Artivion Inc (AORT) 2009 Q3 法說會逐字稿

Greetings. And welcome to the CryoLife 3rd Quarter 2009 Financial Conference Call. At this time, all participants 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 for CryoLife. Thank you. Mr. Anderson, you may begin.

Hi. Good morning, everyone. This is Steve Anderson, CryoLife's chairman and CEO. And I would like to welcome you to CryoLife's 3rd Quarter 2009 Conference Call. With me today is Ashley Lee, the Company's executive vice president, CFO and COO.

This morning, we reported record revenues for Q3. Revenues were $28.2 million, a 5% increase over this same period of a year ago. Net income for the third quarter was $1.9 million compared to $3.6 million for Q3 in 2008.

The difference in earnings between the two years is mostly due to the fact that our effective tax rate in the third quarter of '08 was 6%, and our effective tax rate in the third quarter of '09 was 41%. This change in the effective tax rate is due to the valuation allowance on the Company's deferred tax assets during 2008. The third quarter of 2009 represents the 11th consecutive quarter of profitability for the Company.

The agenda for today's call is as follows -- Ashley will discuss today's earnings release by product line and tissue preservation service line and in comparison with the same period one year ago. He will comment on our strong balance sheet and the significant increase in our cash position.

I will comment on the FDA's recent [A2D] designation for the SynerGraft process aortic human heart valve, the recent CE mark approval of BioFoam Surgical Matrix in international markets and its early clinical results. I will also comment on the FDA approval to begin the US clinical trial of BioFoam that we announced earlier this week. I will comment on our very successful second annual Ross Summit meeting that was held here at CryoLife's corporate headquarters in September.

After my comments are completed, Ashley will return to give some financial guidance for the remainder of 2009. And then we will open the call for questions.

At this time, Ashley will comment on the Company's third quarter financial performance.

Thank you, Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I'd like to make the following statement -- comments made on 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.

Additional information concerning risk and uncertainties that may impact these forward-looking statements 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, 2008, our form 10-Qs for the quarters ended March 31, 2009 and June 30, 2009, our form 10-Q for the quarter ended September 30, 2009, which we expect to file by the end of this week, and in the press release that went out this morning, a copy of which is contained on the Investor Relations portion of our website.

This morning, we reported our results for the third quarter and first nine months of 2009. We set an all-time quarterly revenue record of $28.2 million in the third quarter of 2009 and an all-time first nine-month revenue record of $83.1 million. These amounts were 5% and 4% higher than the corresponding periods in 2008.

Our cash and securities balances increased between $26.7 million at June 30, 2009 to $32 million at September 30, 2009. Year-to-date in 2009, our cash balances have increased by $9.3 million compared to December 31, 2008. Our cash balances at the end of this month are estimated to be near $34 million, which equates to approximately $1.20 per share.

Net income for the third quarter of 2009 was $1.9 million, or $0.07 per basic and fully diluted common share, compared to $3.6 million, or $0.13 per basic and $0.12 per fully diluted common share for the third quarter of 2008. If we had recorded 2008 income taxes at a normalized 41% effective income tax rate as we did in 2009, net income in the third quarter of 2008 would have been $2.2 million, and fully diluted earnings per share would have been $0.08.

Net income for the first nine months of 2009 was $6.3 million, or $0.22 per basic and fully diluted common share compared to $10.2 million, or $0.37 per basic and $0.36 per fully diluted common share for the first nine months of 2008. If we had recorded 2008 income taxes at a normalized 41% effective tax rate, net income in the first nine months of '08 would have been $6.4 million, and fully diluted earnings per share would have been $0.22.

See our press release issued this morning, a copy of which is contained on the Investor Relations portion of our website, for a reconciliation of these non-GAAP, net income and earnings per share numbers to the corresponding GAAP numbers.

We saw evidence that the cardiac business continued to improve during the third quarter. Cardiac revenues for the third quarter of '09 increased 4% compared to the corresponding period in '08 and increased 13% compared to the second quarter of '09. The increase in the third quarter compared to the prior year was primarily due to a 7% increase in unit shipments, partially offset by a decrease in average service fees.

We believe factors contributing the cardiac improvement include our efforts in physician training, including the Ross Summit and monthly aortic allograft workshops; the efforts of our new specialized cardiac technical representative sales force; anticipated seasonal increases with respect to the increase over the second quarter; and increased shipments into international markets, in particular, Germany and Austria. Also positively affecting the cardiac business during the quarter was our 510(k) clearance of CryoPatch SG, used for cardiac reconstructive surgeries. We anticipate that this will be a growing part of our cardiac business in the coming quarters.

The vascular preservation service business continues to do well. Vascular revenues for the third quarter in the first nine months of '09 increased 8% and 10% compared to the corresponding periods of '08. These increases resulted from an 8% and 10% increase in unit shipments for the third quarter and first nine months of '09 compared to the comparable periods of '08. Surgeons are seeing the benefits of using our preserved vascular tissues, especially for the prevention of amputation of lower limbs and in actively infected surgical sites. We believe that this will continue to be a very attractive market for us. And we believe that we have significant room for growth in this business.

Product revenues, which consist primarily of BioGlue and HemoStase, increased 5% in the third quarter of '09 compared to the third quarter of '08 and increased 6% in the first nine months of '09 compared to the first nine months of '08. The increase year-over-year primarily reflects the growing usage of HemoStase in cardiac and vascular surgical indications. HemoStase revenues for the third quarter and first nine months of '09 were $1.6 million and $4.1 million.

Total preservation services and product gross margins were 60% and 62% for the third quarter and first nine months of 2009 compared to 64% for the corresponding periods in '08. We expected to see a decrease in gross margins due to increasing HemoStase sales, which carry a lower gross margin than our recent aggregate gross margins, higher per-unit cost and, to a lesser extent, an increase in cardiac tissue shipments into Europe, which carry lower ASPs, and some pricing pressure that we're seeing as a result of the economy and its effect on hospital purchasing patterns.

Preservation services gross margins for the third quarter and first nine months of '09 were 41% and 43% compared to 46% in the corresponding periods in '08. Product gross margins for the third quarter and first nine months of '09 were 82% and 84% compared to 83% and 84% in the corresponding periods in '08.

General, administrative and marketing expenses for the third quarter of '09 were $12.4 million compared to $12.1 million for the third quarter of '08 and $37.4 million compared to $36.5 million for the first nine months of '09 and '08. G&A and marketing expenses for the first nine months of '09 increased primarily due to marketing expenses, including personnel costs, advertising, physician education and training and for materials to support current revenue growth and our efforts to increase our preservation service and product offerings.

R&D expenses were $1.5 million for the third quarter of '09 compared to $1.2 million for the third quarter of '08. R&D expenses were $3.9 million for the first nine months of '09 and '08. R&D spending in 2009 primarily focused on BioFoam and SynerGraft tissues and products. Refer to our FCC filings for detailed discussions and factors affecting our results of operations, including our form 10-Q that we plan to file by the end of this week.

I'll now turn it back over to Steve.

Thank you, Ashley. On October 6, we announced that the FDA had granted a Humanitarian Use Device Designation for the SynerGraft process CryoValve SG aortic human valve for aortic valve replacement in patients from newborns to 21 years. An HUD is a medical device intended to benefit patients in the treatment or diagnosis of a disease that affects fewer than 4,000 people in the United States per year. The HUD Designation is the first step in obtaining a Humanitarian Device Exemption, or an HDE, for this valve. An HDE would allow a company to market the CryoValve SG aortic human heart valve in the US.

We have begun the process of conducting the bench and animal studies as well as collecting recent follow-up data on a series of clinical implants that are necessary for an HDE submission. We expect this process to take about one year to complete.

The patented SynerGraft technology platform servers as the foundation for the next generation of implantable biological tissues and is designed to remove allergenic donor cells and cellular remnants from the valve without compromising the integrity of the underlying collagen matrix. The SynerGraft process aortic human heart valve will compliment the SynerGraft process pulmonary heart valve that was cleared by the FDA in February of 2008. Since the clearance of the SynerGraft process pulmonary human heart valve, more than 380 of these valves have been implanted primarily in children. There have been over 2700 SynerGraft process heart valves implanted in people, with the longest implantation in excess of eight years.

On August 4, we announced that we had received a CE mark for BioFoam Surgical Matrix as an adjunct in the sealing of abdominal parenchymal tissues, specifically liver and spleen, when cessation of bleeding by ligature or other conventional methods is ineffective or impractical. The CE mark allows for unrestricted commercial distribution of BioFoam in the European community. BioFoam is based on the same protein hydrogel technology platform from which BioGlue surgical adhesive was developed and becomes our second product from the Company's protein hydrogel technology platform to receive a CE mark.

The Company has been developing BioFoam in conjunction with the United States Department of Defense, which has provided the Company with most of the funding for advancing this product. We continue to evaluate the potential for using BioFoam to seal penetrating wounds, such as gunshot injuries, as well as for other types of surgery. To date, the Department of Defense has granted about $5.4 million to CryoLife for the development of this surgical sealant.

The controlled clinical launch of BioFoam began in Europe in early September with initial clinical uses occurring in Germany, the UK and France. Based on the number of liver and spleen procedures done annually in Europe, we estimate that this is a $30 million annual market opportunity with a worldwide annual market of about $100 million. As of yesterday, we have completed 21 BioFoam applications in 19 patients, with the longest follow-up now beyond 30 days in the controlled clinical launch. The product has worked well and provided hemostasis in all of the cases. All of these initial patients will have completed their 30-day follow-up by the 21st of November. We anticipate a full commercial launch in Europe to begin in January of 2010.

Additionally, we have begun feasibility animal studies, evaluating the use of BioFoam and cardiovascular procedures. One acute and two chronic animals were recently completed with BioFoam applied to the aorta, terminal vein, and an aortic [junct] graft. The BioFoam stopped bleeding in all cases, demonstrating the product's potential utility in these applications. The chronic animals will be evaluated at 30 days.

We anticipate that BioFoam will be useful in cardiovascular procedures like sternal bleeding and suture line sealing. BioFoam is easily visualized in the surgical field, and initial studies indicate that it biodegrades more quickly than BioGlue. We expect to conduct a pivotal animal study and file for a cardiovascular CE mark application towards the end of the first half of next year.

If BioFoam proves to be valuable in controlling active bleeding in cardiovascular applications, we believe the market opportunity in Europe for BioFoam could be significantly larger than the market opportunities for BioGlue. Initial estimates suggest this expanded opportunity could approach $100 million annually.

Earlier this week, we announced that the FDA had approved our United States IDE to conduct a human clinical trial for BioFoam for use in sealing liver parenchymal tissue on cessation of bleeding by ligature or other conventional methods as ineffective or impractical. The approved IDE is for a perspective, multi-center, randomized feasibility study evaluating safety outcomes of BioFoam as compared to standard topical hemostatic agents. We will now seek approval from the United States Department of Defense, which will be the final step necessary to begin this trial.

Following DOD approval, the feasibility investigation will be conducted at two investigational sites and will enroll 20 eligible subjects with 10 subjects in each treatment group. Upon successful completion of the feasibility study and subsequent FDA and DOD approvals, a follow-on prospective, multi-center, randomized, controlled, pivotal study will be conducted. It is currently anticipated that the pivotal investigation will enroll a total of 164 eligible subjects, 82 subjects in each treatment group across a maximum of 10 investigational sites.

The successful completion of the BioFoam US clinical trial, which we anticipate will take about three years, will give the Company a technology platform of three products to control surgical site bleeding that would in the aggregate address active bleeding sites in vascular and cardiac reconstruction surgeries, as well as the sealing of parenchymal tissues, such as liver and spleen surgical procedures. Management believes that the total annual worldwide market for surgical adhesives and glues approaches $900 million.

On September 25 and 26, the Company hosted its second annual Ross Summit at our corporate headquarters in suburban Atlanta. There were 85 physicians from 18 countries who attended the meeting. Half of the registrants were international. The proceedings of the summit were webcast, and as a result, there were an additional 31 people from 14 countries who participated in the webcast.

The purpose of the meeting was to review recent published data from around the world that relates to the efficacy of the Ross procedure for the treatment of aortic valve disease. The course program consisted of both didactic sessions and afternoon wet lab training in the various techniques for aortic and pulmonary valve transplantation. The Ross procedure, first reported by Mr. Donald N. Ross, FRCS, of London, England, in 1967, consists of moving a patient's native pulmonary valve into the aortic valve position and then replacing the pulmonary valve most commonly with a cryo-preserved pulmonary human heart valve. Worldwide published data indicates that patients receiving this type of surgery are returned to normal life expectancy for their age and nationality.

Shortly after the first Ross Summit in 2008, we developed a Ross community website to foster exchanges of clinical results and surgical techniques among cardio vascular surgeons worldwide. The proceedings of the 2008 and 2009 Ross Summit are available on the Ross community website at www.therosscommunity.com. The growing Ross community website now has 189 permanent members.

That concludes my comments. And now I'll turn the call back over to Ashley for some financial guidance for the rest of the year.

As detailed in our press release this morning, we expect total revenues and preservation service revenues for the full year of '09 to be near the lower end of our previous range of guidance, BioGlue revenues to be slightly below our previous range of guidance and HemoStase revenues to be near the higher end of our previous range of guidance. We expect other revenues for '09 to be approximately $1 million, primarily related to funding received from the DOD in connection with the development of BioFoam. The amount of other revenues is largely dependent upon actual expenses incurred related to the development of BioFoam.

We expect G&A and marketing expenses to be near the lower end of our previous range of guidance and R&D expenses to be within the range of guidance for the full year of '09. The R&D expectations include $1 million to be funded by the Department of Defense in connection with the development of BioFoam.

We expect operating income to increase for the full year of '09 compared to '08. However, we expect our effective income tax rate to be approximately 41% in '09 compared to a tax benefit in '08. As a result, earnings per share in '09 will be lower than in '08, when we reversed a significant portion of the valuation allowance on our deferred tax assets, which resulted in the recognition of significant income tax benefits.

We currently plan to issue our initial 2010 financial guidance at the Piper Jaffray healthcare conference in New York on either December 1st or 2nd. Although we are currently in the process of finalizing our 2010 plans, we will say that we certainly expect 2010 to be another record year in both revenues and operating income.

There are a few items that we would like to comment on that we believe could be positive developments for the Company in the future. As Steve mentioned earlier, we expect to begin enrolling patients in our BioFoam IDE either late this year or early next year under an FDA-approved clinical trial. This will be the first step in getting a commercial approval to distribute BioFoam in the United States.

We are still optimistic that we will get approval to sell BioGlue in Japan. Progress continues to be made on this matter. We are in the process of completing our second large animal study for the use of ProPatch, our FDA-cleared SynerGraft process patch, for use in general surgery indications, and, specifically, ventral hernia repair. If the studies are concluded successfully, we expect to ramp up our efforts to secure our commercialization partner in general surgery.

We continue efforts on the business development front to find complementary products for companies that we can acquire to leverage our existing infrastructure and sales force to deliver more value to our shareholders.

Although at some point during 2010, we expect to pay income taxes at a rate somewhat closer to our effective income tax rate of 41%, we believe that we will continue to generate a significant operating cash flow during 2010. We also continue to analyze our cost and expense structure to ensure that we optimize it to reflect our current strategic direction and initiatives. Overall, we look forward to continuing progress on our strategic initiatives in 2010.

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

At this time, we'll open up the conference call for questions.

Thank you. We will now be conducting our question-and-answer session. (Operator Instructions). Gentlemen, our first question is from Matt Dolan of Roth Capital. Please proceed with your question.

Hi, guys. Good morning.

Good morning.

Hi, Matt.

First question on BioGlue, maybe you can give us some details as we haven't seen a level quite this low for a year or two. What's happening there with pricing or competition or maybe something at the hospital level? Just some more commentary would be appreciated.

Yes, Matt, there are a few factors that are playing into what we saw with BioGlue. First of all, we've seen some recent product approvals, and recent meaning within the last couple of years, in areas where BioGlue had been used on an off label basis. So we think that we've seen some of that business go away.

We also continue to see hospitals challenge the use of products in surgical procedures, including sealants and hemostatic agents. And we think that that's had a small effect on our business. We're also seeing some of our large competitors become very diligent in enforcing hospital purchasing requirements under their contracts. Again, we haven't seen -- that hasn't affected our business to a huge extent, but, again, it has made some effect.

We've also seen HemoStase actually be used in a small amount of procedures where BioGlue has currently been used. We don't think it's a significant issue for the BioGlue business going forward. But, again, we did see a little bit of that recently in the last couple of quarters. We can still see a little bit of push back from pricing. And for the nine month number, foreign currency exchange rates had an effect on the revenues year-to-date, although to a lesser extent in the third quarter of this year.

So, again, there's several issues that we see there, none of which I think stands out any more than the other. We think a lot of -- we hope that a lot of these issues are transient and that they'll go away, especially factors relating to the economy. We think others will probably run their course in 2009.

And going forward, we're still optimistic that we're going to be able to grow the business. It's a major focus of the sales force running into 2010. And if all goes according to plan in what we see, we still believe that at long term we're going to be able to grow this business at a rate consistent with growth and cardiac and vascular surgical procedures, which is in the mid single-digit range.

Okay. That's great. So if I look at the guidance, what it implies for Q4 for pushing down towards the lower end of things, it's still a sequential increase, but not significant. I know last year you saw sequential decrease in Q4. But for the most part it seems like Q4 is one of your bigger quarters of the year. Is that guidance related primarily to the BioGlue situation, or maybe is there a more general comment you can provide on hospitals and destocking and some of the issues we saw earlier this year? Or what's the rationale there?

I'll cover on BioGlue specifically. And we certainly expect to see fourth quarter be sequentially better than the third quarter. If you look at where we are in the month of October right now, October's on track to be better for BioGlue revenues than any particular month, any single month in the third quarter. And we expect that to continue into the fourth quarter, so a couple of things there.

We expect BioGlue to increase sequentially. We also think that that will have the effect of increasing gross margins sequentially in the fourth quarter compared to the third too, because it was a little bit lower than what we wanted it to be in the third quarter and because BioGlue has such high gross margins, and you know it affected margin in the third quarter. And we fully expect gross margin in the fourth quarter to increase sequentially over the third.

On the guidance side of things, you're not providing 2010 yet. You did provide comments for expectations of record revenue and earnings. Was that the comment you made earlier?

Operating income.

Okay. So maybe just a general -- I know you gave kind of a synopsis of what's going to drive growth. But if we think of the base business growing in the mid single-digits, how are you going to provide growth or accelerate growth from what we've seen here in 2009, whether it be adding to the sales force or some of the initiatives you gave out? Are any of those something we should start to rely on?

Well, I think that we have seen -- we'll talk about issues specifically. We continue to see year-over-year growth there. The cardiac business is certainly redounded. We're seeing year-over-year growth in the vascular business. We expect that to continue into 2010.

For BioGlue, again, it's a major focus of the sales force right now. There are a few things that we're working on there from a marketing standpoint. We're really looking at marketing BioGlue in combination with HemoStase as a perfect partnership to really address like 90% of the needs that the operating room has to control blood loss.

So we're really focusing on marketing the two products together. We've always marketed their speed, simplicity and ease of use. We're also taking a different approach with product approval committees, especially as it relates to HemoStase. And we're focusing on the economic story of using BioGlue and the cost savings with the reduction IN blood products. So we fully expect to be able to grow BioGlue.

And then HemoStase, again, we're only getting into our second full year of the launch in 2010. And we expect that business to increase significantly.

Okay. Thank you, guys.

Okay.

Thank you. Our next question is from Mr. Greg Brash of Sidoti & Company. Please go ahead with your question.

Good morning, guys. Thanks for taking my call.

Hey, Greg.

Good morning.

I just wanted to focus a little bit on the preservation services gross margin. You mentioned a couple of the things going on there, increased sales in Europe and some of the pricing pressure. How bad is that pricing pressure? Has it gotten materially worse from what you were seeing in the second quarter?

I don't think it's gotten materially worse, Greg, probably static as far as maybe the level of activity that we're seeing. I think the two primary things that have affected gross margin in the tissue processing business is we have reduced throughput, which has resulted in higher unit cost. And in addition to that, some of the things that we had previously mentioned, which were some of the pricing pressures that have been persistent since the fourth quarter of last year.

And with that being said, going forward, we think that tissue processing margins will probably continue to be under a little pressure between now and the middle part of 2010. And we think that in 2010 those issues should abate. And we think that we will actually have the opportunity to move tissue processing more just back in the other direction and potentially improve them in the second half of the year and beyond into 2011.

What's going to drive those improvements? Is it just increased sales of say some of these higher-priced SG products?

No. That will certainly be one factor. But I think the more important factor is that over the last several months we have had a very big initiative ongoing within the organizations to look at our cost structure, our processing techniques, to make sure that they are as efficient as possible. We've come up with several processing improvements that have been implemented throughout the year and continue to be implemented. And we think that all of these initiatives in the aggregate give us a fair amount of optimism and comfort that at some point in 2010 the trend should reverse itself and the margins should start improving again in 2010 and beyond.

Was there around 41% this quarter? Did you see that deteriorating any further until you can perform some of these initiatives or --?

We would expect them probably to decrease a little bit from here. I will say that going forward into 2010, and I'll address margins in the aggregate, typically we haven't given guidance. But in the aggregate, we don't anticipate that margins should decrease significantly in the aggregate from where they are right now. We could see a little bit of pressure, but not a whole lot from the current levels.

Okay. And then just on the BioFoam expectations, you talked a little bit about potentially using it in cardiac procedures, maybe where you're using BioGlue. How long until those studies are completed? When can we realistically maybe expect the indications shown to that margin?

BioFoam will have a full launch in international markets at the beginning of next year. The initial work that we have been doing for sealing organs indicates that it is very effective. It can provide hemostasis in a liver resection under one minute, which is superb.

And then the animal studies that we have recently been doing to evaluate its effectiveness for cardiovascular surgery would indicate that it can effectively hold cardiac pressure, which is extremely encouraging. And I'm very encouraged about that because there has been some criticism of BioGlue's long degradation time. And in the studies that we have been conducting show us that BioFoam pretty much is gone after six months in the body. And I think the doctors will find that very helpful to them.

It's also very easily seen once it's applied in the body. You can see it more easily in the surgical field. And you can see BioGlue. And it isn't as runny. I think it's going to be very user-friendly is what I'm leading up to there.

But the effectiveness of the hemostatic agent is very encouraging to us. And that's going to end up being a significant product for us. That will give us three sealants, adhesives, call them what you wish, that act in significantly different ways and would be used -- have very different uses.

Whereas the HemoStase isn't very strong, BioGlue is very strong. And to refresh people's memory, BioGlue can withstand 500 millimeters of mercury blood pressure within two minutes of being applied. And BioFoam will sit right in the middle of those two products. It'll be a very nice product, a very versatile product. And I'm looking forward to that making a significant contribution in international growth next year.

Okay, very helpful. And just one more on BioGlue, you mentioned several issues that are impacting sales. Did you believe it's more a function of just hospitals cutting back on using sealants in a way to cut costs, or is a competitor out there just really taking on his share?

We really think it's just a conglomeration of all the factors that we mentioned, Greg. We don't see any one of those factors contributing significantly more than the others. Just a lot of little things at this point, but we think that we're on our way to addressing several of those. And, again, we expect revenues to certainly increase sequentially in the fourth quarter. And we expect the growth in 2010.

Okay. One more quick one, do you have your net operating cash generated in the quarter?

Not off the top of my head, but just the aggregate cash balance increased from, I think it was a little over $27 million at the end of the second quarter to about $32 million at the end of the third quarter. So it was in excess of $4 million.

And most of that was on the operating side?

I believe so.

Okay. Thank you.

Thank you. Our next question is from Mr. Raymond Myers of Emerging Growth Equities. Please proceed with your question.

Thank you.

Hello, Ray.

Hey, Ashley. We spent a lot of time talking about BioGlue, but I'd like to talk about the tissue products. Vascular and cardiac tissues were very strong in the quarter. Also, we've learned to be a little bit cautious about strong quarters. They're sometimes followed by weaker quarters. So can you describe the general trend and outlook for fourth quarter here in those products?

We've given our guidance. And as we stated, we expect we expected tissue processing gross margins in the aggregate to be near the lower end of the range that we've previously given. We would expect that each of those product lines should be near where they were in the third quarter. There's an opportunity that it could be a little bit better. But we expect them to be near where they are in the fourth quarter.

And as you know, Ray, if you look at the last couple of years, when we start a new year, we typically have a pretty good increase in revenues on the tissue side in the quarters throughout the year. We see some extensive growth, maybe a little bit lumpy, but maybe a little bit flat. But year-over-year, when we get into the new year we've been able to grow the tissue processing business. And we fully expect that in 2010.

As a result of the Ross Summit, which was held in September, we have picked up a number of large clinic accounts that in the United States and Canada that we did not have prior to the Ross Summit. Those accounts that have recently ordered a sizable number of valves are thought leaders and opinion leaders throughout the world. And I'm very encouraged with that.

We also have identified the fact that so far this year, 27% of all of our pulmonary cryopreserved valves have been shipped internationally. And so our business internationally in preserved tissues is significantly increasing. And we have developed pretty close relationships with some of the key opinion leaders in Europe particularly that I'm very encouraged about.

And so I think that as more papers get published about the efficacy of cryopreserved tissue transplants, I think you'll see that continue to increase. But I'm very encouraged because some of the world thought leaders coming our direction and making substantial orders immediately after the Ross Summit.

That sounds good. And I don't want to belabor the point, but there's something I don't understand about the gross margins in the tissue processing. You've had nice increases sequentially in tissue processing revenue the last three quarters. But the cost of tissue processing has increased by almost the exact same amount as revenue, meaning that the incremental revenue has contributed no gross margin dollars. How is that possible?

That's primarily due to higher unit processing cost, Ray. One of the things that we started doing about a year ago is really focusing on optimizing tissue donation and making sure that we manage the deferred preservation costs on our balance sheet appropriately. So one of the things that we did late last year was to reduce throughput. And by reducing that throughput and actively managing our inventory levels and optimizing our cash levels resulted in some higher-unit processing costs. And that's going through right now.

Okay. All right. That's great. I see the deferred preservation cost actually declined.

Yes. And we expect that that balance will hopefully at worst remain where it is and optimistically continue to move downward. And we would continue to convert as much of that in cash as possible.

Okay. Well, that helps. I think that's a very important point. That's the first time we've seen that balance sheet item decline on a sequential basis in a long time. So congratulations for that.

Let me move to sales. Can you describe the number of direct sales people that you have in each of your businesses?

We have about 12 cardiac specialists throughout the United States. And we're going to be adding to that in 2010. And we have between 40 and 45 sales representatives that handle vascular tissues.

Vascular tissues sales reps handle vascular, HemoStase, and BioGlue. And then the cardiac specialists who focus primarily on cardiovascular surgeons would be handling the three products as well. That's how it's sorted out.

But it takes a more sophisticated salesman to effectively interact with the cardiovascular surgeons. I think you have to know a lot more about cardiac reconstruction to be able to communicate effectively with them. And that's why last year we took the top salesmen in the company and put them over into the best new sales job. And it's turning out to be very effective.

Great. So that's a total of about 52 to 57 total people.

Yes, about 50, 52.

Okay. Okay, that's great. And what are your NOLs currently? What do you have left?

I don't know what the aggregate amount is right now off the top of my head, Ray. But we would expect that we would utilize the majority of our NOLs sometime around the middle of 2010 and then become a more significant payer or cash taxes at that point.

Okay. And then finally, can you talk about the projected expenses and the timing of those expenses for the US BioFoam clinical trial?

As Steve indicated, I think once we actually begin enrollment it's close to about a three-year process. And I think in the aggregate, it could take between $2.5 million and $3.5 million over that three-year period.

Okay, so really not much on a quarterly basis.

Again, depending upon how much enrollment activity there is and follow-up activity, in any given quarter, one could be more significant than the other. But the key factor to remember is that this trial is being predominantly funded by the Department of Defense.

Oh, all right. All right. Perfect. Okay. Thanks, gentlemen.

Thank you.

Thank you. Mr. Anderson, at this time, there are no further questions. I would like to turn the floor back over to you for closing comments.

Well, thank you, everyone, for joining us for the Q3 conference call. And we look forward to talking with you again at the end of the business year.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.