Q4 2019 Earnings Call
And Chief Financial Officer. Please go ahead Sir.
Thank you Todd good afternoon, and welcome to Surmodics fiscal 2019 fourth quarter earnings call before we begin I would like to remind you that during this call. We will make forward looking statements. These forward looking statements are covered under the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
And includes statements regarding surmodics future financial and operating results or other statements that are not historical facts.
Please be advised that actual results could differ materially from those stated or implied by our forward looking statements, resulting from certain risks and uncertainties, including those described in our SEC filings.
Surmodics disclaims any duty to update or revise our forward looking looking statements as a result of new information future events developments or otherwise.
We'll also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results.
This conference call is being webcast and is accessible through the Investor Relations section of the Surmodics website, where the audio recording of the webcast will also be archive for future reference a press release disclosed in our quarterly results was issued earlier. This morning are afternoon, excuse me and is available on our website at Surmodics Satcom.
I'll now turn the call over to Gary Maharaja Gary. Thank you Tim Good afternoon. Thank you for joining US fiscal 2019 was a great Yale accomplishments with demotic during the the we made important progress and all the key initiatives, we laid out to the beginning of the year.
Starting with Surveil, we completed enrollment in the transcend study on schedule. Despite the headwinds from tobacco tax of debate and submitted an application for CE Mark approval on schedule as well. We also made significant advancements with our drug coated balloon product pipeline, we both started and recently completed and.
Coleman for the first in human study Alpha vests, Altria venous access drug coated balloon and we also filed for regulatory approval to begin the first in human study for Sundance, Our Sirolimus coated balloons fell below the knee treatment.
Turning to our non drug delivery pipeline.
We receive five Pinky Clarence fall with Sublime radio Guy cheap and have completed development default Telemark XP coronary device.
We also signed an agreement with a leading multinational medical device partner to commercialize our tell them our partner, we support cap in United States on Europe , we have begun to fill initial orders from our partners and expect the commercial launch to occur later in calendar 2019.
Finally, we saw substantial revenue growth for more medical device and coatings offerings vital Ivy business continued to generate strong operating margins in fiscal 2019.
These businesses continue to provide investment funding to fuel our strategic growth initiatives.
As a results. These advancements we delivered another excellent quarter of solid topline growth and operational performance total revenue for the quarter grew 34% to $40.8 million.
Compared with $23 million into fourth quarter of 2018.
We also reported diluted GAAP earnings of 26 cents per share a non-GAAP earnings of 37 cents per share in the fourth quarter.
While fiscal year 2019 was a terrific year within Surmodics. It was not without its challenges the continuing debate surrounding paclitaxel caught the devices created external headwinds many of which will beyond our control.
As we look ahead to 2020, we are acutely aware that the Paclitaxel debate will continue to influence the future of therapeutic modality, including our own drug coated balloon applications. We are encouraged by the amount of data has been recently published the demonstrate an ongoing and significant attenuation of.
The mortality signal from randomized trials and a complete absence of the signal in very large real world observational study.
All that said I'm quite proud of our team's ability to execute even amidst some unpredictably choppy waters and look forward to continuing to achieve all gold at fiscal 2020.
This year will build on the advancements we achieved during fiscal 2019 with the following strategic objectives first to ensure the continued success of surveil, specifically to perform high quality patient follow up for the primary endpoint analysis.
Second to obtained CE, mark and to make substantial progress towards achieving the FDA approval.
The next key strategic objective is to continue to make meaningful advances in the product development and regulatory approvals across our entire product pipeline.
And finally, the third to continue to optimize the revenue and cash flow performance from our legacy businesses in both medical devices, and diagnostics, which fuel our strategic growth initiatives.
Starting with Surveil, we were very pleased to complete enrollment to follow transcend clinical study in the fourth quarter as planned.
As a reminder, transcend trial enrolled 446 patients at 65 global flights and we'll evaluate safety and efficacy of the surveil drug coated balloon compared with a commercially available DCB and treating peripheral artery disease in the upper leg to.
The clinical data from transcend will ultimately provide insight into relevant clinical questions regarding long term patient level data out to five years.
Transcend comes at a very important time for the vascular and interventional community.
With the discussion around pass attack the latest shifting focus to follow up on long term monitoring of patients through rigorous collection of high quality data.
As such the next stage of the transcend study will require rigorous and high quality follow these patients to generate data and to perform the primary endpoint analysis required for PMT submission.
Our follow up passed the one year primary end point through five years, we'll especially important given the currency based on Packer tax of converting vices.
We are committed to this robust data collection and recently launched is specific patient follow up program new to this type of clinical to ensure that the vital data of thoroughly collected and review.
In regard to our CE Mark submission for surveillance.
We have submitted all required modules to the European notified body on schedule and sufficient time to received CE marked by December 2019.
However.
We will recently informed by the notified body that they have decided to temporarily pause the review of new CE marks for Paclitaxel devices, given the ongoing debate concerning the long term mortality signal.
The notified body Acetadote. This decision will be reviewed as additional data are generated.
Their decision has nothing to do with the completeness of all file nor the safety and performance of our surveil DCB.
While such events were unanticipated and outside the power control, we remain confident in the capability of our devices and the quality of the data that supports regulatory approval.
We fully expected continued dialogue with this notified body during the coming month.
While we do not believe that this was an insurmountable setback, we no longer they expect to obtained CE marked by calendar year end 2019 as previously expected.
Due to the uncertainty surrounding the timing of the CE Mark we have chosen to exclude any financial impact of obtaining the CE, Mark and EU commercialization from surveil Somo revenue and EPS guidance for fiscal 2020 until we have better information.
Moving to our second strategic focus for fiscal 2020 hour ever strengthening pipeline.
Recall that we have three main platforms within this pipeline. The first is vascular drug delivery by a drug coated balloon, namely surveil events and Sundance. The second is our thrombectomy platform to treat thrombosis in multiple vascular beds, including arterial and venous thrombosis pulmonary embolism and neurovascular.
Applications and the food is a treatment of vascular disease via radio access in new frontier has the potential to revolutionize patient care by top combining the best elements of what I call. The trifecta improved clinical outcomes improve patient satisfaction and reduce healthcare costs.
At Surmodics, we have an innovative team with a unique ability to develop these differentiated products at solve real meaningful problem I'm not aware of any company our size that can innovate across such a broad spectrum of differentiated platform to create shareholder value.
Starting with our DCB pipeline during the quarter, we submitted an application for regulatory approval to initiate the first in human study for Sundance, Our Sirolimus base DCB fell below the needed the device Leverages our unique proprietary excipient on our in house best in class or one four ptca balloon class.
Form yet with the low dose of Sirolimus.
Given the preclinical data we have generated and analyze we believe sunland has the potential to be year revolutionary product in the feel of drug coated balloons recently, we were granted breakthrough device designation status by the FDA for Sundance and we expect to start enrollment in the back part of fiscal 2020.
We also recently completed enrollment of our first in human study for vests arterial venous access recovered.
We expect to six month clinical data from this study by early Q3, and we will update you on the next clinical development steps for vastly too in the year. After we have evaluated results from our first in human trial.
We are encouraged by the recent positive clinical data shown by other devices in this space.
Turning to our non drug delivery pipeline, we continue to make progress in our radial artery access and thrombectomy platforms and remain committed to accelerating the development of these platforms in fiscal 2020.
We expect to submit for fighting fleet Clarence on at least three new devices in the platform. Our thrombectomy divides known as pounds is uniquely designed to be easy to use and has the potential to remove organized the thrombus from peripheral vessels without capital equipment and minimal blood loss we are.
On track with the development activities and are targeting regulatory clearance by Q3 fiscal 2000.
Moving onto a radio platform, we received ft effecting get Clarence fall Sublime guide sheet in the second quarter fiscal 19, and expect to secure five 10-K clearance of our 2.5 meter long or one four trends radio balloon catheter, though by the third quarter fiscal 2000.
We've also begun the development of although radial access therapeutic devices, including the all one eight trends radio Ptca balloon catheter designed to treat the more proximal femoral partly to your vessels.
These will provide a complimentary devices fall Subline radio guide sheet. This is just the start of all intend to build a complete line of radial access products.
I'm happy to announce that early this week, we signed an agreement with a leading multinational medical device partner for the worldwide commercialization of our one for ornate ptca balloon catheters.
At the request the fall partner, we've agreed to with whole announcing their identity until they formally launched these products, which we expect will occur during the second quarter fiscal 2000.
Finally, our medical device and I'd business segments continue to drive commercial excellence.
Our medical device business segment faced significant headwinds this year due to the expiration of our generation for hydrophilic coating technology as well as the revenue recognition from the upfront and milestone payments from the Surveil agreement with Abbott, we are continuing to see growth and uptake of our generation five.
Serene coating technology, which has a much longer patent term.
Net of the patent expirations the revenue for medical device coatings portfolio continues to grow in the low to mid single digit.
Meanwhile, revenue growth from Ivy business unit continues to outperform the immuno assay market growth of 3%, while generating excellent operating margins.
Overall, our business fundamentals are sound and we are well positioned to create shareholder value over the long term. Despite this uncertainty created by the after tax will matter. Our goal remains to deliver double digit revenue growth on an annual basis, which we expect will resume in fiscal 2001 will also targeting EBITDA margins.
Of greater than 25% beginning in fiscal 2022 I.
Ill now turn the call over the tend to provide more details in our fourth quarter fiscal 2019 results as well as our outlook for fiscal 2020, Tim. Thank you Gary revenue for the fourth quarter of fiscal 2019 grew 34% to 30.8 million as compared to a 23 million in the fourth quarter of 2018.
Our fourth quarter results include 5.1 million of revenue recognized from the 10 million transcend patient enrollment milestone payment received during the quarter.
Looking at our two business units medical device delivered outstanding 46% growth, increasing 7.9 million to 24.8 million in the fourth quarter.
For in vitro diagnostics business fourth quarter fiscal 2019 revenue, which is predominantly comprised of product sales totaled 6 million down slightly compared with a year ago period.
Medical device revenue growth was broad based our fourth quarter royalty and license fee revenue totaled 16.8 million up 6.5 million from the comparable prior year quarter during the quarter, our surveil distribution and development agreement with added vascular generated revenue of 7.6 million an increase of 5.4.
Our million.
Product sales increased 325000 or 7% driving this growth was an increase in balloon catheter unit volume as well as increased reagent sales to our coatings customers.
Growth in our medical device coatings license portfolio resulted in 1.1 million of additional royalty revenue as compared with the prior year quarter.
Our fifth generation hydrophilic coating royalty continues to deliver strong growth and contributed approximately one third of the quarter's royalty revenue growth.
R&D services revenue once again saw strong performance, increasing 1.1 million or 52% from the prior year quarter, driven by increasing demand from our coatings customers, who require support for their pre commercial and commercial product activity.
The continued strength of our medical devices coatings portfolio has positioned us to mitigate a portion of the revenue headwind expected from the fiscal 2020 expiration of our fourth generation hydrophilic coating technology patents.
The medical device unit reported operating income of 3.7 million in the quarter compared to a $2.1 million loss in the year ago period.
Medical device operating results were impacted by the receipt of the milestone payment associated with the transcend enrollment completion and $1.7 million of increased R&D spend reflecting continued investment in our innovative product development pipeline to support our future growth.
I believe revenue in the fourth quarter was down 100000, or 1% compared with the prior year quarter.
Our IBT revenue was impacted by lower sales of our distributed antigen products offsetting the decline in the antigen sales was growth in our organic diagnostic products and service offerings, which together were up 270000 or 6% from the prior year quarter.
Operating margin in the fourth quarter fiscal 2019 was 46% compared to 39% and the comparable prior year quarter.
Impacting IBT operating margin, we're operating efficiencies and product revenue mix, which was skewed toward higher margin products.
Product gross margins for the quarter were 65.8% of product sales as compared with 61.8% in the prior year quarter.
Our fourth quarter product gross margins were favorably impacted by both our diagnostics and medical device businesses.
As a percentage of revenue fourth quarter fiscal 2019, R&D expenses, including costs of clinical and regulatory activities totaled 47.6% compared with 54% in the year ago period.
R&D expense was 14.5 million in the quarter up 1.9 million from the fourth quarter fiscal 2018.
The increase in R&D expense was driven by increased spending on the development of our whole product solutions pipeline, including activities to further advance our abbey access and below the knee drug coated balloons.
As Gary mentioned in fiscal 2020, we expect to initiate and founder first in human clinical study for our Sundance below the knee sirolimus drug coated balloons and expect to advance development efforts on several products, including those related to our Ponce thrombectomy and sublime radio access platforms.
As a result, we expect R&D expense to range in the mid to high Fiftys as a percentage of revenue in fiscal 2020.
SGN expenses in the fourth quarter fiscal 2019, or 23% of revenue versus 28% in the prior year period.
On a dollar basis SGN a in the fourth quarter fiscal 2019 totaled 7.2 million as compared with 6.5 million a year ago.
Impacting the increase in SGN expansion in the quarter were increased investments to support product pipeline development and preparation for product market evaluations to support our strategy. We anticipate fiscal 2020, SGN a spending to be in line with this past quarter on an annualized dollar basis as we support product development develop.
As well as execute clinical evaluations and our cleared products.
We recorded an income tax expense of 564000 in the fourth quarter fiscal 2019, as compared with income tax benefit of 300000 in the prior year period.
Both periods reflect the impact of Nontax benefited amortization contingent consideration gains in expenses and operating losses in Ireland.
On a GAAP basis, our diluted earnings totaled 26 cents per share in the current year quarter as compared with a loss of 13 cents per share in the fourth quarter fiscal 2018.
On a non-GAAP basis quarterly earnings per share were 37 cents in the fourth quarter fiscal 2019 versus five cents and the prior year quarter.
Our balance sheet reflects the strength of our operating performance, even as we make significant investments to support our strategic initiatives cash and investments totaled 55.3 million at quarter end and we generated cash from operating activities of 12.5 million in the fourth quarter, bringing us to 8 million for fiscal 2019.
We also invested $6 million and plant and equipment during fiscal 2019.
Our current cash and investment balances and operating cash flows provide adequate capacity to support our strategic growth initiatives.
Turning now to our outlook for 2020, we expect fiscal year 2020 revenue to range from 87 to 91 million. This outlook includes between 5.1 and 5.5 million of revenue associated with the surveil avid agreement as compared with 13.5 million in fiscal 2019 and.
In addition, our guidance anticipates of $5 million to $5.5 million decline in hydrophilic coating royalty revenue in fiscal 2020, resulting from the expiration of the patents covering governing our fourth generation hydrophilic coating.
Also you will recall that fiscal 2019 also included a $1 million minimum royalty from the extension of an existing hydrophilic coating technology license that will create an additional headwind in fiscal 2020.
Our fiscal 2020 guidance excludes revenue associated with the achievement of additional surveil milestone payments surveil product sales or surveil profit sharing revenue.
Likewise, our guidance does not include any potential revenue that could be earned as a result of successfully executing a distribution agreement for our vast Abby access drug coated balloon.
We expect of fiscal 2019 diluted loss in the range of a loss of 60 cents to a loss of 30 cents per share.
We expect non-GAAP diluted earnings per share to range from a loss of 44 cents to a loss of 14 cents.
With that.
Ill now turn the call back to Gary.
Thank you Tim.
Want to make sure I, thank our talented team in us and in Ireland for their hard work and perseverance. We will continue to same period of collaboration encouraged as we pursue all key objectives in fiscal 2020.
Well that we'll now open the call question.
Thank you if he would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
Well take our first question from Brooks O'neil with Lake Street capital markets.
Good afternoon guys.
I'm sure you could appreciate it.
Little surprised by the guidance.
So I would sort of modeling was that a little bit.
I'm going to ask you first whether there are any anticipated payments for your new agreement that you talked about today with this around this below.
Well Brooks just to be clear on this or ominous balloon.
Talking about the Sundance drug coated balloon now there are and grow our guidance does not reflect any any license fees are milestone payments associated with Sundance as Gary remark. This year fiscal 2020 will initiate the first in human study, it's unlikely that we'll get to a point, where we would negotiate a distribution agreement.
For Sundance, and therefore unlikely that would receive any license fees are milestone payments that would be recognized as revenue during the year, Alright, and Abbott vascular has the option when we finish that first in human study based on the clinical data.
Two.
To do a deal with us on that that would not see until 2020 fiscal 2021, and it will look forward to that and another year books I wasn't sure. Just Mitchell were you talking about the on four or need commercialization agreements, we just signed the non drug devices.
Yes, I'm sorry.
Okay, great. Thank you for the clarity.
Brooks areas no upfront payments that will be received for the open for on a day balloon catheter very similar construct with what we did with the Telemark distribution agreement, we will be paid for manufacturing products for the customer so think of it more as product revenue as there are no license fees or milestone payments that will.
Be earned with either or any of those three products.
Okay. That's good and then I'm, just assuming and correct me if I'm wrong that the patent expiration.
In the.
Device business, that's probably been anticipated for a long time right.
It has we have been communicating this in our in our K and we've made comments about this previously the gen. Four quoting royalty revenue headwind is expected to be about five to 5.5 million in fiscal 2020.
I'll, just provide a little bit of color and commentary for those who are building construct in their models. The royalty headwind is going to be nonexistent for the most part in Q1 and the the 5.5 or the five to 5.5 million dollar headwind will be realized as we go throughout the year bigger.
And then in Q2 and you should think of it really is maybe starting around a million dollars headwind in Q2 in Q3 will be maybe be somewhere between 1 million in the half to 2 million and Q4 will be about two and a half to 3 million to give you a little bit of color on how we'll get to the five to five and a half over the course of the year.
I'll just also share with you broken with the other folks who are listening them to call today that we expect that the a headwind will continue and fiscal 2021.
I had one will probably be about half is mount half of the amount that we're expecting here in fiscal 2020 and thereafter, we think will allow will be we'll see a diminishing impact and should for the most part have that headwind behind us should become a tailwind in 2022 similar to the expiration of generation three patents a couple of somewhat similar to that.
Thats correct.
Right.
Just so we're on this topic is there any other and explorations that you expect impact.
No earnings going forward.
Nothing of significance.
Brooklyn, I showed up in 2010 that was the biggest thing we had two.
Patent expirations and gentry engine for on the strength of the R&D team jumped on developing a new.
Slew of patents and products to to do that.
You know the tough thing is it takes given our type of industry is the long cycle. So it takes a long time to bridge the expirations given the lifecycle of the products. We're talking about so that's the reason we're very happy just this would have been.
A lot worse, if we didnt have serene, which is the new generation of patents and those pathans high level.
I don't want to guess what it is but as another 25 years you adds 2032, I think that is the patent expiration on.
So rain center and by the way the 10-K take a look at that I think we highlight what the patent.
Portfolio looks like in terms of the timing and also kind of how to do the math on it but.
And that 10-K will be issued here probably.
Over the next month within the next month.
The number of Tim is talking about in terms of the impact is not the impact that we're receiving is the impact.
That given everything we're doing to mitigate it that's still isn't that impact that executive would have been much different even in this fiscal year, we were not acting to mitigate that's right the size of it.
Okay. That's good thank you very much.
Thanks, Thank you Brooks.
Thank you we'll take our next question from Mike Matson Needham and company.
Hi.
Yes, I just want to start with this.
Announcement about the notified body issue.
With regard to surveil getting a CE mark.
So I guess is it possible to use a different notified body is there.
Someone is there a government agency in Europe is saying that they can't.
Grant five sorry.
Works for these products.
Well first of all.
Clearly.
Those were the initial questions now I'll just say, there's this came out of the blue.
We had already have.
Submitted in the the modules for the medicinal review just a review of the drug that takes 210 days statutory thats been done the on site CE Mark manufacturing orders have been done the validation lots have been done and the notified body aside the clinical module since made before they have not even apparently looked at it.
Because of this what appears to be a policy decision as you know what I don't want to spend.
Get on the soapbox, but as you know in Europe , the changing to the MDR regulation sometime in May.
I believe this has to do with though.
Feeling of risk by the notified body about granting.
Our CE Mark to.
Category of device, where there is a known mortality signal.
What I don't understand as we can debate, whether there is a mortality signal or not.
But if you believe there is a mortality signal the devices that supposedly at creating it.
On the market the no action there is no action so what doesn't make logical sensitivities. If you have a new technology, but doesn't have Warner has data that clearly we don't have 3.5 year data. It just seems odd that.
You would block access to the new technology to put a finer point on that they have said settlement and we'd be surprised to see CE marks come out for although drug coated devices. They have said that they will grant.
Additional line extensions CE marks the existing CE mark devices as long as the lesion length.
As shorter than the maximum lesion length of does not exceed and the total drug content does not go up on that so.
As I said this is a.
Quite a recent development for us because we were expecting to see walk in December .
And so.
What avenues do we have.
I will tell you.
This notified body is no different than any notified body would go to right now and and so that's that's one issue. They maybe other avenues, we can work, including more daido more data is coming out the German insurance data approvals was you probably saw it was up published two weeks ago.
So by freezing good though.
And it absolutely shows apps and sofa signal so.
We.
The reason we took it out of guidance is we want to make sure how would we set guidance.
We understand clearly to Avenue, what we what we are trying to do to make sure we get the outcome, we have put into guidance.
This point, we just don't feel comfortable.
Putting something in the guidance, while we are getting our old arms around it I know what it sounds disappointing, but I don't think youll would want to any other way in trend and clearly the impact is really the gorilla in a room in the guidance. We are provided in fiscal 2000.
Okay. So I guess, if you've had.
So would it what did you take out of the guidance was at the.
Sorry, I think theres a milestone payment that you get but then you also start order gets CE mark start potentially getting some revenue for the product itself. So you took both of those things out of the guidance.
Thats right, Mike It's Tim the best way to think about it is theres really three different revenue streams that could have been in the guidance here. If we would have obtained obtained CE mark and I.
I won't put too fine a point on on any of these three because there's a lot of variables that impact these but the first revenue stream would be additional milestones and the revenue that would be recognized from additional milestones. So there could be one or perhaps to that could have been attained in 20 fiscal 2020.
As well as surveil product revenue from sales at it would be.
Making the European Union as well as a profit sharing comment so.
We don't have we can't really provide a whole lot of context around what those would look like until we have more clarity to gary's point, but I'll, just say would go a long way to offsetting the the delta here between what we generated for revenue in fiscal 19 versus what you're seeing in the of the outlook for 2020.
And it sounds odd that our strategic waterflood strategic objective is to get the CE Mark in fiscal 2020, and it's not in our guidance. So you can understand.
The dilemma for us there we.
We're going to find a way to get the CE Mark.
But the timing.
And the impact on the year I'd, just some not we're not comfortable putting it in guidance and guiding all investors.
That way.
Yes, I mean I completely agree with that approach I'm, just trying to understand what would it be split so as far as.
The notified body I mean.
When you say you're going to get it approved I mean, you're not going after we complete the us.
Transcend trial or something like that are you.
Oh Gosh I hope not when I said, we are going to find a way it's a challenge internally to our team. So we have hit.
On obstacle and we have different opinions.
We're going to explore all avenues.
Off.
I mean, frankly, I think it's unfair I'll just say that okay.
I think it's it doesnt allow equal market access than that.
Doesn't make sense, so if something doesn't make sense, there's got to be away to accomplish it.
We set so thats, that's what I mean to intimate by that.
Okay.
Yes, it it doesn't sound like changing you can't just go to different notified body like sounds like they all have a policy with us.
No I bring out.
Most notified bodies are not taking any.
Things are really gummed up in Europe , if you listen to sell Velvet earnings calls as well in terms of getting throughput on any category of devices not just.
A combination products.
And given the impending AMDR regulations I don't believe any notified body is going to take new stuff now it will have to be under the MDR regulations. So.
But what I will say is given this was recently we.
Up buttoning up on exploring all options and we'll be happy to share that when we.
We have a mobile to fight channel here.
Alright, okay.
Okay.
But one one other thing I will say, Mike and just for the.
Listeners keep in mind that up to 57 million.
Of milestones view upon getting the approval of Soviet what I'm talking about casualty system will have the revenue recognition and that is.
Potentially spread out over the next up to seven quarters.
So if you look at the impact of what it had an hour year.
We don't have the approval to speak about this particular milestone with our strategic fought the ABL with yet, but it's it's significant.
Cash and the concomitant revenue recognition.
Over the next.
Up to seven quarters, so think of think of that.
I think for them that way.
Thats the milestone payments for the CE, Mark you're talking about.
So for four offer all remaining all remaining milestones of which we can we cannot knowledge growing around the CE Mark is one of them, but they're significant other milestones with the trends and clinical and ultimately you SDMA approval.
Okay.
But those are independent of the CE Mark.
Yes, they are yeah okay.
Alright, and then just.
Let's see the the timing for Abbott to make a decision on allows US now that the first in human as Tom would you expect that what's or deadline.
Well we.
Finishing the patient follow up writing the clinical report and Abbott has very good clinical team. So we they will be reviewing the actual final clinical reports, which will take place in our third quarter.
And then they have a very short window of time of.
Have a bona fide.
Negotiation to to do a deal so thats an hour third quarter, and we do not have any of that and guidance because.
We don't want to speculate on what to dealers are the interest is.
I will say the Medtronic data set.
Was a good data set for me to see because it.
It was very it was very powerful.
Significant efficacy and.
We'll be clearly looking at Medtronic of how to get through the FDA would that be any approval on a pack with actual device. So all those things will be happening, we hope by the third quarter.
Okay and then just final question the just the guidance between 20 guidance include.
The revenue from the five 10-K distribution agreements that you already entered.
It does Mike so there the guidance does in fact reflect revenue for all three proprietary products based on these these agreements that we recently signed.
And the best way to think about the guidance here is we're really looking at anywhere revenue anywhere in 2028 anywhere from about half a million to about a million per product.
And obviously you can imagine it's not that precise but within a couple of hundred thousand for each of these products. So so we'll I'm sure we'll be talking more about this as Eric as their partners launched products and share with folks kind of the success, we might be seen throughout the course of the year, but the best way to think about this is it's going to probably be more back end.
Of the year, they're ramping up for that they're ramping up Thats correct. I don't think we'll be at steady state you on those products this year.
Okay, all right I'll call golf now, let some other people get on thanks.
Thank you Mike.
Thank you as a reminder, if you would like to ask a question. Please press star one now.
Our next question from Jim Sidoti of Sidoti and company.
Good afternoon can you hear me.
We hear you will hear you Jim Jim.
Great.
I could cover Tonight.
The first.
The clinical trial.
How long the follow up.
Going to be now and that these patients were enrolled.
The one year wildly, yes, so the primary endpoint analysis, which trial as statistical design for safety and efficacy is a one year follow up and.
We completed the trial in August so one year fallout, it's happening all now for the tranche of patients continuously but the last patient follow up it is a window off plus or minus 30 days, but so you can imagine by September of 2000 2020, right we will follow.
Load up that patient.
However, the we we given this paclitaxel issue we.
Well, we're trying to do is to make sure. We don't lose the long term falloff of these patients and so we'd want to make sure we follow them up in years 234 and five.
Versus having to goal.
Yeah.
For the till later on even while we're on the market that's right and that hasn't change Jim It's always been a five year follow up for the study.
For the submission for PMDA approval from the FDA that protocol requires a 12 month follow up.
Okay, So 12 months, where you'll get a better and then hopefully sometime towards the end of 20 totaling submit their data for approval.
Okay.
He had a first thing is we we share it with our partner Abbott and then we submitted to slow for PMDA approval process.
Is it there is a set process, but it could take some time through 2021 to get the approval.
Right, but you packet optical you can.
Submitted.
Sometime around end of 2020 early 2024.
Hi, that's that they'll calendar year debt, yeah, that's our plan yet.
Yes.
Alright, and then if you were to get the CE Mark approval can you tell us what the milestone payment from that it would be.
Well, Jim will need to hold off on that I think we know what we've characterized in the past is that there's.
Handful of milestone payments and everyone was tied to a very important milestone event and they got successively larger or the potential to be successfully larger than the prior milestone. That's really all I can say at this point so just stay tuned on that.
Yes, it's not insignificant.
Okay all right.
And then in the quarter, you said you generated about 12 and a half million dollars of operating cash.
Our I'd be curious about your peers, you only had about three or 4 million are rapidly moving.
Hi, good added to transform into $12 million lukash yet.
It's really because of the the cash that we receive from Abbott and the form of the $10 million milestone payment, which we didn't recognize all that revenue. We recognize five I think 5.1 million, while we get to cash you have them okay.
Declining receivables in the quarter.
No.
So Jim we and I can talk offline if that would happen I can walk you through the cash flow statement, but if you're looking at the PNM on trying to bridge back to the cash flow remember that the FPN now reflects $5 million of revenue right and from the milestone payment and then if you think about it we recognized about two and a half million.
Allergies from less surveil upfront and the milestone number one right and so if you think about it not all of that was cash because we've received the cash on the 25 previously but I can show you that puts in the calls here on that but I.
I think in your math year, you're eliminating or not considering the fact that we received the 10 million, which does hit the cash flow the operating cash flow, but isn't hitting the PNM now and then we have two and a half million dollars hitting the PM now from the surveil upfront, which is in hitting the cash flow.
But I'd be happy to walk you through that.
Okay, all right and then the our agreement you have improved through the earn through balloon catheters before were 14 million 18 mill balloon catheters.
Are those not those are non coated catheters right.
Non drug delivery, yes, they are quoted with our.
Yes, no im sorry, non drug coated.
Correct right no drug coating on those catheters.
And at some point in fiscal 2012 year, what if you will be going forward, where crude airport roof, yes, I'm, hoping you see the telemark partner as early as before the end of this year when they launch that's right. It will have have all anymore. So that's what we understand I think as Gary mentioned in his remarks, we've already of manufactured in ship proud.
Stick to the partner.
First one for Telemark and for the second agreement for the partner that will not be distributing and selling the on foreign the on the expectation is that they would be doing a launch early.
In our Q2, which is.
Q1 of calendar year 2020.
Okay, and then again for me.
Im sorry.
Well go ahead go ahead.
Or is it within the words were from the.
Clearly as you said.
Yesterday, we could it to drop through the wearable in Q4, which was around 7 million in the correct.
Weathered therefore.
Yes, so theres a couple of things going on as we had in 2019 I think it was about $24 million divest DNA expense, we had basically an offset to SGN a based upon a customer settlement. So in essence, we'd be looking at about just under 25 million of actual ESG.
In a expense if we didn't have that onetime benefit, but we anticipate a higher I asked infrastructure spend over the course of fiscal 2020, which could approach about a half a million, but they are the greatest increase in the SGN a spend for fiscal 2020 is really going to be related to hiring activities to support the product development initiatives.
As well as the spin to to support the product clinical evaluations that we plan to execute against in fiscal 2020. So those that's really there's also a few other things that get you to the total.
But those are really the big ones that are a bit different than what we spent in 2019.
Sure. So thats not really sales people with people, who are who do this clinical studies to compare your products, which were clearly ARPU.
Yes.
Lesson, we learned with how long it took the signs of these agreements.
We just sold one these products the goal cold and two things by having them continue to be exercising the cath lab, where we get the data.
Also speaks to the value that we have and it's something that we we believe will get us will that all of value and the continuous to use of these both and Cath lab gets a lot more attention from the strategics than just the clearance and so continuing to exercise it getting of our shopping.
No pencils and what we're seeing the value from end users. We believe will ultimately get us about a deal.
So okay. So if it basically critical specialists that are going to work into cash.
And.
Our support.
You are using the devices.
Absolutely absolutely I mean, it's tough for us and ill give you an example, and telemark the initial some of the initial.
Evaluation of that was done back last summer.
2018, stride and some physicians wanted it they wanted to keep using it and so we don't have a mechanism to do that even as we look to sign a deal. So we believe this is good the feedback is good for us in a connects us much more intimately to these customers.
As feedback from our next generation of device Thats right. So thats okay.
How many folks or is it 10 or 15 or can you give us a build an alternative.
No.
It's not 10 to 15, it might be up to four.
Cover the couple of the big interventional areas in the country.
Got it.
Alright, thank you.
Thank you Jim.
Thank you well take our next question from Mike to ski Barrington Research.
Hey, guys.
Tim can can you remind me how much of the original 25 million milestone related to habits.
I'll have been recognized at this point.
Great Great question, Mike in and so I think as we've described in the past the upfront payment is 25 million and we were actually recognizing the 25 million over the full period ending with the five year patient follow up and so.
As of September Thirtyth, we've recognized just north of 50% I think it's 51% of that 25 million, so little little more than 12, and a half million and put a little context around that we've done that that record that revenue has been recognized over about 20 months.
And and so now we've got 60 more months to complete the five year follow up so we'll be recognizing the other 12 and a half million over 60 months. So we recognized about 50% of the revenue over the first 25 months or 25% of the overall time that will be spent conducting the study.
So it's not given you that it gives you a perspective as to why we have the headwind in 2020.
With regard to the sure bail revenue I think we're recognizing 5.1 to 5.5 million.
So I think it's a great question and also as you think through the first milestone the 10 million, we recognized 5.1 million of that are 51%.
At quarter end, and so we'll be recognizing the remaining 4.9 million of that over the next 60 months for the most part and as Gary mentioned, it's not normally distributed so the distribution or the recognition is really based upon the expenses that we incurred to to complete the transcend study.
In the follow up.
Okay.
And then on the on the.
Coating.
Thanks patent expiration. So I remember the last time that occurred a few years ago, you guys gave some somewhat Gary.
Sort of guidance on the net impact originally and then it ended up every quarter you guys sort of mitigate more than it seems seemingly then.
Then you had anticipated.
Any sense that use.
Essentially have modeled sort of the same way you did originally and then maybe three and can kind of close this five to five and a half million whole more than maybe.
You've guided.
Well, that's right that we'd like to think that were pretty conservative in our guidance and and clearly we do have growth in the serene royalty portfolio, which is helping to mitigate some of the patent expiration.
Impact what the generation for coding.
Yes, I think theres really two elements here. So if you think about the the headwind of five to five and a half million dollars from the Gen. Four coating royalty there might be we might see some benefit and 2020 from the gen. Four coating royalty, meaning customers sales of the products could be higher than.
And then we'll than what we're thinking which would generate more royalty, albeit at a step down rate, which would help.
And then as you think through.
The the math here and this exploration I think we've been pretty clear in the past on Gen. Three it's the same mechanics, but a lot of the the impact is based upon when the customer manufacturing the product not just when they sell the products. So our forecast is trying to estimate what's in the channel based upon the Pirow three ish.
Experience as well as the expiration of pans outside the us which happens basically in another year and so the Prs three experiences is similar to what are the PR for experienced is similar to what we had with Pirow three will be pretty darn close with the $5 million to $5.5 million headwind, but if were.
Off on either of those input then we might have a more favorable or less favourable impact. But this is this is our guidance we feel highly confident about this.
And you will typically what we like to do Mike and I think you've come to realize this if we're wrong, we'd prefer to be to have a favorable impact on the PNM and we didnt.
We loon.
It was all first time going through that patent expiration of PR. Three so we learnt that time there was more product in the channel that we assume that I'm, sorry, but I wouldn't see that we did this.
We're hoping for the same reason, we trued that up a little bit understanding that so this is.
More secure guidance, but as Tim said it could could vary.
It's one way why how we could possibly exceed.
The guidance or perhaps maybe ill revised guidance upward in the future, but given where we sit today I wouldn't be if we felt it was going to come in stronger we'd have a different guidance and we'd have a different.
Headwind that wouldnt be presenting so.
Let's say two and will I'm sure will be.
Covering us as we go through the year.
Okay all right.
Willing to share what.
What percentage of R&D related to surveil.
19.
Ill.
Okay, Great question and.
And thinking I don't know that I have all the detail in front of me here because clearly as you can imagine there's external costs and I'm happy to share that with you I think we spent somewhere between 11 and $12 million on the transcend study and fiscal 2019, but that doesn't include any of the people here so the comp in the benefit.
It said that also are reflected in R&D.
Expenses, whereas these folks are actually helping them manage this and also we're creating products right that are going to be either used or were used in the study.
As well as products that were being.
Use for submissions that may be used for regulatory submissions and.
And the like and getting ready for operator manufacturing product once we get commercial so there's there's more expense.
I'm going to Mike then then the 11 to 12 that was spent on transcend so but I just don't have those those numbers in front of me I think the tough thing is as we get commercialization ready that oil has to go to R&D, because that's right, it's not cost of goods not insignificant.
Okay. So so what I was trying to get at is what might be the delta in fiscal 2008 versus fiscal not sure.
So yes.
Any let me help you with that so you'll notice that the R&D.
Spend is going to be lower in 2020 versus 2019, I think we came in around 53 million in 2019, and if you do the math in terms of the no.
Mid fiftys to high Fiftys as a percentage of revenue you're going to find that we might be around 50 to 51 million of R&D expense. So in essence, we're going to be spending perhaps two to 3 million last in 2020, a good chunk of the the reduced spend is going to be coming from that transcend clinical study, which.
I just mentioned.
I think 11, Aldo it's going to be.
Up to 6 million I think in 2020.
Give or take a few hundred grand but but it gives you a perspective that we're accelerating the spend on some of the other things like the the Sundance.
Study as well as some of the work that we're doing just on the development of the proprietary products.
Okay, Great and just last one I just want to make sure I heard it right did you guys say that there is 52 million left in milestones across all I'll just 57, seven it's pfizer to having done in sorry, Okay got it right. Thank you very much guys. Appreciate it. Thank you. Thank you Mike.
Thank you. This concludes our questions I'll now turn it back to Gary Mirage for closing remarks.
Well.
Thank you for listening to the earnings call today and.
Look forward to updating you on our first quarter earnings call in the next quarter and have a great evening. Thanks, everybody.
Thank you ladies and gentlemen. This concludes today's call you may now disconnect.