CryoLife, Inc. (NYSE: CRY), an implantable biological medical device and cardiovascular tissue processing company, announced today its results for the second quarter of 2010. Revenues for the second quarter increased 4 percent to a second quarter record of $29.3 million compared to $28.2 million for the second quarter of 2009. Net income for the second quarter of 2010 was $2.9 million, or $0.10 per basic and fully diluted common share, compared to $2.5 million, or $0.09 per basic and fully diluted common share, for the second quarter of 2009.
"We are very pleased to be reporting record second quarter revenues and our 14th consecutive quarter of profitability. CryoLife continues to execute effectively on its business plan despite a challenging economy, as evidenced by the $3.7 million increase in our cash, cash equivalents, and restricted securities in the quarter to $41.4 million. We believe that our continuing strong operating performance, coupled with our ongoing stock repurchase plan and business development initiatives, will lead to enhanced shareholder value over the near- and long-term," stated Steven G. Anderson, president and chief executive officer.
The Company recorded pretax charges in the second quarter of 2010 of approximately $420,000 in costs related to litigation with Medafor and recorded a $385,000 gain on valuation of the derivative related to the investment in Medafor common stock.
Revenues for the first six months of 2010 increased 8 percent to a first six month record of $59.0 million compared to $54.9 million for the first six months of 2009. Net income for the first six months of 2010 was $4.9 million, or $0.17 per basic and fully diluted common share, compared to $4.5 million, or $0.16 per basic and fully diluted common share for the first six months of 2009.
The Company recorded pretax charges in the first six months of 2010 of $729,000 in connection with the write-off of capitalized legal expenses associated with BioGlue® Surgical Adhesive intellectual property rights in Germany and approximately $834,000 in costs related to litigation with Medafor. Additionally, the Company recorded a $1.2 million gain on valuation of the derivative related to the investment in Medafor common stock.
Preservation service revenues for the second quarter of 2010 increased 6 percent to $15.0 million compared to $14.1 million for the second quarter of 2009. Preservation service revenues for the first six months of 2010 increased 11 percent to $30.6 million compared to $27.6 million for the first six months of 2009. The increase in preservation service revenues for the second quarter of 2010 was primarily due to increased shipments of vascular tissues. The increase in preservation service revenues for the first six months of 2010 was primarily due to increased shipments of both cardiac and vascular tissues.
Product revenues, which consist primarily of sales of BioGlue and HemoStase®, were $14.1 million for the second quarter of 2010 compared to $13.9 million for the second quarter of 2009, an increase of 2 percent. Product revenues were $28.1 million for the first six months of 2010 compared to $26.9 million for the first six months of 2009, an increase of 5 percent. The increase year over year primarily reflects the growing usage of HemoStase in cardiac and vascular surgical indications in the U.S., and cardiac, vascular, and general surgery indications in many markets outside of the U.S.
Total preservation services and product gross margins were 61 percent for the second quarter of 2010 and 63 percent for the second quarter of 2009. Total preservation services and product gross margins were 60 percent and 64 percent for the first six months of 2010 and 2009, respectively.
Preservation services gross margins were 40 percent for the second quarter of 2010 and 43 percent for the second quarter of 2009. Preservation services gross margins were 40 percent and 44 percent for the first six months of 2010 and 2009, respectively.
Product gross margins were 82 percent for the second quarter of 2010 and 84 percent for the second quarter of 2009. Product gross margins were 82 percent and 84 percent for the first six months of 2010 and 2009, respectively.
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. General, administrative, and marketing expenses for the second quarter of 2010 included approximately $420,000 in costs related to litigation with Medafor.
General, administrative, and marketing expenses for the first six months of 2010 were $25.5 million compared to $25.1 million for the first six months of 2009. General, administrative, and marketing expenses for the first six months of 2010 included a charge of $729,000 related to the write-off of capitalized legal expenses associated with BioGlue intellectual property rights in Germany and approximately $834,000 in costs related to litigation with Medafor.
Research and development expenses were $1.2 million and $1.4 million for the second quarters of 2010 and 2009, respectively. Research and development expenses were $2.5 million and $2.4 million for the first six months of 2010 and 2009, respectively. Research and development spending in the first six months of 2010 was primarily focused on the Company's BioGlue, BioFoam™ Surgical Matrix, and SynerGraft® tissues and products.
Other income of $215,000 and $865,000 in the second quarter and the first six months of 2010, respectively, consisted primarily of a $385,000 and $1.2 million gain on valuation of the derivative related to the investment in Medafor common stock.
As of June 30, 2010, the Company had $41.4 million in cash, cash equivalents, and restricted securities, compared to $35.1 million at December 31, 2009. Of this $41.4 million, $2.4 million was received from the U.S. Department of Defense as advance funding for the development of BioFoam protein hydrogel technology, and $5.3 million was designated as restricted securities primarily due to a financial covenant requirement under the Company's credit agreement. The Company has net operating loss carryforwards that will reduce required cash payments for federal and state income taxes for the 2010 tax year.
Medafor Update
As previously disclosed, on March 18, 2010, Medafor informed the Company that Medafor was terminating the exclusive distribution agreement (EDA) between the parties. CryoLife filed a motion for a preliminary injunction against Medafor's termination of the EDA in the U.S. District Court for the Northern District of Georgia. The court held hearings on the motion on May 10 and June 28, 2010, but has not yet ruled on CryoLife's motion.
During the time period between Medafor's announcement on March 18, 2010 and late June, Medafor rejected three of the Company's purchase orders for HemoStase totaling approximately $1.8 million. Due to these rejections, the Company did not have sufficient inventories of all sizes of HemoStase to fulfill all orders, specifically the 1 gram international product. In addition, management believes that the Company lost additional sales of HemoStase due to uncertainty in the market as to whether the Company had the authority to market HemoStase and whether it would be able to continue to supply the product in the future, as well as due to continued sales by Medafor of its product into the Company's exclusive territory in violation of the EDA.
Beginning June 29, 2010, Medafor began shipments of HemoStase to CryoLife pursuant to a $2.5 million purchase order that CryoLife submitted on June 25, 2010. By mid-July CryoLife received the 1 gram international product ordered on June 25. On July 9, 2010, the Company submitted an additional purchase order for approximately $1.35 million of HemoStase. Medafor has begun shipments under this purchase order. As of July 27, 2010 Medafor has filled approximately $2.5 million of the $3.8 million aggregate in June and July purchase orders.
If the EDA with Medafor remains in effect and Medafor fills purchase orders in compliance with the EDA, the Company believes that HemoStase revenues will increase for the full year 2010 as compared to 2009. HemoStase is still in a growth phase and has significant room to further penetrate CryoLife's existing customer base. However, on July 27, 2010 the Company received notice from Medafor alleging that CryoLife had materially breached the EDA and stating that Medafor will terminate the EDA if the breach is not cured in 30 days. CryoLife does not believe that Medafor will be able to terminate the EDA per the terms of the notice without breaching the EDA. CryoLife's ongoing litigation with Medafor and recent Medafor actions, including this new notice, may negatively affect the Company's ability to distribute HemoStase. Based on the Company's existing inventory levels of HemoStase as of June 30, 2010 and additional receipts of HemoStase through July 27, 2010, CryoLife expects that it can generate between $6.0 and $7.0 million in future sales of HemoStase unless the EDA is ultimately terminated. The guidance below includes a range of $4.0 to $4.5 million in HemoStase revenues for the second half of 2010.
2010 Financial Guidance
This guidance is given subject to the assumptions and qualifications discussed below. The Company expects total revenues for the full year of 2010 to be between $118.0 million and $122.0 million, which includes between $1.0 million and $2.0 million related to funding received from the Department of Defense in connection with the development of BioFoam. The Company expects 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. The Company expects earnings per share of between $0.34 and $0.38 for 2010.
The assumptions upon which this guidance is based include HemoStase revenues of between $4.0 million and $4.5 million in the second half of the year, levels of Medafor related litigation expenses in the second half of the year consistent with the first half of the year, and that the EDA will not be terminated. The earnings guidance contains general expenses associated with business development opportunities, but does not include significant expenses associated with specific targets. The Company has withdrawn its proposal to acquire Medafor and does not currently anticipate a transaction occurring during 2010; however, should CryoLife renew its proposal or take other actions to acquire Medafor, such as a proxy contest or tender offer, it could incur expenses or changes in the value of the Medafor derivative that could materially affect this guidance.
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