Q4 2019 Earnings Call
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I would now like to introduce your host for today's conference Mr., Matthew Dodds, leaving us with senior Vice President of corporate development, Sir you may begin.
Thank you Sydney and welcome to our conference call in the gas discussing we even though its financial results for the fourth quarter and full year 2019.
Joining me on today's call, our Damien Mcdonald, our Chief Executive Officer Dad used in our Chief Financial Officer, and Melissa for Arena, our Vice President of Investor Relations.
Before we began that we'd like to remind you that discussions during this call will include forward looking statements.
Factors that could cause actual results could differ materially are discussed in the company's most recent filings and documents furnished to the FCC, including today's press release that is available on our website.
We do not undertake to update any forward looking statement.
Also the discussions will include certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, there is available on our website.
We have also posted a presentation to our website that summarizes the points of today's call.
This presentation is complimentary to the other call materials and should be used as an enhanced communication tool you can find the presentation in a press release in the Investor Relations section of our web site under news and events presentations at Investor Dot, leaving Nova Dotcom.
With that I will now turn the call over to Damian Thanks, Matt.
Welcome to our fourth quarter 29 team conference call.
Today, we will discuss our results.
Provide some recent highlights and provide our guidance for twentytwenty.
29 chain with a challenging year overall and sales in the fourth quarter well below our expectations.
The shortfall in South was largely driven by a rest of world region, which I will explain in more detail shortly.
However, S did reach the upper end about guidance range, driven by a strong profit margin and a favorable tax right.
I'm going to start off by discussing some recent highlights then move to a sales results focusing first on F. Three primary growth drivers U.S. epilepsy.
Not circulatory support and the rest of World region.
Then I will discuss our via next strategic portfolio initiatives difficult to treat depression or de TD and heart failure.
After my comments said, we'll provide you with additional details on the results and provide that twentytwenty guidance.
Then I'll wrap up with closing comments before moving on to Q and I.
We have committed to providing ongoing clinical data related to the use of BNS therapy.
In early December we released new daughter at the American Epilepsy Society annual meeting on two debilitating sub segments of epilepsy.
Super refractory status epilepticus, and Lennox Gastaut syndrome.
We received CE Mark for cemetery, BNS therapy device for difficult straight depression.
Our first commercial symmetry implants in the UK occurred earlier this month, thanks to a collaborative effort with both the Somerset partnership NHS Foundation Trust and the Taunton in Somerset NHS Foundation Trust.
Thank you to both of these teams for supporting the severely affected patients Gordon.
In February.
The journal of affective disorders published an international consensus statement written by several renowned psychiatrist proposing the use of difficult to treat depression, I'd say more clinically useful definition and treatment resistant depression.
This consensus emphasize is a more empathetic assessment and treatment approach as a company. We commend this decision and one embraced the use of difficult to treat depression or de T.D. as it designation going forward.
Yesterday, we received U.S. ft, <unk> five 10-K clearance for a device modification to our three T to cool. This is an important step as we work through the resolution of the residual issues about warning letter.
Now I'll discuss have three growth drivers U.S. epilepsy advance circulatory support and rest of World region.
All the net sales results will be stated on a constant currency basis.
You S. epilepsy, south declined in the high single digits versus the fourth quarter fourth quarter of 2018, but rose sequentially and well within our guidance range.
This calculation excludes $2 million in D. TD sales recorded in the fourth quarter.
In 2020, we expect the U.S. epilepsy business to grow in the low to mid single digits, excluding day to day sales.
Advanced circuitry support sales were $9 million in the quarter, an increase of 20% from the fourth quarter of 2018.
This performance excluded any benefit from a next generation livestock system.
The growth was driven by deeper penetration of existing accounts with project through our kids.
Used for that right ventricle recovery.
And tend to my Kids also saw a modest picked up in growth due to DRG reimbursement code changes on October one.
Well, we did initiate a very limited commercial release of life spotlight in the fourth quarter, we faced the yield issue that will require some additional time to rectify this will limit at full U.S. commercial release until the second half of the year.
That said, we still expect her I see us business to grow at least 20% in 2020.
Rest of World, South righty $5 million in the quarter I decline of 5% compared to the fourth quarter of 28 team.
As a reminder, we terminated a Canadian distribution agreement at the beginning of 2019 and in the fourth quarter of 2018 cells from this agreement for $8.7 million and were located in this region.
Excluding this impact rest of world sales grew mid single digits.
This performance was below recent trends, Andrew primarily to two factors.
First we face an unexpected supplier issue for a key component of our Oxygenators that led to a backlog in the rest of world region, where we have been experiencing the highest level demand.
As supply is currently building out additional manufacturing capacity.
Second we did not execute in Japan during the quarter, while we did grow in the mid to high single digits in this market compared to the fourth quarter 2018, we expected to see more of a benefit from a shift to direct distribution in both hospitals and neuromodulation.
Turning now to difficult to treat depression sales in the fourth quarter, what $2 million and $5 million for the full year consistent with that guidance.
In 2020, we expect de de sales of approximately $20 million from a combination of the recovery study replacement implants for CMS eligible patients.
And a modest benefit from a commercial payer efforts.
Finally in heart failure I ran some half Refu S. pivotal trial continues to progress ahead of expectations with over 200 patients enrolled.
I'll now turn the call evidence that for another view about financial results.
Thank you Dan.
I'm going to discuss the fourth quarter results in greater detail and then provider 2020 guidance.
Sales of 288 million declined 2.2% compared to the fourth quarter 20 team.
Damian mentioned earlier the fourth quarter 2018 included 8.7 million in distribution sales from an agreement that was terminated in the beginning 2019.
Cardiovascular sales were $174 million down 3.8% from the fourth quarter 2018.
Cardiopulmonary sales were $133 million in the quarter declined 8.4% versus the fourth quarter 20 team.
Our lung machine sales declined in the low single digits, primarily due to difficult year over year comparison in the rest of World region.
In addition, the timing of capital equipment purchases led to a stronger performance in the first half of 2019.
Excluding the impact of the Canadian distribution agreement Oxygenator sales declined low single digits due to an unexpected supply issue of one of our key components.
Turning to heart valves.
Sales for heart valves were $32 million in the quarter, an increase of 14% versus the fourth quarter 2018, primarily due to favorable comparisons in the rest of world region.
Personal grew 10% this quarter globally, while we sold declines in the U.S. they were more than offset.
While favorable year over year comparisons in the rest of World region, primarily driven by the middle East in Japan.
Now, let's turn to Neuromodulation.
Sales were $113 million, which were flat versus the fourth quarter 2018.
You as Neuromodulation decline, 5%, while Europe grew 17% in rest of World grew 39% behind the continued adoption of send Tivo, which now represents 61% global generator sales.
Adjusted gross margin as a percent of net sales for the quarter, 69.7%.
70 basis points from the fourth quarter 2018.
The margin improvement was driven by the focus on mix in our pricing discipline.
Adjusted R&D expense in the fourth quarter was $38 million compared to $36 million in the fourth quarter 2018.
R&D as a percentage of net sales was 13.1% versus 12.2% in the fourth quarter 2018.
R&D is increasing behind our continued progress in the anthem half route pivotal trial and the initiation of the recover study.
Adjusted EPS DNA expense for the fourth quarter as $108 million compared $101 million for the fourth quarter 2018.
SGN as a percentage of net sales was 37.4% up from 33.9% in the fourth quarter of 2018.
The increased investment is largely related to expanding rest of world commercial infrastructure and building out our U.S. neuromodulation capabilities, including DTT.
Adjusted operating income from continuing operations was $55 million compared to $68 million in the fourth quarter last year.
Adjusted operating income margin from continuing operations was 19.2% compared to 22.8% in the fourth quarter of 2018.
Our adjusted effective tax rate in the quarter was 5.3% and improved in improvement from 16% in the fourth quarter of 2018.
The lower tax rate is primarily attributable to an ongoing benefit related to our ongoing tax planning efforts.
Finally, adjusted diluted EPS from continuing operations in the quarter was one dollar compared to $1.12 cents in the fourth quarter of 2018 and was within our guidance range.
Moving to cash flow or cash flow from operations, excluding payments for one time integration and restructuring costs through the fourth quarter of 2019 was $151 million.
Capital spending for 2019 was $25 million, which was $13 million lower than 2018.
Our cash balance at December 30, Onest 2019 was $61 million up from $47 million at December 30, Onest 2018.
Our net debt at quarter end was $273 million up from $124 million a year in 2018 to address or three TV settlement payments.
Now turning to 2020 guidance.
In terms of our overall guidance, we forecast 2020 sales growth to be between three and 5% on a constant currency basis.
If current exchange rates remain unchanged the company's full year revenue guidance will be negatively impacted by up to 1%.
We expect our neuromodulation business to grow in the mid to high single digits, driven by the rest of world region in incremental the TD sales.
We expect our cardiovascular franchise to grow in the low single digits with strong growth from Dcs, largely offset by the lease stage replacement cycle of age allowance.
Now turning back to the rest of the piano.
Adjusted gross margin is projected to be in the 70, 71% range.
We expect adjusted R&D to be in the range of 14% to 15% of sales and adjusted SGN a to be in the range of 30.5 to 39.5 person sales driven in large part by or incremental DTV investments.
We are projected projecting adjusted operating margin from continuing operations to be in the 16.5% to 17.5% range.
Our adjusted effective tax rate is expected to be in a range of 14% to 16%.
We are projecting adjusted diluted earnings per share from continuing operations to be in the range of three dollar 10 cents to $3.30, which includes a minor impact from foreign currency.
The share count is expected to be approximately 49 million.
Well, we don't provide quarterly guidance or sales are historically lower in the first and third quarters.
Our expenses are generally more evenly spread out in particular, the first quarter is our softest earnings.
Our adjusted cash flow from operations, excluding integration restructuring beauty product remediation litigation payments is expected to be in the range of $180 million to $200 million.
Integration and restructuring are expected to be in the range of $35 million to $40 million compared to $44 million in 2019.
Capital spending is projected to range between 25 and $35 million.
Depreciation and amortization expense is expected to be approximately $20 million.
With that I'll turn the call back to Damian for some final comments thanks that.
While 29 team did not guys expected we've learned a lot as a company putting in place building blocks to be stronger and remain confident in our growth prospects.
We will be laser focused on improving our execution in 2020, delivering strong portfolio management and developing the talent and culture of Livanova.
To highlight those focus areas. Please refer to the slide 18 inept investor presentation.
I'd like to take a moment to thank many of you on this call for the Sadara and constructive feedback you provided over the past several months.
You see that feedback reflected in the framework on that slide.
Well some of that cardio pulmonary businesses will be challenged in 2020, we're expecting strong global growth in epilepsy, a ramp up in the de T.D. efforts and the release of lifestyle to drive sales growth high this year.
We look forward to updating you want to continued progress and delivering on our commitments to drive shareholder value and with that Sydney, we're ready for questions.
Thank you if you have a question at this time. Please press the Star then one key on your Touchtone telephone.
Your question asked and answered or you wish to remove yourself from the Q. Please press the pound.
And if you are using a speaker phone please look the handset.
First question comes from Rick Wise, if your line is open.
Okay.
Hi, Rick.
Maybe just starting up.
Cardio pulmonary.
I mean as you indicated.
What's the biggest underperformer that seems to be mostly rest of world. Maybe you could give us even more color on the two major factors one I'm clear on the supplier issue.
But help us understand.
More detail what takes six months, what its revolving on what takes six months terrorism to resolve how do you make sure it doesn't happen again the other part.
I'm just I'm not is clear.
I'd like to be when you talk about.
Rest of World is that cardio pulmonary only or the total portfolio.
That.
What's impacted or where there was a shortfall just a clarification there.
Thanks, Rick.
First off let me just say, it's fair to say that 29 thing was not play off here for us.
Good luck on good teams, we've taken time to step back and evaluate that game and we've made changes to focus we made changes to that processes and you know we've made changes to execution metrics.
And trying just to I roster. So you know, we're setting ourselves up for a stronger year for CP, there and a number of things. The supplier issue was the one thing that you mentioned.
That discussion has been an ongoing one with that group and we've seen a number of improvements with them they've been very responsive and they are putting in place additional capacity for.
Supporting our growth plans going forward, but that that group.
Really did impact us in the quarter I would say you know Japan.
Was the second thing that cost us some hot take as we were really expecting a stronger performance from them, but they grew mid single digits and that was very strong for that economy, but we'd expect that significantly different performance as we were shifting from at distributor model to direct model.
We put in place some different things or as a result of that our account planning processes that we've we've.
Deployed very effectively in Europe, the key opinion leader engagement increased proctoring around.
Particularly the hot fell transfer so I think that for US is another big thing.
And.
Lastly, I tell them growth in the quarter paste, some pretty tough comps rest of world rest of world.
2018 versus 29, Jane was a very strong comp for HL lands and that was the facing the third thing so I really but supplier issue, Japan and then the actual end comps coming back around so that's the CP wrap up.
Gotcha.
The turning to narrow.
You are guiding it.
If I'm understanding correctly to mid to high single digit growth.
You know clearly 20, making about thank you for calling it out.
The DTT.
Oh trial maybe.
If you could.
Help us better understand.
Well I'm not even stronger performance from if you will but core business.
The trial.
Help better understand.
The some of the factors there how are you.
Factoring in potential drug competition as you incremental competition as you contemplate 2020.
And the replacement cycle versus new employees, just again, if you could do a little deeper dive into some of those moving pieces sure.
So first of all we're really pleased with the double digit growth performance of Europe and international this year and I think that team have done a great job and I will say since the Q1 results and the reset from the U.S. team they performed well and they exceeded their plan and are in the back half the year. So I'm.
Placed with that so going forward.
We've had a thoughtful full cost that I think really takes into account a number effect is and we are really considering as you said you know the idea of additional competitors in the drug area.
And we put in place the number of changes that we've alluded to before a market intelligence and competitive selling approach is different.
I would say that we've also change that go to market. We've added M.S. sells into the field account targeting has changed clinical evidence and support that I mentioned early on in my prepared comments has changed and so all of those things for US a important building blocks to drive the U.S. back to.
Gross gross stuff. So we see strong double digit performance in the European and international markets, that's being a great driver would being prudent I think and thoughtful without a U.S. full cost as we consider new drug launches and I think we're setting ourselves up for a.
Platform.
Yes.
And so maybe last from me.
Like spark.
It sounds like you have a new and help me better understand help us better understand the yield issue and that.
The second half launch conservative optimistic.
I think too bad then I'd just say.
I mean, it sort of just on the side a little bit.
Just happened to talk to us.
Doc yesterday on a different topic.
Who and life part came up and.
You bet enormously enthusiastic about the potential for the product.
A better pump better flow.
As language was great future Peach mobility. He described it I'm quoting him as a huge deal.
Does this delay.
You know how representative that reaction and this delay.
Concern us or.
Could maybe second half 20.
Better than mid year, reflecting in your guidance today.
Well I think I was actually a lot of great information there Rick. So first let me say I think you know we've guided thoughtfully to this greater than 20% growth for that for the full year and I think that's an important signal from us about what we think about this platform. So our initial experience with the pumps in the controllers.
In the field has been really well received and I think that this starts were taking around the yields as important. It's a it's an important component of the control up and we want to make sure that we have continuous flow to have production make what we expect to be the demand and we think this is a better approach then.
Having I stop stop with the with the yields so I think were on it the team have done a tremendous job of identifying how to fix this and I think we're going to look forward to some great growth from this from the scrip and I'm pleased to hear that your experience well that you're you adopt his experience is similar to us it is an important product.
It has a simplified interface, it's easier to set up the priming is incredibly much simpler.
And the high flow right I think is something that people are going to see as an important important aspect of the patient recovery. So I'm pleased to hear you will see hearing the same feedback we.
Thanks.
Thanks, Rick.
Thank you and our next question comes from the line of Matthew O'brien. Your line is now open.
Thanks, and thanks for taking the questions just real quickly Damian or that can you just quantify the impact of the supplier issue in Q4.
Yeah, no, we're not giving and into specific.
Numbers, but it did create a backlog for us as I said, we work through a lot of that and we're going to.
Be on a very good stance I think going forward and especially as we returned to really normal numbers in the later in 2020 and 2021, but I think that this team has been very responsive esupply a quality team an app procurement team have done a great job, but we're not going into the exact numbers on the backlog. Okay are you through that.
Issue now are you back to full capacity.
Yes, largely okay. Thanks, and then shifting over to the any kind of following up on Rex question on the on the Neuromod business. When you strip out the contribution from DT D.
You know and the rest of the world commentary again, it kind of implies you know.
You asked number that's pretty low single digits, you know and I know your accounting for the new drugs, which really haven't had an impact historically on you guys on a longer term basis. So I'm. Just curious why are you still so conservative in that business are you worried about other device competition, specifically and then.
What do you think that domestic neuro my business can maybe get back into that.
First single digit range.
Yeah. So like I said earlier I'm really pleased with how this team responded and since the Q1 reset that team as met their numbers and can continue to deliver and I'm encouraged by that performance, having said that we take all new drugs launches seriously and as you say long term the drugs.
I had an impact, but we are looking at making sure. We're thoughtful about the 2020 focused.
And low to mid single digits reflects our expectation that there may be some impact.
Big picture DRA is still in a hugely underpenetrated and our focus is on the drugs plus the Ns.
As I've said before they're a number of important benefits of BNS therapy that drugs comp that shape and wave we believed that our south of marketing efforts really approach this and as I said, we've also put in place new go to market with the MSL beginning to ramp in the field that a new.
Version of account targeting and more us support with clinical evidence.
I'm encouraged but I think this is a thoughtful.
For full cost for 2020.
Okay, that's fair and if I can squeeze a more here just on the.
The DGD.
Cynical study can you tell us how many patients are enrolled at this point and then I thought your commentary on the commercial side was short, but very interesting you know that you're you're making some progress there can we expect any kind of.
Central positive update here in 2020 as far as some coverage on the commercial side.
Yes, so look on the.
The overall number when what kinda give specific details on the enrollment.
But I will say I'm really pleased with how this team is ramping you know then a number of really great high as I've made good progress on opening the sites up and similar to the ask them study, we really expect to see enrollment accelerate through the year.
I think the forecast is really based on first of all their cap a trial. It's at primary focus. This is the single most important thing, but having said that we're also looking at end of service for the CMS eligible patients and then some modest gains with private pay as as we.
As we ramp some of the efforts, there and especially with patients who are probably screen out of the recover trial, but a little less eligible for therapy I think that they're an important population. So you know we're investing behind this as Ted said with the the R&D spend really augmenting our patient engagement and recruitment.
And really the field support for these into service in private so again I think important focus for us and I think one of the things that has the potential to create a lot of value for us for live in either.
Very helpful. Thank you.
Thanks, Matthew and our next question comes from Raj Denhoy. Your line is open.
Hi, good morning.
I wonder if.
Maybe start maybe start with the guidance you know I think one of the things that we've been thinking about is the cadence should be new product launches and everybody thinks are more conversations view. It sounds like in 2021, there is going to be some significant launches both in the heart lung machine side of business as well as in BNS and you and your generator.
Both those could prove to be pretty significant upgrades and so the thing that were curious about is how much you've incorporated.
Potential slowdowns in purchases towards the end of this year is as customers may be anticipate the launches of those new products and 2021.
Yes, Thanks, Raj, we didn't anticipate or forecast a big numbers for slowdowns and purchases for this year, but I think what were want to learn problem is where we landed in 2019, both in terms of the impacts of new drug.
Entrance for BNS therapy, obviously looking at how we trended with each of them and some of the things that we saw with CP being very thoughtful and our guidance for 2020 I.
I think also looking at the investments that we have to make to support the pipeline.
On one side, we were disappointed that we had to shut down the TMB all VR program after prolonged efforts to to redesign that product and address the safety issues.
And at the same time, we have is fantastic opportunity with tier de at heart failure, and others and so allocating resources to support those those investments and so that's why we guided where we did.
Well, maybe like maybe I can ask question different way so in past product launches when you've launched a new BNS generator for new heart lung machine.
What has been the cadence of purchases in front of those launches how have you seen any slowdown in the business and I think one of things were also maybe asking about two we said launches that you sort of started articulate our fairly significant wood with adding Bluetooth to the BNS generator. The upgrades on the heart lung machine and these seem like pretty chunky launch.
He has come 2021.
In times past through seen any impacting your business units in front of those kinds of watches.
Yes, not material impacts in previous launch yeah. So.
And look specifically I shall names I mean, the last I tell them that was launch was 12 years ago.
And you know that said the signal a significant opportunity for us and and.
The other aspect of it is ABC local footprint is very different now so the way we would phase then roll out launches really sort of go around the world. So you know you things like Neuromod for example, the release in the U.S. first.
Would still allow us to continue selling San Teva in the international and European geographies, So where we're seeing strong double digit so.
Those are all expanded thoughts as we going into a at launch planning for 2021.
Okay Fair enough and then just maybe one on a.
Italy has been a lot of news flow out of essential went back to kind of Irish Northern Italy, where you guys got some presence.
Given the sworn history. There is there anything you can update in terms of whether you're expecting impact impacting your supply or any.
Any business disruptions at this point.
Yes. Good question, we Havent full cost any overall corona virus impact on a in our guidance.
Having said that Italy's less than 5% of our sales in 2019, we do have to manufacturing facilities, they're wanting solutia and one in Miranda.
That both located in <unk> in regions that I'm not affected currently by the by the virus. So.
They are outside the current exclusion zone.
We have a small administrative office in Milan that weve closed that facility for the weak.
Unlike just about everyone else. We're monitoring this daily we have a whole number of discussions going on with that tier one and T. Two vendors to show that I have appropriate measures in place.
But like like everyone in the well we're monitoring this and I think we've taken the appropriate steps I thought.
Okay. Thank you.
Thanks Raj.
Thank you and our next question comes from Scott Fargo. Your line is open.
Hi, Scott.
Mr violently like question thought.
Sorry bigger problem. Thanks Diamond.
Yeah. So.
First question. Please just relates to the performance so.
No modulation into full cool so I.
I think your previous commentary was surrounding a return to new patient growth in North America during the fourth quarter.
And next Q4 performance doesn't appear to stuck with that and that around 40% businesses replacement. So can you talk a little bit about what happened there and whether you will see new patient contraction.
Rather than growing fast expected.
And also through.
Emails Bloomberg's coming and then I think you already so just some clarification on your guidance for new merchandise you place I think you've said you expect to go low single digit low to mid single digit in North American epilepsy, and I think you've been growing around 20% outside of.
The U.S., so that would imply to me at least.
Garden peaceful mid to high single digit epilepsy, unless you expecting rest of the world to materially change. So can you. Please clarify that that is the right interpretation and the golladay comes on top.
Yes. So you have the guy that's correct. So first of all I mean coming back to 2020.
Yes that is correct, we are assuming that the U.S. as a growth epilepsy.
Given the 2019 reset that we had we were pleased that we in Q4, you know for the full year beat our overall guidance on since.
The reset in April by about $5 million for the full year. When you look at Q4 2019. It was a tough comp I mean, the U.S. grew 10% in Q4 2018. It was really related to the momentum that we had was sent tivo.
So.
I feel good about where we're entering we are being.
Thoughtful about EUR 20 to 20.
Guidance for a for epilepsy, and the $20 million that we're building and forward TRD will also help us or deep sorry, the PD.
So so you've got a enough on the 2020, Scott I just want to make sure that Youre analysis is basically right yeah.
So thank you just just to be 100%, so oh going well, we shouldn't be in a situation or mid to high single digits epilepsy.
Yes, correct.
And just like round out the 20 not the 29. Thank you for I think we the other thing for us in the overall performance was strong and ahead of Atlanta, We did have I I December recall classification from I recall that we executed in August and I think that cause some confusion in the market. So at the top without funnel.
We're still really strong, but the velocity of moving through that funnel with a little slower than we anticipated and that's why there was there was a slight downturn in new patient implants, but overall, we're really happy with the performance at that time.
Okay. Thank you.
I'm sorry to beat this open nicotine on guidance, but if that is the case and depression revenues come on tall. Then basically your guidance is assuming no growth from cardiopulmonary annual group guidance given the that franchise is 40% in gross revenues.
I just wanted to understand a little bit better than this oxygenate issue because I think the 10 15 years I've never seen their supplier issue folks should night. So can you talk a little bit about walk teas.
Supply issue here and also maybe give us some flavor for you low single digit cardio pulmonary walk is embedded full auction niches within that assumption.
What I did yes, lighter and you will do the come Guy I think one of the forecasted you're right I mean, cardio pulmonary we're projecting low single digit.
Performance, just given the fact that ace, yes, we're saying 20% for the year. So.
And on that on the component supply I, you know I don't have enough history or you have a longer history than I, but you know I'm sure that there have been supply issues in the past in our instance, I'm not going to nine that particular supply up at this they supply a majority of this component for the oxygenate a market we've been working closely with them and.
Resolved some of the issues not all of the issues, but they they back onto contiguous supply, which is great and we now expect to clear the backlog and a return this portfolio to some growth.
As I said earlier that they're working on manufacturing capacity. So that there is you know I stronger demand support for 2021.
Oh, it very good guys or maybe just one last quick one if I am I right. I mean, you know I appreciate you being out front about being a challenging and 2009 thing I guess a question for you as you know and do you consider this week, so starting that make a structural issue for leaving I've, perhaps you can share with US why you think youre.
A large company and you talked about that you've learned some lessons over the course from the one thing can you can you go a little bit more than six line, what they want a I also including some of the leadership changes you've my thanks.
Right, that's a pretty extensive set of conversations to have but let me try and summarize it I mean, I do think where a growth company and I think that we will show the.
People, who had faith in us that that's the case and we're forecasting growth this year and I anticipate that we'll be able to deliver on noticed based on the following festival.
Made changes to the focus of our organization simplifying the things that we are focusing on and I refer you to again to page I think what are those things to drive growth U.S. epilepsy, U.S. IC, yes, and international I'm sorry, the focus there is important the processes that we put in place where my.
Taking a number of changes to.
Why we think about operational efficiency the effectiveness of the live another business system and how those things are applied more broadly where we've seen that implemented effectively in Europe. For example, nine quarters of contiguous sales growth. The quality team has used these methodologies to change and none.
Her of key processes and I point to the effective with the five 10-K clearance for three take time through significant efforts there to have that remediated.
And then lastly, the operations team you know enormous process change there specifically in supply chain and logistics, you know, where we're starting to see a reduction in backorders globally. So the process is a change and the execution metrics have changed.
And that's a an important set of behavior is internally for us and how we apply those vertically throughout the company with respect to leadership changes. Some of you that have been following the case will have seen that we've made some changes to a a section 16.
And we've combined the operations and the R&D organization I think this is critical back to paying and medical innovator and the second focus area, which is pipeline execution.
Bringing those two groups together are important to drive speed to market and you know they're very focused on you know the near term things, which is Lux Buck.
The trials with recover an anthem and the Polaris program.
And then and then lastly, Ah we also took out the franchise structure the verticals that were on your remote and cardiovascular.
And focus the teams much more on global marketing insights and key opinion leader development again important for the speed to market and not get innovation.
Put the responsibility for a commercial delivery more squarely back into the regions and those those regions now have a greater level of accountability for the for execution. So this is a longer US then you probably wanted but I'm trying to point to is very specific actions, we've taken and then.
You can also say on that page 18, how we're looking to focus more definitively on EPS and cash generation as well.
Great. Thanks, good answer thanks, I mean, I'll jump back in the Q.
Right just thanks Scott.
Thank you and our next question comes from Mike Matson. Your line is now open.
Hi, Thanks.
So I just wanted to ask about the.
The savings from shutting down keeps on and then the 150% head count reduction that you're going to be implementing.
Italy, or I guess combined with case on so obviously, that's going to be generating some savings it sounds like and based on what the guidance sort of implies you're planning to reinvest virtually all of that one can you quantify the savings into can you confirm whether or not any of that is gonna be falling through the bottom line results.
And the thanks, Mike for the question you know clearly we were disappointed about where you know keeps on landed and ultimately the investments that we made there and also as you pointed out the restructuring of.
Our cardiovascular it did generate savings, we do see a tremendous opportunity.
It's roughly about 25 30 cents between the two.
That we are putting back into depression, mainly we think that this depression recover study is a very large and complex study we've really.
Mark on the enrollment, we're making substantial investments to ensure that we have strong patient recruitment and engagement. We're also doing a lot of work on us. So study analysis and also looking at the.
Commercial prospects both completions study.
We're also investing as you know in rest of the pipeline, but the big driver is really the.
DGD so.
Okay. That's that's helpful. Thanks, and then that kind of leads into my next question just just on BTD. So I mean, you did call out a number of investments that you're making there and I understand part of that is to fund the actual trial itself and all the activity around the trial, but to what degree are you kind of laying groundwork.
For an eventual coverage the favorable coverage decision.
And how much of that investments going toward that.
Type of investment and then.
What does that sort of imply about your confidence in that the outcome of the trial currently.
Well.
Let me take that this or that the confidence in the outcome of the trial is largely based on the aronson paper that we know we've spoken about in the past you know weight you see significant changes in response right significant changes in remission right and those are over a long period and you see that the period.
Performance continues to improve Oh, I have up to five years. So.
That's what gives us the confidence in where the guy. So what do we know has to happen, but first of all we've got to get the trial enrolled so a lot of without pardon icon two or two enrolled us. This trial as quickly as possible. Then you my old remember its 500 patients in the unit Paula and up to 500 patients in the.
Hi, Pola, So you know where we're very aggressively.
Opening sites and trying to drive patient enrollment.
Importantly, there you know you have to make sure patients are engaged and continue to.
Participate in the trial, so were spending a resources on that to make sure that we have tools in place to drive engagement online tools apps and I think the team there have done a great doesn't make some great steps there to really look at patient engagement and then lastly, you know ensuring that the the field.
Clinical support in the engineers, who a in a responsible for the programming in the blinded study.
Really a well well first and also available and so we've ramped that resource investment there.
I think overall, we're also encouraged by the possibility of moving into end of service to CMS eligible patients and you know the possibility of private pay as and and so you know we're also recruiting people in that market access area as well to help us support those efforts so.
This clinical trial, there's the clinical.
Trial execution, and then is the commercial ramp and all three of those pieces on the significant investment.
Yeah, I would just add I mean that is one of the reasons why SGN a still remains relatively high for 2020 in our guidance is because we are building the team building capabilities to support.
The infrastructure to support the trial, but also to then ultimately be in a position to start once that once the trial is completed.
Okay. Thanks, and then I apologize if you mentioned that caused us a first five or 10 minutes, but I know you commented on current a virus with regard to Italy, but but what about with regard to China do you how much revenue drop in China and to what degree are you getting any supply any of your components out of China.
Yeah. So thats another another good follow up question on that so China represents less than 5% of our sales and 29, tying up so we don't anticipate huge disruption yet, but we have not taken that into account in our guidance as I said, we don't have any manufacturing in China and only limited supply agreements.
So we don't currently anticipate any impact on Esupply since we're not expose really to the Chinese market. However that said we are continuously monitoring at tier one and T. Two vendors there to make sure that any supply changes I communicated quickly.
If you know we haven't seen a change in elective procedures, yet, but we're also monitoring that as well.
And you know, we're also making sure we support the Chinese government in any way, we can with at products. We know that oxygenation is an important aspect of this at the moment and so we're working through any any aspects of that big requirements. So overall I think again like we said with the Italians dot.
It's fluid we're monitoring it every day and we think we've taken the appropriate steps.
Okay. Thanks, a lot.
Thank you.
Next we have a follow up question from Scott Bardo. Your line is open.
Oh, Thanks, Josh you give me a lot of a a lot of calling but just a couple of quick case I know, we've discussed a little bit before about your commitment to deliver you will meet him some targets when set obviously that's been a few puts and takes but just with respect to your commitment to stop man.
Turning the business to get to this.
20% margin and can you today come from it should.
[laughter] mileage fall in the next couple of years I'm also <unk> would lot you do this might be talk a little bit about where you will redeploying some of your investments.
Given that you've got some cost.
So takeout from mitral when also the transfer production from salute, just so well where's that money going its not flowing through tomorrow, you just yet.
Yes, so Scott we have an absolute commitment to get to 20%. We understand that that is a goal that we've set out and we believe that.
We will get there sooner rather than later for 2020, we're redeploying a lot of the savings related to case on back into depression, given the significant opportunity, we're generating 20 million a revenue, which is which is great to support the business, but the level of investment.
With that we're making both in R&D and building initial commercial capabilities is in excess of that so we think this is a great opportunity and that's why we're not dropping.
To that 20% target in Twentytwenty, but I believe that you know.
More like 2021, we should be seeing that kind of number. So we you know again I'll refer you to slide I think gross margin expansion continues to be a focus for us.
At maintaining SGN I as a percentage of revenue. This year is an important signal for us.
So leverage we know is K, but I think everyone. I'd also say the upside of de TD, and that's where we're investing.
Great. Okay. Thanks, guys.
Thank you I'm not showing any further questions at this time.
Well, thanks, Sydney minimal. Thank you everyone again as always thoughtful questions and on behalf of the entire team. We appreciate your support and the continued discussion and we look forward to updating you on an ex cool thanks, everyone.
Ladies and gentlemen, thanks for participating in today's conference. This concludes the program you may now disconnect everyone have a great day.
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