Exactech, Inc. Q2 2008 Earnings Call Transcript

Sep.13.08 | About: Exactech, Inc. (EXAC)

Exactech, Inc. (NASDAQ:EXAC)

Q2 2008 Earnings Call Transcript

July 31, 2008 10:00 am ET

Executives

Bill Petty – Chairman and CEO

Jody Phillips – CFO

David Petty – President

Analysts

Jeff Johnson – Robert W. Baird

James Sidoti – Sidoti & Company

Julie Hoggatt – Noble Financial

Bill Plovanic – Canaccord Adams

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Exactech Inc. second quarter 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, July 31, 2008.

I would now like to turn the conference over to Dr. Bill Petty, CEO. Please go ahead, sir.

Bill Petty

Thank you, Brittney. And welcome to everyone to Gainesville, Florida, which is a tropically beautiful humid morning in July. We are very pleased to discuss our quarter two results with you. I will start by giving a little information regarding the quarter, then some information about the first half of the year, a little bit of a breakdown for the product segments, some information about comparatives between domestic growth and international growth. And then, I'm going to close my comments with a comment about the effect of our acquisitions.

Then, I will turn it over to Jody Phillips, our Chief Financial Officer, to give some more detail about the financial results. And then also, as a reminder, our President, David Petty is here. And he will, in addition to Jody and myself, participate in the question-and-answer session.

Revenue for our Q2 '08 was up 38% to $43.7 million from $31.6 million in the second quarter of '07. Our diluted earnings per share for the quarter was $0.24 based on a net income of $3 million. This compares with net income of $1.4 million or $0.12 diluted earnings per share a year ago. It is important to remind you that in the second quarter of '07, we had an impairment charge of $1.5 million. Excluding this charge, the second quarter '08 diluted earnings per share of $0.24 compares to $0.20 in the second quarter of '07.

Going now to the first half of '08, for the first six months of 2008, our revenue was $83.5 million, which is an increase of 37% over $61.2 million for the same quarter in '07. The net income for the first six months of '08 was up 78% at $5.8 million, compared to $3.3 million for the first six months of '07. This does include the second quarter '07 impairment charge of $1.5 million.

Now, to go a little bit to the different product segments, sales of our knee products in the second quarter was a strong driver of 21% to $20.5 million from $16.9 million during Q2 of '07. Our hip implant sales for the second quarter were $5.7 million, which represents a 4% increase from the revenue of $5.4 million in Q2 of '07. Biologic services revenue increased 21% to $4.7 million from $3.9 million in '07. And shoulder implant revenue increased 69% to $3.9 million from $2.3 million in the second quarter of 2007.

Our United States sales grew 24% to $28.8 million. That's up from $23.3 million in Q2 '07. Second quarter sales increased internationally 79% to $14.9 million from $8.3 million in the second quarter of 2007; and in the quarter, represented 34% of total sales compared with 26% in the same quarter last year. Though our same-store revenues were up substantially, our international business did receive a boost from the contributions of some European distributor startups.

Regarding the comments related to the acquisition, we completed one acquisition very early in the first quarter, that being spine, and another early in the second quarter, that being our distributor in Europe. Certainly, those affected our top line for both the first half and the second quarter. It is important to note, though, that without these additions, and if we do not consider the Link distribution termination, which was as of the beginning of this year, our organic growth in our core products for Q2 was 28%, which is pretty strong compared to industry figures.

I'm now going to turn it over to Jody to give a little more financial detail. Jody?

Jody Phillips

Good morning, everyone, and thanks for joining us. We were pleased to report financial results for the second quarter that were at the upper end of our previous guidance. From an operations standpoint, we feel that we made significant progress during the quarter in the integration of our French distribution and spine acquisitions that were completed earlier this year.

We continue to focus on the development and growth of our core knee, hip, and shoulder products. And we feel that the 28% quarterly and year-to-date growth of our core products is the large driver behind our success. The sales momentum allowed us to maintain our internal production volumes and contributed to the gross margin percentage being better than we expected during the second quarter.

The operating expense increase of 26% to $21.8 million was consistent with our expectations with the two primary drivers of the increase being the consolidation of the French distributor as well as legal expenses. If you remove the comparative impact of the $1.5 million impairment charge in 2Q '07, the operating expense increase for the second quarter was 38%, which was consistent with our top-line revenue growth. Operating expenses are expected to increase roughly consistent with our sales growth through the balance of 2008.

The resultant Q2 '08 net income of $3 million represented more than a 100% increase versus the second quarter of '07. And on a dollar basis, it represented a 27% increase when you've removed the impact of the 2Q '07 impairment charge.

As I referenced in the release, we completed a $20 million additional placement of equity during the quarter on a register-direct basis. And we renewed and increased our credit facility from a $30 million facility to a $40 million facility of which $7.1 million was outstanding as of the end of the second quarter.

Looking forward, we increased the bottom range of our full-year revenue and EPS guidance to reflect this last quarter's performance. And we feel that we are well positioned to achieve the full-year numbers as they are outlined.

The current guidance for the full year is for revenues of $164 million to $169 million with diluted EPS of $0.94 to $0.98. We've released our guidance for the third quarter of 2008 with a sales range of $37 million to $40 million and EPS of $0.21 to $0.23 on a diluted basis. This does reflect the traditional seasonal impact, which could be more pronounced this year due to the current mix of our European business.

Again, thanks for joining us this morning.

Bill Petty

And, Brittney, we're happy to entertain questions at this time.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator instructions) Our first question comes from the line of Jeff Johnson with Robert W. Baird. Please go ahead.

Jeff Johnson – Robert W. Baird

Thank you. Good morning, guys.

Bill Petty

Morning, Jeff.

Jeff Johnson – Robert W. Baird

A few things here, and I apologize – I joined the call about two minutes late. So, Dr. Petty, I don't know if you addressed any of this in your earlier comments. But could we talk a little bit on the mix of revenues, especially how it shook out on the hip side and the other products category? I guess, specifically, if we could get growth rates at all, ex. the Link termination on hips and knees; that would be helpful. And then if we could just dive into what in that other product category, what are some of those revenues? And how sustainable are those coming through the France Medica deal?

David Petty

Sure. It's David, Jeff.

Jeff Johnson – Robert W. Baird

Thanks, David.

David Petty

Good morning. Yes, and you've asked the right question about the Link. Remember, for the entire life of that agreement, we reported the Link sales under the hip and knee categories. And the vast majority of those sales were hip sales. So, if we take the hip – the Link hip – out of the comparative from the prior year, our quarter’s growth for our core hip products was 27%. And year-to-date, that number is 34%. So, taking the Link out makes a big difference.

And on the other product category, the European distributor acquisition brought with it sales of other orthopedic products. Like a lot of independent distributors do, this company sold products and continues to sell products that are predominantly complementary products to the Exactech product line. And we will expect that to continue.

Jeff Johnson – Robert W. Baird

And, David, should we expect – I guess, can you help us think about the run rate in the other segment now? Obviously, there's some concern anytime you acquire a distributor that sells other companies' products. Is there any risk that some of those other products or the other manufacturers don't feel comfortable staying with you guys at this point as a competitor, so to speak? Or how should we think about the gating over the next few quarters of that other revenue line?

David Petty

Well, I think the opportunity in that distribution channel really is the Optetrak Knee, where we were not really having as much coverage as we wanted across the board. And so, that's what our focus is. Like any distributor, we're sort of obliged to conform. And the people who are running that business believe that as long as they continue to deliver revenue and perform well, that those relationships will continue.

Jeff Johnson – Robert W. Baird

Okay.

Jody Phillips

Jeff, one – this is Jody. One thing I'll add – whenever we announced the French acquisition, we made the statement that we expected around $9 million in U.S. revenues for the last three quarters of the year; and based on our second quarter performance, we certainly feel we are on track or ahead of that. So, the early results are positive in that regard.

Jeff Johnson – Robert W. Baird

And I'm sorry, we're talking on the France Medica deal there, Jody?

Jody Phillips

That is correct.

Jeff Johnson – Robert W. Baird

Yes. Okay. Fair enough. Great. All that is helpful. And then, if we go down to the margin side, I think that was to me the most positive thing coming out of the quarter here. And I don't mean that in a bad way. I mean, it was at flat year-over-year margins, much better than I was expecting. And so, I'll ask the question that I asked last quarter as well why should we think margins are going to fall in the back half of this year? I think I'm at 100, 120 basis points year-over-year in the back half of the year contraction. And that just seems like it may not materialize now that you guys have done much better on executing and absorbing some of these extra costs here in the last couple of quarters.

Bill Petty

I think you're right on to some extent. We are still cautiously optimistic that we can do better than that 100 to 200 basis point decline that we've formerly projected. We've certainly done better than that on a year-to-date basis. And as long as the top-line sales momentum continues, which allows us to have hefty manufacturing volumes, I think we can do better than what we've outlined before on the gross margin line. We certainly did that in the second quarter. And the impact of the French distribution was not as dilutive on the gross margin as we expected. So, I think we can do better potentially than what we've outlined there.

Jeff Johnson – Robert W. Baird

And, Jody, is Altiva break even yet at this point?

Bill Petty

We're not breaking out those numbers, Jeff. I will say that we're pleased with what's going on with that business now. We certainly have a lot of activities going on and a number of integration activities. But it's not a tremendous strain.

Jeff Johnson – Robert W. Baird

Okay. Fair enough. And then – thanks, Dr. Petty. And then, I guess last question on operating margins. I know you haven't quantified in the past the extent of the DoJ investigation costs and what have you. But, Jody, in my model, it works out where it has to be a headwind of north of 100 if not 200 basis points to operating margins on a quarterly basis when you combine that with maybe some of the integration costs on France Medica and that. Am I off base on that? Are core operating margins really expanding here at 100, 200 basis points and just being masked by some of these costs?

Jody Phillips

You're trying to paint me into a corner, aren't you?

Jeff Johnson – Robert W. Baird

I'm trying to. I'm hoping to get something out of you.

Jody Phillips

Everything you've stated so far is not way off base. Certainly, the expenses related to the DoJ inquiry, they are material numbers. And they're fully baked into our numbers here. And we're not breaking those out. But you're – everything you stated is accurate.

Jeff Johnson – Robert W. Baird

Fair enough. And last question, then I'll jump – tax rate a little higher than we were looking, in fact, 600 bps higher than we were looking. What is the impact there? And what should we think on tax rate sustainability going forward?

Jody Phillips

Good question. Certainly, there was a little bit of a blip in the second quarter on the tax rate. There's two elements kind of that are significant here. Number one, our year-to-date projection for our total income has bumped us up to the highest marginal tax rate in the U.S. of 35%. So, that's increased just on about 1% basis.

And then, basically during the second quarter, we made the assumption that we were going to elect the accelerated depreciation on new capital equipment, which was offered in 2008. That has a corresponding unfavorable impact on our domestic producers' deduction. There was a little bit of a year-to-date catch up in that number in the second quarter. So, that's the reason second quarter in isolation was a little higher. On a go-forward basis, though, we probably are expecting a higher rate than we were looking at before, probably in the neighborhood of 38%.

Jeff Johnson – Robert W. Baird

Okay. So, even at 38%, that's probably a good penny, penny and a half quarterly impact there that you're absorbing in the bottom line number I'd assume.

Jody Phillips

That's correct.

Jeff Johnson – Robert W. Baird

Yes. All right, guys, that's all I've got. I appreciate it.

Bill Petty

Thank you, Jeff.

Operator

Thank you. Our next question is from the line of James Sidoti with Sidoti & Company. Please go ahead.

James Sidoti – Sidoti & Company

Good morning, Jody. Good morning, Dr. Petty.

Bill Petty

Morning, Jim.

James Sidoti – Sidoti & Company

I think what you're trying not to say is that the DoJ's probably costing you a penny or two a quarter.

Bill Petty

What we're saying, Jim, is we received a subpoena last December. So, we knew we were going to have legal expenses. We certainly worked those into our budget. And there's no question that the legal expenses in general and specifically for the DoJ are substantial.

James Sidoti – Sidoti & Company

Right. So at some point, once that investigation ends, we should see the operating margins get back to I guess an even higher operating – higher level than they are at this point.

Bill Petty

We would like to get that to that point for a number of reasons, Jim.

James Sidoti – Sidoti & Company

Okay. On the Link side, when did you terminate that agreement?

David Petty

As of December 31of 2007.

James Sidoti – Sidoti & Company

Okay. So, we have two more quarters where the hip comps are probably going to look a little bit distorted as a result it sounds like.

David Petty

Yes. And thank you for mentioning. I had meant to remind everyone of that. You're right, absolutely right.

James Sidoti – Sidoti & Company

Okay. And then on the Altiva distribution, have you started to push through your DBM products through those channels yet? Or is that still yet to come?

Bill Petty

Jim, actually, we were marketing DBM products through Altiva at the time prior to the acquisition. So definitely, the answer is yes.

James Sidoti – Sidoti & Company

Okay. All right. And any big needs for cash going forward? Most of the cash you have now, is it for working capital? Or is there anything else that you plan on investing in, in the near term?

Jody Phillips

We've certainly got some working capital needs just due to the robust growth of the business. But we think the facilities that we have in place now are certainly adequate. And we continue to look to evaluate other investment opportunities. But we're certainly well financed for the time being.

James Sidoti – Sidoti & Company

All right. And my last question is one you probably don't want to answer as well. But 28% growth in the core products, well ahead of the rest of the market. I got to believe you're seeing some kind of benefit from some of the larger companies' changes to their distribution and some of the guidelines that they're sticking to now. I mean, is there any reason why you can't continue at this rate as a result of that?

Bill Petty

Frankly, Jim, I'm not sure it has much to do with our competitors. I think that our team here has done a good job in bringing products to market that surgeons are interested in, both domestically and internationally. And I would not underestimate in any way the growth in the quality of our domestic sales force. A lot of hard work done there by Bob Purcell that we brought on now more than a year ago. And we continue to work closely with our international team as well to bring that kind of growth.

And David may have a little more color on your question.

David Petty

No, I think that's accurate. It's certainly the quality of the sales organization and also the addition of some really interesting technology that's improving patient outcomes, like the reverse shoulder and some new things we're doing with the knee line and the hip line. There's a lot of reasons for surgeons to be attracted to the products that we're introducing in the last year and a half.

James Sidoti – Sidoti & Company

Has the size of the sales force remained relatively stable since beginning of the year?

David Petty

It has. I mean, we reported at the end of Q4 115 – I'm sorry – 205 total sales reps. And that number is 216 now. But as we've said a number of times, we really are focusing on the quality. So, we've added more than the 11 reps that that would indicate because we've probably lost some that weren't producing. And we've added more and better quality.

James Sidoti – Sidoti & Company

Okay. And then – sorry – I did have one more question. New product rollouts the next four quarters?

David Petty

Sure. We have an interesting approach for Cruciate Retaining Knees that we're adding to the existing Optetrak line that we're calling CR sloped tibial insert. And that's going to be rolling out in the second half of this year. There's the Arthrofocus, which is more of the resurfacing type uni-compartmental knee replacement that's meant to be earlier intervention, which will come out late this year or early next.

We have what we call the PF Logic version of Optetrak, which is essentially an evolution of the posture stabilized version of the knee, which we developed in continued collaboration with the Hospital for Special Surgery. And that will be followed by something that we call the CR Logic, which takes the sloped tibial insert for Cruciate Retaining Knees and fits it into an entirely new system. And we think that that's going to give us a lot of opportunity within the knee line.

We continue the rollout of the Novation Crown Cup. Also, the second half of this year, we will launch the Novation Element Stem, which is a flat wedged-fit stem that is very conducive to use with the anterior approach in total hip replacement, which is becoming more and more popular. We have in the pipeline the development of the revision acetabular system that will utilize an interesting porous metal technology. And we also have a low-demand system for hips that will be used outside the U.S. as well as as a fracture system in the United States.

And the shoulder line will continue to build on the success of the reverse with the launch of a fracture plate system for the proximal humerus in the second quarter of next year as well as an innovative press-fit glenoid that we'll also launch about that same time.

And to complement the Accelerate PRP system and the biologics line, we will be launching early next year a bone marrow aspirate concentrate system, a way to use autologous stem cells in spinal fusion. And I think that about covers the pipeline for the next four quarters.

James Sidoti – Sidoti & Company

That's it?

David Petty

That's all. We have 39 active product development projects. And those are the ones that'll roll out in the next 12 months.

James Sidoti – Sidoti & Company

Okay. All right. Thank you.

Operator

Thank you. Our next question is from the line of Julie Hoggatt with Noble Financial. Please go ahead.

Julie Hoggatt – Noble Financial

Hi, guys; and congratulations on the strong quarter. Most of my questions have been answered. But I was hoping maybe, David, you could talk a little on the spine pipeline. I know that there were some motion-preserving technologies that I think were being worked on. And I didn't know if this was anything you could talk about.

David Petty

Julie, good question. And as you've alluded to, our current products are basically fusion products for the spine, including both cervical and lumbar spine as well as the biologic products that we've already been asked about. And yes, we have a number of development projects in the pipeline in spine, including motion preservation work with a very strong team.

And I will add that we convinced Raymond Cloutier, who has been at Exactech for many, many years leading Engineering and Development, who actually was the project manager for the Optetrak Knee; and you know the success of that. Raymond has moved over to lead the spinal development. And he's really hit the ground running and I think making a lot of progress there. So, in addition to what we would call standard products, which as you know, still represent about 80% of the spinal market, we do have some very interesting technologies that we're working on in the spinal area.

Julie Hoggatt – Noble Financial

Okay, but none you can give us more detail on at the moment?

David Petty

No.

Julie Hoggatt – Noble Financial

Okay. My other question is concerning this cross-selling; do you think there's still room for cross-selling to accounts that have recently been added for your new products? I'm not sure who would take this question.

David Petty

I'm sorry, Julie, didn't understand the question.

Bill Petty

The term you used, cross-selling?

Julie Hoggatt – Noble Financial

Cross-selling.

David Petty

Cross-selling, sure. You mean from selling knee customers hips or vice versa or that kind of thing?

Julie Hoggatt – Noble Financial

That kind of thing, exactly. So, say a customer comes on because they like the new ceramic-on-ceramic hip, do you still think – do your salespeople still think there's a lot of room for cross-selling to those accounts? Or has most been penetrated? Can you kind of give us an idea of what's going on there?

David Petty

Sure. I think there's definitely an opportunity there when you consider that half the revenue for our company – roughly half – is the total knee system. And we, of course, have a broad range of other products. And so, there's a large number of customers out there that are Optetrak Knee customers. And as we add more products, like I mentioned on the hip line, I think our hip line will become more and more attractive to those surgeons who are currently using the Optetrak Knee. And there's a real opportunity there to grow that business.

I also think that the reverse shoulder has offered an opportunity for Exactech to become acquainted with a larger group of orthopedic surgeons, some of whom do get the knee replacements. So, the shoulder customer base is a good opportunity for us to drive additional sales of hip and knee and biologics as well.

Julie Hoggatt – Noble Financial

Okay. Okay. Thank you.

David Petty

Thank you, Julie.

Operator

Thank you. (Operator instructions)

Our next question comes from the line of Bill Plovanic with Canaccord Adams. Please go ahead.

Bill Plovanic – Canaccord Adams

Great. Thank you. Good morning.

Bill Petty

Hi, Bill.

Bill Plovanic – Canaccord Adams

A couple questions here – first, just in regards to the DoJ and the legal expenses as they roll forward; at this point, do you have any clarity as to whether you'd expect to continue the expenses with a court-ordered monitor, like we've seen with the other companies? Or do you think that the settlement will be a little less than we saw with the larger players?

Bill Petty

Bill, before I answer the question, I first want to congratulate Brittney on pronouncing your name correctly. I think that's the first time we've ever had that on a conference call. Three cheers for Brittney.

In response to your question, obviously, I mentioned earlier that it's important for us to have a satisfactory and timely settlement. And satisfactory is the most important part of that. I don't think we're at a stage yet that we can predict exactly what any kind of settlement might be if there is a settlement. Sure, we would like to keep the expenses down as much as we can. We've certainly worked a lot on our compliance programs here. And we think they were very strong previously. And we want to make them stronger. But we're just not really able to predict that at this time.

Bill Plovanic – Canaccord Adams

Okay. And then, just a point of clarification – you said that you've already worked on your compliance programs. If you see kind of what some of the other players that have already settled have done, do you think that you're already in line with what they're doing – they're now kind of rolling out – or that you may have to kind of tweak it a little more?

Bill Petty

I think from the standpoint of basic compliance, we are in line. I think from the standpoint of some of the processes and methodologies for that that we need to beef that up a little.

Bill Plovanic – Canaccord Adams

Okay. I mean, there's obviously a big opportunity here is the confusion that's been caused by them kind of stepping back for a little while to reset.

David Petty

We – Bill, we've always paid a lot of attention to how we handle relationships with consultants. And I think that the important thing to note is that in the deferred prosecution agreements and the non-prosecution agreement, the Department of Justice introduced some interpretations and guidelines that are new – new as of September. And so for sure, we need to make sure that the new information that became available through those agreements is properly considered as we always do continue to improve our processes.

Bill Petty

In fact, Bill, shortly after the settlements in September, I commissioned a team here at Exactech consisting of our Legal Counsel Donna Edwards and Gary Miller, who you know, to audit all our processes related to those DPAs and NPAs and corporate integrity agreements. So, we had started that process even before we received our subpoena in December. And again, that was based on new information, new interpretations that we saw in those DPAs and NPAs. So, that's a process that's now been underway at Exactech for almost a year.

Bill Plovanic – Canaccord Adams

Fantastic. So hopefully, you're well positioned when the time comes. In relative to the France – I'm sorry – to the Altiva acquisition, it's running at $13 million prior to the acquisition. Obviously, that's pulled off a little. The question I have is do you believe that you've kind of seen the basing of the revenue stream kind of lost the docks that you're going to lose, stabilize and keeping the ones you're going to keep, so it's kind of building from here forward? Or do you think there could be a little more fallout before we kind of reach the bottom upon which to build off of?

Bill Petty

I think we've stabilized. I mean, obviously, one never knows 100%. And just to be totally clear, there were some major customers that were lost from Altiva at the time in the fourth quarter of last year. So, we were aware of that before we completed the acquisition. As you know, we have been and remain very positive about entering the spinal market.

The work that we have done here, I've already mentioned Raymond Cloutier taking over the product development. I think you know that we've given Bruce Thompson, who's a Senior Vice President here and leader of our Biologics division, to also take on the leadership of the spinal division. And we think that we've – I should add that we've pretty much moved that entire operation to Gainesville. The people who participated in the move are here and working. We've taken over the logistics and been doing that now for the last three months or so.

So, we feel that the integration is going well. And actually, that lost business had occurred before we completed the acquisition. And we feel that Bruce, Raymond, the others on that team have that stabilized. And we're looking forward to positive things in the future.

Bill Plovanic – Canaccord Adams

Okay. And then, last question – just relative to Link, you mentioned that the growth of that product line in hip was 27% excluding Link; and I would assume that that was excluding the France Medica as well or anything else. It seems like it was so you had a pretty tough comp quarter in the second quarter. Would you expect the third or fourth quarter – was there any unusual stocking or slowing sales that it may not look as slow a growth, I mean, up 4% on the surface didn't look good. But when you give us the actual underlying numbers, it's very positive. Just trying to get a feel for kind of what those comps are in the third or fourth quarter and if you'd even be willing to give us what the Link numbers were on a historical basis so that we can build our models and really see that?

Bill Petty

Certainly the second half of last year, our domestic hip business ex-Link started to pick up some momentum. So, the comps are a little tougher. We don't want to break out that Link element. But you'll still continue to see a significant difference between our reported hip number and what the number is excluding Link. So, I think the comps are going to be a little tougher.

But we've also released a number of new products since then. And the second half of last year was also when we initially released the ceramic products. And we're at pretty much full rollout on that as well now. So, we're still confident that we can have meaningful domestic hip growth when you remove the Link comparison.

Bill Plovanic – Canaccord Adams

Okay. Great. Thanks so much.

Bill Petty

Thank you, Bill.

Operator

Thank you. And our next question is a follow-up question from the line of Jeff Johnson with Robert W. Baird. Please go ahead.

Jeff Johnson – Robert W. Baird

Hey, guys. David, I was just hoping I could go back and ask a few more pipeline questions. I know you covered a number of products there. But a couple other things I try to keep my eye on – any traction or can you talk about the traction thus far in pain management with the Accelerate product? And then also, any update on the metal-on-metal or resurfacing pipeline and then on the light curable DBM; would be the three.

David Petty

Yes. You're on top of things. Sure. Okay. For the pain management accelerated recovery technique that we are using, both in knee replacement and hip replacement, and in part of that technique calls for the use of our platelet concentrate system, the Accelerate System. And if you break down the biologics growth in the numbers that we're looking at now, there's a really meaningful contribution coming from that PRP system, the Accelerate System. And the reason for that is we're seeing more and more adoption of use of that product in conjunction with primary total knee surgery. And a lot of that does – is stimulated by the interest in the pain management techniques.

The – you ask also about the metal-on-metal. And you know that we've mentioned before that we've had an ongoing project there with respect to bringing metal-on-metal technology, including large bearing heads. And we think we've made a lot of progress there. The regulatory process for that is always complex. And we feel like we've made a lot of progress there. But I think it would be a mistake to try to predict how quickly we can get through that regulatory process. I can just tell you we're actively working on it and enthusiastic about the project.

The Optecure, the curable, the light curable or phasic version of that has been before the FDA. And they have come back and asked questions. And we're going back to answer those questions. So, that's another one where we would have to sort of rely on how we can respond to those questions and what the FDA does with those responses.

Jeff Johnson – Robert W. Baird

Okay. Great. And then, it did sound like on the final two there, the metal-on-metal and the light curable that just kind of keep any expectations out of our model until we get an update from you?

David Petty

Yes, I think so. I think so. It's always hard to tell when you're going through that regulatory clearance process.

Jeff Johnson – Robert W. Baird

All right. And then, David, on metal on metal, internally developed product is still – is the way to be thinking about that as opposed to maybe an external?

David Petty

We're – actually, it's more of a partnership approach. So, we don't have a full-blown – only internally developed projects underway.

Jeff Johnson – Robert W. Baird

Okay. Great. I appreciate it, guys.

Bill Petty

Thanks, Jeff.

Operator

Thank you. (Operator instructions) And there are no further questions at this time. I would like to turn the call back to Dr. Petty for any closing remarks.

Bill Petty

Thank you, Brittney. And first, which I did not do in the beginning, I need to provide the disclaimer. This release contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Act of 1934. They represent the company's expectations or beliefs concerning future events of the company's financial performance.

These statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include the effect of competitive pricing, the company's dependence on the ability of third-party manufacturers to produce components on a basis which is cost-effective to the company, market acceptance of the company's products, the effects of government regulation, and other possibilities. Results actually achieved may differ materially from the expected results included in these statements.

I want to thank everyone for their participation and their interest and confidence in Exactech. And I wish you a great end to the week and a great weekend. Thanks much.

Operator

Thank you. Ladies and gentlemen, this concludes the Exactech Inc. second quarter 2008 earnings conference call. Thank you for your participation. You may now disconnect.

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