Artivion Inc (AORT) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cryolife, Inc., fourth quarter and year-end earnings conference call. At this time all participates aren't are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Anderson, President and CEO of Cryolife, Inc. Thank you, sir. You may begin.

Good morning, everyone, and welcome to Cryolife, Inc.'s, fourth quarter, 2005 and year-end conference call. This is Steve Anderson, Cryolife, CEO. With me today is Ashley Lee, the Company's Executive Vice President, Chief Operating Officer, and Chief Financial Officer we finished 2005 on a high note with fourth-quarter revenues increasing 9% over the third-quarter and BioGlue fourth-quarter revenues increasing 8% over the third quarter of 2005. Fourth-quarter 2005 revenues were up 13% over the fourth quarter of 2004. Total year-to-year revenues were up 11%. Ashley will add more insight into these numbers in a few minutes. The agenda for today's call is as follows; Ashley is going to comment on 2005 sales growth by-product line, he'll make a few comments about improved margins and the final settlements of shareholder litigation. He will also discuss the hiring of Piper Jaffray to evaluate the Company's alternatives and give you an update on their recent activities. I'll comment on the continuing success of our BioDisc human implant program in the U.K. and the European regulatory time frame for BioDisc. I'll also comment on the status of our model #100 SynerGraft AV Access Device. I'll discuss our plans for the development of the BioFoam product for acute trauma, and will give you the regulatory timetable for European approval. I'll discuss the European and US rollout of the 10 milliliter BioGlue Syringe and spreader tip, and I'll also discuss the timetable for the 510K submission for our surgical patch that is made from bovine pericardium. After my comments are completed we'll open up the call to questions from our listeners. At this time, Ashley will discuss the Company's performance in fiscal year 2005 and specifically the fourth quarter of 2005.

Thanks Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995 I would like to make the following statement. Comments made in this 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 risks and uncertainties is contained from time to time in the Company's SEC filings including the risk factor section of our form 10-K for the year ended December 31, 2004. You should also refer to our form 10K for the year ended December 31, 2005, which we expect to file by the end of the week.

This morning Cryolife reported financial results for the three months and year ended December 31, 2005. Revenues for the fourth quarter of 2005 increased 13% to $18 million, compared to 15.9 million in the fourth quarter of 2004. The net loss in the fourth quarter of 2005 was $681,000 or $0.04 per basic common share and $0.06 per di -- fully diluted common share compared to a net loss of 2.4 million or $0.10 per basic and fully diluted common share in the fourth quarter of 2004. Excluding a $512,000 or $0.02 per share non-cash gain for the change in the value of the derivative related to the Company's preferred stock and a $558,000 or $0.02 per share favorable adjustment to the product liability accrual. The adjusted net loss in the fourth quarter of 2005 was 1.8 million or $0.10 per fully diluted common share. Revenues for the full year of 2005 increased 11% to 69.3 million compared 62.4 million in 2004. The net loss for the full year of 2005 was 19.5 million or $0.85 per basic and fully diluted common share, compared to a net loss of 18.7 million or $0.81 per basic and fully diluted common share for 2004. Excluding an $11.6 million, or $0.49 per share charge for settlement of the shareholder class-action lawsuit, a $702,000 or $0.03 per share favorable adjustment to the product liability accrual and an $851,000 or $0.04 per share charge related to post employment benefits, the adjusted net loss for the full year of 2005 was $7.8 million or $0.36 per common share.

BioGlue sales in the fourth quarter of 2005 increased 5% to 9.6 million compared to 9.2 million in the same period in 2004. BioGlue sales for the full year of 2005 increased 6% to 38 million compared to 35. million in 2004. Revenue increases for the three and 12 month periods were primarily attributable to price increases. U. S. BioGlue sales were 7.2 million and 7.1 million in the fourth quarter of 2005 and 2004 respectively, and 28.7 and 27.9 million for full year of 2005 and 2004 respectively. International BioGlue sales were 2.4 million and 2.1 million in the fourth quarter of 2005 and 2004 respectively, and 9.3 million 7.8 million for the full year of 2005 and 2004. We saw a return to sequential revenue growth in BioGlue during the fourth quarter of this year. We believe this is attributable to sales incentives that were put in place during the fourth quarter as well as having more sales persons on board during the fourth quarter. With the recent approval of the BioGlue 10 milliliter syringe and the BioGlue spreader tip we are optimistic that we will see continued growth in BioGlue revenues during 2006.

We had indicated in our previous conference call that procurement trends were favorable and that we expected that to be reflected in our top line. We are beginning to see that in the fourth quarter of 2005. Tissue processing revenues in the fourth quarter increased 26% to 8.1 million compared to 6.4 million in the fourth quarter of 2004. Tissue processing revenues for the full year of 2005 increased 18% to 30.3 million compared to 25.7 million in 2004. Tissue processing revenues increased primarily due to price increases, an increase in tissue procurement, and an improvement in processing yields, which resulted in an increased number of allografts available for distribution. Procurement trends continue to go favorable and we continue to experience strong growth in tissue processing revenues during the early part of 2006. You may refer to our 10K which we file -- plan to file by the end of the week for more information about procurement trends.

I'd like to talk about specific tissue processing product lines. Even though we experienced full-year decreases for cardiac and vascular tissue unit shipments, we're pleased to say that we believe we're beginning to see that trend reverse as evidenced by the increase in unit shipments of tissue across all product lines in the fourth quarter of 2005. Cardiac revenues were 3.4 million for the fourth quarter of 2005, compared 2.8 million for the fourth quarter of 2004. An increase of 21%. The increase in revenues was driven by price increases and a 11% increase in cardiac unit shipments in the fourth quarter of 2005 as compared to the same period of 2004. The unit shipment increases are a result of the strengthening procurement trends we saw in the latter half of the year and an increase in yields. Cardiac revenues were 13.8 million for 2005, compared to two -- 12.5 million for 2004, an increase of 10%. Vascular revenues were 3.2 million for the fourth quarter of 2005 compared to 2.5 million in the fourth quarter of 2004. An increase of 26%. The increase in vascular revenues was driven by price increases and a 5% increase in vascular unit shipments in the fourth quarter of 2005 as compared to the same period in 2004. Again, the increase in unit shipments results from increasing procurement and better yields. Vascular revenues were 11.5 million for 2005, compared to 10.3 million for 2004. An increase of 11%. Orthopedic revenues were 1.6 million for the fourth quarter of 2005 compared to 1.2 million in the fourth quarter of 2004. An increase of 35%. Unit shipments of orthopedic tissue increased 10% in the fourth quarter of 2005 compared to the fourth quarter of 2004. Again, the increase in unit shipments reflects improving procurement trends and improving tissue yields. Orthopedic revenues were 5.1 million for the year ended 2005, compared 2.9 million for 2004, an increase of 77%. For a more detailed discussion of the factors driving revenues, please refer to our form 10-K for 2005, which we will file by the end this week.

Total product and tissue processing gross margins in the fourth quarter of 2005 were 54% compared to 49% in the fourth quarter of 2004. Total product and tissue processing gross margins for the full year of 2005 were 53% compared 40% in 2004. Tissue processing gross margins improved in 2005 compared to 2004, primarily as a result of price increases, an improvement in tissue processing yields, and an increase in units processed resulting from procurement increases. We expect continued improvement in gross margins on tissue processing services during 2006. We recently implemented price increases at the beginning of 2006, and also implemented some changes to our processes at the beginning of 2006. We are optimistic that these changes will have a measurable, positive effect on tissue processing gross margins.

General administrative and marketing expenses in the fourth quarter of 2005 were 10.5 million compared 10.7 million in the fourth quarter of 2004. General, administrative, and marketing expenses for the full year of 2005 were 53.2 million, compared to 42.6 million for 2004. General, administrative, and marketing expenses for the full year of 2005 include an $11.6 million charge related to the settlement of Securities litigation, $851,000 related to post employment benefits, and a $702,000 favorable adjustment to the product liability accrual. The Company adopted S FAS 123 revised share based payment in the fourth quarter of 2005 in connection with the adoption of FAS 123 R, the Company recorded a charge of $89,000 during the fourth quarter of 2005 related to stock options and it's employee stock purchase plan. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations. During the fourth quarter, our cash balance decreased from $16.1 million at September 30, 2005, to 12.2 million at December 31. The change in cash balances include a $1.8 million final payment to settle the class-action Securities litigation and a draw of $1 million on the Company's credit facility.

In early January, we announced that we had engaged Piper Jaffray to assist the Board and Management in conducting a review of strategic options available to the Company. This is a comprehensive process that is ongoing. When the Board of Directors has determined an appropriate course of action, we will communicate that information to you. That concludes my comments. Now I'll turn it back over to Steve.

Thank you, Ashley. We have successfully enrolled nine patients in the initial pilot study of our nucleus pulposus replacement that we call BioDisc. The pilot study has been ongoing in the U.K. since mid year in 2005. Our earliest patients received their implants in July, 2005, and so we have six-month implant data on two of them. All of the patients have completed their six-week post-operative evaluations, and all of the patients remain pain free as of their last followup. Our intention is to collect the data from the initial pilot study patients who have had six-month post-operative examinations and to use this data as a basis for our CE Mark Application. We expect to make our CE Mark Application for BioDisc in the fourth quarter this year, and we are anticipating that BioDisc will be approved for general distribution in Europe sometime in the first quarter of 2007. We will also begin discussions with potential new implanting centers this year. Throughout this year we plan to meet with potential European partners for the biodisc product as the distribution network we have in Europe is focussed on cardiovascular markets and not the orthopedic markets. We hope to announce the European partner in the fall of this year. This announcement will probably be made about the same time that we file our application for a CE Mark.

To aid in identifying potential US clinical investigators, we will be demonstrating the BioDisc product at the meeting of the American Association of Orthopedic Surgeons that will be held in Chicago during March this year. There will also be a paper given on the patients in the pilot study at BritSpine, a spine surgeon meeting in Cardiff, Wales in April. A paper on the initial pilot study patients will also be given at the Spine Arthroplasty Society Meeting in Montreal this coming May. We have made a DVD of the BioDisc being implanted in a patient that also features an interview with the doctor and one of the nine patients on location in Scotland. The DVD will be used to educate and help instruct surgeons on the BioDisc implantation techniques and we -- will be available on our web site very shortly. Management believes that the worldwide market for a nucleus pulposus replacement like this is about $800 million.

Another key orthopedic growth area for the Company centers on our cryopreserved osteoarticular grafts for the remodeling of the distal femur. We believe that we are the only tissue processor that knows how it cryopreserve OA grafts while maintaining greater than 50% cell viability. Since we introduced this particular graft in February, 2005, we have had 97 implanted into patients. We also have significant revenue increases in our preserved ligaments and tendons. We offer these tissues in two forms. One is a radiated and the other is aseptically processed tissue. As many of you know in conjunction with the Department of Defense, we are developing a product for treating blood loss from severe trauma. We call this product BioFoam, and early animal tests are underway to evaluate it's ability to seal organs that have been severely lacerated from acute trauma. The US Congressional appropriation for the development of this protein hydrogel in 2005 was $925,000, and the Congressional appropriation for the continued development in 2006 is $2.3 million. The first proof of concept testing was done in December, 2005, and we are currently in the process of developing the application techniques, appropriate volumes, and expansion co-efficience for the product. After the first animal testing we made the decision to change the formulation so as to make the foam stronger and to package it in a 50 milliliter cartridge for optimal effectiveness. When the product is applied to wounds, it initially looks like Reddi-wip but it is capable of controlling blood flow from severe injuries. Additional animal testing is scheduled for late March this year at the Army's trauma research facility at Fort Sam Houston in San Antonio. Provided that the remaining animal studies are successful, we will be on schedule to submit an application for a Ce Mark for this product in early 2007. We are also evaluating the potential for a humanitarian device exemption that's called an HDE application with the Food and Drug Administration.

In December, 2005, we introduced the 10 milliliter syringe of BioGlue into European markets. The 10 milliliter syringe in conjunction with the new spreader tip for the glue were well received by our European customers. Approximately 35% of our European accounts converted to this new delivery system within the first 30 days of its being introduced to the European marketplace. We will introduce the 10 milliliter syringe and the new spreader tip in the United States markets on March 1st, and we are expecting a customer conversion rate from the gun to the new syringe similar to the conversion rate we experienced in Europe. We exhibited the new syringe and spreader tip at the Society for Thoracic Surgery Meeting in Chicago that was held the last few days of January. The physicians who visited our display were enthusiastic about the ease of use of the new spreader tip and the 10 milliliter syringe. It is management's opinion that the new 10 milliliter syringe and spreader tip will have a very positive effect on BioGlue sales going forward. The new syringe is disposable and doesn't have to be autoclaved as did the original delivery device. It is easier for the doctor to handle and should give the physician more control over the placement of the adhesive. The new spreader tip allows for a controlled and precise ribbon of glue to be administered over suture lines. These are relatively small improvements that we expect to have a major effect on BioGlue sales.

The Society of Thoracic Surgeons Meeting that was held in Chicago in late January was a very good meeting for the Company. About 100 physicians visited our booth during the 2 1/2-day meeting. Based on conversations I had with implanting physicians, we are expecting to regain some of our lost cardiac business at significant pediatric and teaching hospitals in the United States. Furthermore, the physicians who made these commitments will be assisting us with regaining the procurement of cardiac and vascular tissues in these areas. It appears that the primary reason for these positive decisions to return to Cryolife is the fact that we have 15 year data that substantiates how the tissues we preserve function in various patient populations over time. We are not aware of any competitors that have published any implant data that shows how the tissues that they preserve function over time. First-quarter, 2006, tissue preservation revenues through the 15th of February are continuing to show strong growth over the same period last year. Management believes that since its inception in 1984, the Company has processed tissues from more than 80,000 donors. According to our records, we have processed 18,667 aortic valves that have been implanted into people. We have preserved 21,852 pulmonary valves that have been implanted, and 10,844 patches for cardiac reconstruction. There are over 2,000 U.S. surgeons who have implanted tissues preserved by the Company.

Over the past year, we have been developing a decellularized surgical patch made from bovine pericardium. This patch is designed to be used for various surgical reconstruction procedures such as rotator cuff and hernia repair. The patch is treated with our proprietary decellularization SynerGraft process. Both our cardiovascular and orthopedic sales forces could sell the product. This product would compete directly with the LifeCell surgical patch. We anticipate filing our 510 ap -- 510K application for the surgical patch in the second quarter, with the US approval and market rollout anticipated for the third quarter of 2006. Management believes that the market for surgical patches exceeds $300 million in the US each year. During the fourth quarter, we were -- we were able to resolve some manufacturing issues that had -- had us in a backorder situation on our model 100 SynerGraft AV Access Device that we sell in international markets. The model #100 continues to perform well in select patients who have experienced problems with other hemodialysis access devices or autogenous AV fistulas. The model 100 AV access device can be used effectively in infected field and is often the product of choice for dialysis patients who are experiencing continued infections in their native fistulas or AV shunts. The model #100 has been implanted in approximately 350 patients in Europe including 20 that have been enrolled into a prospective, randomized study at St. George,s Hospital in London.

On April 7th we will be hosting our annual Cardiac Fellows Meeting here at Cryolife headquarters. This is the fourth year that we have invited U.S. senior cardiovascular surgery residents to a two-day seminar on the uses and implant techniques of Allograft cardiac and vascular tissues. The course director is Ronald C. Elkins, MD, Professor Emeritus of Cardiovascular Surgery at the University of Oklahoma. On the faculty will be Donald [Dodi] MD, Professor Emeritus of the Department of Cardiac Surgery at the University of Utah. Kenton Zehr, MD, Chairman of the Department of Cardiovascular Surgery at the University of Pittsburgh. Jose A. [Nabia], MD, of the Cleveland Clinic. Francis Robicsek, MD, Ph.D, who is Professor Emeritus of the Sanger Clinic in Charlotte, North Carolina. John R. [Dodi], MD, who's a Professor at the Latter Day Saints Hospital in Salt Lake City, Utah. [Emil A. Bocha], MD, Boston Children's Hospital, and John A. [Farrenbacher], MD, who's a Physician at the University of Indianap -- Indiana in Indianapolis. The course includes didactic sessions and laboratory exercises, and implantation techniques, all of these sessions will be held in the Company's learning pavilion complex.

That concludes my comments. And at this time I'll turn the call back over to Ashley who will provide some guidance for the rest of the year.

Thanks, Steve. We are reaffirming the revenue guidance that we provided to you in early January of 2006. The Company expects tissue processing and product revenues to increase to between 74 and $77 million for the full year 2006. We expect BioGlue revenues to be 39 to $41 million, and tissue processing revenues to be between 34 and $35 million for the full year of 2006. Bioprosthetic, cardiovascular and vascular device revenues are expected to be approximately $1 million in 2006. We expect an increase in tissue processing gross margins during 2006 as compared to 2005, as a result of price increases and tissue processing improvements initiated early this year. General administrative and marketing expenses are expected to be between 44 and $48 million for the full year of 2006. R&D expenses are expected to be approximately 5.5 to $6 million for the full year of 2006. We adopted FAS 123 revised in the fourth quarter of 2005. The guidance for 2006 includes expense associated with the adoption of FAS 123. 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 that we will, in fact, be able to identify and communicate such factors to you on a timely basis. That concludes my comments. Now I'll turn it back over to Steve.

At this time, we will open up the conference call for a few questions.

Thank you. [OPERATOR INSTRUCTIONS] Raymond Myers, Emerging Growth Equities

Thank you and congratulations on progress on so many fronts, it's almost hard to know where to begin.

Thanks.

Very nice quarter and year and making great progress. I had some questions right off the bat about the loss-per-share figure. Where it says fully diluted $0.06.

Yes.

Can you explain how it is that the fully diluted loss is greater than the -- the non-diluted loss. How are you calculating that?

There's going to be a lot more detailed information in the footnotes to our financials which are going to be filed in the 10K, Ray. But in -- in a nutshell --

Do we take that off line, then?

Yes, you can. But what it relates to is you just have to assume conversion of the preferred stock and the exercise of a lot of the stock option that's are out there, and it's a very complicated calculation. But -- but that will be detailed in our 10K which will be filed by the end of the week.

Okay, well -- I'll give you a call later on and we can get though -- I need to just get that to get a note out.

Okay.

Maybe a related question. What is the current fully diluted share count?

Let's see. I don't have that information available to me at the moment, Ray. But I can --

[Hold on. All right. ]

It should be in our press release.

Well, okay. No. But that was as of Q4. I meant as of now. But we'll follow up.

Okay.

The full balance sheet isn't provided. But is it correct that the accounts receivable declined nearly 50% in the fourth quarter? If so, how?

No. The accounts receivable did not decline. They -- they actually increased year-over-year. That's just a reflection of our increasing revenues. They're actually up a little bit to, I think, in excess of $10 million for the quarter. Compared to a little over $8 million at the end of last year. I think it's just a reflection of -- of an increase in revenues.

I was looking at sequentially.

I don't have the sequential number from the third quarter.

The 23 -- about 23.5 million --

There should not have been a decrease in -- in trade account receivables. There could have been some monies that we expected to receive from insurance companies related to, settlements of lawsuits and -- and there could be some other receivables that are in there. But the trade receivable number actually increased sequentially and year-over-year.

Yes, okay, I see that. Then the -- then the total assets increased from 59 -- decreased from 59.9 million in the third quarter to 42.8 in the fourth. Is -- is that primarily due to the reduction in insurance?

Yes.

Claims?

That's correct.

Can you explain what that is about?

Well when we actually had the settlement of the shareholder litigation, we received I think a lot of those monies, some of those monies in the fourth quarter of this year. So we actually had both our receivable -- I mean, our assets and liabilities grossed up to reflect the -- the payments associated with that litigation.

Okay, thanks. You talked a lot about price increases on various products. Is it right to assume that those are all in the 5% range, or are some of them higher?

Some of them are higher. If you are looking -- if you're talking about going forward in 2006, we -- we hope to achieve mid to high single digit price increases, effective price increases across the board. If you look at 2005, it just varies depending upon what particular tissue or product that you're talking about. And I think that you'll have -- see a lot more information about that in our 10-K. But I think the important thing is that we -- we're starting to see good unit growth in -- across all of our tissue processing product lines in the fourth quarter of this year.

Yes, that is nice to see. And I particularly see it in the cardiovascular and vascular areas. What do we -- what's your feeling about the orthopedic business? You know, as -- as we talk about, also, that Piper Jaffray's looking at strategic alternatives, the orthopedic on a percent basis is doing great. But on a absolute dollar figure, as -- as a absolute dollar figure, it's really -- doesn't look to be enough to move the needle. What -- what's your feeling about that business?

Right now, we are still committed to -- to growing our orthopedic business. As far as the -- the evaluation of alternatives, I -- I won't get into any details there because, we've had some discussions. But no decisions have been made. But as far as, where management stands on the orthopedic business presently, we are committed to that business.

Okay. Can you give us any more detail about what is being discussed in terms of these strategic alternatives?

We -- we really can't. It -- it -- it's a comprehensive review. Nothing has been taken off of the table at this time. And the process continues.

Okay. Next I wanted to switch over to BioGlue. You had a nice fourth quarter in BioGlue. You mentioned some sales incentives. Can you describe what those were and what is it that gives you confidence that BioGlue revenue would be higher in 2006? [You] think you said it was optimistic, but frankly, you didn't sound nearly as optimistic about BioGlue growth as you did about cardiovascular and some other areas.

Units -- of BioGlue were considerably higher in '05 than they were in '04. And I'm sorry, I'm not remembering the exact amount of unit growth. We think that's really important because it shows that the model mix is switching around, had switched around quite a bit in '05. So although there was only a five or six percentage increase in dollar sales, there was significant improvement in the unit sales. So people have been moving to the two -- the two milliliter and five milliliter syringe. And that is one of the reasons that we feel that the introduction of the 10 milliliter syringe is -- is going to be to be a big shot in the arm here when it's introduced on March 1st. Because I think that numerous physicians thought that the cartridge and gun device were kind of clumsy. And based on working the booth in Chicago a couple of weeks ago, they really seem to like the syringe. That's been our experience in Europe. So I'm expecting that the -- the volume of usage of BioGlue is going to accelerate due to a more convenient delivery device.

Yes, we've seen that, too in other products where it's amazing, just the convenience of use factor is a significant driver beyond just the clinical aspects.

Ray, I actually have a little bit more color to -- to add to that also. You know, Steve had mentioned that -- that especially over the last year or two that we've seen a migration from the 10 ml cartridges to some of the five and two ml syringes. I think doctors are getting better in applying the glue and that we've seen a little bit of a shift mix to the five and two ml cartridges. But to give you an idea, if -- if you look at the total number of cartridges and syringes, whether they be two, five, or 10 ml, the actual number of unit ship -- units shipped increased 9% in 2005 compared to 2004. So even though we think that doctors are becoming maybe a little better in applying the glue, but it's -- it's evident to us that the actual number of procedures that it's being used in, at least anecdotally, we see that that number is increasing.

What is the cost of the 10 milliliter syringe versus it's alternatives? What I'm trying to get at is, as you offer the 10 milliliter syringe for the first time, what -- if you switch from a 10 milliliter cartridge to go to the 10 milliliter syringe -- ?

It -- it -- it -- there's a little bit of a premium price on it. I don't know -- I don't recall exactly what the number is, Ray. But -- but it is a slightly higher ASP for the syringes as opposed to the cartridges.

What about the difference between the five ml syringe and the 10 ml syringe?

I have to give you that information off line, I don't have it right at my -- at my hands at this point.

Okay, but it seems to me that there's some opportunity to go -- for people who weren't switching from 10 ml cartridges to five ml syringe might switch to a 10 ml syringe if that were available?

Yes.

Good. I'll let some others ask some questions and get back in queue.

Okay. Thank you.

Mark Mullikin, Piper Jaffray & Co.

Hi, thanks for taking my question.

Sure.

I just wanted to start off with the tissue processing business. And drill down on the units and the price. With respect to the units, can you break out qualitatively or quantitatively, how much of that increase is from bringing on new partners versus yield from existing partners, or just getting more supply from existing partners?

We don't have that detailed of information at our hands at this point. You know, we gave some information about, unit -- increases in unit shipments versus -- and pricing and total increases. There's going to be more discussion about that in our 10K. But we don't have the information at our hands on -- on yields from, specific suppliers and so forth. We have it but not --

Can you qualitatively say is it more from, yield on existing partners versus new partners? You know, which is more? Is it from bringing on new banks or is it from -- ?

It's a combination of both. We -- our procurement trends, and there's going to be a lot of discussion about that in our K also. But our procurement trends, especially in the second half of the year, were very positive. So we were able to increase the number of suppliers that we received tissues from. And at the same time increase the yield from both the new and our existing suppliers. So it was a combination of both.

Okay. Fair enough. And then looking at the price, if my math is correct here, your pricing increases, were above 10% and over 20% in the ca -- in cardiovas -- no, in vascular and orthopedic year-over-year. And, if my math is correct, how are you getting those price increases, and are you getting any pushback? Do you think they're sustainable?

We haven't received much -- much pushback. Let me address, your question here. The -- certain areas, depending on what type of tissue it is, the price increases were different depending on the tissue type. A lot of the tissues that we processed, there are really just no other alternatives available to physicians, and, we've had to increase the costs of -- of, processing our tissues over the last several years, and -- and we have to, charge what we need to in order to -- to continue doing what we're doing. But we haven't seen a lot of pushback. In the area of -- of orthopedics, one of the things that -- that's coming into play there is in 2005, we actually did not have any price increases in orthopedics. The reason that the revenue increased far outpaced the unit shipment increase is because of a shift mix in -- in our product offerings. As Steve mentioned earlier, we re-introduced osteochondral allografts in January of 2005. And the ASPs on osteochondral allografts are probably four times those of most of our other orthopedic tissues. So there were -- there was some issues with product mix in orthopedics especially.

And was there a similar issue in vascular?

One of the things that we have concentrated on in vascular is, most of our -- our tissues in vascular processing are geared toward peripheral vascular reconstruction. So we need very long segments of saphenous vein in order for clinicians to be able to solve the -- the medical need there. And the -- the ASPs associated with -- with the longer tissues are -- are higher because it takes longer for technicians to procure them as well as process them. So I think there was a little bit of a -- of a product mix issue there, too.

Okay. That makes sense. And then I just wanted to ask you a little more about the surgical patch you're going to put the 510K into the FDA for. Will that be targeted to the complex hernia repair market, that life cell really target specifically, or will it be more basic hernia repair procedures?

That's one of the areas that -- that we are looking at. The complex hernia repair.

As well as the rotator cuff reconstruction.

Okay, and do you have clinical data as far as, revascularization rates on that product in hernia repair?

We -- we don't have any clinical data. Obviously, human clinical data. That's, after we get approval, one of the things that -- that we are going to be looking at doing are some studies to support our future marketing efforts.

And do you have any -- it's probably pretty early to be think being pricing strategy there , but do you have any thoughts on that at this point?

Not at this time.

Okay. And then just a housekeeping question. How much 123 expense is included in the '06 guidance?

For the fourth quarter of 2005, there was $90,000 in the expense that came through roughly. We anticipate that in 2006 the numbers are going to be very similar to the options that are currently outstanding. If there are other options that are granted during 2006, then that will increase the amount of expense that we record during 2006. But we won't know until we know what those amounts of options that are -- that are granted if any.

So for now maybe just use 90k a quarter?

I think that would be a fair estimate at this point.

Okay. Thank you very much.

You're welcome.

Scott Shevick Bear, Stearns

Hi, yes, a couple of questions and just a comment. First question, in a general sense, I was wondering, Ash, if you could say when you think this Company is going to be -- could break even? In a general sense, is that from your standpoint '07, '08 '09 time frame? The second one -- question's going along with the first one is, what do you think the -- the approximate inherent margins are, gross profit margins are in the tissue business? Third, do you anticipate having to raise money in '06?

Okay, Scott. Let me give those a --

Let me just offer a comment as a shareholder. I -- as far as on the strategic front. I think the Company should seriously consider breaking itself into two pieces. My thought process behind that is if you look at the operating expenses you've given of over 50 million, BioGlue probably does 30 million in gross profits. That means that the tissue business has to come up with 20 million in gross profit just for the Company to break even. It did I think six or seven million for '05. So the tissue business, from a gross profit margin standpoint, has to triple just for the Company to break even. What I think that does to stock is it takes away from the inherent value of BioGlue, which, if that was stand alone, stock would probably be $8 to $10 if you look at multiples of sales or earnings. You'd be generating cash, not losing money. And if you sold or spun or split the tissue business, you'd get some money for that. So from a shareholder standpoint, some of the parts seems to get double digits for this Company and if you keep it together, it may be a turnaround situation, but may take years. So I'd like to hear your thoughts on that last comment, as well as the first couple.

Well, I appreciate your comments, Scott. Especially as it relates to the, some of the parts valuation. All I will say in response to that is that we have an ongoing process that is ongoing with Piper Jaffray to review strategic options available to the Company. And nothing has been take not off the table at this point. It's a very comprehensive review. We appreciate your input. And when there is -- when a discission has been made by the Board as to what direction the Company will take we will certainly inform our shareholders and let them know.

In regards to some of the other questions that you had, I think the first was in regards to profitability, we -- we obviously have not given any guidance to -- in regards to gross margins. Subsequently, obviously, no guidance on the bottom line. You -- followed that up with the comment, is it going to be '07, '08, or '09 when you expect to be profitable. We would -- we would hope that that at the latest it would be sometime in '07. We're certainly not going to guide to that at this point. But we would certainly hope that that at some point in '07 that we could be profitable. And as our recovery continues and we get more visibility on that, we might be able to make some more definitive statements about when we would expect to, completely turn the corner and become profitable again. You had followed that up with two other questions, and I forget what they were. If you could repeat them for me, I'd be happy to at least attempt to answer them.

The other of just on raising money. I mean, you have 12 million in the bank. You know, looks like -- ?

I think that the response to that question, too, is, we would really consider that as part of the process that we're currently undergoing with Piper Jaffray to evaluate our alternatives. And again as a comprehensive review. Nothing's been taken off the table at this point. We'll evaluate our finances and where the Company is. Again, when we've made a determination to take a course of action, we'll let you know.

Thanks.

Due to time constraints, our final question is coming from Stephanie Haggerty with Register & Akers. Please state your question.

Great quarter and everything I wanted to ask has been asked.

Okay, Stephanie. Well, it's nice to hear your voice. You should be happy.

I am happy.

Okay.

Thanks.

All right. Thank you. I guess we have no further questions and actually no time for further questions. So we'll look forward to talking to you at our next conference call in about three months.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at any time. Thank you for your participation.