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CryoLife, Inc. (NYSE:CRY)

Q1 2008 Earnings Call Transcript

April 30, 2008 10:00 am ET

Executives

Steve Anderson – Chairman, President and CEO

Ashley Lee – EVP, COO, CFO and Treasurer

Analysts

Matt Dolan – Roth Capital

Mark Mullikin – Piper Jaffray

Raymond Myers – Emerging Growth Equities

Josh Kolevzon – Millenium Partners

Operator

Greetings, ladies and gentlemen, and welcome to the CryoLife First Quarter 2008 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) It is now my pleasure to introduce your host, Mr. Steve Anderson, President and Chief Executive Officer of CryoLife. Thank you, Mr. Anderson. You may now begin.

Steve Anderson

Good morning, everyone, and welcome to CryoLife's Q1 2008 Conference Call. This is Steve Anderson, the CEO of CryoLife. And with me today is Ashley Lee, the company's Executive Vice President, COO and CFO.

This morning the company reported its operating results for Q1 '08. Revenues were $25.6 million, a 4% increase over Q1 of '07. Combined cardiac and vascular revenues increased 18% in Q1 2008 versus Q1 2007. Earnings per common share for the first quarter of 2008 were $0.10 versus $0.04 for the first quarter of '07. This is the fifth consecutive profitable quarter for the company. The Q1 2008 operating results indicate that the company continues to make progress in the implementation of its strategic plan that was put into place in late 2006, early 2007. Ashley will comment more completely on the company's first quarter 2008 financial results in just a few moments.

But before he does that, let me share the agenda for today's call with you. First, Ashley will comment on the operating results for Q1 2008. He will comment in detail on allograft revenues by tissue type. He will comment on the sales growth of BioGlue and the progress that has been made by the companies that have negotiated technology licenses for BioGlue. He will discuss the new line of credit that the company negotiated in March of 2008. I will discuss the signing of the distribution agreement with Medafor, Inc. for their powder hemostat. I'll also discuss the beginning of the animal testing on the organ transport solution that we licensed in January of 2008 from Trophic Solutions. During the quarter, the FDA cleared our decellularized SynerGraft human pulmonary heart valve, and I will discuss the implications of that clearance in some detail. After my comments are completed, Ashley will return to give some financial guidance for the rest of the year. After his guidance comments, we will open up the call for questions.

At this time, Ashley will discuss this morning's earning release.

Ashley Lee

Thank you, Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I'd like to make the following statement. Comments made in this call, which look forward in time involve risk and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company’s or management's intentions, hopes, belief, expectations or predictions of the future. Additional information concerning risk and uncertainties is contained from time to time in the company's SEC filings including the Risk Factor section of our Form 10-K for the year ended December 31, 2007, and our Form 10-Q for the quarter ended March 2008, which we expect to file by the end of this week, and in the press release that went out this morning.

This morning, we reported our results for the first quarter of 2008. Revenues for the first quarter of 2008 increased 4% to $25.6 million, compared to $24.5 million in the first quarter of 2007. Excluding orthopedic revenues of $327,000 and $1.8 million in the first quarter of 2008 and 2007 respectively, total revenues increased 11%.

Net income in the first quarter of 2008 was $2.8 million, or $0.10 per basic and fully-diluted common share, compared to $1.4 million, or $0.04 per basic and fully-diluted common share for the first quarter of 2007.

Tissue processing revenues in the first quarter of 2008 increased 4% to $13.4 million, compared to $13 million in the first quarter of 2007. Tissue processing revenues increased primarily due to an increase in demand for the company's cardiac and vascular process tissues and, to a lesser extent, price increases, partially offset by decreases in shipments of orthopedic tissue following the company's cessation of orthopedic tissue procurement and processing in January of 2007.

Cardiac revenues were $6.2 million for the first quarter of 2008, compared to $5 million in the first quarter of 2007, an increase of 25%. The increase in cardiac revenues was due to a 26% increase in cardiac units shipped, which increased revenues by approximately 17%, and an increase in average service fees, which increased revenues by 8%.

Vascular revenues were $6.9 million in the first quarter of 2008, compared to $6.1 million in the first quarter of 2007, an increase of 12%. The increase in vascular revenues was driven by an 8% increase in vascular unit shipments, which increased revenues by 8%, and by fee increases, which increased revenues by 4%.

Orthopedic revenues were $327,000 for the first quarter of 2008, compared to $1.8 million in the first quarter of 2007, a decrease of 82%. The decrease in orthopedic revenues is a result of a limited supply of orthopedic tissues available for shipment following the company's cessation of procuring and processing orthopedic tissues on January 1 of 2007.

BioGlue revenues were $11.9 million for the first quarter of 2008, compared to $11.2 million in the first quarter of 2007, an increase of 6%. The increase was largely due to the favorable impacts of product mix, and an increase in average selling prices that increased revenues by 3%.

Total product and tissue processing gross margins were 63% in the first quarter of 2008, compared to 61% in the first quarter of 2007. Tissue processing gross margins in the first quarter of 2008 were 45%, compared to 41% in the first quarter of 2007. Tissue processing gross margins improved in 2008, compared to 2007 primarily as a result of price increases, and a favorable product mix in 2008.

General, administrative, and marketing expenses were $12.1 million in the first quarter of 2008, compared to $12.3 million in the first quarter of 2007. The decrease in G&A expenses was primarily attributable to a decrease in expense for post-employment benefits, partially offset by an increase in stock-based compensation. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations, including our Form 10-Q that we plan to file by the end of this week.

As of March 31, 2008 we had $12.9 million in cash, cash equivalents, and marketable securities, of which $946,000 was received from the U.S. Department of Defense as advance funding for the development of protein hydrogel technology for use on the battlefield. The $12.9 million of cash excludes $4.5 million of cash we used to pay off our prior credit facility, which expired on February 8th of 2008.

In March, we entered into a new credit facility with GE Healthcare Financial Services, which provides for up to $15 million in revolving credit for working capital, acquisitions, and other corporate purposes. Refer to our Form 10-Q to be filed by the end of this week or our recently filed 8-K for more details about our credit facility.

I'd like to provide an update on the progress on the development of BioGlue for use in cosmetic surgery and BioGlue for use in hernia mesh fixation. Our partner for cosmetic and plastic surgery, BioForm Medical, has completed their pilot study. They are currently in discussions with the FDA regarding the initiation of their pivotal IDE study. We'll keep you up to date as we learn more. As for Europe, we expect to have an approval for BioGlue's use in cosmetic surgery soon, and BioForm will lead efforts to commercialize BioGlue in that market.

Our distribution partner in the U.K., Ireland, and Germany for BioGlue's use in hernia mesh fixation is Proxy Biomedical. Recall that BioGlue is currently approved for this indication in many international markets. Proxy has initiated a study in Germany and has enrolled over 40 patients in a post-approval study. The early results are very encouraging. Hernia repair is one of the most commonly performed surgical procedures in the world, and we believe that BioGlue’s use in mesh fixation may represent an attractive opportunity for us. We'll keep you posted as developments occur.

Now, I'll turn it back over to Steve.

Steve Anderson

On April 16th we signed a private label distribution agreement with Medafor for their haemostatic agent. CryoLife's brand name for the product will be Hemostase MPH. Hemostase MPH is an FDA-approved patented microporous polysaccharide hemisphere, a plant-based flowable powder that is engineered to rapidly dehydrate blood, enhancing clotting on contact. It is provided to the surgical suite in a ready-to-use delivery applicator. Unlike many haemostatic agents, Hemostase MPH does not require either additional preparation or special storage condition. Hemostase MPH is fully absorbable within 24 to 48 hours of application compared to other surgical hemostats, which can take three to eight weeks or more to fully break down.

Our distribution agreement is exclusive for cardiac and vascular uses in the United States beginning May 1st, 2008, excluding approximately 41 hospitals until no later than the end of this year, and the United States Department of Defense facility hospitals. Our distribution agreement is exclusive for cardiovascular and general surgeries with certain exceptions outside of the United States, excluding China and Japan. We plan to begin distribution in the United Kingdom, Germany, and Canada on May 1st, and in the rest of the world beginning in January 2009.

We feel that this product augments our BioGlue surgical adhesive by being effective in sites where active bleeding is occurring. The two products, Hemostase MPH and BioGlue, should together enable the company to compete more effectively head-to-head with certain other short-acting reabsorbable haemostatic products, as well as strengthen the company's franchise in products for control of surgical bleeding throughout the world. Market research available to us estimates that the total United States market for a product like Hemostase MPH is about $580 million.

During the quarter we successfully negotiated an exclusive worldwide license from Trophic Solutions, a small company in Madison, Wisconsin, for the technology surrounding an organ transport solution that could enable kidneys to be held for up to six days rather than the current three days without machine profusion but with equivalent outcomes. This technology was invented by three professors from the University of Wisconsin. The early animal testing of this new solution was done on a comparative basis with the UW solution using simple cold storage. These tests showed that the Trophic Solutions technology had many advantages over the UW solution.

Based on these results, Trophic Solutions received approval from the FDA to conduct a pilot study on this new organ transplant solution in humans. The pilot clinical study showed results with the Trophic Solutions technology, such as delayed graft function, to be comparable to published results obtained with machine profusion using the Belzer solution. The early tests, however, did not compare Tophic Solutions in cold storage to machine profusion in the same study.

We have decided to test Trophic Solutions against both machine profusion and the UW solution in a head-to-head comparison in animals. The study is being conducted using a pig model. We expect that the results of this comparison study will be available to us at the end of August of 2008. If these pig trials come out in favor of the new Trophic Solution and show that it is superior to UW solution, then we will move immediately into the human pilot study after FDA approval of the study plan. We estimate that this study will consist of 125 patients being followed for six months.

If this technology is successful and we can prove that we have a superior organ transport solution, then we will be in a position to significantly strengthen our market position with the tissue banks and organ procurement organizations that supply us with the tissues we preserve. In market studies available to the company, the total world market for an organ transport solution, as I've described, is $50 to $65 million.

On February 7th, the FDA cleared our SynerGraft processed pulmonary human heart valve for commercial distribution. We began processing valves using the SynerGraft process on February 8th. The SynerGraft process removes donor cells from the tissues using gentle hypotonic lysis and enzymatic washing steps, thereby creating a decellularized collagen matrix that has fewer antigens than standard processed allograft tissues. The release of this valve is a significant event in the history of the company, as well as for patients who will be undergoing right ventricular outflow tract reconstruction or pulmonary valve replacement as part of the Ross procedure.

The fact that the SG valve may be used in both of these procedures gives us the potential for use across a broad patient spectrum from neonates to adults. Based on retrospective data over a six-year period on 342 patients that we sent to the FDA, the SG-processed valves have been shown to be 99% free of endocarditis at six years, with 95% freedom from explant on patients having right ventricular outflow tract reconstruction at six years, while Ross procedure patients showed a 98% freedom from explant at six years.

The first implant, following the FDA clearance, of a SynerGraft processed pulmonary valve was done on March 18th at St. Louis Children's Hospital. There had been an additional 37 SynerGraft processed heart valves shipped for cases either already completed or scheduled throughout the United States since that time. The SynerGraft valve has been used in both right ventricular outflow tract reconstruction and Ross procedures. The implanting physician's acceptance of this technology has exceeded our expectations. Currently, we have an excess of 360 SynerGraft processed pulmonary heart valves working their way through the preservation process.

The SynerGraft technology is a technology platform that may be applied to vascular tissue, as well as valves. Our next FDA filing for SynerGraft processed tissue will center on our CryoValve SG decellularized aortic human heart valve. CryoLife's regulatory staff has requested a meeting on this subject with FDA, which we hope will occur later this spring.

That concludes my comments, and now Ashley will return with some financial guidance for the rest of the year.

Ashley Lee

Our GAAP revenues are composed of product and tissue processing revenues plus other revenues. With the recent clearance of our SynerGraft processed pulmonary heart valve, and with the recently announced private label agreement for Hemostase MPH, we now expect product and tissue processing revenues for the full year of 2008 to be between $102 and $107 million. Other revenues for 2008 may reach between $1.5 and $2 million, primarily related to funding received from the Department of Defense in connection with the development of BioFoam. The actual amount of other revenues is largely dependent upon actual expenses incurred related to the development of BioFoam.

Tissue processing revenues are expected to be between $53 and $56 million, and BioGlue revenues are expected to be between $47 and $49 million for the full year of 2008. Other implantable medical device revenues are now expected to be approximately $2 million in 2008, which includes an estimated $1 million in revenues from the distribution of Hemostase MPH. As we roll out this product and gain more experience with the product uptake, we could increase this revenue guidance at some point later this year. We expect gross margins for Hemostase MPH to be slightly below our consolidated gross margins in 2008.

We expect general, administrative, and marketing expenses of between $48 and $51 million and research and development expenses of between $6.5 and $8.5 million for the full year of 2008. The research and development expectations include an estimated range of between $1.5 and $2 million to be funded by the U.S. Department of Defense in connection with the development of BioFoam.

That concludes my comments and now I will turn it back over to Steve.

Steve Anderson

At this time, we will open up the conference call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator instructions) Our first question comes from Matt Dolan with Roth Capital. Please proceed with your question.

Matt Dolan – Roth Capital

Hey, guys. Good morning.

Steve Anderson

Good morning.

Ashley Lee

Good morning. How are you?

Matt Dolan – Roth Capital

First question on SynerGraft and your assumptions relative to your guidance, first since you had a month of actual usage in the market and you conducted your recent symposium. Can you give us some feedback on these initial cases, and based on what you heard, how much of your customer base are you expecting will convert to SynerGraft this year?

Steve Anderson

There has been a great amount of enthusiasm about the SynerGraft processed heart valves and the early implants, from my perspective, look like they are primarily replacements for homograph valves that have been implanted for some time, generally. And we've had more RVOT implants than we have had Ross procedures. Ross procedures would be new surgery or initial surgery. The RVOT appears to be redo surgeries in children that were reconstructed early in their life. I think that within the next year, most of our pulmonary valves will be converted to SynerGraft processing because the clinical results, the six-year [ph] clinical results, are so favorable, particularly in kids, and they seem to last longer. And if that is – comes out to be actually fact, then there will be fewer operations required for the kids that have had their right hearts reconstructed. But the response at the allograft symposium last week was very enthusiastic. And most physicians there were pediatric cardiovascular surgeons.

Matt Dolan – Roth Capital

Okay. Great. That's helpful. And then with respect to Hemostase, can you give us an idea of how you are going to market this product alongside BioGlue, including pricing plans? And what percentage or proportion of your current surgery volume do you think you are unable to use BioGlue and that this product may be applicable for?

Steve Anderson

This is applicable for active bleeding sites and it will compete directly with some of the Baxter products that are effective in those kinds of situations. And also, it would compete with fibrin adhesives that are often used for fields that – surgical fields that are kind of seeping. And it is really going to be used for different indications than the BioGlue. BioGlue has to be used and should be used in a dry field. BioGlue is a lot stronger than Hemostase. In fact, it's a lot stronger than any of the competitive haemostatic type of agents. The other key feature here that I am particularly enthusiastic about is that it will give us an opportunity to bundle our products in certain large accounts. And it should, I would think, result in more hospital contracts for surgical sealants and enable us to compete right across that whole surgical spectrum. Maybe Ashley has some other things he'd like to add.

Ashley Lee

Yeah, Matt, if you look at the markets for the haemostatic agents as compared to some of the surgical adhesives and sealants like BioGlue and some of the fibrin sealants and FloSeal, the markets for the haemostatic agents are really about twice as big as what you would see for surgical adhesives and sealants. So, we think that by having Hemostase, it's really going to allow us to address the entire market for the control of surgical bleeding, and we think the market for the haemostatic agents are roughly about twice as large as they are for surgical adhesives and sealants. So, we are really excited about having the opportunity to distribute this product. If you look at our pricing, we think that we are going to be very, very attractively priced on a competitive basis based on Thrombin and then FloSeal and a lot of the other haemostatic agents that are out there. So, we are going to be very competitively priced. And we are very optimistic about the opportunity.

Matt Dolan – Roth Capital

Okay. Great. And then finally, on the revenue guidance again. Looking at trends last year, we saw, basically, declines from Q1 and then a big acceleration in Q4 on a dollar basis. But I think there were some variables playing in there with RTI, et cetera. So, can you give us commentary, maybe on how to look at those trends on a more normalized basis this year?

Ashley Lee

We– If you look at the last two to three years, you have seen some weakness in the second and third quarters as compared to the first and the fourth. We don't expect to see that type of weakness this year. I mean if there is any indication of weakness, you might see it in the third quarter because – and especially with BioGlue, and we've seen that in the last couple of years, just because of all the vacations in Europe and vacations in general. But if you look at how we are positioned right now, we have CryoValve SG, a recent product that we are actively marketing right now. We have another new product in Hemostase MPH. In addition to that, we have a more tenured and experienced sales force that has been with us, on average, much longer this year than at this point last year. We've got new marketing programs in place. And quite frankly, we've got a lot of momentum right now. And because of all that, we really don't expect to see the type of weakness in the middle part of this year that you've seen in the last couple of years.

Matt Dolan – Roth Capital

Very good. Okay. Nice job. Thanks, guys.

Operator

Our next question comes from Mark Mullikin with Piper Jaffray. Please proceed with your question.

Mark Mullikin – Piper Jaffray

Good morning.

Steve Anderson

Good morning.

Mark Mullikin – Piper Jaffray

Sorry if I missed it, but did you give the price volume breakout on BioGlue?

Ashley Lee

We didn't give the exact numbers. We had, actually, a slight decrease in milliliter shipped, but we actually have favorable product mix that actually resulted in more units going out the door. So we – the volume mix contributed about 3% to the increase in revenues, and that predominantly occurred in international markets. And then we had about a 3% increase due to pricing.

Mark Mullikin – Piper Jaffray

Okay. And when you commented on Medafor and the ability to bundle, how important is that? What percentage of the market do hospitals purchase under these contracts that are bundle contracts?

Ashley Lee

We don't have the exact statistics on how much of the purchasing is done in that manner. We do know that our competitors have been able to use– utilize that strategy in the past against us. And we think that now, by having Hemostase, we'll be able to do that also.

Mark Mullikin – Piper Jaffray

Okay. And is there any update on the timing of BioGlue in Japan?

Steve Anderson

No, there isn't. We haven't heard anything from the regulatory agencies one way or the other as far as approval or not approving it. Last week we had a training course that included about six or eight Japanese cardiovascular surgeons and certain executive representatives from our marketing partner in Japan. They came here to Atlanta for a couple of days to be trained in the product. And then, they also attended some live surgery cases in downtown Atlanta to see BioGlue used in the operating theater. That all went very well. And I think that based on my feelings about our marketing partners' response to all of that that they remain very optimistic that that approval will come through.

Mark Mullikin – Piper Jaffray

Are there any statutory requirements in Japan as far as when they have to respond? Or is it open-ended?

Steve Anderson

It's very open-ended. This has been going on for a very long period of time.

Mark Mullikin – Piper Jaffray

Are there any issues, specifically, that they are concerned about?

Steve Anderson

We think that we've addressed all of the issues that they have been concerned about.

Mark Mullikin – Piper Jaffray

Okay. And can you just update us on the status of the sales force? How many reps you have, how many you plan to add this year? And OUS, what the distribution channel looks like?

Ashley Lee

Yeah. Currently, we have a full complement of 35 sales reps here in the U.S., with five regional managers and a couple of direct global employees above that. So, we are looking in the low 40s, all said and done. We do have plans to expand our sales force during the remainder of this year and probably into 2009. As we finalize those plans, we will reveal more of them to you. But all of those expansions are currently included in our guidance for the remainder of this year. But with a product like Hemostase that really gives us the ability to approach more cardiac and vascular surgeons, we are looking at expanding our sales force. In regards to international markets, we are currently direct in the U.K. and in Germany, and we have manufacturer reps in all of our markets. We currently have – I think it's five or six reps in the U.K., and currently, three or four in Germany. We are potentially going to expand in the German markets, potentially go direct there. We'll increase our presence and the size of our direct sales force there. And we are currently in the process of evaluating some other international markets to see exactly what our strategy is going forward. But we are very excited, again, to have the opportunity to distribute Hemostase, and look forward to continuing building our sales force and moving forward.

Mark Mullikin – Piper Jaffray

And then, just finally, when do you expect to move to a fully taxed rate?

Ashley Lee

Our best guess at this point is in 2009. And we have ongoing discussions with our tax advisors and our accountants. And our best guess at this point is 2009. If we have some updates to that, then we will let you know at some point in the future.

Mark Mullikin – Piper Jaffray

Okay, thanks. Nice quarter.

Operator

Our next question comes from Raymond Myers with Emerging Growth Equities. Please proceed with your question.

Raymond Myers – Emerging Growth Equities

Thanks for taking the questions. And congratulations, Steve and Ashley, for the progress in the company.

Ashley Lee

Thank you.

Raymond Myers – Emerging Growth Equities

Couple of specific questions before I get to the more general ones. What was implantable medical device revenue in the first quarter?

Ashley Lee

What was it comprised of?

Raymond Myers – Emerging Growth Equities

No. How much was it?

Ashley Lee

I think that's broken down in our press release, Ray. It was roughly close to $200,000.

Raymond Myers – Emerging Growth Equities

Great. And then, it looks like the grant revenue related to BioFoam was lower in the first quarter than it's been in a while, yet you kept your guidance for the full year approximately the same. Can you give us an update on what the BioFoam development program is doing?

Ashley Lee

We are currently in the process of conducting animal studies, shelf life and stability studies, things of that nature. We gave some guidance in the call that that indicated that we could spend anywhere between $1.5 million and $2 million for the entire year of 2008. We continue to make progress. And still believe that at this point, that the guidance that we gave out is accurate for 2008.

Raymond Myers – Emerging Growth Equities

And assuming that occurs, when do you expect the product will be ready for sale to the Department of Defense?

Steve Anderson

We would still need to go through the IDE, PMA process to actually sell to the Department of Defense. Our plans are to submit for CE mark at some point during this year. And as we continue to make more progress, we'll give you updates on when we expect to do that, but based on the progress that we are making, we still anticipate filing a CE mark at some point this year that would allow us to distribute in Europe. And when we have some more definitive timelines on when we will file an IDE and begin the clinical trial, we can share more information about when we expect to ship to the D.O.D.

Raymond Myers – Emerging Growth Equities

Okay, great. In the past we’ve talked a bit about BioDisc and ProPatch. You have so many products in development it’s tough to tracking them all, but is there continued progress on those two? Are those kind of on hold?

Steve Anderson

There has been continued progress on BioDisc with our notified body in Europe. I am expecting it to get blessed for a pilot study later this year. On the ProPatch situation, we had been negotiating for a long time, maybe almost a year, with a large company regarding an exclusive contract for them to market that particular product, and we found out recently that they wanted to discontinue those discussions. So, now that we don't have that particular conflict with them, we are reevaluating marketing that product ourselves. And this happened within just the last week or 10 days, a very short period of time ago. So, we'll address that issue in more detail at the next call next quarter.

Raymond Myers – Emerging Growth Equities

Well, that sounds like it might be an outside opportunity.

Steve Anderson

We think it's a very good opportunity. We just felt we were committed to negotiate with this firm in good faith. And under the circumstances, we were a little disappointed on how it turned out, but maybe it's a blessing in disguise. And certainly, the marketing opportunity is superb. We will have to sort through it here in-house, and make the decision as to whether or not we want to move forward with it on our own. But the animal study work has looked very encouraging. We are very pleased with that. And so, I would expect us to make a decision here in the near future that would put that into our representatives' bag.

Raymond Myers – Emerging Growth Equities

Okay. Now, how would that work? Because ProPatch is used for, potentially for hernia as well as shoulder repair. So, is that correct?

Steve Anderson

There is also an opportunity for us in the approval that we got from FDA for using it as a cardiac patch. And since we have a distribution network that is focused on reconstructive cardiac surgery, that's where we would focus.

Raymond Myers – Emerging Growth Equities

What about the hernia? Because it seems like you are moving more and more in that direction with the BioGlue with the mesh.

Steve Anderson

We would probably talk with the companies that we are partnering with on the BioGlue about that. They might be interested in that. But all those decisions have yet to be made exactly how we would approach that.

Raymond Myers – Emerging Growth Equities

Okay. But at a minimum, it sounds like there's some upside potential to finally– even though it didn't move forward with this partner, there's some upside potential in the cardiac patch.

Steve Anderson

Oh, yes. Yes.

Raymond Myers – Emerging Growth Equities

That's great. A question on the BioGlue gross margins. Everything moves around just a little bit quarter to quarter, but we had a slight downside move in the BioGlue gross margins in the first quarter to 83.5% and that's a slight down sequentially, but increase year-over-year. So, is this a seasonal effect or what's going on there?

Ashley Lee

No. The 83% that you are speaking of, Ray, includes all implantable medical devices, so it includes CardioWrap, it includes our O'Brien valves, and things of that nature. The BioGlue gross margins are actually a little bit higher than the 83%. And those actually held steady during the first quarter of this year. And a little bit of the decrease that you are saying was related to some of those other products. And those really don't comprise a large part of our business.

Raymond Myers – Emerging Growth Equities

That's not related to BioFoam grants, is it?

Ashley Lee

No, it is not.

Raymond Myers – Emerging Growth Equities

So, looking forward, is Q1 an aberration where it was slightly lower than those other products? And we'll see it get back to the –

Ashley Lee

Yes. We expect our margins to be a little bit higher for our implantable medical device business for the remainder of the year.

Raymond Myers – Emerging Growth Equities

Okay. That's great. We had also a slight uptick – well, you had a continuation of the trend of improving human tissue preservation gross margins now up to 45.5% this quarter. Seems to be going up a percent or more each quarter. That's been the trend. Is there any reason that we should expect that trend wouldn't continue?

Ashley Lee

We are not going to give specifics on the magnitude of the improvement, but obviously with CryoValve SG now available to us, we think that we have room to expand margins in our tissue processing business.

Raymond Myers – Emerging Growth Equities

That all sounds very good. And then finally, your guidance, you've increased your guidance $1 million for the full year. And you also talked about the hemostat product being a $1 million revenue for the full year. So, in a sense, you didn't increase your base guidance at all. If you simply did – if you had just a good fourth quarter and you had the same $25.5 million Q1 revenue throughout the year, you just annualize that, we are already at the bottom end of your guidance. So, one would assume that the low end of your guidance is highly conservative.

Ashley Lee

We would hope that it is. But again, it is our guidance. I made a comment on the call earlier today that over the last two to three years, we have seen a little bit of weakness in the second and third quarters. We're not expecting to see that same magnitude of weakness this year. If we see any weakness, we would expect to probably see a little bit maybe in the third quarter, if we see it at all. But our guidance speaks for itself. It's between $102 and $107 million. And if we need to revise that as we move throughout the year, then we'll do that.

Raymond Myers – Emerging Growth Equities

Okay. Good. And the sensitivity, of course, is particularly in Q2 where you had a particularly strong first quarter last year, and then Q2 was a more normalized quarter. You are well into Q2 now. What you are saying is you don't see any repeat of that type of situation. And if anything – there’s nothing unusual about Q1 being particularly strong.

Ashley Lee

We like where we are, so far, in the second quarter to-date. We've had a very good April. We are pleased with where we are at this point.

Raymond Myers – Emerging Growth Equities

Okay. Well, thanks very much, Ashley. And congratulations to both of you, Steve and Ashley. And thank you. We look forward to next quarter.

Ashley Lee

Okay.

Operator

Our next question comes from Josh Kolevzon with Millenium Partners. Please proceed with your question.

Josh Kolevzon – Millenium Partners

Yes. Hi, guys. My questions were actually asked and answered. So, thanks and congrats on a great quarter.

Ashley Lee

Thanks, Josh.

Steve Anderson

Thank you, Josh.

Operator

There are no further questions in queue at this time. I would like to turn it back over to management for closing comments.

Steve Anderson

Thank you very much for joining us for the Q1 conference call, and we look forward to meeting with you at the conclusion of the second quarter.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: CryoLife, Inc. Q1 2008 Earnings Call Transcript
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