Artivion Inc (AORT) 2002 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to CryoLife second quarter earnings conference call. At this time, all parties 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, and President and CEO, Mr. Steve Anderson. Sir, the floor is yours.

Good morning everyone. This is Steve Anderson, CryoLife's CEO, and I would like to welcome you to CryoLife's second quarter and first conference call. With me today are Ashley Lee, the company CFO and Dr. Jim Vander Wyk, the company's Vice President of Regulatory Affairs and Quality Assurance. The focus of today's conference call will be on the company's record financial performance for the first half of this year and the significant changes management has made to new product priorities and regulatory submission timetables.

The comments about our new product priorities and pipeline, and new regulatory timeframes for SynerGraft products and BioGlue product line extensions are significant, and represent management's continuing focus on the company's extensive new product portfolio. The agenda for today's conference call is as follows: first, Ashley will go over this morning's press release and will comment on the company's record financial results for the second quarter in the first half of 2002. Then I will discuss the human clinical results of the SynerGraft allografts and SynerGraft for both cardiac and vascular use. I will also comment on BioGlue clinical results as reported by Dr. Joseph from the University of Pennsylvania, at a recent cardiovascular meeting in Helsinki, Finland. Then I will talk about updated and revised new products and regulatory priorities at CryoLife as well as new development timetables for various new products.

I will also comment on our procurement results for the first half this year. After those comments, Dr. Jim Vander Wyk will bring you up to date regarding the company's regulatory agenda. And then after Dr. Vander Wyk's remarks, Ashley will provide financial guidance for the third and fourth quarters of this year. At that time, then, we will open up the conference call for questions. At this time, Ashley will read our forward-looking statement and then we'll review this morning's press release and comment on the company's record financial results for the second quarter and for the first six months of the year.

Thanks 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 telephone call , which look forward in time, involve risks and uncertainties in our forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's or management's intentions, hope, beliefs, expectations or predictions of the future. All statements made during this conference call do not reflect historical results or information should be deemed to be forward-looking statements. It is important to know that the company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning risks and uncertainties is contained from time to time in the company's SEC filings, including the risk factor section of our most recent form 10-K, copies of which may be obtained free of charge by contacting the company. This morning we report record revenues and earnings for the second quarter, end of June 30, 2002. Revenues for the quarter were $25.7 million, 18% above second quarter 2001 revenues, of $21.7 million. Revenues increased in all service and product lines over the previous year's quarter. Revenues for the second quarter also represent an all-time quarterly record for the company. Net income for the quarter was $2.8 million verses $2.5 million in 2001, an increase of 10%. Diluted earnings per-share for the second quarter were $0.14 verses $0.13 for Q2 2001. Revenues were about 1% below the lower end of our earlier guidance of between $26 to $27 million. Revenues were most - were lower than expected, most likely due to the adverse publicity associated with the CDC, and the FDA warning letter. Earnings were lower than anticipated due to the revenue shortfall, coupled with higher than anticipated increases in insurance premiums, costs associated with legal matters, and additional costs incurred with addressing regulatory issues. BioGlue revenues were $5.3 million for the quarter, at the higher end of our guidance, and up 100% over the corresponding period in 2001.

The primary factors driving the growth in BioGlue revenues were the PMA approval of BioGlue for use in vascular repair, as well as growth of revenues in international markets. We made our initial shipments of BioGlue under the PMA approval about mid December. We have received orders from approximately 370 new customers since that time, with approximately 190 of those being added during the second quarter of 2002. Approximately 77% of BioGlue revenues are generated domestically, with our current 2002 reorder rate at over 70%. The remainder of BioGlue revenues are approximately 23%, is generated internationally, where revenues were up 28% year over year. To give you an idea of how same hospital sales are tracking, we compared the last six months sales prior to the PMA approval, at our top 50 hospitals, and compared that to the first six month's sales for those same hospitals since the PMA approval.

On average, the total sales of BioGlue per hospital prior to the PMA approval was approximately $23,000.00, or about $3,800.00 per month, compared to about $33,400, or about $5,600.00 per month since the PMA approval. That's about a 46% increase in same hospital sales. Cardiac revenues were $7.7 million for the quarter, up 7% over the corresponding period in 2001. the 7% increase in revenues came on a 3% increase in units. Revenues from SynerGraft treated cardiac tissues represented 48% of total cardiac revenues for the quarter. vascular revenues were $6.4 million for the quarter, up 6% over the corresponding period in the prior year. The second quarter revenue increase came on an 8% increase in unit shipments. Orthopedic revenues were $5.9 million for the quarter, up 7% over the corresponding period in 2001. the increase in orthopedic revenues came on a 6% increase in unit shipments.

We saw good increases in orthopedic procurement that helped build the growth in this area. Gross margins in the third quarter were 59.9% compared to 57.7% for the corresponding period in 2001. The improvement for the year is due to the increasing contribution of BioGlue to our operating results. General administrative and marketing expenses for the quarter were 39.4% of revenues compared to 37.4% for the corresponding period in 2001. These expenses as a percentage of total revenues were higher than anticipated due to several factors, including higher than expected insurance premiums that went into affect in April and May of this year, costs associated with legal matters, costs associated with addressing regulatory issues, and lower than anticipated revenues. Planned increases in expenditures in 2002 resulted primarily from expenses necessary to support the rollout of BioGlue under the PMA approval, general business growth, as well as some 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 $1.3 million for the corresponding period in 2001. R&D expenditures currently represent about 4.6% of year to date revenues, pending relates principally to the company's development of BioGlue of - into our focus on our SynerGraft technologies. Our tax-rate in 2002 is 34%. Now I'll turn it back over to Steve.

Thank you for the very detailed report Ashley. It is our opinion that the operating results that Ashley has just reported give credence to our observation that the CryoLife brand in the cardiovascular and orthopedic allograft business is a very strong brand, and that the physicians in these specialties continue to believe that CryoLife preserve tissues are a significant benefit to their patients. At this time, I would like to comment on the press release announcing a buyback of the company's stock. At a board meeting held last Thursday, the CryoLife board of directors made the decision to authorize a buyback of up to $10 million worth of CryoLife stock. The stock buyback will begin no sooner than Thursday morning. Now I'd like to review the implant results of the allograft valves and veins processes with SynerGraft technology. We began implanting human heart valves processed with our unique proprietary SynerGraft technology in February of 2000.

We have reported to you previously that in our analysis of postoperative results, this has become apparent that SynerGraft processing eliminates or mitigates the increase in panel reactive antibody levels in the transplant recipients. From February 2000 to present, we have implanted 813 SynerGraft processed human valves throughout the United States and Canada. 800 of these valves remain implanted at this time. We have also had 648 SynerGraft patches implanted for cardiac reconstruction purposes, which brings our total of implanted allograft tissues processed with the SynerGraft technology to 1448. We have performed analysis on some of the explanted SynerGraft allograft valves, and these studies indicate that the valves are repopulating themselves in vivo. About 48% of our allograft valve processing revenue is from SynerGraft processed tissues. SynerGraft processing carries a 24% price premium when compared to allograft valves processed by conventional methods.

People continue to ask us why we expect the use of human valves for cardiac reconstruction to continue to expand over the next few years. And the simple is answer is that if they are properly implanted they work better than synthetic valves do. Typically, human valves have normal , do not require the use of anticoagulants and they do not have a catastrophic failure . They are the valves of choice in women of childbearing age, and in cases where there is an active infection in the heart, and in pediatric cardiac reconstruction. In fact, over 23,000 children have benefited significantly from CryoLife processed tissues. The allografts do not calcify as readily as porcine heart valves do in children, and in many cases, they last as long as mechanical heart valves do. Over 88% of CryoLife preserved allograft heart valves are free from structural failure at ten years. We estimate that CryoLife provides over 70% of the cryopreserved cardiac tissues in the United States. We also processed allograft vascular tissue with the SynerGraft process.

And since January of 2001, we have implanted about 394 vascular grafts processed with the SynerGraft technology. About 381 of these grafts remain implanted. A key feature of these SynerGraft allograft vascular grafts is that they do not increase PRA levels in patients. Therefore if these patients become candidates for a whole organ transplant sometime in the future, they will not be removed from consideration due to the fact that they have an increased or elevated PRA level. Approximately 7% of our vascular allograft processing revenue is from tissues processed with the SynerGraft technology. The reason that surgeons remain enthusiastic about preserved human vascular grafts is that they will stay open if they are implanted below the knee. Synthetic grafts frequent exclude very quickly if they are implanted below the knee. Human vascular grafts have many advantages when they are used as A-V Access devises instead of synthetic grafts. First of all, SynerGraft vascular grafts will revascularize in vivo, and they remain , by that I mean they remain open with significantly lower infection rate over longer timeframes than synthetic grafts do.

We estimate that CryoLife provides over 90% of the cryopreserved vascular tissues in the United States. As you'll recollect, we received a CE mark for SynerGraft vascular grafts made from bovine in August of 2001. Through devise follow-up, we have been able to verify that 54 SynerGraft vascular grafts have been implanted as A-V Access devises and for peripheral vascular reconstruction. We think the number is considerably higher than 54, but have been unable to verify a higher number. It has been reported that 8 of these grafts have been removed. A presentation on the clinical experience with this new vascular graft was given within the last month at a cardiovascular meeting in Helsinki, Finland, by Dr. from Italy. She reported on the results of 10 A-V Access grafts implanted for approximately 4.5 months mean time. She recorded more favorable clinical results as compared to synthetic vascular grafts. As a result of these excellent clinical results for the A-V Access SynerGraft we have moved up the priority of the SynerGraft vascular grafts and will be applying for an IDE in the fourth quarter of this year. We are giving the SynerGraft vascular graft the top priority in the SynerGraft product line as vascular grafts have a much less demanding regulatory pathway than do heart valves. Based on market data available to us, there are approximately 234,000 A-V Access procedures done annually in the United States, of which we feel our devise will address approximately 75,000 to 80,000 of these procedures.

We estimate that the United States market for an A-V Access graft is between $35 and $40 million. Present A-V Access grafts sell for about $400.00. As we expect to charge $1,200.00 for one of our SynerGraft vascular grafts, I think that it is a reasonable expectation that our SynerGraft A-V Access devise has the potential to triple the size of the market. The higher per-unit sales cost of the SynerGraft vascular graft and the fact that renal disease is growing at 9% per annum indicates to us that this market offers us an excellent growth opportunity. And of course, an A-V Access devise made from a bovine is not supply constrained, as human vascular grafts are at this time. With our forth quarter application for the IDE, we feel that it is reasonable to expect approval of the A-V Access graft IDE in Q1 of 2003. We expect that we will be required to enroll about 400 patients in the clinical trial. 200 with a SynerGraft implant and 200 with a implant.

We would expect the clinical trial to take about 2 years. One year to enroll the patient, and one year of follow-up. If you add some time for administrative follow-up, I think that it is reasonable to expect a PMA approval for this product in the late 2005 or early 2006. We believe that the SynerGraft vascular grafts represent the first technological change in vascular graft technology in about 35 years. In a related move, we are going to withdraw our IDE for the O'Brien heart valve from the FDA. We estimate that this decision will save us approximately $2 million per year. This will also help us to focus on the SynerGraft A-V Access devise, which addresses a much larger market, and has a much shorter FDA approval. Basically we feel that pursuing the IDE was not going to be cost effective. The SynerGraft porcine heart valves continue to be followed and the results of the international clinical trial that has been going on for some time are as follows: since August 1999, 38 SynerGraft valves have been implanted, and 10 of these valves have been explanted. These valves have been implanted in both the pulmonary and the aortic positions.

In many cases these initial implants of the SynerGraft valves have been made in very sick patients, or patients who have had problems with prior surgical implants. Seven of these 38 patients have died from various causes. We are continuing to follow the remaining 21 implanted SynerGraft valves, and analysis of some of the explanted valves shows that they also remodeled themselves in vivo. As Ashley reported earlier, BioGlue continues to do well in U.S. markets. The PMA we received in December 2001 for all vascular is an expansive indication, and we expect sales to continue to grow. Earlier this year we gave you guidance that fiscal year sales would be between $20 and $23 million, and we are on track to sell over $20 million this year. At the recent European Society for Cardiovascular Surgery meeting in Helsinki that I mentioned earlier, there was a BioGlue paper given by Dr. Joseph of the University of Pennsylvania. Dr. , a member of our cardiovascular medical advisory board, reported that BioGlue was 64% better at than the control model. Using BioGlue resulted in 31% fewer used. 33% fewer red blood cell units were used, when using BioGlue instead of standard procedures. 83% fewer platelets units were used per procedure. There were 43% fewer frozen plasma units used per procedure.

The bottom line is that BioGlue is very effective when compared to standard treatments and is very cost effective for cardiovascular surgeons to use. As we have mentioned, in previous conference calls, we have been investigating the feasibility of filing PMA supplements for a BioGlue gel and a BioGlue foam. In order to get these two products to work properly, we have had to add a few ingredients to the basic BioGlue formulation. These additional ingredients are just enough different from the original formulation that we would need to conduct lengthy clinical trials under an IDE and additional biocompatibility and shelf life testing to support a PMA supplement for the gel or foam products. As a result, we have revived our BioGlue product and regulatory strategy, deciding instead to apply to the FDA for additional indications for the presently approved BioGlue formulation.

This strategy is based upon data from successful international clinical usages, and we have decided to apply for an application for hernia repair and an application for sealing dura mater, the fibrous membrane that surrounds the spinal cord and the brain. The data available to us regarding hernia repair indicates that there are about a million hernia procedures per year in the United States, of which 285,000 may be appropriate for use of BioGlue. If only one five-milliliter cartridge of BioGlue were to be used for each hernia repair, that would convert into a market of at least $70 million. We have also evaluated the market for a dura mater sealant and have found that there are about 750,000 craniotomy and spinal surgeries per year. We feel that out of these 750,000 surgeries, that about 112,000 procedures would be applicable for the use of BioGlue. If you were to use only one five-milliliter cartridge for these 112,000 procedures, that would convert to a market of at least $39 million. We expect to file IDE applications for hernia repair and for dura mater sealing in Q2 of 2003. We are continuing our progress on a CE Mark application for the biodisc product, the injectable spinal disc.

We expect the CE Mark application for the biodisc product to be made in Q1 of 2003. we expect to file an IDE application to conduct a clinical trial for this product in the United States in Q2 of 2003. procurement continues to be excellent. For the first six months of this year, procured and processed tissues are up 29% over last year. This translates into a 62% increase in orthopedic tissues, a 16% increase in cardiovascular tissues, and a 23% increase in cardiac tissues. From our perspective it appears that the procurement groups behind us and giving us more support than ever before. The strong procurement support we are getting portends well for our revenue growth going forward, and it is particularly rewarding that our orthopedic procurement continues to increase in the face of adverse publicity, and I feel that this fact alone indicates a tremendous level of support from the procurement groups.

Due to the adverse publicity surrounding our industry, a few customers have decreased their use of allograft tissue implants. In certain cases, customers who have suspended the use of allograft tissues have realized that for certain patients there are no suitable alternatives, and have resumed implantation of allograft tissues on a routine basis. We have been particularly affective in communicating with the physician community through the expanded use of our science forum. CryoLife is the only allograft tissue supplier that is able to provide in detail, the unique beneficial clinical outcomes that physicians can expect from the implantation of allograft tissues. CryoLife has actively compiled clinical data over the last 18 years that differentiate outcomes by surgical procedure and patient demographics. CryoLife has always had a strong physician education program, and since the first of this year, more than 110 surgeons have participated in surgical training in our corporate educational facility. Since June 1 of this year, more than 30 surgeons have participated in these programs. The majority of these surgeons are orthopedic surgeons. At this time, Dr. Jim Vander Wyk will review various regulatory issues.

Thank you Steve. Good morning and thank you for joining us. I will discuss several topics today before proceeding to reply in the question and answer period later. These topics include the status of responses to the FDA inspection observations, our processing and testing protocols, CryoLife's complaint handling system, CryoLife's documented reported infection rates and changes adopted at CryoLife. First, we have responded to all of the FDA's observations. We expect to have a meeting with the FDA after they have completed their review of our responses. We believe we are proceeding in an appropriate manner, is satisfactorily addressing the FDA's observations.

I will now address issues related to CryoLife processing and testing. several inaccurate and confusing statements by others, regarding CryoLife's processing and testing. What CryoLife has or has not implemented, and when, and calls for many quarters to institute further changes. Here are a few points to remember that I'd like to emphasize. One, CryoLife has always tested the tissue it distributes for the presence of bacteria and fungi, using a companion sample.

We have always tested for both aerobic organisms that grow in the presence of air, and anaerobic bacteria, which cannot grow with oxygen present. These anaerobic bacteria that we test for includes species of clostridium, including their spore forms. Two, it is and has been CryoLife's policy and procedure to discard tissues whose companion tissue exhibits growth of microorganisms. Three, our testing process follows treatments designed to significantly reduce bacterial that is normally found on donor tissue. Four, tissue is used only if it is recovered from donors that are free of know infections, both bacterial and viral, as well as risks of such infections. Five, donors must meet age and numerous other criteria. Six, the allograft soft tissues that CryoLife distributes currently cannot be sterilized with out adverse effect on functionality and durability. Seven, CryoLife has always performed annual audit of its quality system as required under GMP and ISO9001.

These audits are routinely reviewed during inspections by LRQA, our European regulatory authorities. Eight, CryoLife includes a prominent warning in its labeling, describing the tissue's potential for disease transmission. CryoLife labeling also clearly recommends that due to the nature of the tissue, the surgeon consider the use of postoperative anti microbial regimens to reduce the potential for infections. Nine, as required by FDA regulations and ISO standards, CryoLife maintains a complaint system. This system relies not only on voluntarily submitted complaints and reports, but proactively searches out incidents from literature, observations from CryoLife personnel, case report forms from reimbursed reference hospitals, as well as media reports.

Available data is gathered. Internal records are examined, and if samples are available, testing is conducted. If the data supports a need for an action, a corrective action is implemented. Most complaints do not require a corrective action. If required by regulations, various federal and state reports are submitted to the appropriate agency. These complaint records are routinely reviewed by the FDA and LRQA during inspections. Ten, an analysis of our FDA mandated complaint file concerning reports of alleged infections associated with CryoLife tissues, both substantiated or not, over a period from January 1, 1999 to June 30, 2002, indicates that the total reported infection rate is 0.2% for orthopedic tissues and is 0.56% for allograft heart valves. These reports include all allegations of infections in allograft recipients, and do not necessarily correlate to infections caused by the implanted tissue. These rates are acknowledged by CDC and other healthcare professionals as very low.

The rate for CryoLife valves is substantially lower than the published infection rate of 1.6% for sterile mechanical heart valves, and 1.2% for sterile bioprosthetic heart valves. Reported infection rate associated with CryoLife orthopedic allograft is 0.2% verses .6% to 2.2% infection rate reported by the CDC for sterile prosthetic orthopedic devises. Despite this excellent safety record, all recommendations from all sources are being reviewed by CryoLife, which is using independent scientific expertise in its reviews and activities to assure the public and regulatory agencies. Two recommendations, which were implanted, are the adoption of refrigeration protocols to extend warm time, and the American Association of Tissue Banking standard for preprocessing bacterial testing that became effective just this July 2002. In summary, the FDA observations are being addressed. Recommended changes are being instituted, and there is no evidence of increased infections from CryoLife allograft tissue. Thank you again for your attention. Steve.

Thank you Jim. Ashley will now go over the financial guidance for the fourth - third quarter and the forth quarters of this year.

First, Steve, I'd like to make a few additional comments about our financial condition. We have an excess of $30 million in cash and investments currently. We are not in a position of having to go out and access the equity markets. Our cash position allows us to pursue our stock buyback and at the same time, still pursue our regulatory and product development strategies. Our current ratio currently stands at 6 to 1, and we have only about $6.4 million in debt. In summary, our balance sheet is very strong. Now I'll give some guidance on how we see the remainder of this year unfolding. BioGlue revenues for the third quarter of this year are expected to be between $5.3 and $5.7 million. We expect BioGlue revenues to be in the range of $5.7 to $6 million for the forth quarter of this year.

Cardiac revenues for the third quarter of this year are expected to be flat compared to the third quarter of 2001. For the fourth quarter of this year, we expect revenues to increase between 6% and 10% over 2001. For the full year, we expect cardiac revenues to increase about 4% to 6% over full year 2001 revenues. This is down from our previous full year guidance between now and - 9% and 11%. Vascular revenues are expected to increase between 4% and 8% for both the third and the fourth quarters of 2002 over 2001 levels. For the full year, we expect vascular revenues to increase about 6% to 8%, down from our previous guidance of low double-digit percentage growth. Orthopedic revenues for the third quarter of 2002 are expected to grow between 6% and 8% over the third quarter of 2001, and to be flat in the fourth quarter as compared to the fourth quarter of 2001.

For the full year, we expect orthopedic revenues to be about 6% to 8% above 2001 revenues, down from our 20+% previous growth guidance. We expect total revenues to be between $26 and $27 million for the third quarter of 2002, and between $25 and $26 million dollars for the fourth quarter, and to be between $102 and $104 million for full year 2002. Gross margins for the remainder of 2002 are expected to be between 59% and 60% of revenues. General administrative and marketing expenses are anticipated to be between 37-1/2 % and 38-1/2 % of revenues in the third quarter, and between 42% and 43% of revenues for the forth quarter. For the full year, we expect G&A expenses to be between 39% and 40% of revenues. We have taken into consideration the affects of the larger than expected increases in insurance premiums, costs associated with legal matters, as well as costs associated with complying with the FDA's recent observations.

The percentages also take into consideration the reduced revenue guidance for the remainder of the year. Research and development expenses will be between 5% and 5-1/2 % of revenues for the remainder of the year. Additionally, as Steve indicated, our procurement remains very strong. We anticipate that our tissue levels will increase this year. We also expect that demand will increase over time. In the mean time, we will continue to manage procurement, to balance procurement, with the needs of the implanting . Earnings per share for the third quarter of 2002 are expected to be between $.13 and $.14, with fourth quarter EPS being between $.11 and $.13. For the full year, we expect earnings per share to be between $.54 and $.57. 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 questions, and if the operator is standing by, if you'd please do that at this time.

Thank you very much Mr. Anderson. The floor is now open for questions. If you have a question or a comment at this time, you may press '1' followed by '4' on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the '#' key. Questions will be taken in the order they are received, and we do ask that while posing your question, that you pick up your handset to provide optimum sound quality. Our first question is coming from of .

Hey guys.

Hey Archie.

Alright, could you - maybe this is best responded by Jim Vander Wyk. Jim, I know you responded, you've got a meeting pending with the FDA as it relates to the warning letter, but do you have - do you have an agreed - have they agreed that you're kind of responses - have you agreed on a final path of action here, or what's the next milestone, I guess, for the Street, on the warning letter?

As we've noted before, we did respond within the appropriate timeframe of 30 days the first time through. Gave them additional information within 30 days, and that is what they have now. There was a substantial amount of material in that second response, and they need to go through that. We've replied to the formal warning letter, and what we are now doing is what we said, waiting for them to finish that. I have a schedule of activities that I am conducting that I have given to the FDA. Over the next several months, those will becoming completed. We will submit them as they are completed so that the FDA is assured that we're maintaining our commitment. I am anticipating soon that we will get together with the FDA. The premise of that meeting will be twofold, to determine which of the observations we have satisfactorily completed or addressed, and which ones are still pending and how they feel about our schedules and our protocols. I have nothing to date that indicates there are any issues associated with those schedules. So that's the basis for the meeting.

But I guess typically, Jim, doesn't the FDA agree to your plan of action, and then that becomes a disclosable event, or at least as it relates to the outstanding observations?

My understanding of the process is that while the process is ongoing, it is an open investigation and it is not public except for the warning letter. So basically, I don't anticipate that the FDA would be making any formal announcements or even that they're obligated to give any indications that we have satisfactorily completed anything. They may do that, but it is not a general requirement of their process. We will of course be updating the - all of you periodically as to what we have completed.

Ok. Then on maybe Ashley, this is best for you - you talk about a 7% increase in the business and 3% increase in units. 48% is coming from SynerGraft, which carries a 25% higher price point. The math doesn't seem to work. You should be picking up just on your prices on SynerGraft 7+% a year, shouldn't you?

The 24% premium that we spoke about, Archie, were on valves only. A lot of the SynerGraft issues, or a portion are also SynerGraft treated patch materials, and the premiums on those are much less than on the heart valves.

Ok. And then, my last question, and I'll get back in the queue, is actually two more questions. What's the tenor of business right now, as you enter the third quarter? Fairly subdued, it sounds like?

Of business?

Yeah.

Business is ...

It's real good.

... it's good. You know, it's obviously, you know, we've reduced our guidance, you know, but that's been taken into account with the guidance that I just gave you, but you know, for the most part, you know, the sales people are upbeat and we're moving forward and trying to get through the issues that we're faced with.

I think the best indication, Arch, is the number of physicians that continue to come here to be trained. And what was the number I gave you - it was over 30 in June that were here. Like last Saturday, we had five arthropods that spent the whole day here in the lab being trained, and yesterday we had two cardiovascular surgeons from Dallas that visited us the whole day. So there is a tremendous amount of interest that continues in all of our new tissues. Happy about that.

Great. Thanks a lot guys.

Thank you. Our next question is coming from of Bank of America Securities.

Hi guys.

Hi Kurt.

Hi Kurt.

Could I ask about the disconnection between the procurement, which I guess for the six months is up 29% -- look at the cryopreservation portion of your business was only up 7, year on year, for the full six months, so are you able to keep that tissue - store that tissue, and might that improve - or might that be able to find its way to the market in the next couple of quarters, or is it just a miss alignment of sizes and particular products that are in demand? Can you talk about that?

first of all, I think that there are several factors that contribute to the disconnect. SynerGraft tissues, first of all take longer to process than our normal allograft tissues, so by nature their levels are going to increase somewhat as we process those tissues. And then, as you just indicated, Kurt, some sizes of allografts are in greater demand than others, and high demand grafts go out the door as soon as they make it through our quality system. Some of the others, you know, we might have in our freezers for a year or two, but our packaging, you know, provides that - for a ten year shelf life, so as it stands right now, we currently have no concerns about, you know, tissue that is currently sitting in our freezers and ultimately being shipped. You know, some will just take a little bit longer than others. But I think the other thing that, you know, has contributed to the disconnect is obviously with the adverse media that's been surrounding the company, and has reflected in our lower revenue guidance for the second half of the year. You know, it's been a little bit weaker than we had anticipated, and I think that's contributed a little bit to the disconnect. But I think that over time as these issues become resolved and the media subsides, I think that demand is going to pick back up and I think everything that we have in our freezers now are eventually going to go out the door.

what about - I mean in the mean time, though, while there is this negative publicity, what are doctors using instead of your products? You think they're actually using bovine pericardium, or porcine valves?

You know, it depends on which segment of the market that you're looking at Kurt. It - you know, 40% to 50% of our business is pediatrics, as it related to cardiac tissues, and in those instances, there really are no suitable alternatives. So they are going be using cryopreserved tissues. If you look at the adult population, you know, there are some other alternatives there, but if you look at the core markets that we target, which are women of child bearing age, young active adults, you know, it makes a lot of sense to use cryopreserved human heart valves there, and then the other area where our heart valves are really indicated for, are in patients where there is active endocarditis, and where there are active infections because human heart valves are very good at responding to antibiotic treatments and clearing up those infections.

we were asking too, about BioGlue, that - how are you feeling about BioGlue? That the pace you referred to is a little bit lower than we were looking at in our projections, I know we may have been high, but you've looked forward to continued good penetration there. What - can you give a little bit of flavor for the guides you're giving right now, and is that conservative, is ...?

The guidance that we're giving right now is still within the range that we initially gave at the outset of the year. You know, we've narrowed the range a little bit, but it's still within the range and we're still continuing to see uptake of the products and we're getting good reports from the field and one thing I didn't mention when I was giving my guidance earlier, in the - at the end of the third quarter conference call, we'll be giving our initial guidance out on '03, and obviously we'll be giving more color on what we see by - doing next year.

The increase in the line, can you flesh that out for us a little bit in terms of what are you spending that money on, is this consultants, you talk about insurance little bit, but is this -- you know, are you laying that out as in preparation for a out in the market place with competitive activities with respect to the publicity, or what - can you give us a little bit more detail on that?

Sure. When we initially formulated our budgets for 2002, we anticipated - and I am going to speak addressing insurance first, then I'll address some of the other issues. We anticipated that insurance premiums were going to increase in light of what happened last September, and as part of our budgeting process, we budgeted for an approximate 75% increase in insurance premiums, because even though, you know a lot of that was property and casualty, we knew that it was going to affect all of the markets in general, from product liability to to everything. So we essentially budgeted about a 75% increase across the board for insurance premiums. When we finally got our policies renegotiated around the April timeframe, it turned out that the increases were 200+%.

Oh my goodness. Ok.

Which is something that we did not anticipate. That's essentially - the increase over what we expected is about a penny more per quarter alone, in and of itself, than what we had anticipated. At the same time, with those increased premiums, our deductibles also increased from a quarter of a million dollar in the aggregate to a million dollars in the aggregate, under professional and product liability. So you know, those were some increased costs that we are faced with also. As you're well aware, you know, we have the class-action lawsuits now, and we have provided, you know, for legal fees in the second half of the year as it relates to defending ourselves against those particular lawsuits and, you know, nothing that, you know, increased that we have provided for in the second half of the year as it relates to getting out and combating competitive activities. I don't think that, you know, we're not really focused so much on the competitive activities, we're more focuses on, as Steve mentioned earlier, conducting more science forums around the country and again reminding surgeons to the benefits of CryoLife processed tissues.

Ok, thank you all again. Back in queue.

Thank you, or next question is coming from of .

Thanks. My first question is about reconciling a couple of the guidance items you gave. You'd mentioned that the procurement is up and that the procurement groups are rallying behind you, and in the past you've pointed out that your procurement is the single biggest determinate of your top line, because demand exceeds supply, and so as much supply as you can get, you can sell, so procurement really is what drives the top line. And also this morning you pointed out that the negative publicity - the adverse publicity has prompted you to lower your top line guidance, so I'm trying to reconcile those two facts, that the procurement is as strong as ever and that they're rallying behind you. The demand looks a little light because of the adverse publicity, and I if I were to put those two things together, I would say, 'well because CryoLife's top line is supply determined rather than demand determined, that would not be a cause to lower the guidance of the top line', so can you comment on that?

Yeah, I'll make a couple of comments, Alex. First of all, in our guidance that we gave for the second half of the year, you know, just to address top line at this point, we are assuming that some of the surgeons and institutions that have been reluctant to implant tissues recently, we're assuming right now, in our guidance, that we're not going to get those customers back in the second half of this year. So it's a big step that we are able to successfully get them back implanting our tissues. You know, we could have some upside to those numbers, but again, you know, we didn't want to go out there and assume that we were going to get all that business back and have to go back out and revise guidance again at some point later. And then the second thing is that, you know, again we're really not sure as to the timing of when we're going to get some of that business back, so again, we just want to be a little bit conservative.

But even without getting that business back, I thought since you had an excess demands to begin with, loosing some of that demand would - unless it was loosing an enormous amount of demand, would not impact your top line as long as your supply was good, and your supply is as strong as ever - or am I - should I conclude that your top line is more in demand determined rather than supply determined by the guidance you've given us.

I guess if - you know when we were - and we still believe our business is for the most part, supply driven. I think that we maybe underestimated the affect that the recent events with the media and the CDC and the FDA issues have had on our demand. You know, we certainly think that our demand is going to pick back up as soon as these issues subside, but you know, maybe those issues had more of an affect than we initially thought.

Ok, thanks. Let me also ask about the current quarter. you commented that the, you know, the $.14 was lower than the Street consensus for this quarter, and that was not so much by the top line, because your top line was very close to guidance, but because of the expenses of the insurance premiums, legal matters, and addressing the regulatory issues. But your SG&A for the June quarter is exactly in line with your previous guidance, so where are those things showing up and how are they affecting your bottom line for this current June quarter?

We go to a lot of conventions, healthcare conventions and conferences early in the year, Alex, and you know, that has a lot to do with it. We also incur a lot of just...

But which line item are you talking about that impacting?

G&A.

Ok, I mean, to me - you've previously said 10 million, and then you came in at 10.1 million.

Right, and we probably, you know, once we were going through the quarter, we've actually, you know, curtailed some of our spending, because of these issues that were coming up. But with that being said, you know, there're a lot of other things in the first quarter that we incur, auditing, costs, you know, legal costs associated with SEC filings, medical conventions, and so forth. And that's, you know, some of the things that we just didn't occur in the second quarter of this year. But again, also the - I don't think that I ever stated that gave a specific revenue - I mean expense amount for G&A expenses. We gave a range of guidance, and if you look at the actual percentage is higher than anticipated because of the short revenues.

Ok. One more thing on procurement. You gave procurement statistics for the half of the year - for the first half of the year verses the second half, and we'd like to hang our hat on that evidence that the procurement groups are rallying behind you. Since this negative publicity really started to hit in the second quarter, you know, it wasn't so much of an issue in the first quarter, it would be great to know how the procurement has done in just in the June quarter verses a year ago. Can you give us any feedback on procurement in the June quarter specifically?

Yeah. For the June quarter, total allografts processed and made available for shipment are up 30%, year over year.

Ok, great. And then one last - I'll follow the floor question convention and get back in the queue. You've pointed out infectious disease risks in cardiac and orthopedic, but not so much in cardiovascular, is my impression correct, that vascular tissue doesn't seem to have the same infectious disease issue that heart valves and cartilage does, or is that a misperception?

The infection rates that are reported to us for the vascular tissue are so low that you really can't do appropriate calculations. The other thing is that there's no very reliable data to make a comparison to, because we are essentially most of the vascular cryopreserved tissue out there, if not all of it, so that wouldn't be a legitimate comparison there. But remember now, even when you're talking about cardiac and orthopedic, the numbers are extraordinarily low and keeping it in the context of it being a problem, may not be appropriate in view of a lot of other data that's out there recently about the very huge numbers of infections, just associated with the background of being in a hospital. Those numbers have been recently extrapolated upwards, and so our numbers are so low there that, you're right, it - we don't even report them for the vascular.

Ok, thanks a lot.

Thank you. Our next question is coming from of .

Good morning. Just - are you guys going to continue to sell the O'Brien devise over seas and in Canada. I know you've removed...

Yes we are.

You will support that ?

Yes.

Ok, and then just - last question. Do you think that with the regulatory issues, with addressing the FDA letter, does this indeed actually put you, maybe ultimately by this time next year, a little bit in an advantage in that you - would think that you would be set to comply with the practice standards? And help me out, how is the FDA going to come back to companies. Do they sort of sign off - not on the FDA issue, but on the when companies are complying with the tissue factor standards and how does that work, and how that work and would that happen for you maybe earlier than later?

Indeed, we do have the opinion that CryoLife will be better positioned when the good tissue practices do become a final rule. The fact of the matter is that because CryoLife is a medical devise manufacturer, PMA class devise in the BioGlue, that a large number of our systems, which we use for both, the tissue and the BioGlue, have been reviewed and are appropriate to their function. The issues associated in this last inspection were focused directly on the tissue, and revolved around the infection or infection control issues. When we do have those in place, and have satisfactorily addressed it, the vast majority of issues that are in the good tissue practices will have been appropriately addressed. And we feel, as you pointed out, that we will be in a much better position to go forward. I've alluded several times to the obligation that the FDA has to tell a company that they are compliant - or to tell the world that a company is compliant. They have no such obligation.

More than that, it is the policy of the FDA not to issue any document that says a company is in compliance. A number of foreign countries do request that kind of document, and when we go to the FDA, they give a document out that says that a company is in substantial compliance. So the FDA will refuse to tell you that a company is or is not in compliance. You can't get that kind of data. What you have is a cessation of their follow-up. When they stop saying that we are not addressing something, or stop issuing 483s or warning letters, then you know you have complied. It is as nebulous as that. We will have confidence internally from our discussions with them, and the fact that we do not have any ongoing issues with observations, that we have satisfactorily addressed the issues. That does not mean as a routine, the FDA can't reinspect, and that is a thing that every company in a regulated environment faces constantly. So, yes we will address all of these. We will meet our commitments, we will satisfy the FDA and we will move on and be in substantial compliance with the good tissue practices, I believe, by next year.

Ok, thank you. And just finally, you've the - I guess the sort of surgeon in - surgeon training - are these just new surgeons that are coming to get newly acquainted with your products or are these surgeons that are sort of coming out to walk through and just discuss current issues? Can you ...

Probably they are mostly coming out here to - for their first training efforts, and the arthropods particularly are being taught how to transplant the tissues we preserve. Yesterday there were two cardiovascular surgeons from Dallas here. They have been using our tissues for a long time, and they spent some time with me, and were discussing some pretty exciting cases they had had within the last couple of weeks. And their primary interest was to update themselves regarding the SynerGraft heart valves and the - meaning SynerGraft allograft, and the SynerGraft vascular grafts, and they spent a lot of time in R&D going through the histologies and working through the slides with and the inventors of those particular two products, and they - after their conversations with me, one of them had been involved in an expensive reconstruction of an aorta that had burst, and it was - he said it was the most expensive reconstruction that he had ever done, and that he was very happy with the outcome. So I think it's - yesterday was familiarizing themselves with the SynerGraft technology, taking a look at the data that we've accumulated from the human implants that have been done, taking a look at all of the R&D information so - bring them up to date. So I think it's both, but the arthropods seem to center more on the developing their surgical techniques in our lab format than the cardiovascular guys.

Ok, thanks very much.

Thank you. Our next question comes from of .

Hi. I had a question on the regulatory costs, which were mentioned as being part of the SG&A increase. Is it possible to characterize some portion of those as recurring and some portion of those that might be one time in nature, and then I'm also - that's the first question, and then the second question is as we move into '03, is it possible at this time, to kind of bracket what those costs might be yet? Thanks

Responding to the first part, the vast majority of those expenses will be one time type of expenses. Remember now, the observations and the warning letter were focused on validation issues. They were not focused on ongoing methodologies. When you do a validation, you do it essentially once. You demonstrate the validity of the system, its effectiveness and prove that it does what it was designed to do. The costs associated with that, our expenses of materials, outside laboratories, that type of thing, and as I said, they are basically one time only. Expertise that we bring in to assure ourselves, so there are those consultant expenses associated, and again, they are one-time events. It would be difficult for me now to give you a final number. Some of it depends upon the satisfaction level of the FDA, but we are not talking numbers that are hugely significant with regard to the direct expenses associated with that.

John, how our budgets develop here every year, is that we begin our next year's budgeting process approximately on August 1st, and we go through a number of iterations with the intention that it will be - the budget will be completed at the end of November, and it's usually presented to the board of directors at the December board meeting, which is in early December. And so that would mean that at the third quarter conference call, which would happen probably the third week of October, that we will probably be quite well prepared to comment in detail on that - how the budgets are going together, and the increases in costs that we're seeing due to all of the things - many of the things that have been discussed today. So if you'll ask that question that question in the next conference call, I'm sure you'll get a much more detailed response.

Alright. Thank you.

Thank you. Our next question is coming from of .

Good morning guys. May be disconnect is the word of the day here today. What kind of stock that's selling at about 1-1/2 times your revenue - your lower revenue guidance and about 5 times likely BioGlue sales number for next year, so unless the core cryopreservation business is going away, I'm a little confused. Using that as kind of a sweetener for you, can you give us maybe - I'm going to beat a dead horse here, but can you give us maybe a little better sense of what the near term trends have been in that business. And I can understand certainly, with the stock down as much as it has been over the past month, that you'd want to be extremely conservative on the guidance you give, but I am curious that the guidance is based on sharp fall off in business that you've seen here in the past month or so - or month or two, or if you're just - you're being conservative and maybe anticipating a further decline in the business, or how you kind of went about this. Can you maybe give us just a little bit of insight into the current trends, or the recent trends?

Yeah, let me take a stab at that, Greg. The guidance that (audio break) remainder of the year is based essentially on the business as we see it today. I think that the business that we have lost, you know, has probably occurred within the last couple of months. We're not aware right now of any significant institutions or that could potentially be leaving CryoLife. When we put together our guidance again for the third and forth quarter, we wanted to, you know, be realistic based on what the current business is, knowing that if some of the business turned around and we were able to get some of it back, we could potentially have some upside in the second half of this year.

Ok, so the follow-up on that, you have - you've obviously mentioned you've seen some business go away, but at the same time you've seen some come back already.

Yes.

So, again, I am still - I'm trying to get you to, I guess, answer something you probably won't answer or can't answer, but you are making the assumption though, that anything that you've lost won't come back and basically no real pickup in business from new sources. I mean, last time - I was down there a couple of months ago, and obviously business is going pretty nicely at that point, and you indicated that since procurement was so strong, that you guys were going to actively go out and try to recruit new doctors.

you're right, Greg. We're not assuming that we're going to be picking up - in our guidance, we made the assumption that we're not going to be regaining any lost business - or in picking up any new business. We just made that assumption. We wanted to base it on as things currently stand right now.

Ok, good enough. And then one other question on the FDA process and then, again, I know this is difficult to probably answer, but can you just give us some sense of timing. I know the various issues involved here all bring different timing aspects with them, but Jim, can you give us a little bit of an idea - I realize the validation takes longer, things like that, but give us - give everybody just kind of a sense of how long it's going to take to get some sense of resolution here on these issues.

I think I previously mentioned that there is a variety of issues that we already addressed, I believe, satisfactorily. There are others that have a relatively short-term endpoint, and that is over the next couple of months, say until September. Things that we can very clearly say are going to be completed in that period of time. There are several by their very nature of the validation, take substantially longer. It is not a question of difficulty associated with them. For example, if you were to do a bioburden study, which they pointed out in their observations.

That takes a year. It is simply doing it. We have designed the protocols, we have to establish the methodologies to do that, and we will be instituting that. But it's nature is that one does those studies over each of the four seasons of the year. So from a technical point of view, I have an unsatisfied observation for that length of time. However the FDA, I am hopeful of, will be convinced that we are meeting that obligation. We will send them data periodically so that they understand that we are on track. And it is my believe that that constitutes satisfactorily addressing the observations. They understand I can't make a year less than a year, and this is a standard process with all observations. The difficulty will be if we fail to meet those obligations. And I have no intention of failing to meet those obligations. They are not the types of things that would be that difficult.

Ok. Thank you guys.

Thank you. Our next question is coming from of .

Hi gentlemen. You've basically answered a lot of the questions regarding the linearity of the quarter, but could you kind of help a little bit further when it comes to the insurance side. I'm a little bit perplexed product liability coverage. Exactly how much you have today, what is the premium, or what is the deductible change since starting in April?

Yeah, the limits that we have are $25 million in total for product and professional liability. Prior to this year, the aggregate deductible under that policy was $250,000.00. The aggregate deductible for the policy that began in April of this year is $1 million dollars. That deductible covers both claims and defense costs.

Who is your carrier for the liability?

The primary underwriter on our liability policy is .

Ok. And could you help me understand a little bit further when it comes to competition. Several others in your industry, when - submitted an FDA warning letter, saw a dramatic falloff in their sales, and many of those customers had taken advantage of the competitor's FDA letter. Have you seen anything to the like of that in the industry today, and if not, do you anticipate anything of that like?

I haven't seen anything like that .

Ok, thank you gentlemen.

Thank you. Our next question is coming from of .

Hey guys.

Yes.

Hey, just for I'd just like to ask like an anecdotal question. Have any of your doctor clients come back to you and said that they've had any patients that have indicated that they would or wouldn't want certain types of tissue?

My impression is that one or two of them have reported to us that they were asked by their patients about issues, and then we have supplied materials such as you're familiar with, to the surgeons so that they can provide to their patients. I do not have a listing or am unaware of any significant numbers of patients who have not undergone a surgery because of this situation. I do know that some of them have asked about that, and probably will continue to do so, and it's probably not a bad thing for them to do. When the surgeon goes over those risks, they also go over the benefits, and the patient can make that decision. But they have not been, to my awareness, any significant numbers in that category. We do not see any significant numbers of patients or doctors calling in, in the last month or two regarding these issues. We have previously addressed them.

Ok, and do - so the doctors - you think some of them may - I mean, do you guys kind of have something that when they are in there for training, that you kind of tell them to say to patients, or is there a speech that they give - kind of a standard one that they are going give some of these patients, particularly the knee ones, that has been updated, or is it kind of wait and see if any of these patients really come in with questions?

We have provided surgeons who have requested it. Several white papers, fact sheets associated with the regulatory oversight to CryoLife, data run infection rates, materials associated with the benefits, and any other clinical help that we can, and that has seemed to be sufficient.

Ok, and then just one detail question. I didn't get your guidance for the third quarter on the revenue line. What was that number?

For total?

Yeah.

Between $26 and $27 million.

$26 to $27. Thanks a lot.

Thank you. Our next question is coming from of .

Hi guys.

Hi Robin.

I just wondered, Steve, you gave a somewhat revised regulatory schedule for BioGlue. Was your timeframe on the SynerGraft regulatory a different timeline that what we were told in the past? It sounded the same to me.

It's the same. SynerGraft time is the same.

Ok. And then on BioGlue, would the hernia repair and dura mater be the two near-term filings? Nearest term?

Yes.

And the gel and foam are history, right? Do you do those in the future?

Yes. They aren't off the product list, they just have a lower priority.

Ok. Ok.

We thought it was going to be easier and more straightforward to take the present formulation of glue and expand the uses of that present formulation by developing data for new indications, rather than to come back and have those two other products.

Oh, I see.

Robin, from our strategy that the - what we are trying to do is get the product into two different populations of surgeons, general surgeons and neurosurgeons.

I would like to reiterate that both of those decisions were based upon a fairly large compilation of data for clinical uses for those exact indications that we have seen internationally. So we have a high degree of confidence that those are two very successful indications, and we have backup data to support the IDE submission for them.

Ok, great. Thank you.

Thank you. We do have a follow-up question coming from of .

Thanks. On the adverse publicity, I know that the FDA warning letter has been the starting point for some of that publicity, and others has come from the CDC. My impression is that you have a better ability to control the FDA than you do the CDC, because you can respond directly to the protocols of the FDA, whereas the CDC is - doesn't work in quite the same way. Is that a correct characterization, and if so, what is your outlook for being able to curb the negativity of press events that surround each of those two agencies, and which one is more of a factor on your publicity going forward?

I don't think that you would ever be able to force me to say that I could control the FDA, as much as that might be desirable. The issues associated with that is that the FDA is a regulatory agency. It must abide by certain prescribed of operating, investigations within the company until such time as they are completed. It gives us an opportunity no to be tracked hour by hour with regard to that, and announce that we have done and complied with what they need to do. The CDC certainly is entitled to issue whatever they believe to be the situations, and CryoLife will simply continue to post the facts of the matter as we understand them to be, and caution people that an open public forum in the media may not necessarily represent the clarity of the situation that people can get directly from us.

So the CDC had an issue about a positive culture on a heart valve. Is there anything else that might come up with the CDC that you see on the horizon?

The CDC has requested four people to report incidences of infection that they see. It would be impossible for us to anticipate who might be calling them in, and what they might allege. It is a system that we have here in our complaint handling that, as I indicated, a number of complaints do not require a corrective action, because when you get into the details of it, you do not have the data to support the allegation. So it is difficult for me to say what might or might not appear from the CDC. They have a separate system from us, and I've clearly indicated what we do to get our data. I think they are relying upon basically call-in. We do have a relationship that allows them to submit to us what they know, or have heard from their call-ins. We do correlate that with our complaint handling system. If it is a new report, we follow it up appropriately. If it's an older report, we inform them of that, and that we have already taken care of it. So we're just continuing to proceed in that manner.

Ok. Thanks. On the new SynerGraft A-V Access device that Steve was describing. The starting material of that, is it - I know it SynerGraft, but is it human saphenous vein or is that the bovine starting material?

Bovine .

Ok, so that products was previously known by just a numeric designation, and you're now naming it ...

SynerGraft Model 100.

Ok, but now you've called it the SynerGraft A-V Access devise. That's the working name for it?

it's easier for people to follow that description than if we just started calling it by Model 100. So I'm trying to make it as specific as possible so the listeners will know exactly what I'm talking about, because it's easy to mix up the SynerGraft allograft vascular graft product with the SynerGraft bovine A-V Access devise. So...

Ok.

... maybe I didn't make it as clear as I had intended.

Ok, great, thank you. And then one final thing, the guidance for the SG&A looks to me like it's spiking up just in the fourth quarter, not so much in the third quarter, but particularly in the fourth quarter. Is that correct, and is there something particular about the fourth quarter?

Yeah. There are a couple of things about the fourth quarter. Primarily we get hit with a lot of property taxes in the fourth quarter of this year, which we don't amortize over the full course of the year. So we've got some costs there, and with us cutting back a little bit on our production of in connection with not pursuing the IDE, we're probably going to have some manufacturing costs that are probably flip over into G&A late this year. So that's the primary reason. It's not because we expect, you know, greater than anticipated legal fees, or regulatory costs in that particular timeframe.

Ok, thanks a lot.

Ladies and gentlemen, unfortunately we do not have any more time for any other questions. I would like to thank all the listeners today for their participation, and let them know to have a great day. This is the end of your CryoLife second quarter earnings release conference call. Again ladies and gentlemen, thank you very much for your participation. You may disconnect your lines at this time, and have a wonderful day.

Thank you.