Wednesday, April 28, 2010

Cryolife Q1 2010 - Edited

Ashley Lee
Our cash, cash equivalents and restricted securities balances as of today are approximately $40 million. Net income for the first quarter of 2010 was $1.9 million or $0.07 per basic and fully diluted common share compared to $1.9 million or $0.07 for per basic and fully diluted share for the first quarter of 2009. We recorded pretax charges in the first quarter of 2010 of $729,000 in connection with the write off of capitalized legal expenses associated with our BioGlue intellectual property rights in Germany. Approximately $380,000 in business development cost primarily associated with our proposal to acquire Medafor and approximately $415,000 in cost associated with our litigation with Medafor.

Steven Anderson

During the first quarter progress continued on the European post market study for BioFoam at three EU centers. The focus of the study is the assessment of BioFoam as a surgical hemostatic adjunct in the open repair of liver parenchyma following liver resection or liver transplant surgery. A total of 53 patients have been enrolled into the study with a target enrollment of 55 patients at these three centers. This includes 13 in the United Kingdom, 15 in France and 25 in Germany.

Interim analysis shows achievement of HemoStase within 1 minute in 88% of the application site and within 3 minutes in 94% of the application site. We are adding a fourth center from Leipzig, Germany to increase overall enrollment to 70 patients. As we broaden our clinical approach CryoLife is also establishing an online data registry for surgeons to document clinical information related to the use of BioFoam.

Based on the successful outcomes and surgical technique refinements developed during the European post market study, distributor and direct sales team training was conducted in late January at the Annual European kickoff meeting that was held in Rome. The product was formally introduced to the marketplace at the European Association for the study of liver which was held in Vienna in mid-April this year. Initial sales to date have been made to distributors and clinics in Germany, Italy, France and Spain.

Early acceptance of BioFoam by clinicians has been encouraging with more than 70 applications of the BioFoam product to-date. On December 9th the company received approval from the Department of Defense to move forward with the IRB submissions at pilot centers for the BioFoam IDE in the United States. This is the last step in the DoD approval process for the IDE study. As you will recall the DoD is funding the US clinical study for BioFoam. FDA has already provided approval for this IDE study. We expect to receive final written approval from the DoD within the next four to six weeks.

We expect patient enrollment for the United States IDE for BioFoam used as an adjunct to conservative measures of achieving HemoStases on resected liver parenchyma tissue to commence in Q2. An interim analysis is planned once all 20 patients from the two pilot centers reach 12-month follow-up. The study report along with a request to initiate the pivotal phase of the study will be submitted to FDA and DoD at that time.

During the recent preclinical testing of BioFoam it was observed that it was effective and withstanding aortic blood pressures. Accordingly, a decision was made to design a study to evaluate HemoStases in a cardiovascular application.

The animal work is beginning and will consist of 25 animals to be followed for up to three months. BioFoam's effectiveness will be evaluated against the effectiveness of Gelfoam and BioGlue. This study is expected to begin during the second half of this year.

Ashley Lee

We are reiterating our guidance for the full year of 2010 subject to the ongoing litigation with Medafor including our continued ability to sell HemoStase. We expect total revenues for the full year of 2010 to be between $118 and $123 million which includes between $1.5 and $2.5 million related to funding received from the Department of Defense in connection with the development of BioFoam.

We have withdrawn our proposal to acquire Medafor and do not currently anticipate a transaction with them occurring during 2010. However should we renew our proposal or take other actions to acquire Medafor such as a proxy contest or tender offer, we could incur expenses or changes in the value of the Medafor derivative that could materially affect our guidance. Medafor informed us on March 18, 2010 that the distribution agreement between the parties was terminated. We filed an emergency motion for preliminary injunction in federal court requesting that the court order of the agreement to not be terminated. The court has set a hearing date for May 10, 2010. If Medafor is successful in its attempt to terminate the agreement and elects to discontinue shipping HemoStase to us, then our full year 2010 guidance would be materially, adversely affected.

We believe that Medafor does not have a basis for terminating the agreement, and the guidance above assumes that it will not be successful; however, there is no guarantee that the outcome will match our expectations. Additionally, we have budgeted for a certain level of expenses related to our ongoing litigation with Medafor. If actual future legal expenses exceed the amounts budgeted, then it could materially, adversely affect our expense and earnings guidance.

Q & A

Matt Dolan Roth Capital Partners

Okay, with respect to the Medafor agreement, where are you on HemoStase supply at this point, are they still shipping to you and how far along are you on any contingency plans you might have?

Ashley Lee

As it relates to their shipping product to us, the last purchase order that they were shipment was due to us was placed in January and they have substantially fulfilled the shipment of that purchase order. We recently placed additional purchase orders recently and the shipment for those particular purchase orders are not due until mid-May. So we will find out in mid-May as to whether or not they will – they’re planning on continuing to ship product to us.

reg Brash Sidoti & Company

Okay, and you’re maintaining your guidance, so I’m assuming you have some confidence that (inaudible) determination but if he doesn’t you have plans to bring on some additional products to replace HemoStase.

Steven Anderson

We’ve stated that we remain very active on the business development front and we’re not going to talk about specific areas or specific targets until it’s appropriate to do so, but the HemoStase product line is important to us and to the extent that we came, we would like to protect that revenue stream going forward.

Greg Brash Sidoti & Company

Okay, switching to BioGlue, some past quarters you were seeing off label use, less off label used pricing pressure, hospitals just curtailing the use of surgical sealing. Any improvement there?

Ashley Lee

We continue to see those types of issues out in the field, I think one of the areas that first of all the business was up year-over-year, that’s the important thing but one of the areas of the country where we did see some challenges more so then recently was in the North East, but all the other issues that we see they’re still out there but we still remain focused on growing that business.

Raymond Myers The Benchmark Company

Okay that sounds good. And next I wanted you to explain the – why patent loss in – or explain whether the patent loss in Germany would impact your BioGlue sales?

Steven Anderson

We don’t think that that is filled. First of all, Tenaxis, the party that – the other party is Nova Reaction (ph) has already been distributing BioGlue, I mean their products, which is (inaudible) in Europe. So we have been competing against that in Europe for a year or two now.

So even with that competitive product on the market, if I would recall correctly, we increased our revenues in Germany year-over-year about in excess of 20% and we expect to do even more than that in 2010 compared to 2009 as it relates to Germany. And then the Nova Reaction (ph) that resulted in us taking the charge in the first quarter is only specific to Germany, it doesn’t really affect any of the other countries in the EU.

Raymond Myers The Benchmark Company

Thanks. One other question, how is there a gain on the Medafor stock, when it’s not publicly traded, how do you value that?

Ashley Lee

That’s a long discussion, but I will do my best to answer here Ray. When we initially purchased our position in Medafor, we gave the selling shareholders a makeover provision whereby we could pay them additional compensation for their stock in the event that we were able to successfully acquire Medafor.

So what we had to do is when we initially setup net asset on our books, we had to determine what we could – where that’s considered a couple of factors, the likelihood that we would acquire Medafor, what and eventual price might be. And so a lot of assumptions went into what the ultimate value was that we established on our balance sheet to acquire Medafor.

Since we withdrew our proposal to acquire Medafor, all of those assumptions changed. And since those assumptions changed, the value of the derivative or the likelihood of the transaction might occur, all those assumptions changed and that resulted in us revaluing the derivatives associated with their stock. And as a result of that, we had to take income into other income for the first quarter of this year.

There is going to be a long discussion about that in our 10-Q that we will provide you much more detail. But hopefully in a nutshell that wasn’t too confusing as to how that was altered in the gain in the first quarter.

Raymond Myers The Benchmark Company

So we shouldn’t assume any quarterly – necessarily any quarterly volatility based on share price or anything else unless there is a material change in your Medafor relationship?

Ashley Lee

That’s fair.

Raymond Myers The Benchmark Company

Great, thank you.

Source: Seekingalpha

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