Synovis Life Technologies, Inc F4Q07 (Qtr End 09/30/07) Earnings Call Transcript

Synovis Life Technologies Inc. (SYNO)

F4Q07 Earnings Call

December 5, 2007 11:00 am ET

Executives

Richard Kramp - President and Chief Executive Officer

Brett Reynolds - Chief Financial Officer, Corporate Secretary and Vice President of Finance

Analysts

David Bayer - Northland Securities

Ernie Andberg - Feltl

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Synovis Life Technologies' Fourth Quarter 2007 Conference Call. My name is Chan and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the today's conference. If at any time during the call you require assistance, please press "*" followed by "0" and a coordinator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes.

I will now turn the presentation over to Mr. Richard Kramp, President and CEO of Synovis Life Technologies. Please proceed, sir.

Richard Kramp - President and Chief Executive Officer

Good morning. Welcome to Synovis Life Technologies' 2007 fourth quarter conference call. Brett Reynolds, our CFO, and I will present the highlights of this rewarding quarter.

First, I will remind you that forward-looking statements made in the course of this phone conference are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words such as should, could, may, will, expect, believe, anticipate, estimate, continue, or other similar expressions.

There are certain important factors that could cause results to differ materially from those anticipated by the forward-looking statements made during the course of this conference, and the company has no obligation to update its forward-looking statements. Reference is made to the company's annual report on Form 10-K for the year ended October 31, 2006 and all public filings made thereafter by the company.

Results discussed today are for the consolidated company and for current quarter unless otherwise identified. Comparisons are always to the same period of the prior fiscal year unless specified differently.

As is our custom, Brett will begin by providing the financial overview for the quarter. Brett?

Brett Reynolds - Chief Financial Officer, Corporate Secretary and Vice President of Finance

Thank you, Rich, and good morning, everyone. We are very pleased to report our fourth quarter and fiscal '07 results this morning. Fiscal '07 is the year we are proud of, a year in which the strategies that we have implemented over the last few years delivered solid financial results.

These results include the following, our consolidated revenue for the year was $67.9 million, reflecting growth of 22% over fiscal '06 and resulting in record revenue for our fiscal year. Our gross margin for the year was 46%, the highest consolidated annual gross margin in over five years. Our operating income was $3.3 million, the highest operating income since fiscal '03 and an improvement of $7.5 million over the prior year and earnings per share of $0.30 for the year, the highest EPS since fiscal '03.

On a quarterly basis, significant progress was made each quarter during fiscal '07 and our fourth quarter provided a strong finish for the year.

The highlights of the progress we made each quarter during the year include the following. Revenue in the first quarter of '07 was $14.2 million and increased meaningfully each quarter thereafter. We finished the year with $18.9 million of revenue in the fourth quarter, an increase of 33% from Q1 to Q4.

Operating loss in the first quarter was $259,000, while operating income in the fourth quarter was $1.6 million, with each quarter showing operating income improvement.

Earnings per share of $0.02 in the first quarter, $0.06 in the second quarter, $0.10 in the third quarter and finishing with EPS of $0.12 in the fourth quarter.

I'll now go into more detail on our Q4 financial results, focusing first on our consolidated results and then by business unit. On a consolidated basis, we achieved record quarterly revenue of $18.9 million in the fourth quarter, an increase of 29% or $4.3 million over the fourth quarter of last year.

Of this, surgical business revenue was $10.3 million, an increase of $2.2 million or 28%, from last year. This is the sixth consecutive quarter in which the surgical business has achieved a record level of revenue.

Interventional business revenue was $8.6 million, an increase of $2.1 million or 31% from Q4 of last year, reflecting significant revenue growth to customers in non-CRM markets.

Our fourth quarter consolidated gross margin was 48%, our highest consolidated quarterly gross margin in over three years, and up 5 percentage points from Q4 of last year. This increase is due to significantly improved margins in both business units.

Consolidated operating expenses totaled $7.5 million in the quarter, up 12% from the year ago period. This increase is driven by higher expenses in the surgical business related to the expansion of our direct sales force, as well as higher marketing and medical education activities in support of our sales force initiatives.

Higher revenue levels and stronger gross margins for both business units led to a consolidated operating profit in the fourth quarter of nearly $1.6 million, up significantly from the operating loss of $370,000 in the year ago period.

Interest income was $625,000 in the fourth quarter, and was $2.1 million for the year, both of which were about 60% higher than the respective prior year periods, due to increase cash available for investment, the mix between taxable and tax-exempt investments and higher overall interest rates.

We recorded income tax expense at an effective rate of 29% for both the quarter and the full fiscal year. This differs from our Federal statutory rate of 34% primarily due to the benefit of tax-exempt interest income and R&D credits, offset somewhat by state income taxes and other small permanent items.

Net income was $1.6 million or $0.12 per diluted share in the fourth quarter as compared to net income of $92,000 or $0.01 per diluted share reported in the fourth quarter of last year. This is our highest quarterly earnings per share since the fourth quarter of fiscal '03.

Now, the surgical business in more detail. Our surgical business generated revenue of a record $10.3 million in the fourth quarter, an increase of 28% or $2.2 million when compared to Q4 of last year. Higher worldwide unit volumes and new product introduction increased revenue by approximately $1.8 million.

The increase in unit volumes occurred across all of our product lines, and is largely attributable to our direct sales force growing product sales. The remaining $400,000 of the increase in revenue is due to higher average selling prices.

Key items of note from a product line perspective include the following. Peri-Strip revenue was $3.6 million in the fourth quarter, the highest quarterly sales of the fiscal year and an increase of approximately $600,000 or 19% from the year-ago period.

This growth was due primarily to higher unit sales with our circular buttress more than doubling in sales and international sales reflecting the benefit from the launch of the PSD Veritas in Europe, where we received CE Mark in the third quarter of this year.

Revenue from Tissue-Guard patch products totaled $3.3 million in the quarter, an increase of approximately $690,000 or 27%. All of our product offerings in the Tissue-Guard line grew at similar rates and we had meaningful unit growth both domestically and internationally.

Launched in early '07, revenue from Veritas for the complex ventral hernia application saw growth throughout the year and we are approaching an annual sales run rate of almost $2 million based on Q4 sales.

Lastly, revenue from our microsurgery products reached a record $1.7 million in the quarter, an increase of approximately $525,000, or 46%, over the prior year.

Coupler and related instrumentation sales grew by 43% in the quarter. For all of fiscal '07, surgical revenue increased nearly $10 million or 36% to $37.7 million. Approximately $6.5 million of this increase was due to higher unit volumes, new product introductions and product mix changes. The remaining $3.5 million of the increase in revenue is due to higher average selling prices, largely from the pricing benefit realized as a result of our transition to a direct sales force.

The surgical business gross margin was 67% in the quarter, up from 64% in the fourth quarter of last year. For the year, the surgical gross margin was 65%, up 6 percentage points from all of fiscal '06.

The gross margin improvement for both the quarter and the year came from higher pricing and favorable product mix, as well as production volume increases leading to better labor and overhead utilization.

Operating expenses in the surgical business totaled $5.3 million in the quarter, as compared to $4.6 million a year ago. As noted earlier, the drivers of this increase include the expansion of our direct sales force and increased education activities to support the direct sales force.

In addition investment in R&D for the quarter increased by $265,000 over the prior year reflecting our effort to enhance our current product portfolio and leverage our technologies into new applications. Surgical business operating income was $1.5 million in the quarter with an operating margin of 14.8%. This is a significant improvement over the operating income of $570,000 in Q4 of last year. For the full year the surgical business produced operating income of $5.3 million reflecting a very strong return to profitability after an operating loss of $482,000 incurred during fiscal '06.

Turning now to the interventional business. The interventional business revenue was $8.6 million in the fourth quarter up $2.1 million or 31% from the year ago period. The increase in revenue was due to growth from both CRM and non-CRM customers. In the CRM market revenue totaled $5.8 million in the quarter, an increase of 17% from Q4 of last year. Q4 revenues from customers outside the CRM market totaled nearly $2.8 million, an increase of 76% from a year ago primarily due to sales of newly developed products for customers in the urology and gynecology field. For all of fiscal '07, interventional revenue was $13.2, an increase of $2.1 million or 7% from fiscal '06.

Looking back on fiscal '07 interventional revenue was down by 16% in the first half of the year when compared to the same period in '06 but was then up 38% in the second half of the year when compared to the second half of '06.

These data points reflect the stabilization of the CRM market and our new product offerings to customers in the second half of the year. The Q4 interventional gross margin was 26% up 8 percentage points from a year-ago. For the full year gross margin was 23%, up 4 percentage points from fiscal '06. The increase for both periods was due to higher production volumes coupled with stable overhead expenses along with favorable product mix.

The Interventional business had operating income of $573,000 in the fourth quarter, as compared to an operating loss of $335,000 in the year ago period. For the full year, interventional had operating income of $483,000, a sizable improvement over the operating loss of $1.4 million in fiscal '06.

Corporate and other costs. The costs we include in the corporate and other category are those expenses that are not allocated to either of our operating business segments. These expenses primarily represent the cost of being a public company and include only the portion of management time estimated to be associated with corporate activities. These costs totaled $524,000 in the fourth quarter and $2.5 million for the year, both of which were similar to prior period amounts.

And now the balance sheet and cash flows, our balance sheet remains very strong. We have total assets of almost $95 million, net working capital of over $66 million and no debt.

Cash, cash equivalents and short-term investments totaled $53.7 million as of the end of the year, an increase of $6.7 million from the end of fiscal '06. The increase is due to operating activities providing $8.5 million in cash, partially offset by our capital additions throughout the year.

The drivers of the annual net cash provided by operating activities of $8.5 million were net income, depreciation and amortization and non-cash stock based comp. For the year, working capital changes have used approximately $800,000 of cash due to higher receivable in inventory balances in line with higher revenue levels. For our fourth quarter, cash flow from operating activities totaled $3 million.

In conclusion, our strong financial results for Q4 capped an exciting fiscal '07. We saw sequential improvement each quarter and the effort, focus and strategy of the past two plus years are now beginning to be reflected in our operating results. We are now well positioned to keep building upon this foundation as we look forward to fiscal '08.

Now I'll turn the call back over to Rich. Rich?

Richard Kramp - President and Chief Executive Officer

Thanks, Brett. The fourth quarter of 2007 is another in a growing series of strong quarters for Synovis. We have had solid performance from both divisions and across all product lines. The stock market has recognized the consistency of our performance and both our stock price and trading volume are up.

For the surgical division, this fourth quarter is the sixth consecutive record revenue quarter since the third quarter of 2006 when we came to full strength in the 24 new direct sales territories established in the United States. That quarter and every quarter thereafter have brought record revenues.

Transition to a direct sales force is a costly affair, but we entered with a reasonable number of sales people and we entered with experienced people. We have gone from near breakeven net operating earnings six quarters ago to $1.5 million in the fourth quarter of 2007. For the four quarters our compound quarterly growth rate is, was a healthy 28%.

Late in the second quarter of 2007, the surgical sales team began to layout a 36 territory plan to cover the United States and they carried out the transition from 24 to 36 territories during the third and fourth quarters. We had filled 10 of the 12 newly created sales positions by fiscal year-end, and as of the beginning of this week the final two territories have been filled. In spite of the added expense associated with recruiting, hiring, the initial training of the newest members of our sales team, we have maintained operating earnings levels in the surgical division at almost 95% of the third quarter level.

As many of you recall, we plan to add sales people when revenue per sales person -- excuse me got into the range of $1.2 to $1.5 million per year. We moved a little early on that plan, because of the momentum we saw in the first two quarters of 2007 and our logic was sound. If we analyze -- if we annualize U.S. fourth quarter surgical sales without the revenue from our microsurgical group, we are already selling at a rate approaching $900,000 per person for the 34 people we had on-board at year end. We therefore remained in a good position to bring cash to the bottom line as our new people come up to speed with their -- in their respective territories over the next six months.

Sales of our Peri-Strips products grew 19% this quarter over last year's fourth quarter, led by strong adoption of our circular buttress. This product is currently available for only two of the four configurations of circular staplers now on the market. We are planning to have a full compliment of circular buttresses for all configurations by the mid 2008.

Within our Peri-Strips product line in the United States a transition to Veritas PSD continues with 71% of our linear buttress sales being Veritas in the fourth quarter of 2007 versus 53% in the fourth quarter of 2006. The desire for non-permanent buttress is clearly being expressed and thus our receipt of CE Mark clearance for our Veritas PSD products in Europe in July was very timely.

This is important for our international growth, where the initial preference for gastric banding were staple line reinforcement as used five years ago in Europe has -- I am sorry banding was not used five years ago, and Europe has started to trend strongly toward gastric bypass, where they do use staple line reinforcement. It has been observed and documented in clinical papers coming from institutions overseas that long-term weight loss and reduction in insulin-dependent Type II diabetes is better after gastric bypass surgery than after gastric banding. To learn more about this interesting surgery you can watch the Or-Live presentation of two gastric bypass procedures, which will become available at www.orlive.com on Tuesday, January 15th at 6 pm. Both procedures will use Peri-Strips Dry, our PSD with Veritas Collagen Matrix.

Our entry into the complex ventral hernia market in February of 2007 is gaining traction. And our sales people are devoting a good portion of their time to this important call point. As they build relationships with surgeons who perform these procedures, and establish the understanding and credibility of the remodeling properties of Veritas. We expect the acceptance of the product to grow. Introduced in the second quarter of 2007, annualized fourth quarter sales are already approaching $2 million and the performance of the product has fully lived up to expectations.

As I mentioned in our third quarter conference call, you can view an excellent example of the application of Veritas in a large complex ventral hernia repair were primarily closure of the patients abdominal muscular layer was not possible and the Veritas patch itself had to retain the pressure of the bowel while it was healing. The surgery was performed by Dr. Jonathan Limpert of SSM Saint Mary's Heath Center and is available by going to our website www.synovissurgical.com and looking under live webcast.

Synovis Micro Companies Alliance or MCA is a strong and growing part of the surgical division. This group is totally focused on servicing micro and reconstructive surgeons with specialty products which meet their unique and exacting needs. Until recently MCA has approached this niche market with a hybrid sales force of four direct sales people and seven independents. However, in the beginning of the fourth quarter they began a nearly cost neutral transition to 100% direct sales force, which will be complete by 12/31/07. As of fiscal year end, MCA had added two direct sales people for a total of six, and had sales revenue per person based on annualized fourth quarter domestic revenue of over $900,000. The one remaining direct position is expected to be filled by the beginning of January 2008.

Sales to the micro and reconstructive surgery market have more than tripled over the last three years with the addition of several products and product lines. The anastomotic vessel coupler has been one of the primary drivers of revenue growth, and is becoming accepted as the standard-of-care with reconstructive surgeons. This product post -- this product line posted 43% revenue growth in the fourth quarter of 2007, versus the same quarter of last year.

The flow coupler is an extension of the coupler product line and adds to the capability of verifying continue blood flow at the connection site during critical -- during the critical heeling period. Development of this product has been technically challenging, but we have persevered, because interest and the ability to not evasively monitor blood flow in reconstructed parts of the body remains high. We believe we have overcome all of the technical issues and plan to complete the testing required for FDA submission by mid-February. We are targeting market release early in the second half of 2008.

A final, but not insignificant note for the surgical business unit in the fourth quarter was the successful recertification of the facility under ISO 13485, a process which takes approximately every two years.

Turning now to our OEM business. Our interventional division weathered the difficulties experienced by the ICD market in the last half of fiscal 2006 and the first half of fiscal 2007, and has delivered two profitable quarters in the third and fourth quarters of 2007. Revenue grew 31% in this fourth quarter relative to 2006 and gross margin soared almost eight full points from 18.1% last year to 26% in 2007's fourth quarter.

With below-the-line expenses well managed, operating earnings were well over $0.5 million or 6.7% of revenues. CRM revenue was up for the quarter and non CRM revenue grew an impressive 76% in the fourth quarter of '07 versus the prior year. This growth is a result of the emphasis that the interventional sales team placed on seeking business from non-CRM customers, and the creative and often intense efforts of the development and manufacturing groups to meet the varied needs of these new customers.

Interventional is currently involved in courting several additional opportunities in non-CRM markets, while continuing to support our CRM customers by posting excellent on-time-delivery and first-pass quality metrics. Our LinoLakes facilities and our facility in Dorado, Puerto Rico also underwent their ISO 13485 audits in the fourth quarter, and all facilities passed and were recertified.

The ICD market was growing at about 7 to 7.5% in the last half of 2007, with growth in United States in low-single digit and international growth in the high teens according to reports related to the top three CRM companies. It is too early to predict how or if this growth will be affected by the recent recall of the [popular] ICD lead, a device which carries the defibrillation shock from the ICD itself to the patient's heart.

Synovis has not manufactured components related to any other recalls experienced by the ICD industry and does not manufacture components for this lead. Therefore, to the extent, there is a shift in market share to the other two large CRM companies. Synovis could see an increase in order volume.

Based on industry reports, it is possible that this recall will not have the impact the 2005, 2006 ICD recalls had on the overall market, simply because patients now receiving these devices may not be good candidates for drug therapy as an alternative.

Reviewing now our product development and clinical activities in the fourth quarter of 2007, we have learned much about the challenges of stapling and staple-line buttressing in the colorectal area of the human digestive system.

As many of you know, we have been conducting studies of the application of Peri-Strips, both linear and circular in [colon resection]. We have concluded that the use of staple-line buttressing in this area does not reduced leakage to a statistically significant degree. It appears that the lesser amount of blood supply in the colorectal area, especially after radiation therapy for cancer, extra tissue is significantly more sensitive to compression by staples with or without buttresses.

Compression further reduces blood supply in immediate area and can result in leakage at/or near the staple-line due to tissue degradation. We also learned however that the circular buttress may reduce the incidence of structure of circular anastomosis, particularly in patients whose bowel must be temporarily diverted to allow tissue healing. It appears however that this market maybe too small to dedicate any significant amount of sales time to this call point. We will continue to observe how these patients progress to learn more about this opportunity.

We have made further progress in the study of Veritas as a myocardial patch in the fourth quarter. We now have completed four eight-week studies in the right ventricle and two eight-week studies in the left ventricle. We have recently started two additional studies in the left ventricular position for an extended period of six months. In each and every right heart study completed to-date, the Veritas Collagen Matrix material supported the growth of contractual myocardial tissue to near original fitness in eight weeks, on the left side where the myocardial muscle is nearly two and a half times as thick as on the right side. After eight weeks, the heart muscle reach near full thickness at the periphery of the patch, but not in the middle.

The purpose of the longer term study is to allow more time for full regeneration of center of the patch. This is an exciting application, a one which will take two to three more years to develop.

For the near term, we are investigating use of Veritas as a patch for AV fistula repair. In patients who must undergo dialysis for kidney failure, a shunt is formed between a medium size artery and vein in the forearm to allow the removal and reintroduction of cleansed blood at a relatively high flow rate. This shunt also called an AV fistula is punctured by a large bore needle approximately three times a week and can collapse or leak after about 12 to 18 months and some time sooner.

It is expected that the unique orientation of collagen layers in bovine pericardium may provide a repair that is better able to seal and heal after the dialysis needle is withdrawn. Veritas for this application could be tested and ready for at least by the end of fiscal 2008.

As we did last year, we would like now to give you our thoughts on 2008. For the surgical division, we are projecting revenue growth to exceed 25% with the primary drivers being our tissue patch product line, including Veritas for the ventral hernia market, and our microsurgical products along with continued growth in the PSD product line.

Gross margin is expected to improve throughout the year that will be influenced by product mix. We are looking to be in the range of 68% to 70% by the fourth quarter of 2008.

In fiscal 2008, growth in expenses will reflect the full cost of a 36% direct sales force for our tissue products, and a 7% direct sales force for our microsurgical products, plus increased marketing expenditures to support the work of these people in the field.

These investments together with increased spending on R&D for product line improvements and new applications for our Veritas material are expected to grow operating expenses at about the same rate as revenue.

Now with respect to the interventional division, we look for continued success with our diversification effort, but are in a wait-and-see position with the CRM industry. Although, there are some similarities to last year, there are reasons to believe that the overall impact to the ICD market as a result of the recent lead recall will not materialize or will be milder than that caused by the prior ICD device recalls.

Given this situation, we believe, our interventional revenue growth rate will parallel that of the overall ICD market with potential upside from our diversification efforts.

Gross margin for interventional was 23% in fiscal 2007, and we expect a similar or slightly better margin in fiscal 2008.

As has been the case in the last several years, our gross margin in interventional is highly sensitive to revenue volumes.

Historically, for both divisions, our first quarter is our lowest revenue quarter due to 10% fewer shipping days for the surgical division and the impact of the November and December and January holidays, on production days at our interventional customers manufacturing plants.

Calendar year inventory adjustments also play a part in reducing component demand in the OEM business. We expect this pattern to continue for the first quarter of 2008 with subsequent growth in the remaining three quarters. That is our update for the fourth quarter and year of fiscal 2007.

And we would now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen if you would like to ask a question please press "*" followed by "1" on your touchtone telephone. If your question has been answered or you would like to withdraw your question please press "*" followed by "2". Again that is "*" "1" to ask a question. The first question comes from David Bayer with Northland Securities.

David Bayer - Northland Securities

Congratulations on a very well executed quarter, gentlemen.

Richard Kramp - President and Chief Executive Officer

Thank you.

Brett Reynolds - Chief Financial Officer, Corporate Secretary and Vice President of Finance

Thanks, David.

David Bayer - Northland Securities

Just wondering if you could talk a little bit about on (inaudible) obviously we are starting to see some more activity from LifeCell and Stratus and just to review your thoughts in the field what your hearing or seeing in terms of that?

Richard Kramp - President and Chief Executive Officer

In our ventral hernia market?

David Bayer - Northland Securities

Yeah.

Richard Kramp - President and Chief Executive Officer

LifeCell, well for everybody's knowledge, LifeCell is the largest player in that market with human tissue and they recently introduced, are in a process of introducing porcine tissue, porcine skin that is. We are in terms of the size our position in that market is still quite small. So I don't know if LifeCell is paying much attention to us at this time.

But we -- our product competes very, very well with LifeCell's product and that's why we got into this market. First of all, it's an attractive market because LifeCell has the greatest market share but they're also the highest cost producer and the highest priced product. So there is a lot of margin to be had.

Our product is made out of bovine pericardium is remodelable, as is their human skin product. And this is an important thing in the hernia market, so we have a remodelability, we actually have a lower cost of goods and therefore can offer a price advantage and still have a very good margin. We have our direct sales force in place in order to do really -- we are selling tissue products in this market, we have to have a teaching sales force and they have to know what they are talking about.

We are also the only product out there in the market including the LifeCell's bovine tissue or porcine, I mean human tissue or porcine tissue that has the indication from the FDA of minimal tissue attachment. This is a complication that occurs to 30% of hernia cases. So, our activity in this market we think is gaining traction because we have all these advantages, we also have handling advantages. Human skin or porcine skin, any skin product, the collagen from that skin is stretchable because it needs to be -- in its normal use okay.

And when you are repairing a hernia you do not want a stretchable patch because the hernia itself is caused by stretching or bulging of abdominal fracture muscle protrusion through that causing our skin to stretch. So what happens when a doctor uses for instance a lifestyle product they have to pre-stretch it and there is no given guideline as just how much to pre-stretch. With our product right out of the package they can -- they don't have to dehydrate it and they do not have to pre-stretch it, so they seal it right in. And so with all of these advantages we think we have a very competitive product and we're -- we're seeing that kind of acceptance in the market.

David Bayer - Northland Securities

Very helpful. Thank you.

Operator

Your next question is from Ernie Andberg with Feltl.

Ernie Andberg - Feltl

Good morning.

Richard Kramp - President and Chief Executive Officer

Hi, Ernie.

Ernie Andberg – Feltl

You made some comments in your outlook and reviewing the year that had to do with the outlook for the CRM market and the impact of the Fidelis Lead recall I gather from what you've said that you don't see much overall impact on the market in terms of implanting ICDs from that?

Richard Kramp - President and Chief Executive Officer

Ernie I believe that at this stage we have not seen any --- I will say it's probably too early to see too much but what we've read is that you know we've seen some studies where doctors have been quizzed about this and their reaction has been that any of the indications for ICD applications from previous time have been tightened down a bit so patients that are receiving them -- not that previous couldn't benefit from them but maybe a drug therapy was an alternative for some of those patients.

It seems now that the patients receiving ICDs absolutely need them because drug therapy can do some things to relieve some of the (rate) problems but they can't do what an ICD can do. So what we're hearing is they think that many of the -- maybe questionable patients have been flushed out of the system and that those receiving ICDs now absolutely need them so that's their early indication and we don't expect to see the whole industry dip down. There might be some market shifting amongst the top three CRM but not a -- it is certainly not as large but maybe none at depression.

Ernie Andberg – Feltl

Okay now then you said that you believed that your interventional business would be up in line with the CRM growth in 2008 fiscal year but I don't recall you giving us any indication of what you thought that growth might be?

Richard Kramp - President and Chief Executive Officer

Well what I -- that was sort of a way to protect our --

Ernie Andberg - Feltl

Smoke?

Richard Kramp - President and Chief Executive Officer

Our -- it wasn't smoke, but it was this, it is saying we don't know -- we do know that the CRM market has grown in the later half of 2007 and I did say that 7% to 7.5%.

Ernie Andberg - Feltl

Yes.

Richard Kramp - President and Chief Executive Officer

I would expect that it -- we just said we don't think it will go down or if it did it would be mildly, it would down from that number mildly or at that number. I don't expect that number to improve, so in essence what I said, but quite indirectly that if the CRM market in fact is not impacted, as we hope, we'd expect to grow in the area of 7 to 7.5%, if it is impacted and goes down we would expect that to impact us, because the CRM -- in spite of our rapid growth in non-CRM, CRM is still an appreciable portion of our OEM business.

Ernie Andberg - Feltl

Fair enough, I understand what you are saying there. Now, then you made a comment Rich about the overall CRM business -- pardon me the overall interventional business not -- I thought you were implying not much upside to that kind of growth rate from the other business, did I interpret you wrong?

Richard Kramp - President and Chief Executive Officer

Yeah, I think you did. We've seen a lot of upside from the non-CRM. And that's why I kind of said we would grow with the overall CRM business, whatever it is, with the upside coming from the non-CRM business.

Ernie Andberg - Feltl

Alright, I misinterpreted your comment there. Then why do you think that the gross margin in the overall business, if revenues are going to be up from where they are right now, are going to be roughly flat with last year when you had a -- and I think you mentioned 23% for the year -- your gross margins in Q4 in the business were 26%, what's changing in there?

Brett Reynolds - Chief Financial Officer, Corporate Secretary and Vice President of Finance

Hi, Ernie its Brett. You know in our first part of the year typically we see revenue goes down

Ernie Andberg - Feltl

Yes, I have seen that.

Brett Reynolds - Chief Financial Officer, Corporate Secretary and Vice President of Finance

And so, we have stable expenses there. As we look back on the year, our revenue has really fluctuated within interventional, it's been 20, 21, 24 up to 26%. The last two quarters have been very strong and we've had a lot of utilization of overheads.

Ernie Andberg - Feltl

Yes.

Brett Reynolds - Chief Financial Officer, Corporate Secretary and Vice President of Finance

So, with that we see some improvement in margin going forward offset by general inflationary increases in labor in other goods we produce, that's why we're saying we would expect the margin to be flat up slightly next year.

Ernie Andberg - Feltl

Fair enough, I understand. Thank you.

Richard Kramp - President and Chief Executive Officer

Thanks Ernie.

Operator

Ladies and gentlemen, as a reminder you may key "* 1" if you would like to ask a question. You have a follow-up question from Ernie Andberg, with Feltl.

Richard Kramp - President and Chief Executive Officer

Hi, Ernie.

Ernie Andberg - Feltl

Back to the [colon] resection, basically here you saying that you guys are not going after that market in any significant fashion going forward or did you have any expenses for the three surgeons you said who were looking at that product line or that application that go away?

Richard Kramp - President and Chief Executive Officer

No, no we didn't Ernie. We were just doing fairly small studies in those areas just to -- kind of verifying or solidifying what we've seen in earlier larger studies. So, we didn't have any appreciable expenses that would disappear.

Ernie Andberg - Feltl

Okay. Thank you.

Operator

Ladies and gentlemen, you may key "* 1" if you would like to ask a question. As there are no further questions in the queue at this time I will hand the call back to Mr. Richard Kramp for closing remarks.

Richard Kramp - President and Chief Executive Officer

Thank you, Jena. 2007, has been a very good year for Synovis, any way you look at it. We have achieved the following, six consecutive record revenue quarters in the surgical division and full validation of the direct sales strategy. Strong success in interventional division, with diversification into non-CRM markets, and the return to profitability, a long record of quarter-over-quarter revenue growth in our microsurgery business with verification of the value on future potential of this exciting niche market. The expansion of our direct sales force in both the soft tissue repair and reconstructive surgery markets, and the exciting product improvements and product developments for the future from our R&D group. Please stay tuned for the next chapter in Synovis' exciting story. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.

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