Artivion, Inc.

Greetings. Welcome to Cryolife third 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 the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. It is now my pleasure to introduce your host. I will now turn the call over to Greg Honachek. Thank you, Greg Honachek. You may now begin.

Thank you. Good afternoon, and thank you for joining the call today. Joining me today 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 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 is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. Now I'll turn the call over to CryoWise CEO, Pat Mackin.

Thanks, Greg, and good evening, everyone. Thanks for joining us. Total revenue for the third quarter was $67.9 million, reflecting year-over-year growth of roughly 5% and 6% on a non-GAAP constant currency basis. Reveners were at the midpoint of our revenue guidance that were driven by revenue growth in both our Onyx and Yotech product lines. We also saw inline performance in our tissue processing business. We also executed an exclusive distribution agreement with Endospan, which we believe will provide additional growth in cross-selling opportunities in the future. Demand for our innovative product portfolio remains robust, and we continue to make good progress on the advancement of our product pipeline. Turning first to Yotech. Yotech grew 9% on a year-over-year, non-GAAP constant currency basis. Growth of the quarter was solid, but tempered by continued supply issues. We expect to resolve these supply issues over the next few quarters and anticipate growth trends for our Yotech products to accelerate as Enside, Enya, and Evita Open Neo hit the European market early next year. With respect to Enside, many of these patients are treated with risky, invasive open surgical procedures, which are characterized by lengthy hospitalization periods and prolonged recuperation. With our custom-made stent grafts, which can take up to, or they can be treated with our custom-made stent grafts, which can take up to 90 days to manufacture. Ensight is the only off-the-shelf, pre-cannulated thoraco-abdominal stent graft with inner branches that eliminate the waiting period experienced by approximately 70% of patients who would normally receive custom-made stent grafts. The Enya thoracic stent graft system is our next-generation, low-profile solution for patients with aortic disease. This includes both aortic aneurysms and aortic dissections. The Enya delivery system addresses one of the major challenges of the low-profile T-bar devices, which are high-deployment forces. The squeeze-to-release mechanism is simple and gives physicians much more control while treating both simple and challenging anatomies. It's one of the most versatile grafts on the market and is the perfect complement to our VitaOpen Plus hybrid stent graft system, as well as a line of custom-made devices, providing clinicians with a complete portfolio of products. Finally, regarding the VitaOpen Neo, which is our next-generation frozen elephant trunk, we expect to receive CE mark in the first quarter of 2020. Switching gears to Onyx. Revenue increased 12% on a non-GAAP constant currency basis, driven by the strength from our aortic valves, which were up 11% in the quarter. Revenues in North America grew 10%, while our OUS markets grew 14%. We expect Onyx revenue growth to remain in the high single or low double digits as we continue to take market share. We also expect to receive in the fourth quarter an IND approval to begin our PROACT-10A trial, a prospective randomized clinical trial to determine if patients with an onyx aortic valve can be maintained safely and effectively on Eliquis versus Warfarin. We believe the commencement of the PROACT-10A trial alone will drive additional market awareness from physicians and healthcare providers regarding the proven clinical benefits of the onyx aortic valve. Based on recent discussions with the FDA, we now expect the PROACT-10A trial will consist of approximately 1,000 patients at up to 60 sites in North America and potentially some sites in Europe. This is down from our previous estimate of up to 1,200 patients. As the only mechanical valve with FDA approval for use with reduced amounts of warfarin, the onyx aortic valve reduces patient bleeding by over 60% compared to competitive mechanical valves. If the PROACT-10A trial is successful in proving that the onyx aortic valve recipients can be maintained effectively on Eloquus, we believe Cryolite will become the market share leader in the mechanical valve market, while simultaneously taking share from existing bioprosthetic aortic valves. Such an indication has significant potential to accelerate growth in our onyx business. Moving to our tissue business, we continue to see inline performance in our tissue business, which is up 5%, led by our cardiac tissue valve business, which delivered year-over-year 19% growth. We continue to experience strong demand for our pulmonary tissue valves, which we believe stems from a renaissance in the Ross procedure, as well as improved availability of our pediatric heart valves. We are confident these tailwinds will continue to drive growth in our cardiac tissue business. BioBoot continues to deliver solid results, increased 1% on a non-gap constant courtesy basis in the quarter. We submitted our application for regulatory approval to the Chinese FDA earlier this year and look forward to sharing updates on the process when available. Regarding U.S. per clot, The trial is now complete and we remain on track to submit our PMA for the FDA in early 2020. Lastly, we recently announced our EU distribution agreement with Endospan, an Israeli-based privately held developer of the Nexus device, which is the only endovascular stent graft system currently CE marked for the repair of both aneurysms and dissections in the aortic arch. As part of our collaboration with Endospan, We've become the exclusive distributor for the Nexus stent graft system in Europe. Additionally, we extended a loan of $5 million and a commitment to loan up to an additional $10 million to Endospan to support Endospan's U.S. clinical trial for Nexus and its commercialization of Nexus in the EU. As a reminder, there are approximately 36,000 procedures worldwide that are treatable with Nexus and Evita OpenNeo, which places a total addressable market opportunity at just over $1 billion. We estimate that approximately 75% of the worldwide market, or just over 800 million, can be addressed through an endovascular approach with Nexus. And approximately 25% of the worldwide market, or just over $250 million, can be addressed in an open surgical approach with the Evita OpenNeo. In Europe alone, there are approximately 7,000 ARCH procedures done annually, placing the overall EU market for aortic ARCH repair products at over $200 million. where the endovascular portion of the market is about 150 million. We expect our market share to grow as Nexus' unique value proposition affords our commercial European team with access to current competitive accounts, expanding our reach across the European market. Our current European commercial infrastructure, which includes an 88-person direct sales team, provides for significant cross-selling opportunities between Nexus, and our Yotech portfolio, given Nexus's synergies with our highly differentiated surgical hybrid graft, the Evita Open Neo. We will leverage this infrastructure to not only drive adoption of Nexus in Europe, but also to drive further market penetration of our branch technologies, as well as our other competitive Yotech product offerings. Over the coming months, we will focus on training sales reps, as well as surgeons on Nexus. We will target the top 50 plus centers performing these sophisticated and complex procedures. While we expect to commence cases in the fourth quarter, we do not anticipate material contributions from Nexus this year. As the most comprehensive and technologically advanced aortic stent graft portfolio, our Yochek products address the entire aorta from the aortic valve to the iliac arteries. We believe the addition of Nexus to Vita Open Neo, Enya, and Enside along with the rest of our aero repair products, positioned us to drive accelerating revenue growth in Europe through 2023 and beyond. Before I turn the call over to Ashley, I'd like to take a few minutes to talk about our fourth quarter guidance. As a reminder, over 40% of our revenue is derived from customers based outside of the U.S., and as a result, we are affected by fluctuations in currency exchange rates. At the end of the third quarter, our year-to-date gap and non-gap growth rates were 6% and 8% respectively, a 200 basis point difference. In addition to these currency headwinds, we also experienced an issue with a sole supplier of our TMR handpieces, and as a result, we will not have TMR handpieces during the fourth quarter and possibly longer. We therefore are updating our outlook for 2019 with expectations for revenue now in the range of $276.5 I will now turn the call over to Ashley for a detailed review of our third quarter results and our financial outlook. Ashley.

Thanks, Pat, and good evening, everyone. Total company revenues increased 5% to $67.9 million and grew 6% on a non-GAAP constant currency basis compared to the third quarter of 2018. We saw year-over-year revenue increases across all four of our major product lines. Looking at the product lines, Yotech revenues for the third quarter grew 5% and increased 9% on a non-GAAP constant currency basis, both compared to the third quarter of 2018. Yotech supply is continuing to improve, and we expect that growth will accelerate beginning in 2020 with this improved supply and the launch of three next-generation Yotech products. Onyx revenues for the third quarter increased 12% on a GAAP basis and 12% on a non-GAAP constant currency basis, both compared to the third quarter of 2018. Aortic valve revenues increased 11% compared to the third quarter of 2018. Revenues increased double digits in both domestic and international markets. BioGlue revenues in the third quarter were flat on a GAAP basis and increased 1% on a non-GAAP constant currency basis, both compared to the third quarter of 2018. We expect growth to accelerate as we continue to see the benefits of our direct strategy in select European markets and Brazil and the anticipated approval of BioGlue in China. Total tissue processing revenues for the third quarter increased 5% compared to the third quarter of 2018. During the third quarter, cardiac tissue processing revenues increased 19% and vascular tissue processing revenues decreased 9% year over year. Cardiac tissue processing revenues were favorably affected by strength in the pediatric market and a renaissance in the Ross 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 have mentioned previously, vascular tissue availability has been improving, and we expect that to positively affect vascular tissue revenues going forward. Our gross margins were 66.6% for the third quarter. The margins were 60 basis points higher in Q3 versus Q2. Our income tax expense was favorably affected in the third quarter by the expiration of certain federal tax statute of limitations. On the bottom line, we reported a gap net loss of approximately $134,000, or zero cents per fully deleted share in the third quarter, reflecting $1.2 million in business development expenses primarily related to the IndusFan transaction. non-GAAP net income was $2.2 million, or six cents per share. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results. As of October 28, 2019, we had approximately $33.2 million in cash and cash equivalents. This is after the $15 million in cash payments paid in September related to the endospan transactions. As of September 30, 2019, we had approximately $221 million outstanding under our term loan B, and based on our credit documents, our current gross leverage stood at approximately 4.1 times, and our net leverage was approximately 3.6 times. We expect our net leverage to decrease to the low three times adjusted EBITDA range by the end of the year. The interest rate on our term loan was 5.35% at the end of the third quarter. We can comfortably service our debt and have no financing needs to support our current business model. As Pat mentioned earlier, our TMR handpieces are supplied by a large contract sole supplier. That supplier decided to move the location of manufacture of our TMR handpieces which required that we secure a PMA supplement approval from the FDA for a change in manufacturing location. As part of the process to approve the PMA supplement, the FDA conducted an inspection of the new proposed manufacturing site and issued our supplier observations, which the supplier does not anticipate resolving until late this year or early next year. In our view, the observations do not relate to any product-related complaints or safety issues. As a result, we will not have any TMR handpieces until our supplier resolves these observations to the FDA's satisfaction. We have therefore removed TMR handpiece revenue for the fourth quarter from our full-year guidance. We will update you as appropriate about the timing of receipt of approval of the PMA supplement and when we expect to resume selling TMR handpieces, which we hope to be during the first quarter of 2020. As Pat mentioned earlier, due to this and other matters, we are adjusting our full-year 2019 financial guidance to a range of between $276.5 and $278.5 million. Our four-year guidance reflects the temporary lack of availability of TMR handpieces and the impact of FX rates on our top line, specifically the weakness of the euro versus the US dollar. We estimate that currency will adversely affect our revenues by over $3.5 million for the full year. If not for the impact of currency in 2019 and the issue with TMR handpieces in the fourth quarter, we would have been within our initial range of revenue guidance of between $280 and $284 million. Despite these factors, Our guidance reflects between 4.8% and 7.8% growth on a constant currency basis in the fourth quarter and between 7.2% and 7.9% growth on a constant currency basis for the full year. We continue to expect our full-year non-GAAP EPS to be between 28 and 32 cents per share. That concludes my comments, and I'll turn it back over to Pat.

Thank you, Ashley. Through the first three quarters of 2019, we delivered constant currency growth of 8%, which places us at the high end of our original guidance. However, the continued currency headwind coupled with the short-term issues have taken us off that original guidance. With that said, we believe these issues are transient, and we have several catalysts which position the company for growth. Specifically, we're looking forward to the upcoming launch of our three next-generation Yotech products in early 2020, as well as the anticipated commencement of the PROACT-10A trial. Additionally, Nexus should drive growth and enhance our ability to cross-sell. And we have a deep pipeline with near-term catalysts such as Biomu in China and Perclot in the U.S. That will expand our total addressable markets and fuel solid growth for years to come. We are deeply committed to improving the lives of patients with aortic disease and remain steadfast in our efforts. Before closing, I'd like to thank our employees for their innovative spirit in execution of our strategy. With that, we'll now open the line to questions. Operator, please open the lines.

Absolutely. At this time, we will be conducting a question and answer session. If you would like to ask a question, please 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 keys. One moment, please, while we poll for questions. Our first question comes from the line of Jason Mills of Canaccord Genuity. Please proceed with your question.

Hi, Pat and Ashley. This is Cecilia on for Jason. I just wanted to ask about the Yotech portfolio, just in light of kind of the recent trends in the business. But as you look to 2020, between supply issues easing, the three new products coming online, and then now AndoSpan being able to drive pull-through sales, what do you view as kind of the biggest incremental drivers of growth?

Yeah, so I think the one thing that we, you know, were surprised by this year that is, you know, showing up this quarter is, you know, we had budgeted twice as long to get the Yotech approvals. We typically, it takes us in the old days, it took us, you know, three months. We added three more months just to be safe in this new kind of regulatory environment in Europe. And we obviously still don't have the approval. So, You know, we're very confident that for the thoracic stent graft and the branched focal abdominal that we should have those approved in Q4. We potentially could get the NEO, the third product, in the fourth quarter. That's probably more going to slip into early Q1. But I think, you know, for us, starting 2020 with really four brand-new endovascular stent grafts with a 90-person channel with improving supply, I think, we'll just get stronger kind of as each quarter, you know, rolls out. So first thing is you get the approvals, which we're confident we'll get, you know, in the, you know, couple of this quarter and maybe one early in the next quarter. And Nexus is already approved. So I think those four new devices, we've got a great sales force and then make sure we, you know, execute on the supply chain side of things. I think we'll see Yotech strengthen each quarter that goes by.

Great. Thank you. And if I could also ask just on Onyx, you know, heart valve trends that you saw in Q3. I know you talked about seeing some tissue valves get pushed into younger patients in Q2. I was just curious what you saw in Q3 on the heels of low-risk approval and just your expectations going forward. Thank you.

Yeah, no, and I think, you know, we don't get kind of perfect information about what's happening in the market. It's really kind of anecdotal from, you know, customers in the field. We saw good growth in Onyx in the quarter. We saw, you know, double-digit growth with Onyx. I think that the PROACT-10A trial, and we're very confident we're going to get that in the fourth quarter as well, we think that that news and that excitement around, you know, a very unique anticoagulation trial that no one's, you know, it's only been done one other time, and it was, you know, I think this is a very unique opportunity for the company. So I think both the current messaging around Onyx, The fact that we're the only mechanical valve in the U.S. that can have a, you know, 60% plus reduction in bleeding because of our low in INR label, followed by a clinical trial with Eloquist in 60 centers, I think is going to really create a lot of kind of excitement around the Onyx valve and the Onyx story.

Great. Thank you.

Our next question comes from the line of Mike Madsen of Needham & Company. Pleased to see you with your question.

Hi, thanks for taking my questions. I just wanted to start with Yotech, with the CE marks, kind of a follow-up to the prior question. So clearly it's been delayed. Is this just simply an issue of the backlog over there, the notified bodies? I mean, everyone I've talked to, is indicated as just things are just really, really backed up there. And then I guess the second part would just be, you know, what is your confidence around the early next year guidance that you're giving now? You know, I'm not worried about the products not getting approved. I'm just worried about additional delays, I guess.

Yeah, I think that, you know, and I alluded to this on the first question. I mean, we clearly underestimated the bottleneck at the notified bodies with this transition from medical device directive to MDR. They are overwhelmed. You know, we've seen some notified bodies kind of exit the field. And the ones that are still there are in the process of trying to get MDR certification. And, you know, all companies are just overwhelming them. So I think that it's really a bottleneck issue to your question. I mean, I feel pretty confident that, you know, the products that we've got in the queue on the Stancraft side are You know, as I said earlier, I think we'll get a couple of them this quarter. I'm hoping to get all three this quarter, but one of them may slip into – we actually submitted two back in February and one in August. So there's a little bit of a difference in the timing of when we submitted, which you could say would – you know, kind of you would follow that on the requisite approvals. I think the thing for us that's disappointing as you go into 20 is if we had got these in, you know, in the middle of 19 as we had planned – We could have done our, you know, rollouts, our training, train the reps, train the physicians, get the inventory out there, and you could have kind of hit the ground in full stride on January 1. What this does is it basically just pushes things back, you know, a quarter or a quarter and a half, depending on when these come in. And so, you know, we're still very, you know, bullish on that portfolio, but I think that it's going to be, you know, it's just a later quarter, a quarter and a half, just because of the timing of the approvals.

Okay, thanks. And then just on the PARAC-10A trial, I mean, with the reduction in the size of the trial, I mean, is there any material benefit to the cost of the trial or the timing, the amount of time it's going to take to run the trial?

Yeah, I mean, not really. I mean, again, it's 200 less patients, so you could say it's, you know, whatever that would be, like 18% less. But But at the end of the day, I mean, it's still a big trial, right? In heart valves, 1,000 patient trials is a big trial. You know, we have a lot of excitement. We've already done some site visits. The centers are extremely interested. Patients are interested. So my hope is it actually enrolls. You know, again, no one's ever done a trial like this where it's actually existing valve patients. So that's, I think, another important point is that, you know, it's a year, year and a half to enroll, a couple-year follow-up. So it's, you know, it's a three to four-year endeavor. So I don't think that the cost savings going from $1,200 to $1,000 is really going to make that big of a difference. It's still an expensive trial.

Can you guys still hear me?

Yeah.

Hello?

We can hear you, Mike.

Okay, sorry, my phone cut off for a second there. Just a final question. Per clot, do you have any idea if that will require an FDA panel?

We don't know yet. I would be surprised. I mean, you know, obviously regulations have – I'm never surprised by stuff on the regulatory front, but I would be surprised if it needed a panel, to be honest with you. I think it's a pretty clean, you know, low-risk – it's not an implantable device. It's a hemostatic agent, interoperative device. you know, with no safety issues, good clinical results. I would be surprised, but again, we'll obviously cross that bridge when we get to it. I'm hoping it's going to be a, you know, a fairly easy approval.

Yeah. Okay, great. Thanks a lot.

Our next question comes from the line of Jeffrey Cohen of Lannenberg Thalman. Please proceed with your question.

Oh, hi, Pat and Ashley. Thanks for taking the questions. Yep. Ashley, firstly, what's the $2.4 million other expense on the income statement?

Those are predominantly unrealized FX losses on intercompany payables and loan balances. They're primarily non-cash items. And it kind of follows from the comment that Pat made earlier about the impact of FX rates on on the top line. It's having a big impact on our intercompany payable and loan balances.

Okay, got it. Can you talk about the sales force a little bit? I know you mentioned it was an 88 or 90 direct both US and XUS. Can you talk about maybe potential XUS as it relates to product introductions from Yotech and or Nexus and or adding new territories directly?

Yeah, so our U.S. channel is about 60, and we don't plan on making any changes to that channel going into 20. The European channel is about 88 today. We are going to be adding on the margins. You know, we're going to add a handful of people to support the Nexus launch. Again, we already have a big team of people that are highly trained in this area, so those people are getting trained. but we're also going to add some specialists on the Nexus side because it's obviously a very technical procedure. We want to make sure we have the case support available for that. And then we'll also look at different geographies. I mean, if we're seeing a specific geography that's growing very quickly, we will potentially add people there, and we've done that on a historic basis. But nothing in the, you know, it's under 10 in the European realm. The other geographies, Latin America and Asia Pacific, you know, we continue to invest in, in feet on the street in both of those regions. And, you know, we'll talk more about that as we move into 2020.

Perfect. Got it. Okay. And then can you talk about the tissue side? It looks like this appears to be more of a trend as far as cardiac picking up steam at a fairly high rate relative to vascular. Is it pricing or is it demand?

Yeah. I mean, the cardiac tissue, you know, is really a great story. I mean, we saw 19% growth in the quarter. I think part of it reflects that our procurement group has done a wonderful job communicating the benefits of the Synagraph technology, which is proprietary to Cryolife. We're the only company that has a decellularized heart valve, and the results are meaningfully different than a non-decellularized heart valve. So that message has gotten out there, and it's shifted procurement to Cryolife preferentially. I think the second thing that's going on is the clinical data on the ROS procedure continues to be very strong. numerous publications showing that it's a fantastic option for younger patients. And we see kind of a resurgence. There's been a big kind of momentum in Canada for the Ross. We see big centers in the U.S. looking to add Ross, you know, creating Ross centers. So I think that trend continues. Our procurement is in a very good position. I think it's almost a tale of two cities. You know, on the vascular side, You know, we got ourselves in a position, and we talked about this on a previous call, we got ourselves in a position where we didn't have a very good inventory position on our long sap in the same, which is what the customers require or prefer. And we've gone through a, you know, kind of a tiger team approach over the last six months, and we've totally resolved that issue. In fact, we're going to have a very strong position on long sap in his vein. going through the fourth quarter and into 2020, where that'll be an opportunity for us as we move into 2020.

Got it. Okay. And then lastly, can you talk about the upcoming Product 10 Ultra as far as the timing on getting the centers up and running and enrolling?

Yeah. So we've had a great – the FDA has been great from an interaction with us on this, and we've had a number of meetings – This obviously is a complex area, and they've been very participatory, and we've worked very well with them back and forth. We're literally kind of at the finish line, all the final documentation is kind of ready to go. So I'm hoping sometime in November, December, we're going to have the final protocol. As I mentioned earlier, we've already gone out and started doing site qualifications. I think we've been out to like 15 or so of the 60 centers. We'll probably hit another 15 this quarter, so we'll have – half the centers will be ready to roll when the protocol comes out, and then we're going to kind of shoot the protocol out to everybody. We'll probably have an investigator meeting at the STS in January, and we should be enrolling patients for sure in Q1. Maybe we could hit a center in Q4.

Okay, and any hypotheses about how that might enroll?

Yeah, I mean, it's hard to say because we've actually never done it. I don't think anybody's ever done a trial like this. This is very unique in that all the patients that are going to be in this trial, I'd say the majority of the patients that are going to be in this trial are walking around with onyx valves in them today. And what's going to happen is the surgeons and cardiologists that put that valve in are going to consent those patients to see if they're interested in being in the trial. And it literally involves us having them go in for a physical and a visit to the doctor's office And then they get randomized to either be on Coumadin or Eloquist. And if they're on Eloquist, we mail them Eloquist. And if they're on Coumadin, we mail them Coumadin. And so I think that this sets up for potentially enrolling, you know, pretty quickly. We're budgeting about a year and a half, partly due to the time it takes to get centers up, doing the contracts, all this kind of paperwork type stuff. But I think – you know, let's say we start the trial on January 1st. We think it's going to, we'll enroll that trial. It'll take us all of 20 and half of 21.

Perfect. Okay, that does it for me. Thanks for taking the questions.

Thanks, Jeff. Our next question comes from the line of Brooks O'Neill of Lake Street Capital. Please proceed with your question.

Good afternoon. And you've talked a lot about some of the detailed questions. I'm hoping, Pat, You might reflect, you just passed your five-year anniversary with Choir Life. I'm hoping you might talk a little bit about how you assess your first five years there and perhaps what you see as your biggest opportunities for the next five.

Yeah, I mean, I guess, you know, when I look at it, the company is, I think, extremely well positioned. I mean, if you look back, we acquired Onyx in 2016. At the beginning of 16, we acquired Yotech at the end of 17. We just did the end of span deal. You know, we had 20 reps in Europe when I started. We now have 88. We had probably 35, 40 reps in the U.S. We now have 60. We had one person in Latin America and Asia Pacific. We now have probably close to 40. And if you look over the next five years, the acquisition of those three companies or the two acquisitions and the one distribution agreement with the auction with Endospan creates a significant pipeline opportunity. The ability to – the PROACT-10A trial that we talked about, the ability to bring the Yotech Stancrafts to Europe, the new devices, then to take those into the U.S., simultaneously we'll be investing in the infrastructure in Asia Pacific and Latin America. You know, I think that the pipeline that we have, you know, we have 10 or 12 products in the pipeline that will be coming out over the next five years. And the critical mass that we're going to be realizing in Asia Pacific and Latin America, when you combine those two things, the pipeline and the channel, I think it's just, you know, we continue to build the company to the point where, you know, we'll be at critical mass over the next five years. And then every incremental product that you add is going to have, you know, significant drop through for the company.

That's great. Let me just ask one more slightly more detailed question. Obviously, BioGlue was one of your biggest businesses. Can you talk just a little bit about how you see it fitting into the current cryolite and what your outlook is for that piece going forward?

Yeah, I mean... It's interesting. I mean, BioGlue is an integral technology into the aortic portfolio. I mean, one of the things we talk about is that Cryolife is an aortic company. Everything from an aortic valve to an arch replacement to an aneurysm or a dissection from the aortic valve all the way down to the iliac artery. You know, BioGlue is sold around the world. It's a staple in the operating rooms for a life-saving procedure in aortic dissections. The new frozen elephant trunk goes hand in glove with BioGlue. Our onyx valve with some of the additional technologies that are used in the ascending arch are used with BioGlue. The fact that this expansion in Asia and Latin America where they're still heavily dominated by surgery, BioGlue will continue to grow. And then the addition of China I think will be a very nice opportunity for us. I think it's integral. It's a great product because it has to be on the shelf in a cardiac surgery OR because of aortic dissections. And it's high margin, and it funds a lot of the infrastructure as we move into markets. It is a critical technology for aortic surgery.

That's great. I'm excited about the future. Congratulations on all you've accomplished.

Thanks, Brooks.

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

Good afternoon, Pat and Ashley. A couple questions here. First off, on the TMR business, can you give us some sense of how much the SolarGrip handpieces were as a percentage of revenue for that segment?

I can tell you the amount of the impact that we expect it's going to have in the fourth quarter is about $1.5 million. Okay. Yeah. That's awful.

And, Joe, this is one that, I mean, unfortunately, I've been through a lot of these in my career where, you know, this stuff happens all the time. I don't know if people are aware, but when you have a PMA product, if you change anything, a supplier, a component, you move it, it requires an FDA filing. And we were aware of it. We were working with our partner. We built a bunch of inventory in anticipation of the move. And unfortunately, it just, you know, all the things that could go wrong went wrong. And again, there's nothing wrong with the product. In fact, I think there was no quality problems. There was no patient issues at all. It's just, you know, the FDA, we just, you know, by the time they were going to get it done, we ran out of hand pieces and we built up a year of inventory. So it's not like we didn't know about it. It's not like we weren't prepared. It just took a lot longer than we anticipated. So You know, we're hopeful we can, you know, this will be resolved in this quarter. You know, but, you know, it's a transient issue.

So it's sole source, handpiece, and he or your supplier got 483 observations from the FDA, and nothing related to the handpieces is what you're saying.

Yeah, no, so it was basically a manufacturing move. Right, so the products that they had built for us had built for us for years. We have, you know, extremely high quality. We have really no issues. And the FDA goes in and inspects the new facility, and, you know, they found the typical stuff that you find in a 483, you know, training records, procedures not following, being followed in order. I mean, I think, again, it was minor stuff, but still it rose to the level where the FDA wasn't going to let them release product until they rectified it, and they got to go back in and inspect. So that's where the time comes in. It's disappointing, but, I mean, like I said, it's a transient issue, and it's, frankly, not a strategic product line for us. And we think it's going to be kind of a one-quarter delay, maybe a little bit longer, but it's not going to be material from a business standpoint.

Okay. And then flipping over to Yotech, you know, you had some sterilization issues in the first quarter. I'm assuming those are gone based on the commentary today. and then I'll wait with the follow-up.

Yeah, that was in the second quarter. I'm sorry, in the second quarter. Yeah, and that was a total one-off. I mean, it was double sterilized in our sterilizer. It was just that somebody made a mistake, and we put processes in place to make sure that never happens again. So, I mean, that was really kind of a one-off that's behind us.

Okay, and then, you know, as you look out to 20, you guys gave us some – encouraging guidance that the growth in Yotech should accelerate going forward. I'm just curious, Pat, you know, you've got current manufacturing constraints, right, because these are custom-made products, and then you're going to go to an off-the-shelf offering. I guess, how do you guys balance or think about capacity with those two product lines essentially going on at the same time?

Yeah, well, I'd say the first thing, the great news about the Yotech product line is that we have so much demand that we can't keep up with it. And we grew 9% in the corner. And that was with no new products and some supply constraints. We have tons of opportunity on Yotech. Our Asia Pacific and our Latin America business are growing extremely fast. Europe's got all these new products coming. So it's really just getting the supply chain We've been hiring. We've hired new people. We're putting processes in place to make sure that we keep up with supply. So, like I said, it's another transient issue, but I'm very bullish on Yotech and on the new products as we kind of get them out and get the pipeline filled with products as we move through into 2020. Okay.

And then lastly, Ashley, I guess on PROAC 10A, I guess how should we think about incremental R&D spend there or cost for trial? Any thoughts there? It would be great.

Yeah, I mean, we've kind of spoken about this in the past, but if you look at our business right now, and this is not guidance, but let's say we're going to be around $300 million next year, 10% of revenue is about $30 million. And We think that as we go out over the next three to five years, we can easily fund our pipeline by tweaking R&D spending at 10%, give or take, you know, of revenues on an annual basis. So, you know, we think that we've got plenty of capacity to handle this R&D pipeline, including PROAC 10A within those guidelines.

The only caveat I would say on that is, and it goes back to Jess' question he asked earlier, I mean, we predict what we think the enrollment is going to do. If the enrollment accelerates, you know, you could, in fact, we've even talked about calling out what we think it's going to cost so that you guys can be aware of, you know, we expect to enroll, you know, 70% or 60% of the trial this year, and this is what it will cost. If it goes faster, it's going to cost more. If it goes slower, it's going to cost less. I would think investors would be excited if it went faster. So I can't necessarily control every patient getting in, and if it goes faster, that's great, but it could go up a little bit in a year or down a little in a year based on enrollment rates. But I think Ashley's point, if you look at the macro next three or four years, 10% to 11% R&D, some year might be 11%, some year might be 9%, but around 10% should be able to you know, afford us the opportunity to, to fuel the pipeline.

Sure. Thank you.

I would like to remind, I would like to remind our participants at this time, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Suraj Khalil of Oppenheimer. Please proceed with your question.

Oh, um, Hey, Pat. Hey, Astro. Can you hear me all right?

Yeah, it's right.

So, Pat, all my questions, I just want to keep them to ONIX. Pat, can you give us a framework of U.S. versus O.U.S. on ONIX? And the reason I ask is as PROACT 10A ramps up, you know, just to give us some baseline where we could map out how fast things are going.

As far as the enrollment, yes.

Yeah, the enrollment and just the step up in ONIX, organic ONIX versus, you know, because of a pull-through because of PROACT-10A.

Yeah, I mean, we, you know, we're careful here because, I mean, we're running a trial. We don't have an approval. So I think the point is that there's going to be a lot of people talking about ONIX and the trial that we're doing. We're still in discussions right now about we're looking at a handful of European centers. it gets complicated when you start getting into the drug side in Europe because, as you can imagine, I mean, one of the reasons this took so long in the U.S., you know, we originally started with CDRH, and then we ended up with CDER, and then we went back again. So that same thing could happen in Europe, and I don't want to delay the trial. So I think we may have a, you know, we're going to talk about having maybe, you know, a couple centers in Europe, but the majority of this trial is going to be in North America, U.S., and Canada. And As far as the, you know, the speed of enrollment, we talked about that earlier. I mean, it's a – we think a year and a half we can enroll this trial. You know, could take – could be faster, could be longer. Just we have never done a trial like this before.

Okay. And, Pat, remind me on Proact 10A. My memory fails me here. You know, for a patient enrolling in ProAct10A, what would be the average duration of Coumadin use before the switch to Eliques?

Yeah, so we – are you talking about post-surgery, or are you talking about how long they've been on Coumadin before ProAct10A?

Either or, because there will be a difference in endothelialization. Most of the acute events are out of the way. Just how do we look at a certain cohort and map it out and say Pat Mackin came in, he was three months on Coumadin, moved over to Eloquiz, blah, blah, blah. Here's what his rate was.

Yeah, I got the question. Yeah, so it's actually a very important question. In fact, The only other trial that was done with a novel anticoagulant with a mechanical valve was called Realign, and the majority of their events were in the first 90 days. And if you look at our original PROAC1 trial, we had a 90-day blanking period where you had to be on full-dose Coumadin for that first 90 days for exactly the reason you mentioned. You want to make sure that the valve is fully endothelialized, and after that point, that's when we randomized to lower INR. That's exactly the same thing we're doing here. This trial will be for onyx patients who are at least three months out from surgery.

Got it. Okay. And finally, Pat, last question. Remind me, is there an interim look now in the final trial design? Is there a penalty? Because, you know, obviously you'll have reduced the patient size, so there must be some change in the event rate assumptions. I'm curious if there is also an interim peak and any penalty thereof.

Thanks for taking my question. No, it's a good – there is – under either design, the $1,200 or $1,000, there was no interim analysis. And the reason it gets – I mean, you know your statistics well. This is a non-inferiority trial. And the way this is powered, it's a two-year cumulative endpoint. So I think the way to answer the question the other way is there is no interim analysis because it's a two-year endpoint. The other way to look at this is if the trial doesn't stop, then it's successful, right? So there's obviously a data safety monitoring board, a DSMB, and if they see problems that they're going to obviously have to stop the trial. But conversely, you could think about it this way, right? If it takes us a year and a half to enroll, all the patients after 18 months are in, your first patients have already had it for 18 months. Every day that goes by and the trial doesn't stop is your probability of success goes up, if that makes sense.

Yep, that's perfect. Thank you.

At this time, there are no further questions over the audio portion of the conference. I would like to turn the conference back over to management for closing remarks.

Yeah, just one thanks for joining the call. And just to wrap up very quickly, you know, through three quarters, we're at 8% constant currency growth, which is at the high end of our guidance range. You know, constant currency is – I mean, currency has been a headwind, and we had this, you know, unfortunate kind of transit issue with TMR in a quarter. That being said, I mean, we're very bullish on the opportunities we have going into 2020. We've talked about our three Yotex fan crafts, the Nexus opportunity – our expansion in Asia Pacific and Latin America, the PROACT-10A trial, and then we've got, you know, on the later in the year, we're pushing hard to get Perclot in the U.S. and Baguio in China. So, you know, we feel very good about the state of the business and look forward to, you know, executing as we move out through the rest of the year and getting this 2020 set up. So thanks again for joining.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.