Q3 2019 Earnings Call
Greetings and welcome to quite a life third quarter 2019 financial conference call. At this time all participants on this and only mode. I question answer session will follow with a formal presentation. If anyone should require operate assistance. During the conference. Please press star zero on your telephone keypad. Please note this call.
France is being recorded it's now my pleasure to introduce your host I would now trying to cold over to Greg on the Chuck. Thank you Greg on the truck you mean altogether.
Thank you good afternoon. Thank you for joining the call today, joining me today, <unk> management team or Pat Mackin, CEO and absolutely see up.
Before we get I'd like to make the following statements to comply with the Safe Harbor requirements on the private Securities Litigation Reform Act of 1995.
Comments made on this call that look forward in time involve risks and uncertainties and our forward looking statements within the meaning of the private Securities Litigation Reform Act like 90 Park.
The forward looking statements include statements made as to the copies or management's intentions hopes beliefs expectations or predictions of future.
These forward looking statements are subject to a number of risks or uncertainties.
Options that may cause actual results could differ materially from these forward looking statement.
Additional information concerning these concerning certain risks and uncertainties that may impact. These forward looking statements contained from time to time in the Companys SEC filings and in the press releases that was issued earlier today.
Now I'll turn the call over the Cry why CEO Pat Mackin.
Thanks, Craig and good evening, everyone. Thanks for joining us.
Total revenue for the third quarter was 67.9 million, reflecting year over year growth up roughly five and 6% on a non-GAAP constant currency basis.
Revenues were at the midpoint of our revenue guidance that were driven by revenue growth in both are onyx in your tech product lines.
We also saw in line performance in our tissue processing business.
We also executed an exclusive distribution agreement with end to span, which we believe will provide additional growth and cross selling opportunities in the future.
Demand for innovator product portfolio remains robust we continue to make good progress on the advancement of our product pipeline.
Turning first to go check your check grew 9% on a year over year non-GAAP constant currency basis.
Growth for the quarter was solid but tempered by continued supply issues.
We expect to resolve the supply issues over the next few quarters anticipate growth trends for our eurotech products to accelerate as inside and yeah it'd be open Neil hit the European market early next year.
With respect to end side. Many of these patients are treated with risky invasive open surgical procedures, which are characterized by lengthy hospitalization periods and prolong recuperation.
With our custom made stent grafts, which can take up to where they can be treated with our custom made stent grafts, which can take up to 90 days to manufacture.
Inside is the only off the shelf pre cannulated truckload dominant stent graft would enter branches that eliminate the waiting period experienced by approximately 70% of patients would normally receive custom made stent grafts.
The idea thoracic stent graft system is our next generation low profit profile solution for patients with New York disease.
This includes both the already Aneurisms and Eric Dissections.
And your delivery system addresses one of the major challenges at the low profile T. bar devices, which are high deployment forces.
The squeezed to release mechanism is simple and gives physicians much more control well treating both simple in challenging anatomies.
It's one of the most personal graphs in the market and use the perfect complement to our view to open plus hybrid stent graft system.
As well as a line of custom made devices, providing clinicians with the complete portfolio products.
Finally regarding the via open neo which their next generation frozen elephant shrunk, we expect to receive CE Mark in the first quarter of 2020.
Switching gears to Onyx.
Revenue increased 12% on a non-GAAP constant currency basis, driven by the strength from our erotic valves, which were up 11% in a quarter.
Revenues in North America grew 10% well our O U S markets grew 14%.
We expect Onyx revenue growth domain in the high single or low double digits as we continue to take market share.
We also expect to receive in the fourth quarter and I, India approval to begin our proactive on a trial.
Prospective randomized clinical trial to determine if patients without onyx aortic valve can be maintained safely and effectively on elk was versus warfront.
We believe the commencement of the prolactin a trial alone will drive additional market awareness from physicians in health care providers regarding the proven clinical benefits or the onyx Onyx aortic valve.
Based on recent discussions with the F.D.A., we now expect to proactively trial will consist of approximately 1000 patients at up to 60 sites in North America and potentially some sites in Europe .
This is down from our previous estimate of up to 1200 patients.
As the only mechanical valve with ft approval for use with reduced amounts of warfarin <unk>.
The onyx aortic valve reduces patient bleeding by over 60% compared to competitive mechanical valves.
It's a proactive any trial successful improving the onyx Eric valve recipients can be maintained effectively on eloquence.
We believe cryolife will become the market market share leader in the mechanical valve market, while simultaneously taking share from existing about prosthetic aortic valves.
Such an indication has significant potential to accelerate growth in our onyx business.
Moving to our tissue business, we continue see inline performance in our tissue business, which was up 5% led by our cardiac tissue valve business, which delivered year over year, 19% growth.
We continue experienced strong demand for pulmonary tissue valves, which we believe stems from a renaissance in the Ross procedure.
As well as improved availability of our pediatric heart valves.
We are confident these tailwinds will continue to drive growth in our cardiac tissue business.
Bioglue continues to deliver solid results increased 1% on a non-GAAP constant currency basis in the quarter.
We submitted our application for regulatory approval to the Chinese have D.A. earlier, this year and look forward to sharing updates on the process when available.
Regarding U.S. perclot.
The trial is now complete and we remain on track to submit our pmeight to the FDA in early 2020.
Lastly, we recently announced or your distribution agreement with end to span in Israeli based privately held developer of the Nexus device, which is the only endovascular stent graft system currently CE Mark for the repair both Aneurisms and dissections an erratic arch.
As part of our collaboration with end to span we've become the exclusive distributor for the Nexus stent graft system in Europe .
Additionally, we extended alone a $5 million and a commitment to alone up to an additional $10 million to end to span to support and the spans U.S. clinical trial for Nexus in his commercialization of Nexus in the EU.
As a reminder, there are approximately 36000 procedures worldwide that are treatable with Nexus in a V to open Neil.
Which places a total addressable market opportunity at just over $1 billion.
We estimate that approximately 75% of a worldwide market or just over 800 million can be addressed through and endovascular approach with Nexus.
In approximately 25% of a worldwide market or just over $250 million can be addressed in an open surgical approach with easy to open Neil.
In Europe alone there are approximately 7000 arch procedures done annually, placing the overall you market for aortic arch repair products it over $200 million.
Where the Endovascular portion of the market is about 150 million.
We expect our market share to grow is nexus is unique value proposition affords our commercial European team with access to current competitive accounts expanding our reach across the European market.
Our current European commercial infrastructure, which includes an 88 person direct sales team.
Provides for significant cross selling opportunities between Nexus and our Geotech portfolio, given Nexus is synergies with our highly differentiated surgical hybrid dropped the view to open Neil.
We will leverage this infrastructure to not only drive adoption of Nexus in Europe , but also to drive further market penetration of our branch technologies as well as our other competitive Yo tech product offerings.
Over the coming months, we will focus on training sales reps as well as surgeons on Nexus.
We will target the top 50 plus centers performing these sophisticated in complex procedures.
Well, we expect.
Trends cases in the fourth quarter, we do not anticipate material contributions from Nexus this year.
As the most comprehensive and technologically advanced you would extend craft portfolio are you check products. It does seem tire order from the already valve to the iliac arteries.
We believe the addition of Nexus to be to open Neil and Ya and inside along with the rest of are able to prepare products positioned us to drive accelerating revenue growth in Europe through 2023 and beyond.
Before I turn the call over to Ashley I'd like to take a few minutes to talk about our fourth quarter guidance.
As a reminder, over 40% of our revenue is derived from customers based outside of the U.S.
And as a result were affected by fluctuations in currency exchange rates.
At the end of the third quarter, our year to date, GAAP and non Greg non-GAAP growth rates were six and 8% respectively.
200 basis point difference.
In addition to these currency headwinds, we also experienced an issue with a sole supplier of our TMR hand pieces and as a result, we will not have TMR hand pieces during the fourth quarter and possibly longer.
We therefore updating our outlook for 2019 with expectations for revenue now in the range of to 76.5 to 278.5.
I'll now turn the call over to actually for a detailed review of our third quarter results and our financial outlook Ashley.
Thanks, Pat and good evening everyone.
Total company revenues increased 5% $67.9 million and grew 6% on a non gap constant currency basis compared to the third quarter 2018, we saw year over year revenue increases across all four of our major product lines.
Looking at the product lines, you'll take revenues for the third quarter grew 5% and increased 9% on a non-GAAP constant currency basis basis, both compared to the third quarter of 2018.
Your debt supply is continuing to improve and we expect that growth will accelerate beginning in 2020 with this improved supply and the launch of Threed next generation you'll take products.
Onyx revenues for the third quarter increased 12% on a GAAP basis, and 12% on a non-GAAP constant currency basis, both compared to the third quarter of 2018.
Awarded valve revenues increased 11% compared to the third quarter of 2018.
Revenues increased double digits in both domestic and international markets.
Bioglue revenues in the third quarter were flat on a GAAP basis, an increase to one person on a non-GAAP constant currency basis, most compared to the third quarter of 2018.
We expect growth to accelerate as we continue to see the benefits of our direct strategy in select European markets in Brazil, and the anticipated approval of Bioglue in China.
Total tissue processing revenues for the third quarter increased 5% compared to the third quarter of 2018.
During the third quarter cardiac tissue processing revenues increased 19% and vascular tissue processing revenues decreased 9% year over year.
Cardiac tissue processing revenues were favorably affected by strength in the pediatric market and a reserve Renaissance in the Ross procedure.
Vascular tissue processing revenues decreased primarily due to a temporary shortage of long segment vein graphs to meet our existing demand.
And a decrease in average sales prices, resulting from competitive pressures. However, as we have mentioned previously vascular tissue availability has been improving and we expect that to positively affects best scar tissue revenues going forward.
Our gross margins were 66.6% for the third quarter.
The margins were 60 basis points higher in Q3 versus Q2.
Our income tax expense was favorably affected in the third quarter by the expiration of certain federal tax statute of limitations.
On the bottom line, we reported GAAP net loss of approximately $134000 were zero cents per per fully diluted share in the third quarter, reflecting $1.2 million in business development expenses, primarily related to the industry and transaction.
non-GAAP net income was $2.2 million or six cents per share.
Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results.
As of October 28, 2019, we had approximately $33.2 million in cash and cash equivalents. This is after the 15 million in cash payments paid in September related to the into Spain transactions.
As of September 30, 2019, we had approximately $221 million outstanding under our term loan B and based on our credit documents. Our current gross leverage stood at approximately 4.1 times and our net leverage was approximately 3.6 times.
We expect our net leverage to decrease to the low three times adjusted EBITDA range by the end of the year.
The interest rate on our term loan was 5.35% at the end of the third quarter, we can comfortably service our debt and have no financing needs to support our current business model.
As Pat mentioned earlier, our TMR hand pieces are supplied by a large contract sole supplier.
That supplier decided to move the location of manufacturer of our TMR hand pieces, which required that we secure a P. M. A supplement approval.
From the FDA 40 change in manufacturing location.
As part of the process to approve the PM a supplement the FDA conducted an inspection of the new proposed manufacturing site and issued our supplier observations, which the which the supplier does not anticipate resolving until late this year or early next year.
And our view the observations do not relate to any product related complaints or safety issues.
As a result, we will not have any TMR handpieces until our supplier resolves these observations to the FDA satisfaction.
We have therefore removed TMR handpiece revenue for the fourth quarter from our full year guidance.
We will update you as appropriate about the timing of receipt of approval of the PM may supplement and when we expect to resume selling TMR hand pieces, which we hope to be during the first quarter of 2020.
As Pat mentioned earlier due to this and other matters, we're adjusting our full year 2019 financial guidance to a range of between 276, and a half and $278.5 million.
Our full year guidance.
Reflects the temporary lack of availability of TMR hand pieces and the impact of FX rates on our topline specifically the weakness of the euro versus the us dollar.
We estimate that currency will impact.
We will adversely affect our revenues by over three and a half million dollar sort of full year.
Not for the impact of currency in 2019, and the issue with TMR hand pieces in the fourth quarter, we would have been within our initial range of revenue guidance of between 280 in $284 million.
Despite these factors our guidance reflects between 4.8 and 7.8% growth on a constant currency basis in the fourth quarter.
In between 7.2, and 7.9% growth on a constant current currency basis for the full year.
We continue to expect our full year non-GAAP EPS to be between 28 in 32 cents per share.
That concludes my comments and I'll turn it back over to Pat.
Thank you Ashley.
Through the first three quarters of 29 team, we delivered constant currency growth of 8%, which places us at the high end of our original guidance.
However, the continued currency headwind coupled with the short term issues have taken us off that original guidance with that said, we believe these issues our transient and we have several catalysts, which positions which positioned the company for growth.
Specifically, we're looking forward to the upcoming launch of our three next generation Eurotech products in early 2020.
As well as the anticipated commencement of the proactive trial.
Additionally, Nexus should drive growth and enhance our ability to cross sell.
We have a deep pipeline with near term catalysts, such as Bioglue in China and Perclot in the U.S.
That will expand our total addressable markets and fuel solid growth for years to come we're deeply committed to improving the lives of patients with chronic disease and remains steadfast in our efforts before closing I'd like to thank our employees for their innovative spirit in execution of our strategy would that we'll now open the line to questions. Operator, operator, please open the lines.
At this time, we will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad.
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Participants using speaker equipment, it may be necessary to pick up your handset before passing the Sarkies one moment. Please hold the poll for questions.
Our first question comes from a lot of Jason Mills of Canaccord Genuity. Please proceed with your question.
Hi patent actually this is.
Jason I just wanted to ask about <unk>.
Polio.
In light of kind of the recent trends in the business, but I think 2020 between supply issues easing the three new products coming online and then now and those and being able to drive pull to sell what do you view is kind of the biggest incremental drivers of growth.
Yes, So I think I think the one thing that we were surprised by this year that is showing up this quarter is.
We had budgeted twice as long and get the Eurotech approvals.
We typically it takes us in the old days it took us three months, we added three more months just to be safe in this new kind of regulatory environment in Europe .
And we obviously still don't have the approval. So we're very confident that for the thoracic stent graft in the branch stope abdominal.
That we should have those approve in Q4.
Potentially could get the neo the third product in the fourth quarter, that's probably more going to slip into.
Early Q1, but I think for us starting 2020.
With really for for brand, New Endovascular stent grafts within 90% channel with improving supply I think we'll just get stronger kind as each quarter rolls out. So first thing is you get the approvals.
Which we're confident we'll get in the.
Couple of this quarter and maybe one early in the next quarter and Nexus is already approved so I think those four new devices.
We've got a great Salesforce and then make sure we execute on the supply chain side of things I think we'll see yotel strengthen each quarter that goes by.
Great. Thank you.
If I could also asked just onyx.
Hi, Bob trends that you saw on Q3, I know you talked about seeing some tissue valves got questions younger patients in Q2 I. Just curious what you saw in Q3 on the heels of low risk approval and what's your expectation alright. Thank you.
Yes, no and I think we don't we don't get kind of perfect information about what's happening in market, it's really kind of anecdotal from customers in the field. We saw good growth in onyx in the quarter, we saw double digit growth with Onyx.
I think that the the proactive on a.
Trial, and we're very confident we're going to get that in the fourth quarter as well.
We think that that that news in that excitement around.
A very unique.
Quite collation trial that no ones, it's only been done one other time and it was I think this is a very unique opportunity for the company. So I think.
Both the current messaging around Onyx.
The fact that we're the only mechanical valve in the U.S. it can have a.
60% plus reduction in bleeding because of our LOE and <unk> low and I am I in our label.
Followed by a clinical trial.
With Eliquis and 60 centers I think is going to really create a lot of kind of excitement around the onyx valve in the Onyx story.
Great. Thank you.
Our next question comes from the line of Mike Matson Needham and company. Please proceed with your question.
Hi, Thanks for taking my questions just wanted to start with with your attack with the the CE marks kind of as a follow up to the prior question. So.
Clearly it's been delayed.
Is this just simply an issue of the backlog over there and notified bodies. I mean, you never want to talk to as indicated. It's just things are just really really back up there and then I guess second part would just be.
What is your confidence around.
The early next year guidance that you're getting now.
I'm not worried about the products not getting approved I'm just worried about additional delays I guess.
Yes, I think that one and I alluded to this on the first question I mean.
We clearly underestimated the bottleneck at the notified bodies with this transition from medical device directive to MDR.
They are overwhelmed we've seen some notified bodies kind of exit the field.
And the ones that are still there are in a process or trying to get NDR MDR certification and all companies I've just overwhelming them. So I think that it's really a bottleneck issue to your question I mean, I feel pretty confident that the products that we've got into Q on the stent graft side.
I said earlier I think we'll we'll get a couple of them this quarter.
I'm, hoping to get all three this quarter, but one of them may slip into we actually.
Submitted to back in February and one in August so theres, a little bit of it did have a difference in the in the timing of when we submitted which you could say would kind of you would fall that on the requisite approvals.
I think the thing for that for US is disappointing as you go into 20 is if we had got these in in the Middle a 19 as we had planned we could have done. Our you know rollouts are training train the reps train the physicians get the inventory out there and you could have kind of hit the ground in full stride on January one.
What this does is it basically just pushes things back you know a quarter.
Our quarter and a half depending on when he's come in and so we're still very bullish on that portfolio.
But I think that it's going to be it's just it's just a later quarter quarter and a half just because of the timing of the approvals.
Okay. Thanks, and then just on the correct had a trial I mean with the reduction into that.
Size of the trial I mean is there any material benefit to your to the cost of the trial or the timing.
The amount of times can take the run the trial, yeah, I mean, not really I mean again its 200 less patients. So you can say, it's whatever that would be like 18% less.
But but at the end of the day I mean, it's still that's a big trial right. If you in heart valves 1000 patient trial is a big trial.
We have a lot of exciting we've already done some site visits.
The centers are extremely interested patients are interested so my hope is that actually enrolls.
We haven't no one's ever done a trial like this where it's actually existing validation. So that's I think another important point.
Is that it to a year you're doing half to enroll a couple of your follow up.
So it's it's a three three to four year endeavor. So.
So I don't think that the cost savings going from 1200 to 1000 is really going up.
Well, we can hear you might okay, sorry, my forecast for second there just final question Perclot is that going to Rick do you have any idea if that will require FDA panel.
We don't know yet I would be surprised I mean.
Obviously regulations have.
Im never surprised by itself on the regulatory front, but I wouldn't be surprised if it needed a panel to be honest with you I think it's a pretty clean.
So low risk, it's not an implantable device, it's a hemostatic agent.
Her operative.
Yeah with no safety issues, good clinical results I I'd be surprised but again, we'll obviously cross that bridge when we get to it I'm, hoping it's going to be.
Fairly easy approval.
Okay, great. Thanks, a lot.
Our next question comes from a lot of Jeffrey Cohen of London Landenburg Thalmann. Please proceed with your question.
Oh I pad Ashley thanks for taking my questions.
Yes, yes, actually first lien, what's the a the to porphyry moving other expense on the income statement.
Those those are predominantly unrealized.
If FX losses on intercompany.
Payables in loan balances.
There are primarily non cash items.
Yes, it in any kind of follows from the comment that Pat made earlier about the impact of FX rates on.
On the topline, it's having a big impact on our inter company.
Payable in loan balances.
Okay got it can you talk about the Salesforce a little bit I know you've mentioned a was 88 or 90 direct <unk> for US an extra west can you talk about me, but potentially edge ex us as it relates to a product introductions from Joe check and or Nexus and or adding new territory.
Directly.
Yes. So we are us channels about 60, and we don't plan on making any changes to that channel going into 20.
The European Channel is about 88 today.
We are going to be adding on the margins.
We're going to add a handful of people to support the Nexus launch again, we already have a big team of people that are highly trained in this area. So those people are getting trained.
But we're also going to add some specialist on the Nexus side, because it's obviously a very technical procedure, we want to make sure we have to the case afford available for that.
And then we'll also look at different geography is I mean, if we're seeing a specific geography. This growing very quickly we will potentially add people there and we've done that on a historic basis, so but nothing nothing in the you know it's a it's under 10 in the European.
Well the other geographies Latin America Asia Pacific, We continued to invest.
In feet on the street in both of those regions and.
We will talk more about that as we move into 2020.
Perfect got it Okay, and then can you talk about the tissue side it looks like.
She appears to be more of a trend as far as cardiac picking up steam at a fairly high rate relative to bashed Where's. It is your pricing or is it demand.
Yeah, I think I mean, the cardiac tissue.
Is it really a great story I mean, we saw a 19% growth in the quarter.
I think part of it reflects that our procurement group has done a wonderful job communicating the benefits of this finagraph technology, which is proprietary to cryolife, where the only company that has a decellularized heart valves and the results are meaningfully different than any non decellularized heartfelt.
So that message has gotten out there and its shifted procurement to two cryolife preferentially.
The second thing that's going on is the clinical data on the Ross procedure continues to be very strong.
Numerous publications showing that it's a fantastic option for younger patients.
And we we see kind of a resurgence has been a big.
Momentum in Canada for the Ross, we see big centers in the U.S. looking to add Ross.
Creating Ross centers. So I think that that can bet trend continues our procurement isn't very good position I think it's almost a tale of two cities the on the vascular side.
We got ourselves in a vision, we talked about this on a previous call. We got ourselves in a position where we didn't have a very good inventory position on our long saphenous vein, which is what the customers require.
Our prefer.
And we've gone through a.
Kind of a tiger team approach over the last six months and we've totally resolve that issue. In fact, we're going to have a very strong position on long saphenous vein going through the fourth quarter and into into 2020 were that'll be an opportunity for us as we move into 2020.
Got it Okay, and then lastly could you talk about.
Upcoming approach I know trauma as far as the a timing on getting the centers up and running at enrolling.
Yes, so we've had a great. The FDA has been great from a interaction with us on this and we've had a number of meetings.
This obviously, it's a complex area and they've been very participatory and we've worked very well with them back and forth. We're literally at the kind of at the finish line. All the final documentation is kind of ready to go so I'm, hoping in sometime in November December we're going to have the final protocol, we as I mentioned really we've already gone out and start.
To doing site qualifications I think we've been out to like 15, or so of the 60 centers will probably hit another 15. This quarters, we'll have half the centers will be ready to roll when the protocol comes out and there were going to kind of shoot the protocol out everybody.
We will probably have an investigator meeting at the STS in January .
And we should be enrolling patients.
For sure in Q1, maybe maybe we could hit a center in in Q4.
Okay, and any hypothesis about or how that might enroll.
Yeah, I mean, it's hard to say because we have actually never done to all the anybody has ever done a trial like this this is a very unique in that.
All the patients that are going to be in this trial I'd say the majority of patients are going to be in this trial are walking around with onyx valves that them today.
And what's going to happen is the surgeon and cardiologists that put that valve and.
Going to consent those patients to see if they're interested in being in the in the trial. It literally involves us having them going for us for a physical in a visit to the Doctor's office.
And then they get randomized to either be on coumadin or eloquent synthroid eloquence.
We mailed melquist and if there I'm coming in we mail uncommitted and so I think that this it sets up for potentially enrolling pretty quickly. We're we're budgeting about a year and a half partly due to the time it takes to get centers up doing the contracts.
Ill, just kind of paperwork type stuff, but.
But I think let's say we start to trial on January Onest, we think it's going to will enroll that trial.
It will take us all 20 and half of 21.
Perfect. Okay that does for me thanks for taking the questions. Thanks, Jeff.
Our next question comes from a lot of Brooks O'neil of Lake Street Capital. Please proceed with your question.
Good afternoon and.
Talked a lot about some of the detail questions I'm, hoping Pat.
Slide.
As.
Five year anniversary with quite a light.
You might talk a little bit about how you does your first five years there and.
What do you see is your biggest opportunities for the next.
Yeah, I mean I guess.
When I look at it to the companies I think extremely well position I mean, if you if you look back we've.
We acquired we acquired Onyx in 2016.
At the beginning of 16, we acquired Geotech at the end to 17, we just at the end of span deal.
We had 20 reps in Europe . When I started we now have 88, we had probably 30 540 reps in the U.S., we now have 60.
We had one person in Latin American Asia Pacific, We now have probably close to 40.
And if you look over the next five years.
The.
Acquisition of those three companies are the two acquisitions into one distribution agreement with the option with Endo span.
Creates a significant pipeline opportunity.
The ability to the Proact any trial that we talked about the ability to bring the yotel stent graft to Europe , the new devices than to take those into the us.
Simultaneously, we'll be investing in the infrastructure in Asia Pacific in Latin America.
So I.
I think that the the pipeline that we have.
We have 10 or 12 products in the pipeline that'll be coming out over the next five years and the the critical mass that we're going to be realizing in Asia Pacific in Latin America. When you combine those two things the pipeline in the channel I.
I think it's just we continue to build the company to the point, where we'll be it will be at critical mass over the next five years and then every incremental product that you add is going to have significant drop through for the company.
That's great let me just as more slightly.
Good question.
Bio Glu was.
One of your biggest.
Can you talk just a little bit about how you see is fitting into the current.
Great.
Our outlook is for that going forward.
Yes, I mean, it's interesting I mean by Bioglue is an integral technology into the aortic portfolio I mean, one of things we talk about is that Cryolife isn't aortic company.
Everything from an aortic valve to a arch replacement to a aneurism or dissection from the already probably down to the iliac artery.
You know.
Bioglue is sold around the world. It's a it's a staple in the operating rooms for a life saving procedure in aortic dissections.
The frozen the new frozen elephant trunk goes hand in glove with Bioglue.
Our onyx valve with the some of the additional technologies that are used in the ace sending arch or use with bioglue.
The fact that this expansion in Asia and Latin America.
Where there is still heavily dominated by surgery will file we will continue to grow and then the addition of China I.
I think will be a very nice opportunity for us. So I think its inaugural it's a great product because it's it's it has to be on the shelf in a in a cardiac surgery or because of the Arctic dissections.
And it's high margin added funds a lot of the infrastructure as we move into markets.
As a critical technology for four aortic surgery.
That's great.
I think about the future congratulations on all you've accomplished.
Hi, Thanks Brooks.
Our next question comes from a lot of Joe Munda of first analyst. Please proceed with your question.
Good afternoon patent actually a couple of questions here first off on the TMR business some sense of how much.
Celebrities.
And pieces words as a percentage revenue.
For for that segment.
What I can tell you that the amount of.
The impact that we expect is going to haven't fourth quarters about a million and have dollars.
Okay.
Yeah. That's helpful. And this was asked was one and Joe. This is one that I mean, unfortunately I've been through a lot of these in my career, where you know this stuff happens all the time.
People are aware, but when you have a pmeight product if you change anything a supplier a component you move it it requires an FDA filing.
And we were aware of it we partner we are working with our partner, we built a bunch of inventory in anticipation of the move and unfortunately, it just you know.
All the things that could go wrong went wrong and there's nothing wrong with the product in fact, I think there was no quality problems. There there was no patient issues at all.
It's just the FDA, we just by the time, they're going to get it done we ran out of hand pieces, we built up a year of inventory. So it's not like we didnt know about is not like we weren't prepared it just took longer than than we anticipated. So.
We are hopeful we can you know this will be resolved in this quarter.
But so it's a change in issue.
So.
It's sole source a hand piece.
And he where your supplier got 43 observations from the from the FDA.
Nothing related to the hand pieces is what you're saying.
So is it was basically a manufacturing move right. So the products that they had built for us. It built for three years, we have extremely high quality, we have really no issues and the FDA goes in inspects the new facility and they found the typical stuff did you find and a 43 that training records procedures not fallen of being followed in order.
Sure I mean, I think again, it was minor stuff, but still it it rose to a level with the FDA wasn't going to let them or lease product until they till they rectified it and they gotta go back in and inspect so that's where the time comes in.
It is disappointing, but I mean, it's like I said, it's a it's a transient issue and it's not I mean is frankly, not a strategic product line for us and we think it's going to be kind of a one quarter delay, maybe a little bit longer, but it's not going to be material from a from a business standpoint.
Okay.
And then.
Flipping overdue Yo Tech.
You had some sterilization issues in the first quarter.
I'm, assuming those are gone based on the commentary and then I'll wait and with a follow up.
Yes that wasn't that was in the second quarter that was already second quarter. If that was a total total one off I mean, it was double sterilized that our sterilizer. It would just somebody made a mistake and we put processes in place to make sure that never happens again, so I mean that was really kind of a one off.
That's behind Us.
Okay, and then you know as you as you look after 20, you guys give us some.
Encouraging guidance that the growth can you effect should accelerate going forward I'm just curious Pat you know you got current manufacturing constraints right because.
These are custom made products and then you're going to go to an off the shelf offering I guess, how do you guys balance or think about capacity.
With those two product lines essentially going on at the same time.
Yes, I'd say the first thing the great Great news about the Yo Tech product line is that.
We have so much demand.
That we can't keep up with it and we grew and grew 9% corridor.
And that was with no new products and some supply constraints.
We have tons of of opportunity on Eurotech, Our Asia Pacific and our Latin America businesses are growing extremely fast Europe's got all these new products coming so it's really just.
Getting the supply chain.
The order we've been we've been hiring we've hired new people.
Weve.
We're putting processes in place to make sure that we keep up with supply. So I guess, it's it's another transient issue, but I'm very bullish on on Utac and on the new products as we kind of get them out and get the.
Pipeline filled with products as we as we move through the into 2020.
Okay.
And then lastly, I actually I guess on proactive <unk> I guess, how should we think about incremental R&D spend their cost for trial.
Any thoughts there would be great.
Yes, I mean.
We've kind of spoken about this in the past but.
If you look at our business right now and this is not guidance, but let's say you know we're going to be around 300 million next year, 10% of revenues about 30 million Bucks and we think that as we go out over the next three to five years, we can easily fund.
Our pipeline by keeping some R&D spending at 10%.
Give or take.
Of revenues on an annual basis. So we think that we've got.
Plenty of capacity to.
Handled this R&D pipeline, including proactively within those guidelines you only caveat I would say on that is and it goes back to Jeff's question. He asked earlier I mean.
We predict what we think the enrollment is going to do.
If the enrollment accelerates.
You could in fact, we've even talked about calling out what we think it's going to cost and so that the you guys can be aware.
We expect to enroll.
70 per 60% of the trial this year and this is what it will cost if it goes faster is going to cost more to go slower is going to cost less I would think investor was would be excited if it went faster right. So I can't I can't Nestle control every patient getting in and if it goes faster that's great but it could.
No go up a little bit any year or down a little in your based on enrollment rates, but I think ashley's point, if you look at the macro.
Next three or four years.
10% to 11% R&D some of your might be 11, some year might be nine but around 10% should be able to.
Afford us the opportunity to to fuel the pipeline.
Sure.
Thank you.
I would like to have a mine I would like to the mine our participants at this time, if you would like to ask your question. Please press star one on your telephone keypad.
Our next question comes from a lot of summarized Kaleo of Oppenheimer. Please proceed with your question.
Oh.
Hey, Pat Hey, Ashley can you give you all right.
Hey, it's Roger.
So that's all my questions I, just want to keep them to onyx.
But can you give us so framework of U.S. versus all U.S. on Onyx and the reason I assets as proactive hey wraps up.
Just to give us some baseline maybe could map out how fast things are going.
As far as the enrollment.
Yes, and the enrollment and just the step up in Onyx organic on X versus you know because of a pull through because of Proact penny.
Yeah, I mean, we were careful here because I mean, we're running a trial. We don't have an approval. So I think the point is theres going to be a lot of people.
Talking about Onyx and the trial that we're doing.
We're still in discussions right now about.
We're looking at a handful of European centers.
It gets complicated when you start getting into the drug side in Europe , because as you can imagine I mean, we one of the reason this took so long in the U.S.
We originally started with CDR aged than we ended up with Cedar and then we went back again, so that same thing that happened in Europe , and I don't want to delay the trial. So I think you. We may have a we're going to talk about having maybe a couple of centers in Europe .
But the majority of this trial is going to be in North America U.S. in Canada.
And as far as the.
The speed of enrollment we talked about that earlier I mean, it's a we think a year and a half we can enroll this trial.
Could take could be faster could be longer just we have never done a trial like this before.
Okay and remind me on Proact today, My memory fails me here.
For a patient enrolling and proactively what would be the average duration of limited use therefore, the switch to eloquence.
Alright.
Yes. So we are you talking about post surgery, you're talking about how long they've been uncommitted before.
Either or because the right you know that is.
There will be a difference and the feeling ization.
Acute events are out of the way just how do you look at a certain cohort and map it out and say Pat Mackin came in he was three months and Cobot then moved over to eloquence update here's what does rate was yes.
I got the question, yes, so thats its actually a very important question in fact, the only other trial that was done with a novel and acquiring them up with the mechanical valve was called real line.
And the majority of their events were in the first 90 days.
And if you look at our original Proact one trial.
We had a 90 day blanking period, where you had to be on full full dose coming in.
For that first 90 days for exactly the reason you mentioned.
You want to make sure that the valve is fully endothelial lies and after that point, that's when we randomize to lower IR. That's exactly the same thing were doing here. This this trial will be for Onyx patients, who have who are at least three months out from surgery.
Got it okay.
And finally passed last question remind me.
No no in the final a trial design is that a penalty because it obviously you'll have reduced the patient side. So there must be some change in the event rate assumptions on fuel yet that is also an interim peak and it's a penalty.
They're all thanks for taking no no. It's a good there is under under either design to 1200 or a thousand there was no interim analysis and the reason it gets I mean, you know your statistics well.
This is a non inferiority trial in a way. This is powered it's a two year cumulative endpoint. So I think the way to answer the question. The other way is there is no interim analysis.
Because it's a two year endpoint.
The other way to look at this is the if the trial doesn't stop.
Then it's it's successful right. So theres, obviously, a data safety monitoring board of DSMB B and they if they see problems that they're going to obviously have to stop have to stop the trial.
But Conversely, you could think about it this way right. If it takes us a year to have to enroll.
All the patients after 18 months or in your first patients have already had it for 18 months.
Everyday that goes by the trial doesn't stop is your probability of success goes up if that makes sense.
Yes, that's perfect. Thank you.
At this time there no further questions over the audio portion of the conference I would like to turn the conference back over to management for closing remarks.
Just one thanks for joining the call and just to wrap up very quickly.
Through the through three quarters were at 8% constant currency growth, which is at the high end of our guidance range.
Constant currency is any currency has been a headwind than we had this.
Unfortunately kind of transit issue a TMR in a quarter.
That being said I mean, we're very bullish on the opportunities we have going into 2020.
We've talked about our three Eurotech stent grafts.
The next this opportunity.
Expansion Asia Pacific in Latin America, the Proact any trial.
And then we've got.
On the on the on the later in the year, we're pushing hard to get Perclot in U.S. and boggle in China. So.
We feel very good about the state of the business and look forward to.
Executing as we move out through the rest of the year in getting this 2020 set up so thanks again for joining.
This concludes today's conference. Thank you for your participation you may disconnect. Your lines at this time have a wonderful rest of your day.