Artivion Inc (AORT) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen, my name is Stacey. I will be your conference facilitator today. At this time I would like to welcome everyone to the CryoLife third quarter 2005 conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Steven G. Anderson.

Good morning everyone. Welcome to the Q3 '05 CryoLife conference call. This is Steve Anderson, the Company's CEO, and with me today is Ashley Lee, CryoLife's Executive Vice President, COO and CFO. The agenda for today's conference call is as follows. Ashley will review the Company's third quarter performance by product line. He will also comment on the settlement of the shareholders' litigation as well as the settlement of the derivative litigation. He will bring you up-to-date on the SEC investigation.

I will follow Ashley's comments with an update on the initial BioDisc implants that took place in the UK on July 27th, and the schedule for additional implants in the near future. I will comment on additional clinical investigation sites that we're contemplating for the Spinal Disc clinical study that is ongoing. I will comment on the progress we've made with our tissue engineering research in the UK.

Also I am going to comment on the cardiac reconstruction symposium for physicians that was conducted by the Company on October 6th through 8th. And I will also bring you up-to-date on the development of the BioFoam product that is being partially funded by an appropriation from the 2005 Department of Defense appropriations bill.

We have particularly good news about the recovery of our orthopedic implant business, and I will comment on that as well as the outstanding success of our newest orthopedic product, the cryopreserved osteoarticular graft. Finally I'm going to discuss the timetable for CE Mark and FDA new product applications for the remainder of the year, and into '06. After my comments, Ashley will offer some guidance for Q4 '05 and for the fiscal year '06. At this time, Ashley is going to comment on today's press release.

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 involve risks 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 Factors section of our Form 10-K for the year ended December 31, 2004, and subsequent SEC filings.

This morning CryoLife reported financial results for the three and nine months ended September 30, 2005. Revenues for the third quarter of 2005 increased 2% to 16.5 million compared to 16.1 million in the third quarter of 2004. The net loss in the third quarter of 2005 was 3.1 million or $0.14 per fully diluted common share, compared to a net loss of 6 million or $0.26 per fully diluted common share in the third quarter of 2004.

Excluding a $412,000 or $0.02 per share non-cash gain for the change in the value of the derivative related to our preferred stock, and a $701,000 or $0.03 per share charge related to post-employment benefits, the adjusted net loss in the third quarter of 2005 was $2.8 million or $0.13 per share.

Revenues for the first nine months of 2005 increased 10% to 51.3 million compared to 46.5 million in the first nine months of 2004. The net loss for the first nine months of 2005 was 18.9 million or $0.81 per share, compared to a net loss of 16.4 million or $0.72 per share for the first nine months of 2004.

Excluding an 11.8 million, or $0.49 per share, charge related -- charge for the settlement of the shareholder class-action lawsuit, a $372,000 or $0.02 per share non-cash charge for the change in the value of the derivative related to the preferred stock, and a $701,000 or $0.03 per share charge related to post-employment benefits, the adjusted net loss for the first nine months of 2005 was $6 million or $0.28 per share.

BioGlue revenues were 8.9 million for the quarter ended September 30, 2005, flat compared to 8.9 million in the corresponding period in 2004. BioGlue revenues were 28.3 million for the nine months ended September 30, 2005, compared to 26.5 million in the corresponding period of 2004. BioGlue revenues for the first nine months increased 7% over the corresponding period in 2004.

BioGlue revenues were below expectations due primarily to some open territories throughout the US resulting from salesperson attrition. The majority of the shortfall in sales came in areas where we had no sales representation, or salespersons who were relatively new to the Company. We currently have two open sales territories and we have plans in place to increase the size of our sales force in the upcoming year.

Tissue processing revenues in the third quarter of 2005 increased 5% to 7.3 million compared to 7 million in the third quarter of 2004. Tissue processing revenues for the first nine months of 2005 increased 16% to 22.2 million, compared to 19.2 million for the first nine months of 2004. Tissue processing revenues for the three and nine-month periods increased primarily due to the recovery of the orthopedic program, along with modest growth in the cardiac and vascular programs in the nine-month period.

Cardiac revenues were 3.1 million for the third quarter of 2005, compared to 3.5 million in the third quarter of 2004, a decrease of 10%. Cardiac revenues were 10.4 million for the first nine months of 2005 compared to 9.7 million for the first nine months of 2004, an increase of 7%.

Cardiac revenues were down sequentially compared to vascular and orthopedic revenues, which were up sequentially. The factor driving this is the procurement that drove third quarter revenue, which was the first and second quarters of 2005 combined, was down compared to the comparable period in 2004 for cardiac tissues; whereas procurement for vascular and orthopedic tissues increased for those same periods.

During the last two quarters procurement has increased nicely, which we believe will drive revenue growth across all tissue processing lines. You may refer to our 10-Q, which we plan to file by the end of the week for more information about procurement trends.

Vascular revenues were 2.8 million for the third quarter of 2005, compared to 2.6 million in the third quarter of 2004, an increase of 7%. Vascular revenues were 8.3 million for the first nine months of 2005 compared to 7.8 million for the first nine months of 2004, an increase of 7%.

Orthopedic revenues were 1.4 million for the third quarter of 2005, compared to 843,000 in the third quarter of 2004, an increase of 62%. Orthopedic revenues were 3.5 million for the first nine months of 2005 compared to 1.7 million for the first nine months of 2004, an increase of 105%. For a more detailed discussion of the factors driving revenues, please refer to our Form 10-Q for the third quarter of 2005.

Total gross margins in the third quarter of 2005 were 52% compared to 43% in the third quarter of 2004. Total gross margins for the first nine months of 2005 were 53% compared to 36% for the first nine months of 2004. Tissue processing gross margins in the third quarter of 2005 were 18% compared to a negative 2% in the third quarter of 2004.

Total product and tissue processing gross margins for the first nine months of 2005 were 19% compared to negative 24% for the first nine months of 2004. Excuse me, that was for tissue processing gross margins, not total product and tissue processing gross margins.

Tissue processing gross margins improved in 2005 compared to 2004, primarily as a result of the improvement in tissue processing yields. We expect an improvement in gross margins and tissue processing services during 2006. The extent of the improvement will depend upon the results of our ongoing processing improvement initiatives and the continuation of the recent improvement in our procurement trends.

General, administrative and marketing expenses in the third quarter of 2005 were 11.1 million compared to 12.1 million in the third quarter of 2004. G&A expenses in the third quarter of 2005 include a $700,000 charge related to post-employment benefits. G&A expenses for the first nine months of 2005 were 42.7 million compared to 32 million for the first nine months of 2004.

G&A expenses for the first nine months of 2005 include an $11.8 million charge related to the settlement of securities litigation and $700,000 related to post-employment benefits. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations.

As we have previously announced, we have settled the class-action shareholder lawsuit and derivative shareholder litigation. By eliminating the distractions and risks associated with those matters, we can focus more of our time and effort on operational issues. We have six outstanding product liability cases.

We have recorded unfunded balance sheet reserves of 1.1 million for known product liability lawsuits that remain open or have been settled but not yet paid. These reserves will be reviewed periodically and may decrease or increase in the future based on our experience.

Additionally, we have unfunded reserves of 8.4 million for incurred but not reported product liability losses, offset by 2.6 million in estimated insurance recoveries (ph), representing a net liability of $5.8 million. These reserves will also be reviewed periodically, and may decrease or increase in the future based on our experience.

We believe the current level of product liability litigation that the Company has outstanding is manageable and somewhat expected for a medical device company of our size. In the future, unless circumstances dictate otherwise, we will not be providing updates on product liability litigation on our conference calls, but will instead provide those updates in our 10-Qs and 10-K filed with the SEC.

The SEC investigation is still ongoing, and we have no idea as to when it will be concluded. Again, you should refer to our SEC filings for detailed discussions of outstanding litigation.

During the third quarter, our cash balance decreased from 22.1 million at June 30, 2005 to 16.1 million at September 30. This balance reflects the approximately 7.5 million paid during the third quarter related to the settlement of the shareholder litigation, and also reflects borrowings of approximately 3.5 million on our revolving credit facility.

Excluding the $7.5 million payment for the litigation settlement and the $3.5 million draw on the credit facility, our cash and marketable securities balances decreased approximately $2 million during the third quarter of this year. Now I will turn it back over to Steve.

As many of you know, on September 6th the Company announced that the first two BioDisc implants, our nucleus pulposus replacement, had been done in the UK. Both of these patients, a man and a woman, are continuing to do well according to the implanting surgeon. These two patients are the first in an initial human implant pilot study.

The third patient in the initial pilot study was implanted on October 12, and the physician feedback is that the patient is also doing well. A fourth patient was implanted yesterday on November 2nd. Another patient is scheduled to be implanted on November 12, and the sixth and seventh patients, are scheduled for November 16.

Based upon the early success of these implants, we plan to seek regulatory approval to expand our pilot study early next year. This would involve 20 additional implants at the current center and the addition of 5 additional implanting centers, 4 more in the UK and 1 in Sweden.

We expect to submit our application for a CE Mark for general European distribution of the BioDisc in Q4 '06.

CryoLife management participated in the CE Unterberg Healthcare Conference in New York City on October 25th. During that presentation, corporate management commented on Company operations and updated the conference on the initial BioDisc implant.

CryoLife presented the initial BioDisc implant data at the IN SPINE conference which was held yesterday, November 2nd, in Dallas, Texas. The Company will participate in the Transatlantic Spine Conference in Zurich, Switzerland, which begins tomorrow, November 4th. Management believes the worldwide market for our nucleus pulposus replacement device could approach $1 billion by the year 2010.

As we have indicated in earlier conference calls, our new product approval focus going forward will be on developing our international product portfolio. By focusing the first phase of our new product launches into international markets, we will not only solidify a solid market position for our products, but also we will generate topline revenues more quickly.

The recent management changes that we've announced in the Company's worldwide sales and marketing structure, and in the management of our European subsidiary, are testimony to our focus on the development of international markets.

Presently we're sponsoring new product research at the following universities and hospitals in the UK. Oxford University in Saint George's hospital in London, with the SynerGraft AV access device. The Magdi Yacoub Institute in Harefield Hospital with the SynerGraft and mesenchymal stem cell heart valve project, and also our primary investigational site in the UK for the BioDisc.

I'd like to bring you up-to-date on the CE Mark applications that we will be making in the near future. The unique BioGlue spreader tip now has CE market approval. We are preparing to launch this important device on December 1st. We anticipate receipt of the CE Mark for the 10 ml syringe of BioGlue during the fourth quarter. And we are preparing to launch the 10 ml syringe within two weeks of receipt of the CE Mark.

In international markets, BioGlue is approved for the sealing of air leaks in lungs after lung surgery. Management believes that the spreader tip will make it easier for the surgeon to apply BioGlue over air leaks in lungs and for the sealing of suture lines for extensive cardiac reconstruction.

We expect the 10 ml syringe will replace the applicator and cartridge system that has been in use since the product's introduction in 2002. The spreader tip will be submitted to FDA sometime this quarter by a PMA supplement. And the 10 ml syringe for BioGlue that will replace the applicator and cartridge will also have a PMA supplement filed in Q4 of this year.

The BioGlue laparoscopic tip that will enable BioGlue to be used during minimally invasive surgical procedures will be submitted for a CE Mark during Q2 '06. And the IDE for BioGlue's use for dura mater sealing was sent to the FDA on September 30th. There is a thirty-day turnaround time for IDE submissions, so we should be hearing from FDA regarding this submission in the near future.

BioGlue has had a CE Mark for soft tissue repair, which includes the sealing of dura maters since 2002. The CE Mark submission for BioLastic, our anti-adhesion device, is planned for the second quarter of 2006.

We have received an appropriation from the Department of Defense in the amount of $925,000 for use in the study of BioFoam in traumatic injuries. This contract project is being conducted at the U.S. Army's Institute for Surgical Research Center at Fort Sam Houston in Texas. BioFoam is a formulation of BioGlue that contains an expansion agent that enables the glue to be expanded by a factor of five as it leaves the syringe.

We anticipate the foam will be used for hemostasis in trauma situations. We anticipate filing for a CE Mark for the use of BioFoam in the sealing of lacerated parenchymal organs in 2007.

The 510-K for the bovine pericardial soft tissue patch for the repair of rotator cuffs and perhaps for hernia repair will be submitted during Q2 '06. The cryopreserved OA graft initiative that we began six months ago has been well accepted by the implanting surgeons. Since we launched this program approximately 65 cryopreserved osteoarticular grafts have been implanted, generating $678,000 in revenues.

The results have been excellent. The cryopreserved OA grafts enable the surgeons to schedule the surgery on a timely basis, rather than having to implant the tissue within a few days of tissue recovery, as was the situation prior to the preserved OA graft being made available. We believe that CryoLife is the only Company in the US that is capable of freezing articular cartilage while keeping the cells viable.

As a result of the growth and acceptance of the OA grafts, we feel they should significantly help the recovery of the orthopedic business of our Company. We feel that the articular cartilage repair arena is a significant growth area for the Company. In the near future we will begin offering other cryopreserved tissues to address clinical needs for which current treatments are sub-optimal, and which will be unique to the industry.

Last week we heard from the CBER branch of the FDA regarding the classification of SynerGraft-treated human vascular grafts. The agency has determined that these grafts will be regulated as devices. Human vascular grafts not treated by the SynerGraft process will remain classified as banked human tissue and regulated under Rule 1271.

The FDA has also been considering our 510K application for SynerGraft treated allograft heart valves, which are regulated by the CDRH arm of the FDA. Last week we scheduled another meeting with CDRH for November 14th. The purpose of this meeting is to review the clinical data that we have submitted in support of our 510K application for SynerGraft treated allograft heart valves.

Two papers were recently published demonstrating excellent clinical outcomes using the SynerGraft treated human heart valves. One paper, presented in the Journal of Thoracic and Cardiovascular Surgery in October, reports the clinical experience from the Mayo Clinic using CryoValve SG aortic valves in an adult population. The other paper presented in this month's Annals of Thoracic Surgery reports the clinical experience from the University of Michigan using CryoValve SG pulmonary valves in a pediatric population.

In the Mayo Clinic series, 22 adult patients were implanted with a CryoValve SG aortic valve. Patients were evaluated based on the development of panel-reactive antibodies and hemodynamic performance. Results at one year demonstrated that panel-reactive antibodies were negative in 95% of the patients. In addition, evaluating the hemodynamic follow-up at a mean of 2.5 years, the mean gradient was 8.8 mg of mercury, with no patient having more than trivial aortic valve regurgitation.

In the University of Michigan series, outcomes from 26 pediatric patients implanted with a CryoValve SG pulmonary valve were compared to 26 age and diagnosis-matched controls, receiving standard processed cryopreserved pulmonary allografts. Results from this study revealed that at a mean follow-up of 19 months, the median degree of insufficiency of the CryoValve SG valves was significantly less than that of standard cryopreserved allografts.

In addition, a significant difference in valve gradient was noted between the two groups, with CryoValve SG demonstrating a lower mean gradient of 7.6 mm of mercury compared to standard cryopreserved allograft valves, which demonstrated a mean gradient of 14.6 mm of mercury at this follow-up time period.

During the quarter, two meetings were held between CryoLife scientists and researchers at the Magdi Yacoub Institute in the UK for the purpose of evaluating xenograft and allograft tissues preserved using the SynerGraft antigen reduction process. One meeting took place in the UK and one here in Georgia.

As you will recollect, the Company has a collaborative research effort with the Magdi Yacoub Research Foundation for the purpose of evaluating the use of mesenchymal stem cells in the development of an implantable tissue-engineered heart valve. The Company has underwritten three years of collaborative research with the Magdi Yacoub Institute and returned -- retains the right to any commercial technology that results from this research.

On October 6th, 7th and 8th the Company hosted a symposium on techniques of cardiac reconstruction and heart valve replacement using allograft heart valves at our headquarters Learning Center in Atlanta. Attending the symposium were 20 cardiovascular surgeons from around the US. The course director for the symposium was Ronald C. Elkins, MD, Professor Emeritus of Cardiothoracic Surgery at the University of Oklahoma.

The symposium's keynote speaker was Professor Sir Magdi Yacoub, FRS, a preeminent cardiovascular surgeon from the UK who is Professor of Cardiothoracic Surgery at the Imperial Hospital Heart Sciences Center and the Magdi Yacoub Research Institute. Other faculty members were Paul Stelzer, MD, Associate Professor of Surgery at the Albert Einstein College of Medicine. John W. Brown, Professor of Cardiothoracic Surgery at the Indiana University School of Medicine. Kenton J. Zehr, MD, Associate Professor of Surgery at the Mayo Clinic. John D. Oswalt, MD, Cardiothoracic and Vascular Surgeons of Austin, Texas. And Karyn S. Kunzelman, PhD, Director of Research at the Central Maine Heart and Vascular Institute at Lewiston, Maine.

We announced today the recent action of CryoLife's Board to amend and restate CryoLife's shareholder rights agreement, which was originally adopted in 1995. After careful consideration and upon the advice of the Company's financial advisers and legal counsel, the Board concluded that the rights agreement is an important tool to protect the value of the stockholders' investment in the Company.

Management feels that the continuation of a rights plan is in the best interest of CryoLife stockholders. It is important to note that the amended plan does not prevent a change of control of the Company where that is in the best interest of the Company's stockholders.

Additional details regarding the amended and restated rights agreements may be found in the current report on Form 8-K filed by the Company with the Securities and Exchange Commission today. That concludes my comments, and Ashley will now give some guidance for the fourth quarter.

I'd like to give some guidance for the remainder of 2005 and for 2006. As I stated in our previous conference call, we will only be providing full-year guidance, starting with our guidance for 2006. In the fourth quarter of 2005 BioGlue revenues are expected to be between $8.5 and $9.5 million, and tissue processing revenues are expected to be between $7 and $8 million.

Bioprosthetic, cardiovascular and vascular device revenues are expected to be between $175,000 and $200,000 in the fourth quarter of 2005.

The Company expects tissue processing and product revenues to increase to between $72 and $76 million for the full year of 2006. The Company expects BioGlue revenues to be between 39 and 41 million, and tissue processing revenues to be between 32 and 34 million for the full year of 2006. Bioprosthetic, cardiovascular and vascular device revenues are expected to be between -- to be approximately $1 million in 2006.

The Company also expects an increase in tissue processing gross margins during 2006 as compared to 2005 as a result of tissue processing improvement initiatives expected to be implemented during early 2006, and with the continuation of the recent improvement in our procurement trends.

The Company expects general, administrative and marketing expenses to be between $10.5 and $11.5 million in the fourth quarter of 2005. General, administrative and marketing expenses are expected to be 44 to 48 million for the full year of 2006. The Company expects research and development expenses to be approximately $1 million in the fourth quarter of 2005 and between $5.5 and $7 million for the full year of 2006.

The Company will also adopt FAS 123 Revised share based payment in the fourth quarter of 2005. In connection with the adoption of FAS 123R, the Company expects to record a charge during fourth quarter of 2005 related to stock options and its employee stock purchase plan. Additionally, the Company will record charges related to stock based compensation during 2006. The amount of the charges will depend on final determination of the valuation model, as well as the related input assumptions and any future stock option grants.

Our guidance for 2006 does not include any provisions for FAS 123R. We will attempt to keep you updated on significant corporate developments that are likely to affect the outlook for the Company, but can make no guarantee we will in fact be able to identify and communicate such factors to you on a timely basis. That concludes my comments, and now I will turn it back over to Steve.

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

(OPERATOR INSTRUCTIONS). Raj Denhoy, Piper Jaffray.

Good morning guys. I was curious if I could ask a little bit about the revenue growth performance in the quarter and also your guidance going forward. It was significantly slower than it's been in the past. I think it was roughly 2%. And the guidance you're giving for the fourth quarter and into next year is sort of mid single digits. What's changing here? Are you seeing increased competition? Or maybe you could just hash out what's tempering your expectations for growth at this point.

Hopefully we are being conservative. As we announced in the previous conference call, and as I alluded to earlier, we have had some attrition in our sales force which we believe has affected in particular the BioGlue revenue growth over the last couple of quarters. We have been in the process of filling those open positions in our sales force, and we're almost done there.

I also indicated we expect to increase the size of our sales force for cardiovascular, vascular and BioGlue for next year too. We think that's going to be -- to help us reinvigorate the revenue growth there.

We hopefully are being conservative in the numbers we're giving out for 2006, but only time will tell there if things go better than we expect. And hopefully at some point we will be raising guidance. But at this point we believe it's prudent to be conservative, hopefully, and so that's the numbers we've given out.

Maybe I could ask a little bit on -- you mentioned it's primarily -- you think BioGlue is being impacted by attrition in the sales force. Are you seeing anything competitively out there? Is there any new products that might be impacting you? I know there's been some talk that getting the spreader tip and the 10 ml syringe out might improve the prospects there a little bit. Is that still the plan at this point? You still think those will be able to impact the business next year? (multiple speakers)

This is Steve. At this time, there are no competitive situations that we feel are any different from what they've been in the last couple of years. We've done a thorough analysis of the BioGlue sales, and we can track the shortfall right back to specific hospitals. And all of those hospitals are sitting in territories that have -- or were vacant for a period of time, as a result of the sales force attrition. And we have a program that we've implemented to focus on those accounts.

I don't think we've lost any business per se. I think the ordering slowed down because they didn't have a salesperson calling on them. And we have rehired all but one salesman for our open territory and we're going to expand our sales force next year. And I think that will turn that around. But I don't think the competitive situation at this time is any different from what we've seen over the last couple of years.

I guess that sort of begs the question, if you're looking for that business to turn around next year with additional salespeople, and new products as well, the guidance is still for roughly 7% or right around 7% BioGlue growth. I guess again it goes back to Ashley's comment. Was that just being very conservative on your part at this point?

It's being conservative, and also when you hire new people it takes a while to get them properly trained.

Fair enough. One additional question on the tissue business. Again, in recent quarters you've talked pretty glowingly about your expectations for the orthopedic tissue side of the business to rebound with the Clearant sterilized products as well as the cryopreserved articular grafts. Anything changed there, or is that still growing -- up to your expectations?

We expect the orthopedic area of the Company to be a real growth area for the Company next year. And we're seeing good acceptance of the orthopedic products right across the whole orthopedic tissue product offerings.

I will just ask one last one as long as we are on tissue. The gross margins there again were -- I think you said 18% in the quarter. Just in the first quarter this year, they were up to 22%; in the last couple quarters they've been a little bit below that. It sounds like you're expecting them to rebound, but maybe you could give a little bit more of an explanation as to why they've been depressed a little bit here from what they were running just even earlier this year.

The decrease in the second and third quarter as compared to the first, we don't really -- we just view that as just maybe something that's inherent to the tissue processing business because of yield issues. So we really don't view that drop from 22 to the 18% range as anything significant to be of concern.

We do have a program in place right now that we anticipate implementing probably no later than the middle part of the first quarter of next year. We are currently in the process of completing what we believe are the appropriate validations to implement these processes. And we believe that it could have a very meaningful impact on our gross margins next year.

We don't want a give out any guidance at this point as to what we expect gross margins to be next year. But maybe after we implement this program in the first quarter and can see some of the results that we're getting, we could probably give you more color as to where we expect to be. But we do expect it to be meaningful -- a meaningful increase as compared to where we are right now.

I hate to do this, but I do have one additional one. On SynerGraft, now that you've gotten the FDA's decision that it should be regulated as a device, I think you may have covered this, I'm sorry if I missed it. What are the plans now for that technology? Will you try and get some sort of approval here in the states, or where are we?

The SynerGraft technology that you're talking about applies only to vascular grafts. And we have a meeting over in the CDRH area, where it has already been determined that SynerGraft processed human valves were devices. And so since they were determined a long time ago to be devices, we submitted a 510-K. I think we submitted the 510-K in late '03, believe it or not. And we have been submitting data to them off and on throughout that time frame.

We have a face-to-face meeting with the deputy commissioner of CDRH on the 14th of this month to go over all of the final data submissions that support our 510-K application. So their decision regarding the heart valve process by SynerGraft really centers around the fact whether they're going to approve the 510-K. Really two separate issues.

They now decided what they're going to do over in the vascular area. And since that has happened so relatively recently, we haven't made up our mind yet if we're going to apply for an IDE PMA path for the SynerGraft processed vascular grafts, or whether we're just going to continue to offer standard processed and standard cryopreserved vascular grafts like we've been doing all along during this discussion we've had with the FDA.

Thank you, very helpful.

Raymond Myers, Emerging Growth Equity.

Let me just start by asking about the procurement trends throughout 2005. Ashley, you mentioned they were down in the first half and that's what's affecting the results here in the third quarter, but that recovery improved in the second half. Can you describe why that was?

As I mentioned I think in previous conference calls, and this goes back for a long period of time. There were -- for a while, while we were working through our issues and trying to resolve issues we had with our yields, we intentionally were not aggressive in going out and trying to increase our procurement because it obviously didn't make sense while our processes were still in a state of flux.

As those processes became a little bit more stable, as evidenced by our margins in the first three quarters of this year, we made more of a concerted effort to develop our procurement and approach some of those agencies that had formerly sent tissue to us and weren't currently doing it earlier this year.

I think what you're seeing in the second half of this year, in particular in -- well, it's actually across all product lines and tissue lines, is the fruit of those efforts. They're starting to pay off from us getting back and aggressively pursuing procurement.

So the improvement in procurement is clearly positive, and the fact that it was low was expected in the first half. What you're saying is unexpected was the sales force attrition that occurred. And can you tell us when did that sales force secure (ph) and give a little more color about what caused it? And what -- how much -- how many people left or can you give any color to what it was?

About five or six people left. And there was one particular company that will remain nameless that has been rating cardiovascular companies across the United States. So we're not the only recipient.

One of the larger device companies lost 30 salesmen to this particular company. And I know the other people that specialize in cardiovascular device sales have lost quite a few people to them as well. We think that's over. And I don't think we're going to be confronted with that again. I think it's a transition point in the industry.

When did that happen?

It started probably in the –-.

First quarter maybe?

Maybe fourth quarter of last year, first quarter of this year, and just continued on through the second quarter. And obviously it's affecting the third quarter.

So it wasn't really affecting the quarters up until the third quarter, but then --.

Probably second and third quarter it affected.

Yes, I'd say so. In addition to that, there were certain sales reps, three or four, that weren't keeping up with the growth that we felt we should have for the Company. We asked them to leave. So it's a combination of factors.

So five or six people left to go to this other company, but three or four you had to ask to leave as well?

That's right. That would be pretty normal business, I'd say.

And so was basically the impact of this concentrated in the third quarter? Because as you leave a territory uncovered, the sales don't decline immediately, but as they're somewhat neglected, they decline more precipitously as it goes on longer?

You don't have someone there asking for the business every day. So we know specifically where we lost business. We know it by hospital, by hospital, we even know it by the physicians that were involved. We have a plan that we've been putting together and have implemented, actually; addresses those specific hospitals and physicians, and I'm sure we'll get it turned around.

So really to the point, you think you've identified exactly where this is. If this is the only -- the primary cause of the slowness in the third quarter, you should be able to turn that around in the fourth.

We feel that.

Was there anything additional that caused the slowness in the third quarter, or in the guidance for 2006?

I don't think so.

What about BioGlue performance in Europe, how did that do in the fourth quarter? Third quarter, sorry.

I know it was way up, but I don't have that number. (technical difficulty)

It was strong?

Yes, I don't have the number right in front of me.

I know it was a very good performance, but I just don't have it.

Does that continue into the fourth quarter?

It's too early to know.

That's good to hear it's strong in Q3. Thank you very much.

Rob Pelosi (ph), BlackRock.

Could you just remind us a little bit about the sales force structure, and are the same sales reps selling tissue and BioGlue?

Yes. Let me explain that. We have a direct sales force for cardiovascular sales. And so the cardiovascular sales force handles vascular grafts, and they handle also the allograft heart valves. And they handle BioGlue.

The reason that we have put all of that together is that we are really in the cardiac reconstruction business. We're not in the heart valve business. But all three of those products fit together for cardiac reconstruction, and we're focused right on that particular specialty, both for adult cardiac reconstruction and for pediatric reconstruction. So that's the way the cardiovascular sales force is organized.

The orthopedic sales force has direct sales management, but it is comprised of manufacturers' reps throughout the United States. So that has a different configuration from the cardiovascular.

Could you talk a little bit about the numbers of reps you have now, and what the thought is on the amount to add in '06?

My recollection is that we have around 30 to 32 direct sales -- cardiovascular sales reps at the moment. And you have regional sales managers on top of that, product management as well. And we will probably expand the sales force into the mid to high 30s as we go through the year.

Any thoughts as to where those sales reps come from? Do you look for cardiovascular experience, or do you just look for device experience overall?

We're looking for cardiovascular sales experience.

Stephanie Haggerty, Register & Akers.

I had a couple of questions that were already answered. But one of the things I was curious about is, I'd like to get some clarification on -- I'm not even sure if my recollection is totally accurate. But my recollection is when we started out the current year, we were being told that there were various new tissue processing methods that were going to affect the second half of the year, and help increase margins. And now I'm hearing that that's something that's going to happen in the first half of next year.

So has the one we were talking about before already taken place, and now we're talking about all new different processing methods in the second half of next year? Explain that to me.

There were just some delays in getting some of the initiatives that we were working on implemented. In addition to that, when we enter into the year, we have some ideas of some things that we believe will work. But we have to go through the process of validating them and doing the appropriate research on them.

And not every idea that we have going into a year ends up turning into something we can actually implement. But the changes -- one specific change, though, that I'm talking about in '06, we are pretty confident that we're going to get this one implemented on time. The validations are ongoing right now, so we do expect an improvement in -- (multiple speakers).

But Ashley, are these things similar to what you were talking about for the second half, they just slipped into '06? I'm just trying to see --.

They're actually -- some of the things that have slipped into the second half of '05 we're continuing to work on. That's not even one of the things I'm talking about being implemented in '06. This is actually something that we've been investigating for the last few months. We recently began the validations on them and we expect it to be implemented, this one big initiative in the middle part of the first quarter.

Okay. I was impressed as always with Steve's recitation of what you all are doing with BioGlue overseas, and with some of your other products, too. I know we're still burning cash. My question is, has there ever been consideration given to trying to find some partners to accelerate development of some of these products? I know the Disc product in particular I get very excited about, but it's a pretty heated marketplace. And a lot of dollars would help.

There are ongoing discussions with potential partners, two to be specific, for the BioGlue product. And our potential partners are in completely different aspects of the healthcare business, meaning different specialties. We will never be involved as a Company in those specialties. We're hopeful that we can get those agreements done, and I'm very encouraged about it. The product is very versatile. It has many different applications, and giving or selling a license for certain applications of BioGlue make a lot of sense.

We haven't had any discussions with anyone at this time about the BioDisc product. Of course we would be interested in doing that, but we have to get to a point where we know that the product works in humans. How it works in animals is one thing, but how it works in humans is really crucial. And the early results are extremely encouraging.

The doctor that's been putting them in, has implanted the four spinal discs, is very enthusiastic. If you will recollect, the initial pilot study that he was going to do was going to involve 10 patients. And he is, the first part of the year, going to be going to his ethics committee and the proper committees in his hospital in the UK, and expanding that pilot study by an additional 20 patients.

He's also been helpful in helping us select other potential clinics where we can implant the BioDisc product and we're working on those. And as we expand our human trial, and if we continue to get the outstanding results that we have been seeing, then of course we would be happy to talk with someone. We feel right now it might be a little bit premature.

I don't question that. Can you give us any timeframe at all for when you think that would be possible?

In order to apply for a CE Mark, you have to -- we feel we are going to have to have between 15 and 20 patients that have been implanted, and they have to be out six months. They would have to go through a post operative evaluation. And so that will push us out, certainly, well into the middle of next year before that would happen.

At the American Association of Orthopedic Surgery meeting, which is either in late February or early March, I would expect that we would have information in our convention display and booth that would comment on the first of the patients that had the implants. Because they will be out about six months by that time. I'm hopeful that we will, anyway.

One last question. Recently I was at the Georgia Biomedical Partnership meeting, and you all had a lot of studies posted there. One of them was on Aurazyme. I kind of thought it had died. Is that something you're pursuing?

It is still something we're pursuing, but it's not a project that we can devote a lot of monetary resources to. But we still continue to do some benchwork here, and continue to see if we can find some way to create some value from that technology. But it's not something that is extremely high on our priority list. We're certainly not -- we can't devote a lot of monetary resources.

No, I just thought it had been shelved.

It has a little bit different focus than it had in the past. We have a new Web site[RM1] for Aurazyme. And if you click on CryoLife's Web site, under the R&D section of our CryoLife Web site you'll find a whole new Web site for Aurazyme that gets into the new focus of that research, and where we think that is leading us.

One last question. The burn rate in the quarter, if you X out the things you wanted to X out, you said it was a little over a couple of million.

That's correct.

Is that something you think you can at least maintain or improve upon?

If you look at the last few quarters, it's been somewhere between 2 and 3 million.

Yes I realize.

I think at the current state of business, we think it's going to remain there. We obviously anticipate our revenues are going to increase, and hopefully the burn rate will correspondingly go down.

One last thing, BioGlue. Are you putting a price increase in effect next year, and is that in your projections?

We're discussing whether or not to do that right now, it is not currently in our projections.

Thank you very much, I appreciate it.

That's all the time we have for the call today. I would like to turn the floor over to Mr. Anderson for the closing comments.

Thank you for joining us today, and we look forward to talking with you at our year end conference call.

This concludes today's CryoLife conference call. You may now disconnect your lines at this time, and have a wonderful day.

[RM1]Be consistent within the sentence.