Artivion, Inc. (AORT) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the CryoLife Corporation 2Q 2018 Financial Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Mackin, Chairman, President, and CEO; and Ashley Lee, CFO for CryoLife. Thank you and you may begin.

Good morning. This is Lynn Lewis from Gilmartin Group. Thank you for joining the call today. Joining me from CryoLife management team are Pat Mackin, CEO and Ashley Lee, CFO. Before we begin, I would 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 those 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 last night. With that, I would like to turn the call over to CryoLife's CEO, Pat Mackin.

Thanks, Lynn, and good morning, everyone. I'm pleased to report we had very successful second quarter. Our strong performance was driven by solid execution of our strategy which is performing as expected. Our two transformative acquisitions JOTEC and On-X both were strong contributors in the quarter and the momentum continues to build. We're also seeing the benefits of the global realignment of our direct sales force. I will detail later on what is behind our market share gains, update you on the progress of the clinical front, and why we’re confident our best days are still ahead. Our second quarter results reflect strong performance across all of our major product lines. Revenue was up to $68.5 million, up 10% on a non-GAAP basis. Currency it's also at a constant currency basis. What's especially noteworthy was that the revenue from On-X and JOTEC were up 21% and 31% respectively on an organic basis. This performance further validates our market strategy and the ability of our products to compete. As a result, we are raising our revenue expectations for 2018 from the previous range of $250 million to $256 million to a new range of $256 million to $260 million. Our solid results through the first half of the year are a direct result of a successful integration of On-X and JOTEC and our strategic decision to focus on our attention on the treatment of aortic disease. We believe our total addressable market to the products we market today to be approximately $2 billion and based on our robust internal R&D pipeline, we expect this to increase by another 50% to an addressable market of $3 billion. What we had in vision when we transformed the company over the last several years is playing out in the market as expected. For those that are new to the company, CryoLife is a significantly different company than it was just a few years ago. We started to raise our growth profile by bringing in technologically advanced and differentiated products that were backed by compelling clinical data and supported by an experienced and well trained team of direct sales professionals. We delivered our net objective which has allowed us to move market share meaningfully in a relatively short period of time. We also capped select Legacy CryoLife products while divesting others not in our current area of focus. So some of these decisions has meaningfully increased our growth rate and our profitability. We are seeing with our honest line that our sales people and customers gain experience with the products, sales steadily improve. And really after the On-X acquisition, On-X growth was in the mid-to-high-single-digits, now that it's growth is exceeding 20%. In addition, our On-X market share in the U.S. is still only around 30% which gives us lots of room for future growth. We believe the effective dissemination of the PROACT data as well as actual performance of the product are helping to grow our share. We added only 12 new accounts in the U.S. in the second quarter, with sales were up 20%, highlighting the deeper penetration into existing accounts. A portion of this growth results from increasing usage of our mitral valves and accounts -- that were brought online in previous quarters with aortic valve that were in playing predominantly aortic valves. We have other catalyst to drive growth. First, at this time we're selling very little into the Chinese market which is an enormous market for both On-X and JOTEC product lines. Second, we're also hopeful to the On-X Ascending Aortic Prosthesis or AAP who will return to the European market later this year. Third, we're starting to see more traction in On-X and JOTEC product lines from cross-selling than ever before. Fourth, we are currently only seeing minimal incremental benefit from going direct in Spain, Italy, and Poland because many tenders are still being managed by former distributors. This will change over time and bodes well for future growth. Fifth, France and the UK are just getting started to see the results of JOTEC being sold directly, we also expect those contributions to increase over time. So as you just heard, there are still a fair amount of untapped potential well within our sights. Turning now to our second quarter performance, we remain on track with each of our five core initiatives. We're well on our way toward achieving these goals we set for 2018. The first key initiative we set for 2018 is to achieve our full-year 2018 financial guidance. As evidenced by reported results and increase in revenue expectations for the year, we're well on our way to delivering on this initiative. Our second key initiative is to complete the integration of JOTEC and deliver double-digit non-GAAP revenue growth in 2018. In the second quarter 2018, we posted non-GAAP revenue growth of 31% in the JOTEC portfolio over the second quarter of 2017. We saw strength across the entire JOTEC portfolio specifically in our differentiated branch technologies. We believe these results demonstrate the significant potential of JOTEC's product portfolio in an overall market that is growing in the low-single-digits. We expect this momentum to continue. Just as we saw with On-X, we're seeing our direct sales teams especially in those countries where we just converted from a distributor continue to gain experience and take market share. Moreover, you may recall we plan to introduce three next-generation products in Europe in 2019. We remain very excited about the prospects for the JOTEC business going forward. Our third key initiative is to continue our momentum in the On-X business and deliver double-digit revenue growth in 2018. We're off to a great start as the On-X portfolio grew 21% in the second quarter relative to the second quarter of 2017. Including a 22% increase in North America, an increase of 25% in Europe, Middle East, and Africa, and that's despite not having AAP available in that market, as well as a 9% increase in Asia-Pacific, Latin America. Our sales force continues to educate more and more physicians and other healthcare professionals that On-X is the only mechanical aortic valve that is FDA approved for 1.5 to 2.0 INR which showed a 65% reduction in bleeding in the PROACT clinical trial. This information of clinical superiority is convincing more and more physicians just like the On-X valve for their patients. Our fourth key initiative in 2018 is to continue to expand our current total addressable market opportunity through investment in our R&D product pipeline, including both JOTEC product line and our legacy CryoLife product lines. In that regard, we continue to make significant progress in our clinical trials for BioGlue in China and PerClot in the U.S. In the BioGlue China trial, we have now completed enrolment in that trial, we remain on track for potential approval of BioGlue China in the second half of 2019. Since restarting the PerClot study under revised protocol, we now have full site activation in 22 centers. To-date we've enrolled 70% that's 230 out of 324 patients needed to complete that trial. Our current enrolment keeps us on track for a PMA submission to the FDA in the first half of 2019. We’re also working to start the PROACT 10A trial. We look forward to providing more details about this exciting trial on future calls. And finally, we remain on track to launch several next-generation JOTEC products in international markets next year. These are the same products we will be seeking to bring to the U.S. markets and expect to commence U.S. clinical trials next year. Our fifth key initiative for 2018 is to complete the transition to direct sales channels in our Legacy CryoLife products in Spain, Italy, and Poland. I'm pleased to announce that we've achieved that objective and as of April 1st, we're positioned to service customers on a direct basis for CryoLife Legacy products in each of those markets. And with that, I will now turn the call over to Ashley.

Thanks, Pat. I’ll now review our results for the second quarter as well as our financial outlook. Total company revenues increased 43% to $68.5 million when compared to the second quarter of the prior year. On a non-GAAP basis, total revenues increased 12% and 10% on a constant currency basis. On a geographical basis, second quarter North American revenues were $38 million, an increase of 7% year-over-year. The increase was driven by 22% increase in On-X revenues and 8% increase in tissue processing revenues and a 3% increase in BioGlue revenues. Revenues from our Europe, Middle-East, and Africa region were $24.2 million, an increase of 203% and an increase of 25% on a non-GAAP basis compared to the prior year. Revenues from Asia-Pacific and Latin America were $6.3 million for the second quarter, an increase of 41% and an increase of 3% on a non-GAAP basis compared to the prior year. Looking at our individual product lines, On-X revenues for the second quarter were $11.9 million, an increase of 21% over the second quarter of 2017. On-X revenues in North America direct markets were up 22% over the second quarter of 2017. Europe, Middle-East, and Africa On-X sales increased 25% overall year-over-year for the second quarter and On-X direct sales in Europe, Middle-East, and Africa excluding Spain, Italy, and Poland where we were currently in transition grew 36%. On-X revenues increased 9% in Asia-Pacific and Latin America. JOTEC revenues for the second quarter were $17.2 million. Non-GAAP JOTEC revenues increased 31% compared to the second quarter of 2017. We saw strength across the entire portfolio especially our branched Thoracoabdominal and Iliac grafts. On a constant currency basis, non-GAAP JOTEC revenues were up 19% in the second quarter. BioGlue revenues in the second quarter increased 2% year-over-year to $17 million. Despite competitive activities, North American BioGlue revenues were $9.3 million in Q2, an increase of 3% year-over-year. OUS BioGlue revenues increased 1% year-over-year to $7.7 million. BioGlue revenues were up 8% in Europe, Middle East, and Africa and decreased 7% year-over-year in Asia-Pacific resulting from distributor ordering patterns. We remain positive on the prospects for BioGlue based on our ongoing strategy to go direct in select OUS markets, the cross-selling opportunity with 45 JOTEC reps who call on vascular surgeons, and a potential regulatory approval of BioGlue in China in the second half of 2019. Total tissue processing revenues for the second quarter were $19.2 million, an increase of 8% compared to the second quarter of 2017. During the second quarter, vascular revenues and cardiac tissue processing revenues increased 10% and 7% year-over-year respectively. Our overall gross margin for the second quarter was 67%. Gross margins in the second quarter included a charge of $1.2 million related to a step-up in basis for acquired JOTEC and other distributor inventory. We expect an additional $300,000 charge over the balance of the year, the majority of which is expected in 3Q. Excluding the $1.2 million charge, non-GAAP gross margin for the second quarter was 69%. SG&A expenses during the second quarter were $34.7 million which includes $1.3 million in integration and business development related expenses. Our tax rate for the second quarter of 2018 was a benefit of over 200%. The tax rate reflects excess tax benefits related to stock compensation expenses, partially offset by non-deductible transaction costs and executive compensation. Excluding these items, our effective tax rate would have been in the mid-20% range. On the bottom-line, we reported GAAP net income of $226,000 or $0.01 per fully diluted share in the second quarter of 2018 and non-GAAP net income was $3.9 million or $0.10 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 31, 2018, we had approximately $33 million in cash, cash equivalents, and restricted securities. We had approximately $224 million outstanding under our Term loan B and based on our credit agreement, our current gross leverage stood just over four times and our net leverage was just under four times. As Pat said earlier, as a result of our performance year-to-date and our growing confidence in our business model, we are increasing our 2018 full-year revenue guidance to a range of $256 million to $260 million from our previous range of $250 million to $256 million. All other guidance currently remains the same. And last, we expect revenues for the third quarter of 2018 to be between $61 million and $63 million which reflects the seasonality of our Europe, Middle-East, and Africa business during the European holiday season and to account for the dollar strengthening approximately 4% compared to the first half of the year. That concludes my comments and I'll turn it back over to Pat.

Thanks, Ashley. As you've heard this morning, we're firing all cylinders. Our sales momentum is strong, our strategy is working, our pipeline is advancing on schedule, and we're still in the early days in capitalizing on the large opportunity before us. With both large acquisitions now integrated, we're able to focus even greater attention on market execution and that is showing up in our results. All the pieces are in place for the continued growth. Our sales force has more experienced liner products and there is ample market share for the taking. We also have a robust R&D pipeline settled over multiple years. If approved, our pipeline will provide us with tremendous incremental growth potential around the globe. What also excite us is that all the potential growth areas I have discussed this morning are already embedded within the company today. If we were able to execute on our plan we'll have numerous new product launches, BioGlue in China, powerful PROACT data, the new PROACT 10A trial, combined those initiatives will vastly increase our growth potential. We do not have to make another acquisition and we still have the ability to increase our adjustable market by over $1 billion from our pipeline alone. This is for precisely why, I have brought in several highly experienced individuals to lead critical areas of the business. We have assembled an exceptional management team who are well suited to deliver on our objectives. I said in my opening comments but it's worth repeating our best days are still ahead. So in closing, I'm very proud of what we've been able to accomplish in a relatively short period of time and I want to extend a sincere thank you to all of our employees who had a hand in delivering another great quarter. With that, we will now open the lines for questions. Operator, will you please open the lines.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. And the first question comes from Jason Mills with Canaccord Genuity.

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

Hey good morning.

Good morning, Jason.

Great, good morning. I would like to start with JOTEC really terrific quarter there and if I just for currency looks like that is run rating well over the $60 million level which is tremendous growth on a pro forma basis. Could you tell us if there were any back orders that you had to deal with perhaps augmented that growth or was that sell-through and should we be thinking about -- am I thinking about it right in terms of the run rate?

No, I think you -- there were no, we weren't selling back orders; I think the constant currency growth for JOTEC is around 19%. And we're very excited, as you know when you acquire a company and you integrate, you're always nervous about what the quarters look like, the first quarter or two, I can tell you that the European team and I think people just remind people the CEO of JOTEC remained on board as the Vice President of Europe, Middle-East, and Africa. He is a extremely strong leader, he's done a great job integrating the team, he now leads that entire organization commercially as well and tell you they're firing on all cylinders. They've done a great job as far as integrating the company, taking the CryoLife products direct in Spain, Italy, and Poland, taking the JOTEC products direct in France and in Ireland and again we're still -- we still kind are seeing the benefits of that going forward. So that business is really firing on all cylinders and in fact we actually had some back orders on our kind of our vascular and kind of our Dacron PTFE graft lines. So we actually had back orders in the quarter that we're working on filling even with these numbers.

That's a superb number. So and Pat next question just kind of longer-term, I guess we have to look at a couple of years to see what the business may look like with PerClot in the United States and BioGlue in China. But if we -- could you give us a sense for the opportunity for those products from a revenue perspective in the first couple of years after approval, it seems to me that at least for PerClot, you're going to have the sales force in place, so it's just plugging it in and really providing physicians with an alternative and what seems like a really strong alterative as well. And then for BioGlue you've distributors there in place, I think as well. So could you just talk about perhaps what you see from those two products, let's say first full-year, full couple years after they’re approved in those respective geographies?

Yes. So I'll take the BioGlue China, it’s actually rewarding to see that trial is now enrolled and that we're really in kind of wrapping up the clinical trial. I know it was a significant study, it was about 180 patients in type aortic dissections in China. We conducted a trial in the seven largest centers in China and it's a good sized market as you can imagine it's pretty difficult to get great market data as we really don't have super granular data like we can in Europe and the U.S. But our best estimate is that that market alone just aortic dissection market in China is probably a $10 million market and there's no competitor in that space and that's kind of equivalent to what Japan is the Japan market opportunity is. So that again now we're in the approval window and the CFDA approval cycle because this is a kind of a life saving technology, we're hoping to get faster approval but those approvals can take 12 to 24 months. So we're going to have to work to see exactly kind of where that's going to land in the kind of the future revenue stream. But I think that's a $10 million market opportunity and a lot of those procedures are highly concentrated in big centers where we did the trial and maybe handful more outside of it. But I think it's a pretty easy market to get access to, so it gives you kind of a good sense on China. As far as PerClot, I mean that trial as I mentioned is now 70% enrolled, we're hoping to finish enrolment by the end of the calendar year, it's just a 30-day follow-up, so there's not a long tail to the follow-up. We just need a package of the data to submit to the FDA. So that’s probably a nine-month approval cycle, so we could see PerClot at the end of 2019. So again we're little bit in the -- for both of those trials kind of at the tail end in one and done with the other. We're kind of in the regulatory cycle of, if everything goes great, we could get them at the tail-end of 2019 but I would say definitely in 2020. The PerClot market is probably about $100 million market right now and as you commented we've got 75 direct reps in Europe, we've got 60 feet on the street in North America. So we've got a good 125 people direct reps that could be selling our product immediately upon approval. So we’ll have to make some assumptions of what we think we can do with our product, we obviously have an extremely strong cardiac and vascular channel but I think you could make some assumptions there on what we could do in that marketplace going forward.

Yes, that's helpful. Lastly, Ashley for you, gross margins were a nice surprise the upside here, was that primarily due to mix and how should we think about the trends for your gross margins over the next couple of years?

Yes. So for the full-year of 2018, we maintained our gross margin guidance on a GAAP basis is between 65.5% and 66.5% on a non-GAAP basis excuse me. On a GAAP basis we think for the remainder of this year they're probably going to be between 67% and 68% and then a lot of that is driven by product mix, geographical mix, as well as throughput through the tissue processing laboratory. We haven't given out any guidance for 2019 and 2020 on gross margin, but we publicly stated with both the On-X and JOTEC acquisitions that over the next four years or so that we expect to drive gross margins in to the low to mid 70% range. So the cadence on how we get there, we may not get to the 70% range over the next couple of years but it's a possibility but we'll have more detailed guidance early next year on what we expect gross margins to be in 2019.

Yes, if I add just a comment there, I mean we clearly have a focus on -- you saw in the last three years we've taken gross margin from 60% to 69% on a non-GAAP basis and almost a 1,000 basis point improvement. We are highly focused on kind of our cost down programs. I think I’ve mentioned on previous calls, we've got two leaders on the operations side both came to us from Baxter. I'd worked with previously one of them at Medtronic really stellar individual one ran the global supply chain for all of Baxter which is a $2 billion spend. He's going to be bringing that and he is a brought kind of a number two guy in to manage that whole area of the business. So we're looking at a significant cost down effort over the five years and it's one of our major kind of competitor for us to get margin expansion to the tune of up to 2% to 3% of cost down every year over the next five years.

Thanks for all of that. I'll queue up again. Terrific quarter.

Thanks, Jason.

Thank you. And the next question comes from Suraj Kalia with Northland Securities.

Good morning gentlemen. Can you hear me? Okay.

Hey good morning, Suraj.

Good morning.

Pat, Ashley first and foremost excellent quarter. I had a bunch of questions, first and foremost PROACT 10A any update their I’m not sure if I missed anything in your prepared remarks?

Yes, so we -- I’m kind of being cautious on my comments, we've got a meeting with the FDA this month, so we'll know more then. So I just -- I don't want to get out of my skis, I can tell you that we have worked for almost two years on this protocol. And I think I've mentioned previously, we have two world famous clinicians who have been working with us and it's been a real pleasure to work with them. John Alexander is at Duke, he was one of the main investigators in the Aristotle trial on Eliquis approval for Atrial fibrillation. And then Lars Svensson is the Chief of Cardiac and Vascular at the Cleveland Clinic, who's obviously got a impeccable reputation. So we'll be going to the FDA later this month with both of them and will be presenting our protocol, it is a significant clinical trial I can tell you that. I think the current kind of broad level trial, we're looking at a -- about I think the total number is almost 2,000 patient trial with two years of follow-up. So it is a big undertaking but we think it's a landmark kind of market changing clinical trial. So I really can't say more than that because I got to wait till we have the conversation with the FDA and when we do we can give people updates on future calls.

Got it. Pat, you’ve been very clear in terms of the value proposition of On-X. And I'm curious I think so in your commentary you said there was increased utilization in existing accounts, the number I have is 682 accounts in the U.S. maybe I'm off. But can you walk us through what are the dynamics of, why does utilization spiking up, I guess I'm trying to understand is the trajectory -- should the slope of the curve remain the same or were there any one-time effects that we should be careful about?

Yes, I think it's multi-factorial. So I think one thing that's encouraging to us is that it's hard to say it's one thing, so I can give you, I can probably list off five things that are contributing to the continued success of On-X. We took 10 points of market share in the last 24 months so in a significant market against tough competitors. I'll tell you what's doing this. The PROACT as you know was published in JACK in June. So it really didn't even show up in Q2. That's a really important trial because it goes to cardiologist and cardiologist are the ones that manage the blood thinners of the patient after they get a heart valve. So now you have a whole new group of clinicians that frankly the device companies don't call on kind of the non-interventional cardiologist, they just got a massive paper telling you that you can put your patients on this valve and reduce their bleeding by 65% which is a very meaningful clinical difference as you know. So I think that that dissemination of the PROACT data to cardiologists, you haven't even started to see that. Second, as I mentioned on previous calls we've done a significant amount of work on our patient website and I would encourage people to kind of go and look search On-X aortic valve online. We've got patient stories, we've got doctor testimonials, we've got a surgeon finder, we have a team here in Atlanta that basically feels kind of a, it's a patient group and we're seeing a number of patients that wanted different option for the heart valve, they want a lifelong solution with less bleeding. So I would say that the patient initiative has been very successful. Our sales force, we just took Canada Direct last year, we got three great direct reps up there, we just took the CryoLife hence On-X Direct in Spain, Italy, Poland back in April, so we're to be putting direct people on the street there. Our U.S. team we continue our leadership there has done a fantastic job bringing in kind of outstanding individuals, we have not increased the footprint but we've brought in to the extent if people aren’t doing -- can’t hit their growth numbers, we're bringing in better talent. We've got the PROACT 10A trial we just talked about kind of in the wings. So we've also got the PROACT Mitral trial which should be enrolled this year. So it's exactly, it's the sister trial to the PROACT Aortic where you can reduce your blood thinners by half and get a big benefit in bleeding but we’re running the same trial with the mitral valve which will be enrolled this year and will require a year of follow-up, so it's a couple of years, but that's a 2020 opportunity. So it’s just -- so it just kind of keeps going and going and going, so if you try to pin it down as the one thing, it’s not one thing and I think the more comfortable that our reps get some of the valve and the more momentum the product gets, we're growing the business 20% in flat market. So clearly there's something to this. And I think the last thing is we're hearing from competitors that they're having a hard time dealing with us because they don't really have a comeback.

Got it. And finally, either Pat or Ashley, one of the things that you all have mentioned consistently in the past is at some point we will start seeing the fruits of our going direct strategy especially in some of the BENELUX countries. Ashley I heard you talk about 75 direct reps in Europe, I presume part of them have to be the legacy JOTEC reps. Specifically for On-X in Europe, can you help quantify the impact of going direct at some of these countries, what has been the contribution to the top-line earlier you were getting X and now you all are getting X plus Delta X and the Delta X is because of new reps. Any color there would be great? Again gentlemen congrats on the great quarter.

Yes. So I think may be Ashley can do this, the two kind of us can take this one at a time. So first I would say just macro. We have about 30 reps in Europe; they call in heart services sell the On-X valve. We've got about 45 reps in Europe that are kind of a Legacy JOTEC reps that sell the kind of vascular surgeons and the vascular product line, so that's the full 75, so you got 30 people selling On-X aortic valve in Europe. In countries like Spain, Italy, and Poland each one is very different. I mean I lived there and worked there for a number of years, so I have a good understanding of those markets but Poland for example they hired direct reps almost immediately in January. Because that market is more direct, less tender whereas if you look at Italy you've got sometimes you've tenders that last for three years and those have to remain with the existing distributor. So you take business direct where you can, you leave some of the distributor and then you kind of wean them off as you go forward, so again it's really a different answer by country but in each case, we're seeing and again Ashley can comment on these specific numbers when we kind of remove the middleman, we're seeing probably between a 30% and 50% increase in revenue and the corresponding margin that would go with that.

Yes, Suraj I'll just give you a couple of examples. In my prepared comments I had indicated that in our direct markets for On-X in Europe, Middle-East, and Africa and this excludes Spain, Italy, and Poland because we're currently transitioning right there so we're not even beginning to see the full effect of this. Our sales in those direct markets were 36% year-over-year. And as Pat indicated, it varies significantly by market just to give you a couple of examples. We have a larger sales presence in Germany and our sales are up 120% year-over-year, Switzerland they were up over 250% year-over-year and again it just depends on what specific market it is but I think that we're confident that and Pat mentioned this in his prepared comments that some of these markets like Spain, Italy, and Poland, some of the tenders are still being managed by our former distributors and we're really not even beginning to see meaningful impact yet from those countries as it relates to the Legacy CryoLife products and we think that's going to be a tailwind over the next two to three years as those tenders expire and we're going to continue to see increasing benefit from the strategy.

Thank you. And the next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Hi Pat, Ashley, how are you?

Hey, good morning.

Good morning, Jeff.

Hey just to follow-up on a little bit of the questions from Suraj, as far as Spain, Italy, Poland, what's the current size of the sales forces there and generally speaking for some of the European territories, is there room to grow more, is that something that you're considering or the size is good currently?

Yes. So I think we don't really give out kind of specific country level, kind of rep numbers but I would say that for each one of those, so for Poland, for example, we had no direct CryoLife reps if you will I mean now there are, there are all CryoLife reps but there were legacy kind of JOTEC reps in Poland and actually it's our best team in Europe. They hired a couple of direct people back in January to represent the kind of the CryoLife product lines On-X and BioGlue. So I think that -- again it’s different by country and those country leaders will put on direct people, as Ashley was just commenting, as you see the tenders online. Poland is less of a tender countries you can put those reps on quicker. Spain has also got kind of heavy tender, so that country leader will probably add a rep this year and then maybe add another rep next year, so it's just a kind of titrate the feet on the street to the going direct opportunity. I would say that the bigger question. I mean a lot of the -- how many feet on the street we put will be will be kind of tied to the revenue opportunity and the growth opportunity. We're very bullish on Europe, we've got great leadership over there, we've got a 75% team. I mentioned in my comments we're launching three brand new products next year in the European market and each one of them is a breakthrough in its own right. The off the shelf branch thoracoabdominal device we think is going to be a home run. And we will probably add feet on the street to support just the potential the huge potential of growth that that will deliver. So lot of it is going to be predicated upon when we launch the new products what are our expectations for the new products are and there is more room for expansion on the commercial side in Europe as those products come out. I’ll take the same for the U.S, I think the U.S. at least with the current portfolio is in a bit of a holding pattern on feet on the street until we have some of the new products that come in and then we will expand there as well. But we will make sure that the math works as far as that, the investment we make on the feet on the street will drive the growth that will support the spending.

Okay, got it. And could you talk about the guidance a little bit and the cadence assuming like obviously this quarter was tremendously strong, but it seems like you may be a little cautious in the back half of the year I guess that being that your two most powerful segments are European base which is typically the weakest quarter of the year, so how does that Q3 and then Q4 pulling through as well?

Yes, two things I will let Ashley fill in some comments on. I mean you just hit on one of them. I mean Q3 in Europe I mean I lived and worked over there. I mean August each country takes holidays at different times. August is pretty much a throw away month over in Europe. So you have to factor that into your Q3 numbers our Q3 is always our lowest of the year. I think the other thing which is a real kind of a headwind in the back half is the dollar has strengthened five points from the first half. So that's just a math exercise, if you figure in the currency adjustment, if you figure in kind of European holidays in Q3, that's we're still showing real great growth. So I mean we figure that into the guidance. I don't know Ashley, if you want to comment?

Yes, just a couple of other quick comments. I mean if you look at our third quarter guidance so we're still projecting double-digit growth year-over-year for the quarter, so that's going to be nice. And the other thing that I mentioned about the fourth quarter it's our toughest year-over-year comp. So if you look at the Legacy CryoLife business we posted I think close to just under $49 million in revenue last year, so that was by far away our best quarter in for JOTEC. They had a nice quarter as well in the fourth quarter. So it’s a tough comp but we're still projecting a high-single-digit growth for this full-year and potentially even low double-digit growth but depending on how we perform.

Okay. And then lastly for me, as you think about now that your 10% grower with a couple barge targets coming on market like PerClot and BioGlue perhaps you enter next year. How you think about M&A now, how is your appetite today versus six months ago and how might your appetite kind of evolve over the next couple of years?

Yes, I know, I think again I made some comments in my -- in the prepared remarks that one of the great things about both the On-X and the JOTEC acquisitions as well as the internal CryoLife kind of legacy pipeline is that the combination of all those things together, if you just I just kind of rattle off some things that are coming down the pipe that I'm excited about BioGlue, China is enrolled and will be bringing that product to market again hopefully late next year but definitely in 2020. PerClot will be enrolled by the end of the year again will probably more like a 2020 product. We have three brand new JOTEC products, the new thoracis stent graft, a new Frozen Elephant Trunk, and a new first ever off the shelf branch thoracoabdominal We've got the PROACT 10A trial that will obviously give an update as we hear more about that. So we’ve got the U.S. bringing all those JOTEC products to the U.S. I mean these two acquisitions combined with CryoLife make it, so we actually don't have to do any M&A. That being said I mean we're always going to be very smart. We have a strategy and a vision that’s focused on aortic disease, I think you will see more if you're going to see anything from us it will be a tuck-in which will be more of a product where we would buy a smaller company with a -- maybe a one product company that we would just take that product and drop it in our reps bag. I think that's very different from what we've done with the kind of the two platform acquisitions of On-X and JOTEC. But again we were acquisitive but at the same time we don't really need to do anything because we can deliver the kind of growth we're looking for with what we have.

Thank you. And the next question comes from Joe Munda with First Analysis.

Good morning Pat and Ashley, can you can hear me okay.

Hey good morning Joe.

Hey good morning Joe.

So couple questions here Pat you touched a little bit in your comments on about the new products, the three next-gen products, how should we think about the potential rollout of those products in 2019 do you envision them coming all online at the same time or would you expect them to be more of a staggered rollout, for our safety and modeling, how do you think we should take a look at it, should they come on all comments?

Yes, a lot of these I mean it’s interesting because a lot of these there is probably five products that all fall in the same bucket, BioGlue China, PerClot, the JOTEC products E-nya, E-nside and E-Vita OPEN NEO, those are the five products. They’re all in various forms of coming out and the last step is the regulatory approvals either in Europe, China or the U.S. and trying to predict what regulatory bodies are going to do, I found in my career is quite difficult. So what we do is we look at how long it takes to get a CE Mark, we look at how long it takes to get an approval in China, we look at how long it takes to get a PMA approved in the U.S. and there is a range right, people have taken two years to get stuff approved in China, people have done it in a year. So there's a range. So we tend to be conservative in our planning, we don't want to put things in our numbers that is kind of wing and a prayer that it's going to happen. So for example the JOTEC products to your question we'll be submitting two of those three products will be submitted for European approval at the end of the calendar year. Best case would be we could get that at the beginning of Q2 more likely is we’re going to get at the beginning of Q3, so when we do our modeling, we will probably --

Hello?

Yes, thank you. [Operator Instructions]. And the next question comes from Brooks O'Neil with Lake Street Capital.

Hey this is Frank Takkinen on for Brooks O'Neil.

Hey, Brooks, can you hear us?

Yes this is Frank Takkinen on for Brooks O'Neil.

Can you hear us, okay?

Yes, we can.

Okay.

So my first question is about what are you guys kind of seeing as far as the competitive landscape goes for On-X and JOTEC?

Yes. I mean I've talked a lot about the On-X, I mean it’s the only product that has FDA approval for a 50% reduction in blood thinners and a 50% reduction in the INR you have to maintain which yields a benefit of 65% reduction in bleeding. Those results were published recently in The Journal of American College of Cardiology, a Peer Reviewed journal so that data is now being widely disseminated. If a competitor wants in the U.S., if they want to claim that they're going to do a seven-year $20 million clinical trial and get an FDA approval. So I made a comment in one of the questions have it's very hard for a competitor to counteract that because it can’t promote a product for that indication. So again I think particularly in the U.S. market, it going to be hard for people to compete with us. As far as JOTEC again we talked a lot about this when we made our acquisition, the reason I was interested in JOTEC is not because they had a seventh or eighth AAA on the market. It was because several of their products are very proprietary and novel that other people don't have any of their other people have and we typically have the best version of them. So the Frozen Elephant Trunk, we have one competitor in that market and we do extremely well with that. Our custom brand historic abdominal devices, we have a -- our closest competitor is Cook. They have -- it takes them four months to turnaround a product, it takes us 18 days. So this gives you a sense our branched E-liac device, where one of a couple of people that have it, we're doing extremely well with that device. So a lot of the bigger players don't have the technology. So our whole philosophy is highly differentiated technology backed by a very strong sales force and it's obviously showing up in the results.

Great, thanks. And then my second question is can you just kind of give me a feel about how you guys feel on your net leverage and how we should think about this going forward?

Yes. I made some comments on my prepared remarks based on our credit facility, our gross leverage is just over four times around 4.3 and our net leverage is around 3.7 and we've also made some comments previously in connection with the acquisition that that assuming that we execute on our plan that we anticipate our net leverage to be in the low three times by the end of 2019. We're comfortable with leverage around those levels, we're going to be executing and again just we're comfortable with that, we have no current plans to do anything at this point. Pat was talking about the M&A a little bit earlier. If we found some opportunities to acquire tuck-ins and so forth, we would consider using leverage to do that but I think longer-term we're probably more comfortable around the three times range.

Thanks.

Yes just to comment, it sounds I just got to note that on Joe Munda's question, the call went blank when I was trying to answer some of that. We were talking I guess people can’t hear us. So Joe’s question was about what assumptions you should make for the JOTEC products for the European launches next year? And my comments surrounded a lot of our upcoming launches are now moving into the cycle of kind of the regulatory approval frame and for things like BioGlue China, PerClot, and the JOTEC products, we really go through a process where we look at not just our company but what's the average allotted time, it takes a company to get approval kind of fastest, shortest, longest. And then we make assumptions for our planning purposes where we're going to kind of take those launches. And specifically Joe to the JOTEC EU products, we're submitting for CE Mark at the end of 2018, the fastest we've got that done before is probably 90 days, so we could have it at the beginning of Q2, more likely it's kind of 180 days which will be beginning of Q3. So that's probably what we’ll put in our planning is the second half, launching those products in the second half of 2019. So we expect two of them, the E-nya and the E-nside to come in the kind of the Q3 timeframe and then E-vita OPEN NEO probably more like a Q4 or even into 2020. So hopefully that got Joe’s question because sound like we had a technical difficulty on the call.

All right. And does the current question or have any additional comments?

No, I don’t. Thanks and congrats on the quarter.

You bet. And as there are no questions at the present time, I would like to return the call to management for any closing comments.

Yes. So we want to thank you for joining this morning. We’re very pleased with the results of the quarter, as I mentioned we're hitting on all cylinders, I mean we had 31% growth in JOTEC, 21% growth in On-X, 12% growth overall for the overall business, tissue grew 8%, so again we're very pleased with how the business is performing. I think the integration of JOTEC has gone extremely well. We're pretty much done except for some IT kind of back office work in Europe which is still ongoing and should be done at the end of the quarter. BioGlue China has enrolled, we're moving into the regulatory approval cycle. PerClot 70% enrolled, we will be moving to the regulatory approval cycle in by the end of the year. We have -- we just talked about our three JOTEC product launches coming next year, we talked about our FDA meeting with PROACT 10A. So we were very excited, we have a lots of things to be excited about and we look forward to keeping you posted on our progress at the next quarter. Thanks for joining.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.