Artivion, Inc.

Greetings. Welcome to the CryoLife second quarter 2019 financial results conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Greg Hadacek from the Gilmartin Group. Thank you. You may now begin.

Thank you, Operator. Good afternoon. This is Greg Hadachek from the Gilmartin Group. Thanks for joining the call today. Joining me today from Cryo-Lex 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 and and are 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 these forward-looking statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements as contained from time to time in the company's SEC filings and in the press release that was issued earlier today. Now, I'd like to turn it over to Cryolife CEO, Pat Mackin. Pat?

Hey, thanks, Greg, and good afternoon, everyone, and thank you for joining us. Our second quarter delivered inline results despite unexpected headwinds that impacted the quarter. We demonstrated once again our differentiated portfolio can drive consistent results even while facing short-term challenges. In the quarter, we simultaneously produced solid organic revenue growth and made further progress towards a number of our key development objectives. Those of you who have been following the company know that in the second half of 2019, we expected to launch three next-generation Yotech products, along with continued progress on other pipeline opportunities. I am pleased to report Execution on our strategy and delivery of our 2019 objectives is still on track. Turning to our second quarter performance. Total revenue for the second quarter was $71.1 million, reflecting 4% on a GAAP basis and 7% on a non-GAAP constant currency basis as compared to the second quarter of 2018. This strong, consistent growth was delivered primarily by BioGlue, Onyx, and Yotech product lines. Yotech grew 8% on a non-GAAP constant currency basis relative to the second quarter of 2018 driven by increased penetration in our international markets. During the second quarter, our primary sterilization partner experienced a failure of one of its sterilization lines that caused us to lose product. Excluding the loss of revenue stemming from this situation, our Yotech growth rate would have been approximately 11% on a non-GAAP constant currency basis. Looking forward, we expect the growth trends for our Yotech products to continue, driven by the platform's differentiation as well as the introduction of three new next-generation products into key European markets by the end of this year. Turning to Onyx, revenue increased 5% on a non-GAAP constant currency basis as compared to the second quarter of 2018, with non-GAAP constant currency revenues in North America growing 6%. Despite a softer-than-expected growth in the second quarter, we expect ONIX revenue growth to remain solid as we continue to take market share from our competitors given ONIX's superior design and FDA labels. Both BioGlue and tissue businesses continue to deliver solid results. BioGlue increased 7% on a non-GAAP constant currency basis as our direct sales team and distributors in Europe and Asia Pacific continue to demonstrate the strength, effectiveness, and economic advantages of our surgical adhesive in these markets. During the second quarter, our tissue business was up 4% on a non-GAAP constant currency basis, led by another strong quarter in our cardiac tissue valve business. Before turning the call over to Ashley, who will review our second quarter financial performance, I would like to discuss some business highlights as well as near-term and long-term growth catalysts. Starting with Yotech. We remain on track to introduce three Yotech products into our European markets in 2019. In the first quarter of 2019, we submitted our next-generation thoracic stent graft and the first-ever off-the-shelf branched thoracal abdominal device for CE-Mark. Based on typical timeframes, we would anticipate receiving CE-Mark for these products in the third quarter of 2019. As a reminder, our next-generation branched thoracal abdominal device, which is named E-N-SIDE, will be the first time a branch stent graft will be available off the shelf, eliminating days of waiting for a patient-specific device custom graft to be built. Further, next month we will submit our next-generation frozen elephant trunk called the Vita Open Neo for regulatory approval and expect to receive CE mark by the end of the year. As the next driver of long-term growth for our best-in-class Onyx mechanical valves, We are currently working with the FDA to finalize the design of our PROACT-10A trial, and we hope to receive an approved IND from the FDA in the third quarter. We continue to be very excited about this trial, as we expect it to demonstrate that the unique design and technology of our onyx mechanical aortic valve will allow patients to use Eliquis versus using Coumadin and having to go to the doctor to monitor and eliminates going to the doctor to monitor and manage their post-procedure INR levels. As you know, such an indication would be a substantial benefit to patients, and we believe could accelerate growth in our onyx business. Moving to BioGlue. Our application for BioGlue was submitted for the regulatory approval to the Chinese FDA earlier this year. Regarding our per-clot product, enrollment in our U.S. per-clot trial is complete, and we remain on track to submit a PMA to the FDA in early 2020. Turning to our tissue business, as previously mentioned, we continue to experience strong demand for our pulmonary tissue valves, which we believe stems from recent long-term performance data. Adding to these positive data were results from Dr. Paul Stelzer's ROS study, which was presented in early May at the AATS meeting in Toronto. In this retrospective review of 213 patients who underwent the ROS procedure, over a 20-year period. The data demonstrated survival at 10 and 20 years of 89 and 71% respectively, as well as freedom from re-operation for ROS failure at 10 and 20 years that was 92 and 85% respectively. For those who are not familiar with the ROS procedure, it's a double valve procedure where the pulmonary allograft is used to replace the patient's native pulmonary valve, which has been moved to the aortic position. Finally, we continue to make good progress in the expansion of our sales operations in Asia Pacific and Latin America. The recent additions of our two commercial leaders have already impacted sales penetration in these areas, capitalizing on our portfolio's competitive strengths as well as cross-selling opportunities. Over the next several quarters, we remain on track to expand our commercial teams in Asia Pacific and Latin America as we migrate toward direct sales in selective territories. The experience we gained through our shift to direct sales from distribution partners in Europe has helped us implement a smoother direct process in Latin America and Asia Pacific. I will now turn the call over to Ashley for a detailed review of our second quarter results and our financial outlook. Ashley.

Thanks, Pat, and good afternoon, everyone. Total company revenues increased 4% to $71.1 million this and grew 7% on a non-GAAP constant currency basis compared to the second quarter of 2018. We saw year-over-year revenue increases across all four of our major product lines. As Pat mentioned, we lost a very large Yotech production run during the quarter that would have generated approximately $500,000 in additional revenue, which would have resulted in reported revenue growth of approximately 5% and non-GAAP constant currency growth of approximately 7%. Recall that we posted strong revenue growth in the second quarter of 2018, which has created our toughest quarterly year-over-year revenue comp. Looking at individual product lines, Yotech revenues for the second quarter were flat and increased 8% on a non-GAAP constant currency basis, both compared to the second quarter of 2018. This large difference in reported versus constant currency growth growth rates is due primarily to the year-over-year weakness in the Euro versus the U.S. dollar. Considering the impact of the lost production run, reported Yotech revenue growth would have been approximately 5%, and non-GAAP constant currency growth would have been approximately 11%. ONIX revenues for the second quarter increased 4% on a GAAP basis and 5% on a constant currency basis, both compared to the second quarter of 2018. BioGlue revenues in the second quarter increased 5% on a gap basis and 7% on a constant currency basis, both compared to the second quarter of 2018. Revenues were particularly strong in international markets, where we experienced a 20% year-over-year increase in revenues on a constant currency basis. We saw growth in every OUS geography during the quarter. The growth has been augmented by the expansion of our direct strategy. Total tissue processing revenues for the second quarter increased by 4% compared to the second quarter of 2018. During the second quarter, cardiac tissue processing revenues increased 16% and vascular tissue processing revenues decreased 7% year-over-year. Cardiac tissue processing revenues were favorably affected by recently published long-term performance data of our tissue valves and a renaissance in the ROS procedure. Vascular tissue processing revenues decreased primarily due to a temporary shortage of long-segment vein grafts to meet our existing demand and a decrease in average sales prices resulting from competitive pressures. However, as we mentioned during our last conference call, the initiatives that we implemented during the second quarter to increase near-term supply are in place, and we expect vascular revenues to be favorably affected going forward. Our gross margins were 66% for the second quarter. Gross margins were about 40 basis points higher in Q2 versus Q1, and we expect that margins will continue to improve over the balance of this year. Our income tax expense was favorably affected in the second quarter by excess tax benefits associated with stock compensation. Excluding those benefits, our effective tax rate would have been in the low 20% range. On the bottom line, we reported GAAP net income of approximately $2.8 million, or 7 cents per fully diluted share, in the second quarter of 2019. Non-GAAP net income was $4.1 million, or 11 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 July 26, 2019, we had approximately $44 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 4.2 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 5.58% at the end of the second quarter. We can comfortably service our debt and have no financing needs to support our current business model. We are maintaining our full year 2019 financial guidance, and we expect third quarter revenues of between $67.5 and $68.5 million. Our third quarter revenue guidance reflects temporary supply issues with the Yotech product line and the impact of currency on our business. Regarding Yotech supply, quantities to support the transitioning and initial stocking of the enhanced distributor networks in Asia Pacific and Latin America, quantities needed to support consignment in our direct markets, and the units to support testing for next-generation product line introductions and various worldwide trials supporting new approvals, have created temporary supply issues with our Yotech product line. We expect the supply of Yotech products to increase beginning in the third and fourth quarters. Despite these factors, our third quarter guidance reflects growth of between 5% and 6.5% on a constant currency basis, and our constant currency growth for the full year is still expected to be between 8% and 9%, which is consistent with our previous comments of delivering high single-digit growth. That concludes my comments, and I'll turn it back over to Pat.

Thanks, Ashley. So, as you've heard today, we're making great progress advancing on our key objectives. We expect to launch three of our next-generation Yotech products over the next two quarters. We filed our BioGlu application for regulatory approval in China. We expect to start the PROACT-10A trial in the third quarter, and we anticipate submitting our per-clot application to the FDA in early 2020. We believe we have the pieces in place to drive consistent growth and take the company to the next level. That is why I can say with confidence our best days are still ahead. Last, I'd like to thank all of our employees who've helped make the second quarter a success. Your important work not only benefits the company, but the many people and families around the world. With that, we will now open the line to questions. Operator, will you please proceed with the call?

Yes, thank you. We'll now be conducting our question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 keys. One moment, please, while we poll for questions. Thank you. The first question comes from the line of Jason Mills with Canaccord Genuity. Please proceed with your question.

Hey, Pat and Ashley, it's David Reska. I'm for Jason. Can you hear me all right? Yeah, we hear you fine, David. Hey, so first I want to start on two questions maybe on Yotech. So, you know, looking forward, could you provide some color around kind of where you think the Yotech product rollouts in Europe look going forward and kind of how we should think about the commercialization processes for those as kind of the second part to that one? Where do you think we could kind of see any type of acceleration coming from either the U.S. or European rollout and really, you know, just trying to get a better sense of how we're thinking about or how you guys are thinking about setting up commercialization ahead of the rollout?

Yeah, so, I mean, a couple things. Number one, we've said from the beginning that, you know, with the CE mark applications that we've added a little bit of extra time, and we've always contemplated and we talked early on in the year about, the first two submissions, the thoracic stent graft Enya and the branch throat abdominal graft Enside, that we expected kind of a Q3 approval. And we still feel like that's on track. Obviously, we're in the early days of Q3, but we feel like we're going to get both of those devices approved in Q3. The third device, which is the Evita Open Neo, which is our frozen elephant trunk device, we will be submitting that in the next week. and we expect to get that approval in the fourth quarter. So, I mean, we will obviously, as those products, you know, get approved, we'll be, you know, and that's one of the reasons you see kind of an acceleration in the second half, because we think those products will meaningfully add to the, you know, to the top line. I think probably the most important message around that is, I mean, we're extremely bullish, and we had kind of a, you know, softer growth rate around 8% constant currency But frankly, we had a sterilization problem in the quarter, and we've got some supply challenges in the near term. But I'm extremely bullish on the Yotech product line, particularly with these three launches coming up. I think it's like 60-plus percent of our portfolio is getting upgraded. So we expect to see improved performance in the second half. And as the supply kind of loosens up and becomes more prevalent, we certainly expect to see better growth rates of Yotech exiting 19, but we think 20 is going to be a very nice year for all those products in Europe.

Okay, thanks. Maybe the second one, talking about margins, I guess, for the second half of this year and then maybe looking into next year. Could you go into detail about some of the initiatives you have in place as far as what's going to boost margins, whether it be product mix, structural changes, some leverage in the product launches, or the OUS direct sales force transition? If you could provide some detail on that, that'd be great.

Yeah. David, we've touched on a couple of these in previous calls, but there are several things that are going on within the company that we think are going to result in gross margin improvement over the next several years. First and foremost, one of the things that we've started to focus on this year is just cost down initiatives. It was just a discipline that as a smaller organization that we had not previously had and with the enhancement of our management team and some of the new ops people that we've brought in, it's a focus of the organization now. So we think that just cost down is going to help to drive margins higher this year and over the next three to five years. In addition to that, there are some things that are going to help enhance margins both nearer term and long term. The initiatives that we have going on around the world where we are going direct in certain markets, and we've talked about some of those previously. You know, just after the Yotech acquisition, you know, taking both companies' product lines direct in markets where we weren't currently direct in Europe. You know, we are taking the former Cryolife product lines of Onyx and BioGlue direct in Brazil, and that initiative really just kicked off in the second quarter of this year. Another thing that we're working on is enhancing our distributor networks, both in Asia Pacific and Latin America. And by doing that, we're optimizing our distributor networks. That's allowing us to capture margin as well. And then the last thing, you know, a little bit longer term, as Onyx continues to grow, and as we look more into the future with getting the Yotech product line in the U.S., we think that those are both going to be margin-expanding opportunities for the company in the future.

All right, great. Thanks for taking my question.

Next question is from the line of Mike Mattson with Needham & Company. Please proceed with your questions.

Hi, thanks for taking my questions. I just wanted to start with ONIX. So the growth was a little slower there, and I didn't hear a lot of commentary. Maybe I missed it, but you don't know the reasons for that. I heard a lot on kind of Yotex. I understand what's going on there, but I'm just curious what happened with ONIX.

Yeah, I mean, we've obviously been growing ONIX pretty significantly over the last several years, and as we kind of do our kind of field checks and You know, there was nothing kind of out of the ordinary. I think the only, you know, the only thing we've heard a little bit of a trend of is, you know, some, you know, other companies pushing their tissue valves into kind of the younger patient population for a future TAVR device, which we think is not a smart strategy. But it didn't really, you know, there wasn't anything meaningful that jumped out other than that in our kind of field checks.

Okay, thanks. Just to clarify, when you say pushing tissue valves, who means, SAVR or TAVR?

SAVR, yeah, which again is, yeah, and it's part of this, you know, to me this is just something that with the recent, you know, Partners 3 data that came out, I don't think, you know, people ask us, you know, is TAVR having an influence on, you know, your mechanical valves? And, you know, I think that's a very far reach. If one looks at the trial, you know, less than 7% of the patients were under 65 years old. So this was a trial that was, you know, 65 to 80-year-old patients, and the average was 74. So, you know, I think the thought of putting a TAVR in a patient that's under 65 years old is not well supported in the clinical community. What we have heard is, you know, some people saying, you know, particularly cardiologists saying, well, put a SAVR tissue valve in, and then we'll give them a TAVR valve later. And again, I think that if patients were informed with the data, that's not something that they would accept. There's extensive literature about inferior performance of tissue valves in patients under 65. It's well documented. They have worse structural valve deterioration leading to reoperation. There's an increase in mortality. So again, I think this, you know, you know, or tissue in younger patients has already been proven out. In fact, kind of the most eye-opening data that I heard kind of this quarter from a surgeon meeting was, you know, the mean time to a bioprosthetic failure in the valve and valve registry was 8 to 10 years, and that was in 77-year-olds. So you can imagine if you start putting tissue valves in younger patients what's going to happen there. So, again, I think, you know, we feel very strongly that onyx in the under 65 patient population is with a lower INR is a great solution. And even better is the PROACT-10A trial, which as I commented in the script, we're looking at bringing out in the, you know, hopefully get approved in the third quarter. So we feel like we have a great solution for this patient population. You know, I think that the partners data was great for patients at 75 years old. By the way, it was one year data. So again, I think for a certain patient population, it makes sense. I think the other thing people gotta remember is There are no bicuspid valves in those trials, and that's the majority of patients who are under the age of 65. So I think there's a lot of reasons why TAVR is not coming into our kind of turf. It's more kind of them trying to bring tissue in, and that's not a kind of a bright strategy given the data.

Okay, that was super helpful. And then just a couple on Baogu, so curious if you have any updates or any visibility at all into the Chinese timing. And then also, it was really strong outside U.S., the 20%, I think, growth consequences. So is that cross-selling or just more speed on the street, or what's going on with that?

Yeah, no, so on Baogu China, I mean, it's a little bit of a black box, to be honest with you. I mean, you know, we've looked at the approval timelines of other you know, PMA-like products in China, and it's one to two years. From the feedback we've gotten from, you know, our partners on the ground in China, we should be hearing back probably in Q4, kind of the initial feedback, you know, what kind of questions we're going to get and, you know, if and when we're going to go to panel. So, you know, as we get more color from that feedback, we'll certainly share, you know, on a future call kind of what the status is, but we don't really have anything new at this point. As far as the international BioGlue growth, you know, the majority of our sales outside of, you know, kind of U.S. and Europe, which are heavy direct markets, it's all through distributors. So, I mean, this is not uncommon to see kind of, you know, lumpy buying patterns where you have a big quarter, one quarter, and then, you know, a little softer the next where the distributor may stock up or, you know, unwind that it doesn't necessarily tie into your kind of 90-day reporting quarter. So, We always had a good quarter with BioGo internationally, but, again, that can be somewhat, you know, lumpy throughout the year.

Okay, great. That's all I have. Thank you.

Thanks, Mike.

Our next question is from the line of Jeffrey Cohen with Leidenberg Salmon. Please proceed with your questions.

Hi, Pat. Ashley, how are you? Hey, Jeff.

Hey, good afternoon.

So two questions, if I may. So, firstly, does it feel to you like – your reps are getting more efficient or were more efficient for the quarter? Was that as a result of some of the activities in Europe or any specific call-outs on that front? Looks like they did more with less.

Yeah, I mean, I think, look, the one thing we're very excited about, I mentioned this earlier, I mean, over the last few years, we have significantly strengthened our channel in Europe. I think we're sitting at roughly 85 reps in Europe right now. We are on the heels of basically a total revamping of the Yotech portfolio, which we think is going to provide meaningful growth, particularly in 20. I think as many of you know who are in this field, you get the approval, you've got to get your launches and all these kind of things. You've got to get your consignment inventory out and train your reps and train your customers. So it takes a little bit to get up and going, but we're very excited, particularly in this new regulatory environment in Europe where is this transition from the medical device directive to the medical device regulation, which is going to basically close the door on a lot of people getting approvals without pre-market clinical data. So we feel like we're going to have a world-class thoracic aorta portfolio with a really strong channel, you know, to kind of end this year and to kick off 20. So I think that that channel is very well prepared to, you know, accelerate growth.

Okay, got it. And then could you talk a little bit more about this production run and this half a million dollars?

I'm just trying to get a better understanding of... Yeah, there's two things that are going on on the Yotech front, right? And the first one is, you know, is frankly just a mistake. I mean, we have, like many companies, we have a partner that does a sterilization. They basically sterilized a lot of about a half a million dollars worth of product twice. So they kind of cooked it twice, which means you've ruined the product. That hurt us to the tune of about a half a million dollars, as Ashley commented in his remarks. The second thing that's going on is, you know, Yotech was primarily a, you know, it was a European, German-based, European-focused company that sold to distributors outside of Europe. And we've put in some very strong commercial leaders in Asia Pacific and Latin America to As you've heard in the comments, we're bringing on new distributors, we're hiring direct people. To bring in the inventories to cover cases, launch products, launch distributors, we are just at max capacity at Yotech right now. It's not something you're just going to wave a wand and all of a sudden you can just spit out as many more units as you want. It takes some time to get the people trained and get them up and running. We are a bit manufacturing constrained right now, and that is our biggest kind of, you know, slowing down our third quarter a little bit. But as I said, we will rectify this. It will get better in the Q4. And as we get these launches coming up, I think we're going to hit into 2020, you know, kind of in full stride.

And then what about the footprint there, Pat? I know that previously I think the facility was – 50% or 60% or 70% capacity with two runs, and there's some availability to construct another structure? What's the story there, and how's that kind of going?

Yeah, we've actually – no, it's a good question. I mean, I was just over there a couple weeks ago. We've actually just taken another floor of our main building, which is much needed. We've had to bring in temporary trailers as we're doing some of that work. I mean, literally, it's – you know, we're growing. That product line grew, as you well know, 25% last year, and we've got a lot of expansion we're doing. So we've got the capacity and the space. It's just kind of how fast can you ramp everything up. So we've got a very strong operations team. It's a good problem to have. We wish we had full supply today, but we'll get there. And I'm extremely excited about the opportunities for the Yotech product line to continue to grow at a significant rate as we get these product supply issues resolved.

Okay, and you're sole source now as far as easy sterilization on that front?

I mean, we use lots of different sterilizers around the world for different products, so I wouldn't say I'd have to check specifically for Yotech, but we've addressed the issue.

Got it. Perfect. Thanks a lot for taking the questions.

Thank you. As a reminder, to ask a question, you may press star 1 from your telephone keypad. The next question is from the line of Kalia Suraj with Northland Securities. Please proceed with your questions.

Good afternoon, Pat. Good afternoon, Ashley. Can you hear me all right?

Yes, it's kind of a scratchy connection, but we can hear you.

My apologies, Pat. I'm at the airport, so you might hear some background noise. Hopefully, my questions come through. So, Pat, for Proact 10A, there seems to be a slight delay from your original commentary shed some additional color in terms of the discussions of the FDA. Is there something in the trial design that is a point of convention? Any color would be great.

Yeah, sure. No, I heard your question. No, so, I mean, look, we've been in discussions with the FDA for probably 18 months. They've been very helpful, and obviously this is kind of a new area for them. And I think the complexity of the device arm CDRH working with the drug arm CDER, you know, there's some internal complexity there, you know, inherent to the agency. They've been very good to work with. We've purposely had a number of meetings with them to iron out all the issues. So, again, I always say I can't predict how long it's going to take regulators to get stuff approved. I think most of you would agree with that. You know, I would say we've had very good conversations with them, and we're submitting our final IND this week. So, you know, I mean, I think we've got all our questions answered, and, you know, we'll wait and see what the response is, but, you know, it's a 30-day response time. So we feel like, you know, we should get an approval in the third quarter for the trial.

Got it. Pat, you and I have talked offline about this, and I'm just curious, you know, obviously partner three, there's tremendous anticipation on low-risk approval. You know, Edward said that approval is imminent. If I remember correctly, the average age in P3 was 73 years. My question, Pat, is as you look out, how do you think, you know, you would prevent age creep? By that, I mean, how would you prevent you know, a 65-year-old patient getting TAVR. I know you mentioned my husband, but I'm curious, you know, once you get into low risk, as far as I understand, there really is no age limit per se. Am I wrong in saying that?

Yeah, you're actually dead wrong. This is a big confusion. Low risk does not mean young age. I mean, it was kind of a tricky way to do this, but I mean, less than 7% of the patients in PARTNERS III were under the age of 65. So this trial was predominantly, 93% of the patients in this trial were 65 to 80. The average age of PARTNER III is 74. There is zero durability study of a patient at the age of under 65 with TAVR. So, I mean, I'm not to say that it won't happen, but again, I think that the data out there does not support, in fact, The surgeon KOLs I talk to basically feel like TAVR is not indicated in patients under 65. There's a couple of reasons for it. Number one, there's no long-term performance data with how does that tissue valve work in an under 65-year-old, because we know bioprosthetic valves don't work in under 65-year-olds very long. The second is the majority of the patients under 65 have a bicuspid valve, and bicuspid valves were not studied in PARTNERS III. So you can talk about age creep, but they didn't study bicuspid valves, which is the majority of the issue for patients under 65. And then you get into the whole tissue, and tissue doesn't last in kind of under 65-year-olds to begin with. Now you're going to put a TAVR with tissue inside. And I think this data out of the valve and valve registry that I commented on earlier The mean time to failure for the bioprosthetic valves in that valve and valve registry was 8 to 10 years in 77-year-olds. So what's the failure rate going to be in patients under 65? So, again, you know, look, people are going to do what they're going to do, but I think at the end of the day, the reason patients don't like mechanical valves is because they don't like taking Coumadin. And with the Onyx valve today, you can take half the amount of Coumadin and still get a mechanical valve, which is way better than what our competitors do And the second piece is Proact-10A, we hope to start enrolling that trial this year, and that's a total game changer for patients under 65. It's going to get down to the question, do you want one valve for life, or do you want a life full of valves?

Thank you. Our next question is coming from the line of Joe Munda with First Analysis. Please proceed with your question.

Good afternoon, guys. Can you hear me okay?

Yeah, we hear you fine.

Pat and Ashley, the first question revolves around the third quarter guidance. I'm just curious, you know, let's say all things being equal, you were hitting on all cylinders with Yotech, both on sterilization and the supply issues. How much of an impact do you think it would have had on the third quarter?

I mean, it's hard to say. I mean, we know from our kind of orders that we have in-house that we can't fill in the third quarter. is probably, I mean, in the range of $1.5 million to $2 million. Okay.

Okay, that's helpful. And then on the Onyx side, you know, I don't have the numbers in front of me, but, you know, the confidence had always been for double-digit growth from that business, you know, a little softness in this quarter. I guess how do you overcome some of those issues you just spoke about regarding data from Partners 3 and potentially, you know, overcoming that to drive growth in the Onyx business back to, you know, double-digit?

Yeah, well, I think there's a couple of things. I mean, one, you know, currency has been a big issue for us this year. I mean, there's no question. So, you know, our constant currency on its growth was in the kind of the 8% range. You know, we did some market checks on, you know, key accounts in the U.S. as well as, you know, overseas accounts. You know, and I said the only noise we heard was, you know, some noise around the kind of this kind of move to tissue to set up for TAVR. That being said, I think that the PROACT-10A trial is a total game changer in the field. So it's not like we're kind of standing still. We think that a one valve, and again, we're talking about patients under the age of 65. For that patient population, the idea of getting multiple valve operations over a lifetime doesn't make a lot of sense for the patient or the payer. So if you can have a more benign anticoagulant like Eliquis, we think it would really change the landscape of, you know, the onyx valve in the aortic position in patients under 65. So it's not like we're just sitting still and, you know, going to have to, you know, deal with kind of the partners three. I mean, we've got a very unique clinical trial kind of coming this quarter.

Okay, that's helpful. And then I guess my last question on the vascular, on the tissue business, you talked about competitive pressure as well as supply constraints. I'm just curious, how much of the decline is related to either supply or competitive issues? Thanks.

Well, I think they're tied together. I mean, this has been a real issue, and we've made significant progress improvements in that area. And we expect our vascular tissue to be much stronger in the second half, as we commented kind of last quarter. But the two kind of trigger each other, right? So we can't cover a long sap in his vein case because we don't have product. And then they call the competitor and the competitor drops price. So we've kind of let them into our accounts. And so by eliminating the supply problem, we eliminate the competitive problem. So I think we're The Cryolite brand is extremely strong. We've been doing this for 30 years. If we get our field the full supply of sap and zane, we'll eliminate this issue.

Okay. Okay. Thank you.

Thank you. Mr. Mackin, there are no further questions at this time. I would say turn the floor back over to management for closing comments.

Good. Well, thanks again for joining the call. And one of the points I would remark, we set out our number for Q2 and actually beat the top line and the bottom line, even in the face of the currency challenges. So I'm proud of our team for delivering on that. The second thing is we've got a lot coming in the back half. We've talked about we expect to get the PROACT-10A trial approved in Q3. We expect to get our next-generation thoracic stent graft, our next-generation thoracal abdominal stent graft approved in Q3. We've got our Vito Open Neo, our next generation frozen elephant trunk that should get approved in Q4. Our Yotech supply and our vascular tissue supply should both be improving in the second half. So, again, we feel like as we work through this kind of Yotech supply issue in Q3 that, you know, Q4 will be strong and we'll be heading into a really strong 20 because then we've got kind of BioGlue China and Perclop in the U.S. hitting. So, You know, I think it was a solid quarter. We had some headwinds, but we're going to deal with them and move forward to a stronger Q4, and then I think with nice momentum going into 2020. So thanks again for joining.

This concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time.