Artivion Inc (AORT) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CryoLife third quarter 2002 results conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Steve Anderson, President and CEO. Sir, you may begin.

Good morning, everyone, and welcome to CryoLife's third quarter conference call. This is Steve Anderson, CryoLife's CEO, and with me today are Ashley Lee, the company's Chief Financial Officer, Dr. Jim Vander Wyk, the company's Vice President of Regulatory Affairs and Quality Assurance, and , our FDA Legal Counsel.

Our agenda for today's call is as follows. Ashley will review the company's operating results for the third quarter. He will also comment on revenues by product line. Dr. Vander Wyk will review our progress with FDA compliance and discuss the timetable for resuming full operations. I will review SynerGraft implants for both vascular grafts and heart valves and our IDA submission timetables for the SynerGraft vascular graft. I will also review BioGlue product developments and the timetables for additional IDE submissions for various BioGlue products and indications.

Our progress with the BioGlue evaluations by the United States Army will be commented upon. Then I will make some comments on our plans to continue our orthopedic business and I'll also make some comments about our international sales progress. After my comments are completed, Ashley will return to give some guidance on Q4 and 2003. After Ashley's comments, we will open up the conference call to questions and Mr. will answer any of the questions that are asked about FDA compliance issues or questions about corporate litigation.

At this time, Ashley will comment on this morning's press release and the Company's operating results for the third quarter.

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 risk and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements include statements made as to the Company's or management's intentions, hopes, 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.

Additional information concerning risk and uncertainties is contained from time to time in the Company's SEC filings including the risk factor section of our most recent form 10Q. Copies of the form 10Q may be obtained free of charge by contacting the Company.

The morning Cryolife reported financial results for the third quarter and nine months ended September 30th, 2002. Revenues for the third quarter were 16.9 million compared to 22.6 million in the third quarter of 2001. Net loss for the third quarter of 2002 was 19.6 million compared to net income of 2.7 million in the third quarter of 2001.

On a fully diluted basis, loss per common share for the third quarter ended September 30th, 2002 was $1.01 as compared to net income per share of 14 cents for the same period in 2001. Excluding tissues returned pursuant to the FDA order, revenues for the third quarter were 17.9 million. And excluding nonrecurring, noncash pretax charges of $27.2 million or 92 cents per share associated with the FDA order, net loss for the third quarter was $1.7 million or nine cents per share.

Revenues for the nine month period were 65.6 million compared to 65.7 million in the same period in 2001. Net loss for the first nine months of 2002 was $22.1 million compared to net income of 7.2 million in 2001. On a fully diluted basis loss per common share the first nine months of 2002 was $1.14 compared to earnings per common share of 37 cents recorded in the same period in 2001.

Excluding tissues returned pursuant to the FDA order, revenues for the nine months ended September 30th, 2002 were 69.1 million. And excluding nonrecurring, noncash pretax charges of 37.2 million or $1.27 per share associated with the FDA order, net income for the nine month period was 2.5 million or 13 cents per share. Revenues and earnings were lower than expected due to the FDA order issued on August 13th. On September the fifth we reached an agreement with the FDA to allow limited distribution of our life and limb saving tissues. As a result of this agreement, surgeons now have a mechanism that allows them access to our life and limb saving tissues as evidenced by the improvement in our revenues in October as compared to September. For the month of September, total revenues were $3.7 million and month-to-date revenues through October the 28th were approximately $3.9 million. We believe the improvement is due to the fact that we have a demonstrated history of over 90,000 tissue implants with associated infection rates similar to or less than sterile synthetic implants. We also believe it is a reflection of the fact that prior to the FDA order we had approximately 70 percent of the cardiovascular market and over 90 percent of the vascular market.

The company reported a non-recurring, non-cash, pre-tax write down of deferred preservation costs of $22.7 million or 77 cents per diluted share for the third quarter of 2002 and 32.7 million, or $1.11 per diluted share for the nine months ended September 30, 2002, to reflect the estimated impairment of deferred preservation costs due to the FDA order. These amounts represent tissues that we do not expect to distribute because our current agreement with the FDA requires that tissues processed under validated methods replace those tissues subject to the FDA order.

Also, as a result of the FDA order and in accordance with Statement of Financial Accounting Standards Number 142, we recorded a non-recurring, non-cash, pre-tax charge relating to goodwill of $1.4 million or 5 cents per diluted share. Additionally, we recorded a non-recurring, non-cash, pre-tax charge of $3.1 million or 10 cents per diluted share relating to valves. As Steve will mention later, we have elected to focus our development efforts on other areas.

BioGlue revenues for the quarter were $5.2 million, up 113 percent over the corresponding period in 2001. The primary factor 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 of 2001. We have received orders from approximately 550 new customers since that time with approximately 150 of those accounts being added during the third quarter of 2002. Approximately 78 percent of BioGlue revenues are generated domestically with our current 2002 re-order rate at approximately 65 percent. The remainder of BioGlue revenues, or approximately 22 percent, is generated internationally where revenues were up 49 percent year over year for the third quarter.

Cardiac revenues, excluding tissues returned due to the FDA recall, were 5.7 million for the quarter compared to 8.2 million for the third quarter of 2001. Revenues from SynerGraft treated cardiac tissues represented 59 percent of total cardiac revenues for the quarter. Cardiac revenues for the month of September were $1.2 million and month to date revenues through October the 28th were approximately 1.1 million.

Vascular revenues, excluding tissues returned due to the FDA recall, were $4.1 million for the quarter compared to $6.2 million in the corresponding period in the prior year. Vascular revenues for the month of September were $573,000 and month-to-date revenues through October the 28th were approximately 1.1 million. Orthopedic revenues were $2.6 million for the quarter compared to 5.3 in the corresponding period in 2001. Orthopedic revenues are nominal at this time.

Gross margins in the third quarter were a negative 96 percent compared to 58 percent in the corresponding period in 2001. The decrease for the quarter is due to the non-cash write-offs of $25.8 million relating to deferred preservation costs and prosthetic valve inventories. Excluding write-offs associated with the FDA order, gross margins were 58 percent for the quarter ended September 30, 2002.

General administrative and marketing expenses for the quarter were 66.3 percent of revenues compared to 36.7 percent for the corresponding period in 2001. These expenses as a percentage of total revenues were higher than anticipated due to several factors including high than expected insurance premiums, costs associated with legal matters, costs associated with addressing regulatory issues and lower than anticipated revenues. Costs associated with the FDA order including FDA consulting, public relations, miscellaneous legal fees and downsizing cost total approximately $1,250,000 for the quarter or seven-and-a-half percent of total revenues.

Research and development expenses were $1.3 million for the quarter compared to 1.2 million for the corresponding period in 2001. R&D expenditures currently represent approximately eight percent of quarter-to-date revenues. R&D spending relates principally to the company's development of BioGlue surgical adhesive and to our focus on our SynerGraft technologies. Now I'll turn it back over to Steve.

Thank you, Ashley. At this time, Dr. Vander Wyk will review our progress with FDA compliance and will discuss the timetables for the FDA inspection of our facilities and the approximate anticipated timeframes for our resuming full laboratory processing operations.

vander wyk: Thank you, Steve. Good morning. CryoLife has been actively working with the FDA to address the issues raised in the warning letter dated June 17 and the subsequent order for recall and destruction dated August 13, 2002. On August 20, company personnel and legal counsel met with representatives of FDA Center for Biologics Evaluation and Research and the Center for Devices and Radiological Health to discuss the warning letter, the order and corrective action proposals. This meeting clarified the issues requiring action and provided useful background for future discussions about distributing certain tissues subject to the order. The FDA later confirmed that heart valves were not subject to the recall.

On September 5, CryoLife representatives met with the Atlanta district office to propose a draft corrective action plan for discussion. This meeting concluded with general agreement on proposed strategy and a formal agreement that modified the FDA's August 13 order to allow distribution, under controlled conditions, of certain lifesaving and limb-saving non-valved cardiac and vascular tissue that are subject to the order.

Subsequently, Cryolife submitted to FDA the procedures it had implemented to meet the required conditions for distribution of its life saving and limb saving non-valve cardiac and vascular tissue. Our graphs allowed to be distributed under the September 5th modification are currently being distributed and processed in the manner allowed by the modification agreement.

On September 5th, Cryolife submitted to the FDA its full reply to the issues raised in the warning letter and on August 12th Atlanta District followup letter. This submission included Cryolife's proposed correction action plan and implementation schedule.

On October 13th, Cryolife submitted a routine update on the status of the recall and proposed a method by which tissue subject to the recall that has been returned from the field may be properly destroyed. At this time, Cryolife is proceeding with the validations of its process as described in its corrective action plan in anticipation of a planned re-audit of its facility by FDA before the end of the year.

In parallel activity, on October 8th, Cryolife received FDA approval of a supplement to its BioGlue that allows production of BioGlue in the newly expanded production facilities. This concludes my formal remarks. Steve.

Thanks, Jim. Now I would like to make some comments about our SynerGraft family of products. Before I do so, I would like to emphasize that there are two categories of products using SynerGraft technology: , which are animal based; and allographs, which are human tissue based.

We continue to monitor our SynerGraft heart valve implants that have been implanted in Europe in a limited clinical trial. The first SynerGraft heart valve was implanted in Australia in August of 2000 and since that time, there have been a total of 38 SynerGraft valves implanted in humans in Europe and in Australia.

Most of the implants have been in very sick people or people who have rejected allographs in the past. A total of 21 SynerGraft valves remain implanted at this time. We continue to monitor the performance of these valves through periodic reports from the implanting physicians.

As you know from previous conference calls over the past year or so, we have been evaluating whether to pursue our for the SynerGraft heart valve with the FDA. Because of the recent events surrounding the FDA order relating to the tissues we process, we have had to revise our new product priorities and timetables substantially. I will be commenting on these new timetables and priorities throughout this conference call.

One of the key new product priority decisions we have recently made is our decision not to pursue our for the SynerGraft valve in the United States at this time. Our reason for this decision is twofold: first, we are focusing on conserving our cash and we can't do as many new product submissions as we did in the recent past. And so we have decided to focus on products that do not require clinical trials that are as lengthy and rigorous as those that are required for an artificial heart valve. Second, the approval time for an artificial heart valve is about six or seven years. And our present new product focus is on products with far shorter approval time. We do plan to continue to pursue the SynerGraft technology with an IDE application for a SynerGraft that we call the SynerGraft Model Number 100. In our animal testing we have observed that this device remodels itself with the recipients own cells. We received a mark for this device in August of 2001 and we estimate that over 100 of the SynerGraft Model Number 100 vascular graft have been implanted in Europe since the mark was issued. We can verify that 56 SynerGraft have been implanted in Europe, of which 48 remain implanted. You'll remember that this graft is made from a . We are preparing an for the SynerGraft for submission to the FDA and expect to submit this during late January of 2003. We think that the approval time for a product like this will be about three years and that it will require about 400 implants. We estimate the total market this product addresses in the United States will exceed 70 million in 2004. Additionally, the approval of this device would move our model mix more into the medical device arena with more product lines that have unlimited supply. Based on the time frames that are typical for the approval of an , we would expect that the SynerGraft would have an approved PMA sometime in 2006.

As you know, we have also applied our proprietary SynerGraft technology to the human valves and vascular tissues we preserve. Over 1,058 of the SynerGraft processed valves have now been implanted in patients in the United States. Of these, 870 are pulmonary valves and 188 are aortic valves. There have only been five . We are pleased to report that less than 1 percent of these valves have exhibited structural failure. The longest implant of a SynerGraft heart valve is 2.5 years. These valves have been shown to mitigate the increase in levels that the panel reactive antibody levels that can be a problem in some patients would conventionally process heart valves. They have also been observed to remodel themselves . The SynerGraft valves give us a very strong proprietary position and the heart valve segment with a very strong, intellectual property position.

We also preserved vascular tissues with the SynerGraft process and to date about 480 of these grafts have been implanted in humans. Only 10 of these grafts have been removed at this time. These grafts also mitigate the increase in levels that sometimes occurs with conventionally processed human vascular grafts. They also have been observed to remodel themselves. We estimate that the United States market for a vascular access device that remodels itself is about $77 million. Our intellectual property position is very strong in this area as well.

We continue to make progress in developing additional products using the BioGlue's use in sealing dura mater for brain and spinal surgery in April of 2003. We think that the U.S. market for a dura mater sealant is about $35 million per year and we believe that this IDE could result in an approved PMA as early as 2006.

We are continuing our work on the development of an injectable spinal disk nucleus replacement using BioGlue and the IDE for this product is scheduled to be filed with the FDA during June of 2003. We estimate that the market - U.S. market - for an injectable disk nucleus is about 158 million annually. We are optimistic that we can obtain and approve PMA for this product in 2007.

During June of '03 we plan to file a PMA supplement for BioGlue's use as a fixation device for hernia mesh repair. And according to market data available to us, we feel that the United States market for a hernia mesh fixation device is about 57 million. We are optimistic that this supplement could be approved as early as the first quarter of 2004.

We also anticipate filing a PMA supplement for a BioGlue syringe in February of 2003. This one-time use, preloaded disposable syringe could replace the BioGlue applicator device that's now in use. We will have a two-milliliter and a five-milliliter syringe of BioGlue available about September of 2003. The syringe is storable at room temperature and we feel it will be easier and less cumbersome for the surgeons to use.

Research with the United States Army Trauma Center at Fort Sam Houston is continuing with various products made from BioGlue . They have shown a great of interest in the BioGlue foam for the treatment of extremity wounds and severe trauma. They are working on the concept of developing a liquid tourniquet with the foam and have used the foam successfully in animal studies in this manner.

As you'll remember from previous conference calls, BioGlue can act as a barrier to bacterial infections and we know that it will exchange carbon dioxide and oxygen. Since it is made primarily of protein, it is also very biocompatible. You'll recollect that we can cast materials into different shapes and we can also make it in sheets for its use as a wound covering. The Army has indicated an interest in conducting a human clinic trial for BioGlue's use as an artificial skin. And we continue to be optimistic about the uses of BioGlue in combat situations and they seem to share our enthusiasm.

It is our intention to reenter the orthopedic soft tissue business, assuming we pass the inspection or re-inspection by the FDA. As you know, CryoLife is a pioneer in the of soft tissues for knee reconstruction and we feel that we still have a strong technical advantage in certain segments of that market. We were one of the first to successfully preserve and transplant , and patella tendons and we feel that we will be well received when we reenter the marketplace.

We continue to investigate ways to expand the use of donated human tissues and we intend to begin processing tissues, used in ankle and shoulder reconstruction. When you consider the synergy that will exist between our sports medicine allografts, and the BioGlue injectable spinal disc products, we will be developing a very strong product base within the orthopedic reconstructive surgery field. September was the best month in the history of CryoLife Europa. Europa sold $451,000.00 worth of BioGlue in September, which was also a record. It was the best quarter in Europa history, and it was the first quarter that we have sold over a million dollars in Europe.

This represents an increase of 22% verses last year. BioGlue sales of 814,000 were also 50% higher than the previous year in Europe, the rest of the world sales were up about 15%. We remain encouraged with our progress in international markets. Now I would like to give you a summary of the new product applications that we are anticipating filing in the first half of 2003. We will file a SynerGraft AV-Access devise IDE. We will file a PMA supplement for the new BioGlue syringe. We will file an IDE for BioGlue's use in in brain and spinal surgery. We will file an IDE supplement for BioGlue's use as a fixation devise for hernia mesh fixation. And we will file an IDE for an injectable spinal disc nucleus. As you know, it is the gift of tissue donation that drives our tissue processing business going forward, and after we received the FDA order modification, we began processing cardio vascular tissues again, on September 16. We have been operating at about 80% of our cardiac pre-recall procurement rate during both September and October, and we anticipate adequate vascular procurement in order to meet our demands.

Contingent upon passing the FDA inspection that we have requested, we also are planning to begin processing orthopedic tissues again in mid December. Initially we expect to recover up to about 50% of our orthopedic procurement. As we continue to grow our procurement business back to where it used to be, we will continue to add support personnel and laboratory personnel as we need them. We have already hired back about ten support people in the quality assurance - reliability assurance and microbiology area to help support our procurement efforts. Processing tissues at these levels should bring us back to the level of about a $60 million company on an annualized basis. At this time, I would like to turn the conference call back over to Ashley, who will discuss some guidance going forward.

Thanks Steve. I would like to make a few comments about our financial condition and then I will give you some limited guidance for the upcoming year. First, we continue to cooperate with the FDA, and hope to have a full resolution to our outstanding issues during the fourth quarter, and it should be noted that the guidance that I will be giving is predicated on a successful resolution of these issues. This guidance will definitely be refined in the future, as we resolve these issues and reestablish our position in the marketplace. Our current annual revenue run rate is approximately $50 million. Assuming that we are successful in addressing the FDA's concerns during the fourth quarter of this year, we believe that we will be able to generate between $58 and $65 million in revenues during 2003.

Again, assuming that we are able to satisfy the FDA's concerns, there are several reasons why we would believe that this level of revenues is achievable. First, as Steve mentioned earlier, approximately 80 percent of our cardiac procurement base remains in tact. Several of those organizations representing the remaining 20 percent of our cardiac procurement have indicated that they will resume sending cardiac tissues to CryoLife once the FDA concerns have been addressed. Second, as you recall, our vascular procurement levels had increased dramatically during 2001 and 2002. We're confident that we'll be able to achieve sufficient vascular procurement to meet any demands that we will have during 2003. Third, we have several tissue procurement organizations that remain ready to resume sending orthopedic tissues to CryoLife for processing. We believe that we will be able to recover up to 50 percent of our pre-FDA order orthopedic procurement.

Although we anticipate that orthopedic revenues will be less than our run rate at the time of the FDA order, we believe that those organizations who have indicated that they would be sending ortho issues to CryoLife, after the FDA issues have been addressed, coupled with some new tissue introductions in orthopedics, will enable us to have a robust orthopedic business going forward. Finally, we believe that there will be a demand for these tissues because we believe that the soft tissue , processed by CryoLife, after reinspection, will be among the safest available.

We have an excess of $28 million in cash in investments as of September 30, 2002. We anticipate receiving an excess of $10 million over the next six months related to tax refunds and . Our current ratio stands at 3 to 1 and we currently have only about $6 million in debt. We believe that our burn rate during the next two quarters will be approximately $10 to $12 million as we replace tissues that are subject to the order. We expect to be near cash flow break even in mid 2003. We also continue to invest in R&D to develop new, innovative options for patients. In addition to the regulatory pipeline that Steve mentioned earlier, we will also be introducing new tissues in the area of orthopedics. We believe that our R&D pipeline provides us a robust growth platform.

Considering the above factors, we believe that we will have more than adequate cash to ensure that we're able to manage our way through these issues, satisfy the FDA's concerns, return to profitability and growth the company.

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

Thank you, Ashley.

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

Thank you.

The floor is now open for questions. If you do have a question, you may press one, followed by four on your touch-tone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

Once again, ladies and gentlemen, that's one, followed by four to ask a question at this time.

Our first question is coming from of US Bancorp.

Hey guys. How you doing?

We're doing pretty good, Archie. How are you?

Things seem to be on the mend, that's good. The -- I have a variety of questions. I'll try to move through them fairly quickly. The first relates to BioGlue, which although up significantly year over year was flat to maybe a little bit down sequentially. Could you kind of go through why you might see a flattening in the business sequentially and what we should look for from BioGlue in '03.

Yes, , the third quarter BioGlue numbers were obviously not as good as we had anticipated and the primary reason was is that our direct sales force that also distributes cardiovascular and vascular tissues were very distracted during the third quarter. They had to deal with this FDA recall as well as spend a lot of time educating hospitals, administrators, surgeons, risk managers on the issues that we have been facing over the last couple of months and, quite frankly, it was a distraction.

We haven't given out any specific guidance for BioGlue for 2003 and we're not going to do so at this time. But I will tell you that, for the month of September, our BioGlue revenues set a record. We were approximately $1.75 million in the month of September. And so far, in the month of October, we tracking towards having another record month for BioGlue sales.

So you're sense is, with the recall taking less of your sales force's time that they'll be more actively promoting BioGlue.

Absolutely.

Do you think you'll be able to get that product back into your prior guidance ranges for '03 which I think was ...

I don't know that we've given prior guidance for '03 relating to BioGlue, , but, you know, we do anticipate being able to grow that business significantly next year.

OK. Second, I'd like to talk a little bit about cash burn. I think you guys burned something on the order of five or $6 million in the quarter. And you're stated guidance is for - is that 10 to $12 million per quarter for the next couple of quarters or 10 to 12 million in total to the point at which you're breakeven?

Ten to 12 million in total up through the end of the first quarter of next year - at the end of the first quarter. And as I mentioned a little bit earlier, we anticipate receiving some very significant tax refunds and - related to just overpayments and . So, you know, we anticipate that the second quarter of next year will probably be cash flow positive because, primarily, of these tax refunds coming back in. And then on an operating basis, going forward from the third quarter on, we anticipate being close to cash flow breakeven.

So the 10 to $12 million is on an operating basis, exclusive of these tax issues. Correct? Or is - or is 10 to 12 ...

That is correct.

OK. I'd like to ask Jim a quick question. You gave us, I think, a very good sense of the timeline on the warning letter. Could you give us some sense of what issues remain to be done? What kinds of things have to be done to have the FDA find you guys in compliance with the observations on the warning letter?

, this is . Let me respond to that since I've been dealing directly with the FDA on those issues. We filed our corrective action program with the FDA earlier this month. We've had communications with them and we know that they're in the process of reviewing that document and we expect to hear back from them in the next week or so. And at that point in time, our request is that they come out for a re-inspection of the company and we hope that that can be done ...

END unid: ... is that they come out for a re-inspection of the company, and we hope that that can be done sometime during November, or at the latest, early December.

So, that would imply to the casual listener that you think you've already -- in an action item sense, you've already done what you feel you need to do, and now it's up to the FDA to come out and confirm that.

Well, we have made substantial progress in addressing the concerns that FDA had. And yes, we are optimistic that we have a program in place that is fully responsive to the issues that have been raised. We obviously expect that we'll have continuing discussion with the agency. But, we believe at this point that we have a program in place that will allow the company be in full operation very soon.

Your legal background has served you well, sir.

Maybe I could return to Steve and Ashley. I think you guys commented on ortho and cardiac procurement rates. What about procurement rates in -- a little bit more exact sense of where you intend to be there, other that whether you think you can cover demand?

vascular ?

Correct.

At the present staff that we have in our laboratory, we anticipated that we could handle about 280 hearts a month, and about 200 vascular . We made that judgment after the modification of the order was made. And in September, we did almost exactly that number. In October, it's tracking a little bit higher. We should do more like 300 hearts, and about 200, 210 vascular .

As the procurement comes back on line -- and we can pretty much forecast that -- what groups are going to begin sending us tissues that, again, that presently are not? Then we anticipate hiring back some of the staff that we laid off. And those plans are in place, and right now we're functioning downstairs at a capacity as to what we had anticipated.

OK. And then last question -- I'll get back in the queue. Are you guys comfortable giving us a sense of bottom line expectation for '03 and for -- I don't think you gave us any bottom line expectation for Q4, either.

I'm not comfortable at this time giving you an expectation, . There are obviously, you know, still a lot of work to be done, and at this point not comfortable giving you, at least, what we think is going to happen in the fourth quarter and 2003 as it relates to earnings.

OK. Thanks a lot, guys. I'll get back in the queue.

OK.

Our next question is coming from Kurt Kruger from Banc of America Securities.

Hi. This is actually for Kurt. How are you guys doing?

Hi, .

Just a couple of quick ones. I'm curious about your assumptions on the timing of the coming out and re-inspecting the plant. I know it sounds like you're sort of almost inviting them back in and hoping that they show up some time before the end of the year. I guess my question has to do with your level of confidence that you'll actually get it done by the end of the year. And I guess the to that is sort of the worst-case scenario if that kind of drags out a bit, you know, to some of these and other supplements you have planned for the first part of the year are start to get pushed back. You know, does cash start to become an issue or I wonder if you could just address that?

Let me address, this is . Let me address the issue with regard to the FDA reinspection.

As I indicated, based on the information that we have supplied the agency and the regular communication that we've had with them and their indication that they are going to be responsive to the corrective action plan, we are optimistic that we'll be able to have that reinspection before the end of the year. Obviously that is a decision that FDA will need to make but we have been working on that assumption and they have not indicated that that will be an issue. However, as I indicated, we are waiting to hear back from them on that point and we may have, you know, more information in a week or so but they have indicated that they are going to give this priority and so we believe that they will do as they've indicated.

OK and I guess then the other question about the worst case scenario is, you know, it sounds like the relationship is going quite well but, you know, if, in the worst case, if it does drag out for a while, is there some -- will there be some push back some of the other plants? Will, you know, will cash start to become an issue?

If the -- this is Ashley, . If the reinspection is pushed back the it could potentially push back our time tables depending upon the nature of the work and the amount of work that needs to be redone -- be done in response to any issues that might come up. You know cash I guess could potentially become an issue if it gets pushed back -- the reinspection gets pushed back to far but at this time, again, we're optimistic that the reinspection will happen in the fourth quarter of this year. Even if it's pushed back into the first quarter of next year, I don't anticipate that it's going to create any problems for us as it relates to cash.

And should we expect to hear when that happens or will it be sort of, you know, you guys will let us know when everything's been cleared up or will there be sort of interim communications with all of us?

Well I don't think that there will be communication as that process is ongoing. At the conclusion of that process and when there is information that is available that, you know, is material enough that would require a press release, then that information will be distributed.

OK. My other questions were about procurement. I guess I'm just curious, you know, what is happening to the tissue now that your procurement partners are collecting. Where is that going and I guess I'm curious on the arrangements that are ensuring you that you're going to get it back or at least half of it back when you get back on the market because right now somebody else is taking it, obviously.

, this is Ashley again. Right now I think that the tissue procurement organizations that have historically been sending tissues to us are sending those tissues to a variety of different locations to make sure that that donated tissue is used and can hopefully be implanted into patients that need it. We have had an ongoing dialogue with all of our tissue procurement customers and as it relates to the ones that we work with for orthopedic tissues, they have indicated that as soon as we get these issues resolved, then they will resume sending tissues to us. What I can tell you is that, you know, part of our ongoing work that we're doing in relation to this FDA compliance work is that we needed to get some tissues in - orthopedic tissues in so that we could conduct some of these validation processes. And based on the tissues that we were able to get in, in a limited period of time in early October, that procurement as well as what we've heard from - verbally, from our tissue procurement customers, leads us to believe that we'll be able to recover up to 50 percent of our orthopedic procurement.

Yes. I admit it was encouraging to see that the heart valve procurement had jumped back up to 80 percent from the 50 percent that you guys wrote in your second quarter queue.

Yes. And I think that after we were able to get the interim agreement in place with the FDA, I think that was encouraging news to a lot of our tissue procurement customers and I think that helped us turn the tide a little bit. And, as I said, you know, as it stands right now, the - several of the procurement organizations that comprise the 20 percent that is not coming to us have indicated that once we have been - have got these issues behind us with the FDA that they will resume sending tissues to CryoLife.

Great. And just one final one. The gross margins you said were about 58 percent in the quarter if you back that all to the nonrecurring charges. Do we expect to sort of continue at that sort of normalized 58, 59 percent level in the fourth quarter into next year?

I believe so. I mean, obviously, our - a larger portion of our business in the fourth quarter and in 2003 will be BioGlue as compared to what we've done historically. But with the reduced level of tissues being processed, we believe that the margins will, in the fourth quarter in 2003, be comparable to what you've seen over the last several quarters.

Great. Thanks a lot.

Our next question is coming from from Securities.

Good afternoon, gentlemen. On the gross margin, can you tell me what happened with the BioGlue gross margin last quarter and how much is recurring and nonrecurring there?

One second, . Our BioGlue gross margins in the third quarter of '02 improved to 81 percent as compared to 79 percent in the same quarter last year. OK?

OK.

As it relates to gross margins going forward, I think that we indicated a little bit earlier that overall, you know, gross margins in the third quarter, excluding these nonrecurring charges for tissue write-downs were approximately 58 percent, which is comparable to the same - to the third quarter of last year. And again, going forward, we anticipate that our gross margins are going to be comparable to what they have been historically.

OK. On the cost and expense line, though, you're showing product cost of 4.739 million. And what's included in that line item besides the cost of BioGlue?

It's the cost of heart valves and vascular tissues that we've been distributing under the interim agreement with the FDA.

Those are under product costs, rather than human tissue preservation costs?

I'm sorry. I'm sorry. Those are under the cost of preservation. The other costs in product costs are the write-downs for valves.

I see. And those totaled how much?

I believe they were 3.1 million before tax.

OK. And then on the revenue, you gave some October sales numbers. Were there distribution and grant revenues in the October month to date?

The distribution revenues -- the total revenues that I gave you excluded any distribution revenue, which has been nominal ...

OK.

... through the month of October.

So, it's 3.9, and we can back into BioGlue if we subtract out the 1.1 for cardio and the 1.1 for vascular?

There are also some other small, miscellaneous revenues in there for valves in Europe, and . But, the BioGlue number -- as I've indicated -- we did it at roughly 1,750,000 in the month of September, and we're right now tracking towards -- and that was the best month that we had ever had, and we're tracking towards being a little bit better than that in the month of October.

OK. OK. As far as the general administration and marketing line, where -- I didn't notice much of a decline, even though we had the lay-offs and perhaps the lay-offs were too quick to really hit, here. What should we look for in Q4 for that number?

I'm not comfortable at this point giving any specific guidance on a number, and -- because it's largely dependent upon, you know, what are revenue levels are going to be, and how many additional costs we incur addressing the remaining FDA issues.

OK. OK.

But, as I stated a little bit earlier, the number that we reported for the third quarter of this year -- just bear with me a second -- that number included $1,250,000 related to the downsizing, as well as FDA consulting, PR issues, and so forth.

OK. And then lastly, if I could ask Mr. to discuss the status on the product liability, wrongful death lawsuits?

OK. At this time, there are approximately 15 cases pending against the company. All of them are in the discovery phase; a vast majority of them in the very early stage. Over the past several months, there have been a couple of lawsuits that have been settled and resolved. And the remaining lawsuits -- we feel there are valid, factual and legal defenses in all of the cases. And, you know, they are being defended, and because of the early stage that the cases are, there's really not any more specific information that can be given. But, we feel comfortable that those cases are, you know, being -- moving toward resolution.

OK. And then insurance is paying the attorneys' fees -- is that correct?

All of those cases are being defended pursuant to insurance coverage of the company, which includes the cost that are involved with deductibles, you know, that the company has to pay.

OK and so those expenses are running through the income statement, the legal expense?

That is correct.

OK. As far as the cases that were settled with the matter settled?

No.

OK or the other -- I don't know how to pronounce the name, the ?

No. That -- the both of those cases are still pending.

OK. Thank you very much.

We have time for one last question on today's call and our next question's coming from from .

Yeah, thanks for taking my question. Just a couple quick things. First of all, I'm wondering, in this process of your issues and showing the FDA that, you know, that your products are safe, it's going to take a fair amount of data and these have proved to be slow growing organisms that have infected the products. I'm just -- I'm wondering if it's really realistic to -- if it's realistic to believe that you can produce stuff to satisfy the FDA requirements in just a couple of months.

Well the issues are quite complex but to -- for purposes of trying to be responsive to your call, the main focus of the concern has been on the validation of the processes related to the elimination to the extent possible of bacterial and fungal infections and so the actual validation process and how that is going to be demonstrated is what is at issue and they're really not related to the growth rate per say of the organisms. So from a scientific standpoint, it is definitely something that can be addressed through the validation and documentation of that validation process.

OK. Also in this most recent press release you don't really talk about the current liabilities on the balance sheet. I was wondering if you could give some color to how say accountings payable and other short term liabilities have actually changed since last quarter and year over year.

I don't have that information directly in front of me right now, . The only significant change that I think is in current liabilities is that we have reflected all of the outstanding debt under our bank loan, which is approximately $6 million as being currently payable but, other than that, I don't suspect that there's been any significant changes to those numbers, although I don't have them in front of me right now.

OK. Trade payables wouldn't have changed a whole lot?

I don't have the number in front of me right now but I don't suspect that they would have.

OK and just one last, quick question. I'm wondering if you can give a little bit of color on how the sales force is dealing with customer concerns about product safety. I understand, you know, obviously the reason a lot of us believe that you still have an enormous market ahead of you is that you've got products that just aren't available any other way, heart valves and such, very important things but if somebody is looking for an orthopedic product, for example, you've got a fair amount of competition. What sorts of arguments are you using in order to help customers gain comfort with continuing to select you as a supplier?

In conversations that we've had with the physicians or they have had with us, it's very encouraging to take note of the fact that there are evidently significant differences, visible differences and handling differences between the tissues we preserve and the tissues that competitors preserve. The doctors that we have spoken with claim that they can see the difference when the tissue is thawed. And now I'm talking specifically about tissue.

We're told that it handles better than the other processors' tissues and that it sutures better. And that it functions, postoperatively, better. So there are numerous physicians that have made the decision - this is orthopedic physicians - to postpone certain surgeries in anticipation of our orthopedic tissues again being available for transplantation.

Then can you give some guess, understanding that it's nothing more than a guess, about, say, the proportion of existing physicians who rely on you would continue to do so versus those who have maybe switched to a competitor with an inferior product?

That would be hard to do at this moment. We'll have to wait and see.

OK. Thank you.

At this time, I'd like to turn the floor back over to Mr. Anderson for any closing comments he might have.

All right. We'd like to thank everyone that has joined us today. If you have any further questions, you can call our investor relations department and they'd be happy to help you with those. And we look forward to talking with you about our fourth quarter results sometime after the turn of the year. And we'll talk with you then.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.