growth of the company.

That completes my comments and I’ll turn back over to Steve.

Steve Anderson

At this time you’ll open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Brooks West with Piper Jaffray. Please proceed with your question.

Brooks West - Piper Jaffray

Couple of things on the preservation services again, the underlying dynamics there. Is it more of a supply issue or demand issue that you guys at this point?

Steve Anderson

I would say it’s more of a demand issue. I think we have adequate supply to meet any demand that we might have for our products with a perceivable future.

Brooks West - Piper Jaffray

Okay and then on Cardiogenesis on the guide, realizing it was a May acquisition, how much actual contribution thinking about time or number of days did you have in Q2?

Steve Anderson

I think we closed on that acquisition around May 17, I believe. So, it was right at a month and a half in the second quarter, that we actually had that product line.

Brooks West - Piper Jaffray

Okay, and so anything with the underlying performance there that makes you more or less enthusiastic about products for the rest of the year?

Steve Anderson

I think right now that it’s tracking according to plan. I think as it’s trending right now we’re probably looking at being at or near and hopefully above that the top end of our guidance and if that’s in fact the case and then we’ll come back and address that in the third quarter call, but things are going according to where I’m right now.

Brooks West - Piper Jaffray

Great, and then maybe one last one from me just on the acquisition pipeline, you guys mentioned you are still going to be active. Can you give us the sense of you know what the near-term pipeline looks like and I mean should we look for something at this year or you feel like you got enough on your plate? Thanks.

Ashley Lee

I think you should look for something additional this year.

Operator

Thank you. Our next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed with your question.

Matt Dolan - Roth Capital Partners

Just looking at a couple of this on a revenue side, the base business is you mentioned demand there the previous question, were there any maybe distractions related to Cardiogenesis acquisition that might have slowed things down there in the interim? And then another follow on why is the revascularization guidance so low relative to what you put in only set base?

Ashley Lee

I don’t think that we encountered any real significant distractions you know it was it’s an integration process and inherently those take some time to work through, but I don’t think that we encountered any unexpected issues there.

As it relates to the guidance and I alluded to this when I answered Brooks at the second ago the things continue to trend the way they are then it looks like that we will be at the top end or hopefully above or owing to guidance. And if the trends can continue then, then we’ll come back and address our guidance in our next conference call.

Matt Dolan - Roth Capital Partners

Okay, and then shifting to gross margin, which is really strong in the quarter, maybe you can just help us understand how that plays out, especially as we layer in Cardiogenesis, what’s like your number to think about going forward?

Ashley Lee

If you look at the balance of 2011 I think the margins gross margins are going to be affected by product mix. If you recall you know in the third quarter typically with Europe being on vacation, BioGlue is a little bit less of our revenue mix as compared to the other quarter. So it probably would not surprise to see the margins trend downward slightly during the third quarter of this year, but certainly above where they have been historically before the acquisition of Cardiogenesis.

I think longer term, I think that we fully expect our margins to expand and potentially significantly. With the addition of the Cardiogenesis product line, those gross margins we anticipate being, 80% or better going forward. Once we get PerClot, the manufacturing process transferred here and approved in the US, that’s going to be an 80 plus percent gross margin product. So longer term, we fully expect to see margin expansion. In the near-term we expect the margins to be better than they have been historically leading up to the acquisition of Cardiogenesis, but its going to be effective some of our product mix and so that’s what we expect in the second half.

Steve Anderson

In addition to that, we’re working hard on getting third quarter approved in Brazil and in Canada, and we’re making good progress on that, its just a matter of working our way through the bureaucracy that is involved in approval in those countries. And so they should come on here in the next six to nine month and that products then would be looking at significant sales increases as a result of that. And the success we’re having in Brazil was of course with BioGlue it is sort of piggyback on that. And so, I would expect with the larger volumes late this year and next year with PerClot that those margins probably will continue to increase.

Matt Dolan - Roth Capital Partners

Okay, looking at that R&D your expectations imply a doubling of spend on average in each of the next two quarters, may be go out and see that. Ashley, is that, is that the right way to think about it?

Ashley Lee

Yes, and again, that’s largely going to be dependent on the timing of enrolment in the BioFoam IDE and how much progress we make on re-climbing the PerClot IDE in beginning enrollment in the fourth quarter. So those numbers could prove to be a little bit high, but it’s going to be largely dependent on the timing of getting these IDEs approved in beginning enrolment. If you look at the two quarters for the balance of the year, I think the expenses the guidance that we gave that the expenses would probably be a little bit skewed towards the fourth quarter as opposed to the third quarter.

Matt Dolan - Roth Capital Partners

Okay, and then last one, it is kind of point of clarification on adjusted EPS. If I look at the adjustments you made in Q1 plus the adjustments in Q2 its greater than the $0.05 adjustment you are making on the guidance for the year. So, can you help us just put that all together and what’s included, what’s not and those numbers?

Ashley Lee

It’s all transaction and integration related costs predominantly related to Cardiogenesis and also other business development activities. I think maybe with that $0.05 maybe not including some of the taxes that for the second quarter you know the tax rate in the second quarter is 52% and that $0.05 may not include any effect related to that abnormality in the tax rate that result in the second quarter.

Matt Dolan - Roth Capital Partners

So you are calculating on annual basis for the four year guidance versus what we have seen $0.08 here today?

Ashley Lee

I have to look at that a little bit more detail Matt and get back to you on that.

Operator

Thank you. Our next question comes from the line of Raymond Myers with Benchmark. Please proceed with your question.

Raymond Myers - Benchmark

The first one is actually for Steve. You were talking about the $500,000 of BioGlue that sold in Japan already six weeks. How much is that is stocking orders? How can we think of that as in terms of the run rate?

Steve Anderson

Of course they are doing their distribution network no question about that. It’s hard for me to know though exactly how much of that is stocking order. I know that they have been surprised as we have that of the repeat orders that they have made here, I think they have made a total of about three large purchases in that short period of time.

Raymond Myers - Benchmark

Do you feel the sense of what you would expect to sell say in a 12 month period in Japan?

Steve Anderson

Based on how we are dong, I would put it as slightly over a million dollar.

Raymond Myers - Benchmark

Okay, that’s pretty good. Originally when we talked about BioGlue in Japan we thought that opportunity would be quite large and then you got approval there for a very specific (inaudible) indication that was about $10 million market.

Steve Anderson

Yes.

Raymond Myers - Benchmark

On the last call I asked you about this and you were a little more cautious at that time about Japan BioGlue sales, because that market is small you said that you thought you would have to do an additional clinical study to enter the $150 million general surgical sealant market in Japan. And I wonder are we being more optimistic now that we can broaden the use before having to do that study?

Steve Anderson

I think it’s evident that the Japanese physicians are using it off label for other uses. I think it’s too early. I don’t happen to know where they are using it at this time, but it’s obvious from the volume that they are using it an addition to and other places in addition to aortic dissections. We are going to do an additional clinical study, but we have the same exact approval from the FDA initially when we marketed that product in the States and of course and it ended up being used a lot for certain neurological indication and maybe that’s where it’s being used in Japan. I would have to ask our distributor we happen to know that I don’t at this early stage.

Ashley Lee

I think it’s also fair to say to, Ray, that we are pretty early in the roll out right now. So, it certainly has exceeded our expectations at this point, but may be a little bit too early to have a lot of market intel. But I think that will you know as we continue to roll out over the next quarter to beginning a lot of that intelligence and we will probably be in a better position to know exactly what it’s going to look like over the next year to, but we were certainly optimistic about it based on the performance today.

Raymond Myers - Benchmark

It’s good to see we are making progress in Japan and Brazil with BioGlue, but if you take out the upside of both markets it would appear that the US BioGlue or perhaps its international is lower than might have been anticipated, is that correct?

Steve Anderson

No, actually I think that US is probably trending close to where we had anticipated. And in fact, BioGlue is actually a little well ahead of plan for the four year today for companywide. But I think that US (inaudible) it’s been you know, we have had challenges there and we talked about those over the last several quarters, but I think that that business is pretty much trending to where we expect it to be overall worldwide we are a little ahead of where we expected to be and that’s largely due to some of the successes that we are having in Japan and other international markets.

Raymond Myers - Benchmark

Okay, that’s good to hear. Then holding into that, in the last call you were talked about competitive pricing pressures and I think particularly in US across several markets. Can you update us on those?

Ashley Lee

I think that those continue to persist and those are the things that we have been dealing with over the last several quarters and I think that we’ll continue to deal with over the next several quarters. But we really haven’t seen any significant changes in the cost environment or competitive activities it still remains tough, but what that means that you know we’re seeing some successes albeit and significant growth, but we’re seeing successes in our legacy businesses.

Steve Anderson

One thing we can definitely say is that PerClot and BioGlue together in Europe give us an opportunity to bundle the adhesive hemostatic agent together in certain bidding situations and that definitely has been an advantage to us. And I think it will continue to be an advantage to us going forward. Once the PerClot is on the markets in the United States I would think that that type of bundling procedure for various hospitals or pharmacies would continue to give us an edge in the marketplace once it’s approved in the States, but it’s certainly is helpful to us to be able to do that in Europe.

Ashley Lee

I’ll add to, Ray, that that and I alluded to this a little bit earlier in my comments. Our legacy businesses are maturing and but they are profitable; they generate a fair amount of cash for us and they’ve allowed us to go out and execute on the business development front and invest our internal pipeline. And if you look at over the next few quarters and the couple of years, we see growth coming from a lot of these things that we’ve been able to execute on, the acquisition of Cardiogenesis and we think that we’re going to see significant growth in PerClot international markets and with BioGlue in certain international markets. So that’s where we see the growth coming from over the foreseeable future, excluding any other things that we might be able to execute on the business development front.

Raymond Myers – Benchmark Company:

One last thing did you update us on the BioFoam US IDE?

Steve Anderson

No we’re still on the early very early stages of enrolling patients in that trial. So that’s very early on.

Raymond Myers – Benchmark Company

Can you remind us how many patients you are trying to enroll and how many enrolled.

Ashley Lee

We are looking at doing I think 20 patients in a highlight study due the way that is currently designed. It’s a two-year follow-up, but we anticipate going to the FDA hopefully with six month data to allow us to move forward afford on pivotal study.

Raymond Myers – Benchmark Company

And how long do you think it will take to remove the twenty patients?

Ashley Lee

Longer than we had anticipated when we began the trial. As I think related to in previous calls the inclusion criteria for the trial were restrictive and we have gone back to the FDA on a couple of occasions to get those criteria loosened. They have done that once and we expect to hopefully get another accommodation that will allow us to expand the inclusion criteria so that we can get the enrollment going.

Operator

Thank you. Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Joe Mondillo - Sidoti & Company

Just real quick, two questions. What was the CapEx spend for the half year?

Ashley Lee

CapEx? About $1.2 million.

Joe Mondillo - Sidoti & Company

With the growth that you guys are seeing in BioGlue and PerClot, we assume to see an increase in CapEx going forward to support the growth that you are seeing?

Ashley Lee

Not necessarily. That’s one of the parts of our business that we think is very leverageable. We have got the infrastructure here currently at our facility to ramp production for BioGlue. We do not perceive any significant spend on CapEx for PerClot and getting that manufacturing process migrated to our US facility. It’s going to be well less than $0.5 million in total to get that production facility up and running. So you are not going to see anything significant.

Joe Mondillo - Sidoti & Company

And my other question was just on inventory. I know that you guys have seen great growth in BioGlue and PerClot. We expect also to pick up an inventory going forward. It seems like inventory has kind of sink down a little bit from December.

Ashley Lee

Yeah, I think we do pretty good job of managing our inventory levels for BioGlue. I wouldn’t see anything significant and probably wouldn’t see a significant increase or ramp in PerClot inventory levels until we got an approval in the US.

Operator

Our next question is a follow-up question from the line Brooks West with Piper Jaffray. Please proceed with your question.

Brooks West - Piper Jaffray

Hi guys, just a quick follow-up on the R&D spend. Ashley, I think you said 10 to12 million guidance for the year and here today you are only at 3.4-3.5. I am wondering what’s the big delta is in the second half?

Ashley Lee

Anticipated enrollment in the BioFoam and PerClot IDEs predominately, as well as some of the additional R&D work that needs to be done on PerClot to support the IDEs mission. So, if the enrollment is delaying and likely the guidance for R&D is high, but we guided assuming that we will be enrolling special in fourth quarter this year.

Operator

Thank you. Mr. Anderson, there are no further questions, I would like to turn the call.

Steve Anderson

Alright, well then we will close the call and thank you for joining us and we look forward to talking with you at the close of the third quarter.

Operator

Thank you. This concludes today’s teleconference. You may discontinue your lines at this time. Thank you for your participation.

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Source: CryoLife's CEO Discusses Q2 2011 Results - Earnings Call Transcript
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