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 9^th. 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.

Hemostase - Medafor states CryoLife Press Release is Misleading and False

Please click the thumbnail to read.

PS - Happy Independence Day!

Hemostase: Medafor says its off...CryoLife its on.......

NOT SO FAST, MY FRIEND!

The continued quagmire that is the CryoLife/Medafor relationship appears set to continue according to This latest Press Release from CryoLife.

Background

After a failed takeover bid by CryoLife they encouraged Medafor shareholder's to withhold their votes at a recent Medafor shareholder meeting. This was rejected by 95% of the 70% of attendee's and one disappointed shareholder will no doubt be Jim Karerchersuch who commented "I say get rid of CryoLife and let investors make some money,".

Expenses in the tussle continue to escalate for both companies with Medafor CEO Shope stating... "The real problem for Medafor is the distraction and expense stemming from CryoLife's takeover bid and continuing litigation, Shope said. Had it not been for the $1.2 million the company shelled out for legal expenses last year, Medafor would have been profitable, ."

and another online source stating ...."Anderson, who launched the hostile takeover attempt of Medafor in 2009 and chose several public venues to prosecute his case, spent approximately $6 million in the effort."

Conclusions

For those on the sidelines this extremely public battle has been an intriguing insight. Lately barely concealed personal attacks are now appearing in certain news articles relating to CryoLife CEO Steven Andersons, age and absence from the shareholder meeting despite his residence in MN. Meanwhile Medafor management were brought under the spotlight with the CryoLife claim "that Medafor's CEO and chief financial officer earned a combined $700,000 last year." Medafor management also denied any issues related to the fact that Medafor senior executives, and Pennsylvania residents Shope and Pasquale don't live in Minnesota, where the company's 21 employees are based. With Pasquale claiming it isn't necessary to live locally.

Investors and Distributors must be feeling unsettled by the lack of clarity in terms of supply, and without any public statement from Medafor or the courts (where both companies appear more comfortable communicating) the status quo appears confusing.

One positive indication from this mess is that plant-based hemostatic technology is certainly worth fighting for. Medafor partner Orthovita must have an eye on these occurences, as will other key China manufacturer Starch Medical.

Medafor's board gets a vote of confidence

Shareholders of Brooklyn Center-based Medafor Inc. on Thursday decisively rejected a suitor's proposal to withhold support from the company's board after it turned down a takeover bid.
The Atlanta biomedical firm CryoLife Inc., which is Medafor's top distributor and shareholder, abandoned its $2-a-share cash and stock bid for the privately held company in March. The Medafor board dismissed it as "grossly inadequate."
But the two companies continue to duke it out in federal court, most recently over Medafor's decision to sever the distribution agreement between the two. CryoLife had also proposed withholding support for the five-member board, on the grounds that it "has overseen the destruction of Medafor's business, its technology and the value of its shares."
Shareholders who control roughly 70 percent of the company's shares voted by a 95 percent margin to re-elect the board.
At the center of the dispute is Medafor's unique blood-clotting powder, called HemoStase, which CryoLife distributes in the United States and in some markets abroad. But the legal status of that agreement is now unclear: A ruling by a federal district judge on the matter is expected soon. (While sales have temporarily lapsed in those markets as a result of the dispute, Medafor says customers will continue to be served after the ruling.)
At Thursday's meeting, held at the Northland Inn in Minneapolis, Medafor's CEO Gary Shope said the company's revenue in 2009 grew 40 percent to $13.8 million. He said trends in the business are strong through the first quarter of this year.
"The Medafor of today is a revitalized company," Shope said. "We've had a few bumps in the road, but we'll get through it."
The real problem for Medafor is the distraction and expense stemming from CryoLife's takeover bid and continuing litigation, Shope said. Had it not been for the $1.2 million the company shelled out for legal expenses last year, Medafor would have been profitable, he said.
The meeting was attended by about 175 shareholders, who listened as Shope and Chairman Michael Pasquale tag-teamed a series of questions.
Many shareholders appeared frustrated that they haven't been able to cash out their long-held stock at a profit. "I say get rid of CryoLife and let investors make some money," said Jim Karercher, a longtime investor from Ortonville, Minn.
Some asked for salary figures for the two executives, a request that was denied. CryoLife claims the company's CEO and chief financial officer earned a combined $700,000 last year.
Another shareholder asked why Pennsylvania residents Shope and Pasquale don't live in Minnesota, where the company's 21 employees are based. Pasquale said the company is global, and it isn't necessary to live locally.
One noticeable absence from the meeting was Steven Anderson, CryoLife's CEO, who is a Minnesota native and a former Medtronic Inc. executive. Anderson had planned to attend the meeting, but was waylaid by a family emergency, according to CryoLife spokeswoman Nina Devlin.

CryoLife to Submit Bond After Seeking Preliminary Injunction Against Medafor

KENNESAW -- CryoLife Inc. (NYSE: CRY ) likely will be ordered to submit a bond for up to $500,000 after filing an emergency motion for preliminary injunction in a drug distribution dispute with Medafor Inc., according to an SEC filing.
CryoLife, an Atlanta-based maker of medical products that enable heart and blood vessel reconstructive surgery, said it opposed Medafor's demand for a bond in the range of $14 million to $40 million because any injunction would not harm the defendant.
The U.S. District Court in Atlanta said it requires a bond before issuing a preliminary injunction, and ordered the two litigants to submit proposed bond amounts by June 11. The filing states the court is considering a bond in the range of $100,000 to $500,000.
CryoLife accuses Minneapolis-based Medafor of violating a drug distribution agreement by allowing other companies to distribute Hemostase, an absorbable blood-clotting agent manufactured by Medafor, in territories and medical fields reserved exclusively for CryoLife.
Under the agreement, CryoLife said it is the exclusive U.S. distributor of the drug used in cardiac and vascular surgery, excluding those performed at Department of Defense hospitals; and the exclusive distributor internationally, except China and Japan , for all surgeries other than orthopedic and ear, nose and throat surgery.
Medafor, in turn, accuses CryoLife of violating their exclusive distribution deal by selling Hemostase in Spain for uses allegedly barred by the agreement.

Orthovita Q1 2010 - Edited

Our biosurgery sales increased 12% during the first quarter of 2010, compared to the first quarter of 2009. Biosurgery offers an important strategic entry to hospitals where our Hemostats product have many application and new sales representatives benefit particularly from this product line as they seek to gain access to new accounts......

Graham Tenneco

What is the direction or do you think drift going to be or trends based on the Obama's healthcare plan and what might meaningful procedures and where an ASP basically?

Tony Koblish

We can't know all of that what's going to happen. However, I think the concept of evidence-based medicine and clinical data and clinical value proposition to the patients; I believe is going to be more and more important as we go forward. I think that we are exceptionally well positioned across all of our product platforms for that day, not just with Cortoss, which happens to have superb therapeutic benefit, value proposition to the patient, subsequent fracture benefit to the patient also reduced healthcare expenditure and re-hospitalization as shown in our clinical data, but we have an excellent proposition around the Vitoss business relative to more expensive therapies in bone grafting and our Vitagel business is also plays to demonstrate some effected clinical data around knee replacements etcetera. So, I think we are very well positioned in terms of comparative effectiveness, clinical data value proposition that one trend that’s not going to go away and I think that’s going to just be the price to play going forward. We are not going to get there all at once, but it’s going to happen and so I think cost effective, clinical value proposition we are very well situated for that eventuality, which is I think going to be the major fallout long-term.

Source: Seekingalpha

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