Artivion Inc (AORT) 2002 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the CryoLife's first quarter earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host Mr. Steven Anderson CEO of CryoLife. Sir, the floor is yours.

Good morning everybody. This is Steve Anderson, CryoLife's CEO and I would like to welcome you to CryoLife's Q1 conference call. With me today are Ashley Lee, the company's CFO and Dr. James Vander Wyk , the company's VP of Quality Assurance and Regulatory Affairs. The agenda for today's conference call is as follows. Ashley will go over today's press release and will discuss first quarter revenues by product. I will discuss SynerGraft Valves and Vascular Graft revenues and clinical results. I will discuss various aspects of the commercial rollout of BioGlue. I will also discuss procurement of tissues year-to-date and compare this year's procurement results to last year's results. Dr. James Vander Wyk will discuss certain regulatory issues. When Dr. Vander Wyk has completed his comments on the regulatory issues, Ashley will return to discuss revenue and earnings guidance for the rest of the year. At that time, we will open up the conference call to questions from the analysts. Ashley will now discuss this morning's press release and CryoLife's first quarter results.

Good morning everyone. First, I would like to make the following statement regarding forward-looking statements. Comments made in this telephone call, which look forward in time, involve risks and uncertainties and our forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such risks and uncertainties include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. All statements made during this conference call that do not reflect historical results or information should be deemed to be forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. This morning, we reported record revenues and earnings for the first quarter ended March 31st, 2002. Revenues for the quarter were $25.5 million, 19% above the first quarter 2001 revenues of 22 million. Net income for the quarter was 3.1 million versus 2.5 million in 2001 excluding non-operating items, an increase of 23%. Earnings per share for the first quarter was 16 cents versus 13 cents for the first quarter of 2001 excluding non-operating items. BioGlue revenues were $4.9 million for the quarter up 100% over the corresponding period in 2001. The primary fact of driving the growth in BioGlue revenues was the PMA approval of BioGlue for use in vascular repair. We made our first shipments of BioGlue under the PMA approval about mid December. Since that time, we have received orders from approximately 170 new customers. Of those customers, approximately 35% had reordered the product as of the end of the first quarter, 80% of BioGlue revenues are generated domestically with our current 2002 reorder rate at over 70%. The remainder of BioGlue revenues, were approximately 20% is generated internationally, where revenues were up 17% year over year. Cardiac revenues for the quarter was $7.3 million up 6% over the corresponding period in 2001. The 6% increase in revenues came on a 4% increase in units. Revenues from SynerGraft treated Allograft heart valves represented 35% of total cardiac revenues for the quarter and 43% of cardiac revenues for the month of March. Vascular revenues were $7 million for the quarter up 9% over the corresponding period in the prior year. The first quarter revenue increase actually came on a 1% decrease in unit shipments. In the prior year first quarter, there was a large number composite grafts that were shipped for peripheral vascular procedures. Although the number of units decreased in 2002, the number of procedures increased due to a fewer number of composite procedures being performed and the ASPs on the longer vascular segments are higher than on the composite grafts. Vascular revenues also increased due to an increase in procurement as well as a marked improvement in the number of femoral veins and arteries that were shipped for A-V access procedures. Orthopedic revenues were $5.9 million for the quarter up 13% over the corresponding period in 2001. The increase in orthopedic revenues came on a 9% increase in unit shipments. We continue to see strength in the area of non-bone tendons for ACO Re-constructions and in the area of OA grafts. Additionally, we saw very healthy increases in orthopedic procurement primarily resulting from competitive wins in our collaboration with AlloSource. Gross margins in the first quarter were 59.3% compared to 57.1% for the corresponding period in 2001. The primary driver and the increase in margins is the increasing in contribution of BioGlue on our operating results. Our general and administrative expenses for the quarter were 37.2% of revenues compared to 38.1% for the corresponding period in 2001. The increase in expenditures in absolute dollars was primarily due to the rollout of BioGlue under the PMA approval, general business growth as well as additional expenses resulting from the expansion of our corporate headquarters and manufacturing facilities. R&D expenses were $1.2 million for the quarter compared to 1.1 million for the corresponding period in 2001. R&D expenditures currently represent approximately 4.5% of year-to-date revenues. R&D spending relates principally to the company's development of additional indications and formulations for BioGlue surgical adhesive and to our focus on SynerGraft technologies. Our tax rate during the first quarter was 34%. Now I will turn it back over to Steve.

Thank you Ashley. There have been a total of 37 SynerGraft heart valves implanted in the world since August of 1999, 25 of these heart valves remain implanted. The implants have been done both on the right and left side of the heart. Analysis of the expanded valves have shown us that they repopulate with the recipient's own cells just like the animal implants do. The valves have been implanted in both infants and adults. There have been a total of 27 SynerGraft Vascular Grafts implanted in Europe since November of last year. These 27 grafts represent the 27 implant cards, which have been returned to us, but we estimate that closer to a 100 of the SynerGraft Vascular Grafts have been implanted in Europe and we just have not received the implant cards coming back to us at this time. These vascular grafts have been implanted for peripheral vascular reconstruction purposes and as A-V access devices for dialysis patients. None of the SynerGraft Vascular Grafts has been removed to our knowledge. On the Allograft side of the business, there have been 987 SynerGraft processed Allograft heart valves implanted in people throughout North America since February of 2000, 982 of these Allograft valves remain implanted at this time. There had been five SynerGraft processed Allograft valves removed from patients. Histological examination of some of these valves indicate that they do repopulate with the patient's own cells in vivo. We have also confirmed that PRA levels are significantly reduced in the patients who receive a SynerGraft processed Allograft valve. The significance of the lower PRA levels means that these valves are less apt to cause a low-level immune response in comparison to conventionally processed Allograft valves. In addition, the lowering of the PRA levels assures the recipient that if by chance they need a whole organ transplant in the future that their PRA levels will be low enough to enable them to qualify for a whole organ transplant. We believe that SynerGraft processed Allograft heart valves are a significant improvement over porcine and mechanical heart valves as well as conventionally processed Allograft heart valves. We feel that the SynerGraft heart valves address the worldwide Tissue Heart Valve Market of about $750 million. Since January of 2001, there have been a total of 262 SynerGraft processed vascular grafts implanted in patients in North America. These SynerGraft processed vascular grafts have been implanted in A-V access devices for dialysis patients and for peripheral vascular reconstruction purposes. All of these grafts remain implanted in patients at this time. We remain enthused about the clinical performance of the SynerGraft heart valves and vascular grafts, both the Allografts SynerGrafts, and the Xenografts SynerGrafts. I would like to remind you that there has not been a significant technical advance in vascular grafts in the last 30 to 35 years. SynerGraft Vascular Grafts are revolutionary and they address a worldwide market of about of one billion. All other Allografts that are processed in the United States increase PRA level after they are implanted. Now, I would like to make some comments on BioGlue. Another way to look at the sales increase that I actually talked about is to compare milliliter to milliliter sale in corresponding periods. And in the first quarter of this year, we sold a 105,000 ml of BioGlue and that compares very favorably with sales of 76,000 ml in the fourth quarter of last year. Where is BioGlue being used? According to reports from the field it is being used in AAA, endarterectomy surgeries, sealing of suture lines, aortic dissections, and aortic root replacements, aortic aneurysms. It is being used for gluing and sealing of organs, sealing of dura, sealing of A-V access devices. It is being used in femoral popliteal bypasses, the sealing of LVADs and the sealing of prosthetic valve suture lines. It is also being used for sealing of synthetic conduit suture lines and the conduit itself to pre-clot the graft prior to putting it under aortic pressures. It is being used for coronary artery anastomosis. We think it is much simpler and less expensive than prosthetic anastomosis devices. Its being used to seal gunshot wounds and Bentall procedures. Prior to the PMA approval of BioGlue in mid December, we had about 600 accounts using BioGlue and we estimate, as Ashley has said that we have opened about 160 to 170 new accounts since mid December. During the first quarter of this year, we estimate that 61% of our BioGlue accounts have reordered. We continue to estimate that the total US market that BioGlue addresses is about $700 million. Now, some comments about procurement. The name of the game in the Allograft preservation businesses procurement and the number of donors processed in the first quarter of this year, here at CryoLife was up about 43% over last year. Part of the reason for the increase in procurement is the strategic alliances that we have been forming with large tissue procurement groups. Another reason is that some of the tissue processors have irritated some of the procurement groups who then decided to support other processing groups. Ashley refers to those as competitive wins. We have also added additional procurement liaison people to our staff and they seem to have have had an immediate impact on increasing procurement across the board. We feel that our procurement in the early part of the second quarter is up at least 25% over the similar time frame last year. And the significant procurement increases that we have seen in the first quarter and early second quarter portends well for second quarter revenues, as you will recall that it takes 45 to 90 days to move tissue through our system. As you have ascertained from the comments on our business in Q1, we have had a very good first quarter and our Allograft preservation business continues to grow throughout all of its segments, cardiovascular, vascular, and orthopedic. The 19% growth that we have experienced in the first quarter has continued into April and so far in April, we are having another record month in revenues. We estimate that we are about 25% ahead of last April's revenues. At this time, Dr. Vander Wyk will comment on various regulatory issues.

Good morning, today I will be making several brief comments on the benefits of tissue implantation, tissue safety prospectus, current regulatory issues and future directions. CryoLife and the entire tissue banking industry has long held that donated human tissue is a precious source of life saving or life enhancing benefits for thousands of individuals. The industry is founded on the premise of multiplying this benefit to the maximum possible. Human heart valves are the implant of choice in children and women of childbearing age. They provide a natural replacement, free of the concerns of anticoagulant blood therapies. Ironically, given the recent concerns of tissue infections, heart valve Allografts are particularly valuable replacements in cases of acute and chronic endocarditis infections of the patient's own valves or mechanical replacements. Vascular Allografts are demonstrated to save limbs, salvage hearts and provide access for medical treatments such as dialysis. Musculoskeletal Allografts reduce or eliminate pain and restore motion often to normal range allowing tens of thousands of individuals to return to productive lives. We keep these outcomes in mind constantly, while making the hundreds of daily judgements necessary to providing a safe reliable supply of such tissue. However, this benefit is not achieved without risk. Donor screening mandated by 21 CFR 1270 and various state regulations as well as voluntary industry practices has greatly reduced the risk of such infectious diseases as HIV, hepatitis, and syphilis. All tissue banks adhere to these requirements, but the implantation risk is not and cannot be completely eliminated. Constant vigilance must be maintained. Since the implantation of Allograft is usually a major surgery, they are inherent risks associated with these operations. Patients can and do react badly to anesthesia. There are errors that occur on the part of health care providers and hospitals are common environments for contracting infections. It is also true that since viable human cryopreserved tissue cannot at this time be sterilized without detrimental effects on the Allograft. An organism can be passed though the processing system and ultimately cause a rare tissue mediated infection. I would like to recall the recent published reports that make it appear that there has been a sudden dramatic appearance of a large number of serious infections associated with tissues. This is not true. The reported infections have occurred at a very low rate over years from a number of different tissue banks. The CDC and FDA have been aware of these risks and reported infection rates throughout the last decade. There is no change in the type or rate of risk. This risk is understood within the community of implanting surgeons. There is no significant difference among sources of the tissue. Regulatory oversight or certification does not guarantee freedom from the possibility of infection. Let us provide some perspective on this situation. Typical infection rates for the implantation of mechanical orthopedic devices are reported as being between 0.6 and 2.2%. We have previously stated that the rate of reported infection of CryoLife orthopedic Allograft is about 0.2% that is 2/10th of 1%. Infections directly associated with cardiac pacemaker implantation is said to be as high as 25 to 35%. Our reported rate for Allograft heart valves is less than 0.16%. Despite this safety record, CryoLife is constantly working to lower these reported rates. We utilize training, environmental controls, decontamination procedures, and automated testing procedures to assure that the tissues are as safe as reasonably possible. Due to the focus on recent infections reported by CDC, there is a heightened effort by both industry and regulatory agencies such as FDA and State Health Departments to review and assure that all that can be done is being accomplished. CryoLife had and continues to cooperate with these investigations by these agencies. In some cases, these agencies have made recommendations to be considered. Implementing these recommendations depends upon further investigations or testing, demonstrating the recommendation is reasonable, practical or scientifically justified. Indeed, in some cases of recommendation such as the one made by the CDC to adhere to standards of warm ischemic time was based upon initial assumptions, which were not true in the end. Far from being a problem, the data showed that all, but one infection reported from CryoLife by CDC were associated with tissue from donors that had been refrigerated within AATD standards. And that the other donor was properly handled within the standards of the state of New York, Georgia, and California. Further the FDA criticized CryoLife for immediately implementing a change to its testing based upon CDC recommendation. The FDA contented there was not sufficient data to justify the change. Nonetheless, the CDC and FDA have made observation during investigations of CryoLife and other tissue banks regarding testing and handling of tissue that are reasonable and which CryoLife is committed to implementing as quickly as they can be properly validated. With respect to the CDC recommendation to audit covered inventory, even though such an audit cannot have any effect on the safety of tissues, CryoLife has carefully determined to not undertake this effort due to the large amount of tissue that would need to be destroyed. This is not in keeping with our promise to donors to provide all possible tissue to recipients. However, as part of several investigations into alleged infections, they has been testing by CryoLife and regulatory agencies of a number of whole cryopreserved Allografts. This testing is similar to the auditing recommended by CDC. The results are as we anticipated. Most of the Allografts show no evidence of contamination using complete destructive testing. The current regulatory requirements of the FDA and various states for human tissue do require, as I have previously stated, serological testing for certain infectious diseases. They require efforts to prevent its handling and cross contamination as well as extensive record keeping and labeling practices. They do not and cannot require the tissue be sterile. CryoLife labeling recognizes this by placing a prominent boxed warning in its Instructions for Use stating that the tissue may transmit an infectious disease. There is a further statement that the implanting surgeon should consider appropriate prophylactic antimicrobial treatment of the recipient. This is the same recommendation that the CDC has made. However, the CDC has no regulatory authority to mandate any practices in tissue banking or health care practice. AATD, which is a voluntary trade organization of tissue banks and which also has no regularity authority has a number of published standards, which are appropriate and which are followed by most tissue banks including CryoLife. In addition to the states of New York, Georgia, and Minnesota as well as the CDC, the FDA has conducted two extensive inspections of CryoLife. The first was in December following the death in Minnesota, during which they made no observations and all samples taken tested negative for contamination. The second followed a recent report of two heart valve infections. The FDA initiated the investigation prior to the completion of CryoLife's own investigation, which we undertook as part of our standard procedures. Subsequently, CryoLife received pathology data from the hospital's own laboratories that clearly demonstrated there was no evidence of infection in either valve. This is consistent with CryoLife's previous assertions that not all reports of infection are necessarily true or are connected with the tissues supplied by CryoLife. Despite these findings, the FDA did make a number of observations to which CryoLife is replying. These observations do not encompass requirements for significant change to CryoLife practices, but involves efforts to demonstrate that the practices in place are better documented and validated. We believe that implementing the technical procedures to address these observations would enhance our commitments to compliance. At this time, we have already conducted several experiments reviewed by FDA personnel, which we believe will demonstrate to the agency that the procedures being used by CryoLife are effective and controlled. What is CryoLife going to do to address the issues associated with tissue safety? 1 CryoLife will maintain the effort it has always expended that has resulted in making available the maximum amount of the safest tissue possible. We will continue to cooperate with regulatory agencies to enhance as possible procedures and testing to assure that the tissue is as safe as it can be while maintaining a reliable supply. CryoLife will continue its extensive educational programs available through procurement agencies to train their personnel in recovering tissue and continue and expand further educating surgeons and all other hospital personnel on a risk relative to the benefits of human tissue. Finally, CryoLife has initiated a major research effort into the potential methods of sterilizing soft tissue in a manner that does not adversely affect the clinical benefits of implanting Allograft tissue. At this time, I will turn the conversation back over to Ashley Lee.

Okay, now I will give you some guidance for how we see the remainder of the year and specifically the second quarter and following? The first comment I would like to make is that, we do not expect to meet our previously issued guidance for SynerGraft heart valves. We had guided to between $1.2 and $1.8 million. And the uptake, just has not been as quick as we had anticipated. However with these manufacturing levels, the product line is not profitable and therefore we do not expect that this will adversely affect our previously issued full year earnings guidance of between 74 and 80 cents. Now for some comments specifically about the second quarter, we expect BioGlue revenues to be somewhat between $4.9 and $5.3 million for the second quarter. We expect cardiac revenues to increase between 8% and 12% over the second quarter of 2001. Vascular revenues are expected to increase somewhere between 12% and 15% over the second quarter of 2001. Orthopedic revenues are expected to increase somewhere between 14% and 20% for the quarter. Overall, we expect total revenues to be somewhere between $26 and $27 million for the second quarter. Margins are expected to be between 59% and 60% for the second quarter of 2002. General, administrative and marketing expenses in 2002 are anticipated to be between 36.5% and 37.5% of revenues for the second quarter. R&D expenses will be between 4.5% and 5.5% of revenues in the second quarter and finally earnings per share are expected to be between, somewhere between 17 and 19 cents for the quarter. That concludes my comments and now, I will turn it back over to Steve.

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

Thank you. We are now open for questions. If you do have a question or a comment, please press "1" followed by "4" on you touch tone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the "#" key, also if using a speakerphone please pick up the handset before asking a question. Please hold while we call for a question. Once again that is "1" followed by "4" on your touch tone telephone at this time. Thank you, our first question is coming from Alex Arrow. Please state your affiliation.

Latenburg, thank you. Congratulations, great quarter guys. First question is about the cost of goods sold, you have broken it down into Human Tissue Services and Products, so I would imagine that, that means the human tissue cost of sales and then the BioGlue and porcine valves cost of sales. But the products cost of sales is larger than I would otherwise expect, so I am imagining that I do not have a clear understanding of how you, which product is supplied to which of those two categories? Could you comment on that?

Yeah. The product cost of sales includes BioGlue and then prosthetic valves, SynerGraft heart valves, vascular grafts, and OY heart valves. And just because the products are new and we are manufacturing at very low levels at this time, the overall margins include the startup cost and startup manufacturing cost that we are absorbing for the SynerGraft and heart valves and vascular grafts.

Okay, so margins are not as good as you expect them long term on BioGlue and SynerGraft heart valves?

Well, it is quite the opposite, you know, that the BioGlue margins are, you know, approaching 80% right now and then as we continue to grow the SynerGraft heart valve and vascular graft business, we expect that those margins are going to be very good and in excess of what we are experiencing in human tissues, but we just have to build that market first.

Okay, but the 2.2 million is, you know, more than, more than you would calculate from applying 80% gross margins to BioGlue plus to the 50 to 60% gross margin to the other products. So there is other stuff in there, but I think I get the gest. Next question on the SynerGraft vascular tissues that were, you said, 282, some of them I think has been implanted for both A-V access for dialysis and also for peripheral vascular. You said that those are both Xenografts and Allografts. Does that mean that is Xenograft?

There has been about 25 documented Xenograft vascular grafts implanted and we think that, that number is closer to a 100, but we haven't received the implant cards back. But the other bigger number on the vascular is for Allograft vascular it is a couple of 100s.

I will come back at you with exactly what I said just a minute?

So, I mean, my only question really is does that include the bovine ureters? Is that what is driving the growth there?

No, the bovine ureter SynerGrafts are sold only in Europe. These are the ones that the 262 SynerGraft processed vascular grafts are human Allografts and we have 25 or 27 of the SynerGraft bovine ureters documented implanted in Europe. But we think that, that number is actually higher. We think that number is closer to a 100. We don't think we have had any of those ex-planted either Alex, because if there was a patient outcome that wasn't really good, you know, you always hear about those.

Okay, thank you. Ashley mentioned that the competitive wins that you had experienced in the first quarter were from, when some of the other groups had irritated the larger procurement groups. Can you tell us what they did to irritate them?

No! I don't know exactly, you know, just we have heard that when they come our way, I guess, but while we try to make it easy to do business with us and I think that we are here to do business with some of the other tissue processors.

Okay, very good and the last question.

Panel Reactive Antibody.

So it's a measure of whether there is an immunologic reaction happening?

Yes.

Okay.

And its definitely lower with the SynerGraft processing that has been in the past with conventionally processed Allografts.

Okay, very good, yeah. You mentioned that you were going to be able to breakdown Xenograft and Allograft, if so, that would be great but, you know, I am not expecting that, so I will just go back in the queue.

Okay.

Thank you.

Thank you, our next question is coming from Kurt Krueger. Please state you affiliation.

Oh, yeah. Bank of America. Hi guys.

I am here with Rosh too, he might chime in with a question. But could I ask about the or what is the trend line for the orthopedics? That was a little disappointing for us and you say you are going to look forward to, I guess, 14% to 20% in the next quarter growth rate. Could you give us sense of how, that what happened in the first quarter? Its seems like your procurement was up, it didn't seem like it was reflected in the orthopedic line in the first quarter.

Yeah, that is I can walk you through that very easily Kurt. When we were in the forth quarter of 2001, we had been very successful all throughout the year in building our orthopedic program and we were so successful so that in the fourth quarter of 2001, we were really selling out of existing inventory as opposed to procurement. So by the end of 2001, especially with non-bone tendons, we had been so successful our inventory levels had been depleted. So our procurements started picking up towards the very end of last year with orthopedics and it continued into the first quarter of this year. And the reasons that you did not see sequential growth is because we again take 45 to 90 days to get tissues to our system. So it really just started making its way through the system, you know, late in February and in March. So that is why we expect, you know, to the programs to really start accelerating again just due to procurement, which we didn't really have in the first quarter, especially in the first half of the first quarter.

But, you know, last year, I guess, for the full year, you were up almost 40% in orthopedics in the orthopedic sector, I mean. Is the procurement running now though at a rate, where we could look forward to going back to the, you know, close to those levels, half the distance between current in those levels? What do you think?

Well, you know, we had three years of, you know, close to 40%+ growth and I think the guidance that we gave for the full year was 20+% for the full year. We still expect to meet that guidance and we expect our orthopedic revenues to accelerate during the year, but no, I don't expect this to be, you know, up towards 40% and, you know, at this point, I am comfortable with, you know, 20+%.

Okay, as doubtful, can I ask about the, I am not sure what it was, but I guess, I just could just have a discussion of that. Where do you think we go from here? I mean, do you think, are they quite satisfied at this point or what kind of events can we look forward to over the next say two quarters? Any continued interaction or open-ended issues with the FDA, unresolved issues?

I think that the fear engendered by all the publicity has made all the regulatory agencies more sensitive to what is going on in the tissue banking industry and that although they have been monitoring it and have been aware of what the situation has been for number of years. I do believe that all the regulatory agencies will maintain a heightened inspection rate of all tissue banks over the remainder of this year. I think that the premise there will be, to making sure that everybody is using the best practices that they can. As I pointed out here in the inspections for CryoLife, their observations, they made a number of them. But they were not on issues that CryoLife isn't doing this or isn't doing that it is a matter of documenting and giving more scientific data to support the practices that we are doing. We are fully confident that we are going to be able to do that, as I mentioned, I already have experiments that preclude any necessity for the FDA having a problem with CryoLife tissue. The results are all what we expected them to be. I expect that you will hear that other tissue banks have also been inspected. We are aware of at least a semi major effort across the countryside to look at all tissue banks. So I expect, yes, over the next number of months to hear continuing announcements from the CDC as they finish up their investigation and fully describe what they feel are the events going on. I think this will have a positive effect on tissue banking. I would expect to see a number of small tissue banks over the next year or two not to be able to maintain the pace and to put forth the scientific efforts that CryoLife is capable of doing and that other large banks is capable of doing. So, I expect to see a fall out of tissue banks and that's the general thought process, you may see announcements from the FDA on this point or that point regarding their findings, but again they must be kept in complete perspective as to what the real issues are.

Well, if I can just question that part a little bit further? Would you think it would be safe to say that it is unlikely that you will have any impairments of your revenue, project your capability of developing sales revenues, but that this may weigh on the story psychologically for some time. Is that fair, or do you think you are going to clear the, you know, the cloud, the psychological cloud as well?

I don't think there is a psychological cloud. You know, most of the doctors that we talk to, are very familiar with dealing with any kind of an infection. Most of the doctors at one time or another has served under Hospital Infection Control Committees and so they are very aware of what a typical infection rate would be for their hospitals or their operating room environment and of course, they all know they have all have been informed as to the extremely low percentage, the infection rates from tissue banks and they understand the issue. I do not think that there is going to be any adverse effect on the company's growth of its revenues and it is implantable Allografts.

Just one quick question, I I could on BioGlue and then I will get back in the queue. You know, the guidance you gave 4.9 to 5.3 I think was, you know, probably that is going to make us think that you are being may be a little conservative there. Given that you just hit the 4.9 level. Does that reveal a kind of quality if you will of the 4.9 and that causes us to question whether or not those are going to be repeat sales and what the uptake is likely to be on that original 4.9, given that you do not have much of a trajectory after that 4.9?

Kurt, we still think that our revenue guidance for the full year is 20 to 23 million and it is still good and we expect that our revenues are going to ramp and rank rather nicely throughout the remainder of this year. You know, we have only been in rollout for one quarter now, you know, literally about almost four months and we are very encouraged by what we are seeing so far. We have no reason to believe based on the ordering patterns that we have seen from customers that there is a lot of stock on the shelves, but at the same time, we think it is prudent that we do not go out there and raise the expectations for the rollout, because again we are so early and we are still developing data on customers usage pattern, reorder patterns, and so forth. So, you know, we hope that we are conservative in our guidance in the second quarter.

Okay, thank you very much.

Thank you, our next question is coming from Dave Jeffery. Please state you affiliation.

Hi, its CIBC World Market. I was wondering if you guys could just quickly give a little bit more color on the vascular business too. I think you said you were down 1% in shipments and that revenues were 7 million and up 9%. And I know you commented briefly, but can you describe that a little more detailed, because that seems like, I mean, you are down in shipments and still be up like that seems a little strange.

Sure, yeah in the first quarter of last year Dave, our inventory of long segments of saphenous veins, which is used for peripheral vascular reconstruction. They were running very low, so we made a very consorted effort to pull those cases or meet the needs of those cases with composite grafts essentially two shorter segments of saphenous vein that the doctor then sowed together to meet the need of the vascular surgeon up in the field. In the first quarter of this year, our procurement has been so good that we were able to fill a lot of those cases this year and we actually saw growth in the number of cases. But we were actually able to fill those cases with longer segments of saphenous veins and the longer segments of saphenous vein carry higher ASPs just because, you know, the procurement processes takes longer, there is more cost involved. So, you know, we charged more for those grafts. So with the higher ASPs on the longer segments of saphenous vein and the actual increase in number of cases that were performed in the first quarter of this year. That is why we see a little bit of disconnect between unit shipments and revenues growth in the first quarter of this year.

Great and on BioGlue, the milliliter that you guys gave out that was this quarter versus fourth quarter of last year correct?

Yeah, that is correct.

So have guys had an ability to raise the price of the product and if so, is it more, I think your doing more US sales this quarter than last as well. May be, I think you were at 65% US in the fourth quarter and 80% now. Is that the reason or are your guys able to raise prices on the product or could you explain?

It is purely a function of higher ASPs in the United States and, you know, obviously with the PMA approval in the first quarter that is why you are seen the revenue growth outstrip the unit growth.

And then one just quick modeling one.

Total cash investments at the end of the first quarter, we had let say, a little over $34 million in cash investments, receivables, our trade receivables. We were at about 68.8 million for the end of the first quarter. The third preservation cost, a little over 261/2 million, inventory about 6.5 million.

Excellent, thank you a lot, good quarter.

Okay, thank you.

Thank you, our next question is coming from Keith Salagan. Please state your affiliation.

Good morning and congratulations. To Ashley, I don't know that I am able to still hold out my answer rather, I just want to go back to Kurt's discussion with you on the orthopedic. If I have this correctly, I mean, efforts were strong last year and you were successful in building out orthopedic business, but it sounds as though procurement efforts are in your favor this year with AlloSource other, you know, wins and things like that yet, but if I am not mistaking, your not, its not translating into the same type of success as last year or why would not we actually see that move through in?

Good question, well yeah. You know, First all okay, we still need to get the tissue into the system.

Sure.

So, that is one of the reasons why you haven't seen some of the procurement results in revenues yet and we expect that, you know, moving forward that the remainder of the year that the growth rate will obviously be higher than what they were in the first quarter for orthopedics. The second factor is we just working up with a higher base.

Right.

Its just, you know, intermittently, you know, more difficult for us to cross 40% plus growth year over year for orthopedics.

Right. I mean, I understand that is well outside of industry growth, but if we look at industry growth, I mean, your range is fairly wide 14% to 20%. With 14, you know, what do you need to achieve the higher end of the range versus, you know, the 14%?

We just need for procurements to continue strong and for the remainder of this month and early in the next month.

Okay, alright and then I was just wondering If you probably could, may be characterize the chance of the FDA, sort of making it mandatory to test or to inspect your inventory.

Yeah, the FDA discussed that issue just from the concept that the CDC had made a recommendation and we thoroughly described what opposition on that is. It is, I believe a moot issue on their part at this stage. I do not see any requirement. I do not see any ability for the FDA to make it a requirement.

Okay, alright, and one last question if I may. Can you guys just kind of characterize what is going on with procurement? I mean, I know that there is a lot, you know, there is X-number of tissue banks and everybody would like to have the product. Are you guys, do you see any attrition at all that comes from, you know, negative press, or have you just seen steady, as you mentioned Ashley, competitive wins. What is the shift like in the industry right now? You know, getting new contracts, does anybody lose contracts?

We haven't lost, to the best of my knowledge, any groups over the last several months and, you know, so we have had definitely net gains in the number of groups that are sending tissues to us. The other thing that we are seeing to locate is we expend a lot of resources in time, training the groups that we currently work with in procurement techniques and giving them constant feedback on the quality of procurements that they are doing and so forth. I think that in addition to just competitive wins, we are also seeing our groups that we work with become more efficient in the procurement process as a result of a lot of the training efforts that we make in the industry.

Okay. Thank you very much.

Thank you, our next question is coming from Vivian Wall. Please state your affiliation.

Good morning, I am wondering if you could comment the AATS meaning is coming up and I am wondering if you could give us a preview of what we might look forward to seeing there? That is my first question and then more generally, you ran through such a long laundry list of indications for BioGlue or at least physician indications. I am wondering, when we might start to see some publications come out on some of those newer indications?

We have had a couple of papers accepted for conventions that are upcoming Vivian, and you will see some of those coming out throughout this year. I don't remember exactly if there are any for the AATS, although I think that my recollection is that there is one or two for that particular meeting, but you will see them coming out. We have been working diligently on that. Our plans for the AATS are similar to what they have been in previous meetings. 1 Have the physician implanters work in our booth like they do and make their presentations and discuss their clinical results right there and as, you know, we use our marquees there to let people know when the different physicians are going to be talking about their results. So I would think that Dr. Elcons and Dr. Buveria and Dr Ferine Barker and others will all have an opportunity to talk about their use of SynerGraft processed Allografts as well as their various uses of BioGlue.

And will we see any podium presentations on either SynerGraft, Xenograft or Allograft?

I don't remember.

Okay. Can you just then tell us on the SynerGraft heart valves on the Xenograft side, you mentioned that 25 are still implanted?

Yes.

And that leaves 12 that have come out.

Yes.

Where, where are we in that program?

We are doing well in that program. They have been put into people that are very sick and they are being put in both right side and left side, adults and infants and the doctors are generally pleased with their results. There have been some operative techniques that have not been as effective as we would have liked them to be. So some of the valves have been removed, because of operative techniques that weren't optimum. Some of them have been removed, because the patients died and they have been sent back to us and generally speaking, we are moving carefully through the what I would say, would be a controlled clinical trial in Europe with them.

And when?

We are very optimistic about it and I thing the doctors that use them are also optimistic and enthusiastic about it.

Well it is scheduled, may be for some time next year. But if you remember, we have talked about this in the past that the strategy here is to submit the A-V access device, SynerGraft, first to the FDA and we are expecting that application for a peak on IDE/PNA to be made middle to the late third quarter of this year. And the reason that we are focusing on the A-V access device is that the guidance document for a graft like that is less arduous than a guidance document is for a heart valve and we thing that we can get an A-V shunt approved in three to four years. Whereas as you know, a heart valve takes six year or longer to do that so, that is a strategic decision that we have made and we will go forward, we are going to follow that. So, I would expect the first SynerGraft Xenograft based product in the United States to be the A-V access device.

Okay, thank you. I will get back in the queue.

Thank you, our next question is coming from Don Sherman. Please state your affiliation.

Good afternoon, Ashley I have a question for you regarding your new guidance. The 1.2, 1.8 million, is that sustained through the SynerGraft porcine valves model 500 and 700 sold in New York?

Yes, that is correct.

Okay, and now with the model 100, the Bovine vascular graft, where are revenues to that project coming up? Is that being included in the vascular line of human vascular lines?

No, I did not report in those numbers separately. For the first quarter of 2002, we generated approximately, $50,000 of revenues from SynerGarft Vascular Grafts.

Okay, and then I have a question, two questions, I guess, about R&D. One about biodisc, I know, last quarter, you had said, you are going to do some more animal trials there, can you give us a little update on where that stands?

Yeah, that's going through, the biodisc is going through animal testing, additional animal testing and we have a regulatory schedule for that. You will see it have a CE mark applied for early next year, sometime, let say in the first 4 to 6 months of next year. We will be applying for a CE mark, so if we are successful there then I think that is the first place that you will find it implanted in humans and in my recollection is that, we have scheduled for a IDE submission, very late next year.

Okay, I know you mentioned earlier that in terms of R&D, it may be a little more of focus on finding a means to sterile the human tissue without, you know, compromising on the integrity of the tissue. How much of a shift is there in your resources? What percentage? And what your R&D group has, how many of them had to shift away from say, additional product or additional work on the protein hydrogel product line or SynerGraft and now focused on the sterilization issue?

I don't think it is going to have any impact at all. You know, all of those personnel are dedicated to the projects if they are working on them. So there really should not be, you know, a shift of personnel between projects there.

Are we going to see may be R&D expenses be a little higher in terms of a percent revenue going forward?

The issues associated with the project for sterilization of tissue are not issues that are necessary money and personnel intensive types of things. Their more the duration of things, where you have to put some time in and then you get results back. There is some bench testing to be done and there are some efforts of in the laboratories for example, the microbiology laboratory for testing and some mechanical testing with a QA. So it is not necessarily an effort where you are doing the kind of invention or R&D development that you might think of for a traditional product. It is more running tissues through various modes of sterilization and utilizing some test laboratories. So it is a time factor with regard to that rather than that kind of resource allocation.

Okay, and I know this is a tough question, but I am going to ask anyway. What kind of, I mean, when do you think you could possibly have some means of sterilizing tissue available?

I anticipate quite soon, that we will be able to demonstrate that possibility. The issues associated with when you can have tissue available in any significant amounts in the market place are more driven by the necessity of all of the compliance that the FDA puts on it. They recently issued a guidance document, we do not necessarily believe that the guidance document is an appropriate way for them to have gone about this, but nonetheless the guidance document demands that we fully validate any processes that we institute and that is a very time consuming situation. Sometimes you have to do it over a number of production lots or a number of periods of time in the year, to demonstrate the effect on the facility and while I could demonstrate scientifically having achieved something to demonstrate it from the practical point of view satisfactory to the FDA is actually going to delay the introduction of some sterile cryopreserved Allograft tissue.

Okay, I understand, thank you.

Thank you, our next question is coming from Gregg Simpson. Please state your affiliation.

Good morning guys. I feel like the team draft and last the NFL draft, all the good questions have been picked up aboard here. Got a couple of followups and Ashley, I will start with you, the guidance for the second quarter was a little higher than what we have been looking for and when I put that together with what seems like a very conservative BioGlue guidance. Especially because we have not found that stocking has really been an issue here. You suggested, we write that off to prudence, which I think we are all very happy to do. I am curious if you though can give us some sense of April trend, I know we are already a couple of weeks into it, but if you can give us any sense of BioGlue sales as we have started out here in the quarter?

I think the rollout is still continuing to do very well. I think that we are seeing our average daily sales for the month of April, a little bit ahead of what we saw coming out of this first quarter so I think I will leave it at that Gregg.

Okay, that is fair enough. Can I ask a few other questions on BioGlue though? One thing we have heard from doctors, I know we have talked about this, any plans on offering smaller quantities in terms of milliliters and then also can you update us, you did on biodisc, but also one say the foam and gel versions.

Well in regard to the smaller quantities, we are actually seeing that the uses of the BioGlue are commensurate with them needing the five milk containers, if that is what you were referring to. We do have a 2 ml available internationally and they choose the larger quantity. So as they get in there they find that they windup needing that much. So at least for the types of operations that they are generally using it for currently and for which we have labeling approval are up in the 5 to 10 ml quantity sizes.

In regard to your plan about the gel, we feel that, that can be a PMA supplement and we are intending to file that towards the end of this year or the beginning of next year. We think that the foam product or the foam form of the glue will require a new IDE submission and that is presently scheduled to have an IDE filed for the foam towards the end of next year.

The end of 2003? Okay and then just one last one with respect to, James probably for you. With respect to the recommendations from the FDA or may be Ashley, I guess, I asked this a month ago when we had the conference call. Any cost implications material cost implications for adopting any of these recommendations?

As the way things stand right now, we do not anticipate that, that is going to have a significant impact on our gross structure.

Okay and that is obviously what has been taken into account for the guidance given to that?

Yes.

Okay, alright. Thank you very much.

Thank you, our next question is coming from Archie Smith. Please state your affiliation.

Hey guys, how you are doing?

I will be quick. I can recall two or three very quick questions. Your gross margins, although are up year-over-year work up dramatically sequentially. So it does not seem like you are benefiting dramatically from the ramp in BioGlue. Am I mistaken about that or not?

No, I think that we are benefiting from the BioGlue Archie, I think that probably what occurred was is that the startup manufacturing costs were probably a little bit higher in some of the SynerGraft product lines that we had anticipated and that had a little bit of an adverse affect on margins. But as we continue to go throughout the year and BioGlue continues to ramp up, I think that we are going to see, you know, some improving margins.

This will lead me to my second question, which is that pricing per SynerGraft does not appear to be as strong as you might have hoped initially, we saw a 6% increase in cardiac, 4% units that implies a fairly modest pricing premium per SynerGraft, is that accurate?

A lot of the growth came with the lower AST patch materials in the SynerGraft Allograft cardiac tissues Archie, and the premium on those tissues are not as high as some of the higher priced heart valves.

So what is the premium that you are holding in the market place on pricing for your SynerGraft treated Allograft heart valves?

I think, our, if you look at our price list. It is somewhere around 15% to 18%, but I think if you look at ASPs we are probably closer to about 10%.

Okay, and then, this may be just be me, it is hard to believe I am getting ~ just in the call. You did talk about offering some thoughts about your 2002 guidance, but I did not really hear much about 2002 as a whole. Can you give us a kind of thumbnail sketch of where you expect the year to come out not just the quarter?

Yeah, I was only referring back to the guidance, I guess, that we gave in the third quarter conference call last year, you know. None of our revenue guidance has exchanged since that time, I think for cardiac revenues for the full year that we expected to be somewhere up between 9% and 11%. Vascular tissues, we expected to be in low double-digits growth. Orthopedics, somewhere at 20+% growth. BioGlue between 20 and 23 million, on earning somewhere between 74 and 80 cents.

Great and then the last question just to kind of make sure, we really beat a dead horse here. What are you seeing with BioGlue now already annualizing at roughly 20 million, what are you seeing that has you posturing very conservatively about the BioGlue numbers for this year? I just want to make sure I understand this?

Nothing other than being conservative Archie. You know, we have had one quarter under our belts, under the rollout and although we are very encouraged about returns that we are seeing and the feedback that we are getting. I just do not think it is prudent to go out there and raise revenue guidance at this time. You know, after another quarter under our belt than we have had, you know, more data to look at and I have talked to more surgeon and so forth. May be, we might be in a position to provide guidance at that time, but I just do not think it is prudence to do it right now.

Thank you a lot guys. Thanks for speaking with me long enough to get really the last draft back there?

Thank you, our next question is coming from Allen Chaffer. Please take your affiliation.

Ashley, I was just hoping you could breakdown the BioGlue number just a little bit. This 4.9 million, I was just trying to understand, how much of that was the original aortic defection and how much of that was the new indications?

There is no way to tell that is, you know, we can't track the usage at the hospital level. So its really impossible to tell, you know, about the procedure where the products is being used and we hear and we know from the surgeons where they are using it, but it is impossible to quantify it.

Well, thank you a lot. Great quarter guys.

Thank you, our next question is coming from Robin Slender. Please state your affiliation.

I am probably really the last. Just one more question on BioGlue. It is my understanding that BioGlue is approved for general surgery and soft tissue in January or February. I am wondering what kind of uptake you are seeing from that indication?

That is in Europe, not in United States.

And you know, I think we reported that internationally our revenues were up about 17% year-over year- Robin? It is kind of hard to tell exactly again, where the product is being used in Europe because we are working through manufactures groups over there and I think it is going to take sometime to this in marketing and so forth and get the story of the surgeons in Europe, but you know, to be able to quantify exactly again, you know, what the increase was driven by. Indications prior to the soft tissue repair approval and then the soft tissue repair approval. It is kind of hard to do.

Well, we currently have no plans right now to....

To file separately.

Yeah to file separately for any type of approval and general surgery, but you know, that could change with some point in the further. But right now, you know, we have no plans to file for a separate approval.

Okay, thank you.

Thank you, our next question is coming from David Fonseco. Please states you affiliation.

Excuse me David, do you have a question?

He is not there.

He is not responding. We will move on to our next question, which is coming from Blake Gunner. Please take your affiliation.

How are you doing guys? Just two questions. First of, can you just remind me what did international BioGlue sales grow in the forth quarter? I am just trying to map out how the growth is progressing cause it sounds like most of the growth this quarter was clearly in the US from a new indication. I just want to understand the 17% compares what in the fourth quarter in international?

I don't have that number right in front of me right now Blake, I would have to get back with you on that?

Okay and then my second question for Ashley, just on the balance sheet. You do have amount receivable number. I was just a little bit confused, you guys break out a numbers almost to the receivable numbers and I am just curious. Were you giving the trade account receivable number?

That is trade account receivable number.

So that was 16.8 million.

Right.

And then at the end of the year that was 13.3 million, is that right?

Correct.

Okay, great. Thank you so much.

Thank you, we do have a follow up question coming from Alex Arrow. Please state your affiliation.

Thank you, just one last question. In the year 2001, you had about a million dollars in grant revenue. Can you give us any comments on what kind of grant revenue you might expect for this year?

You know a lot of that Alex is going to depend upon what new grants that we will see this year, but as it currently stands I believe we are somewhere projecting somewhere between $500 to $600,000 in grant revenue for the full year.

Okay, thank you.

Thank you, our next question is coming from Kurt Krueger. Please restate your affiliation.

Thank you. Just to make sure that the horse is completely dead here, let me just apprehend on BioGlue. We, Rosh and I did a quick calculation with those 750 accounts, I guess you have running right now 760 or so. We did a quick run down and it looks like they are only doing, they are consuming the product at about three to four procedures from out that, first of all is that about right and if that is the case, is that likely to climb as we go over the next couple of quarters and do you see a need to extend the further two accounts or could you anticipate that accounts could use it more frequently? You know, give this if you could provide such complexion if you will on the procedures worth being used and are we likely to see it being more, or become an everyday usage and kind of a universal tool?

Well, if you remember the strategy that we started out with 90 days ago, which was to begin with all of the hospitals that had participated in the HDE and make sure that they understood that the BioGlue had been approved with a much broader approval. We have been doing that and I think that part is completed. The second part was to go the cardiovascular hospitals that did not participate on the HDE and get the product on the shelf there. I think that is where we are at the moment. And the third part was then we are going to focus on vascular surgeons. We are somewhere between this, completing the second part of that and working on the third. So, I think you are going to see the usage increase significantly going forward.

I think the other thing that we have seen Kurt is that the longer that the products has been in a hospital, we are seeing usage levels increase dramatically as, you know, more surgeons become aware of the product, how it is used and so forth. So, we absolutely expect to see that the hospitals that we have been prompting up in the first quarter, you know, ramp up their usage as we go up to the future.

Well. you know, you did, I think you said you had about 160 and 170 new accounts in the quarter, you know, since the approval. Do you think you are going to have more in this new quarter that we are in right now, I mean, another 100? What is a good gage on that?

I don't have the exact number, but that is in the marketing plan right now Kurt, but the answer is absolutely yeah, we are expect to adding new customers throughout the remainder of the year.

Okay. Well that is great. We will likely see some good sequential pace on the sale that we would imagine to them?

We are expecting.

Okay, good. Thank you guys.

Thank you, ladies and gentleman. Unfortunately, we have run out of time for a question. I would now like to turn the call back over to Mr. Anderson.

Thank you everyone for being with us. We look forward to talking with you in July.