Artivion, Inc.

Greetings and welcome to the CryoLife first quarter 2019 financial conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Lewis from the Gilmartin Group. Thank you, Ms. Lewis. You may begin.

Good afternoon. This is Lynn Lewis from the Gamartin Group. Thank you for joining the call today. Joining me from Cryolife's management team are Pat Mackin, CEO, and Ashley Lee, CFO. Before we begin, I'd like to make the following statements to comply with the safe harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties in our forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations, or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates, and assumptions that may cause actual results to differ materially from those forward-looking statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements was contained from time to time in the company's SEC filings and in the press release that was issued earlier today. With that, I'd like to turn it over to Cryolife CEO, Pat Mackin.

Thanks, Lynn, and good afternoon, everyone, and thanks for joining the call. As you'll hear today, we're off to a great start in 2019. I'd encourage you to measure us in two ways. First, our near-term quarterly performance, and second, the progress we've made against our clinical and R&D programs. I'm happy to report that we met and exceeded expectations on both fronts this quarter. You may recall from previous earnings calls that we expect to drive consistent growth from our current portfolio while at the same time, we work towards a series of product approvals, new market introductions, and product enhancements. Some of these initiatives have the potential to dramatically change the growth profile of the company. Our first quarter once again illustrates our ability to simultaneously produce strong organic revenue growth and achieve key development milestones, including, one, we submitted regulatory approval for BioGlue in China. Two, we completed enrollment for the U.S. per-clot clinical trial. Three, we submitted for CE-MARC the Enya thoracic stent graft. And four, we submitted the N-side branch thoracobdominal stent graft. I will touch on each of these in more detail throughout the call. Regarding organic revenue growth, total revenue for the quarter was $67.5 million, reflecting year-over-year growth relative to the first quarter of 2018 of 9% on a GAAP basis and 11% on a non-GAAP constant currency basis. This strong, consistent growth was driven primarily by our Yotech and Onyx product lines. For the quarter, relative to the first quarter of 2018, Yotech grew 10% on a GAAP basis and 18% on a non-GAAP constant currency basis, as our Yotech product line continues to take market share. We expect this trend to continue throughout 2019, given how our Yotech products stand out from the competition. We are also the only company to offer a full suite of aortic stent grafts covering the ascending aorta through the abdominal aorta. We expect to introduce three new next-generation Yotech products into key international markets by the end of the year. Turning to onyx, relative to the first quarter of 2018, our first quarter onyx revenue increased 14% on a gap basis and 15% on a non-gap constant currency basis. with non-GAAP constant currency revenues in North America growing 18%. We continue to expect ONIX revenue growth to remain solid, as it is the only mechanical aortic valve in the world that carries the FDA label, allowing patients to be managed three months after their initial surgery at an INR level of 1.5 to 2.0, compared to an INR level of 2.0 to 3.0 for our competitors' mechanical aortic valves. We believe we will have this competitive advantage for a considerable period in the future, as it is unlikely to be replicated by a competitor given the cost and time it would take to conduct a successful clinical trial and obtain regulatory approval. Despite our better than expected overall revenue beat in the first quarter, our gross margins were slightly lower than anticipated, driven by the mix of stronger revenue from our distributor markets. Ashley will review our first quarter financial performance and 2019 outlook in more detail later in the call. I would now like to discuss some of our recent business highlights, as well as near and long-term growth catalysts. Starting with Yotech, we are on track to introduce three new Yotech products in select international markets in 2019. This past quarter, we submitted our next generation thoracic stent graft called Enya, and the first ever off-the-shelf branch thoracic abdominal device called N-SIDE for CE-MARC, both of which we anticipate will be approved later this summer. We are confident that the ability of our branch thoracic abdominal device will offer meaningful benefits for both patients and surgeons, as will be the first time a branch stent graft will be available off-the-shelf, thus eliminating days of waiting for a patient-specific custom graft to be built. Further, we remain on track to submit for regulatory approval our next generation frozen elephant trunk called the Vita Open Neo. This summer with a goal of receiving CE mark by the end of this year. Moving to BioGlue. We submitted for BioGlue regulatory approval to the Chinese FDA in the first quarter. As a reminder, the approval cycle in China can take up to two years. We do not know what the visibility will be as we go through this process, but we'll keep you updated on progress when available. In addition, we're pleased to report that we completed enrollment in our U.S. clinical trial for per clot. We expect to submit our PMA in early 2020 with a potential FDA approval coming later in 2020. Regarding our global reach, we've begun expanding our sales operations in Asia Pacific and Latin America. with our two new commercial leaders, both of which come with extensive large medtech company experience. Over the next several quarters, we'll be adding approximately 20 people in Asia Pacific and 8 to 10 people in Latin America. We currently use distributors in many of these regions and will selectively migrate towards a direct sales model where it makes financial sense. For example, we are in the process of going direct with BioGlue and Onyx in Brazil. as we were able to leverage existing direct operations put in place by YOTEC before we acquired them. Based on the success and experience gained when we migrated to direct sales in our European territories, we expect these moves to direct sales in the regions will begin to produce strong and consistent results. Finally, I would like to discuss our tissue and onyx mechanical valve business. On the tissue side, we are driving solid growth in our pulmonary tissue valve business, which we believe is based on the continuous stream of positive long-term performance data on these tissue valves. Adding to this data set will be the results of Dr. Paul Steller's ROS procedure study that will be presented later this week at the annual AATS meeting in Toronto. Dr. Steller performed the ROS procedure in over 600 patients with great success, and we're looking forward to the readout of those results. We are confident that the incremental positive data will continue to drive growth in our pulmonary tissue valve business. As a reminder, the ROS procedure is a double valve operation where the pulmonary allograft is used to replace the patient's native pulmonary valve, which has been moved to the aortic position. Moving to our next leg of long-term growth for the best-in-class Onyx mechanical valve, We are currently working with the FDA to finalize what is needed for our PROACT-10A trial. We anticipate that we'll have an approved IND from the FDA this summer. Before closing, I'd like to share with you my thoughts on the recently announced PARTNER3 TAVR data and its potential impact on our ONIX business. At a high level, this is something that we've been expecting and have factored into both our 2019 guidance and the longer-term future of our business, so we do not expect a material impact. From a market opportunity standpoint, the average age of a patient population in the PARTNERS III trial was 74 years old. And currently, the average age of an ONIX patient is 58 years old. We believe that over time, TAVR valves will be implanted in patients closer to 70, but we also expect, with positive data for PROACT-10A, that the ONIX valves will be implanted in patients up to 65 years old. With this change in the age populations being treated by these two devices, we believe the target patient population for ONIX will actually increase, and the target population for the two devices will generally remain mutually exclusive. With that, I will now turn the call over to Ashley.

Thanks, Pat. I'll now review our results for the first quarter as well as our financial outlook. Total company revenues increased 9 percent to $67.5 million and grew 11 percent on a non-GAAP constant currency basis compared to the first quarter of 2018. we saw year-over-year revenue increases across all four of our major product lines. Looking at our product lines, ONIX revenues for the first quarter increased 14% on a GAAP basis and 15% on a non-GAAP constant currency basis, both compared to the first quarter of 2018. Yotech revenues in the first quarter increased 10% on a GAAP basis and 18% on a non-GAAP constant currency basis, both compared to the first quarter of 2018. This large difference in reported versus constant currency growth rates is due primarily to the year-over-year weakness in the euro versus the U.S. dollar. BioGlue revenues in the first quarter increased 8% on a gap basis and 10% on a constant currency basis, both compared to the first quarter of 2018. Revenues were particularly strong in international markets, including a 7% constant currency increase in our European region. which resulted from cross-selling efforts from our enhanced direct distribution channel. Total tissue processing revenues for the first quarter increased 4% compared to the first quarter of 2018. During the first quarter, cardiac tissue processing revenues increased 10% and vascular tissue processing revenues decreased less than 1% year over year. Cardiac tissue processing revenues were favorably affected by recently published long-term performance data of our tissue valves. Vascular tissue processing revenues decreased primarily due to a decrease in average sales prices resulting from competitive pressures. However, we do expect vascular revenues to be favorably affected following recently implemented initiatives to increase near-term supply. Our gross margins were 66% for the first quarter, which is slightly less than our full year guidance. These results were largely due to a more significant portion of revenues being generated through our indirect international distribution channels versus our direct distribution channels. We believe our full year gross margins will be higher than what we experienced in the first quarter. SG&A expenses during the first quarter include $1.1 million in integration and business development related expenses. Those charges include expenses associated with evaluating business development opportunities and costs related to the completion of SOX implementation in Europe and audit procedures related to acquisition accounting. Our income tax expense was favorably affected in the first quarter by excess tax benefits associated with stock compensation. Excluding those benefits, our effective tax rate would have been in the mid-20% range. On the bottom line, we reported GAAP net loss of approximately $300,000, or one cent per fully diluted share, in the first quarter of 2019. Non-GAAP net income was $1.5 million, or four cents per share. Please refer to our press release for additional information about our non-GAAP results including a reconciliation of these results to our GAAP results. As of April 29, 2019, we had approximately $43 million in cash, cash equivalents, and restricted securities. We had approximately $222 million outstanding under our Term Loan B, and based on our credit documents, our current gross leverage stood at approximately four times, and our net leverage was approximately 3.5 times. We expect our net leverage to be around three times adjusted EBITDA by the end of the year. Our aggregate interest rate on our term loan was 5.85% at the end of the first quarter. We can comfortably service our debt and have no financing needs to support our current business model. During the quarter, we adopted ASC 842, the new lease accounting standard. This required us to recognize a right of use asset and a corresponding liability for all long-term leases. The adoption of this standard resulted in the recording of a right-of-use asset of approximately $23 million. We are reiterating our full-year 2019 financial guidance, and we expect second-quarter revenues of between $70 and $71 million, reflecting the impact of a strong dollar on our Euro-denominated businesses. Our second quarter guidance reflects between 5% and 7% growth on a constant currency basis. Note that 2Q of 2018 is our toughest quarterly revenue comp for the year when we posted revenues of $68.5 million. That concludes my comments, and I'll turn it back over to Pat for closing comments.

Thanks, Ashley. In closing, we had a very successful start to the year, putting the business squarely on track to produce high single-digit top-line growth in 2019. Equally important was our progress advancing our strategic long-term growth objectives. While that important work doesn't show up on the top line today, it is critical to our future success and should take Cryolife to the next level. Our robust pipeline and clinical endeavors have increased the company's total addressable market to $3.5 billion. We arrived at that forecast after considerable market analysis. That is why we believe it's important to track not only our quarter-to-quarter financial performance, but also our development programs. If we execute on them, which we are confident that we will, we expect to be a significantly larger and more formidable company in the coming years. We're getting close to the expected launch of the first of our next-generation products with Yotech and plan to introduce new products and product enhancements in key markets for years to come. As a result, we offer investors an excellent balance of consistent near-term performance and exciting long-term growth opportunities without having to make another significant acquisition. Today, we oversee a highly differentiated product portfolio backed by an experienced sales team. We're doing an excellent job capitalizing on our competitive strengths to take market share. Moreover, our sound financial position gives us the ability to execute on our transformational pipeline of clinical and R&D programs. Our decision to become more focused and deeper in our given markets is yielding the results we had expected. As such, we believe we're in an excellent position to remain a market leader in the select areas that we focus on. As we introduce new offerings, we will further solidify our leadership position in select markets for the treatment of aortic disease. Our strategy is clearly working. Our recent acquisitions are performing as or better than expected. Our sales network has been significantly strengthened, and we have a clear path towards transformational growth opportunities. We understand the execution of our plan is paramount, and we've assembled a proven leadership team to see it through. The better you get to know the company, the more you'll understand our best days lie ahead. Last, I'd like to thank all of our employees who helped make our first quarter a success. Your important work not only benefits the company, but also the many people and their families around the world. With that, we will now turn the line over to the operator to open for questions.

Thank you. We will now be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Jason Mills with Canaccord Genuity. Please proceed with your question.

Hi. Good afternoon, Pat and Ashley. Can you hear me okay?

Yeah, here you're fine. Yes.

Great, and congrats on a great start to 2019. Pat, first question is asked sort of from the perspective of geographical representation of your business, U.S. international, and really we'll ask you to sort of touch on your strategy from a sales perspective as well as a product pipeline perspective, and I have a follow-up or two if you don't mind. But you grew this quarter, obviously, with Yotech, right? having a great quarter. You grew really a little over 10% internationally, a little under 10% U.S. to sort of net out at your 9% reported, 11% organic. And it sounds like over the course of the next several quarters, the products that you'll be bringing to market, new products bringing to market, and really the trends, the stronger trends in your business are outside the U.S., Could you talk about that and the strength outside the U.S., as well as what you may be doing before, let's say, Onyx 10A and PerClock can have an impact on your business in the U.S. to maybe further augment your U.S. growth profile?

Yeah. No, and I think one of the things that is just inherent in the current model is we don't have any of the Yotech products approved in the U.S., And we have Yotech, you know, approved obviously everywhere in Europe. And then we're starting to get approvals around the world in these, you know, in Asia Pacific, Latin America, which is benefiting the growth. So we fully in our planning, you know, for the year in our strategic plan. we're expecting more growth in the international markets than the U.S. just because of the portfolio. We do think we can boost growth in the U.S. with the items you mentioned. You know, the U.S. approval of PERCLOT will obviously be a big deal, as well as we think PROACT-10A, once that trial is approved and the word gets out about what we're doing there, will be a big deal. But we pretty much actually had a very good quarter in the U.S., but just, again, given the product lines and you know, what we have in the different markets, we're going to be expecting, you know, faster growth outside the U.S., you know, on a consistent basis.

Okay, great. And then sort of segueing into that discussion about the U.S., it certainly wasn't lost on me, the spending in the quarter on business development activity. I know that you've got a lot on your plate. You've executed two relatively large deals, two large deals in the company's history. in the relatively recent past, but are you seeing assets out there that are notable and that fit within your framework from a valuation margin and growth perspective more so today than you've seen in the past? Because I don't believe I've seen a call out such as this in recent quarters.

Yeah, I mean, there's always, you know, we've said that we would be opportunistic as it relates to M&A. I can tell you that there's a handful of assets that are available and out there, and we're always looking. But I can tell you that based on kind of where we are right now with our five-year plan, and Ashley mentioned this in his comments, we really don't need to do any acquisitions. We have positive cash flow. We can service our debt. We don't need to raise shares. We can support our business model, and we're actually generating cash. So we don't need to do any deals. That being said, I mean, we would always be interested in potentially, I think more interesting is a tuck-in that could potentially boost our growth rate even higher. You know, the real advantage we've got now is we've, you know, kind of around the world, we've, you know, gone direct in many countries in Europe. We're putting infrastructure in place in Asia Pacific. We're putting infrastructure in place in Latin America. You know, we're going to have 180 direct reps at the end of this year. And if you can bring a tuck-in... once you get your approvals and I can sell it by 180 direct reps around the world, it has amazing, you know, pull through on your P and L. So I think from, you know, my message to investors would be, we don't, we're not looking at doing another kind of, you know, Yotech size transaction. If we were to do anything, it would be a tuck in and it wouldn't, we would not, you know, dilute anybody in the process of doing that.

Yeah. Great. And lastly, I appreciate your commentary. with respect to partner three as it relates to onyx. But maybe talk about and level set us with respect to the mechanical hard valve markets mix U.S. to U.S. It's my understanding the majority of MHV market is outside the U.S. and in emerging markets that just really in a lot of places can't afford $30,000 a pop for transcatheter valves. And your point's well taken with respect to the mutual exclusivity of the age group. So maybe talk about the dynamics that face positively and negatively your onyx business as you look sort of beyond the real near term as we digest partner three data into the next couple of years. It sounds like you've got a business even excluding 10X or 10A that could remain a solid grower for you for a while.

Yeah, no, it's a good question. I mean, just to level set on your question, I mean, the mix of mechanical valves U.S. is about 30% of mechanical valves, and OUS is about 70% of mechanical valves. And the primary driver of that is basically economic, as you point out. There are many countries around the world that just can't afford a $30,000, you know, TABRA valve, and, you know, the economics are driving the therapy. I think the other thing is, you know, these indications have been, I think, widely adopted in many countries around the world, but they just can't afford you know, the lower risk patient population, they just can't afford it. And we've still been growing the Onyx business double digits. So we see the Onyx, I mean, you just saw, you know, U.S. Onyx grew 18% again in the first quarter. You know, we had good performance outside the U.S. We think the PROACT 10A, you know, this is an interesting kind of dynamic as the partners three kind of lower risk patient population you know, the average age of a TAVR patient goes from kind of the low 80s to the mid 70s, and maybe even down, call it down to 70. You know, we think that, you know, onyx, the average age of an onyx is, as I mentioned in the script, 58. But we think Proactin A starts to move that up to, you know, 68. So while partners in TAVR may be moving kind of south on age, we're moving north on age. And maybe we meet at 70. So, you know, these two populations today, are frankly mutually exclusive. In fact, if you were at ACC and listened to the presentation, even the PIs of the trial stated they believe that surgical valves should be the therapy of choice in anybody under the age of 65, right? So again, I just think this TAVR thing is, you know, I think it's interesting. But don't forget, I mean, the tissue used in a TAVR valve is the same tissue used in a bioprosthetic valve. And we know from a major meta-analysis that was published in JAK just recently, that performance of a tissue valve is much worse in younger patients. The valve deterioration, the explants, et cetera, et cetera, it's just the tissue does not stand up in a younger patient. So there's actually a clinical reason why you don't want to put a tissue or a TAVR valve in a younger patient. They don't last that long.

It's helpful, Pat. Thank you. I'll get back to you.

Our next question comes from the line of Mike Mattson from Needham & Company. Please proceed with your question.

Yeah, thanks for taking my questions. I guess I wanted to ask about a few questions about Yotech. So I want to start, I thought there was a fourth product there that you were expecting to get a CE mark on potentially this year, the eVentus self-expanding product. peripheral stent. So can you maybe talk about that? And what is the market opportunity there, market size in Europe for that product?

Yeah, so just to refresh, there were four Yotech products. We had never predicted that the Aventis was coming this year. We were hoping to submit for CE Mark this year. But the three main Yotech stent grafts Enya, which is the thoracic stent graft, Ensai, which is a branched thoracoabdominal, and Evita Open Neo, which is a frozen elephant trunk. The first two have been submitted, and we're highly confident that we're getting an approval this summer. The third, which is the Evita Open, we will submit this quarter, and we're confident we should get an approval by the end of the year. So those are the three stent grafts that we had talked about in our plan. The Aventis, which you asked about, is a self-expanding coverage stent. PTFE coverage stent, which is basically the primary technology we use as the bridging stent on our branch grafts, whether it's the ILLIAC or the thoracovitaminal device. This is a product that fell right in this kind of chasm from the medical device directive and the medical device regulation, this kind of shifting kind of tectonics plates in Europe on the regulatory front. And we were hoping to get that product in kind of under the MDD, the old MDD, without having to have clinical data. And, you know, we don't think that's going to happen just because the door is kind of closing at all the notified bodies. So, I mean, the good news is we didn't have any revenue in our guidance for that product. You know, the bad news is we're going to have to do pre-market clinical data, so it'll show up later than we wanted, but there was no revenue in the plan. That being said, it's a significant opportunity. The global market for a branched or excuse me, for a PTFE-covered self-expanding stent is a half a billion dollars. And we have a great product. So it's probably one of the most exciting things in our platform. We really haven't talked a lot about it. You know, unfortunately, with this kind of MDR situation, we're not going to get it in Europe, you know, this year or next year. But we'll be doing the clinical work to bring it to market both in Europe and the U.S., and it's a significant opportunity.

Okay. And then, you know, just I guess to follow up on that would be related to the MDR comments that you made, or MDD, I guess. Just with the three products that you are expecting approval, or I guess CE marks this year for, you don't expect any issues there either in terms of timing or you're confident you're not going to need data for those?

Yeah, so I think going into the year, this was, we typically would put about a quarter of amount of timing from an approval standpoint. We actually doubled it just because of the shift from MDD to MDR. I'm very confident that the first two products we submitted, so the thoracic stent graft and the branch stroke abdominal, I'm very confident those are going to get approved this summer. We submitted them on time in the first quarter. We've had very few questions back. So again, I think I have very good kind of visibility. I think those are in great shape. We're going to submit our frozen elephant trunk in Q2, so I think probably in June. And I think it should go on kind of the same path. But I have better visibility to the first two because we've already submitted and already been in dialogue with the notified body. We have not submitted the third. But again, I think we're very confident we think we can get that approved this year as well. So we should have all three of those Yotech products approved before the kind of MDR door closes, if you will.

Okay. And then my final question is just another one on Yotech. So with those three products, are those higher gross margin? Is there some, would there be any kind of margin benefit if those, when those are launched, if they, you know, if the growth at Yotech kind of accelerates?

Yeah. I mean, I think, you know, the, the, the challenge with the, cause it's going to be in the same geographies, right? So we're going to be launching the same products in the same geographies. And a lot of those are, are, those markets have pretty good pricing already. And so the only way we're going to pick up margin is on the cost side. And I think in the early days of the rollout, you typically have some ramp up time to get your lines all set up. So I don't think there's a lot of margin opportunity in those. I mean, we've kind of baked it into the guidance. The bigger change would come when those products come to the U.S., which is obviously a ways away, when you get the kind of the higher pricing in the U.S. market, which we don't have at this point. So I don't see a real margin opportunity for those products, because we've already kind of figured that into the guidance. Okay. Thanks a lot. Thanks, Mike.

As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Suraj Khalia with Northland Securities. Please proceed with your question.

Pat, Ashley, can you hear me all right?

Yeah, we hear you fine. Yes.

Congrats on a great quarter. So, Pat, let me start out. You've given a great sort of 30,000 feet level view on how the business is progressing. You guys are hitting on all the numbers and the roadmap you have laid out. that you can share, Pat, can you walk us through what's going on in the trenches?

Hey, Suraj, we lost you right after you said trenches. Sorry, right after you said trenches, the line went dead and then you just came back up.

Sorry, Pat, I was just asking, you know, what kind of metrics you can provide us. You know, let's say this was what Yotech was doing in Europe, these many hospitals, this is the utilization rate, this is how we've turned it around. For that matter, Onyx and Yotech in Europe and Onyx, any color, you know, so that we can get a sense of, you know what, here is the underutilization and here is how much capacity we have. understanding that 180 reps are going to be on board?

Yeah, I think it's, you know, again, there's, there's kind of a couple different ways you could look at it. I mean, the first point I would make is, you know, when we acquired Yotech, Yotech had been growing 20 plus percent for the previous five years. So we didn't acquire an asset that, you know, needed a lot of turnaround. It was, it was a highly performing organization with a great product line, a great Salesforce, a great leadership team. So, I mean, in Yotech has, kind of performed even better than we thought. As you know, it grew 25% last year. We had 18% growth, constant currency in the first quarter, and we're on the heels of launching three new products this year. We've also gone direct in multiple countries. So we took, for example, we took the Yotech team, the Yotech product line direct in France, because we were direct there and they weren't. We're adding 20 people in Asia. We're adding 10 people in Latin America. you know, frankly, we haven't even really gotten to the whole opportunity because there's a number of, I mean, Yotech was a small private company that did a great job, but at the same time, they didn't have kind of the global reach that we had or the resources that we have. And just taking the current portfolio from Yotech and getting regulatory approvals in different markets in Latin America and different markets in Asia Pacific are going to start adding to our growth. And you haven't even really started to see that yet. So, I think there's a number of different ways you could look at this. Ashley mentioned in his comments about BioGlue. BioGlue in Europe grew 10% this past quarter. That was a product line that was growing kind of low single digits. And the fact that we added the 50 Yotech reps to the product line or gave that product to the Yotech reps, we're now growing that business double digits. So it's just, it's a number, there's a number of different things we've seen by the kind of the, you know, Cryolife plus Yotech is like a one plus one equals three. And, you know, it's the same in the distributor markets. You know, we've seen, you know, significant opportunities in the distributor markets where we had different relationships than Yotech had, and we're leveraging those. So, again, I think there's a multitude of things you could look at, at how kind of Yotech with Cryolife is not only kind of has the opportunity to kind of grow faster, but it is more broad around the globe and even more direct around the globe.

Got it. Pat, I don't have my notes in front of me. I'm driving. But has there been a delay in PROACT 10A IND being approved? Is the FDA hung up on something or, you know, this is just normal process and you guys had factored in, and forgive me, I don't have my notes in front of me.

No, I think, you know, I always, you know, it's kind of a dangerous business to predict what regulatory agencies are going to do. And we try to give kind of what we think is the, you know, the window that we think something's going to get approved. I can say that we've been in constant discussions with the FDA and about this trial, and they've been very helpful and I think very kind of open to working with us. The last piece of the puzzle is really the statistics and the powering, and it gets very kind of technical, but we've got some of the world's best statisticians working with us and working with the FDA, so I'm pretty confident that we're going to have something here, have an IND approved this summer. You know, our goal is to, you know, start this trial enrolling this summer, and I think you know, once we get the IND approved, then we can start kind of kicking off opening centers. And so it's, you know, I think we're on track with pretty much what we told people.

Got it. And final question, Ashley. Cadence of gross margins, how would you guide us through the year, just given FX and, you know, the impact on the different businesses? Thank you for taking my questions.

Yeah, you know, as I mentioned earlier in the call, Suraj, they were a little bit lower than we anticipated in the first quarter, and that was primarily due to the mix between distributor business versus our direct markets. We're still anticipating that the gross margins for the full year are going to be 67 plus percent for the full year. So, you know, I think that Again, in any given quarter, it can be affected by product mix and geographic mix, but those things, you know, set aside, you know, we're expecting the gross margins to be relatively the same for each of the remaining three quarters with the full year, again, being, you know, 67 plus percent for the year.

Gentlemen, thank you, and congrats again.

Our next question comes from the line of Joe Munda with First Analysis. Please proceed with your question.

Good afternoon, Pat and Ashley. Thanks for taking the questions. Pat, first off, in your prepared remarks, you talked about adding roughly 20 people in Asia-Pac and 10 in Latin America. Just going back and looking at my notes here, you were talking about adding distributors in China in the second half. and building out a distributor network in Latin America. Just wondering, has something changed or is this complementary to what you're doing in both markets?

No, it's actually complementary. So there's, you know, if you start with kind of Latin America, so the first piece on Latin America is Yotech was already had a direct operation in Brazil and was direct with the Yotech portfolio. They'd invested, you know, a lot of time over the last few years to build up that operation. So one of the things we're doing, and it's just starting, we talked about it last, I guess we talked about it in Q3, that we started unwinding our distributor in Brazil with BioGlue and started destocking them. to prepare to go direct with BioGlue in Brazil, and that's just starting now. Obviously, we have to hire some direct people in Brazil to support the BioGlue and the Onyx product line. So that's one of the, you know, some of the people from that are there. The second is having some infrastructure in Latin America from a marketing and education standpoint to to either consolidate or open up new distributors in countries that we may not be in or upgrading in countries that we think we can do better. So it's kind of an additive. There's two pieces going on. One is there are some direct people going in. There's also some infrastructure going in to support the distributor market. Kind of the same with Asia Pacific. There are some countries where we're actually going to be going direct. So we're going to be putting kind of feet on the ground in Asia Pacific. And similar to Brazil, in China, we're going to have some local infrastructure supporting our distributor there and managing the agents and the sub-distributors. So again, it's kind of a hybrid. Typically, we use a hybrid model in a place like China. So it actually is kind of two things happening at once, right? Some direct people on the ground that'll be supporting and working with distributors for the country. Hopefully that makes sense.

Yeah. I was wondering just to take it one step further, if you could give us some color on what the revenues were per se from Latin America and maybe China so we can have a point of reference.

Yeah, we're not, we're not going to break out, you know, down at that geographic level. I think there's something we probably will do in the future is, you know, as we, as we kind of roll out our five year plan, As those geographies become more meaningful to the company, we can start talking about what we think those numbers will look like. But I think it's premature at this point to give out kind of breaking out line items for Latin America and Asia right now.

Okay. And then, Ashley, in regards to R&D, I mean, you guys have a lot of moving pieces going on with different trials going. initiatives I was wondering if you could give us some color perhaps on how we should think about R&D going forward you know this quarter maybe a little bit lighter than I the rest of us would have thought given all the initiatives going out yeah it was a little bit lighter than probably our own expectation but but for the remainder of the year we're anticipating you know R&D expenses for the full year

to be, you know, in the high single digits approaching 10% of total revenues for the year. And as it relates to the last three quarters of the year, you know, we expect each quarter to be roughly the same over the balance of the year, again, culminating in high single digits for R&D as a percentage of revenue up to 10%. Okay. Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Well, I want to thank everybody for joining on the call, and we've obviously switched to a new format where we're releasing the press release at the end of close of market and then doing our call. That was basically some feedback we got from our investors that they would rather have us do it in this format. So hopefully that it works for more people. We really appreciate everybody joining, and we're excited about what we've got going on and look forward to updating you on our next quarter's call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.