Orthovita second-quarter operating income improves to $0.4 million

Orthovita, Inc. (NASDAQ: VITA), an orthobiologics and biosurgery company, reported financial results for the quarter ended June 30, 2010. Product sales for the second quarter of 2010 were $23.9 million compared to $24.5 million for the second quarter of 2009. Product sales for the second quarter of 2009 included $0.6 million from the sale of Vitomatrix™, a bone graft material used in dental products. There were no Vitomatrix sales in the second quarter of 2010 and no further sales of Vitomatrix are currently expected.

“To more effectively address this outpatient market, where procedures are primarily done by interventional radiologists and neuroradiologists, as well as allow our sales representatives to refocus on our Vitoss and biosurgery inpatient business, we plan to add distributors who specialize in these outpatient markets”

During the second quarter of 2010, Orthovita recorded $1.3 million in U.S. sales of Cortoss™, the Company's novel synthetic biomaterial that was cleared by the FDA in June 2009 for the treatment of vertebral compression fractures, and Aliquot™, the Company's Cortoss delivery device. Since Cortoss and Aliquot were not available for sale in the U.S. until July 2009, there were no U.S. sales of these products in the second quarter of 2009.

Sales of the Company's biosurgery products increased 10% in the second quarter of 2010 compared to the second quarter of 2009. Sales of our Vitoss products, excluding $0.6 million from the sale of Vitomatrix in the second quarter of 2009, decreased 9% in the second quarter of 2010 compared to the second quarter of 2009. The decrease in our Vitoss sales resulted primarily from lower sales of our Vitoss Morsel and Foam products; sales of Vitoss Bioactive Foam products increased 7% in the second quarter of 2010 compared to the second quarter of 2009.

Antony Koblish, president and chief executive officer of Orthovita, said "U.S. sales of Cortoss and Aliquot increased from $0.9 million in the first quarter of 2010 to $1.3 million in the second quarter of 2010. In March 2010, we reduced our Cortoss and Aliquot pricing to be more closely aligned with the shift in vertebral augmentation procedures to the outpatient setting, and we have continued to experience monthly growth in Cortoss accounts. While our sales in dollars increased by 44% from the first to the second quarters of 2010, our Cortoss cartridge unit sales volume increased by 76%."

Mr. Koblish also commented on the sequential growth in product sales from the first to the second quarter of 2010, stating that "excluding the effect of the $1.1 million from the sale of Vitomatrix in the first quarter of 2010, both our total product sales and our Vitoss sales in the second quarter of 2010 increased 4% compared to the first quarter of 2010. Within our Vitoss product family, sales of our Vitoss Bioactive Foam products, which accounted for 65% of total Vitoss sales in the second quarter of 2010, increased 13% from the first quarter of 2010 to the second quarter of 2010."

"During 2010, our biosurgery and Vitoss product prices have remained relatively stable compared to 2009," Mr. Koblish continued. "Our biosurgery product volumes have continued to increase. However, the rapid shift of many vertebral augmentation procedures away from the inpatient hospital market, where we have a strong sales presence among spine and neurosurgeons, to the outpatient market, where we are addressing a new physician target audience, has both slowed our expected rate of adoption of Cortoss and shifted sales force time away from the spine and neurosurgeons who use our Vitoss synthetic bone graft products. Because Vitoss is sold in a highly competitive environment requiring significant sales representative time in the operating room, our Vitoss volume growth has been adversely affected by the Cortoss launch."

"To more effectively address this outpatient market, where procedures are primarily done by interventional radiologists and neuroradiologists, as well as allow our sales representatives to refocus on our Vitoss and biosurgery inpatient business, we plan to add distributors who specialize in these outpatient markets," said Mr. Koblish. "We have streamlined our direct sales force, which will focus primarily on the inpatient spine and orthopedic market to leverage our customer relationships by marketing our biosurgery and orthobiologic products to all of our customers. Through an intense focus on our target physician audiences using a combination of our direct sales representatives, sales agents and distributors in a hybrid sales model, our goal is to regain sales momentum and growth in our Vitoss platform first while developing our hybrid selling model to increase penetration of Cortoss."

Gross profit for the quarter ended June 30, 2010 was $15.7 million, or 66% of product sales, compared to $16.8 million, or 69% of product sales for the second quarter of 2009. The reduction in gross profit as a percentage of product sales was due to a more favorable product mix in the second quarter of 2009, primarily resulting from the Vitomatrix sale mentioned above, combined with higher charges in 2010 due to unused manufacturing capacity charges and increased reserves for expiring inventory.

During the second quarter of 2010, Orthovita recorded operating income of $0.4 million compared to an operating loss of $0.1 million in the second quarter of 2009. The improvement in operating income was due to lower sales and marketing and research and development expenses in the second quarter of 2010 compared to the second quarter of 2009, partially offset by higher general and administrative expenses, primarily related to information technology infrastructure. Sales and marketing expenses were lower in the second quarter of 2010 compared to the second quarter of 2009 primarily due to higher marketing expenses in the second quarter of 2009 in anticipation of the launch of Cortoss. Research and development expenses were lower in the second quarter of 2010 compared to the second quarter of 2009 primarily due to lower Cortoss and other product candidate research and development costs. The net loss for the second quarter of 2010 was $0.6 million, or $0.01 per common share, compared to a net loss of $0.7 million, or $0.01 per common share, in the second quarter of 2009.

Orthovita's earnings before interest, taxes, depreciation and amortization and stock-based compensation expense, or Adjusted EBITDA, was $1.8 million in the second quarter of 2010, or $0.02 per common share compared to $1.1 million, or $0.01 per common share in the second quarter of 2009. A reconciliation of our reported GAAP net loss to Adjusted EBITDA is included with the Summary Financial Information included with this release.

For the first six months of 2010, product sales increased 4% to $47.9 million compared to $46.2 million for the first six months of 2009. This increase was primarily due to higher sales of our biosurgery products, which increased 11% in the first half of 2010 compared to the first half of 2009. During the first half of 2010, Orthovita recorded $2.2 million in U.S. sales of Cortoss and Aliquot. There were no sales of Cortoss or Aliquot in the U.S. during the first half of 2009. Product sales for the six months ended June 30, 2010 included $1.1 million from the sale of Vitomatrix compared to $0.6 million for the six months ended June 30, 2009. The supply agreement for this product was terminated in March 2010.

For the six months ended June 30, 2010, gross profit was $32.4 million, or 68% of product sales, compared to $31.5 million, or 68% of product sales, for the first six months of 2009.

During the first half of 2010, Orthovita recorded a nominal operating loss compared to a $0.5 million operating loss for the first half of 2009. The net loss for the first half of 2010 was $1.7 million, or $0.02 per common share, compared to a net loss of $1.9 million, or $0.02 per common share, for the first six months of 2009.

Adjusted EBITDA for the first half of 2010 was $2.7 million, or $0.04 per common share, compared to $1.9 million, or $0.03 per common share for the first half of 2009. A reconciliation of our reported GAAP net loss to Adjusted EBITDA is included with the Summary Financial Information included with this release.

Nancy Broadbent, chief financial officer of Orthovita, commented, "We have revised our financial guidance for 2010. Our original financial guidance, which we announced on March 10, 2010, included total product sales between $106 million and $112 million and net income between breakeven and $2 million. We now expect total product sales to be in the range of $96 million to $100 million and net income to be between $1 million and a net loss of $2 million. Our revised financial guidance for net income reflects a broader range than our original guidance primarily due to potentially higher charges for unused manufacturing capacity at the lower end of our sales range."

"Due to our revised expectations for 2010 total product sales, we recently implemented a headcount reduction. We recorded a charge in the second quarter of 2010 of $0.1 million for severance costs, and we anticipate $2.4 million in annualized cost savings from our headcount reductions," Ms. Broadbent continued. "We also selectively reduced other expenses, and we do not anticipate the need to raise additional capital to fund our operations for the foreseeable future."

Cash, cash equivalents and short-term investments were $18.6 million at June 30, 2010, compared to $23.1 million at December 31, 2009. For the six months ended June 30, 2010 and 2009, the net cash and cash equivalents used in operating activities was $4.1 million and $3.4 million, respectively. We anticipate the level of cash utilization for the second half of 2010 will be below the cash utilized in the first half of the year.