Artivion Inc (AORT) 2012 Q4 法說會逐字稿

Greetings and welcome to the CryoLife fourth-quarter and year-end 2012 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, Steve Anderson, President and CEO for CryoLife. Thank you Mr. Anderson, you may now begin.

Good morning everyone and welcome to CryoLife's 2012 year-end conference call. This is Steve Anderson, CryoLife's CEO. And with me today is Ashley Lee, CryoLife's Executive Vice President, COO and CFO, and David Fronk, CryoLife's Vice President of Regulatory Affairs and Quality Assurance.

This morning, we released our year-end and fourth-quarter financial report. I am pleased to announce that we reported record fourth-quarter revenues of $32.8 million and earnings of $2.1 million. The fourth-quarter revenues reflect an 8% increase over 2011 and the earnings showed a 12% increase over the previous year's quarter.

We also reported record annual revenues of $131.7 million, an increase of 10% over 2012. Earnings were $7.9 million, an increase of 8%. During the quarter we also paid a $0.025 send dividend to shareholders.

The agenda for the call today is as follows. Ashley will discuss the year-end financial performance in detail. Then Dave will discuss our recent FDA inspection. I will discuss the buildout of our new manufacturing space at Georgia Tech. I will discuss the final integration of the HeRO Graft manufacturing and the timetable for the HeRO CEMark in Europe. I will also discuss the status of the IDE PMA for PerClot as well as the timetable for beginning our human clinical trials. I will discuss additional corporate development activities and initiatives that we are working on. After my comments, Ashley will return to give you financial and earnings guidance for 2013. At this time Ashley will comment about today's press release.

Thanks 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 in this call that 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, including the guidance for 2013 that I will provide in a moment. 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, 2011 and our subsequently filed Form 10-Qs during 2012, our Form 10-K for the year ended December 31, 2012, which we expect to file shortly, and in the press release that went out this morning.

A reconciliation of certain non-GAAP financial measures to the comparable GAAP measures is contained in the press release, a copy of which is located in the Investors section of our website.

This morning, we reported our results for the fourth quarter and full-year of 2012. We achieved record fourth-quarter and annual revenues of $32.8 million and $131.7 million respectively, driven by year-over-year increases in most lines of our businesses and the recent acquisition of Hemosphere. Our fourth-quarter and annual earnings per share totaled $0.17 and $0.28 per share respectively.

The following factors influenced our revenue performance. For the fourth quarter, total profit revenues increased 13% compared to the prior year. Worldwide BioGlue revenues were up 7% for the fourth quarter. This was driven by a 4% volume increase, primarily in Europe.

PerClot sales increased 63% to $1 million for the fourth quarter compared to last year's fourth quarter, and increased 37% sequentially from the third quarter of 2012. This was driven by increased demand in Europe, including Russia.

Although revenues from our TMR product line decreased in the fourth quarter compared to the fourth quarter of 2011, disposable handpiece revenue increased 6% for the fourth quarter over the prior-year quarter. The overall quarterly decrease was due to the sale of laser consoles in the prior-year quarter and our focus now is on driving handpiece revenues and expanding utilization of the TMR procedure.

Revenues from the sale of the HeRO Graft were $1.1 million in the fourth quarter. Over the last three years, the fourth quarter has been the weakest revenue quarter for this business.

During the fourth quarter, we continued to work through new product committees at new accounts. We remain very optimistic on the feedback we are receiving from the field and we expect to see the results of our expanding sell-in effort over the next couple of quarters. We also expect to begin a launch in Europe later in 2013.

Total tissue processing revenues grew 3% to $15.2 million driven by a 7% increase in cardiac tissue revenues resulting from a 7% increase in unit shipments.

Total gross margins were 64% for the fourth quarters of 2012 and 2011. Gross margins for the full year of 2012 were 64% versus 63% for the full year of 2011. Margins for the full year were favorably affected by an increase in preservation services gross margins. Gross margin also benefited from an increased mix of our higher-margin products, including surgical sealants and hemostats, the HeRO Graft, and the TMR product line.

General, administrative, and marketing expenses for the fourth quarter of 2012 were $16.8 million, up 15% from the fourth quarter of 2011. This increase was primarily due to an increase in marketing expenses, including costs associated with our expanded sales staff and increases in spending on advertising, partially offset by a decrease in litigation expense.

R&D expenses were $2.1 million for the fourth quarter of 2012 compared to $1.8 million in the prior-year fourth quarter. R&D spending in 2012 was focused on PerClot, the HeRO Graft, revascularization technologies, SynerGraft issues and products, and BioFoam.

Net income for the fourth quarter of 2012 was $2.1 million, or $0.07 per fully diluted common share. Net income for the fourth quarter of 2012 included $790,000 in business development and integration charges primarily related to the acquisition of Hemosphere, and $171,000 in litigation expenses. Excluding these charges, on a pro forma non-GAAP basis using a 34% tax rate, earnings per share would have been $0.08 in the fourth quarter of 2012. Pro forma non-GAAP earnings per share in the fourth quarter of 2011 would have been $0.09.

As of December 31, 2012, we had $18.3 million in cash, cash equivalents and restricted cash and securities, up from $13.1 million at the end of the third quarter. Our balance sheet remains very strong. We continue to carry almost no debt and generate strong cash flow. We are pleased to be able to return a portion of our profits to shareholders while continuing to build shareholder value through our dividend and our investments in organic and acquisition growth opportunities.

I have a few updates on a couple of subjects. For our TMR business, we have initiatives underway designed to accelerate growth. As I mentioned, we are focused on driving adoption of the technology and utilization of the disposal per-procedure hand pieces. To that end, in the last couple of quarters, we introduced a new laser consoles evaluation program that was designed to make it easier for physicians and hospitals to trial the TMR technology. As a result of this program, we have placed seven laser consoles in the field since last October.

Additionally, we have established a clinical registry that we believe will track important data about the clinical utility of TMR and potentially place more opinion-leading surgeons on the podium talking about the procedure. We currently have interest from about 80 centers to participate in the registry and 19 sites have been actively submitting for IRB or contract approval. We believe that these initiatives will result in growth in our TMR business.

In regards to ValveXchange, we are pleased to report that they initiated their EU clinical study late last year and are about halfway through with their enrollment. This could potentially lead to a CEMark in late 2013. We recently began initial discussions with ValveXchange on EU distribution. For more information about their progress, we encourage you to visit their website or contact them directly.

Please were for to our SEC filings for detailed discussions of factors affecting our results of operations, including our Form 10-K that we plan to file shortly. Now, I'll turn it over to Dave.

As we previously made public, the FDA conducted a routine scheduled inspection of our facilities conducted over a four-week period last September and October. The inspection was not the direct result from any adverse event reports about our tissues or products. At the conclusion of the inspection, we received a Form 43, List of Observations. We took their concerns seriously. We initiated significant efforts to address the FDA's observations and provided three written responses to the FDA detailing our corrective action plans.

As we also previously disclosed, on January 30, we received a warning letter from the FDA. The warning letter relates to certain observations from the 483 that the FDA believes were either inadequately addressed by our responses or for which the FDA required further information to fully assess our corrective actions. The concerns in the warning letter were for a subset of the 483 observations. A majority of the corrective actions detailed in our earlier responses to the 483 appear to have been adequately addressed from the initial observations. We continue to take this matter seriously and intend to fully respond to the FDA's concerns.

Specific concerns addressed by the FDA in the warning letter include ensuring that all complaint investigations are adequately conducted; assuring that management reviews the Company's quality system on a regular and sufficient basis; preventing the recurrence of certain deficiencies noted in personnel training; providing additional information describing changes in the Company's disinfectant system; as well as additional information concerning its environmental monitoring program; and lastly, ensuring the environmental trending reports -- that environmental trending reports are generated pursuant to Company's procedures.

We have had several communications with our local FDA district office to discuss the warning letter concerns, as well as our proposed corrective actions. These discussions have been very constructive. We intend to provide a response to the FDA before the end of next week. Once we have completed the work necessary to address the FDA's concerns, we will request a follow-up inspection, during which the FDA will verify our work is sufficient to address their concerns. Steve?

During September of 2012, we leased an additional 9000 square feet of clean room and laboratory space in a building on the campus of Georgia Tech. The building had previously been occupied by a startup pharmaceutical company that went out of business. The facility's clean room space is ideal for the manufacture of the HeRO Graft that we acquired last May in our acquisition of Hemosphere. The

transfer of the HeRO Graft manufacturing operations from Eaton Prairie, Minnesota to the facility at Georgia Tech is nearing completion. Once final, the manufacturing facility in Eaton Prairie, Minnesota will be closed. We are also using this newly leased space for one of the steps in the manufacture of PerClot, our powdered hemostatic agent. We are presently in talks to lease another 10,000 square feet in the same building. With the current lease, we now occupy 220,000 square feet of office, laboratory and manufacturing space in the metro Atlanta area.

2012 sales of the HeRO Graft since the acquisition on May 17, 2012 were $3.1 million. Our sales forecast for the HeRO Graft during 2013 is for sales between $6 million and $7 million. We estimate the total annual US market for the HeRO Graft to be about 352,000 units. That equates to a $124 million market opportunity in the US. Management believes that the European market opportunity for the HeRO Graft is approximately $30 million. We are expecting CEMark approval for the HeRO Graft late in the first quarter or early in the second quarter of 2013.

The HeRO Graft has gross margins in the mid-60% range. We are planning additional post-market clinical studies in 2013 to further demonstrate the clinical utility of the HeRO Graft.

As we are still addressing questions from the FDA about our IDE for the PerClot, recent feedback from the FDA has provided further clarity on the clinical study design. The number of patients in the study will be approximately 400, 200 for PerClot and 200 for the control group. The FDA has indicated that they are in agreement with a one-month follow-up period. We are expecting approval of our IDE application during the first half of 2013. Our IDE is for multiple indications and specialties, including cardiac, vascular, orthopedic, general and urological surgery.

The manufacturing facility for PerClot in our Kennesaw facility has been completed. Within this facility, we will have enough capacity to conduct our clinical trials. We have completed three manufacturing lots of PerClot that will be used in our US clinical trials, and they will be ready to be shipped to our investigative site upon approval of the IDE.

European and rest of world markets will be supplied with PerClot manufactured by Starch Medical. We have been testing PerClot against the other powdered hemostat on the market manufactured by Medafor. In preclinical testing conducted on the two products, PerClot achieved hemostasis in half the time required by Medafor's product using a porcine liver model. Lab studies also show PerClot absorbs four to five times the amount of fluid as compared to Medafor's product. Based on these studies, we believe we have a very superior product. Management also believes that the worldwide market for powdered hemostats approaches $1.3 billion, growing to as much as $1.5 billion in 2015 with a US market potential of $1 billion. PerClot manufactured at CryoLife will have gross margins north of 80%.

As part of our increasing expansion into Asian markets, we have recently added a contract sales and marketing executive who is based in Thailand. In conjunction with vascular surgeons, our physician training department has begun developing the curriculum and selecting a faculty for our first central venous pathology summit that will be held here at our corporate headquarters next spring. We expect the faculty will be international in scope and will attract experts in the treatment of end-stage renal disease from around the world. Our physician training department has also been working on a curriculum and a faculty for our Cardiovascular Surgery Fellows program that will be held here at CryoLife in the fall of 2013. The Fellows program will replace our annual Ross Procedure Summit which will now be held in alternate years. This initiative should help us develop professional relationships with future cardiovascular surgeons as they work their way through their Resident and Fellows programs at the various medical schools throughout the US.

We are actively involved in additional business development activities. Specifically ValveXchange, of which we own 19%, continues to make progress in their European clinical trial for CEMark approval for their heart valve. And pursuant to our agreements with ValveXchange, we have the first rights to negotiate to distribute their product in Europe. ValveXchange's heart valve would enable us to address the prosthetic aortic valve business, which is a $584 million business in the US and European Union.

We are also actively looking at a number of companies for technologies related to AV access devices and infection control for catheters that would complement the HeRO Graft. We also continue to evaluate additional hemostatic devices, including a unique proprietary device for promoting hemostasis post-sternotomy. This is a surgical site that doesn't have an effective product for controlling hemostasis at this time.

That concludes my remarks. Now I'll turn the call back over to Ashley to give you some financial guidance for the rest of 2013.

We are issuing our initial financial guidance for the full year of 2013. We expect total revenues to be between $139 million and $143 million. This represents annual total revenue growth of between 6% and 9%. We expect tissue processing revenues to increase in the low to mid-single digits on a percentage basis for the full year of 2013 compared to 2012. Revenues from our higher-margin product segment are expected to grow between 9% and 13% for the full year of 2013. The product revenue guidance includes expectations for BioGlue and BioFoam revenues to increase in the mid-single digits on a percentage basis in 2013 compared to 2012, and PerClot revenues to be between $3.5 million and $4 million. We expect HeRO Graft revenues to be between $6 million and $7 million in 2013. We expect revenues from TMR technologies to be between $8.5 million and $9 million in 2013.

Turning to expenses, R&D expenses are expected to be between $11 million and $12 million in 2013 primarily as a result of our investment in our US clinical trials for PerClot. We believe that the medical device excise tax for 2013 will approximate a little over $1 million.

We expect the effective income tax rate for the full year of 2013 to be in the mid-30% range. We will recognize the full benefit of the 2012 R&D tax credit, which was passed in early 2013 in the first quarter of 2013. We will recognize the 2013 R&D tax credit ratably throughout the year.

We expect earnings per share for the full year 2013 of between $0.25 and $0.28.

Finally, we believe we are continuing to successfully execute on our strategy of positioning the Company for accelerated revenue and earnings growth by expanding our addressable market opportunities through internal R&D, expanding and leveraging our sales and marketing, and executing on business development opportunities.

Looking forward, we believe that we have several opportunities to expand the Company's market opportunity with higher-growth, higher-margin products. These include to drive revenue growth in the HeRO Graft through our recent launch in our broader US direct sales force; two, initiate enrollment in our PerClot IDE clinical trial and gain additional marketing approvals in new international markets; three, expand our European sales and marketing coverage for PerClot to include other surgical specialties in addition to cardiac and vascular surgery; four, potentially gain expanded indications for BioGlue in Japan; five, build on our commitment to the Asia-Pacific region by gaining distribution partners for our products in new markets such as China and Southeast Asia; six, drive our TMR business through our clinical registry and increased laser console evaluations; and seven, continuing on planning our discussions with ValveXchange on the European distribution of their exchangeable heart valve product. If we execute on these initiatives, we will be in a good position to drive topline growth on higher-margin medical products and further leverage our operating infrastructure to improve profitability.

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

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

(Operator Instructions). Thom Gunderson, Piper Jaffray.

Good morning. So a little bit on PerClot. The EPS for '13 is a little lower than what we were expecting, and a big part of that is in the clinical trial costs that you're doing for PerClot. That's some would call that expense; some would call that investment. If we look at it, Steve, from an investment standpoint, when -- what's the rollout if this starts sometime in '14. Does it need more investment? Will you need more sales guys? And then how you perceive the payback for this investment that is being made in PerClot?

We probably will have more sales people, because the number of specialties that we are addressing is outside the bandwidth of our present sales forces which are focused on cardiovascular and vascular surgeons primarily. So, I would expect we would add specialists, sales specialists, into the various regions around the country as far as our sales strategy would go. Do you want to comment about these investment and stuff like that, Ashley?

No, just a couple of other comments overall. For -- we think, from this point going forward, it is probably going to take another $4 million to $5 million to complete the trial, and that's really kind of baked into our guidance right now.

As far as return, when we look at business development opportunities, we have target IRR that we like to achieve on any endeavor that we enter into. We don't want to get too specific about what our targets are, but this particular technology fit well within our criteria, and we thought that when we entered into the transaction and we continue to believe that it's a very attractive opportunity to grow the Company going forward.

Got it, thanks. And then a little bit related but probably not, the warning letter comes from the enforcement side. The IDE approval comes from the evaluation side. Is there any hint from any of the FDA people that you're talking to that the IDE would be slowed until the warning letter is cleared up?

We have not gotten any indication that that would be the case at all. And again, we are clearly looking at doing an investigational device exemption to allow the clinical testing, so I think we're pretty comfortable that there should be no impact with regards to the warning letter on any investigational trial that we want to have going forward.

We are also pretty comfortable that, in the dialogues we've been having with the Agency, that we are going to get this matter resolved very quickly. We've had a series of conversations with the Agency over the last week, and it's been very productive and they have been very pleased with the corrective actions that we are proposing to take in place. So we are very optimistic with regards to getting that aspect of it resolved and resolved quickly.

Then one quick detail and I'll get back in queue, and that is, on the 400 patients that you've talked about, approximately how many sites are you thinking of enrolling?

Up to around a dozen sites.

Okay. Thank you.

Jeffrey Cohen, Ladenburg Thalmann.

Thanks for taking my questions. I apologize in advance if I'm somewhat repetitive. So firstly, I guess a question for -- was that David on the call -- in the 483 timing, I think you earmarked the deadline that we would hear something back, is that going to be Friday the 22nd or Monday the 25th? Should you be filing an 8-K on or before that date?

Actually, that date is our due date to respond to the warning letter. The 15 business days that were outlined to respond in the warning letter is on the 21st of this month, so that's our response to the warning letter.

Okay. So that would be on the 21st. So there'll be no 8-K. Is there a deadline for the Agency to get back to you from your response?

No there is not.

Okay. What's the current employee count approximately of the Company?

Between 475 to 480, somewhere in the neighborhood.

Okay. So I'm sorry if this is repetitive. On the PerClot timing, for the trial to wrap up and for you to get data or data submission, what kind of ballpark timing are you looking at?

Since there's so many specialties involved, it is going to be relatively easy for us to get the complete enrollment done quickly. And I would think we would -- and with only a one-month follow-up period that they've already agreed to, I'm expecting that we will make our submission towards the end of this year.

Okay, got it. On the gross margin, I guess for Ashley, 64.5%, Do you think that ballpark is good for 2013?

I expect margins to remain relatively flat, right around the 64% range, understanding that as we continue to drive sales in some of these higher-margin product lines, that we believe over the next few years that we would expect gross margins to increase. But for 2013, probably relatively flat.

Okay, got it. And on the R&D side, the higher expenses looks like $1 million or $1 million in change. Is that solely attributable to PerClot R&D (multiple speakers)

We are guiding to between $11 million and $12 million which is significantly above where we exited 2012. And the majority of that is due to the PerClot clinical trial, although we have other projects that we continue to work on also.

Okay, got it. And it looks like 6% to 9% overall growth rate is your guidance.

That's our initial topline guidance.

And growth rates specific to the preservation service side? Cardiovascular tissue is what on a percentage basis?

Low single to mid single digits on a percentage basis.

Okay, got it. And you had talked about doing a couple of training sessions for ESRD and cardiac.

Yes.

Can you repeat the timing of that, spring or fall 2013?

For end-stage renal disease in the HeRO Graft is scheduled for April of 2013. And then the Fellows program for cardiovascular Fellows will be in September or October of 2013.

Okay, September or October of 2013. Okay, perfect. That does it for me. Thank you very much.

Matt Dolan, ROTH Capital Partners.

Good morning Steve and Ashley. So, I wanted to follow up on the warning letter. Another tissue processing company is dealing with an FDA warning letter as well. And it is affecting their revenue outlook this year as certain facilities or sites are unable to order from a vendor that has an outstanding warning letter. So is this an issue that you could possibly face or if not, why are you confident this won't have a material financial impact?

This is Ashley. It's always possible that it could have an effect on our business. With that being said, for the month of January this year, we had an all-time monthly revenue record and our sales so far in February continue to be very strong. I think that there are a couple of things about some of our product lines that hopefully we'll kind of protect them from any potential issues related to the warning letter. First of all, we have the only de-cellularized heart valve in the world. We have the only fully subcutaneous product that provides patients in end-stage renal disease to continue on long-term dialysis access. We have some other unique products too, so we think that just due to the nature of our products that will hopefully provide us some protection there too. But again, as of today, we are not really seeing any pushback at all from customers and our sales continue to be very strong so far in 2013.

I specifically asked sales management yesterday regarding the feedback from the field, was there any adverse or were there any adverse comments regarding the letter? And the answer to that was we have not had a single account raise that question.

Okay, great. In terms of the earnings guidance, maybe two little components. One is how big is the medical device tax or what part of your business is that hitting? And then secondly, does the earnings guidance include the tax credit or does it assume an adjusted 35% for the year?

The medical device tax we expect to be somewhere a little north of $1 million. So that's already baked into our guidance. The income taxes, we believe the R&D tax credits that we spoke about will place us in the mid-30% range. So that's included also in our guidance. Was there another question that you had Matt, or did --

Now, that was it. But Where are you booking the device tax?

It's in our SG&A.

Okay. And then on the use of cash side of the equation, maybe first you could clarify what the business development charge was in the fourth quarter, and then I have a follow-up.

The business development charges were mostly integration related charges in the fourth quarter. We held some large events focused on training for the HeRO Graft, and we also have a duplicate facility in Minneapolis that we were carrying in the fourth quarter. So that was predominantly the nature of the business development/integration charges.

Okay. Maybe you could just walk through your cash usage strategy. You've done now dividends. You're adding to the buyback, and yet you have some business development efforts that appear to be ongoing and continue to evaluate other acquisition opportunities. What's kind of the messaging that you would like to have out there as it relates to your overall strategy? You're not using too much on dividends and buybacks to be able to have enough firepower to execute on an acquisition. It just seems that you're doing a little of everything.

First of all, if you look at 2012, we generated between $0.55 and $0.60 in free cash flow per share. The current dividend that we are paying is $0.10 per share, so we are committed to and we continue to expect to pay the dividend going forward. So we are committed to that.

And the other two primary sources of cash are going to be potential business development work and potential share repurchases. And both of those are really going to be kind of dictated due to market conditions and what opportunities that we have. So again, we don't really have an allocation of the remaining cash that we would like to devote to share repurchases or business development. It's really just going to be opportunity driven and market condition driven.

Thank you.

Raymond Myers, Benchmark Company.

Thank you, good morning. The first question, I want to ask about the PerClot revenue guidance. If you look at the PerClot revenue for the fourth quarter and annualize it, you get to the top range of your guidance, which is $4 million already. What's happening with PerClot, and why might guidance not be higher?

In the fourth quarter, we received one very large order from an individual hospital in a new market in Russia. That was roughly a $200,000 order. And we think that that event in and of itself proves how excited certain customers are about the clinical utility of PerClot. We believe that we are going to be able to sequentially grow our business throughout 2013. And if we need to adjust our guidance at some point during the year, then we will do so, but we think it's appropriate based on circumstances now.

Okay. Good. And remind me, why was the fourth quarter tax rate so low?

We routinely reevaluate our net operating losses. And during the fourth quarter, we determined that there were some state net operating losses that we thought we were going to be able to utilize, whereas in the past we didn't think we were going to be able to utilize them. So that resulted in a tax benefit in the fourth quarter.

Is that something that could be recurring or no?

We still have some state net operating losses that still have not been recognized, but it's very difficult to predict the utilization of those. Again, we have to go through this process periodically. There is a chance that we could see something like this occur in the future, but as of right now, we don't foresee that.

And the 2012 federal research and development tax credits, were those recognized in Q4 or will they be recognized in Q1?

The 2012 federal R&D tax credit will be recognized in the first quarter of 2013. The 2013 federal R&D tax credits will be recognized ratably throughout the year. So, that would imply that the first quarter tax rate will probably be lower than the remaining three quarters.

And about how much is that tax credit?

If I were call correctly, it is around $300,000 roughly. It might be a little bit more than that, but that's a rough estimate.

Excellent, great. And finally, maybe for Steve or David, obviously the PerClot clinical trial is a very important one for CryoLife. What gives us confidence that you can actually start the trial and finish it by the end of this year as your guidance now suggests?

I think the indications for surgery and the subset of clinical uses that we have are the primary driver for that. We don't have any esoteric procedures that we were doing a dozen years ago when we were looking at BioGlue and we were focusing on aortic dissection. Those don't happen that frequently. These are very high volume procedures, so I think we have a fair amount of confidence with regards to the fact that procedure volume is such that it will allow a very rapid enrollment process.

In the past, there were some very specific issues, questions that you were going back and forth trying to hammer out with the Agency. Is it fair to say that those have been resolved, or not?

There are a few more that we are working through, but I think we are really in a position to come to agreement with the agency's requests are going to be, so I think the next submission that we have, though I can't guarantee it, would be an out and out 100% approval. I think we are going to be very, very, very close to it because, again, I think we are in a position that we understand what their requests are, what their needs are, and we'll be in a position to fulfill those.

Another important fact was that in one of the recent communications that we've gotten from them, it appears that they have agreed to a one-month follow-up period for the patients. And that was kind of at issue whether it was going to be two, three or maybe even longer months or longer. But it appears they have agreed to one month, which we think will save us some time on the back end.

Great. And then finally, the control group is what? HemoStase or standard of care, what does the control?

Another powdered hemostatic that's on the market presently.

And are you seeking equivalence to that?

Yes, the study's design is a noninferiority trial; that is the standard that people do. So that's all -- we are establishing our benchmark on as a noninferiority goal.

Okay, excellent. Thank you.

Joe Munda, Sidoti & Co.

Thank you for taking my questions. A lot of them have been answered already. But real quick, I think somebody touched on the size of the employees at the Company. I was wondering what is the size of the sales force based on the two businesses, the product side and then the human tissue preservation side?

We have about 58, 60 sales reps. That would include field management.

Okay. And that's for all products, or is that broken -- is that broken out by the two segments or is it combined?

That's the combined number.

Okay.

That's domestic. We also have direct salespeople on the ground in Europe too. We have roughly a dozen to 15 there.

Yes, I just wanted to get a current number. Okay.

My second question is, Steve and Ashley, I know a lot of people are concentrating on PerClot. But in your guidance, you talked about vascular tissue growing at a lower rate. I mean it grew 2% year-over-year. I was just wondering if you could give us some color on the segment, because it seems to be your slowest growing segment and what are your plans for that segment going forward?

We've stated in the past that we believe the tissue processing business as a whole is a low to mid single-digit grower going forward. So, that's really kind of our expectation of that business as we move forward. In any given year, we could do better than that, or we might do a little bit worse than that. But on average, we think that these businesses are low to mid single-digit growers.

I was just wondering, because I cover another company in the space but not in the tissue space, more on the medical device space, and they really had a positive outlook because of the Baby Boomers and the amount of patients that would be eligible for vascular procedures. Do you think that's going to change your outlook maybe in 2014, or do you still consistently see it as a low to mid single-digit grower?

Shifting demographics could always help our business. A lot of the business development activities that we have been focused on recently have been targeted at the growing Baby Boomer population, especially the HeRO Graft. So they certainly are very attractive markets. The guidance that we've given so far is what we currently believe. But again, if demographics change and things change in the future, we could be revising our outlook on our growth opportunities going forward for the cardiac and vascular tissue business.

Yes, I guess can I put it another way. I saw you guys -- the cardiogenics effect, is there an acquisition out there that you think could help you boost the growth of that segment?

We are currently looking at some products to put around the HeRO Graft, and that would relate to AV access because of all of the people that are going to be on them going on dialysis.

One thing -- I don't disagree with your other company's analysis of the Baby Boomer impact. I do agree with that. It's just hard for us to forecast that.

Yes.

One thing I can say about the acquisition of the HeRO Graft is that we are seeing vascular surgeons that we've never been able to see in the past and people that we've never had a chance to talk to about our preserved vascular tissues. And so there is a very good chance that our guidance for that product line is conservative because as the HeRO Graft gets more and more acceptance, I would think that it would sort of pull through our vascular tissues. And you know, synthetic -- synthetic vascular grafts don't work well below the knee. Our tissues do work very well below the knee, and they have valves in them because they are veins usually. And our limb salvage rate is very good in comparison to a synthetic graft that would be used below the knee. So our forecast is conservative, I think. We'll just have to wait as we move through the year to see what the true impact is of our acquisition of the HeRO Graft.

Okay, thank you guys.

There are no further questions at this time. I would now like turn the floor back to management for closing comments.

We have enjoyed the conference call today and we look forward to talking with you next quarter.

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