Q3 2019 Earnings Call
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Well I like to turn the conference over to your moderate or today Mr. MCU does leave I know that's senior Vice President.
First of all Smith. Please go ahead.
Thank you Julie and welcome to our conference call webcast disgusting, leaving oldest financial results for the third quarter 2019.
Joining me on today's call, our Damien Mcdonald, our Chief Executive Officer Dad used in our Chief Financial Officer, and Melissa Perino, Our vice President of Investor Relations.
Before we begin I would like to remind you that the discussions during this call will include forward looking statements.
Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the FCC, including today's press release is available on our website, we do not undertake to update any forward looking statement.
Also the discussions will include certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures can be found in today's press release this available on our website.
We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complimentary to the other call materials and should be used as an enhanced communication tool you can find the presentation in press release any investor Relations section of our web site.
Under news and events <unk> presentations at Investor Dot, leaving Nova Dot com.
With that I'll now turn the call over to Damian Thanks, Matt.
Welcome to a third quarter 2019 conference call today, we will discuss our results provide some recent highlights and reaffirmed sales and earnings guidance.
Third quarter adjusted EPS exceeded the upper end to that guidance range driven by high single digit sales growth in Neuromodulation.
That included another sequential uptick in a U.S. epilepsy. So.
The solid performance in Neuromodulation was partially offset by some softness in a cardiovascular franchise.
I'm going to start off by discussing some recent highlights then move to a sales results by business.
After my comments that will provide you with additional details on the financials.
Then I will wrap up with closing comments before moving onto Q and I.
In early September CMS, except that the protocol for ever recover clinical study evaluating Venus therapy for treatment resistant depression.
Recover is a double blind randomized placebo controlled study with a follow up duration of at least one year.
The coverage with evidence frame. What also includes the possibility to extend study into a prospective registry.
Recovery will include up to 500, Uni polo and 500 bipolar patients at a maximum at 100 sites in the United States.
On September 27, Dr., <unk>, President and Chief Medical Officer, Centerpoint behavioral health systems in Saint Louis enrolled the first patient in there what type of study.
We believe this represents a landmark achievements of patients who suffer from is to build a tightening disease.
Turning now to a net sales results for the third quarter, which will be stipend on a constant currency basis.
Total net sales were flat compared to the third quarter of 28 thing.
Neuromodulation grew in the high single digits, well cardiovascular declined in the mid single digits.
Overall, our U.S. business declined 1%, primarily due to difficult comparisons and actual EMS and softness in heartfelt Europe grew for the eight straight quarter and rest of world grew nearly 10% excluding impact of a Canadian distributor exit.
Cardiovascular sales were $155 million down 4.9% from the third quarter of 20 acting.
Cardio pulmonary sales were $120 million in the quarter a decline of 4.5%. That's just the quota of 20 acting.
Heart lung machine South declined in the mid to high single digits Dude due primarily to a difficult year over year comparison in the U.S. and Europe , and a better than expected global performance in the first half of the yet.
Our oxygenated south decline from the previously mentioned terminated Canadian distributor agreement.
In the third quarter of 2018 sales from this agreement <unk> $8 million and were located in the rest of world category of cardiopulmonary.
Excluding this impact oxygenated south grew in the mid to high single digits.
Daniel also performed well growing double digits in the quarter.
Turning to hot melt.
So for hot dogs were $29 million in the caught a decline of 9.1% versus the third quarter of 28 thing as a result of softness in the U.S.
That's the whole declined in mid single digits this quarter as double digit growth in Europe was more than offset by declines in the U.S.
Advance circulatory support or I see us reflects that tandem lock business that we acquired in April 2018.
Sales in the quarter was $7 million, representing 7.6% growth. This is the third quarter 2018.
Lots yourself force expansion continues to gain traction, but the earlier than expected FDIC clearance of luck spot and next generation circuitry support pop in control the system impacted new customer acquisition.
We expect the ice yes business to accelerate in the fourth quarter and still full cost 40, a growth in excess of 20%.
Now, let's turn to Neuromodulation.
Sales were $117 million up 7.8% versus the third quarter 28 thing.
In the U.S. sales rose, 1.4% $88 million and were above our expectations.
The competitive pressures and feel turnover that we experienced in the first quarter continue to moderate and we for overall implant rate rise modestly for the second straight quarter on a year on year basis.
Some teva represented over two thirds of a U.S. generator sales mix in the quota.
Europe delivered mid teen South growth based on the continued adoption of some tivo and a strong performance in the UK, France, Germany and Spain.
European adoption of some t., but is now 56% of generator sales.
Rest of World delivered a robust quota growing I've, 65% driven by a strong performance in the Middle East, China, Eastern Europe , and Brazil from a commercial expansion and I go to market strategies.
And finally Neuromodulation pipeline continues to make good progress in hot side, yet is that anthem half Rep. U.S. pivotal trial continues to enroll ahead of expectations with over 70 sites active and more than 125 patients randomized.
I'll now turn the call out of the sat for another view about financial results.
Thank you Damian I'm going to discuss the third quarter financials in greater detail.
Sales in the third quarter were flat versus the third quarter 2018.
Sales growth in Neuromodulation Ace, yes in Oxygenators were offset by decline and HL labs.
Heart valves in the impact from the termination of a Canadian distribution agreements.
Adjusted gross margin as a percent of net sales in the quarter was 70.1%.
190 basis points for from the third quarter 2018, and represents the first time leave Inovas a group adjusted gross margin has exceeded 70%.
The margin improvement was driven by mix pricing currency.
Adjusted R&D expense and the third quarters $39 million compared to $38 million into third quarter 2018.
R&D as a percentage of net sales was 14.4% versus 13.9% in the third quarter 2018.
R&D is increasing behind our continued progress in the anthem have rough pivotal trial and the initiation of the recover study.
Adjusted SGN a expense for the third quarter is $102 million compared to $101 million in the third quarter 2018.
SGN as a percentage of net sales was 37.8% up 70 basis points.
Versus the third quarter 2018.
The changes largely related to the full impact of expanding HCS commercial capabilities strengthening our commercial organization in international markets and increasing investments in Neuromodulation.
Adjusted operating income from continuing operations was $48 million compared to $47 million in the third quarter of last year as improvements in our adjusted gross margin were partially offset by investments in our key growth drivers in R&D.
Adjusted operating income margin from continuing operations rose 50 basis points to 17.8%.
Our adjusted effective tax rate in the quarter was 11.2% an improvement from 12.6% in the third quarter 2018.
As a result of geographic income mix.
Finally, adjusted diluted EPS from continuing operations in the quarter was 84 cents compared to 78 cents, a year ago and above or 70 to 80 cents guidance range.
Moving to cash flow or cash flow from operations, excluding payments for one time integration restructuring costs through third quarter of 2019 was $91 million.
Capital spending for the nine months of the year was $17 million, which was $7 million lower than the first nine months of 28.
Yeah.
Our cash balance at September 30, 2019, with $75 million up from $47 million Decemberthirty one 2018.
Our net debt at quarter end was $265 million up from $124 million a year in 2018.
In July we made the first payment of $135 million in connection with the settlement of the three key multi district litigation in the U.S., and we received $34 million and product liability proceeds from our insurance carriers.
Now turning to 2019 guidance.
Neuromodulation third quarter results were ahead of our expectations and we now expect U.S. neuromodulation.
Not modulation business to fall within a range of $325 million to $335 million for the full year.
In terms of overall guidance, we continue to forecast 2019 sales growth between one and 3% when it constant currency basis, Although we believe the lower end of the range is more prudent at this point due to the performance of the cardiovascular portfolio.
If current exchange rates remain unchanged the companys full year revenue guidance will be no negatively impacted by 2%.
Also note that this guidance includes one quarter of cells from tandem life prior to the deal closing in April 2018 were $6 million.
And the impact of exiting the distribution agreement in Canada that represented $32 million in sales in 2018.
Now turning back to the rest of the piano.
We continue to project adjusted diluted diluted earnings per share from continuing operations to be in the range of $3 to $3.10. We now expect or tax rate to fall within a range 14 to 15 cents.
Our guidance for all other full year metrics is unchanged from May one.
With that I'll turn the call back to Damian for some final comments. Thanks.
We're confident in our growth prospects and continue to focus on execution strong portfolio management and developing the talent and culture of live in Uh Huh.
What I hopped belt sales remain challenged and we are in a period of difficult comparisons for I told him. The U.S. Neuromodulation business is improving and the rest of the business lines and regions are performing well.
We continue to expand gross margins make significant investments in R&D portfolio and streamline expenses in non core areas.
We look forward to updating you want to continued progress in delivering on our commitments to drive shareholder value and with that Julie will open it up for questions.
As a reminder trust a question you will need to press star one on your telephone to withdraw your question press the pound Keith please standby well because all the questions.
Your first question comes on line of Raj Denhoy from Jefferies. Your line is open.
Hi, Good morning, My Raj.
Maybe we could start with the BNS business. The epilepsy business. So you know as you noted somebody the issues earlier this year.
Secondly, the Salesforce turned over and then they competitive headwinds from the recent drug launch.
I'm curious if you could maybe parse out which of those seems to your covering for you is it are you seeing maybe the sales hires you know getting more productive or is it that that's the kind of slowness in the in the pipeline progression of patient is maybe lessening because of the you know that drug is kinda playing through any any thoughts just really on where are you on that recovery.
Well I think it's a combination of all of that we know we've done a lot in the last six months to really understand the market dynamics I think the uptake of epic dialects, you know the right.
Uptake is flattening. So you know we're not seeing the progression of patients and ER that I think is one thing definitely the salesforce I really believe has become more productive you know we see that in there that new patient implants and the growth rate you know still decline you on.
Yes, but it was a lower lower decline than we anticipated in the head of our expectation. So I think they're being more productive end of service continues to tick along well in that that a low single digit and I think you know the way, we're changing our messaging and talking about unit why BNS is is so essential.
To the to the a mix of drugs and you know you need to have this guardian to get that the other benefits, but cardiac protection neurocognitive benefits decreased hospitalization Sue debt reduction those things I think are really starting to play through in out enough storyline.
Okay fair enough in just two other ones quickly just the so I know you raised the guidance for the U.S. for U.S. BNS.
No again kind of a follow on that last question, but where are you thinking in terms of the recovery now I was just a business that we can reasonably assume no can get back to sort of mid single digits as I move into 2020.
Yeah, I think that for us is where we'd like to have the business position. You know we've always seen this is a a red dot business and the U.S. I think is ticking along well I'm, particularly pleased with what the a international teams are doing to Europe , and the rest of world things I've done tremendous.
Work in the last in the last six months to and I'm really really pleased with what they printing in terms of result.
Okay and then just my last question just on the clinical study you know so you mentioned you know the first implied has occurred I'm curious as any can offer in terms of how that pace of.
I have a patients getting done has progressed are you start in the near the Jets is the question is really thinking about when you can get two interim look at that at the data no 250 or so patients.
How is enrollment going and are you comfortable with maybe getting to that 250 patients you know third fourth quarter of next year.
Yeah, you a spot spot on their Raj and that's exactly what we're thinking it's going to take a little while to ramp thrilled that up to Mount it could get a patient in three weeks. After we had the approval for the study with the.
Really a fabulous separate from the whole team and that's what we're really looking at is in a 250 patients around the uptick for acute and 20.
Okay fair enough. Thank you.
She is Russia.
Your next question comes on to line up Rick Weiss with Stifel. Your line is open.
Hi, good morning Damian.
Congrats on the better than expected neuro performance.
But let me.
Let me turn to the cardiovascular.
Part of business, if I could you said that some cardio pulmonary softness.
Among others. It can you talk take us through the various pieces.
I'm sure. This was not the quarter you wanted to see but just help us sort of business by business understand somebody element tandem life.
Obviously like spark approval came earlier than expected it sounds like you're controlled rollout is.
You know later this quarter just help us understand how bad.
Business, what happened and how the various pieces get back on track.
In the fourth quarter.
Great set of questions are good to hear you.
I'll start with IC, Yes, you know, we did get the clearance earlier than anticipated and honestly I think that impacted our ability to drive new customer acquisitions, if the and new model is coming Paypal or less inclined to want to be trained on the on the old model and that's really what we sold but I think the payment.
Doing well in the account planning for for the launch is progressing and so we'll do a limited release in.
For acute back into full Q and we're really now building inventory. So that we can do a a more robust launch in one q. I think it's important that we go to market with a contiguous supply chain and I think the planning there is on track so.
That's I think a very important.
Step for us at the high growth business that we're very excited about I tell them tough comps you know we grew 10% in the U.S. and 14% in Europe Threeq you 18, a 10% overall so you know it was I a tough protocol.
But you know where it was still a working out pipeline.
We're getting into the later innings of that have that conversion pipeline. The estrace still some room left in risk at rest of world, but in the U.S. in Europe or in the later innings.
And I you know out business is not all just about conversions, we do have new installations and competitive conversions, but you know where a at the back end of that that program. So I think you know the tough comps in the conversion cycle is really what happened there, but again funnel management is in flights and I'm really.
Or expecting it came that continue to drive that business.
Well.
And I look this this was tough for us as you say, but what we wanted to say a personal continues to struggle in the U.S. with the execution there.
But you know your is still doing well and it's really fascinating you know what we just celebrated with NASA clinic in Italy that thousandth in plot Percival and I think it's the largest single fantasy series in the world and a really phenomenal results and patient commit.
But there and yet you know what's still struggling to find that traction in the U.S. Thats. What we continue to focus on you know better commercial execution procedure training. The recent valve and valve indication I think as important you know so we're continuing to work with that team I'd really like to see that turned around I still committed to passive.
I think it's a great product and off as an alternative for you know the thousands of patients where you know tabby is not an option and I think if you're looking for minimally invasive solution. This this is a really quite alternative.
And then.
Lastly, the traditional tissue valves, we've really been moving away from that whole portfolio. So that's continuing to decline in a high single digits.
And mechanical was flat, which was also useful so I think that's the story great growth prospects rights, yes, tough comps and HL EMS, but continuing to work out funnel and then.
Getting getting that personable profile working in the U.S., while we continue to make make headway with the international group.
Yeah.
I think I highlighted oxygenators as you highlighted earlier didn't didn't do quite well you know mid to high single digits in the quarters that that business is holding in and gaining share.
Gotcha. Thank you for all that it turning to guidance for a second it just you know at if I'm thinking about.
The guidance doing the math.
Right quickly here, the fourth quarter guidance and keeping guidance unchanged after especially the strong neuro I think I'm doing it right and in suggesting that a implies much softer neuro results in the fourth quarter.
Is that right is that the right way to think about it and on gross margins. It would seem to imply and I'm guessing if neuro growth would be less gross margins were impacted it wouldn't imply a a big sequential downtick in gross margins am I thinking about right or wrong or.
You know maybe help us understand those dynamics looking at the fourth quarter.
So while we feel good about the new range, we didnt want to remain prudent on the views of this business. You look you look at where we expect and yard to return to growth in Q4 is a very positive.
Resolved as we've mentioned before there is an impact on customer buying patterns and we do still believes that up a dogs as having some impact on the new patient bundle, but as you point out.
We've been taking the range off is it really positive sign.
Yes, the thing to think about two though is as last year's Q4 was a represents a really difficult comp because it was a record quarter for the U.S., where we grew over 10%.
Yes coming to gross margin.
We do think that that should should remain around that 70%, so breaking through the 70% threshold, but because it really positive sign.
For the profitability of the company.
And just a matter.
Maintaining the top and bottom line guidance previously provided.
Gotcha, and maybe last from me serve a two part.
Question, but you know Damian you highlighted Europe eight quarter, a in a row I think you said of.
You know of solid performance I know you've worked very hard to turn around that business gets right leadership get to write systems make it work and it would seem to be working in a big picture perspective.
Hi, U.S. seems more frustrating I think it might be fair to say.
So.
Part one of my question is you know what you know I know you're in a turnaround what needs to be done in your mind. How are you thinking about the next years to get that kind of U.S. consistency and sort of not a fair question because I know, there's a lot of moving pieces here, but just wondered a high level, you're thinking and every CEO CFO is.
So favorite question at this time of the year, how should we be thinking about 2020, I know, what you're like I know you're not yet.
Uh huh.
He felt that we wanted to be first data the guide on that one and I think met would like me to say will provide guidance on that or a fourth quarter coal.
Yes, I would say.
Correct.
So so you really highlighted something that I think is important the you I tried quota and what seems to be watching what was the difference there leadership and a in a mako and the team. There I think have done a tremendous job you know that double digit again in a in international ROI.
The same there I think it really my great progress a lot of changed in that in those geographies with the go to market strategy, taking areas direct and so you know actual percepta leadership and and I think this is the thing that's important in the in the U.S. is for the leadership the gain traction pull bachman, who a lot of people.
No took over the U.S. region at about a quarter ago, and he's really stepped up a and it's starting to a in a really understand where the opportunities are and how to bring the team together you know it's not a one man show that the team of people there that are doing I think right things.
And we'll continue to focus with that same there's also a new CFO in the in the U.S. region as well and you know Lawrence I think is going to bring a lot of discipline to that that group. So I think you know we will continue to focus our energy on getting the U.S. back to you know consistent growth, but I'm quietly encouraged by the then.
New leadership there.
Thank you.
Your next question comes on the line of Matthew O'brien with Piper Jaffray. Your line is open.
Okay. Thanks for taking my questions.
Yes, just one Clark morning.
Clarification on Roger's question did you guys say the interim look should be Q3 Q4 of next year as far as the depression study goes.
Yeah acute people 20, it's the for is the first sooner.
Yeah.
Got it okay.
But then tend to following up on Rex question, a little bit on the cardiovascular business. You know I think you said any cardio pulmonary and really strong first half probably little bit of pull forward sales there.
You're not going to get the new heart lung machine out until the middle of next year and it sounds like the valve is especially first of all in the U.S. remains challenged just because of other options that said clinicians have at this point. So as we think about that business you know.
Heading into 2020 is it one they can deliver some some decent growth throughout the first half of next year or is it going to be more of a.
Gross headwind as the neuroma business.
Seller, it's a little bit.
It's it's Matt Matt So for cardiovascular we're not giving overall 2020 guidance, but if you just think about where the market is yeah. We've said before HL ends oxygenators, it's a low single digit market a lot of that's coming from international expansion versus the U.S. and.
Europe .
Our take is that you know we are assuming that's the current run rate. If you want to give a share go right ahead.
We're really looking at AC asked as we've been talking about as being the key driver and not just now but also in the 2020 gives the opportunity there and as we continue to expand the sales force. So when you put the three parts together that should really be your driver just not just now but also as you look forward.
Okay. That's helpful and can you better for Damian can you talk a little bit about.
Life Spark we were at a conference recently in the feedback on that product was really really strong so I'm not overly surprise to see the Q3 slowdown here why do you think Q4 accelerates a little bit and then did I see in the release that I think you're selling a little bit in Europe . Now is that your are those your for sales in Europe , and how do we frame up which you could do there and.
2020, Yeah, <unk> sales sales in Europe .
Turning to be.
Prioritized for after we get the U.S. cranking and this is why I think it's important what we're planning to do is you know have a limited launch in Q4 small number of accounts build inventory heading into Q1 onset is a slight lift there but also the other thing is the.
CMS decision, which we really applaud them coming back and revisiting DRG Sears or three is being reinstated in and just a couple of days now I'll cover for sub one if I already started yet.
And ER and that's it that's a big deal for US you know we sell over a in a in 100 DRG codes.
And a lot of patients are going to benefit from being able to access the product so between the CMS and launching livestock, we think that that's that's the key driver.
Okay. That's helpful. Thanks for that last one for me is just on the depression side and rise alluded to it a little bit, but do you want to give us a little bit of an update as far as how.
Enrollments going here through October and you know I think you talked about doing $5 million to $10 million in that business here in 2019. So we just just assume kind of low end is the right number.
Yeah spot spot on yeah look it's very early days.
Going to not give sort of blow by blow accounts of enrollment but.
Focus on this milestone of the 250 and near to the end of next year, but you know I think it's it's very encouraging what we've seen the engagement from the side. So was that the investigator kick off meeting in a in Chicago and that was.
Really exciting to see the engagement not just from the investigators but also this stuff that we bought in so I'm I'm excited about what we're going to be able to do here and that's the plan.
Enroll aggressively and what for Q4 20 look.
Thank you.
Your next question comes on the line of Scott, Our though he ran Burke your line is open.
Yeah, Thanks, very much for taking my questions. Good morning.
Hi, Good morning, Scott.
Right.
I guess, it's not surprising to see some volatility in heart lung machines, you called grow that business double digits forever.
But what has surprised me has been your communication confidence about.
This upgrade cycle, we're thinking the last quarter. You said you had some 12 months visibility into the cloud service launch.
Really didn't come to clients you expecting cool so watch really Chinese since last quarter that would be helpful to understand.
Given that this is.
Capital base nation subject some volatility could you. Please at least good account, how big heart lung machine is in the context of calling for mine right. So that's a guy you somewhat predictable consumable drivers. Thanks.
Yeah. So in cardio pulmonary it's about 25% of the of the business. So just to categorize that group.
I think you and paying very close to this business for longer than any of us actually and you know that this cycle was really an exciting driver and I think a lot of people were surprised to see us be able to reinvigorate. This this whole product group and I've been very I'm pleased with how the team.
Have adopted funnel management and.
You know what we've seen over the last you know two and a half years is a real ability for the team to identify three conversions.
And drive that to an X five units.
That we're coming to the lighter into that that cycle. The in the late innings just to put it in a world series context and.
We got what to do there to continue that as well as you know identifying new installations, which is predominantly in the in the international region.
And we'll also winning competitive conversions to and I can't I think the team has really stepped up there.
Having said that you know we are in the back end of the X three convergence like which was the primary driver and there are just tough comps coming around so you know the growth right on this will slow.
But when not any any less excited about you know how we use this business and also to understand what we need to do to continue driving oxygen I'd share.
Okay. Thanks understood.
Respect to tough I was on I, we talk about this and Austin, but Oh shipping many many years for the company I'm trying to improve positioning of that business in North America.
Understand what point do you make a determination on on all my business, although any real trick is the kids.
Okay foam, which indicates is that really makes you comfortable but leaving the country for questions to its full potential.
That's the ideal.
Any any impact.
Yeah I've spoken.
In the past the bat <unk> average daily units.
You know I need to use and and I've seen benchmark level performance of implants here in our sales team in the in the U.S.
And that's what makes me believe we can do this we just have to be consistent we have to be you know better at commercial execution. We've invested in the last couple of quarters more on procedure training the valve in valve indication is giving us a you know I knew a new reason to talk about the product and I think for us. They this.
It is about the sales team finding traction in like the accounts that are expensive and thinking about minimally invasive alternatives for a valve repair replacement.
You know for sure the noise around low risk tabby is creating a headwind for us but that shouldn't take away from what we see is still a lot opportunity. So how do we know we can do it there reps in the U.S., who are doing it and importantly, there are risks and the rest of world who are doing it and that's what makes us believe and as I said.
This mess up.
Experience a thousand patients showed that there is a long the chewed no opportunity here so.
I continue to to want to make sure the same succeed.
Thank you I'm, sorry, just to persist I'd be I'll try to make any difference here I'm when does that rate.
Well I think there's so many wonderful yes, so the persisting VR it could be a very important trial for us it looks like right now it's going to be in the late first quarter early second quarter of 2020 for the full readout being presented at a major medical meeting.
Okay understood and thank you said just I can follow up on great to see.
Collection, having a nice recovery I think that's what we've all been looking for.
But as we look to the full school and that's been a fourth quarter and the company's history, where on an absolute basis. No modulation has not performed better than the third quarter. So I just want to understand that I mean, your opinion given discussions about.
Improving new production in Pompe, there's no reason why that trend shouldn't continue I'm just trying to understand in the context of fuel yeah, Greg Gordon.
Yeah, I think that's fair, who we typically have a very strong Q4. So when we provided this revised revision upwards.
Yeah, we wanted to be prudent in or put in our forecast at the same time Q4 last year was an extremely high quarter. So the call.
Obviously, we want to drive quarter on quarter sequential momentum and so.
We provided that range.
Good. Thank you and lastly, just puts and takes on the treatment resistant that depression trial. So obviously, great news to hear you are going to try and aggressively recruit.
For this trial.
Just help us understand what that means from a revenue perspective into 2020 I know the trial was now bigger at a thousand patients, but what would you expect then.
And on that.
I might be also.
On that point about reimplementation for patients.
But just help us understand and again dine in place if you're gonna have to look into Q4 for these patients do not make 12 month follow up data how does that calling trying work within the context, if the trial design. Thanks.
Yeah. So just on the numbers, we you know I previously Guy five to 10 for this year, we'll be at the lower end of that given the light stop.
At the study and for next year 20 to 30 again looking at the ramp you know the lower end of the 20 to 30 is probably reasonable again will be driving hard to to enroll fast, but let's let's if you want to model that they're the wise I think about it you wanted to yes sure so for the.
The.
Endpoint that would get us to registry a 12 month response, we get our first look at 250 patients. We can continually look every 25 patients after that we're seeing up to 500 patients. So at 12 months follow up somewhere between 250 and 500 is when we expect to hit the endpoint.
So it would be between you know the guidelines we gave them. The best case, you know late 2020, and then think about a few months after that as you know needing to enroll the rest of the patients.
Okay, guys, thanks to the questions.
She is shot your next question comes on line of Matt Taylor with.
Your line is open.
Hi, Thanks for taking the question.
I just wanted to follow up on Neuromod and ask.
More specifically what are the.
Pluses and minuses that we can think about.
For Q4 and going forward in the U.S. and no U.S. can you help us understand last year's Q4 the U.S.
There anything one time like a big bulk or that may that really strong or was that just strong demand.
And then you know for this year is there anything that you can.
Just to like Salesforce ads for you know the end of life comps are things that would help us to forecast. The next couple of periods.
Oh, yes, so I think that there's a number of things you know, we're continuing to see send teva traction in in the U.S. and internationally I think that's that's important so there's that the price premium on that product were now at and 58% and worldwide sales and I think the some small runway.
They're still we typically have a price increase in the quarter, where we you know selectively a look at price changes or by geography, and I think that that's an important driver.
And I think you know we look at.
End of service I think we've said to you before you know 2% to 4% is sort of along Oh that and we're continuing to see you know that low single digit and the service, which I think is an important base.
And then we also talked about expectations for Npis to gradually re a return to growth and you know we've seen sequentially since Q Q1, the the declines in it stopped to decrease so we had a actually a bet a better Q3 than we anticipated in that respect so you know that I.
I think will be a an important not the for us as well.
Unless you got us into service you know that we're assuming we don't grow at the same way, we did a year ago and that's now more than half the overall generator implants.
I should say still is so that hasn't been an impact as well.
And then last year's Q4 was there something onetime and there was that just strong demand and then.
Oh U.S. doesn't seem like you saw any impact from EPA dialects, you still think that you can you talked about doubling that business over a multiyear timeframe is that the kind of outlook, you're still expecting there [noise].
Yeah, we really are very bullish about our opportunities internationally. The the tank in Europe , I think is doing well again the markets. We highlighted have continued to show great traction the change in our go to market in Japan, and going direct has really had a big impact for us. So I think does.
Businesses are continuing to do quite well into the international now is bigger than Europe , but for Neuromodulation, which is a you know huge step.
In the U.S., you know I would say that same executed very well loss last year and you know we talked about in Q1. The you know change in buying patterns with with the Epidiolex emergence and I think you know as we see all of that normalized.
We'll we'll get back to a a natural rhythm with this business Q4 was very strong also because of some deepens the momentum that we had last year.
Okay. All right. Thanks, guys. That's one one other follow up question on the heart valve business I just wanted to understand.
If you thought your growth rate was indicative of the market or are you, losing some share their help us kind of parse out those two factors.
Well, Yeah, Hey, let's talk just about the U.S. I think that that's where the sticking point is you know I I'd say, we're losing share in the U.S. into internationally I think we're in a good place I think in Europe . We're in a good like it's the U.S. as I said I think tabby is definitely a headwind you know you've seen some great print from.
Those companies you know on their results, but again I think we can do more here and that's why I'm continuing to.
Invest and believes that this thing will turn it around and we don't have that much share in the U.S. area, we lost share in the quarter based on our.
So.
Alright, Thank you guys.
Sure Matt.
Your next question comes from the line of Mike Matson Needham <unk> Company. Your line is open.
Good morning, Thanks for taking my questions.
I guess I just wanted to ask about your ability to really focus on both the neuromodulation cardiovascular businesses I see and time it feels a little bit like whack, a mole here, where you know the neuromodulation was weak it's getting better but now cardiovascular is really slowing down. So I guess, that's the first part in the fall apart would be just be.
Yeah. It does it still makes sense to have these two separate businesses combined in a single company.
Yeah I think.
I think that for us it's about balance in the portfolio and we recognize that you know we haven't had all of the paces you know working in unison here driving growth at the same time for a few quarters, but we continue to believe that the power of the combined live another is really useful.
The balance sheet, I think gives us a lot of opportunities to invest and things the scale and scope of that a geographic reach is significantly enhanced by the the business combination and that's for US what what really is important and we've seen that you know you can see what's happening in Europe now with.
During lunch elation crossing the Atlantic you can see the international thing, taking the portfolio and growing you know Neuromodulation for example, 66%.
So we really believed that the scale and scope of the combined team is important here.
Okay and then.
You mentioned the at the New heart lung machine. So I guess first do you think that that has impacted sales of your existing system and then do you think it if it hasn't I mean is there risk that as we get into the first half of next year that it does start to weigh on the cells with existing system, because the reps to work and or the customers just don't want to buy.
The old on right for the Gordon's watch.
Yeah, I think we've been very thoughtful about that and what were looking at ways and paying flexible with with accounts on a how we make that transition. This is always the you know the great question. When you have a capital goods product, but we believe we're being very thoughtful about that and.
You know we've already seen places a work without flexible model here and I think that's what we're going to continue to drive US you know that's got to account by account and look at what they need and Wayne and I and I think that mockup responsiveness as being important to us.
Alright.
Thank you.
Good luck.
Your next question comes on line of Jason Mills with Canaccord. Your line is open.
Hi, Damian thanks for taking the questions I wanted to go back to Mike's. This question, but Oh. It was good question and so if we go back to the premise of the combination in the two businesses there. The <unk> a couple of them were leverage points on the Pinedale and from a tax perspective.
It looks like you've executed quite well there I'm a lot of folks are benefiting on that front as well, but the combination of sure certainly benefited Dinesh DNA I think it's fair to say has been a win win b to B. This combination.
The the expansion of the U.S. business for a under cardiovascular side, we need to be the combination the strength that cyberonics had in the United States hasn't come through and I guess I just wanted to talk to go back to that you did I hear you with respect to the benefit of ER.
Or the ability to leverage a larger franchise, but at this point.
Have you not sort of going to squeeze the benefit out of the combination in could you look to like you did with the CRM business divest underperforming assets when they still might have some value to someone else and focus on the pipeline in and that was the subject to my follow up but I'll get to that second.
Yeah. So.
I think you know you've hit on some really great points taxes benefited SGN I had been <unk>. The R&D I mean, our ability to invest you know essentially double our R&D investment in what I believe is you know and continue to believe it's a great Med Tech pipeline I'm I think are the big big wins, the CB expansion I think.
Done well, except for heart valves I, you know the that cardiopulmonary you know heart lung machine business in the U.S. It was reinvigorated we've done some great work with Oxygenators there.
It's really hot valves that I think as not read through so yeah. We really continue to believe that this is a.
Great combination now we've always said, we will look at the portfolio in a in the lydall date with new effect.
But I think you know what you've seen from US is the continue a continued investment in the pipeline that I believe is really going to read through and the combination as I said apart from the heart valves in the U.S. I think is really really borne out well.
Yes, I think we have scale scale, both with the balance sheet. The piano, yeah, we've we've driven leverage and improved our cost base and as David pointed out weve been able to invest in the pipeline while delivering.
So great results and we've had some ups and downs of course with Neuromodulation, but to have that business now coming back and.
Proving our forecast versus where we.
We're very very positive sign.
Okay. So before I ask my pipeline question, so would be answered deeming bad be that you wouldn't look to divest anything them out in the near to medium term.
Yeah, well that is that does not have plan, but we as I said, it's important to you know remember that we are prepared to make the decisions. When we look at the portfolio and I don't understand that they're better opportunities for that asset somewhere else. So.
In a never say never but that's not that plan.
Got it Okay, and then on the pipeline.
For I guess two part first on the pressure just going back to the question about read out moving to registry. Your your commentary would seem to imply your you think that getting too should 250.
Plus enrollment in the fourth quarter as possible given that you need that full month end point to hit the end of year and then you've got a couple of months of data adjudication. This sort of a read that out so seems aggressive but that would imply a fairly bullish a feeling about the ability to enroll near term. So maybe you could just comment on.
And then secondly, I'm on these calls we used to talk a lot more about the pipeline. So maybe maybe you could give us your current thoughts and mitral what the firm's a plane as long term to compete and what I think is becoming a becoming obvious that it's a it's required.
The toolbox approach with respect to addressing the mitral regurgitation.
Market and then also the owe a safe from maybe you could give us a pipeline update I'm on sleep apnea. Thanks, guys, Oh, yeah, so great [laughter] a lot of nested questions in there.
But recover yet you're right. It does imply a very aggressive enrollment, but again, we believe there is a a pent up demand for these patients again talking to the investigators at the kick off in Chicago, We really do believe that there are patients that they can characterize and put into the study.
And the team a really working hard to be a aggressive there to meet this this time on it you know 250 by a full Q2 0, you know so you're right then you've got some.
A follow up period, and then you know some work to do on the stats and you know that puts us into you know submitting for reconsideration you know one age 22.
So that you're spot on with the mass there.
Excellent.
Mitral valve look I think the team since we put the study and a went back to look at what are the issues, where the teams done a great job with the redesign they've locked into a new design that incorporates the valve and the anchor in a single delivery system. One of the things that I think became.
Apparent in the U.S the centric design discussions was making it simpler to get the the tape out on the anchor and then I think the teams done a great job. There. So the initial feedback with DFT I was positive and I started preclinical work back into bench testing animal studies, the biocompatibility work and you know we're still.
Looking at getting back into enrollment in 2020, I you know I'm not entirely show that the whole toolbox thing you know has fully play that you know I think that people talking about it.
And certainly you know the results with repair initially I think right, but we still believe that you know I replacement option is going to be a necessary and we like the product that the team the team have developed.
Sleep apnea love to sleep apnea market I think that's just such tremendous opportunity there and we really continue to believe that you know we have a great technology and a great know how I mean, we know how to make the these imponderable generators and leads and we've done a lot.
Of work on and I, Bluetooth capability with a with Ah lisanti, but today, what I work. So I think that will read over into our R&D efforts.
So we're bullish on the market bullish on the disease state and what we can do to help patients. We concluded the T. I can three study the read out on the last set of patients where we change that titration protocol has been really positive.
We're still working with the FDIC to find out what exactly would be required for confirmatory study, but we expect to start in 20 on that and you know we stabilize the product design stabilize the supply chain, we understand the tie traction protocol much better than we did when we first inherited this business and so I really.
I think this is a great opportunity for us.
Thanks, so much for taking all the questions David.
You're welcome essentially it's good to hear voice.
Again, if you like to ask the question Press Star one on your telephone. Your next question comes from on high enough Scott Bardo Berenberg. Your line is open.
[noise] Hi, guys. Thanks, Thanks for taking my follow up I'm, just looking at your results today and.
Hi, I happen to and it's a little reflect back a couple of years ago. When you had your capital markets day.
I'm talking 27, saying you had 65 to seven gross margins and nearly 22% operating margin and you have calling out but 2022, you should be a 70% gross margin business with wed like to 20% operating margin and now you paid to the change your gross margin target.
Three years early.
And yet your operating margin. It has constructed thought I thought you can provide these points not expanded so going to completely the door metric ownership position.
I'm, sorry, if I know there's been moving parts that you didn't vested in some pipeline that wasn't a pound and 27 thing, but clearly big differences.
So I guess then the nature of the question is when do we start to see some.
Operating margin performance.
Which is more respectable floor I, 70% gross margin business. So we start to see that evidence as open next year.
Yeah, we're not giving 2020 guidance today on the call, but you're absolutely right that is what we laid out and I'm extremely pleased that we're able to see the gross margin read through.
You know three years earlier than expected and I believe now our belief.
The targets should ultimately be closer to 75% overtime.
So we and our strap plan.
The fit the profile has changed one we built I think a fantastic pipeline here and we've made significant investments in our international expansion. We've also made significant investments and.
Getting neuromodulation back on track, we've made significant investments and things like to your D and starting to build that Appleton SGN a in R&D, but then we've also made investments with with Tcs intend wise and so all those things will help us I think thrive.
Sustainable high single, even double double digit growth rate over time.
And obviously then you start to see the leverage come through and now but this this window in 2019 and 2020 is still largely in investment period of time with the pipeline and the R&D investments or bank.
[noise]. Thank you that that's that's helpful but.
Just to understand direction actually I. Appreciate you don't want to give us any concrete guidance, but HM.
You know your R&D ratios are quite high.
Youre talking about [noise].
Brought a t. all day trial next year.
But on the same so I'm not sure be coupled with more revenue from CMS I'm can you give us some sense actually with the you know operational.
Right shows cost ratios.
And you know have some leverage potential net cheese or do you think they could expand so just some some sense its direction would be helpful.
Yeah, I think bill lot of the R&D investments, we think as a percentage of sales and even absolute dollars are relatively consistent going into 2020 that the investments within that mix will be more focus towards TNT and in heart failure, you know as those are really.
Progressing.
We are driving leverage within gionee.
But we're still making investments in sales and marketing, particularly with tandem life.
And international expansion.
Thanks very much.
[noise] there no further questions at this time I will send a call back over to Damian for closing remarks.
The only thank you and everyone. Thanks for your questions. This morning, and on behalf of Dot whole team. We really appreciate your support and interest and thanks, and we look forward to the next quarter.
Yes.
This concludes today's conference call you may now disconnect.