Saturday, July 31, 2010

CryoLife Q2 Edited -Biofoam rollout on-track, Medafor sold Hemostase with improper packaging and IFU

Ashley Lee

Product revenues which consist primarily of BioGlue and HemoStase increased 2% and 5% in the second quarter and first half of 2010 compared to the corresponding periods in 2009. The increases year-over-year primarily reflects the growing usage of HemoStase in cardiac and vascular surgical indications in the US and cardiac, vascular and general surgery indications in many markets outside of the US.

Total preservation services and product gross margins were 61% for the second quarter of 2010 compared to 63% for the second quarter of 2009, and 60% in the first half of 2010, compared to 64% in the first half of 2009. Preservation services gross margins for the second quarter of 2010 were 40% compared to 43% in the

second quarter of ’09, and 40% in the first half of 2010, compared to 44% in the first half of 2009.

Product gross margins for the second quarter of 2010 were 82% compared to 84% in the corresponding period in 2009, and 82% in the first half of 2010, compared to 84% in the first half of 2009.

General, administrative and marketing expenses for the second quarter of 2010 were $11.7 million compared to $12.3 million for the second quarter of 2009. These expenses for the second quarter of 2010 included approximately $420,000 in cost related to our litigation to our litigation with Medafor.

General, administrative and marketing expenses for the first half of 2010 were $25.5 million compared to $25.1 million in the first half of 2009. The first half of 2010 included a charge of $729,000 related to the write-off of capitalized legal

expenses associated with our BioGlue intellectual property rights in Germany, and approximately $834,000 in cost related to our litigation with Medafor.

Steve Anderson

In late June, Medafor filled most of an approximately $2.5 million order for HemoStase, the hemostatic agents that we distribute for them. We were surprised that this order was filled since they had refused to fill three previous orders, totaling approximately $1.8 million that we had placed in March and April of this year.

As a result of Medafor not shipping the March and April orders, we were enable to fill some requests for the 1 gram size product. We believe this adversely affected our quarter two HemoStase revenues over what we believe they would have been along with the confusion in the marketplace caused by Medafor’s announcement that it was terminating the agreement and what we believe are continued sales by Medafor into our exclusive field. We expect to pursue reimbursement of our damages from those lost sales in our lawsuit against Medafor.

Another thing that we found disturbing about Medafor’s order filling process is that we believe a portion of the product they delivered to us in late June did not meet our incoming acceptance standard. We do not believe this portion of their shipment had the proper instructions for use in the baggage or the correct information on the printed boxes. These discrepancies affected the 5 gram product. This is the second instance of this type of issue.

We placed another order for approximately $1.3 million of HemoStase with Medafor on July 9th. They have begun to fill this order, but have informed us that they will not fill all of it on a timely basis. They have also informed us that they will not fill all of our June purchase order on a timely basis.

These issues with Medafor make working with them increasingly difficult and working with these folks is increasingly becoming similar to trying to work with Larry, Moe and Curly. Despite the difficulty of dealing with Medafor’s management, however, we continue to have faith in the HemoStase product.

During the second quarter, our European perspective multicenter single arm study for BioFoam was completed. A total of 55 patients from three countries were enrolled in this study. There were 15 enrolled in the UK, 15 in France, and 25 in Germany. The focus of the study was to determine the effectiveness of BioFoam in sealing liver resections.

Data analysis of the primary endpoint show the achievement of hemostasis within three minutes in 92% of the application sites. BioFoam’s mean hemostatic time compares favorably to those reported for comparative products. The final report should be completed in the third quarter and will be used to supplement in application for approval in Canada. Since product launch, there have been approximately a 130 cases of BioFoam in the clinical setting.

We continue to move forward on our approval IDE for BioFoam used in the sealing of liver parenchyma. Upon receipt of final approval from the United States Department of Defense, we expect to start patient enrollment into the study mid third quarter of this year.

The approved IDE is for a prospective multicenter randomized feasibility study evaluating safety outcomes of BioFoam as compared to a standard topical hemostatic agent. 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, a follow on prospective multicenter randomized controlled pivotal study will be conducted. It is currently projected that the pivotal investigation will enroll a total of a 164 eligible subjects, 82 subjects in each treatment group across a maximum of 10 investigational sites.

We expect tissue processing revenues to increase between mid-single and low-double digits on a percentage basis in 2010 compared to 2009, BioGlue revenues to increase by low single digits on a percentage basis, and HemoStase revenues to increase more than tissue or BioGlue revenues on a percentage basis.

Matt Dolan – Roth Capital Partners

Maybe a couple of question on the guidance, and the changes we saw there, just to be clear. So on the revenue line, Ashley, can you just walk us through why the top end is coming down? Is that specifically related to HemoStase or something more in the base CryoLife book of business?

Ashley Lee

There are a couple of things of note there. A good portion of the top line – at least the top end of the range coming down relates to grant revenue associated with the BioFoam IDE a little delayed in getting that started. And it looks like that we will in fact begin enrollment in that trial during the third quarter. So, again, as you recall too, those revenue – any revenues that we record there, there are some corresponding expenses. So any reduction in revenue for BioFoam is really neutral to the bottom line of the guidance there.

The other thing is as we mentioned a little bit earlier, the HemoStase revenues were adversely affected in the second quarter of this year, due to the variety of issues that we previously mentioned. As we moved into the third quarter, it looks like things are starting to normalize, again for the HemoStase revenue. So there’s a little bit of an effect there. And, BioGlue, saw a trialing of a new product in the Northeast called ProGel. We don't think the product works as well as BioGlue. However, we did see some trial and errors, so we’re bringing it down a little bit for that.

Matt Dolan – Roth Capital Partners

So you're talking about close to $1 million in litigation in the second half of the year?

Ashley Lee

Yes, and that’s roughly what we spent in the first half of the year.

Matt Dolan – Roth Capital Partners

Okay. And then just two more. So, on the Medafor situation, I mean, what sort of timeframe do you feel like you can find some type of appropriate substitute or replacement for HemoStase? At this point, obviously the relationship doesn't sound like it's overly healthy.

Ashley Lee

We’ve stated in the past that we would prefer to remain in the agreement and continue to distribute HemoStase. We just want to move forward with the agreement. With that being said, we continued to look at a business development opportunities in a wide variety of areas and we are not going to get specific on any of our business development activities. And then when if there is an announcement to make in that area, then we’ll announce it.

Raymond Myers – The Benchmark Company

Okay, great. And my next area of questions is regarding the HemoStase. Given though the lack of cooperation from Medafor that you received to date and particularly recently with them not sending the correct product and packaging, do you think that under the current circumstances you will be able to grow your HemoStase sales in the second half of this year or is it permanently impaired?

Steve Anderson

I don’t think it’s permanently impaired. I think it has a lot to do with their ability to get their product packaged on a routine basis, they do that with contract packaging firms, they don’t do it themselves. And I think it’s a matter of their coordinating those processes better in their company.

I know that they have enough powder in storage to significantly increase their production. But I – from a far, I guess it has to do more with getting that raw material to the people that package their product for them and get the throughput coming out on a more regular basis.

Raymond Myers – The Benchmark Company

Do you have the supply currently to supply all the different sizes that you require?

Ashley Lee

We do.

Raymond Myers – The Benchmark Company

Okay. So there's no impediment in that regard currently?

Ashley Lee

Currently, there is not.

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