Artivion Inc (AORT) 2010 Q3 法說會逐字稿

Greetings and welcome to the CryoLife Third Quarter 2010 Financial Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Steve Anderson, President and CEO for CryoLife. Thank you, you may begin.

Hi, good morning everyone. This is Steve Anderson, CryoLife's President and the CEO, and I would like to welcome you to CryoLife's third quarter 2010 conference call. With me today is Ashley Lee, the company's Executive Vice President, COO and CFO.

The agenda for today's call is as follows. Ashley will review today's press release and will comment on the company's revenues by product line. He will also bring you up-to-date on the litigation and dispute with Medafor. I will discuss the recent Starch Medical transaction, the rollout of BioFoam in Europe, the status of the BioFoam clinical trials in the US and the recent approval of BioGlue in Japan.

After my comments, Ashley will return with financial guidance for the rest 2010 and our initial forecast for 2011. After Ashley's forecast comments are completed, we will open the call for questions. At this time Ashley will discuss the morning's press release and the company's performance for Q3.

Thanks, Steve. To comply with the Safe Harbor requirements of the Private Securities and Litigation Reform Act of 1995 I would 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 or management's intentions, hopes, beliefs, expectations or predictions of the future. Additional information concerning risks 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 previously filed Form 10-K for the year ended December 31, 2009, our previously filed Form 10-Qs for the quarters ended March 31 and June 30 and for the quarter ended September 30, 2010, which we expect to file shortly, and in the press release that went out this morning.

On the call today I will discuss certain non-GAAP financial measures. You can also find the comparable GAAP measures and the reconciliation of these non-GAAP measures to the applicable GAAP measures as schedules to 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 2010. We set all-time third quarter and first nine months revenue records of $28.4 million and $87.4 million for the periods ended September 30, 2010. As of September 30, 2010 we had $36.3 million in cash, cash equivalents and restricted securities which includes $1.8 million received from the DoD and $5.3 million in restricted securities. The $36.3 million reflects the $6.7 million paid in September 2010 in connection with the Starch Medical transaction, $4.3 million paid during 2010 for the repurchase of shares CryoLife common stock, and $2.4 million paid earlier this year to invest in Medafor common stock.

We generated cash flow from operations of $3.8 million in the quarter and $13.8 million for the nine months ended September 30. We expect to continue to generate significant cash flow from operations going forward which will allow us to continue our efforts in the business development front.

Net income before items for the third quarter of 2010 was $2.6 million or $0.09 per basic and fully diluted common share, including pre-tax charges of $3.7 million for acquired in-process R&D related to the Starch Medical transaction, $3.6 million for the impairment of our investment in Medafor common stock, and $1.6 million related to the write down of HemoStase inventory. GAAP net loss for the third quarter of 2010 was $3 million or $0.11 per fully diluted share.

We also reported pre-tax charges in the third quarter of 2010 of approximately $283,000 in costs associated with our litigation with Medafor and recorded $143,000 gain on valuation of the derivative related to the investment in Medafor common stock.

Net income before items for the first nine months of 2010 was $7.5 million or $0.27 per basic and $0.26 for fully diluted common share, including charges of $3.7 million for acquired in-process R&D related to the Starch Medical transaction, $3.6 million for the impairment of our investment in Medafor common stock, and $1.6 million related to the write down of HemoStase inventory. GAAP net income for the first nine months of 2010 was $1.8 million or $0.06 per fully diluted share.

We reported pre-tax charges in the first nine months of 2010 of $729,000 in connection with the write-off of capitalized legal expenses associated with our BioGlue intellectual property rights in Germany and approximately $1.1 million in costs associated with our litigation with Medafor.

Additionally we reported a $1.3 million gain on valuation of the derivative related to the investment in Medafor common stock.

Cardiac revenues for the third quarter of 2010 decreased 2% compared to the corresponding period in 2009, and increased 80% over the first nine months of 2010 compared to the corresponding period in 2009. The decrease for the quarter was primarily due to a decrease in shipments of cardiac [patch] tissues resulting from increasing competitive pressures and a reduced supply of standard process patch tissues available for shipment during the period as we work to achieve an optimal balance in our offered tissues.

The increase in the nine month period was primarily due to a 10% increase in shipments of cardiac valves, primarily due to increasing demand for the CryoValve SGPV in domestic markets, partially offset by a decrease in shipments of cardiac patches.

Vascular revenues for the third quarter and first nine months of 2010 increased 3% and 7% compared to the corresponding periods in 2009. The increase for the third quarter resulted primarily from price increases and the increase for the first nine months resulted primarily from a 4% increase in unit shipments.

Product revenues which consist primarily of BioGlue and HemoStase increased to 3% and 4% in the third quarter and first nine months of 2010 compared to the corresponding periods in 2009. For the three and nine month periods, HemoStase revenues increased partially offset by a slight decrease in BioGlue revenues.

Total gross margins, excluding the write-off of $1.6 million for the HemoStase inventory, were 59% for the third quarter of 2010 compared to 60% for the third quarter of 2009. And 60% in the first nine months of 2010 compared to 63% in the first nine months of 2009.

Preservation services gross margins for the third quarter of 2010 and in 2009 were 41% for each period and 40% in the first nine months of 2010 compared to 43% in the first nine months of 2009.

Product gross margins for the third quarter of 2010 excluding the write-off of $1.6 million for the HemoStase inventory were 80% compared to 82% in the corresponding period in 2009. And 81% in the first nine months in 2010 compared to 84% in the first nine months of 2009.

General, administrative and marketing expenses for the third quarter of 2010 were $11.4 million compared to $12.4 million from the third quarter of 2009. These expenses for the third quarter of 2010 include approximately $283,000 in costs associated with our litigation with Medafor.

G&A expenses for the first nine months of 2010 were $36.9 million compared to $37.4 million for the first nine months of 2009. The first nine months of 2010 included the charge of $729,000 related to the write-off of capitalized legal expenses associated with our BioGlue intellectual property rights in Germany and approximately $1.1 million in costs related to our litigation with Medafor.

R&D expenses were $1.4 million and $1.5 million for the third quarters of 2010 and 2009 and $3.9 million for each of the first nine months of 2010 and 2009. R&D spending in 2010 primarily focused on BioGlue, BioFoam and SynerGraft tissues and pumps.

The write-down of acquired in-process R&D of $3.7 million was for an intangible asset for PerClot distribution and manufacturing rights in the US and certain other countries which do not have current regulatory approvals and was therefore expensed upon acquisition.

During the three and nine months period ended September 30, 2010, the company purchased 493,000 and 767,000 shares of the company's common stock at average prices of $5.52 and $5.51. This resulted in aggregate purchases of $2.7 million for the third quarter and $4.3 million for the nine months of 2010. We will continue to strategically purchase shares going forward as conditions warrant.

Now for an update on Medafor. On September 27, 2010 Medafor informed us that it had fully and finally terminated its exclusive distribution agreement based upon our alleged repudiation of the agreement. This was the sixth time that Medafor had notified us that it had either terminated the distribution agreement or was going to terminate the distribution agreement. As a result of Medafor's termination of their largest distributor which is us, and the resulting future impact of this action on Medafor's financial condition, we reconsidered the carrying value of our investment in their common stock. Due to their termination and other relevant factors, we concluded that our investment in Medafor's common stock was impaired and we reported a write-off of approximately $3.6 million to write the value of Medafor's stock down to a per share value of $1.09.

We are currently evaluating all of our options related to this most recent termination by Medafor and we intend to challenge the validity of Medafor's termination of the distribution agreement and pursue our rights and remedies in court.

Discovery proceedings and the litigation have recently commenced and we believe that a trial would not likely occur before 2012. You should refer to our SEC filings for detailed discussions of factors affecting our results of operations, including our form 10-Q that we plan to file shortly.

Now I will turn it back over to Steve.

Because we were unable to secure a long-term or even a short-term arrangement to ensure that we would have a powdered Hemostat in our product portfolio, we began looking for an alternative product. On September 28 we announced that we had signed a worldwide distribution agreement and manufacturing license for an absorbable polysaccharide Hemostat and its delivery devices that is presently approved and marketed in Europe by Starch Medical of San Jose, California.

We had been competing with the CE mark Starch product in Europe over the past two years and felt that there were certain features of their product that were superior to the Medafor product. We believe that the Starch product PerClot is between two and three times more absorbent than the Medafor product. The PerClot product also has a higher adhesive strength than the Medafor product and is stickier. The differences between the two products are visibly striking when the two products are demonstrated side-by-side in separate Petri dishes.

The Starch transaction will be transformational for CryoLife as it involves a complete technology platform that addresses a worldwide market of about $2 billion and provides us a product functionally superior to the one we are losing. Our license with Starch Medical includes indications for all medical specialties and does not limit us to just cardiovascular procedures like our previous distribution agreement did.

Also, we are anticipating that the gross margins of the PerClot product will be in excess of 80% when we begin manufacturing the product here at our corporate headquarters facility in Georgia. Presently the gross margins for the product that we will be buying from Starch will be between 50% and 60%.

In the US we anticipate filing for our PerClot IDE PMA in early 2011. As we envision it, this clinical trial will consist of about 300 patients at 10 clinics. Follow-up time will be 30 days. We anticipate that FDA PMA approval will occur in mid-2013.

With the addition of the Starch powdered Hemostat we will have an international product line consisting of PerClot for instant hemostasis, BioGlue surgical adhesive for use where a very strong surgical adhesive is required and BioFoam for the sealing of breakable tissues. In other words, we will have a family of surgical hemostatic and surgical adhesive products that will address international markets of about $1 billion.

After the approval of PerClot in the US, we will be addressing a US surgical Hemostat market of about $1 billion. Because of our significant corporate cash position, CryoLife Management continues to be active on the business development front and we continue to look for more products that we could acquire or license in the cardiovascular and general surgery areas.

As you will recollect, a few months ago we bought a patent for our recombinant human serum albumin based surgical sealant. We have been testing this product in our research laboratories and have found it to be well-suited for clinical applications that require a flexible material. We think it would be ideal for [Dura] sealing or lung sealing.

As a company we are focused on developing a complete line of surgical Hemostats and adhesives for use in most medical specialties. We anticipate that by 2013 CryoLife will have a line of surgical sealants and adhesives that will be comprised of four or five separate products addressing a US market of about $1 billion and a worldwide market of about $2 billion.

On October 1, just a few days after the announcement of the transaction with Starch Medical, our European management team initiated the launch of PerClot to our customers throughout Europe. Our direct sales teams in the UK, Germany and Austria have been trained on the product and have begun to market the product to their accounts.

In addition, we have conducted initial training programs but our key distributor groups in France, Italy, Spain, South Africa, The Netherlands and Turkey. As a result of this proactive training program we have successfully launched PerClot throughout the European Union.

Our forecast for sales of hemostatic products in international markets next year approaches $5 million. October sales of PerClot throughout Europe have exceeded our expectations. During the quarter we also announced the hiring of David Lang as Vice President of Market Development at CryoLife International, Inc. David, a Harvard graduate in economics has an extensive background in the international sales and marketing of implantable medical devices. He was most recently the president and a consultant for Starch Medical. For seven years prior to working with Starch, David was the Vice President of International Sales and Marketing for Medafor. While with Medafor, David was responsible for developing their international sales and distribution networks.

He has similar responsibilities with us. And we know that he will be very successful in recruiting and training our international PerClot representatives. David reports directly to Gerry Seery, the President of CryoLife International, Inc and the Senior Vice President of Sales and Marketing for CryoLife Inc.

During the quarter and after a lengthy approval process we began screening patients for enrollment into our BioFoam IDE clinical trial in the US. This feasibility trial will involve 20 patients at two centers in the US. The indication that we are seeking is for the sealing of parenchymal liver tissue. We expect that this clinical trial will be funded by grants from the DoD.

To date we have received about $5.4 million in grants from the DoD for the development of this product. Upon successful completion of the feasibility study, a follow-on prospective multi-center randomized controlled pivotal study will be conducted. It is projected that this pivotal study will include a total of 164 eligible subjects, 82 subjects in each treatment group across a maximum of 10 investigational sites.

BioFoam has continued to perform well in its market rollout in Europe. Since its market launch, more than 450 units of BioFoam have been shipped to our distribution network.

On October 7 we announced the approval of BioGlue in Japan. We believe that Japan is the second largest surgical adhesive market in the world with a total surgical adhesive market of about $150 million. The Japanese approval is for the use of BioGlue in aortic dissections. We will begin shipping to Japan following the QMS audit. CryoLife will be able to ship to its distributor Century Medical upon satisfactory completion of this audit. You will recollect that BioGlue's initial US approval was also for aortic dissections and if you compare the first year's sales of BioGlue in the US with what we anticipate in Japan, we expect total first 12 month revenues by our distributor in Japan to be about $1 million.

That concludes my comments. And now we will turn the call back to Ashley for financial guidance for the fourth quarter and for calendar year 2011.

Note that financial guidance is subject to the risks described in the financial guidance in forward-looking statement disclaimer sections contained in the press release that we issued this morning. We expect total revenues for the fourth quarter of 2010 to be between $28 million and $30 million which includes between $500,000 and $750,000 related to BioFoam funding received from the DoD.

We expect Hemostat's revenue between $2 million and $2.5 million in the fourth quarter of 2010. R&D expenses are expected to be between $2 million and $2.5 million for the fourth quarter of 2010. We expect EPS of between $0.06 and $0.08 for the fourth quarter of 2010.

Our effective income tax rate for the fourth quarter would be approximately 42%. We expect total revenues for full year of 2011 to be between $122 million and $128 million which includes between $1.5 million and $2 million related to BioFoam funding received from the DoD.

We expect tissue processing revenues to increase between mid-single and low-double digits on a percentage basis in 2011 compared to 2010. BioGlue revenues to increase in mid-single digits on a percentage basis in 2011 compared to 2010 with revenues from powdered Hemostats including HemoStase and PerClot to be between $4 million and $6 million.

R&D expenses are expected to be between $10 million and $12 million in 2011. We expect earnings per share of between $0.26 and $0.30 in 2011. We expect our effective income tax rate for 2011 to be around 41% to 42%.

I want to emphasize that we are committed to accelerating the growth of the company. We are increasing our R&D spend as reflected in our guidance and we are currently rolling out and expect to launch several new products in the near future, including BioGlue in Japan, BioFoam in Europe, PerClot in international markets first and subsequently in the US, and SynerGraft aortic heart valves hopefully next year.

Additionally we are actively seeking a partner to commercialize ProPatch for eventual hernia repair.

Given our strong financial performance and cash position, we are well positioned on the business development front to identify complementary products or companies that we can acquire to leverage our existing infrastructure and sales force. We have carefully evaluated our alternatives and believe business development efforts are a prudent use of our cash reserves and a strategy that will create value for our shareholders. We will also return value to our shareholders though our ongoing stock repurchase program.

Beginning next year, we will begin providing our initial guidance in our yearend financial conference call as opposed to our third quarter financial conference call which has been our practice over the last few years.

That concludes my comments and now I will turn it back to Steve.

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

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Our first question is from Joe Munda with Sidoti. Please go ahead with your question.

Hey guys, how are you?

Good morning.

I was wondering if you could go into a little bit more with the charge for the valuation of the Medafor common stock at $3.6 million. Can we expect similar charges going forward, or is this a one-time charge?

As of now we hope and believe that this is a one-time charge. We accounted for our investment in Medafor on a cost basis and we are required as an organization to periodically review that valuation if circumstances arise that lead us to believe that there could be an impairment. And as I indicated earlier in the call with the termination of their largest distributor, which is us, we became aware of some other facts that led us to re-value or reconsider the carrying value of our investments. So we think that this is a one-time charge and we don't currently expect to have future write-downs, but that might not be the case.

Do you still, I forget how much outstanding, if it is still 11% ownership in Medafor that you guys hold?

To the best of our understanding we think currently we still own between 10% and 11% of their shares. And just so you will know, as of right now the current carrying value of our investment in Medafor is roughly $2.6 million as of the end of the third quarter.

And you also mentioned $1.6 million in related to HemoStase inventory that the company does not believe it will be able to distribute. Now why is that? Is it because of the ongoing litigation that is occurring with Medafor?

There is a provision in the contract that indicates that upon termination of the contract we would have six months to continue distributing the inventory that we have. So, what we have to do is evaluate how much inventory we currently have and estimate how much we can sell over those six months that we believe that we can distribute. And absent any other information, the best indication of what we can sell is what our historical sales trends have been.

And that is how you get to that $1.6 million number? [It's becoming] how much inventory you have and how long it is going to take to sell and then what is left over is $1.6 million in inventory that you believe you won't be able to sell.

That's correct. Now, I will say that we are going to do our best to sell everything that we have and we hope to do that. But, again, we have to look at the objective information that we have to evaluate and estimate what we could sell and that was on historical sales trends.

And as far as litigation is concerned, is there any number that you could come up with as far as what you think litigation expense is going to be, going forward?

Well as we indicated in the press release earlier today, most of this year we have spent roughly $1.1 million, okay? And we have budgeted for a similar amount going forward which would indicate about $400,000 that we accrued in our budgets for the remainder of this year. We expect that now that discovery has started that there could be a spike in our expenses while discovery is ongoing. And then we would expect the spending to decrease up until the time that the trial actually starts, if we ever even get to a trial. So that is kind of what we are expecting.

I know you guys signed up now, you are with PerClot, and you are hoping to move that manufacturing in-house. My question to you is, what are you hoping to get out of this trial from Medafor? The compensatory damages? Or are you looking to keep distribution? What is the end game with Medafor?

Well, let me phrase it this way. We believe that we will be entitled to the lost profits that we would have made had we been able to remain in that contract through the middle of 2014. So if you look at the amount of lost profits that we could have generated, the numbers are very significant. Potentially in excess of $10 million. As you look at the litigation moving forward, that is really what we would be going after, our damages which equate to lost profits.

And, I'm sorry, I just have one last question on this issue. Has Medafor approached you on buying you guys out of the 11% you hold currently?

We are not going to get into any discussions that have or might go on between the companies. We have included a very thorough discussion of the situation with Medafor that the current status of the litigation and things of that nature. And it is very comprehensive. And it is in our 10-Q and we expect to follow that in the very near future. So I would refer you to that discussion.

Okay, I will look for it in the Q. I will let somebody else hop in. Thanks guys.

Thank you. The next question is from Tim Lee with Piper Jaffray. Please go ahead with your question.

Hi, good morning and thanks for taking the question. In your comments you made some comments regarding the performance characteristics of PerClot compared to that of HemoStase. I think you said it was two to three times more absorbent. Are you planning on any studies, either conducted by yourself or independent third parties to provide some hard performance characteristics of PerClot relative to some of the other product hemostats or other competitor products on the marketplace?

We are planning to do something like that down the road and in the future. But the visual comparison of how the products work chemically is so striking that I don't think that we have to do that in order to get good market acceptance. I think it would be helpful if we did do that so that we would have very specific scientific data to show the differences in strength and coagulability of the two products side by side, but I don't think it is going to inhibit our launch of the product not to have that.

Thank you. And in terms of the PerClot clinical in the US, you said it was a 300-patient study. Is it a randomized study? What are some of the --

Randomized study.

And what is it randomizing to?

I believe it is just on random.

Got it. And just the general cost to conduct these studies and how should we think about the P&L impact of that study in '11 and '12.

And I will refer you to our press release when we announced the Starch Medical transaction, Tim, but what we have indicated is that we think that the trial will cost somewhere between $5 million and $6 million of which we are going to spend up to $750,000 in the fourth quarter of this year and the bulk of that spending we expect to incur over the next, I would say, eight quarters.

Thank you.

Sure.

The next question is from Matt Palmer with Roth Capital Partners. Please go ahead with your question.

It's Matt Palmer in for Matt Dolan. Thanks for taking the questions.

Hello Matt.

Let's see. So first question on BioGlue. You mentioned you are launching in Japan in 2011. You also mentioned in your prepared remarks that you are expecting mid-single digit growth in BioGlue for 2011, if I heard you right. I was curious what are your expectations for BioGlue revenue in Japan and how much of that is, I guess, in the US market what are your underlying growth expectations?

The number I gave you for the growth in Japan was about $1 million in the first 12 months that the product is approved and in the market. When I say approved I mean we have to go through a quality inspection before we can begin distributing there. So, we expect to pass that. We expect that inspection to be within the next few months. Expect to pass it. And then starting after we pass it for the first 12 months I'm expecting that we will do about $1 million in the first 12 months in Japan.

Considering that, Matt, I think in the US we are expecting probably low single digit growth, maybe to mid-single digit growth and expect that to be augmented by the rollout in Japan and to take that one step farther, and this comment kind of relates to what we are projecting for tissues, too, is that our sales force will have more time in 2011 to devote to tissues and to BioGlue with the absence of being able to distribute in the space in the US market for the better part of the year. So, that increased time and focus we think is going to be beneficial for the other product lines.

That's helpful, thank you. And secondly, in your 2011 guidance you have included hemostat revenue expectations of $4 million to $6 million. How much have you factored in for HemoStase specifically in 2011? How much HemoStase supply do you currently have? And is your 2011 guidance dependent on additional shipments of HemoStase?

The guidance for all powdered hemostats was between $4 million and $6 million and we expect at least $4 million, probably between $4 million and $4.5 million of that to be from PerClot. As it relates to another inventory that we have on hand for HemoStase, I will say that we have adequate inventory to continue distributing through mid-to-late March which is the time at which we expect to discontinue shipping HemoStase in the US.

Thank you.

Your next question is from Raymond Myers with The Benchmark Company. Please go ahead with your question.

Great. Thanks. Most of my questions have been answered but let me ask a few. One, does CryoLife have the right to return unsold product to Medafor?

I think that we believe that we do but that is probably up to the courts to ultimately decide, Ray.

The reason is ask is that I thought I read that in the agreement but maybe they are not accustomed to adhering to the agreement?

Well again I would say that we believe we have the right, but again we would probably think that that issue would be an issue that would be decided by the courts.

Okay, so that could take some time. Is this product --

But going back to a comment from earlier, we took that into consideration when we reported the write-off of the HemoStase inventory, so hopefully we won't have any issues with having to write anything off in the future. That is our hope and expectation.

Our hope is that you might be able to recover some of that.

Yes, again, we are going to do our best to sell all of it, but again that is where we currently stand.

Are you selling HemoStase in Europe or in the United States?

Both currently.

Why would you sell HemoStase in Europe once PerClot is launched which is currently happening?

We got approval to sell PerClot in a lot of international markets, but not all, so we continue to sell HemoStase into those markets where we need to do a little bit more work to get PerClot approved. And then here in the US, obviously, PerClot is not approved so we are distributing HemoStase.

And you can't transfer the inventory from Europe to the US?

I believe they are different product codes.

Okay. You mentioned in the call increased competitive pressures in the cardiac patch market. Can you elaborate on that? Is that a concern going forward?

I think that we are going to be able to address that issue. The primary competitive product that we are seeing right now is from a company called (inaudible) Matrix. They have a [unigraft] patch that is out there right now. And they are having some success with it. But again it has affected our sales recently. Going forward we are just going to redouble our efforts to promote our tissues and the benefits of them out in the marketplace and hopefully be able to address those competitive issues.

Are you seeing any changes in the underlying markets in the cardiac repair or the vascular businesses?

I don't think that we are seeing any major underlying changes in the conditions. Again, in the cardiac area we have seen this competitive product come out in the cardiac patch space. But as far as underlying changes in the market, we are not seeing anything major at this time. Obviously as we continue to look forward as an organization, it gets increasingly harder to continue to keep your growth rates up at the levels that they had historically. And again, that is why we have become much more aggressive in developing products internally through our own pipeline, as well as getting more aggressive as it relates to acquiring competitive, I mean other complementary products and technologies out in the business development front. And I think that you can expect to continue to see that from us.

As the population continues to age and the Baby Boomers get older, you should expect to see considerable growth in our vascular tissue transplant program. That's simply because of the aging of the population, the diseases that older people get, circulatory problems, the increase in diabetes. And the circulatory problems that creates.

We are also looking at the timeframe that homograft tissues perform very well for 15 to 20 years and then in some cases they have to be replaced after 20 years. And so we have a huge backlog there of tissues that have been implanted in timeframes like that that I would expect would become candidates for reoperation. And certainly with the increasing data that we have been able to present to the market place as well as doctor's papers, meaning medical papers that have been published, homograft tissue performs better over the long-term than many of the prosthetic alternatives that are out there. So I think we have a built-in growth pattern in both areas, due to the aging of the population in the vascular area and the expected lifetimes of transplanted homograft valves.

Thanks Steve. I just have one final question. How long do you think this QMS audit will take in Japan so that you will start recognizing revenue on BioGlue?

They have to make a date here. We expect them to make a date in the next 60 days, 90 days at the very longest. It will take probably about a week. If it takes 10 days that is just fine. We expect to pass it without any problems. The last time that the FDA was here, which was a few months ago, we passed the inspection without a single observation from FDA. So I think that the inspection of the company will go extremely well.

So you expect that date to be scheduled in about --

Yes, we expect to hear from them soon. As a matter of fact I just signed quite a few documents yesterday authorizing them to come here and agreeing to meet the standards that they have set through their FDA. And the general type of an agreement that you would have to make with them so that they are going to be comfortable coming to visit us here. It is different from an FDA inspection in that the FDA can walk in the door here at any time they want without giving prior notice. But the documents that I signed yesterday were all in preparation for that inspection. And so I am expecting it to be soon.

Great. Sounds good. Thanks, Steve.

There are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Well thank you for joining us today and we look forward to meeting with you at the close of the calendar year, fiscal year 2010.

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