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Executives

Steven Sobieski - Chief Financial Officer

Paul Thomas – President & CEO

Analysts

Mark Mullikin – Piper Jaffray

Ed Shenkan – Needham & Company

Matt Dolan – Roth Capital

Greg Brash – Sidoti & Company

Steven Lichtman – Bank of America Securities

Jayson Bedford – Raymond James

Caroline Corner – Pacific Growth Equities

Michael Matson – Wachovia

Matt Miksic - Morgan Stanley

Spencer Nam - Summer Street Research

LifeCell Corporation (LIFC) 2008 Guidance Call January 7, 2008 10:00 AM ET

Operator

Good morning and welcome to the LifeCell Corporation 2008 Guidance and Preliminary Fourth Quarter Results conference call. (Operator Instructions) At this time I would like to turn the call over to Mr. Steven Sobieski, Chief Financial Officer of LifeCell Corporation.

Steven Sobieski

Good morning everyone and thank you for joining us on the call this morning. Before we get started I want to remind everyone that certain statements made during this conference call such as our preliminary 2007 operating results and our financial guidance for 2008 are forward looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. These forward looking statement reflect our current expectations regarding future performance or events. Although we believe the expectations reflected in such statements are reasonable we give no assurance that such expectations will prove to be correct.

Our actual future results could differ materially due to a number of factors. Please refer to our SEC filings for more information regarding the risk factors that may impact our results in the future. All of our SEC filings are available through our website.

I’ll now turn the call over to Paul Thomas, President and CEO of LifeCell for introductory comments.

Paul Thomas

Good morning to everyone. Today we will be providing our outlook for 2008 as well as commenting on our preliminary fourth quarter 2007 results. As Steve stated earlier the financial guidance we provide during this call represents our target and expectations.

I’ll start by commenting briefly on our preliminary 2007 results and I’ll then ask Steve to review our 2008 guidance. At the end of our prepared remarks we’ll be ready to take questions from the audience.

This morning we reported preliminary fourth quarter revenues of $52.6 million up 34% compared to the prior year same quarter and up 11% sequentially from the third quarter of 2007. Consistent with the trend throughout 2007 the $13.3 million increase compared to the prior year fourth quarter resulted primarily from higher demand for AlloDerm which increased 38% to $46.9 million compared to $33.9 million in 2006.

Our orthopedic product revenues increased 15% to $3.2 million in the quarter up from $2.8 million in the fourth quarter 2006. Our preliminary full year 2007 product revenues were $190.5 million up 35% compared to the $140.6 million in 2006. Based on these preliminary revenues we expect our full year 2007 diluted net income per share to be in the previously announced range of $.80 to $.82. This compares the full year 2006 diluted net income per share of $.60. Consistent with past practice we plan to release fourth quarter and full year 2007 actual results after the completion of our audit.

I’ll now ask Steve to present our financial guidance for 2008.

Steven Sobieski

I plan to review the key assumptions underlying the 2008 financial guidance that we provided this morning. We project 2008 product revenues in the range of $233 to $243 million which represents annualized growth between 22% and 28% compared with our preliminary 2007 product revenues of $190.5 million. Our product revenue projection includes Strattice which we expect to launch later in this quarter. As you are aware it is difficult to predict first year revenue for a new product. Accordingly we are not providing separate guidance with respect to our expectations for Strattice revenue in 2008. However, we are planning to report actual Strattice revenues on a quarterly basis throughout 2008. Paul will also be providing additional commentary on our Strattice plans before we open the call for questions.

Most of the projected year over year growth in product revenue is expect to result from increased market penetration in challenging hernia and breast reconstruction procedures. Our reconstructive revenue is expected to grow between 25% to 30% and represent approximately 90% of our total product revenue in 2008.

Turning now to the rest of the P&L. Gross margins are expect to remain at about the same level as 2007. Total operating expenses excluding cost of goods are targeted to increase by approximately 25% compared to 2007. The planned increase in spending is focused in three major areas; first are the incremental costs associated with expanding our direct sales organization by 14 bringing the total to 87. At this time the majority of the new territory managers have been hired and trained and are in their respective territories.

The second area where we are increasing our spending is research, development and clinical studies. As previously disclosed we recently commenced several clinical studies intended to support Strattice. The third area where we are increasing our spending is our marketing and medical education programs. Even with planned increases in spending we are projecting total operating expenses to decrease slightly as a percentage of revenue compared to 2007. The incremental spending that I highlighted will be partly offset by leverage in selling, general and administrative expenses.

For 2008 we are projecting operating income in the range of $57 to $62 million representing an operating margin with approximately 25%. Based on our projected operating income range diluted net income per share is expected to be in the range of $.98 to $1.06, that is based on estimated fully diluted shares of approximately $36 million.

Consistent with 2007 we expect to generate a significant amount of operating cash flow in 2008. Part of the cash we expect to generate will be used to fund approximately $20 million in capital expenditures necessary to support the growth in our business including building additional Strattice manufacturing capacity.

At this time I’ll turn the call back over to Paul for summary remarks before we take questions.

Paul Thomas

Before we move on to questions I would like to share a few comments on our targets for 2008. First, I’m very excited about the momentum we have in our business as demonstrated in our Q4 preliminary sales results. I believe that a tremendous opportunity exists to continue to increase market share in our key markets. Our top priority as an organization continues to be on driving top line growth. As Steve noted in his remarks we recently completed a significant expansion of our direct sales organization. We believe that our direct sales organization continues to be a critical driver of our success.

Additionally, similar to 2007 an important part of our strategy for market growth for 2008 includes increased surgeon education. We believe this is especially important with the national launch of Strattice. We are committed to managing our operating expenses while making strategic investments in research and product development in clinical programs that we consider critical to the company’s future.

Our research and development budget, which includes clinical studies, is targeted to be in the range of 12% to 13% of revenue. Our focus in 2008 is on supporting our current products including expanding our markets and applications as well as targeting new product opportunity. Additionally our development team will lead the effort on scale up of our Strattice commercial manufacturing operations.

Steve also noted earlier that we will be funding several clinical studies in 2008 to support Strattice. Patient enrollment commenced in the fourth quarter of last year and although we are at an early time point the initial feedback from surgeons who have implanted Strattice is very encouraging. In total we are planning to enroll in excess of 250 patients in four key studies. In several of the studies patients will be followed for approximately two years post surgery.

Many of you have been asking when data will be available from these studies. Although we will receive interim data we are not planning on making this data public to avoid influencing the outcome of the ongoing studies or compromising their publication value. Our best guess at this time is that results from some of these studies should be available publicly before the end of 2008. However we could possibly see published case studies from surgeons who are not participating in our formal clinical studies earlier in the year.

This concludes our prepared remarks and I’d be glad to take any questions or comments from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Mark Mullikin from Piper Jaffray.

Mark Mullikin – Piper Jaffray

Can you just remind us of what the four studies are that you are conducting on Strattice and any breakout that you might be able to provide as far as how many patients within each of those studies?

Paul Thomas

Yes, I can go through the four studies. We have one study in breast reconstruction following mastectomy similar to earlier work we did with AlloDerm. We have one study that is involved in looking at the use of Strattice in what we’d classify as Grade Three and Four patients, these are patients who either are having an infected mesh removed or are at significant risk of infection because of their co-morbidities. The third study we are doing is involved in looking at the use of Strattice in Grade Two patients these are patients that are compromised in some form but in a less severe state than the Three and Fours. We are looking at also the use of Strattice in inguinal hernia repair.

We mentioned the four major studies but there are multiple smaller studies that we are doing as well. In terms of the detail, in terms of the patient numbers that we intend to enroll and whether there is going to be comparative group or not and what the end points are and so forth, those are details which are probably not appropriate for this conference call but we do have these protocols that have been developed with our key opinion leaders and have been through the IRV process and in most cases are being initiated with patient enrollment.

Mark Mullikin – Piper Jaffray

Can you comment on the competitive field for AlloDerm, it looks like the results this quarter obviously was very strong, how is the pricing holding up and any additional color on how the competitive field is evolving?

Paul Thomas

We were very pleased with our Q4 results; I think we’re up around 35% in the quarter. Obviously those are AlloDerm revenues primarily and the competitive environment I don’t think has changed appreciably in the last quarter or so. It continues to be a competitive market with several players that we’ve talked about in the past being in this space. Including some of the major players like C.R. Bard for example. We have not had pricing pressure so we’ve been able to maintain pricing despite a fairly robust competitive environment and as we’ve talked about in the past AlloDerm is at a significant premium to most of the products in this space. We think that it’s justified based on its clinical performance.

Mark Mullikin – Piper Jaffray

What progress have you made in signing a European distributor?

Paul Thomas

We have not signed a European distributor at this point. We have several parties who we have had very detailed conversations with and we are very pleased with the interest and the opportunity for this product outside the US and we still believe that we will be able to sign an OUS distribution agreement in the first quarter of this year.

Operator

We’ll take our next question from Ed Shenkan from Needham & Company.

Ed Shenkan – Needham & Company

If you are going to break out Strattice in 08’ what kind of expectations do you guys have for revenues?

Paul Thomas

Yes actually Steve mentioned that, what we are doing is we are giving total revenue guidance and we are not breaking out Strattice guidance specifically. In part because it’s a little difficult in the launch phase to give the type of guidance that we would like. What we have communicated, however is that we will report our quarterly Strattice revenues on an ongoing basis.

Ed Shenkan – Needham & Company

So when you report the first quarter you’ll say Strattice was “x” dollars?

Paul Thomas

Yes that’s correct; now remember our Strattice national launch is going to take place towards the end of February with our national sales meeting. I would expect that our Q1 Strattice numbers would be rather small. I think in reality it’s more a Q2 onwards sort of metric track.

Ed Shenkan – Needham & Company

You mentioned the capex spend for the year a lot of its associated sounds like with Strattice manufacturing. Walk us through again gross margin expectations for Strattice and if there will be a change in the gross margin as you ramp up this new facility or not?

Steven Sobieski

With respect to Strattice we have stated in the past we believe there is a significant opportunity for margin improvement with Strattice. We don’t believe this mix of Strattice will be material enough in 2008 to impact corporate gross margin. Additionally in 2008 we’ll still be producing Strattice in our pilot manufacturing space which has not been optimized. When we build out our commercial manufacturing which will be taking place throughout 2008 we’re going to be looking at optimization of the process as well as automation which was not built into the pilot facility. We truly believe there are opportunities for margin improvement above what we’ve been able to realize with AlloDerm, however at this point I’m not prepared to comment more specific as to what those margins may be. Primarily because I haven’t fully analyzed the impact of the optimizations as well as the automation being implemented.

Ed Shenkan – Needham & Company

Could you get the higher gross margin with the pilot manufacturing or is that only with the other manufacturing facility?

Steven Sobieski

We could probably achieve higher gross margins through the pilot facility but at some point we’ll be limited in the volume mix wouldn’t be significant enough to see it in a corporate overall gross margin.

Ed Shenkan – Needham & Company

When do you submit for CE Mark?

Paul Thomas

I don’t have that information readily available so I’d rather not comment. We don’t think that CE Mark will be the rate limiter in terms of our OUS plans.

Operator

We’ll take our next question from Matt Dolan from Roth Capital.

Matt Dolan – Roth Capital

As we look at the 08’ guidance and maybe a follow up on the gross margin question, maybe a little bit more specific can you give us an idea of where gross margin should trend in 08’ relative to the bigger part of your business AlloDerm?

Steve Sobieski

Over the past few years our business has shifted a bit. The demand for AlloDerm has shifted towards much larger pieces especially as we’ve penetrated the more challenging hernias. The cost associated with recovery as well as processing these larger pieces is higher than the cost associated with processing some of the smaller sizes. These higher costs have been offset by volume related efficiencies, however as we saw in 2007 the net impact on gross margin has been fairly neutral. I think looking at 2008 we would expect pretty neutral in terms of the gross margin, as I said in my comments earlier that what we’re projecting at this point.

Matt Dolan – Roth Capital

In terms of Strattice maybe we could get a little more detail on your marketing plans as it relates to pricing and are there any particular indications among your current AlloDerm indications that you might target more aggressively with this product.

Paul Thomas

Since we’re now selling Strattice commercially through our pilot team we are prepared to discuss Strattice pricing and our Strattice list price is going to be approximately 15% less than AlloDerm’s current list price. The intention there is to take some of the cost savings that we anticipate in manufacturing Strattice and sharing those with our customer base and also facilitate the conversion from AlloDerm to Strattice over a period of time. We feel very good about where we are in our launch phase and the initial response that we’ve gotten from customers have been very positive.

Operator

We’ll take our next question from Greg Brash from Sidoti & Company

Greg Brash – Sidoti & Company

I just wanted to focus a little bit on the international side. One, I was wondering if you are including any potential international revenue in your guidance and two, I know you said it wouldn’t be an issue getting a CE Mark but how important is it to get improved reimbursement in Europe where reimbursement is better than that of synthetics?

Paul Thomas

That’s a very good question. The first part of your question with respect to how much international is baked into our 2008 number. It’s really diminimus and the reason for that is in part exactly what you laid out, it’s going to be important to work with our selected partner on getting appropriate reimbursement for Strattice and in order to do that it will involve us doing some clinical research in European markets. In fact we’ve already initiated the process of meeting with European KOL’s and discussing the types of studies which may be most appropriate from both a marketing and reimbursement perspective. A lot of the groundwork I think will actually be laid in 2008 and I would expect that OUS revenues would begin to be more significant piece of our picture in 2009 and beyond.

Greg Brash – Sidoti & Company

You think it would take I guess to get improved reimbursement for the Strattice in Europe could that come as early as early 2009?

Paul Thomas

I think its going to depend on the market right. Each market is going to be a little different in terms of what’s required to obtain appropriate reimbursement. I think the feed back we’ve had from the folks we’ve talked to who are quite experienced in this territory is that you want to do your market launch appropriately and pay particular attention to the clinical data that’s necessary to support an appropriate reimbursement level. You don’t do anything for short term results that compromises where you may want to go in the future and that’s consistent with our philosophy as well.

Greg Brash – Sidoti & Company

Just looking at the Strattice launch in the US will there be separate reps leading in education program in educating surgeons on the product or will your reps be out there both educating surgeons on Strattice but also trying to make the sale on AlloDerm?

Paul Thomas

There are a couple of elements to the surgeon education. One is we have an effort that’s coordinated and led by our marketing group our medical education group internally that does quite a bit with surgeons. Then of course we also have education occurring at the field level with our representatives and we do not plan on having a separate group of representatives detailing Strattice they will carry both Strattice and AlloDerm and educate surgeons on both those products.

Operator

We’ll take our next question from Steven Lichtman from Bank of America Securities

Steven Lichtman – Bank of America Securities

One more question on the gross margin. You mentioned obviously AlloDerm gross margin is expected to be flat overall, therefore in addition to you mentioned Strattice perhaps not being big enough in 08’ be a kneel mover should we also think about the initial up take being current AlloDerm users such that the lower costs will be offset by the lower price, is that another way to think about it?

Paul Thomas

Maybe the way to think about it is you know have another piece of the puzzle in terms of our pricing. We’ve announced that Strattice would be approximately 15% below AlloDerm and yet we anticipate the gross margin on Strattice and AlloDerm to be roughly the 72% that we realized in 2007. Steve has also indicated that those margins on Strattice are out of our pilot plan where we have not optimized the process with respect to materials or cycle times or introduced any automation into the process so that we think there’s further opportunity for margin improvement in 2009 and beyond.

Steven Lichtman – Bank of America Securities

Following up on that, I apologize if I missed it, in terms of optimizing that pilot facility what would be the timing on that and in terms of the expansion where would you anticipate the timing in terms of getting that built out?

Paul Thomas

Let me clarify, we don’t intend to optimize the pilot facility. The optimization work that we have underway is intended for the commercial facility which we hope to have online by the end of 2008. The pilot facility is really just that, it’s a pilot facility that will serve our needs over the next three or four quarters and then we will move into the commercial facility and then actually use the pilot facility for R&D work which is really what it’s intended for anyway.

Steven Lichtman – Bank of America Securities

In terms of data release in 08’ you mentioned I think the interim human data out later this year. What about the primate data are we going to see primate data on Strattice?

Paul Thomas

The data I was referring to was clinical data so you can anticipate seeing the primate data earlier than that and I actually think that some of that primate data should be published in the first quarter.

Steven Lichtman – Bank of America Securities

We should be looking for it in published form.

Paul Thomas

Yes I believe so. I don’t believe I’ve misspoke on that, I believe that we are supposed to have that published data in Q1.

Steven Lichtman – Bank of America Securities

Just a couple other pieces for 08’ in terms of the assumed tax rate in share account. Could you give us ballpark on those?

Steve Sobieski

Before I do I just want to clarify Paul had mentioned 72% margin we’ve actually trending around 71% for 2007. I just want to clarify that.

Tax rate, we think tax rate will be around 43% in 2008, I’m sorry what was your other question?

Steven Lichtman – Bank of America Securities

Share count going up.

Steve Sobieski

Share count rate we are saying for a full year around 36 million.

Operator

We’ll go next to Jayson Bedford from Raymond James.

Jayson Bedford – Raymond James

I just have a couple questions. The fourth quarter seemed quite strong; I was just wondering are you seeing any deeper penetration into the trauma indication?

Paul Thomas

It’s really hard for us to break that out. Anecdotally I think that we are getting feedback from the field that we have accounts that are starting to and surgeons that are starting to use it more in that particular application but it’s very very difficult for us to attribute the growth that we are seeing to trauma versus further penetration of the challenging hernia market. I don’t think we can give you any really good guidance on that. Our view is that the strong growth that we had in Q4 was a contribution of all the indications breast reconstruction, challenging hernia as well as beginning to get a little more traction in the trauma indication as well.

Jayson Bedford – Raymond James

In past calls you’ve talked about penetration into the market for both complex hernia and breast reconstruction would you care to do that now?

Paul Thomas

Sure, we believe that on the challenging hernia market we are approaching 25% penetration and in the breast reconstruction market we believe we are approaching 35% penetration.

Jayson Bedford – Raymond James

Lastly on Strattice has there been any sales force outreach to physicians just yet or does that at all happen at the end of the first quarter?

Paul Thomas

Actually there is a small pilot group of sales representatives who are reaching out to surgeons and accounts to make sure that we understand how the education process and the process of introducing a new product into the hospital is received by our customers and that will help us calibrate or fine tune the national launch which we will commence towards the end of February. There is a small group of sales representatives and customers they are approaching but I believe the number of sales representatives involved in this is less than 10 if I recall correctly.

Jayson Bedford – Raymond James

How do they position Strattice versus AlloDerm?

Paul Thomas

I think that we really start with a mechanism of action. We try to educate our customers that there is a regenerative response whereby you get a rapid revasturization and repopulation with host cells and a remodeling to the native tissue that distinguishes LifeCell products whether they are AlloDerm or Strattice from other competitive offerings. We start with that mechanism of action process of educating the surgeons and then we present AlloDerm and Strattice as representative of this regenerative response and with Strattice you have some advantages that we did not have with AlloDerm.

Starting with the fact that it’s a product in a ready to use configuration that does not require refrigeration, it’s available in more readily available sizes than the AlloDerm product and so on. It’s really up to the customer to decide whether they want to use Strattice in their practice or use AlloDerm which they are quite familiar with and has a long history of published results against it. It’s quite frankly up to the surgeon, although we believe over time more and more customers will move toward Strattice because of some of the ease of use factors that I mentioned. Again, assuming that we continue to see that Strattice performs in a clinically equivalent way to AlloDerm.

Jayson Bedford – Raymond James

Is it fair to assume that you have larger sizes available foe Strattice versus AlloDerm?

Paul Thomas

We have actually a pretty good inventory of large sizes available for AlloDerm. I think the difference is with Strattice is that it’s literally going to be unconstrained certainly when we get into full production of the product so that any size or configuration in any quantity would be readily available. Whereas with AlloDerm the sizes are available but just not in the same unlimited quantity as would be the case with Strattice.

Operator

We’ll take our next question from Caroline Corner from Pacific Growth Equities

Caroline Corner – Pacific Growth Equities

A follow up question regarding pricing for Strattice. You said it was going to be 15% less than AlloDerm, previously in your comments you said that AlloDerm commands a premium because its demonstrated clinical efficacy. Going forward and once the market is seated with some customers that are using Strattice and once, especially going toward the end of 08’ we start seeing some data related to Strattice are you expecting to increase that price going forward or would most of the gross margin improvements be from costs savings and manufacturing?

Paul Thomas

We haven’t announced any plans for increasing the price of Strattice going forward. What I can comment on is we do think that even assuming we don’t have price increases on Strattice that we can have margin improvements because of the efficiencies that we believe are inherently available to us with Strattice.

Caroline Corner – Pacific Growth Equities

The physical build out of the facility for Strattice, the not pilot one, the full scale one, what is the timing for getting that building completed with all of the components within?

Paul Thomas

Let me just clarify something. It’s actually going to be within our current facility, our current building. What we are doing is the build out of the clean rooms the processing suites and so forth. What we are in the process of doing now is moving forward with that program to build the processing suite, introduce the equipment, move forward with validation and be prepared to bring that commercial facility online towards the end of 2008. In the interim we will have all the production for Strattice coming out of our pilot facility, which is obviously up and running currently.

Caroline Corner – Pacific Growth Equities

As you move into the new facility the R&D efforts will be ongoing in order to scale up the process from pilots phase to full phase?

Paul Thomas

That’s happening right now as a matter of fact.

Caroline Corner – Pacific Growth Equities

As far as going from small batch to large batch processing for Strattice what’s your confidence level like now on that process and how is that progressing?

Paul Thomas

We are very confident of our ability to move to scale. We don’t think that’s going to be a significant issue for us.

Caroline Corner – Pacific Growth Equities

My last question, going forward as you roll out Strattice when should we expect to see some cannibalization of AlloDerm sales, is that something you are expecting in 09’ or beyond that? When should we start seeing an effect from the products?

Paul Thomas

We haven’t broken out the Strattice and AlloDerm revenues for 2008 and so we haven’t provided any guidance on that. We will report both AlloDerm and Strattice quarterly numbers so you’ll see it as we see it.

Operator

We’ll go next to Michael Matson from Wachovia.

Michael Matson – Wachovia

I guess I’d just like to piggy back on that question about cannibalization because given the pricing and the fact that you are doing some studies on Strattice in the hernia area. What is the strategy there, I understand the margins may be better, are you all okay with Strattice cannibalizing AlloDerm or are you going to try to segment the market so that while it is cheaper it’s really used in different indications, either less severe hernias or maybe aesthetic breast reconstruction or something like that?

Paul Thomas

Actually our focus is on growing total revenues rather than having specific targets between Strattice and AlloDerm. I think that some of the growth of Strattice will be truly incremental, in other words, in procedures where AlloDerm was not being used or with surgeons who for a variety of reasons may have chosen not to use AlloDerm and our focus is on growing total revenue as well as flowing that all the way down to gross margin and ultimately operating margin on the business. We believe that we can continue to do so, we’ve given you guidance for 2008 which represents our best thinking that we believe we can accomplish that this year and I think it’s fair to say that in 2009 we would hopefully be able to do exactly the same thing, grow total revenues while increasing margins all the way down through net income.

Michael Matson – Wachovia

That sort of leads into my next question on the margin expansion opportunity. It looks like for 08’ based on the guidance you’ve given that you are expecting minimal or maybe a small amount of operating margin expansion but looking out over the next few years, assuming you can keep up this good top line growth, what do you expect for margin expansion? I think in the past, if I recall, you talked about maybe being able to get operating margins as high as maybe 30% if I recall correctly, in the long run.

Paul Thomas

That’s right. Our long-run goal is to have operating margins in the 25% to 30% range and obviously moving from the 25% or so we are at now, up. I think in 2008 as we’ve talked about, there is a tremendous amount of investment that we are undertaking in this business and despite that high level of investment we are able to have a 25% operating margin and we hope that maybe we can even doa little bit better than that.

And then of course, what that operating margin looks like going forward is really dependent on the ongoing investments that we continue to make in this business. But I would anticipate that some of the investments like some of the launch costs associated with Strattice, some of the clinical expense associated with Strattice, some of the scale up expense associated with Strattice, they’ll sort of drop off our operating expenses in 2009.

Now, the real question is, are there other opportunities or investments that we want to pursue in 2009 or do you let that flow through to the bottom line? I think that’s something we’re not prepared to talk about today, but what we’re prepared to say is that some of these investments we’re making in 2008 is freed up going into 2009 and they will either in whole or in part, flow through to the bottom line depending on what investments we choose to make in 2009.

Michael Matson – Wachovia

All right. Then forgive me if you’ve already said this but approval inthe EU for Strattice, has that happened or if not, what’s the expectation on timing of that?

Paul Thomas

Right, I commented very briefly on the timing for getting a CE Mark. We think that theCE Mark is not going to be therate limiting item for us to introduce Strattice inEurope. It will be completing a distribution arrangement with a partner and beginning the process of introducing the product. So if I recall correctly, I believe our timeline for CE Mark is sometime in the first quarter of this year. And as I said earlier, we also anticipate having a distribution partner on line inthe first quarter of this year. So, I don’t think theCE Mark will berate limiting.

Michael Matson – Wachovia

Finally, on the AlloDerm side, I just wanted to check on the supply of donor cadavers there given that we’ve seen some M&A inthe space and I have heard from investors there is some concern that some of these partnerships in M&A activities could lead to a constraint or increase constraint on cadavers. Is that a risk at all?

Paul Thomas

I can tell you that’s something we don’t worry about at all. We have more than enough supply of tissue from our procurement partners and notwithstanding the recent M&A activity -- I assume you are referring to RTI and Tutogen -- we are not concerned in the least about how that may impact our supply going forward.

Operator

Your next question comes from Matt Miksic - Morgan Stanley.

Matt Miksic - Morgan Stanley

Just to push this penetration question and the conversion of AlloDerm a little bit further, based on what you’ve seen so far from the surgeons who are either involved in the studies or your preliminary launch that you have now currently underway, over thelong run, can you help us understand the range of expectations for how much of your AlloDerm business could convert over to Strattice? Is it 10 to 20, is it over 50? Just something to help us understand that.

Paul Thomas

I can give you my personal perspective on that Matt, although there are other perspectives around. I think over thelong term and if we describe the long-term as the next three to five years let’s say, I think there is a possibility that the majority of our business could be Strattice-related and that’s going to depend in part on as more and more people become familiar with Strattice and more and more clinical data becomes available and it is used more often in their clinical practice, does it really hold all the promise that we believe is inherent inthe product? Soin other words, does it truly perform in an equivalent fashion to AlloDerm? Everything we seen thus far indicates it will. Also, are those ease of use or convenience of use factors important in surgeon selection for the product?

I think that it does have the opportunity over the longer term to be the majority of our business. I suspect we’ll have a good handle on that conversion, especially three or four quarters out, in terms of the run rate to give us an indication of how quickly or not so quickly we’ll move in that direction.

Matt Miksic - Morgan Stanley

I know it is difficult to sort of pass out how much of your Strattice growth will be incremental and how much will be essentially a conversion of a potential AlloDerm case, but is that something you expect to help us with going forward as well?

Paul Thomas

It’s rather difficult; in some cases it’s straightforward. So for example, all of our international revenue will essentially be incremental because we don’t sell any AlloDerm there. Now with respect to the current applications that we are involved with which is challenging hernia repair and breast reconstruction, that may be a little difficult because as I sell Strattice to them for a particular case, is that a surgeon who is currently using or would have used AlloDerm, or is itan entirely new customer for a new procedure? We are not going to have that level of granularity or visibility into the sales process to really provide much feedback to the market as to what is incremental and what is replacement.

But what we do hope to be able to report and what we’re focused on is growing our total revenues, which will bea mix of both AlloDerm and Strattice and to continue to penetrate these markets where we’re only 25% to 35% penetrated currently.

Matt Miksic - Morgan Stanley

On the price discount you gave which was very helpful, I am curious as to you know how much you know about where that positions you relative to the synthetic products that are out there? In other words, AlloDerm being the premium-priced product might be considered to be overkill in one application or another depending on the severity of the hernia, for example. Is that enough to get people just picking up incrementally more synthetic business as well?

Paul Thomas

We are, with Strattice, still much more expensive than any of the synthetic based products because remember, AlloDerm was two or three times as expensive as most of the synthetic products. So, a 15% discount off of a 200% or 300% premium is sort of inthe noise level.

What we’re trying to do with Strattice pricing is a couple of things: one is, to the extent that we realize some benefits from the lower cost of processing Strattice, we think it’s important to share some of those benefits with our customers; and as you know, the hospitals are under a lot of cost constraints. We also think that by sharing some of those benefits with our customers that it will facilitate the introduction of Strattice into clinical practice and help us drive the business over the longer term towards Strattice.

So that’s really our intent behind the Strattice product. Because we have cost or margin improvement opportunities with Strattice that aren’t inherently available in AlloDerm, some of the margin improvement that we anticipate to get will come just from improving our cost efficiencies, the cost of manufacturing. Whereas with AlloDerm, as Steve explained earlier, the benefits that we get from increased absorption by the amount of volume we are putting through the facility is offset by our cost of procuring the tissue through our recovery partners as well as some increased processing cost. So it’s really quite a different dynamic that is available to us with Strattice.

Matt Miksic - Morgan Stanley

Okay, so to the extent that there is this trend of converting tissue or converting maybe some synthetic products to tissue use over time, it doesn’t sound like that’s going to accelerate necessarily with Strattice?

Paul Thomas

Certainly not with the challenging hernia and breast reconstruction. Now one of the interesting opportunities we are thinking through is, is there an opportunity to have a different form of Strattice available that would enable us to reach different applications at different price points, while not cannibalizing the challenging hernia and breast reconstruction? That’s an opportunity that is available to us with Strattice that was not available to us with AlloDerm. So we are considering those types of opportunities as well.

Matt Miksic - Morgan Stanley

In different form? Can you be more specific?

Paul Thomas

Sure. If you look at our challenging hernia and breast recon business, those are typically larger sizes of Strattice or AlloDerm, for that matter. But we may be able to have smaller sizes or sizes with different thickness configurations that we can produce ata cost that will enable us to go after different applications with a different price point and yet those product forms would not cannibalize our hernia or breast recon business.

Matt Miksic - Morgan Stanley

On Strattice, just again abig picture, longer-run view is over the next whatever the long run is, three to five years as you mentioned, if you look atthe opportunity inEurope for different or further penetration into new applications maybe or the breast market in theU.S. and then thecore penetration of your challenging hernia business, how do you think those rank in terms of size over thelong run?

Paul Thomas

The European market opportunity in terms of procedures is about the same as the U.S. although the pricing will be somewhat lower. So that will be actually a fairly significant opportunity; several hundreds of millions of dollars since theU.S. opportunity is about $500 million.

We have looked ata whole series of new applications including the use of Strattice in some of the esthetic breast reconstruction and other types of hernias like inguinal hernia and so forth and we think in total some of the new application that we’ve already teed up can be several times as large as the European market opportunity, the only caveat there is all of those opportunities when we really dig in may not fully pan out for us.

I would say that certainly we think that there is significant opportunity inthe international markets and new applications as well, and it is a little bit difficult to handicap which turns out to bea bigger contributor over the next let’s say two to three years because we’re just not far enough along developing either the markets or the new applications to really calibrate that judgment.

Matt Miksic - Morgan Stanley

On R&D, it came in a little higher than at least we were expecting for ‘08 -- not much -- but I am wondering how much of the growth there is driven by some of the increase in studies that you talked about either in U.S. and in Europe; and also whether your partner or your proposed partner will help you fund any of those studies?

Paul Thomas

Actually a fair amount of the R&D increase is related to clinical studies that will be ongoing with Strattice. With respect to an international partner help fund some of those clinical studies, the answer is yes, we will have a cost-sharing arrangement. The reason we’re moving in that direction is because we want to have an active role in helping to both develop and fund OUS clinical trials of Strattice and quite frankly to the extent that we help fund some of those studies, there is an opportunity for a better share of the revenue and that’s again, an investment that we are prepared to undertake.

Operator

Your next question comes from Spencer Nam - Summer Street Research.

Spencer Nam - Summer Street Research

In terms of your sales force ramp up, how do you foresee that ramp up to take place? Is it going to be gradual quarter over quarter or do you expect all of it to be hired upfront?

Paul Thomas

They areall on board now Spencer. They are all on board and trained. There might be one person that we haven’t on board but essentially they areall on board and trained.

Spencer Nam - Summer Street Research

Interest income for 2008, do you have any estimate on that right now?

Steven Sobieski

I think somewhere between $4.5 million and $5 million.

Spencer Nam - Summer Street Research

The marketing and education that you mentioned as part of your spending in ‘08, what exactly would that entail given that Strattice should be working like AlloDerm and overall AlloDerm is very much well known inthe medical community. Do you have a specific message that you would like to send and hence the extended effort on this part?

Paul Thomas

Well, actually the message is along the mechanism of action and having a regenerative response that is available through both AlloDerm and Strattice. The message is really along this regenerative response. Although the response from AlloDerm and Strattice are similar, they are two different products that behave a little bit differently so we are educating surgeons both in educational forms as well as cadaver labs where they can actually handle the material and suture itin and also through our sales force. So we are actually making quite a large investment in this medical education around mechanism of action and hands-on tips for using Strattice in clinical practice.

Spencer Nam - Summer Street Research

When you have two products that are from different backgrounds or different makeup but then they dothe same thing, you can’t help at ask, could there be a preference? How would the salesforce put this out there? Could there be a tendency for the salesforce to go for one over the other or push one over the other? How do you expect to manage that?

Paul Thomas

Well, that’s relatively straightforward. The salesforce follows the incentive trail, the money trail. The sales force will be incented to sell both AlloDerm and Strattice; but preferentially to sell Strattice.

Operator

At this time, I would like to turn the conference back over to your presenters for any closing or additional remarks.

Paul Thomas

Thanks, Connie. Actually we don’t have any closing remarks other than to say we look forward to updating everyone on our final 2007 results after our audit is complete which will be sometime towards the end of February. Thank you very much.

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Source: LifeCell Corporation 2008 Guidance Call Transcript
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