Artivion Inc (AORT) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CryoLife year-end financial release conference call. At this time, all participants have been placed on the listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn it over to your host, Mr. Steve Anderson. Sir, the floor is yours.

Good morning, everyone. My name is Steve Anderson. I'm the President and CEO of CryoLife and I would like to welcome you to CryoLife's 2002 year-end conference call. With me today are the company's Vice President of finance, and CFO, Ashley Lee, and David Fronk the Vice President of clinical research. David Fronk will participate in the Q&A part of this telephone call. The agenda for today's call is as follows. Ashley will comment on this morning's press release, last years financial results and first quarter of 2003 revenues. Then I will comment on FDA developments, international operations, bio blue's acceptance in the marketplace and new BioGlue timetables. My comments will conclude with an outline of our plans to rebuild the company, and bring it back to profitability. After my comments, Ashley will give us some guidance for the remainder of the year and after Ashley's guidance comments, we'll open up the floor to Q&A. Ashley will comment on this morning's press release at this time.

)) Thanks, Steve. First of all 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 within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statement include statements made as to the company's or management's beliefs, intention, hopes, expectation or predictions of the future. All statements made during this conference that do not reflect historical results should be deemed forward-looking statements. It is important to note that the actual results could differ. Additional information concerns risk and uncertainties is contained from time to time in the company's SEC filings including the risk factors sections of our most recent form 10 Q.

This morning, we reported financial results for the fourth quarter in year-ended December 31, 2002. I liked to make a few comments on 2002 and the first quarter of 2003. Revenues for the fourth quarter were 12.2 million. We are currently tracking to between 14.5 and 15 million dollars for first quarter of 2003. That's a 19 to 23 percent sequin hall increase in quarterly revenues. These projections are as of the end of last week. Revenues for the full year of 2002 were 77.8 million, compared to 87.7 million in 2001. Excluding tissue returns pursuant to the FDA order of 3.5 million, revenues for the year were 81.3 million. Net loss for the year was 27.8 million or $1.43 per share which included unusual pretax charges of 42.1 million or $1.45 per share. You can refer to our press release for discussion of the various items compromising this amount. Excluding these items, net income was for the year was two cents per share. BioGlue revenues were 5.6 million dollars for the quarter ended December 31, 2002, up 81 percent over the prior year period in 2001.

The month of January 2003 saw us achieve $2 million in monthly BioGlue revenues for first time in the company's history. We're currently tracking though over 6 million dollars for first quarter. Approximately 81 percent of fourth quarter BioGlue revenues were generated domestically in more than 85 percent of our hospitals have reordered the bond at this time. The remainder of our BioGlue revenues were approximately 19 percent were generated internationally. We're currently focusing our BioGlue marketing efforts on increasing usage within our current customer base. To give you an idea of how same hospital sales are tracking, we compared pre-PMA approval sales in the last six months at our top 50 hospitals and compared that to the average monthly sales for our top 50 hospitals since the PMA approval. On average, the total pre-PMA sales of BioGlue per hospital were about $3,8 hundred per month compared to $8,000 per month since the PMA approval.

Cardiac revenues were 3.3 million dollars for the fourth quarter. Cardiac revenues for the first quarter of 2003 are tracking to more than 4 million dollars. Revenues for 2.4 million for the fourth quarter. Vasco revenues for the first quarter of 2003 are tracking to more than 3.6 million dollars A 24 percent increase in sequential quarterly revenues. Orthopedic revenues were 108,000 for the fourth quarter of last year, compared to 6.3 million in 2001. Assuming we get confirmation from the FDA in Washington, we'll begin districting orthopedic tissues in the second quarter of this year.

Gross margins in the fourth quarter were 70 percent. This reflects the distribution of allograft tissues that had been previously written off in connection with the FDA order as well as an increase in the percentage of revenues derived from the sale of BioGlue. I'll comment later in the conference call on our full year 2003 gross margins. General administrative and marketing expenses for the fourth quarter of 2002 were 127 percent of revenues. These expenses as percentage of total revenues were higher than anticipated due to several factors, including an accrual of 3.6 million for incurred but not reported product liability claims, higher than expected insurance premiums e cost associated with legal matters, costs associated with addressing regulatory issues and lower than anticipated revenues. That concludes my first comments and I'll turn it back over to Steve.

Thanks, Ashley. On February 14th, the Food and Drug Administration completed a two-week inspection of CryoLife's tissue preservation laboratory. During this inspection, the FDA closed in the form number 483 that they had issued in April of 2002. With the closing of last year's form 483, CryoLife has again --is again processing orthopedic tissues. The company is presently processing and distributing, subject only to the restrictions applicable to all tissue processors, allograft heart valves, allograft vascular tissues and cardiac conduits. We are presently distributing BioGlue's surgical adhesive in international and United States markets, and SynerGraft model number 100 AV access grafts and the O'Brien stentless porcine heart valve (ph) in international markets only.

I would like to thank our FDA consulting firm, Acumen Sciences (ph) of San Francisco for their assistance and guidance in successfully responding to the FDA's concern and getting the company re-approved six months from the date of receiving the FDA's order of recall. The FDA inspection follows a successful January 22nd inspection by our European notified body. The inspection of our laboratory by the European notified body occurs twice a year. Their inspection focused on the continued compliance of the company's quality systems to both the ISO requirement and the international standards for medical device manufacturing. The ISO 9001 inspection concluded with one observation that has since been corrected.

The international arena and marketplace continues to be an area of significant corporate growth. During fiscal year '02 international revenues were up 10 percent over 2001. International BioGlue sales increased 22 percent year to year. The SynerGraft AV access device had sales of the year of $176,000. During the year, we successfully converted our U.K. sales force from a rep sales force to a direct sales force. We now have four direct salespeople handling our products in the United Kingdom.

Sales in the United Kingdom increased 94 percent for the year as a result of our conversion to a direct sales force. The United Kingdom direct sales force is complimented by approximately 27 distributors throughout Europe, the Middle East and south Africa. The excellent growth of BioGlue in Europe is primarily a result of the focus of our conversion to a direct sales force in the United Kingdom and the expansion of BioGlue's use to the neurological area to augment our strong base in the cardiovascular area. We believe that we are picking up market share from Baxters (ph) tip-seal product.

Total U.S. and international BioGlue sales for fiscal year 2002 were $21 million, an increase of 97 percent over 2001. As Ashley has said, sales of BioGlue in January of '03 exceeded 2 million dollars, an increase of approximately 40 percent over January of '02. January sales of BioGlue were at an all-time monthly record. We expect BioGlue to contribute approximately 40 percent of corporate revenue in 2003 and BioGlue has an 80 percent gross margin and its continued growth will help us to regain our corporate profitability. Our objective for BioGlue sales in 2003 is between 26 and 27 million dollars.

Earlier this month, Health Canada, the state ministry that oversees Canadian healthcare significantly expanded its approved indications for BioGlue when it approved its use as an adjunct method to repair most human soft tissues. We anticipate filing an IDE for BioGlue's use in the sealing of dura mater in late 2003. Last year, we announced that this IDE would be filed in Q2 of '303, but it has been delayed about two quarters because of our focus on the FDA recall issues. We expect that the IDE for dura mater sealing should take 15 months to be completed an should involve up to 400 patients.

Also we are designing a new disposable syringe delivery system for the BioGlue 2 ml and 5 ml package. The new syringe delivery device requires a PMA supplement and that is scheduled to be submitted to FDA in Q4 of 2003. An additional PMA supplement for the use of BioGlue in hernia mex (ph) fixation is scheduled to be sent to the FDA in Q4 2003.

Preclinical research on the use of BioGlue foam for severe trauma continues at the Army Trauma Center at Ft. Sam, Houston. Researchers there are conducting experiments, evaluating the safety and efficacy of BioGlue as a tissue sealant in large extremity wounds as a wound covering after thermal or chemical injury.

We continue the development of the BioGlue spinal repair system. We had expected to file an application for a CE Mark (ph) in the second quarter of 2003 and an IDE submission with the FDA in Q4 of 2003. However, the IDE submission changes in this product are significant and we now anticipate submitting this IDE in Q2 '04. The delays in this submission are due in part to our focus on resolving the FDA recall issues.

In Japan, the BioGlue clinical trial has been completed, and they are now going through a post clinical trial follow-up review of patients who have received the product. We have recently provided Japan with additional data reflecting the excellent safety record of the product, both in this country and in the rest of the world. We do not know when to expect a final decision from the Japanese ministry of health and welfare.

Late last week, we received a new letter from the FDA. This letter addresses two issues. The first issue centers around the question of whether the SynerGraft allograft heart valve process is significantly different from standard preservation methods. If it is, it is the opinion of the FDA that we need to file a 510-K application for the valves. We are of the opinion that the SynerGraft process is not substantially different from standard processing.

The second question that they have posed is that if SynerGraft vascular tissue is used in a non-homologous use such as an AV shunt (ph) for dialysis patients, then it should be classified as a device and regulated as a device and not regulated as banked human tissue under rule 1270 as it is now. We plan to provide data to the FDA to demonstrate that femoral veins used for AV access should be regulated as banked human tissue. The FDA as has not suggested that the tissues be recalled nor have they raised safety or efficacy concerns. We have been in touch with them regarding a meeting to discuss these issues and we are hopeful that such a meeting will take place in the very near future.

Effective this past Saturday, we began processing all incoming tissues using standard processing methods. We decided to adopt this policy until we have had a chance to meet with FDA and to ascertain what their real concerns are. CryoLife processed cardiac allografts and vascular grafts continue to be well accepted by U.S. surgeons and since the inception of the company in 194, approximately 59,100 cardiac tissue allografts and 31,000 allograft vascular grafts preserved by CryoLife have been implanted in patients in North America. The safety and longevity record of the allograft heart valves we have preserved is excellent. At ten years, 90 percent of allograft heart valves remain implanted. About 16,000 of our vascular grafts have been implanted for peripheral and central revascularization procedures. And we estimate a 72 percent limb salvage rate at four years from this technology.

The SynerGraft model number 100 vascular graft for AV access continues to do well in European markets. We have had about 70 implants that we can verify. However, since we don't get verification of each implant, it's hard to say for sure exactly how much are implanted. We have shipped over 250 model 100s to hospitals in Europe, and an abstract on the clinical results was recently submitted to the vascular access meeting in Lisbon, Portugal.

The first projected SynerGraft product will be the model number 100 AV access device that's made from a bovine urator (ph). We feel this product may be the first significant technological break through in the vascular graft market in 35 years. We are working through additional animal data on the model number 100 and are hopeful that we will file our IDE in Q2 2004. This is the date about one year later than we initially announced. The delay was necessitated by the additional animal data that we wish to collect prior to making the IDE submission. Based upon market data available to us, we feel that the United States market for an AV access device that remodels itself is estimated to be about 46 million dollars annually.

The United States cardiovascular marketing strategy going forward will focus around CryoLife processed human heart valve, conduits, patches and vascular grafts in the BioGlue family of products. All of these products have excellent clinical results as evidenced by our more than 15 years of follow-up of these implanted tissues. 90 percent of the allograft valves we have preserved are still functional long term. The low postoperative infection rates of our preserved cardiac tissue deserve some comment. The 15-year postoperative infection rate for allograft valves we have preserved is less than 1 percent. This compares to 1.23 percent for prosthetic heart valves. Incidentally in comparable age group, porcine valves have an average life span of 10 to 12 years and an allograft heart valve has 12 to 15 years life span.

In conclusion, I'd like to outline our plans for growing the company and restoring it to its industry-leading position now that the FDA 483 let their preceded the warning letter and recall order are behind us. first, the demand for allograft heart valves and vascular tissues remains strong and in many cases there are no suitable medical treatment alternatives for certain classes of patients. We have a very strong market position with our processed vascular grafts and heart valves that have documented and published 15-plus year data with well-defined benefits over other processed cardiac and vascular tissues. We believe that we are the only tissue processor who publishes their implant data and publishes their results of the tissues they preserve.

Number two, our BioGlue surgical adhesive continues to set quarterly sales records. Revenues in '02 are first full year of approval were about 20.9 million. Our '03 sales objective is about 26 to 27 million, and you must remember that BioGlue's gross margin is 80 percent. We have the opportunity to expand our BioGlue family of products over the next few years. We are working on a foam version of BioGlue with the U.S. army trauma center at Ft. Sam Houston. And we believe that BioGlue is the strongest surgical adhesive available for an internal use. It also is important to remember that BioGlue addresses a United States market of about 700 million dollars annually.

Our cardiovascular sales force remains intact, and has remained in close touch with cardiovascular surgeons during the last six months. The preserved cardiac and vascular tissues are handled by our direct cardiovascular sales force. We have about 30 sales men and women throughout the United States that are supervised by four regional managers. Our senior sales and marketing management also remains intact with all of these positions, staffed by people who have been with us an average of six or seven years.

The recent closing of FDA -- of the FDA 483 also means that we are optimistic that we will be re-entering the allograft's sport medicine markets with preserved orthopedic soft tissues in the near future. We have 19 independent rep companies throughout the United States that have remained in place and that will be handling these tissues. These companies have a total of more than 150 sales representatives.

Many sports medicine doctors have told us that they feel our preservation process and the tissues preserved by those processes are superior to other processors' tissues. We have reason to believe that our preserved soft orthopedic tissues will be well received in the marketplace.

We have augmented our soft tissue preservation business with the synthetic bone product manufactured by a German company, Curasan (ph) AG. The synthetic bone product, Cerasor (ph), differs from other bone products in that it is completely reabsorbed over time. It is of course packaged sterile and so it does not have some other risks of allograft bone products. CryoLife's corporate strategy going forward is to concentrate our preservation services and new product development on the three medical specialties of cardiovascular, vascular and orthopedic surgery.

We have always focused on being a diversified medical products company and have historically felt that we were more resilient than other companies as we have four legs on our corporate stool. Cardiac tissues, vascular tissues orthopedic tissues and BioGlue. The recent difficulties with the FDA have proved the value of that diversification strategy and two a degree that is why we have been able to maintain a viable company in the face of a recall affecting a substantial portion of our business.

We will continue to build a diversified, implantable medical devices company that is focused on life sciences answers to implantable medical device issues. We will continue to focus on the development of life science-based implantable devices that are directed at market niches that are not addressed by synthetic medical devices. We have found through the years that these market niches for unique products are not price sensitive and the markets are generally too small to be profitably addressed by larger device companies. Our product and service pipeline is full of proprietary orthopedic, cardiovascular and vascular preservation services and products. We think this bodes well for a revitalization of the company and a return to profitability. That concludes my comments, and at this time Ashley will give you some guidance for the rest of the year.

Thanks, Steve. I'd like to make a few additional comments about our financial condition and pif some limited guidance for the upcoming year. It should be noted that this guidance is predicated on our shipping orthopedic tissues based on the closeout of the April 2002 483. Our current annual run rate is approximately 6 o0 million dollars. As Steve mentioned earlier, we believe that we will be able to generate approximately 70 million in revenues during 2003. We're not giving any revenue guidance by product line other than that we expect BioGlue revenues to be between 26 and $27 million for the year. There are several reasons why we believe that this level of revenues is achievable. First, approximately 70 percent of our cardiac procurement base remains intact. Several of those organizations representing the remainder of our cardiac procurement have indicated that they will resume sending tissues to CryoLife once the FDA concerns have been fully addressed. Second as you recall, our vascular procurement levels have increased dramatically during 2001 and 2002. We're confident that we'll be able to achieve sufficient vascular procurement to meet any demand we'll have during 2003. Finally we have several tissue procurement organizations that remain ready to resume sending orthopedic tissues to CryoLife for processing. Although we anticipate that any future 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 or though tissues to CryoLife after the issues have been resolved, along with our new tissue introductions will enable us to have a robust orthopedic business going forward. We believe that our gross margins in 2003 will be in the mid 50 percent range. This considers an increase percentage of our business to be derived from the sale of BioGlue surgical adhesive and the lower volume of tissues going through our processing system which will adversely affect gross margins in that area. We believe that SG&A expenses will be somewhere between 42 and 46 million dollars for the year. This is an area that is highly dependent upon the timing of the resolution of certain of our product liability case, securities issues and other miscellaneous items. We have approximately 24 million dollars in cash and investments. We anticipate receiving approximately 8.5 million dollars during the second quarter, relating to tax carry carrybacks. Considering growth factors we believe we have more thanned a yat cash to ensure that we're able to manage our way through these issues and return to profitability. That concludes my comments and now I'll turn it back over to Steve.

At this time, we'd be happy to open up the conference call for Q&A.

Thank you. The floor is now open for questions. If you do have a question or comment, you may press one, followed by four on your touch-tone phones. If you're in a speakerphone, we do ask that you please pick up your hand set to minimize any background noise and if your question has been answered, you may remove yourself from the queue by pressing the pound key. Our first question is coming from Archie Smith at U.S. Bancorp.

How are you guys doing?

Good. How about you?

I have not a lot of questions, because you had a lot of information in the call. But a couple of things. You have talked about being back in the processing business for orthopedics, but it seems like you still have some steps to go through with the agency prior to being allowed to distribute. Could you just, A, confirm that, and B, explain what steps you have to go through with the agency to get their good graces as far as distribution goes?

The 483 that the poll is out has been sent forward to Silver Spring. It has to go through a number of levels of management and be approved by those levels of management. We then expect to receive a letter from FDA management lifting the recall, and I would expect that we would get a letter like that within the next month.

So the point is, there's nothing for you to do? It basically has to go through channels at the agency?

Absolutely right.

Okay. Second question, relates to the request from the FDA for five 10-K's on SynerGraft processed tissues. I guess the first question is, are there any SynerGraft processed tissues for which they didn't request five [inaudible] you determine that you have to go forward, what's kind of the process to determine whether or not you would need to file and what happens from that point?

Dave Fronk will answer that question.

Archie, the SynerGraft process cardiac process material the nonpatch issue has not been singled out by the FDA in any way, shape or form, requiring a 10-K submission. When we introduced the SynerGraft program back in --early 2000, we went through and made a conscious decision in terms of whether a filing was needed and have support, why we didn't think that it would require any. That's why we want to talk to the FDA about. On the vascular side, we have been processing them for easy access since 1996. Have a long history of doing that. Surgeons have been using vein for AV access since the late 1960's. So we want to talk to the FDA, show them our supporting documentation, show them the data that we have available, if rationale that we put in place and open that dialogue up with them and get resolution.

Is there any reason why --Steve, I don't remember exactly how long have you been using SynerGraft on the heart valves as an example, but I'm fairly certain it's a year, maybe even two years.

Over two years.

Right.

Dave corrected me, it's over three.

February 2000 was the first implant of a preserve heart valve, SynerGraft treated.

Are we talking about one of the great rip Van Winkles of all time here? How can that become an issue after you have been safely treating people for three years I guess is the question?

The FDA has indicated they have some questions, and we're going to work with them diligently until we have satisfied all of their observations and questions.

But do they understand you have been safely treating people for three years or is that just --

We haven't had a chance to talk to them about that yet, Archie, but let me just comment on this. You know, we are inspect by them at least once a year. And so they have been through our laboratory at least four or five times since we have been processing vascular grafts and heart valves with the SynerGraft process and they haven't made any comment about it before.

So I'll drop that. But what would the process be if you determine that you have to file a 510-K? Is it fairly straight forward --

A 510-K as you know Archie requires showing substantial equivalents to what was already in the place, whether it was from pre1996 or previously 510-K product. In our case, allograft tissue. We have our animal experimental data, our rationales from a manufacturing process in terms of that exactly it is as well as our human clinical experience. We would probably put in a complete package to the FDA four or five 10-K submissions.

But basically this is information you already compiled?

Yes.

A couple of questions for Ashley. And Ashley, maybe Steve as well, how fast -- I know you guys are burning the consulting and legal meters over time here. How long do you think before you can start bringing your SG&A down and what portion of Q4 SG&A would you consider as being nonrecurring?

The -- let me answer the question about fourth quarter first, Archie. We obviously had the 3.6 million for the accrual for IBN in our losses that we made in our fourth quarter. I would estimate that that's close to another million in the fourth quarter that's probably -- I would say nonrecurring in nature. But with that being said, as to when we can expect some of these SG&A expenses to get back in line, it's rally a little too early to tell because we have to get some of these personal injury suits behind us as well as some of the SEC -- the shareholder litigation and so forth. And it's hard to estimate with any degree of accuracy as to when those might go away. We're hopeful that some time during this year we're going to see some of that fall off, but other than that, I really can't give you a definitive timetable.

If you take the 3.6 million dollars out of the Q4 SG&A, which should bring you down to around a little under 13 million dollars, do you think your Q-1 SG&A will be below that sequentially in line or above? If you had to guess. I don't know you don't really --

I think that it would be below.

Good.

Yes.

Thank you very much. I will get back in the queue.

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

Hi. How are you guys? Just a couple of quick questions. I'm curious about what percentage of heart valves were SynerGraft processed before last Saturday? We had it up over the 45 percent level?

In the fourth quarter of last year, the percentage of revenues derived from SynerGraft processing of cardiac tissue was roughly 60 percent.

And I know that product does carry a premium as well.

Right. So what you're talking about, what we've done at this point while we're waiting for, you know, to have if discussions with the FDA, we're just employing our traditional processing. So really what you're looking at I assume is where you're going is looking at the incremental margin is really what it is potentially at risk right here. And this incremental margin is anywhere from 15 to 20 percent. But they're also some additional costs that go into prosegtss SynerGraft tissues. So if you look at it in total you might probably looking at maybe -- at risk maybe 10 percent the revenue number.

Okay. But that is the 70 million you had given as kind of a guidance level for next year didn't have that taken out that sort of at risk still?

That is correct.

Okay. On the orthopedic side, I'm curious, you said that you have a couple of large suppliers that are sort of at the ready to start sending tissue back. I know that the heart valve business recovered fairly rapidly from -- you lost 50 percent and that went up to the 70 or 75 percent level. So what are you looking at for orthopedic tissue? In the sense can you look out and see how fast you can ramp back up in your supply?

We currently have probably two of our larger orthopedic tissue -- organ tissue procurement organizations. One of which has actually already resumed sending tissues to us. We believe that within I would say a quarter we should -- we could potentially get up to 50 percent of our pre-FDA order tissue procurement. However, we're going to be looking at this carefully just to make sure that we don't get ahead of ourselves and -- so again, we're looking at this issue very closely but wing we can get up to probably 50 percent pretty quick limit

If memory serves I think you let go of a number of people in the processing division when the FDA recall hit.

Yes.

Have you hired back a number of the people or are you ramping up that area? )) We fired back five last week so're (ph) in the process of rebuilding our processing capacity to address the expected increase in tissues that will be coming in the door.

Okay.

We have hired back between 17 and 20 people. Since that layoff in September.

And that was out of how many?

About 105.

Okay.

We laid off and then there were approximately 10 or 12 others that left us after the layoff. So it would have come to approximately 115 to 120 people total that we lowered our head count by right around the September time frame. So out of that, we have hired somewhere between 15 and 20 back.

Okay. I imagine you're expecting to hire back as you need also?

Yes.

Absolutely.

On the BioGlue side, now that we have had a couple of quarters with the broad approval under our belts, have you seen any trends emerging as to where the product is being used? Is there specific apply dhargs kind of emerging as the biggest ones and the ones that it's primarily being used in?

Well, I think when -- during the initial launch, it was primarily being used on complex cardiac reconstruction and I think as time has gone on throughout, you know, the second half of last year what we're seeing is surgeons are beginning to use the product more prophylactically to prevent bleeding as opposed to waiting to see whether or not they encounter any untoward complications during complex cardiac reconstruction. I think we're beginning to make some inroads with vascular surgeons.

You know with the introduction of the two milliliter BioGlue filled, a lot of the vascular surgeons have been more willing to use the product and we're starting to see some traction in that area. Internationally, I think that we're starting to see more traction in the area of neurosurgery. We've obviously had some publications about the use of BioGlue in that particular area over the last month or two, and from what we're seeing out in the field especially since we have direct salespeople in the U.K. market and we have direct access to the surgeon we're starting to see that usage in that area starting to pick up.

Okay. If I can ask one final question. Can you outline the change that were made in the orthopedic processing to satisfy the FDA? In other words, some problems with contamination of the antibiotics and those sort of things, have those been addressed and can you give us some more information on what exactly was changed?

Well, we have been working with the FDA over the last six to nine months to improve on a very safe process. Some of the things that we have incorporated that, you know, that are like pre-swabbing cultures and post processing swab cultures we actually had another step in place for the post processing swab cultures. But those are just a couple of examples of some of the things that we've implemented. But again, we have been working with them over the last six to nine months to improve on historically a very safe process and -- but if bottom line is we're very pleased, that closed up 44 from last April.

I guess leave it that

Thank you. Our next question is coming from Brian Ganon (ph) from Ganon Securities.

Hi, guys. I have a couple questions here. Can you help me once again break down the SG&A a little bit further? What exactly was legal expenses and what exactly was strict G&A for the firm?

During 2002?

For Q4.

I don't have the breakout in front of me of Q4. For the accruals that Mae made for IBNR claims was 3.6 million dollars. Our legal expenses on average have been running roughly about $1 million per quarter.

Have any of the lawsuits that you're currently in discussion or in process of gone through discovery yet? Or are you still very premature on this?

We're very premature on that. All of the litigation is still in its very early stages of discovery.

Okay. So what are you guys projecting for the remainder of the year in terms of discovery, or the legal costs? We know that that increases.

Well, it's kind of difficult to estimate exactly where the legal is going to end up. I think a lot of it depends upon some of the early experiences that we had with some of the cases but it is almost -- it's not prudent for us to estimate what the total cost would be, nor when some of these expenses would go away. It's the early to tell at this time.

Fair enough. Regarding your tissue procurement you guys mentioned you're back up to 70% or so on the heart valve or the 75%. Is that volume or process of new tissue?

That's in volume.

In volume. And you're expecting up to 50% in the orthopedic side is that correct?

Up to. We're going to monitor that closely just from the contacts that we have made from our former orthopedic tissue procurement organizations. We believe that we could get up to those levels quickly, but we're going to make sure that we match wit the demand that we have out in the marketplace.

Fair enough. On the sales side, how many salesmen do you have today and can you break it out by category between cardiac, BioGlue and orthopedic?

The cardiac and BioGlue and vascular areas are handled by the same sales force. And we have about 30 salesmen and sales women in that sales force. We have four regional managers in the cardiovascular area and then we have product marketing and national seams -- sales furngtions above that. In the orthopedic area, we have about 19 or 20 rep companies. That's a manufacturers rep type sales forms. And they employ about a total of 150 salespeople among them.

So you're not going to go direct? You're going to use rep companies with?

Yeah, we have been always rep companies. We'll keep it that way for foreseeable future. They are supervised an managed by national sales and supported by a product marketing function.

Fair enough. Last quick question. And this is not meant to be derogatory in any sort of way. I've heard some events that there's some sort of negative peer review article on the SynerGraft heart valve in Europe. Have you guys seen this and if not,, you know, I'm hearing that there's some link issues with that. I was hoping I could get more comment or clarity from management on that.

I'm not familiar with any. I know of one that's in review for the SynerGraft treated allograft heart valves that is coming out from Europe that is very favorable. I think we've got to be very careful in separating anything we hear with regards to SynerGraft with regards to base material. Whether it's the allograft tissue or the porcine tissue. The porcine tissue went in a very challenging patient population. And the outcomes are different than what we're seeing with the allograft heart valve. So I would caution you to make sure that you're getting the full story in terms of what the base material we're talking about. I haven't heard of any negative outcomes regarding the allograft heart valves treated with the SynerGraft process.

Fair enough. In this interim period and I prom this is the last question, your SynerGraft technology has been a big marketing cachet for you. Now that you're not going to be able to use it for the heart valves, how do you compete on a level playing field with everybody else out there?

We haven't said we're not going to be using that. I think this is the object or the subject rather of some discussions with the FDA and if we are required to file a 510-K that is a relatively short-lived process.

How soon will the FDA come bang to you with regards to them definitively telling you need to submit this data or not?

That I don't know. We have to -- we have to meet with them first, and go through and review all of our clinical data which is extensive. And also all of our bench data which is extensive. And then they will need some time to review that. We just felt under the circumstances since the -- there were certain things about their letter that were ambiguous that it was prudent to make the decision that we've made.

Fair enough. I promise this literally will be the last question. Regarding your BioGlue, what competitors are there out there today? I believe cohesion technologies they got bought by got into clinical trials for their surgical adhesion. You mentioned a Baxter product in Asia that you're replacing.

Cohesion I believe was acquired by AngaTech (ph), I believe. They -- their product has been on the market for about a year for internal uses. So we have been competing with that product in the U.S. market and internationally for over a year at this time. Because as I recall it was introduced at the SGS last year. So we're familiar with that product and have been competing with them for a while now. Baxter's product is -- they have had historically the seal, which is more of a sealant that is not as strong as BioGlue and last year Tibble it was last year they acquired fusion medical which had the product glow seal and it's my understanding they are also -- there also that flow seal was also similar to sealants in strength and so forth. But as we understand it, BioGlue is really the strongest and easiest to use product that's out there on the market right now and we have been competing with these other products for a while now in the marketplace.

Are those the only two approved products on the marketplace right now?

Internal use, yes.

Okay. Gentlemen thank you very much. I appreciate it.

Sure.

Thank you. Our next question is coming from Kate Sheridan of Gerard Klauer Mattison & Company.

Hi. I missed Ashley your response to Rog's question on the 70 million dollar in guidance. Did that or did that not consider the premium on SynerGraft?

That did not consider the premium on SynerGraft.

Because that assumes that you would not --( Inaudible )? The 70 million dollars assumes you will not sell a SynerGraft treated tissue?

The 70 million dollars assumes that we will be distributing SynerGraft-based tissue. But the 70 million is a -- is an estimate. Based on the letter or correspondence that we received from the FDA, I'm really -- I don't think that an adjustment to that number is really warranted at this time.

Okay. Thanks very much.

Thank you. We do have time for one final question which is coming from Vivian Wall of Federated Kaufman funds.

Hello, Vivian.

Hi. Just one question on the incremental costs in the potential for offsetting pricing flexibility that you have in the orthopedic tissue now that you are implementing the recommended changes from the FDA.

The costs associated with the swabbing that I mentioned earlier is not going to significantly increase our historical processing costs for orthopedic tissues.

Okay. But what about changes in the window of procurement? What about changes in the treatment of companion tissue?

We don't believe that those are going to significantly impact our cost structure. The greatest single impact in 2003 on the cost structure will just be the lower volumes they are going through, the system. Those will have a greater impact than the processing changes that we've implemented.

So you don't see --don't feel that your rate of discarding tissue would be higher going forward?

We think it will probably be slightly higher, but we don't anticipate that that's going to have a significant impact on the unit cost going forward.

And do you think you have any pricing flexibility in the marketplace to offset any potential cost increases?

It depends really on what the particular tissue is. If it's orthopedics, probably not at this point. With the heart valves and the vascular tissue, we could have a little bit of pricing flexibility there. But with orthopedic tissue, probably not at this point. Just because there's so much more competition in that area with, you know, historically cardiac tissues. We've historically had 70-plus percent sent of the market there in vascular tissue.

Great. Then just another orthopedic question, if you would. Fill us in on how the synthetic bone product might compare to the norian material that was out there, what kind of time period is it reabsorbed in and what applications are you selling it for? For long bone, for long bone fraction, for spinal fusion? Where's it going?

From the marketing standpoint we're currently distributing for nonspinal and nondental uses. So our primary focus right now is going to be on trauma indications. But the area that we are going to focus on over the next year or two is building a market for this -- this product in the area of sports medicine. There are a lot of tissues that are used in that area that are not -- that do not use bone as a fixation device. So we're particularly looking at areas where this could be used to like fill in tunnels and things of that nature that have been created from the implant implantation of nonbone tendons and other things like that. From the reabsorption rates I'm going to have -- I don't know the answer to that at this point. I have to get back with you on that.

I'll stay tuned. Thank you.

Thank you. I'd like to turn the floor back over to our presenters for any closing comments or any remarks.

Thank you for joining us today. We'll be happy to answer any other questions you have. If you wanted to call IR, they'll help you answer the questions you have and then our next conference call will probably be towards the end of April. Commenting on the first quarter.

Thank you, ladies and gentlemen for your participation. This does conclude this morning's conference call. You may disconnect your lines at this time and have a wonderful --- 0