Synovis recorded several special charges in the third quarter, which totaled $8.2 million on a pretax basis and $7.1 million on an after-tax basis, or $0.61 per diluted share. These charges include: the other-than-temporary impairment of $4.1 million in auction rate securities; the immediate expensing of $3.5 million of acquired in-process research and development projects related to the purchase of the assets of Pegasus Biologics; and the write-off of $600,000 of intangibles related to a lower priority product. (See reconciliation table on page 6 for details.)

Richard W. Kramp, Synovis Life Technologies’ president and chief executive officer, said, “The accomplishments of this just-completed third quarter were significant and very important for the near- and long-term growth of Synovis. First, we again posted double-digit revenue gains and realized the 12th record revenue quarter in the last 13 quarters. Second, we are about to complete a 40 percent increase in our domestic direct sales force for our surgical products. And third, we have expanded our soft tissue technology base and regulatory approvals into the orthopedic and wound care markets with the acquisition of the assets of Pegasus Biologics. These achievements promise to increase returns to our shareholders for years to come and were accomplished with very modest investments. The Pegasus transaction brought products with full regulatory approval in the United States, as well as Europe, in the expanding orthopedic and wound care markets. The acquired technology provides a collagen matrix for soft tissue repair which completes the spectrum between our tightly cross-linked Apex technology and our non-cross linked, remodelable Veritas® technology.”

Known as “flexible cross-linking”, the Pegasus Biologics technology binds the potential antigenic sites in the collagen matrix to each other with a long chain, bio-compatible molecule preserving the natural mechanical characteristics of the material while also leaving larger spaces between the crosslinks to allow native tissue integration. This technology is particularly suited to wound healing and orthopedic applications.

Kramp added, “The 14 additional sales professionals hired in the fiscal third quarter and early August for our surgical sales force have begun our intensive training program. We expect to fill the two remaining sales positions in the coming weeks and will then have a total of 56 territory sales representatives and seven regional managers in place for fiscal 2010. Past additions of territory sales representatives have led to greater market penetration and higher revenue approximately six months after the expansion.”

Gross margin for the fiscal third quarter rose to 72 percent, a 3 percentage point gain over the third quarter of fiscal 2008. Most of the gross margin improvement resulted from increased sales of higher margin Veritas products, improved labor and material utilization, and higher average net selling prices. SG&A expenses rose 22 percent over the third quarter of fiscal 2008 due primarily to investments in the expansion of the surgical sales force, expenses related to the start-up of the assets acquired from Pegasus and increased legal costs. Research and development expenses totaled $945,000 in the third quarter, a 12 percent increase over the year-ago period. Priority projects included the final-stage development of the Flow Coupler, Peri-Strips® enhancement initiatives, and work on current and future Veritas indications. On a GAAP basis, the operating loss for the third quarter of fiscal 2009 totaled $(1.7) million. Adjusted operating income (non-GAAP) for the third quarter totaled $2.4 million, a 7 percent gain over GAAP operating income of $2.3 million a year earlier.

In the first nine months of fiscal 2009, net revenue rose to $43.2 million, up 16 percent from $37.1 million in the prior-year period. On a GAAP basis, the net loss for the first nine months of fiscal 2009 totaled $(1.1) million. Adjusted net income (non-GAAP) was $5.9 million, or $0.50 per diluted share, up from GAAP net income from continuing operations of $4.3 million, or $0.33 per diluted share, in the first nine months of fiscal 2008.

Growth through High Potential Products

Synovis offers an attractive product portfolio which includes tissue-based repair and regeneration products, devices for microsurgery, and surgical tools and instruments with applications in several surgical specialties, including bariatric, general, vascular, neuro, micro and reconstructive surgery, as well as the recently added orthopedic and wound care specialties. Product-related highlights for the third quarter follow.

Revenue from patch products based on Synovis’ unique Veritas remodelable biomaterial rose to $2.3 million in the third quarter, an 82 percent increase over the comparable period last year and up 10 percent sequentially from the second quarter of fiscal 2009. Veritas, which is extremely conformable and strong, acts as a “scaffold” to facilitate tissue regeneration. Synovis launched Veritas into the ventral hernia repair market in early fiscal 2007.

Regarding the hernia market, Kramp added, “Veritas has clearly begun to demonstrate performance advantages over other leading products in the market, and we continue to see exceptional revenue growth – our annualized sales rate has reached $9.2 million. Expanding our surgical sales force is an important part of our strategy to further drive growth in this large market. One of the papers we have anticipated was published in early July in The Journal of Surgical Technology International, and presents the science behind Veritas. We expect to receive reprints for use in the field shortly. The next paper on Veritas is scheduled for publication in October in another prominent surgical journal and documents the clinical results of over two dozen complex ventral hernia procedures. Both papers will support our drive to expand the use of Veritas in the hernia application.”

Peri-Strips® Dry, or PSD, product sales totaled $4.8 million in the third quarter, a 1 percent increase over the year-ago period. PSD is a bovine pericardium-based staple-line buttress used primarily to control bleeding and leakage of gastric fluids in bariatric procedures to treat obesity. Peri-Strips products have an exceptionally low adverse event rate.

Kramp said, “The growth rate for Peri-Strips slowed in the third quarter and this appears to be due primarily to expanded trialing and, in some cases, adoption of an integral buttress introduced by one of the stapler companies. This alternative product was available on a limited basis starting at the beginning of calendar 2009 and was fully launched in April. Its primary benefit appears to be in the ease of use area, and we are confident that as intermediate and long-term clinical performance becomes evident, we will see many customers return to PSD as they have from earlier trial centers. We believe the steps we have taken to expand our sales force and develop product enhancements will help strengthen Synovis’ market position and our efforts to convert additional non-buttressing surgeons.”

Sales of our Tissue-Guard line of products for vascular, thoracic and neuro applications increased 10 percent over the third quarter of fiscal 2008 to $4.1 million, with strong growth in vascular applications in U.S. and international markets. Higher unit sales and selling prices contributed to the revenue increase.