CryoLife, Inc. Q4 2008 Earnings Call Transcript

| About: CryoLife, Inc. (CRY)
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CryoLife, Inc. (NYSE:CRY) Q4 2008 Earnings Call February 19, 2009 10:00 AM ET


Steven G. Anderson – President and Chief Executive Officer

D. Ashley Lee - Executive Vice President, Chief Financial Officer, Chief Operating Officer

William F. Northrup III, M.D. - Vice President - Medical Relations and Education


Raymond Myers - Emerging Growth Equities

Greg Brash - Sidoti & Company

Matt Dolan - Roth Capital Partners

Patrick Schaffer


Good morning ladies and gentlemen and welcome to the CryoLife Fourth Quarter and Year End 2008 Financial Conference Call. (Operator Instructions) It is now my pleasure to introduce your host Mr. Steven Anderson, President and Chief Executive Officer of CryoLife. Thank you. Sir, you may begin.

Steven Anderson

Good morning everyone, this is Steve Anderson, CryoLife’s Chairman and CEO. I would like to welcome you to CryoLife’s Year End 2008 Conference Call. This morning I am joined by Ashley Lee, the company’s CFO, Executive VP and COO, as well as Dr. William Northrup, the company’s VP of Medical Relations and Education.

Today we are augmenting our presentation with slides. You may access the slides by logging on to the website and then clicking on the Investor Relations heading, then under that heading click on to web casts and presentations and you will then be able to see the slides.

This morning we reported a record revenues and earnings for fiscal year 2008. Our revenues were $105.1 million as compared to $94.8 million for the same period last year, an increase of 11% year-to-year. 2008 was the best cardiac year for the company since 2001. This represents the 8th consecutive quarter of profitability for the company.

The agenda for today’s call is as follows: Ashley will review today’s press release in detail and by product line. He will also comment on the success we continue to have with the new powdered haemostatic agent we began marketing in May called Hemostase. He will reiterate the company’s top line guidance for 2009. He will also comment on first quarter 2009 revenues and the company’s present cash position.

Dr. Northrup will comment on a number of recent medical papers evaluating long-term survival data following different types of aortic valve replacement surgery that may have a significant impact on the surgeons’ choice of the type of procedure and replacement heart valve options for their patients. He will also comment on the new claim recently cleared by the FDA for RD cellularized CryoValve SG pulmonary heart valve that relates to the reduction of a component of the immune response patients receiving the CryoValve SG pulmonary valve.

I will review our new product development area and will comment on the recent BioFoam IDE and CE Mark applications. I will comment on the regulatory review of BioDisc in Europe and our future plans for the product. I will also review our progress on the testing of the Tropic Solutions organ transport solution. After my comments we will open up the call for questions.

At this time Ashley will review this morning’s press release.

Ashley Lee

Thank you, Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement: Comments made in this call and in the slide presentation, which will look forward in time, involve risks 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 managements intentions, hopes, beliefs, expectations, or predictions of the future. Additional information concerning the risks 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, 2008, which we expect to file by the end of this week and in the press release that went out this morning, a copy of which is contained on the Investor Relations portion of our website.

Our press release also contains reconciliations to GAAP results of certain non-GAAP measures, including our financial results, excluding the impact of orthopaedic tissue preservation services.

This morning we reported our results for 2008. Revenues for the full year of 2008 increased 11% to an annual record of $105.1 million, compared to $94.8 million for the full year of 2007. Excluding orthopaedic tissue processing revenues, total revenues increased 15% for the full year of 2008.

Revenues for the fourth quarter of 2008 increased 2% to $25.5 million, compared to $25.1 million for the fourth quarter of 2007. Excluding orthopaedic tissue processing revenues, total revenues increased 4% for the fourth quarter of 2008.

Our operating income for 2008 was a record $13.7 million, an increase of 65% compared to 2007.

Net income for the full year of 2008 was $32.9 million or $1.18 per basic and $1.6 per fully diluted common share, compared to $7.2 million or $0.26 per basic and fully diluted common share for the full year of 2007. Net income for the full year of 2008 included a tax benefit of $20.1 million or $0.71 per fully diluted common share, related to the reversal of the valuation allowance on our deferred tax assets.

Net income for the fourth quarter of 2008 was $22.7 million or $0.81 per basic and $0.80 per fully diluted common share, compared to $2.6 million or $0.10 per basic and fully diluted common share for the fourth quarter of 2007. Net income in the fourth quarter of ’08 included a tax benefit of $20.1 million or $0.71 per fully diluted common share related to the reversal of the valuation allowance on our deferred tax assets.

Cardiac revenues were $5.9 million for the fourth quarter of ’08 compared to $6.5 million for the fourth quarter of ’07, a decrease of 9%. The decrease in cardiac revenues was due to the aggregate impact of a 22% decrease in unit shipments of cardiac tissues partially offset by the favorable effective tissue mix which together decreased revenues by 12% and an increase in average service fees which increased revenues by 3%.

Cardiac revenues were $25.5 million for the full year of ’08, compared to $22.1 million for the full year of ’07, an increase of 15%. The increase in cardiac revenues was due to a favorable tissue mix and a 2% increase in cardiac units shipped, which together increased revenues by 9% and an increase in average service fees which increased revenues by 6%.

Revenues from the distribution of CryoValve SG pulmonary human heart valves were $1.7 million and $5.1 million for the fourth quarter and full year of ’08 respectively.

Vascular revenues were $6.4 million for the fourth quarter of ’08, compared to $5.9 million for the fourth quarter of ’07, an increase of 7%. The increase in vascular revenues was driven by an 8% increase in vascular unit shipments.

Vascular revenues were $27.4 million for the full year of ’08, compared to $22.7 million for the full year of ’07, an increase of 21%. The increase in vascular revenues was driven by an 18% increase in vascular unit shipments, which increased vascular revenues by 17% and by fee increases which increased revenues by 4%.

BioGlue surgical adhesive revenues were $12.1 million for the fourth quarter of ’08 compared to $11.5 million for the fourth quarter of ’07, an increase of 5%. This increase was primarily due to an increase in average selling prices, which increased revenues by 5% and a 3% increase in the number of BioGlue milliliters that shipped which increased revenues by 2%, offset by the unfavorable impact of foreign exchange which reduced revenues by 2%.

BioGlue revenues were a record $48.6 million for the full year of ’08, compared to $43.9 million for the full year of ’07, an increase of 11%. This increase was due to an increase in average selling prices, which increased revenues by 6% and a 5% increase in the number of BioGlue milliliters shipped, which increased revenues by 5%.

Other medical device revenues for the fourth quarter of ’08 were $906,000, compared to $105,000 for the fourth quarter of ’07. Other medical device revenues for the full year of ’08 were $1.9 million compared to $828,000 for the full year of ’07. Other medical device revenues for the fourth quarter and full year of ’08 included $806,000 and $1.5 million respectively in sales of Hemostase which was added to our product portfolio in the second quarter of ’08.

Total tissue processing and product gross margins were 64% for the fourth quarters of ’08 and ’07. Total tissue processing and product gross margins were 64% for the full year of ’08, compared to 62% for the full year of ’07. Tissue processing gross margins for the fourth quarter of ’08 were 45% compared to 44% for the fourth quarter of ’07. Tissue processing gross margins for the full year of ’08 were 46% compared to 42% for the full year of ’07.

Tissue processing gross margins improved in ’08 compared to ’07 primarily as a result of fee increases and a favorable tissue mix in ’08.

General administrative and marking expenses for the fourth quarter of ’08 were $12.3 million, compared to $12.1 million in the fourth quarter of ’07. General administrative and marketing expenses for the full year of ’08 were $48.8 million compared to $46.5 million for the full year of ’07.

The increase in G&A expenses for the fourth quarter and full year of ’08 was primarily due to increased marketing expenses including personnel costs, advertising, physician education and training, and promotional materials to support our expanding tissue service and product offerings and revenue growth. Additionally there were increased in stock compensation over the same periods in the prior year.

R&D expenses were $1.4 million for the fourth quarter of ’08, compared to $1.3 million for the fourth quarter of ’07. R&D expenses were $5.3 million and $4.5 million for the full years of ’08 and ’07 respectively. R&D spending in ’08 primarily focused on the company’s SynerGraft tissues and products and protein hydrogel technologies.

At the end of the fourth quarter we reassessed our valuation allowance on our deferred tax assets which includes net operating loss carry forwards. Due to a variety of factors, including our expectations regarding future profitability, we determined that maintaining a full valuation on our deferred tax assets was no longer appropriate. As a result, we reversed a large portion of the valuation allowance on our deferred tax assets. This resulted in a very large one time income tax benefit of $20.1 million which significantly increased net income during the fourth quarter and for the year.

You should refer to our SEC filings for detailed discussions of factors affecting our results of operations, including our Form 10-K that we plan to file by the end of this week.

As of December 31, 2008 we had $22.8 million in cash, cash equivalents and marketable securities, compared to $17.4 million at December 31 of 2007. Of the $22.8 million in cash, cash equivalents and marketable securities on hand, $1.6 million was received from the US Department of Defense as advanced funding for the development of BioFoam protein hydrogel technology and $5 million was designated as long term restricted money market funds due to a financial covenant requirement under our line of credit agreement. During 2008 we used $4.5 million of cash to pay off our previous line of credit facility.

Now I will give some guidance for 2009.

In formulating our financial guidance for ’09 we considered many factors. During the fourth quarter of ’08 we began to see a slow down in purchasing by some of our customers, directly as a result of the challenging economic conditions, however, we saw no evidence of a slow down in procedures for you cardiac and vascular tissues which are typically used for critical cardiac and vascular conditions. We believe that most customers continue to perform these critical procedures utilizing existing tissue supply located at hospitals. At some point, we anticipate that tissue ordering patterns will return to expected levels.

Also during the fourth quarter, we saw little push back on pricing for customers, again, due to current economic conditions and the resulting budgetary pressures of hospitals. Additionally, we saw a continuing strengthening of the dollar versus the British pound and the euro. For the full year of 2008 we generated $3.2 million in revenues, denominated in euros and $1.4 million in revenues denominated in British pounds. If the dollar continues to strengthen against the euro and pound we would expect this to have an adverse affect on our 2009 forecast revenues and gross margin. Additionally, it will be more expensive for our foreign customers who purchase product from us in US dollars. We expect that these factors, along, along with the growing contribution of Hemostase, which has a gross margin in the upper 50% range, will cause margins to decrease slightly during 2009.

There is also uncertainty regarding health care policy of our new presidential administration and its affect on Medicare and hospital systems in general. Fortunately, most of our processed tissues address medical conditions for which there are few good options.

Considering all of these factors, our updated guidance for ’09 is as follows:

We expect total revenues for the full year of ’09 to be between $113 and $119 million. We expect tissue processing revenues to be between $58 and $60.5 million and BioGlue revenues to be between $50 and $52 million for the full year of ‘09. Other medical device revenues, which consist primarily of sales of Hemostase, are expected to be between $4.5 and $4.5 million in ’09.

Other revenues for ’09 may reach between $0.5 and $1 million related to funding received from the Department of Defense in connection with the development of BioFoam. The amount of other revenues is largely dependant upon actual expenses incurred related to the development of BioFoam.

Based on the revenues we are seeing so far in January and February, we expect to see sequential and year-over-year quarterly revenue growth in the first quarter of 2009. We expect general administrative and marketing expenses of between $52 million and $54 million and R&D expenses of between $5 and $6 million for the full year of ’09.

We continue to invest in marketing and increased physician education efforts, as well as expanding our sales force, which we began during the later part of ’08. We have invested in sales, marketing and physician education to better position our organization for continued sales growth in 2009 and beyond.

The R&D expectations include an estimated range of between $0.5 million and $1 million, to be funded by the Department of Defense in connection with the development of BioFoam.

We expect our effective income tax rate to be approximately 40% in ’09. As a result, earnings per share in ’09 will be lower than in ‘08 when the company reversed a significant proportion of the valuation allowance on our deferred tax assets, which resulted in the recognition of significant income tax benefits.

In conclusion, despite the challenging economic conditions, we believe that we will continue to grow our business in 2009 and beyond. We remain very profitable. We have essentially no debt. We have an existing line of credit facility. We continue to generate positive cash flow. And, we do not need to raise money to support our ongoing operations.

That concludes my comments and now I’ll turn it over to Dr. Northrup.

William Northrup III, M.D.

Thank you, Ashley. I would like to begin with an update on the CryoValve SG. As disclosed previously this week by the company, the FDA has cleared a new claim for the CryoValve SG pulmonary human heart valve. All references in this presentation to CryoValve SG refer to the pulmonary valve only.

The new labeling claim relates to reducing a component of the immune response and recipients of the CryoValve SG whose pulmonary valve is replaced during a Ross procedure or during reconstruction for a congenital heart defect. For those not familiar with the technology, CryoValve SG pulmonary human heart valve is processed with the company’s proprietary SynerGraft technology, which is designed to preserve the integrity of the support structures of the valve while removing the donor cells and cellular remnants that stimulate antibody production.

In the same way that protective antibodies are formed after exposure to various vaccines, similar destructive antibodies are typically formed after transplantation of foreign tissue or organs and from mismatched blood transfusions. Any level of any pre-transplant antibodies induces the risk of rejecting future tissue and organ transplantations and patient mortality. In addition, high and prolonged antibody levels may prevent or delay transplantation until a suitable cross match compatible donor is identified.

Three slides from our FDA submission supporting this claim will be used to illustrate the significance of this new claim.

In the first data slide we can see the typical development and persistence of what are called panel reactive antibodies, or PRA, in response to the surgical implantation of an allograft heart valve. Time and years is shown on the horizontal axis on the bottom and percent is shown on the vertical axis on the left hand side. The intensity of the antibody response over time is shown in the upper graph with a greater than 50% intensity of the PRA test by one year remaining above 25% intensity up to six years after surgery. A negative response would be considered 10% or lower. As can be seen from the lower graph, 75% of these patients with allograph transplants developed these antibodies and kept them for up to six years.

In the next slide we see a similar comparison of the intensity of the response for the two specific classes of antibodies measured by the PRA test; with time and months on the horizontal axis on the bottom and percent reactivity on the vertical axis on the left hand side. In this case we are comparing the standard CryoValve with the CryoValve SG, where it can easily be seen that for both classes of antibodies the standard CryoValve induces the typical antibody response at or above the 50% level by three months, while the CryoValve SG barely reaches the 10% level of reactivity, below which is considered negative and is unsustained, as demonstrated by the rapid return below this threshold level before eight months.

Finally, in the next slide we can see a side-by-side bar graph comparison of the percentage of patients developing Class I and II antibodies following implantation of a standard processed allograft heart valve in four different studies on the left and the CryoValve SG in three different studies on the right. Percentage of patients with antibodies is on the vertical axis on the left hand side. Clearly, a much lower percentage of the CryoValve SG patients formed antibodies than the standard CryoValve patients.

Based on this data, all evidence regarding the CryoValve SG pulmonary human heart valve indicates: one, a much lower frequency of patients producing antibodies; two, a lower intensity of reactivity if a response does occur; three, a shorter period of time for any sustained production of these antibodies if a response does occur.

This data is supported by four prospective trials and a thorough analysis of the peer reviewed scientific literature in regards to immune response to standard process cryo preserved allograft tissues.

We are pleased with the claim which the FDA has allowed that implantation of the CryoValve SG pulmonary human heart valve reduces the risk for induction on certain antibodies compared to the standard process pulmonary human heart valve. Although a reduced immune response to an allograft heart valve would, in the minds of many clinicians, logically improve durability, we realized that the effect of reduced antibodies on the long-term durability, or long-term resistance to rejection by the patient, of the CryoValve SG has not yet been clinically proven and awaits the longer-term results from the large cohort of CryoValve SG patients currently enrolled in a long-term study. However, our mid-term performance results, which were recently presented at the annual meeting of the Western Thoracic Surgical Association and have been submitted for publication in the Journal of Thoracic and Cardiovascular Surgery are very encouraging, in as much as the CryoValve SG appears to be outperforming the standard CryoValve in several patient subgroups.

For example, the next data slide illustrates impressive, continuing, superior, pulmonary valve competence of the CryoValve SG above the 90% level by the strictest definition of valve competence in all the Ross procedure cohorts shown in the blue bar graphs compared to the standard CryoValves shown in the red bar graphs.

Next I would like to discuss some new survival data following aortic valve replacement, which CryoLife believes underscores the importance of its human heart valve processing services.

According to the Millennium Research group it is estimated that approximately 85,000 aortic valve replacements will be performed in the Unites States in 2009. Because there is a literal menu of multiple options for aortic valve replacement available today, there will be a strong motivation, particularly by the patient, to know of any advantages or disadvantages that may attend one valve replacement choice or another.

Within just the last three years several surgical groups from different countries have reported for the first time in the peer reviewed scientific literature that the Ross procedure, an operation where the patient’s own pulmonary valve is used to replace the aortic valve can restore expected survival. This operation can be performed using CryoLife’s CryoValve and CryoValve SG pulmonary human heart valves as a replacement for the patient’s pulmonary valve.

The next slide is an example from Rotterdam of one of these series that shows the observed survival curve for the Ross procedure super imposed on the expected survival curve with an appropriately matched population. There are at least five individual Ross procedure series from five different countries in two large combined series in the same peer reviewed literature which have demonstrated precisely the same findings, all appearing within only the last three years.

In contrast, recent reports in the same peer reviewed scientific literature that reported excess mortality with the more commonly employed aortic valve replacement procedures. For example, the very robust analysis of over 2,000 patients in Sweden, undergoing mainly mechanical valve implants and followed for up to 15 years was reported in 2000.

As we can see in the next slide there is a progressive difference between expected survival in an appropriately matched population in the closed circles of the top line and the observed survival in the open circles of the lower line over time; with the difference representing the progressive excess mortality over time.

The author’s also demonstrated that this excess mortality was progressive for each decade below age 70 and that for patients under age 50, for example, the observed survival was 4 ½ times worse than expected.

The practice guidelines for the management of patients with valvular heart disease, published in 2006 by the American College of Cardiology and the American Heart Association, clearly recommend tissue valves in patients of any age who will not or cannot take the blood thinner Coumadin. They specifically state that such tissue valves are “reasonable” in some patients under age 65, despite the fact that commercially manufactured tissue valves have limited durability in younger patients.

Based on the very latest report from the Society of Thoracic Surgeons national database published last month in the Journal of Thoracic and Cardiovascular Surgery there has been a steady increase in the use of tissue valves in the aortic position over the past decade, from just over 40% in 1997 to nearly 80% in 2006. The current trend is clearly away from the use of mechanical valves in favor of tissue valves.

Stented pericardial valves, specifically, have become very popular implant choices even in progressively younger patients; however, two very recent publications with a combined total of over 5,500 patients with the second generation pericardial valve have again reported excess mortality with this specific valve substitute in younger patients.

The first study was a Meta analysis of eight peer reviewed publications, with over 2,500 patients, published in 2005.

The next slide, which compares observed to expected survival, shows various age groups on the horizontal axis along the bottom and the percentage of relative life expectancy as compared to a normal population on the vertical axis on the left hand side, demonstrating the progressive excess mortality in males. The youngest patient groups at the time of surgery had the greatest excess mortality, reaching only 60% to 70% of expected survival in the 50 year olds, with a survival loss of 30% even in the absence of a specific known valve complication. This unfortunate outcome was also confirmed in a report just last year from the Cleveland Clinic on over 3,000 patients with the same tissue valve implant, where younger patients were found to have worse than expected survival, which was further amplified with implantation of smaller prosthesis.

We believe the conclusions of the authors of the German Ross Registry, just published in 2007, carefully analyzed over 1,000 patients from 10 different centers, placed the tension between the various aortic valve replacement options in the proper perspective.

As shown in this slide, the authors conclude from their data that the observed survival of the Ross patients in their series is “comparable to the general population and substantially superior to that of other valve substitutes”.

Although we understand the typically long life cycle of technology adoption from the innovators and early adopters of technically more challenging procedures, such as the Ross operation, to the late majority and laggards, we also believe that these new data indicate the impact of specific operations for aortic valve disease on survival. These data may have important implications, particularly for the patient making an informed choice among the available options in what may be referred to as a surgical menu.

As a company, we therefore have made and will continue to make the significant philosophical and economic commitment to partner with the major cardiac surgical societies and associations and program directors in their new thoracic surgery education reform initiative recently published in the two major American thoracic surgical journals under the title Mission Critical, Thoracic Surgery Education Reform.

Specifically, we are building an educational program at CryoLife designed to provide the basic training in aortic root surgery with our monthly aortic allograft workshops and to facilitate a resonance of the Ross procedure through our second annual Ross Summit at CryoLife September 25 and 26 and our new Ross Community website at

Thank you. I will now turn the meeting back over to Steve.

Steven Anderson

Thank you, Dr. Northrup.

On January 19, the company celebrated its 25th anniversary. Since the inception we have processed tissues from over 100,000 donors. We think this is an industry record. Over the past 25 years we have shipped about 160,000 allografts’ for use in reconstructive procedures. During this time CryoLife has become the world leader from the preservation of allograft heart valves and allograft vascular conduits. We are developing a 25th anniversary booklet that reflects on the doctors and their patients who have benefited from the use of implanted cryo preserved heart and vascular tissues as well as BioGlue.

If you are interested in receiving a copy of the 25th anniversary booklet, you should log on to the CryoLife website and fill out the order form that you will find on the home page.

During the last conference call I told you that we had received a lengthy list of questions from our European notified body regarding the BioDisc nucleopulposis replacement device and its CE Mark submission. We are finalizing our response to their questions and anticipate submitting our updated application by the end of March.

Also during the last conference call we commented on the preclinical animal testing that was being conducted to evaluate the tropic solution organ transport solution. At that time we indicated that we had not been able to achieve the results we were seeking using a porcine model and would be changing the testing to a canine model. Since the last call we have completed our feasibility animal testing of the organ transport solution.

After reviewing all of the testing data, we have been unable to duplicate some of the results the inventors had reported earlier. Specifically, our research has shown that the industry standard UW solution, which served as the control for our testing, performed better than we anticipated. This in turn provided less opportunity for the tropic solutions transport solution to show significant improvement in kidney transplant outcomes. Therefore, we do not expect any significant future expenditure to develop this technology. The 2009 forecasts given to you earlier do not include any revenues for this product.

Since receiving FDA clearance for the sinograph process CryoValve SG pulmonary heart valve in ‘087, there have been over 380 of these valves shipped for implant through out the US. They have been used for both right ventricular outflow tract reconstruction and in the Ross procedure.

As Dr. Northrup mentioned, the SynerGraft process valves are performing well in patients and the reduction of the induced PRA levels is a significant patient benefit. The SynerGraft process heart valves carry a premium fee of about $3.500 over list.

You will recollect that for the past several years we have been developing and testing BioFoam surgical matrix an expanding version of BioGlue surgical adhesive. BioFoam includes and expansion agent that increases the volume of the delivered product three to four times that of BioGlue. We have always believed that this product could have a wide spectrum of clinical uses ranging from sealing organs during surgical procedures to sealing wounds from trauma. We have worked with the Department of Defense since 2005 in the development of this product. In fact, over the past four years we have received about $3.5 million from the Department of Defense for the development of BioFoam.

At the end of December ’08 we submitted an application to our European notified body for the approval of BioFoam as an agent for the sealing of organs. We expect to hear back on the status of this submission within the next month or two. When we ultimately receive CE approval, we will initiate a three center 45 patient study that will have up to a six month follow up. We anticipate the commercial launch of BioFoam will begin in Europe after the first 15 patients have been enrolled and they have completed their 30-day follow up.

CryoLife management held an initial meeting with the FDA regarding BioFoam in August of ’08 to discuss our proposed clinical study. Our IDE submission was sent to the FDA in November of ’08 and conditional approval of the IDE was received in December of ’08. Our amended IDE submission will be submitted to the FDA sometime prior to the end of March. The indication for the clinical trial is for the control of bleeding during liver surgery. We will initially conduct a feasibility clinical study of approximately 20 patients, 10 receiving BioFoam and 10 receiving conventional treatment and these patients will be followed for six months. A pivotal clinical trial would be initiated thereafter. We anticipate that it will take about two years to complete both of these studies.

That concluded my comments and now we will open up the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Raymond Myers with Emerging Growth Equities.

Raymond Myers - Emerging Growth Equities

My first question is it looks like the operating expenses were lower than you had guided in the third quarter and perhaps R&D was down related to the tropic solutions. But SG&A was down as well. Could you help us understand what caused that and how we should expect that to fall in Q1 and beyond?

Ashley Lee

If you look at the fourth quarter, Ray, a lot of the short fall in the SG&A expenses were related to lower revenue. You know, we had less commission expense and other expense associated with pushing the product out the door, so that was partially the reason there. We also had an adjustment related to our product liability reserves in the fourth quarter of this year. Also, with the continued strengthening of the dollar, when we translated our expenses associated with International operations back to US dollars, those came back a little bit lower than we had anticipated also. So, if you go into 2009 we have guided SG&A expenses, I believe, to be between $50 and $52 million. I think that really kind of speaks for itself as to where we expect to be in 2009.

Raymond Myers - Emerging Growth Equities

How much product liability reserve adjustment was in the quarter?

Ashley Lee

About $500,000.00 and all of that will be detailed in our 10-K, which we expect to file probably by the end of the day tomorrow.

Raymond Myers - Emerging Growth Equities

Okay great, we will certainly look for that.

It looked like cardiac revenue was down in the quarter. I know an awful lot of that is just due to the economy, it can’t be helped, but how is that looking going into the first quarter? Are you seeing any turn around there? It was unusually low.

Ashley Lee

Let me make a comment about the cardiac revenues and especially as compared to vascular revenues. What we have seen in the past is that cardiac surgeons in hospitals have been more willing to keep a supply of valves in their freezers. You know, they need a variety of sizes and because of the critical nature of the surgeries that are involved, they are more willing to carry an inventory of valves as compared to the vascular surgeon. We have seen that in the past, and especially for the pediatric heart valves, I think hospitals have been more than willing to carry a large supply of valves there.

On the vascular side, because we typically have the inventory available, vascular surgeons and hospitals typically do not carry as much inventory at their facilities as do the cardiac surgeons. I think that’s why you’re seeing some of the disparity in the fourth quarter in the operating results, where the vascular revenues were up in the fourth quarter year-over-year and the cardiac revenues were down.

Now, going forward, as I indicated in my comments, we see no evidence of any decrease in the procedure volumes, because, again, these are critical surgeries. There are very few options for out tissues. We haven’t seen any competitive products come onto the market place, so we think that these purchasing patterns that we’re seeing in the fourth and we’re seeing a little bit in the first quarter, are going to be transient and that at some point the demand is going to return back to the expected levels.

As I stated earlier, we’re seeing, I’m not going to speak about individual product lines, but we’re seeing revenue growth in the first quarter. We expect sequential revenue growth. We expect year-over-year revenue growth and I think that our guidance on the top line for the full year speaks for itself.

Raymond Myers - Emerging Growth Equities

That’s encouraging. I will let others ask questions, thank you.


Your next question comes from Greg Brash with Sidoti & Company.

Greg Brash - Sidoti & Company


Ashley Lee

We can barely hear you; we’re getting a lot of static.

Greg Brash - Sidoti & Company

I’m sorry; I’m on a cell phone. I will try to keep it short. [Inaudible] in the hospitals is it something you expect to correct itself by the second quarter, especially since you’re seeing some growth here now in the first quarter?

Ashley Lee

I think the first part of your question, Greg, and you were breaking up a little bit, but I think it had to do with the cardiac demand and when we expect that to return? I don’t want to go out and say, give you a definitive date. I mean we are starting to see some signs right now, but I think that we’re going to have more color by the end of the first quarter and certainly much more color by the end of the second quarter, we should know more. But again, we expect the business to be up year-over-year in the cardiac business and the vascular business.

Greg Brash - Sidoti & Company

Okay. Have you scaled back on any of your plans to hire sales reps?

Ashley Lee

We have not. In fact, we made the decision late in 2008 where we added ten sales reps and so we’re committed to that and we don’t have any current plans to add any more sales people in ’09.

Greg Brash - Sidoti & Company

I’m just curious if you have any sense of what percent of your cardiac revenues are where the end user is in the pediatric market?

Ashley Lee

It is 60% at least. I mean if you looked at our pulmonary valve business, which is about 40% and then the cardiac patch material which is about 20% of our business.


Your next question comes from Matt Dolan with Roth Capital Partners.

Matt Dolan - Roth Capital Partners

I have a question on this hospital inventory issues. Could you give us a little more color on what you saw throughout the quarter and maybe, if possible, into 2009, now that we are a pretty good way through February, what gives you hope that it really is an inventory issue, that you’re not seeing surgical slow down?

The second part, I don’t know if you’ve commented on pricing yet, but I think in your prepared remarks you have seen little push back. I don’t know if I caught that correctly.

Ashley Lee

As far as it relates to cardiac revenues, again, what we mentioned in the prepared comments and then on the comments that I made with Ray a little bit earlier; we feel pretty confident that it’s really purchasing patterns as opposed to anything related to procedure volume. Again, there are few options for these patients. These are critical cardiac procedures. We haven’t seen any new competitive products come out onto the market place and so there is just no evidence to suggest that there has been any decrease in procedure volume whatsoever.

So, you know, when we look at purchasing patterns we know that a lot of the hospitals, and especially with the pediatric centers, carry a supply of these valves. Based on what we saw in the macro environment in the fourth quarter, we believe that these procedures were still being performed, but they were being performed out of existing tissue supplied. We saw that through out the fourth quarter into a little bit into the first quarter. We are starting to see some encouraging signs that things are improving, but as to when the purchasing patterns get back to normal levels, I think only time is going to tell. I think that well know more by the end of the first quarter, certainly no more than by the end of the second quarter, but again, we fully expect the demand to come back to expected levels.

Matt Dolan - Roth Capital Partners

Okay and on pricing?

Ashley Lee

On pricing we’re starting to see a little bit of push back on pricing in the fourth quarter. A lot of it, again, related to budgetary constraints that hospitals are operating under; nothing significant, but we are starting to see a little bit more of it.

Matt Dolan - Roth Capital Partners

Okay, on SG it looks like the run rate was flat sequentially. Can you talk about how you’re doing there relative to both your ability to supply as well as demand and receptivity there?

Ashley Lee

I think that one of the reasons that we are not able to continue the conversion of our pulmonary valve business over to SG relates to the one year shelf life issue and we are currently in discussions with the FDA to get an extension of the shelf life. We just don’t want to convert all of the inventory over and be stuck with some inventory that potentially we won’t be able to ship before the one year shelf life. So, we are in discussions with the FDA. We believe that when and if we get that shelf life extension, we’re going to be able to continue the conversion of that business over to SG, which will obviously result in some premium pricing and give us the ability to expand the margin a little bit on that business.

Matt Dolan - Roth Capital Partners

Finally, on your ‘09 guidance, I think if I assume a consistent gross margin, I guess my first question would be is the gross margin you exited the year with sustainable? If you assume that, going forward it looks like you’ll have at the mid point kind of a mid teens type of operating margin. Is that a reasonable goal for this year?

Ashley Lee

I will say for your comment on gross margins, and I mentioned something in my prepared comments about gross margins, because of everything that’s going on with exchange rates, with what we’re seeing on, a little bit of push back on pricing. But, the growing significance of Hemostase in our business going forward, which is a product that’s in the upper 50% range; we think that our margins are going to come down slightly from where they are: nothing substantial, but slightly from where they are right now. Again, historically we haven’t made any comment on where we expect operating margin to be and we’re probably not going to start now, but I would think that we’ve got the opportunity to expand operating margin. We are not going to give any specific targets though.

Matt Dolan - Roth Capital Partners

Okay, thanks a lot.


Your next question comes from Patrick Schaffer.

Patrick Schaffer

I have a question about deferred preservation costs. It looks like they were up about 30% year-over-year and that coincided with an increase of about 250 basis points in gross margin. Are the two related?

Ashley Lee

Not necessarily. I mean some of the margin expansion is related to some price increases that we implemented at the very beginning of the year. We also had the CryoValve SG that we introduced in February or March of this year, which carried premium pricing and also gave us the ability to expand our margin also.

Patrick Schaffer

Okay, so you don’t think that the two are related?

Ashley Lee

Well any time that you have increased through put I think it’s going to be a little bit beneficial to your margins, but is it the primary factor? No.

Patrick Schaffer

Okay and do you expect this trend of increasing deferred preservation costs to increase in ’09?

Ashley Lee

Well that’s an interesting question. We implemented some strategies at the very beginning of the fourth quarter of 2008, which were designed to help us optimize this deferred preservation cost balance. That included reducing procurement in certain areas, restricting criteria of incoming tissues and had we not seen the macro events that occurred during 2008 in the fourth quarter, that really led to the short fall in the top line, we would have seen a very minimal increase in deferred preservation costs during the fourth quarter of this year. So, I think that we have appropriate programs in place right now. We continue to look at programs to optimize those balances and could you see growth in the balance in 2009? Sure you could. But I think that we’ve got appropriate programs in place to manage that going forward.

Patrick Schaffer

Okay, great, thanks guys.


Seeing as there are no further questions, I would like to turn the call back to management for any concluding remarks.

Steven Anderson

Okay, thank you very much for joining us and we look forward to talking with you at the end of the first quarter.


Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation.

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