Over the past three years CryoLife has made considerable progress in repositioning the Company with earlier stage, high growth, implantable medical devices.  During this 36 month period the Company has acquired: the HERO graft, the only completely implantable graft for end stage renal disease (ESRD) patients; a laser based technology for treating patients with severe angina; licensed the technology for PerClot a powdered hemostatic agent; and invested $3.5 million and a $2 million loan in ValveXchange, an early stage prosthetic heart valve company that has an aortic valve with exchangeable leaflets.

These corporate development activities, along with substantial growth in our core business segment resulted in record revenues in the fourth quarter and in fiscal 2012.  Revenues for 2012 were a record $131.7 million and earnings were $0.28.  Gross margins were 64% for fiscal 2012 compared to 63% for fiscal 2011.

As of December 31, 2012, we had $18.3 million in cash, cash equivalents and restricted cash and securities, up from $13.1 million at the end of the third quarter.  The Company's net cash flows provided by operations were approximately $8.0 million for the fourth quarter of 2012 and $19.0 million for the full year of 2012.

The transfer of the HERO Graft manufacturing operations from Eden Prairie, Minnesota to CryoLife's new manufacturing facility on the Georgia Tech campus is nearing completion.  Once final, the manufacturing facility in Eden Prairie, Minnesota will be closed.  The HERO Graft manufacturing facility was previously occupied by a start-up pharmaceutical company that went out of business.  They left behind a suite of pharmaceutical grade cleanrooms that would have cost us $3 million to build ourselves so we were delighted to find this state-of-the-art manufacturing space.

2012 sales of the HERO Graft since its acquisition on May 16, 2012 were $3.1 million.  We estimate that the annual U.S. market for an ESRD graft is 35,000 units which equates to approximately $125 million market opportunity.

To accelerate physician acceptance of the HERO graft, our physician training department has been developing the curriculum and selecting a faculty for our first Central Venous Pathology Summit that will be held at our corporate headquarters in April.  We expect the faculty will be international in scope and will attract experts in the treatment of end stage renal disease from around the world.

The IDE application for PerClot, our powdered hemostat, is in process and we are optimistic that it will be completed soon.  Recent feedback from FDA has provided further clarity on the clinical study design.  We expect the number of patients in the study to be 400; 200 for PerClot and 200 for the control group.  The FDA has indicated that it agrees to a one month follow-up period.  Our IDE is for multiple indications and specialties including cardiac, vascular, orthopedic, general and urological.  We are currently optimistic that we can obtain approval of our IDE during the first half of 2013.

The PerClot clinical manufacturing facility has been completed at our corporate headquarters.  We completed three manufacturing lots of PerClot that will be used in our U.S. clinical trials.  These lots of PerClot will be ready to be shipped to our investigative sites upon approval of the IDE.

We have evaluated PerClot against the other powdered hemostat approved for the U.S. market .  In a preclinical experiment conducted on the two products, PerClot achieved hemostasis in half the time required by the other product.  Our laboratory studies also show that PerClot will absorb 4-5 times the amount of fluid as the other product.  Management believes we have a very superior product.  We estimate that the worldwide market for powdered hemostats will be about $1.3 billion in 2015 with the U.S. market potential at $890 million.

We continue to be actively involved in additional business development activities.  Specifically, ValveXchange, of which we own 19%, continues to make progress in their European clinical trial for their CE Mark approval.  Last week they reported that they had successfully completed their 27th implant of the valve in Europe.  We effectively have the right of first refusal to distribute the product in Europe.  We are also actively looking at a number of companies for technologies related to AV access devices and infection control for catheters that would complement the HERO graft.

Since the inception of the company in 1984, we estimate that allograft heart valves and vascular grafts as well as surgical adhesives and sealants have been used in between 850,000 and 900,000 surgeries worldwide.

Very truly yours,

Steven G. Anderson

President and CEO

Atlanta, Georgia  February 25, 2013

 

Forward-Looking Statements

Statements made in this update that look forward in time or that express management's beliefs, expectations, or hopes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the views of management at the time such statements are made and are subject to a number of risks, uncertainties, estimates, and assumptions that may cause actual results to differ materially from current expectations. These statements include those regarding the high growth nature of certain products, plans regarding the transition of HeRO Graft manufacturing operations to the Georgia Tech campus, estimates regarding the annual market and market opportunity for ESRD grafts and powdered hemostats, expectations regarding the Central Venous Pathology Summit, expectations regarding the PerClot clinical study and approval of the PerClot IDE application, and statements regarding future business development activity. The risks and uncertainties impacting these statements include that market opportunities and potential growth related to any of our products, including PerClot and the powdered hemostat market and HeRO Graft and the ESRD graft market, are subject to factors beyond our control, including general economic conditions, physician and patient acceptance of our products, our potential inability to maintain reimbursement approvals and maintain and expand reimbursement rates, and regulatory approval. Competing products may be introduced into the market that may materially impact sales growth for our products. We may be unsuccessful in our efforts to leverage our existing sales force and cross-sell our products, and integration efforts may be more costly and take longer than currently anticipated. If we sell PerClot in the U.S., we will likely be sued for patent infringement, which will be expensive, and if we lose, we may be prohibited from selling PerClot or may have to pay substantial royalties or damages when we sell PerClot, after receiving the FDA’s response to our application. We may not be successful in obtaining regulatory approval to distribute PerClot in the U.S. when expected, if at all. We filed a revised IDE application for PerClot and we received questions from the FDA related to this filing. We are working to address the questions, but there is no guarantee that the FDA will find our responses satisfactory. After approval of the IDE, we may have difficulty in enrolling patients for the clinical study or we may experience other problems or delays with the study. Also, the clinical study may not provide the anticipated results. The transition of HeRO Graft manufacturing operations to the Georgia Tech campus may take longer than expected and we may experience inefficiencies in the short-term as we establish operations in a new facility. We may be unsuccessful in recruiting international experts for our faculty at the Central Venous Pathology Summit, and there is no guarantee that a successful and well-attended summit will translate into increased sales or accelerated physician acceptance of the HeRO Graft. We have received a warning letter from the FDA relating to our processing, preservation, and distribution of human tissue and the manufacture of medical devices and our failure to adequately address the concerns raised by the FDA in the warning letter could result in additional action being taken by the FDA, including without limitation, a recall, injunction or legal action, which could adversely impact our revenues, profits and liquidity. We continue to evaluate expansion through acquisitions, licenses, investments, and other distribution arrangements in other companies or technologies, and we may not be successful in identifying acquisitions or other development opportunities that fit within our overall strategic objectives. Cost and other factors beyond our control could prevent us from consummating acquisitions and other business development activities that we are able to identify. Any business development goals or expectations are subject to change at any time based on management’s assessment of the overall needs of the company. These risks and uncertainties include the risk factors detailed in our Securities and Exchange Commission filings, including our Form 10-K for the year ended December 31, 2012, and our subsequent filings with the SEC. CryoLife does not undertake to update its forward-looking statements.