Artivion Inc (AORT) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CryoLife third quarter 2004 financial results conference call. [Operator Instructions]. It is now my pleasure to turn the floor over to Mr. Steve Anderson. sir, you may begin.

Good morning, everyone. This is Steve Anderson, the CEO of CryoLife, and I'd like to welcome everyone to our third quarter conference call. With me today is Ashley Lee, the company's Executive Vice President, Chief Operating Officer, and Chief Financial Officer.

Today's agenda is as follows. Ashley will comment on today's third quarter earnings press release and will get into the detail of the numbers. He will also comment on the increase in tissue processing revenues including the growth in our orthopedic business and the significant improvement in the company's tissue processing gross margins.

He will comment on the remaining products liability litigation. He will also comment on the company's participation at the recent Rodman and Renshaw Healthcare financial conference held in New York last week.

I will bring you up to date on the shareholder litigation and the SEC investigation. I will comment on the latest developments involving our protein hydrogel technology and the continuing animal trials for our biologic vascular stint. I will give you the results of the human implants for our SynerGraft model 100 vascular graft for AV access and dialysis patients that is made from a bovine ureter and I'll comment on a recent paper that was given on this product at the September tissue engineering meeting that was held in Florence, Italy.

There were a number of other scientific papers given by our staff or by implanting surgeons at the tissue engineering meeting. I will comment on those two. Our director of professional relations Dr. Deandre gave a presentation that included eight year results for Cryopreserved meniscus at the European tissue bank meeting Prague in early October.

I will review that presentation and comment on it. I will bring you up to date on our application for accreditation with the American association of tissue banks. I will also comment on the timetable for the first human implant in Europe of our injectable spinal disk that we have been developing for the last four years as well as other new product time tables.

Finally, I will provide an update on the current process for irradiating orthopedic soft tissues. At the conclusion of my comments Ashley will return and will offer some guidance on how we see the fourth quarter developing and he will give our first guidance for calendar 2005. At this time Ashley will comment on today's press release and third quarter earnings report.

Thank you, Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I would like to make the following statement. Comments made in this call, which look forward in time, involves risks and uncertainties and are forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's management, intentions, hopes, beliefs, expectations or predictions of the future.

All statements made during the conference call that do not reflect historical results or information should be deemed to be forward-looking statements. It important to note that the company's actual results could deliver materially from those projected in such forward-looking statements. Additional information concerning risk and uncertainty is contained from time to time in the company's S.E.C. filings including the risk factors section of our Form 10-K for the year ended December 31, 2003 and subsequent SEC filings.

This morning CryoLife reported financial results for the three and nine months ended September 30, 2004. We are continuing to see the results our process improvement and cost control initiatives during the third quarter. Although our revenues were at the lower ends of the guidance for the quarter, we showed significant improvements in our processing as evidenced by the continuing improvement in our gross margins.

We expect that margins will continue to increase over the next few quarters. Also although our pretax loss increased from approximately $3.4 million in the second quarter to approximately $6 million in the third quarter of 2004. The third quarter amount includes $2.4 million related to litigation settlements. Excluding the 2.4 million, the net loss in the third quarter would have decreased as compared to the third quarter of 2003. We expect that our losses will continue to decrease over the next few quarters.

Total revenues for the quarter ended September 30, 2004 were 16.1 million compared to 15.1 million in the corresponding period in the prior year, representing an increase of 7%. This represents the best quarterly revenue performance since late 2002 and the first quarterly year over year revenue increase since late 2002. Total revenues for the nine months ended September 30, 2004 were $46.5 million compared to $46.7 million in the corresponding period in the prior year.

Net loss for the quarter ended September 30, 2004 was $6 million or $0.26 per share, this compares to a loss of 4.% or $0.24 per share in the corresponding period in the prior year. Net loss includes previously mentioned $2.4 million. Net loss for the nine months ended September 30, 2004 was 16.4 million or $0.72 per share. This compares to a loss of 25.1 million or $1.27 per share in the corresponding period in the prior year.

BioGlue revenues were $8.9 million for the quarter ended September 30, 2004 compared to 6.7 million in the corresponding period in 2003. BioGlue revenues in the third quarter increased 33% over the third quarter of 2003. BioGlue revenues were 26.5 million for nine months ended September 30, 2004 compared to 20 million in the corresponding period in 2003. BioGlue revenues for the nine months ended September 30, 2004, increased 32% over the corresponding period in 2003.

Tissue processing revenues were $7 million in the third quarter of 2004, compared to $8.1 million in the third quarter of 2003. However, tissue revenues in the third quarter of 2004 were up15% as compared to the second quarter of 2004. Total tissue processing revenues were 19.2 million for nine months ended September 30, 2004 compared to 25.8 million in 2003.

However, we are encouraged by the quarterly sequential growth we saw in the third quarter and are optimistic that we are at the beginning of a recovery of the tissue processing program. There are currently no restrictions preventing the company from processing and distributing any tissues that we have historically processed and distributed with the exception of SynerGraft processed tissues.

Cardiac revenues were $3.5 million for the third quarter of 2004 compared to $4.5 million in the third quarter of 2003. Cardiac revenues were $9.7 million for the nine-month period in 2004 compared it 14.3 million in 2003. Cardiac revenues in the third quarter of 2004 increased 23% compared to the second quarter of 2004. Vascular reduce were $2.6 million for the third quarter of 2004 compared to $3.1 million in the third quarter of 2003. Vascular revenues were $7.8 million for the nine-month period in 2004 compared to $10.6 million in 2003. Vascular processing revenues in the third quarter were flat compared to the second quarter of 2004.

Orthopedic revenues were 843,000 for the third quarter of 2004 compared to 467,000 in the third quarter of 2003 and compared to 574 ,000 in the second quarter of 2004. Orthopedic revenues were $1.7 million for the nine-month period in 2004 compared to $897,000 in 2003. We are very encouraged by the ongoing recovery in the orthopedic program. We expect that with the anticipated AATB accreditation, the introduction of the current process and to certain of our orthopedic tissue processing and the introduction of new tissue offerings over the next few months the orthopedic program will continue to recover and be the fastest growing area of our tissue processing activities over the foreseeable future.

Our overall cost of products and human tissue preservation services as a percentage of product and human tissue preservation service revenues were 57% for the third quarter of 2004, as compared to 62% for the third quarter of 2003. And compared to 62% in the second quarter of 2004. We expect a gradual continuing improvement in cost of services and products over the next few quarters as we continue our process improvement initiatives. Gross margins for tissue processing was negative 2% for the third quarter, a significant improvement compared to negative 25% in the second quarter and negative 46% in the first quarter of 2004.

General administrative and marketing expenses were $12.1 million for the third quarter of 2004 compared to 10.6 million for the third quarter of 2003. G&A expenses in the third quarter include an increase in the legal liability accrual of $2.4 million related to litigation settlements. Excluding these amounts, G&A expenses would have decreased year over year for the third quarter.

General administrative and marketing expenses in the third quarter of 2004 were favorably affected as compared to the third quarter of 2003 by cost savings and lower expenses including decreased consulting expenses associated with FDA compliance issues and lower legal fees, partially offset by increased insurance premiums. You should refer to our filing on Form 10-Q for a more detailed discussion of factors affecting our results of operations.

We continue to make significant progress on outstanding litigation, as we announced late last week, we settled several lawsuits over the past quarter, including the claims of plaintiffs in three general liability cases in Oregon that were described in our previous 10-Q filing. We feel that resolving the cases was a milestone for the company although we still must resolve a few open cases we believe we have once again we are significantly reduced the risks associated with these matters. We currently have 10 product liability suits that remain open. Four of them are covered by insurance, which we believe to be sufficient. We have six product liability lawsuits outstanding that are not covered by insurance . We have recorded un-funded balance sheet reserves of $1.8 million for known product liability lawsuits and claims that remain open as of today. This amount represents our best estimate of the cost to resolve the known product liability litigation and claims. Additionally, we have an un-funded reserve of 8.4 million for incurred but not reported losses offset by 1.8 million in estimated insurance recoveries. These reserves will be reviewed periodically and may decrease or increase in the future based on our experience. Finally, the rate at which we have been receiving cases has decreased over the last few quarters and we believe that bodes well for the company. You should refer to our 10-Q for a complete discussion of outstanding litigation.

During the third quarter our cash balance decreased from 23.7 million at July 1 to 15.2 million at September 30. The quarter end cash balances do not reflect approximately 3.3 million that will be paid during the fourth quarter to settle outstanding lawsuits and claims. During the third quarter we paid approximately 2.1 million to settle previously accrued for lawsuits and claims. In addition, several invoices from procurement organizations came due and were paid, resulting in additional payments of approximately $700,000 over the second quarter of 2004. As evidenced in the decrease in our accrued procurement fees. The majority of the remainder of cash was spent for normal operations. We expect that as our business continues to recover that the normal cash burn will most likely decrease on a quarterly basis going forward.

We continue to explore opportunities to strengthen the financial position of the company. If appropriate and at acceptable times the company may seek to complete some type of financing during 2005. We will keep you updated on any progress. Finally, we also presented last week at the Rodman and Renshaw Healthcare investment banking conference in New York last week. We were well received by the banking and investment community and continue to attract interest in the company. Now I'll turn it back over to Steve.

Thank you, Ashley. As you will recollect, we have been dealing with two shareholder actions over the last two years. The two lawsuits are related but substantially different. One is a class action shareholders lawsuit that deals with alleged lost value of the company's stock and the second one is a derivative lawsuit that was brought by shareholders on behalf of the company and against the directors and certain officers of the company. Both of these matters remain open and ongoing.

The animal testing of our biological vascular stent made with the protein hydrogel technology is continuing and its continuing into the next phase of our studies. This involves implants into the carotid arteries of pigs. These implants remain in place for two months at which time they will be removed and evaluated. You will remember from previous conference calls that we initially implanted six biological stents into pigs for a period of one week. These stents were ex-planted and have undergone analysis in our R&D laboratory. All of these implants were patent upon removal and all of them had begun to (inaudible). We continue to be enthusiastic about the potential for a biological vascular stent as we feel that it addresses many shortcomings of present-day metal vascular stents.

At the September tissue engineering meeting in Florence, Italy Mr. Chris Darby, vascular surgeon from the UK provided results on 17 human implants of the SynerGraft model 100 AV access device. These graphs have been implanted from April of 2002 to July of 2003. At 12 months the secondary patency was 83% and the freedom from infection was 94%. Preclinical studies have shown that they can in fact re-cellularize with the recipients own cells. At the beginning of next year we intend to expand the international model 100 in Europe and our forecast is to double the number of implants during calendar 2005. We expect to be applying for an IDE with the FDA for human testing of the model 100 AV access device some time in mid 2005. We anticipate having approximately 3 to 400 implants in the clinical trial and the duration of the trial will be approximately two to three years. This will be the first SynerGraft product in a clinical trial in the US. There were two other papers given on Cryolife Technology at this meeting as well as for other presentations. There was a paper given by David Clark MD of Denver, Colorado and a poster presentation by (inaudible) of the Mayo clinic on SynerGraft processed allograph heart valves. Both of these papers show the positive effects that the decellularization technology has on allogram(ph) heart valves in the reduced immunogenicity of these tissues has evidenced by a considerable lower P.R.A. levels post-implant than with standard processed allografts. In October of 2003 we applied for membership in the American Association Of Tissue Banks.

We were inspected by their inspector during the end of January of 2004. The inspection lasted three days. The application and the inspection report were sent on to the AATB standards and Accreditation committees and are currently under review. We expect to be accredited by the AATB by the end of this year. As you will recollect from previous conference calls, we have been working on a spinal disk nucleus repair replacement for the past four years. Sometimes we refer to this as an artificial spinal disk or BioDisc, its brand name. Over this period we have been conducting animal testing and mechanical testing. This testing has shown us that the material has great resiliency to many different kinds of stresses. As a result we will submit an application for this device to our notified body in Europe. We expect them to approve a pilot study for this device that will be comprised of 10 implants in humans.

We expect our first human implant to be some time in the first quarter of next year and it will take place in Scotland. We expect to file an IDE in the United States for this product some time in the first half of 2005. We also expect to complete our validations of the current process for irradiating orthopedic soft tissues during the fourth quarter of this year. When the validation is complete, we will insert this process into our standard processing of orthopedic tissues. Validations of the current process indicate that it the process is a terminal sterilization process. We expect to begin distributing the current processed, orthopedic soft tissues in early 2005.

As I stated earlier, Dr. Deandre (ph), the Company's Director of Professional Relations gave a presentation at a tissue banking congress in Prague in early October that discussed eight years of implant experience with 23 implants of cryopreserved meniscus. Over that less 8 year of time frame the company has preserved and adding plant at more than 4,000 cryopreserved menisci in humans. We believe this the largest series of implanted human menisci in the world. The clinical data that we have accumulated during this time frame should prove to very useful and reestablishing our leadership position in the allografts sports medicine market. Over the past 18 months we have been conducting animal testing of anti adhesion product that's an offshoot of our protein hydrogel technology with surgeons at a LDS Hospital in Salt Lake City. We call it product BioElastic. The results of these initial animal tests have been encouraging and we are expecting to submit a 5/10-K for this product in the latter part of next year. We expect it to take 90 days for this 5/10-K to be approved. So we are anticipating launching this product some time in the fourth quarter of 2005 or the first quarter of 2006.

Our anti adhesion product is a very thin sheet of material made from our protein hydrogel technology. BioElastic will come in sheets and is designed to be placed internally between the tissues and the chest of the abdominal wall, so there will be a very thin barrier that will prevent adhesions forming during the post-operative healing period. Over time this material will biodegrade. Management believes that the worldwide anti adhesion market for cardiac indications alone is about 250 million per year.

Clearly, the company has significantly changed over the past two years as we are continuing to recover from the 2002 FDA recall. CryoLife's major product is now BioGlue, which accounts for between 55% and 60% of revenue. BioGlue continues to have an 80% to 85% gross margin. Tissue revenues continue to increase and recover and our margins on tissues are recovering as Ashley explained in his earlier comments. Orthopedic tissue processing is growth area for the company as we expect orthopedic revenues to increase by about 30% next year. We think the introduction of the clinic sterilization technology for BioGlue reduction of orthopedic tissues will help to us recover much of our orthopedic soft tissue business.

Also I wanted to emphasize that we believe we are the only processing group that has implant data on how its process tissues perform in people. The eight-year data on preserved menisci implants that I mentioned earlier is good example of this data. On a head-to-head competitive basis, the physicians will tend to the use the product or tissues that have the data to support their efficacy. We have extensive implant data for all cardiovascular and orthopedic tissues and we expect that data and our clinical outcomes to propel us back into a significant player in the allograft soft tissue marketplace. As you have probably ascertained from our comments today, much of the new technology development going forward will be directed toward the biomaterial part of our business.

The development of BioFoam for treatment of traumatic wounds is supported by the $1 million grant from the Department of Defense promises to be an exciting new product. The anti adhesion product that we discussed earlier is another off shoot of our focus on biomaterial technology. The biologic extent made from our protein hydrogel technology is very promising and the injectable nucleus pulposus replacement that is headed for the first human implant in the first quarter is a unique product concept that will compete with spinal cages and artificial spinal disks for spinal reconstruction. We are looking forward to the development of our biomaterial technology and continuing expansion of our wound-healing product, both of which will be crucial to the company's return to profitability and to our continued success as a biological medical device company. That concludes my comments and now Ashley will return and give some financial guidance for the fourth quarter and our forecast for 2005.

For the fourth quarter, we believe that total top line revenue will be in the range of $15 million to $16.5 million. We believe that the fourth quarter will be flat to down slightly compared to the third quarter of 2004 due to seasonality and the large number of holidays in the fourth quarter. For 2005, we expect full year revenues of between 73 million and 80 million. The 2005 revenues contemplate moderate increases in tissue yields and selective price increases. We expect BioGlue revenue for the fourth quarter of 2004 to be between 8.6 million and $9 million. The full year 2005 we expect BioGlue revenues of between 40 million and 42 million. We expect tissue-processing revenues for the fourth quarter of 2004 to be between 6 million and $7 million. The full year 2005, we expect tissue-processing revenues of between 32 million and 37 million. The most significant area of growth is expected to be in the orthopedic program where we expect revenues of between 6 and 8 million for the full year of 2005. As we have previously communicated, we expect a gross margin to continue to improve during the remainder of this year and 2005.

Tissue processing gross margins were almost at break even for the third quarter and we believe they will be positive during 2005. We are working on several initiatives schedule to be implemented late this year or early next year that we believe will have a positive effect on current gross margins. We expect total gross margins to be between the mid 40% and low 50% range for the full year 2005 and that they will gradually improve throughout the year. We expect general and administrative expenses to be between 9.5 million and 11 million for the fourth quarter. For the full year 2005 we expect general and administrative expenses to be between 41 and $45 million. These amounts do not include any favorable or unfavorable adjustments that may be made to product liability or other litigation reserves. Our R&D expenses are expected to be approximately $1 million for fourth quarter. For the full year 2005, we expect R&D expenses to be around $4 million. That concludes my comments. I will turn it back over to Steve.

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

[Operator Instructions]. Our first question is from Tim Nelson of Piper Jaffrey.

Hi, guys.

Hi, Tim.

First question is on BioGlue. You had sequentially kind of level revenues here now for a couple of quarters and guidance sort of the same for Q4. What gets that moving again to achieve your growth targets for 2005?

We are focusing in on expanding or the uses for that product in general surgery because, as you will recollect, it is approved for all vascular repair, large vessel vascular repair, and I believe that a significant area-- specialty area that we haven't accessed enough.

Any data that would help you get at that or what is the marketing initiative going to look like?

Well, we haven't been attending the meetings that the general surgery meetings that would focus in on that specialty and so it will result in directing, redirecting our cardiovascular sales force to making that a focus of their call.

Tim, another thing that we are currently doing also, is that there are a couple of areas in the country where we just don't believe that we have got in the penetration that we needed to and we are selectively in a couple of markets adding sales people. So we think that will help also.

OK. On tissue preservation orthopedic showed some great sequential growth here. And your guidance obviously are much higher. Are the margins on orthopedic any different in achieving the objectives for 2005 key to that margin improvement objective that you have?

It is partially -- that's what we are partially relying on. One of the things that I mentioned in guidance is we are looking at some selective price increases so that's going to help our margins. Also, we are looking at our yields moderately improving across all tissue types. We think that is going to help drive the margin improvement. And, finally, just within the orthopedic program we will have more to say about this early next year but we are looking at introducing some new products and new technologies in orthopedics early next year and we think that's going to obviously help the margin improvement in orthopedics and overall.

But I wondered about the margins on organization in particular, particularly with the clearant process you are going to implement next year. Is that a margin-enhancing technology?

That is a margin-enhancing technology also. Because what that is going to do is increase our yield on certain orthopedic tissues so that our costs will be spread over more units that actually make it through our quality system. And we, therefore, do expect it to have a positive effect on our margins.

OK. Great. And then on the cash situation, if I did a quick math on the numbers you were talking about in the call you had about an operating cash burn this quarter of $5 million. Is that in the ballpark?

That's close.

Would you project that to be similar the next couple of quarters?

I would expect that number to decrease. It might be flat in the fourth. We might improve on that a little bit. But I would expect it to decrease going in 2005.

So, after you pay this judgment you got about $12 million -- I'm just trying to get the sense of the timing when the financing, possible financing you talked about might have to happen next year. Do you have enough to get through a couple of quarters here, three quarters, four quarters?

At least two or three. And if we execute on our plan that we have spoken about, our cash burns have obviously decreased significantly toward the middle or latter part of next year. So we will just evaluate where we are as we go forward and evaluate when we might need to go out and access the markets again.

OK, any visibility as to the time of when any of these un-funded reserves might have to be paid out?

Not really. The $1.8 million that I spoke about for things that we know about today, there are really no scheduled payments because a lot of those cases are still in discovery. And then the $8 million figure I spoke about, that is really for incurred but not reported cases, you know. We don't know when or if that number will ever have to be paid out. That's just going to be a number that is reviewed by our actuaries periodically and, you know, the number could go up our down. And there's really nothing that we can definitively point to this that number relates to at this time.

OK. That is it for me. I will get back in queue.

The next question comes from Kay McKay (ph) of (inaudible).

Yes, with respect to the BioGlue growth, can you give us a breakout of what percentage is due to price increase versus unit increase?

In 2004 or 2005?

BioGlue in the current Q3.

It is roughly about half and half, Kay. Unit growth and price growth.

And as you head into 2005 should we anticipate any further price increases or pricing held steady in that revenue assumption?

We are planning on selective price increases for certain of or tissues and products. We are still in the process of working through with those the amount of those price increases are going to be. But you can expect some price increases.

For BioGlue?

We are looking for price increases in BioGlue also.

OK. And then going over to the tissue area, you, especially orthopedic, you talked pretty bullish about that. Is that due to new products? You touched on pricing. Is the pricing only associated with the new products?

At this point we are not looking at doing anything with pricing in the orthopedic area of our business. The growth that we are talking about in organization is all going to be -- in orthopedics is all in units and new product introduction. We are very bullish about the orthopedic program.

But even with the new products that won't represent a price increase?

No.

OK. Is that the excitement around that, is that due to the clearant process, new and improvement meniscus or new and improved bone tendon bone? Can you give a little more clearance on that?

I can't make think comment about the new products that we are going to introduce next year. I'm just going to wait until we actually do that. A lot of the excitement about the program is just looking at the traction that we are gaining on a month-to-month basis, getting back out, talking with our customers and seeing revenues increase every month. So we are very encouraged by the program. We certainly think that the clearant process is going to help improve our yields and make more tissue available for distribution and will give us a product that, although, you know, we can't say it sterilizes, it is certainly going through a sterilizing process and all of these factors make us pretty optimistic about that program.

Just on that last comment, is it your intention to have a label that claims sterilization or how are you anticipating that labeling?

Not initially we are not going to be having a sterile label on it.

OK. And then can you give us any update with respect to your discussions with the FDA on SynerGraft with (inaudible)?

We had a meeting with them a few weeks ago and we actually had a meeting with the ombudsman for dispute resolution. We had two physicians that were with us at the presentation that talked about their clinical experience with SynerGraft processed allograft heart valves and vascular graphs. The FDA has a certain time frame for making a decision centered around that presentation and we expect their decision to be made some time between Thanksgiving and the end of the first week of December.

OK, and do you expect that will be a definitive decision or just perhaps some comment on their part that requires you to come back with perhaps more information

We just don't know. The package that we sent them after the meeting was extensive. It contained thousands of patients this have received SynerGraft processed tissues. I think -- my recollection is that the time frame involved was approximately four years of implant time for quite a few thousand implants. It is extensive data. But I don't have any idea what their decision will be.

OK. Thank you. One final question on the SEC investigation. Can you bring us up to speed on any progress there?

We don't hear from them for considerable periods of time, then they will request more documents, which we send them immediately. We don't know where that investigation is focused. Of course, they don't tell us things like that. I have no idea as to when it will come to an end. I have been told by counsel that you never know when an investigation has been closed or is ending. The only thing you can say is they stopped asking us for documents and stopped asking questions. So, I would expect that it would get wrapped up some time next year. It has been going on now for a couple of years. But, other than that, I wouldn't have any way of making a suggestion as to when it would be over.

When was the last time they asked you for something?

Two weeks ago.

OK. Thank you.

Our next question is a follow-up from Tim Nelson of Piper Jaffrey.

Just follow up to the SynerGraft issue. Does any of your guidance for 2005 incorporate reintroduction of SynerGraft tissue?

It does not.

OK. That's it.

Our next question is from Stephanie Hagerdy (ph) of (inaudible).

Good morning. Just wondered if you could clarify a couple of issues for me. You talk about having positive gross margins in the tissue business in 2005. And you kind of fudged on 2004. Yet I see that your tissue volume is expected to be up in 2004 over 2003. Is there something going on there that we don't know that there shouldn't be some improvement? I mean you are almost in positive territory. I can't see with a little higher volume you wouldn't be there in Q-4.

We potentially could be, Stephanie. We just aren't going to guide to that. But a lot of these process improvement initiatives that we're talking about, a lot of them are scheduled to be implemented late in the quarter and I just don't want to get too aggressive and in guiding toward being positive gross margins in the fourth quarter not knowing the timing of when the initiatives are going to be implemented. Do we have shot to get there in the fourth quarter? We do, but I'm not going to definitively state that we are going to be there.

And the numbers that you are giving as guidance for gross margin for all of your businesses next year, I assume that you are talking about them progressing all through the year so that they actually, by the end of the year, could be quite a bit better than that?

The number that we gave is for full year gross margin. Exiting the year we could be potentially be higher than the numbers we gave.

Thank you.

We do have time for one final question. Our final question will from Raymond Myers of Emerging Growth.

Thank you for taking the question.

Sure.

My interest is in the soft tissue manufactured under the clearant process. You mentioned I believe expecting to have growth in that or starting that business in the next few months. Can you review for us what some of the milestones are that you need to pass to begin selling tissue under the clearant process? And then also explain how you expect the FD A's good tissue practices will impact your business? And finally comment on when you would expect to be able to make the sterility claim on those products?

The clearant process should be in place toward the end of this quarter. The only thing that is keeping it from being implemented today is the fact that we're finishing validations of the procedure and they should be finished within the next few weeks. There are no significant hoops that we have to jump through for the FDA to have a clearant process tissue back on the market. It is regulated as bank human tissue under rule 1270. Regarding how do we expect the good tissue practices to affect our business, of course we don't really know because we haven't read them. We haven't seen what the final rules are going to be. However, I don't think there's anyone in the tissue processing business that has seen more of the F.D.A. over the last two years than we have. And so I would have to say that I feel that our laboratory is as well prepared as anyone is to confront whatever the new tissue practice, good tissue practices, will be. And, lastly, on your question concerning a sterility claim, we don't have any plans to make this claim on our attorney. I don't think we need to have a claim like that in order to successfully market our tissue.

And the customers are finding value in the clearant process even without the sterility claim?

We found that most of our customers have been extremely loyal. They are looking forward to having greater supplies of tissue. My recollection of the third quarter tissue shipments was that we shipped everything that we had on our shelf. So, I don't feel that we entering the market is going to pose us any special problems. I do expect, with the introduction of new products, that we will be doing at the American association of orthopedic surgery in late February, early March that will be a very good meeting for us. I think --I'm anticipating to have a significant sales increase after that meeting when our new products are put out for display and for review by the physicians. But there does not seem to be any reluctance to use the tissues that we are processing.

Good. Maybe, if it wouldn't give away any competitive secrets, could you elaborate at all on what these tissue process improvements are that are improving your gross margin and yields and also how it is that the clearant process might improve your yields?

In regard to our ongoing internal process improvement initiatives, I don't think the conference call is an appropriate place to discuss them. They are so detailed and there are so many of them, I think it would lead to more questions if we talked to them or talked about them in this particular format. In regards to the clearant process and how we expect that to positively affect our yields in gross margins, the clearant process is a an irradiation process that essentially, (inaudible) and we think that it is very effective in decontaminating tissues and in the end you know we think that's going to lead to higher yields. But what I'd suggest though that if you have further questions, you can call Joe Shepherd, our Vice President of Corporate Communications after the call.

OK, great I look forward to it. Thank you.

I would like to turn the floor back over to management for any closing comments.

Thanks for attending and we look forward to speaking with you next quarter. Thanks a lot.