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Edited Transcript of CRY earnings conference call or presentation 13-Feb-20 9:30pm GMT

Q4 2019 CryoLife Inc Earnings Call

KENNESAW Mar 3, 2020 (Thomson StreetEvents) -- Edited Transcript of CryoLife Inc earnings conference call or presentation Thursday, February 13, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Ashley Lee

CryoLife, Inc. - Executive VP, COO & CFO

* James Patrick Mackin

CryoLife, Inc. - Chairman, President & CEO

* Lynn Pieper Lewis

Gilmartin Group LLC - Founder & CEO

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Conference Call Participants

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* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Cecilia E. Furlong

Canaccord Genuity Corp., Research Division - Associate

* David Joshua Saxon

Needham & Company, LLC, Research Division - Associate

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Joseph P. Munda

First Analysis Securities Corporation, Research Division - VP

* Suraj Kalia

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the CryoLife Fourth Quarter and Year-End 2019 Financial Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Lynn Lewis from the Gilmartin Group. Please go ahead.

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Lynn Pieper Lewis, Gilmartin Group LLC - Founder & CEO [2]

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Thank you. Good afternoon, and 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'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 after 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.

Additionally, you'll see the 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.

With that, I'll turn the call over to CryoLife's CEO, Pat Mackin.

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [3]

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Thanks, Lynn, and good afternoon, everyone. Thanks for joining us. On today's call, we'll discuss fourth quarter and full year results, including progress we're making on our key pipeline products, supply chain headwinds and our 2020 objectives and financial guidance.

Before we begin, I'd like to discuss the positive developments that took place in the quarter that are not only readily apparent by reviewing our fourth quarter financial results, which were affected by supply chain headwinds.

We believe that we're at the beginning of a multiyear period, over which we'll expect to deliver multiple new product introductions and see market expansion of previously approved products. Our pipeline is one of the most compelling reasons to consider CryoLife as an investment as it has the potential to increase our growth rate and address -- and our addressable market opportunity at the same time. In early December, we received CE Mark for E-nya, our next-generation thoracic stent graft; and E-nside, the first and only off-the-shelf thoracoabdominal stent graft with inner branch technology. We believe the enhancements designed into these next-generation products provide us with highly competitive and comprehensive stent graft offering.

We also announced our collaboration with Endospan, which provides us with immediate distribution rights in the EU to the NEXUS product, the only off-the-shelf endovascular graft approved for the repair of both dissections and aneurysms in the aortic arch, a global market that could exceed $1 billion once regulatory approvals are achieved. NEXUS complements our JOTEC portfolio of endovascular aortic repair products and will allow us to cross-sell these products.

In addition, we received FDA authorization to commence the PROACT Xa clinical study, a prospective randomized trial to determine if patients with the On-X mechanical aortic valve can be maintained safely and effectively on Eliquis rather than Warfarin. If we hit the primary endpoint of this study, we expect that our mechanical valve business will be positively impacted, as physicians will choose the On-X mechanical valve over others due to the significant positive patient benefits of Eliquis over warfarin.

Finally, we entered into collaboration with Misonix, under which Misonix will have exclusive U.S. commercialization rights for NeoPatch, our amniotic membrane tissue product, to treat a broad range of indications outside of cardiac and vascular surgery. I'll have more on each of these topics later in my comments.

Moving to our fourth quarter financial results, total revenue for the quarter was $69.7 million, reflecting year-over-year growth of roughly 4% on a non-GAAP constant currency basis. We recorded strong On-X and cardiac tissue revenue growth in the quarter. However, the continued supply constraints with our JOTEC products, which we addressed on prior calls, and the lack of supply for our TMR handpieces, pushed our overall revenue growth slightly below our expectations. If we'd been able to meet the demand for JOTEC products and sell TMR handpieces, our financial results this quarter would tell a different story. The good news is we expect these issues to be transient, and demand for our innovative product portfolio remains robust.

Turning first to On-X, revenue increased 18% on a GAAP and non-GAAP constant currency basis, driven by the strength from aortic valves, which were up 17% in the quarter. Revenue in North Americas grew 5%, while OUS markets grew 45%. For the full year, On-X revenue grew over 12% on a GAAP and non-GAAP constant-currency basis. We anticipate On-X revenue growth to remain in the high single, low double digits, and we expect to continue to take market share.

Switching gears to JOTEC. Excluding the OEM business, JOTEC revenue increased 4% year-over-year on a non-GAAP constant currency basis during the fourth quarter, an increase of 10% year-over-year on a full year basis, and this is even despite the headwinds we faced with supply. We've been addressing our JOTEC supply issues by hiring and training additional sewers in Germany. I'm pleased to announce that our JOTEC manufacturing capacity has increased 39% since we initiated these efforts, and we expect this capacity to continue to expand throughout the year as we hire and train additional personnel. In addition to increasing our internal manufacturing capabilities, we are working to secure additional external capacity through a contract manufacturer, which we anticipate onboarding in the second half of this year. As a result of these efforts, we expect supply to increase meaningfully over 2020. As such, we anticipate year-over-year growth trends for On-X products to accelerate throughout the year as supply improves and as we launch E-nside, E-nya and E-vita OPEN NEO later this year.

Moving to our tissue business, we reported solid performance in revenue in this area, which was up 6% for the fourth quarter and 5% for the full year. This was led by our cardiac tissue valve business which generated 12% in the fourth quarter versus the fourth quarter of 2018. 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 pediatric heart valves. Revenues for our vascular tissue business were down 1% year-over-year for the fourth quarter due to ongoing supply issues, but increased from $9.1 million in the third quarter to $9.4 million in the fourth quarter, primarily due to improved supply of long saphenous vein. Our initiative to improve the supply of vascular tissue is starting to ease in our vascular tissue supply business.

BioGlue was flat on a constant currency basis compared to the fourth quarter of last year, but up 5% on a constant currency basis for the full year of 2019. We submitted our application, our regulatory approval -- for a regulatory approval to the Chinese FDA in February of last year, and believe an approval could take up to 2 years, which puts a possible approval in 2021.

Regarding our U.S. PerClot trial, enrollment is complete. However, we had a small fire that caused a minimal damage to our pilot manufacturing lab in late Q4. The minor damage caused approximately a 3- to 6-month delay to our previously announced time line. Therefore, we now expect to submit the PMA to the FDA in the second half of 2020.

Regarding TMR handpieces, we are still awaiting FDA reinspection of our contract manufacturer's facility. We hope to have these handpasses (sic) [handpieces] back on the market in the second half of 2020.

As we look to 2020, we expect our product pipeline to begin to contribute to our top line and the core business to perform well. This year, we expect to fully launch the EU 3 next-generation Neotech products and NEXUS. We will also initiate the PROACT Xa trial in the U.S., and we'll continue to invest in our sales channels in Asia and Latin America. During the first quarter, we'll be building inventory and training our customers on our next-generation JOTEC products. As we move into the second quarter, we expect to commence limited market releases for E-nya, our next-generation, low-profile thoracic stent graft for patients with aortic disease, followed by a full market release during the third quarter.

Our previous thoracic stent graft, the E-vita 3G, was predominantly used in conjunction with our E-vita OPEN PLUS frozen elephant trunk and our E-xtra DESIGN thoracoabdominal stent graft. E-nya features a new delivery system that addresses significant challenges of low-profile TAVR devices which is high deployment forces. This improvement as well as other product enhancement gives us a significantly more competitive offering that will allow us to gain market share in the European thoracic stent graft market.

As one of the most versatile grafts on the market, E-nya is the perfect complement to E-nside, our recently approved off-the-shelf thoracoabdominal device. Similar to E-nya, we expect a limited market release of E-nside to be in the second quarter, followed by a full market release in the third quarter. Many patients with thoracoabdominal disease are either treated with risky invasive open surgical procedures which are characterized by lengthy hospitalization periods and prolonged recuperation, or with custom-made stent grafts, which can take up to 90 days to manufacture. E-nside is the only off-the-shelf pre-cannulated thoracoabdominal stent graft with inner branches, and E-nside eliminates the waiting period experienced by approximately 70% of patients who typically would require a custom-made stent graft.

We anticipate receiving CE Mark approval for the E-vita OPEN NEO, which is our next-generation frozen elephant trunk, in the first quarter of 2020. This will be followed by a full market release in the second half of the year. We will update you on important developments regarding its approval status.

Turning to NEXUS, we conducted a limited market release in the fourth quarter of 2019, and we'll be gradually introducing the product through a broader market release throughout 2020. As a reminder, NEXUS is utilized in the last frontier of endovascular aortic repair, the aortic arch. And its deployment in the arch is one of the most sophisticated procedures being performed today. As such, we are investing in the appropriate time and effort to ensure that surgeons are adequately trained to deploy the product. There's a great deal of excitement in the marketplace for this technology, and the case schedule is building nicely. Our initial experience with the product has been very positive, and we're confident that NEXUS will be a solid contributor in our product portfolio.

As the most comprehensive and technically-advanced aortic stent graft portfolio, our JOTEC products address the entire aorta, from the aortic valve to the iliac arteries. We believe the addition of NEXUS, E-vita OPEN NEO, E-nya, E-nside, along with the rest of our aortic repair portfolio, provides us a significant cross-selling opportunity through our 90-person European direct sales force.

Switching gears to On-X, with the recent FDA approval of PROACT Xa, our next step is to conduct an investigator meetings -- our investigator meeting with the 60 participating centers. We expect to begin enrollment in the next couple of months and anticipate enrollment to take approximately 18 months. The trial will enroll 1,000 patients at up to 60 centers in North America. If the trial is successful in proving the aortic valve -- that aortic valve recipients can be maintained effectively on Eliquis, we believe that CryoLife will become the market share leader in the mechanical valve segment, while simultaneously taking share from existing bioprosthetic aortic valves. Such an indication has significant potential to accelerate our On-X business, and based on our market research, could increase the addressable market opportunity for On-X to greater than $600 million. We will continue to invest in our Asia Pacific and Latin American sales channels, and over the next couple of years, we expect to double the number of salespeople in these regions.

Finally, before I turn the call over to Ashley for his review of the financial results, I'd like to announce a new initiative that we have begun in response to feedback that we received from our shareholders, the broader investment community, physicians and employees. That is, given the evolution of the company after the acquisition of On-X and JOTEC, we should consider rebranding the company. As such, over the next 9 to 12 months, we will be -- we will devote considerable effort to developing a new brand, with the intent of launching by the end of the year. The new brand will better represent to all of our key constituents who we are and what we do. We believe the timing of this change makes sense as we expect our pipeline to continue to deliver a series of new products that will further transform the company in the years to come.

I will now turn the call over to Ashley, who will provide further detail on the fourth quarter, full year 2019 results as well as our 2020 guidance. Ashley?

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David Ashley Lee, CryoLife, Inc. - Executive VP, COO & CFO [4]

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Thanks, Pat, and good afternoon to everyone. Total company revenues increased 3% to $69.7 million and grew 4% on a non-GAAP constant currency basis compared to the fourth quarter of 2018. For the full year, revenues increased 5% on a GAAP basis to $276.2 million and 7% on a constant currency basis compared to 2018.

Looking at the product lines, JOTEC revenues for the fourth quarter decreased 4% on a GAAP basis and increased less than 1% on a non-GAAP constant-currency basis, both compared to the fourth quarter of 2018. Excluding the OEM business, JOTEC revenues decreased less than 1% on a GAAP basis and increased 4% on a non-GAAP constant currency basis compared to the fourth quarter of 2018. For the full year, JOTEC revenues grew 3% on a GAAP basis and 9% on a constant currency basis compared to the full year of 2018.

On-X revenues for the fourth quarter increased 18% on a GAAP and non-GAAP constant currency basis, both compared to the fourth quarter of 2018. For the full year, On-X grew 12% on a GAAP and non-GAAP constant currency basis.

BioGlue revenues in the fourth quarter decreased to less than 1% on a GAAP basis and were flat on a non-GAAP constant currency basis, both compared to the fourth quarter of 2018. For the full year, BioGlue revenue increased 3% on a GAAP basis and close to 5% on a non-GAAP constant currency basis. Total tissue processing revenues for the fourth quarter increased 6% compared to the fourth quarter of 2018, and 5% for the full year. Cardiac revenues grew 12% for the fourth quarter and 15% for the full year. Vascular revenues decreased 1% for the fourth quarter and decreased 4% for the full year. But as Pat mentioned, vascular revenues increased sequentially from the third quarter to the fourth quarter, reflecting the improvement that we see in vascular tissue supply.

Gross margins were 66.8% for the fourth quarter and 66.3% for the full year of 2019. Our income tax expense for the fourth quarter reflects reserves for uncertain tax positions. On the bottom line, we reported a GAAP net loss of $681,000 or $0.02 per fully diluted share in the fourth quarter of 2019. Non-GAAP net income was $3.8 million or $0.10 per share. For the full year, GAAP net income was $1.7 million or $0.05 per fully diluted share, and non-GAAP net income was $11.7 million or $0.31 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 February 7, 2020, we had approximately $37.3 million in cash, cash equivalents and restricted securities. As of December 31, 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 4x, and our net leverage was approximately 3.4x. The interest rate on our term loan was 5.19% at the end of 2019. We can comfortably service our debt and have no additional financing needs to support our current business model.

Turning to 2020 guidance, we expect our revenue to increase between 6.3% and 8.5% on a constant currency basis in 2020 compared to 2019. Assuming an average euro-USD exchange rate of $1.10 for the full year of 2020 versus a 2019 average rate of $1.12, our full year 2020 revenue guidance is a range of $292 million and $298 million. Our full year revenue guidance assumes no contributions from BioGlue in China, U.S. PerClot or TMR handpieces. Additionally, our guidance includes a nominal contribution from NeoPatch. Excluding all TMR revenues from both 2020 and 2019, our constant currency growth rate for the full year of 2020 compared to 2019 would be between 8.7% and 10.2%.

In regards to the cadence of revenue growth in 2020, we expect that the second half of the year will be significantly better than the first half of the year due to the factors that Pat mentioned previously: expected improvement in JOTEC supply throughout the year and the launches of 3 new JOTEC products, and NEXUS. Considering these factors, we expect first quarter 2020 revenues to grow between 0.3% and 3.3% on a constant currency basis. At a euro-USD exchange rate of $1.10, revenues are expected to be in a range of $67 million to $69 million. Excluding the first quarter of 2019 TMR revenues of $1.7 million, constant currency growth for the first quarter of 2020 compared to the first quarter of 2019 would be between 3% and 6%. We expect our non-GAAP EPS to be within a range of $0.15 and $0.17, which reflects improvements in gross margins and increased investment in our OUS channels and commercial infrastructure, new product launches and increased investment in our pipeline.

If you go back 3 short years ago, we were not at commercial scale. We had about 30 employees in Europe, 1 in Asia and Latin America combined, and our only pipeline product was PerClot. Through the acquisitions of On-X and JOTEC, we are now closer to scale from a channel standpoint in Europe, and we have multiple opportunities in our pipeline that, over time, could deliver new products in multiple geographies over the coming years, but our pipeline requires investment in clinical trials. Additionally, we are still not at commercial scale in Asia Pacific and Latin America, and that takes investment as well, especially in the near term.

So with that being said, on the SG&A side, we are investing over $3 million in developing Asia Pacific and Latin American channels, infrastructure and regulatory capabilities. We expect 2021 to be an investment year, and then we'll begin to see meaningful operating leverage in these geographies. We're going to spend an additional $2-plus million to support growth in Europe, Middle East and Africa, including the launch of 3 new JOTEC products and NEXUS and other worldwide marketing efforts. Combined, the investment in SG&A in Europe, Asia Pacific and Latin America approximates $0.11 per share. Additionally, amortization expense is expected to increase about $1.6 million in 2020, primarily related to the Endospan transaction.

On the pipeline front, we will be spending an incremental $6 million or approximately $0.12 per share on our PROACT Xa clinical trial, and the spend could be more or less than $6 million, depending on the rate of enrollment in the clinical trial. Total R&D and clinical spending are estimated to be in the low $30 million range in 2020.

As for our onetime branding initiative that Pat mentioned earlier, we expect an approximate $0.03 per share impact on GAAP earnings. However, we will be excluding such amounts in our determination of non-GAAP EPS.

In regards to capital expenses, we will be investing in facility expansions in both Germany and Austin to increase manufacturing capacity for JOTEC and On-X. As a result, we anticipate that CapEx will increase from approximately $8 million in 2019 to between $13 million and $15 million in 2020. Additionally, pursuant to our agreement with Endospan, we anticipate paying $5 million to them during 2020, assuming the FDA grants them approval to begin U.S. clinical trials for NEXUS. Any expense resulting from this payment will be excluded from non-GAAP EPS as business development cost.

I want to add one; additional comment about our longer-term expectations related to operating margins. We continue to have confidence that we will achieve 20-plus percent operating margin over time. With our investment in building out Asia Pacific and Latin America and on our pipeline, particularly related to PROACT Xa, we believe we will reach an inflection point beginning late in 2021 and begin to see significant operating leverage beginning in 2022 and beyond.

I will turn the call back over to Pat for his closing comments.

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [5]

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Thanks, Ashley. So in summary, we believe we're on track, and we're delivering on our key objectives. If we look at the short-term headwinds that impacted our financial performance this quarter, none had anything to do with demand for our products. And despite the headwinds we faced in 2019, we still delivered constant currency growth of 7% year-over-year.

Entering 2020, we believe we have resolved our vascular supply issues. We're confident that JOTEC supply will improve throughout the year. In addition to the upcoming 3 JOTEC launches, we also have NEXUS as well as the commencement of enrollment in the PROACT Xa clinical trial. We also have a steady cadence of potential new product approvals over the next few years, including BioGlue China and the FDA approval of PerClot as well as PROACT Mitral, our low INR mitral valve.

We remain confident in our ability to deliver consistent high single-digit revenue growth over the next several years. Our pipeline is now beginning to unfold, and patients around the world with aortic disease will begin to benefit from our innovative new products. To that end, I would like to thank all of our employees that are continuing to turn our vision into reality.

With that, we will now open the line to questions. Operator, can you please proceed?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Jason Mills of Canaccord Genuity.

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [2]

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This is actually Cecilia on for Jason today. I was wondering, could you just walk through On-X growth drivers in Q4, what really drove the strength? And then as you're looking at 2020, just both the drivers and sustainability of growth ahead of its expanded indication. And just your expectations around commercial cadence in 2020 as well as the potential positive impact from Xa ramping awareness and then just over the near term.

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [3]

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Yes. So the first part of your question was on On-X outside the U.S. We saw -- as you know, we're direct in the U.S. and Europe, but we're primarily using distributors everywhere else in the world. And you can tend to see lumpy ordering patterns kind of quarter-to-quarter, so we like to look at it on a full year basis. So I don't think a 45% growth in OUS is a sustainable growth rate. I look at -- frankly, I look at the full year of On-X growing 12%, which I think is very strong, and that's obviously before the PROACT Xa trial started. And the -- can you repeat the second question?

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [4]

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Just the impact that Xa could have over the near term, driving awareness and interest in On-X.

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [5]

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Yes. I've been -- once the -- since this trial has been approved by the FDA, just in conversations with people who I've run into who are on Eliquis, I've been taken aback by how benign that drug is and how they basically say it has barely really any impact on their life. And in fact, one of the -- a friend of mine who needs a -- he's got an ascending aneurysm and a bicuspid aortic valve he's going to need to replace, he's probably 55 years old. And he said, if you guys had a mechanical On-X valve, and I could just keep taking Eliquis, he said, it's just -- that is a total game changer for him.

The second thing I would say is we had a -- there was a review of the clinical protocol at the recent heart surgery meeting, STS, at the end of January. So just a couple of weeks ago. And the first question from the crowd was, this is a total game changer. This is exactly what we've been waiting for. So I think it's hard to handicap what it could do. Clearly, we're not off-label promoting the product. But I will tell you that there's a ton of excitement about what the promise -- if this trial works, what it could mean for patients around the world. The fact that you could get one operation, go on Eliquis through a minimally-invasive incision, and I think have a great outcome on compared to what your other options are.

And finally, our market research shows that not only do we become the market share leader on the mechanical side, but we take significant share from bioprosthetic valves in patients under the age of 70. So again, I think this is a -- we're very excited. Ashley commented that we're spending $6 million this year on the trial, that's $0.12 of earnings. But this is a $400 million to $500 million market opportunity for the company, so I think it's money well invested.

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [6]

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That's super helpful. And then, I guess, just turning to NEXUS, if you can provide a little more insight into your initial takeaways just from the limited launch, as well as the target centers you're going to look to initially going forward and the ability to open up competitor accounts.

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [7]

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Yes. So there are no competitor accounts because no one else has the product like this. So it's actually one of the great things about the product, right? This is -- we're the only ones in town. We did a limited market release in the fourth quarter. I would say there's the typical kind of launch growing pains. We obviously have a partner that's been very good to work with, but we're also being very careful. I mentioned in my comments, this is really the last frontier of stent grafting. I mean going up into the arch and doing a single branch procedure totally through a catheter system has never been done before commercially. And this -- we're the first one, so we're obviously being very prudent and careful to ensure good patient outcomes. And what does that mean? That means we have a very rigorous training program for our surgeons. That takes time. Once a surgeon gets up and trained, then you move on to the next one.

So I think you will see a ramp. We've seen a nice, steady build of a case load of patients who are going to be treated even this quarter. So I think this is something that's actually going to kind of build as we get the training out and get cases under our belt going forward.

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Operator [8]

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The next question is from Suraj Kalia of Oppenheimer.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [9]

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Pat, let me start out with one of the comments you made on PROACT Xa, and I'll kind of reverse -- try to reverse engineer it. Cumulatively, how many On-X patients exist in the U.S.? How do you factor in existing patients with the 18-month time line for PROACT Xa enrollment?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [10]

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Yes. It's a good question, Suraj. And again, this is -- a trial like this has never been done before, right? So it's hard to answer, like what -- could this thing enroll faster? So let me give you some rough numbers. There are about 10,000 On-X aortic valve patients in the U.S. today that are in the, what you call the patient population pool that could access PROACT Xa. And this is also -- again, for others on the phone, this is a very unique trial. This is not a procedure where you're going to do the index case in the hospital. This is a drug trial for patients who have already had the On-X valve implanted that are 3 months after surgery. So that patient population is about 10,000. So we need about 10% to join the trial. From our conversations with our investigators, I think this is a very doable thing. People -- patients are very excited about this concept.

Anytime you do a clinical trial, and I've been involved in lots of them in my career, there is a ramp-in, right? You have to go through the IRB at the hospital. You've got to go through the contracting with the hospital. So that includes some of the enrollment. So it's not like when you get the IDE approved, then all of a sudden you wave a wand and everybody starts jumping in the trial. The biggest, I'd say, 6 months of that enrollment is just getting the IRBs and the contracts done. So I do think that the enrollment could go quick. And Ashley alluded to this in his comments, we're projecting -- we have an internal projection that gets you to the $6 million. That could go a lot faster. It could also go slower. So I mean, our EPS could swing, and we talked about this on previous calls, we will call out the enrollment and the spending on PROACT Xa because it has a direct -- such a meaningful impact on our EPS.

So we're positive. We have a lot of excitement. We have our investigator meeting here in March with 60 centers. And we've got centers, we expect to enroll the first patients in Q1 for the next, call it the next 2 months. So this thing's going to start taking hold. And how quickly enrolled, we'll have to see and monitor as we go.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [11]

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Got it. So Pat, JOTEC. Now that it has anniversaried, and the supply issue that has persisted, I believe, for Q2, Q3 and now Q4, obviously you guys are trying to mitigate that. I'm completely drawing a blank, Pat. Remind me, what would normalized growth rate for JOTEC have been had this supply issue not existed? So that would be one question. And the second thing is, if you keep the supply issue aside, we know that's beyond your control, what has met your expectations? What still requires work on the JOTEC side?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [12]

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Yes. I think -- so a couple of things. I would say it's actually the supply chain issues are totally in our control. And as the CEO, it's my responsibility. So it's -- there's no one else to point the finger at but me. And I've been doing this a long time. I was frankly caught off guard by it, and I don't want to get into the details around it. But at the same time, the first year we acquired the product, we acquired it in December of '17, we owned it for the first year of '18, and we grew 25% without a single supply issue. So going into 2019, supply issues were not on my list. And there was a multitude of factors that happened, some -- a lot of them related to the European MDR, but a lot of other things that, again, some in our control, some out of our control. But I can tell you, we've been working very hard as a team to put this behind us once and for all.

The biggest challenge on this is the hiring of sew-ers, and I mentioned that in the script, right? Which is it takes 3 months to get -- you've got to hire somebody, then you've got to train them. So it takes 3 months. There's a long lead time in that. And we've been hiring very quickly. The great news is we're in the process of bringing on a second source supplier that will basically eliminate any supply problems we have. So from an investor standpoint, the good news is the worst part of it is behind us. Each quarter will get better. And by the time we get to the fourth quarter, the supply issue should be gone. And as we move into 2021 with all the new products and full supply, I think we're going to be -- we're going to have a very strong 2021.

To answer your first question about -- to what could the revenue have been, that's a hard question to answer. I can tell you that JOTEC grew 25% in 2018, and it grew 10% in 2019. I'm not saying that we could have grown 25% again, but it would have been north of $10 million. And I think it probably would have been in the 15% to 20% range, particularly if we've gotten the new products. That's the other piece, right? We had the delays of the new products coming, which also hurts. But again, I think the great news for investors is we've got all the approval. We're waiting for 1 more approval, which we think we'll get this quarter. And then we've got all our approvals. And the MDR kind of door closes on May 26. We're going to have all of our approvals. And our supply chain's going to get better every quarter to the point when you get into Q4, it's gone. And we're going to be rocking and rolling with our portfolio. So again, this is -- it's a transient problem. I'm not thrilled about it, but I can tell you, we've responded very aggressively to fix this.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [13]

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Great. And finally, Pat and Ashley, as we look at FY '20, help us understand what is the level of conservatism built into guidance? And the reason I ask is, obviously, first half, slightly slower than the second half per your commentary. New product approvals, NEXUS. So we get that just in terms of cadence. But if I look at core JOTEC, if I look at core On-X, how should we look at the different levers moving up? How should we think about it from a housekeeping perspective? Any additional color would be great.

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [14]

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Yes. No, I think you look -- and this is not -- I've been doing this a long time, this is not a kind of like we just sat around and back-end loaded the plan. I mean it is real. And the real thing is, right, we -- because of the late approvals of the JOTEC products, we're not really selling any new JOTEC products in the first quarter, and we still have kind of lingering supply issues. So the first quarter is not much different than the fourth quarter. That all starts changing in Q2, right? We are now starting to build the devices for the limited market release for the new products. So all 3 new JOTEC products start the limited market release in Q2. Supply will continue to improve. We move to full market release in Q3, and we're going to have unbridled supply by Q4. So again, this -- the rollout of these products is significant. And I think that you will see the JOTEC number accelerate through Q1, Q2, Q3 and Q4, and be better every quarter. So I think that's a big piece of how this is --

The other piece I would say is, I can't remember the last time we kind of like put out a number. I mean, if you take TMR out of last year and out of this year, we're giving the guidance of 9% to 10%. We're being extremely conservative on the TMR reapproval. I don't have direct control over the FDA, and I frankly don't have direct control over my supplier. And I'm not going to risk my plan based on a reinspection that I don't have total control over. So we've taken TMR totally out of the plan. There is a chance it comes back in the second half. If it does, it will be upside. But I think the thing you should look at as an investor, it's not a strategic product line to us. It's unfortunate that this happened, but it happened. But if you look at the underlying operating performance of this business and you take it out, we're growing -- we're giving guidance of 9% to 10%. And so I don't think it's conservative.

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Operator [15]

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The next question is from Mike Matson of Needham & Company.

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David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [16]

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It's David Saxon on for Mike. I guess, first, just on PerClot, just wondering if you've seen the data. And if so, how does that look? And then just on the commercial strategy, what's your plan on selling it just given that it's going to touch a lot of other call points than your current sales force currently covers?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [17]

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Yes. So basically, the trial has enrolled, and it met its primary endpoint. And we feel very confident from the -- both the safety and the efficacy data that came out of that trial, that we should receive an FDA approval. So we're actually very confident in that.

Your second part of your question is something we've talked about previously on these calls, which is you're correct, PerClot, as Ashley mentioned earlier, we had one product in our R&D pipeline when I joined the company, and it was PerClot. And obviously, we've since dramatically changed the strategy of the company to be an aortic company and we've done the acquisitions of On-X and JOTEC and the partnership with NEXUS with the arch device we just talked about. So this is obviously a very different company.

At the same time, we've invested, and as a responsibility to shareholders we've invested a lot of money in PerClot. And it's also a $200 million market at 80% gross margin that's growing 15%. So it's attractive. Our sales forces around the world call on heart and vascular surgeons; that represents about 20% of the opportunity for PerClot, which obviously is not going to maximize our investment. So we are exploring options of who we can partner with. We could either sell it ourselves. We could partner with somebody else. We could do a flat-out transaction, and we're exploring all those different options. I will tell you that I -- my goal is to get the best return for our shareholders in the process of doing that, and I do think having an FDA-approved PMA product in a market of that size at that margin will provide -- will be an interesting opportunity for some companies.

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David Joshua Saxon, Needham & Company, LLC, Research Division - Associate [18]

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Okay. And then just on the TMR handpiece. Can you quantify the impact to the fourth quarter? And then just going forward, given that it isn't really a strategic product, have you considered just exiting that?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [19]

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Yes. It's a good question. I don't know if Ashley, you can comment on the actual number for the fourth quarter, but we actually had this conversation with the Board, which is, again, it's not a strategic product. Ideally, you'd want to divest it and actually get some money for it. And that's what we may well do. But at the same time, right now, we're in the process of trying to get the product back on the market and then we'll explore the options going forward. But again, I think, for an investor to look at our -- what is CryoLife about, we're an aortic company. This is a product that was, again, a legacy product that was here that's not strategic, not growing. It's very profitable, which is the unfortunate part of it. So we'll just have to be thoughtful when we -- as we move forward. But we took it out of 2020 because of -- we got burned on regulatory approvals in 2019, so I'd say we're being very conservative on that. But we'll see how this thing unfolds throughout the year.

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David Ashley Lee, CryoLife, Inc. - Executive VP, COO & CFO [20]

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In regards to the handpieces in the fourth quarter, we did not have any that we were able to sell, and that impacted TMR revenue by approximately $1.2 million to $1.4 million in the quarter.

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Operator [21]

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The next question is from Jeffrey Cohen of Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [22]

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I wanted to go back to the some of the JOTEC questions from Suraj earlier. So as far as the second-source devices and supply toward the back half of the year, is that -- are the 2 sites going to work in kind of parallel or series? Do you expect the different devices will be in different locations?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [23]

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Yes. So the -- I don't want to get too much into the detail of a second source. It's probably not appropriate. But I mean, the big thing we're talking about is sewing. We're not really talking about -- and frankly, in other places, other people in the field do the same thing. So this is not anything new, it's really around sewing. And we're going to look at our portfolio, and we may have them produce one product for us, which will free up tons of capacity for the German facility. So this -- both facilities will be sewing. We're going to continue to sew in our facility in Germany. This is just going to be adding another supplier that will sell for us, and they already do this for other companies in the stent graft. So I think it's a very low risk and a really nice option for us.

And frankly, like I said, when we move into Q4, assuming we get all these approvals of the second supplier, we will leave this year with ability to supply. And the other thing I would ask you to think about, not only on the JOTEC side, will we have -- go from no new product revenue from JOTEC in Q1, limited market release with improving supply in Q2, full market release with improving supply in Q3, and then full stride in Q4 with full supply, but we're also then going to start hitting all of our international approvals with full supply. So Latin America, Asia Pacific. So as we move into Q4 and actually into kind of '21, I think we're going to see -- this is a great portfolio. And again, it got -- everything got moved back 6 months because of this approval delay. So I'm extremely bullish on what this portfolio's going to do going forward.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [24]

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Yes. Okay. And then with the new products coming out, what have you done already? And what's still to be done as far as the commercial readiness, particularly of the sales force in Europe?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [25]

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Yes, so the sales force, I was at our -- we do a European kickoff sales meeting every year in early January. I was at the meeting, and the whole meeting was dedicated to training. We've got about 95 reps, and we're hiring. We'll probably be at 100 reps by the end of the year. That team has been fully trained. They are kind of chomping at the bit to get the products. And as I mentioned a second ago, Q2, we'll start the limited market release, so it's not far away. They're trained. We need to train their customers. We need to kind of do the first cases. Start building the inventory to support the launch. And as that JOTEC supply improves each quarter, we will continue to get more prime in the pump with devices out there. So I mean, I think the sales side is ready to go. We're just waiting on product.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [26]

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Okay, got it. And then lastly, a quick one for me. Have you seen anything risk-related on the flu side of things in any territories? Potentially, does that take away some of the regular procedures being done in some institutions?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [27]

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We -- I mean, it's like a good news/bad news. I mean we do not have a lot of business in China. It's been most kind of profound in China where there's -- people have been staying home and not going out, not going out of their houses. I think we did around $1 million in China, I mean, roughly last year. We're very bullish on China going forward. I think the 2 impacts -- I mean, I don't think it's going to be a big impact for CryoLife from a revenue standpoint. I think the biggest potential impact is BioGlue China. We specifically had our panel meeting for BioGlue scheduled for -- in the next 30 days, and that's now been postponed because of the coronavirus. So that's where I think we might feel the pain is. I don't know what -- nobody knows how this thing's going to unfold going forward. But if this thing continues to linger, and people aren't going into the offices, I mean, does that push back our approval for BioGlue China? Which is not, by the way -- there's no revenue in 2020 for BioGlue China, so it's not a 2020 risk. It's just a, do we get it later in '21 because of this?

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [28]

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Got it. Okay. So okay, great. And we'll hear more about the rebrand, and I'm glad you're focusing on the top line.

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Operator [29]

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The next question is from Brooks O'Neil of Lake Street Capital Markets.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [30]

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So a lot of details, a lot of moving parts. I was hoping you could kind of summarize where you think the company is heading and sort of what the profile will look like. And maybe give us a sense for when you think you're going to get there in terms of what are the core businesses, what's sort of the top line revenue, what's the top line growth rate, what's the gross margin, what's the earning power of this business as you realize your vision for what this company can become?

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [31]

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Yes. I think -- look, I think Ashley touched on it a little bit. I think it was put into context, right? So I started here 5 years ago. We had one product in our pipeline, and we had one person in Asia Pacific and Latin America. The company has doubled in the last 5 years. Our gross margin's gone up 700, 800 basis points. We are creating a company with our eyes set on creating a $1 billion company. Our guidance puts you at like $297 million, $298 million this year.

We have a pipeline now that has 10 robust products in the pipeline. We're now spending $30 million in R&D. We have a big increase because of PROACT Xa, which is going to take some EPS. But the great news is we're one of the very few companies of this size that's actually profitable. So shareholders don't have to go out and worry about us doing a capital raise because we don't have enough money to pay for our pipeline.

We're also investing in Asia Pacific and Latin America because we have huge opportunity to take our existing products like On-X, like JOTEC, like BioGlue to Asia and Latin America. That's never been done because we never had anybody there. That takes resources. We're building that infrastructure. So I think those are the 2 biggest things that we want our shareholders to understand, is that we're building a company. We're not at scale. We're investing in the pipeline, and we're investing in the channels. And the way that operating leverage drops through is as you get to scale with your channel, and then the pipeline starts spitting products out, you don't need to hire new reps, right?

So we've talked, and Ashley talked about it in his comments, we have a goal in the late, call it, '24 -- kind of 2023, '24, we're going to be moving towards a 20% operating margin, but we're going to be investing in the pipeline in the channels between now and then. And the whole purpose behind that is to drive top line revenue growth. The greatest value creation for a small cap medical device company is revenue growth and margin expansion. We're going to give you 1 point of margin expansion this year, and we're going to look to move our high single digits to get into the double-digit range, as our pipeline and our channels expand. So that's the simple story.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [32]

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That is perfect, Pat, and I think it's a great vision.

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Operator [33]

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The next question is from Joe Munda of First Analysis.

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Joseph P. Munda, First Analysis Securities Corporation, Research Division - VP [34]

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A lot of my questions have been answered, but 2 real quick questions. You talked about the OUS infrastructure build-out in your guidance as well as you touched a little bit there on R&D. I mean, can you give us a sense of what you're doing OUS as far as infrastructure is concerned and spend that you're forecasting out? As well as on the R&D line, the bump up in R&D spend. Maybe you can walk us through a little bit of the moving pieces. You've got a couple of trials done here. But really, where the incremental sort of spend is occurring as well as the new products you're launching or plan to launch.

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [35]

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Yes. So again, you can imagine, right? So I'll talk to the investment in Asia Pacific and Latin America. I mean we had 1 person in Asia. We've now got a team of probably about 15 or 18 in Asia. We're going to be adding more in that region this year. Salespeople, you also have to add the back office support. We've partnered -- we're not being heavy on the back office side, we're much more skewed to kind of the sales and marketing, commercial. But really, the real investment in Asia Pacific and Latin America is around the feet on the street, the educational programs, and just getting out in front of customers, and also the regulatory approvals, right? So if you think about it, we've got tons of approvals of existing products just moving them into the market. So -- and we think these are the seeds we're planting, that we expect that our Asia Pacific and Latin America regions will be significant contributors to popping up our growth rate. They had decent years this year, and I think as we invest in those channels, they will continue to be providers of accelerating our growth rate.

As it relates to R&D, I mean, the biggest change in the R&D was PROACT Xa, and that's $0.12 of EPS. It's a $6 million delta from -- for 2020. The rest of the pipeline, there's moving parts underneath, but we've got 10 products in our pipeline, right, and they're all advancing. We're working on bringing the -- part of the JOTEC portfolio to the U.S., we're going to be -- we finished the enrollment of the PROACT mitral trial. We've got lots of other things in the works, but that increment in R&D is really highly correlated to the PROACT Xa trial.

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Operator [36]

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

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James Patrick Mackin, CryoLife, Inc. - Chairman, President & CEO [37]

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Great. And look, thanks for participating in the call. And hopefully, you can hear it in my voice that we're very excited about what's in front of us. I'm not thrilled about the JOTEC supply or the TMR handpiece, but those are transient issues. I look at kind of what we have going into 2020 through the 4 quarters. I mean, our vascular tissue is back. The supply is back there. We've got E-nya approved. We'll be launching the LMR in Q2. We got E-nside approved. We'll be doing the LMR in Q2. PROACT Xa trial is approved and we're going to start enrollment.

We didn't even talk about the Misonix NeoPatch deal, where we got minimal revenue this year, but I think that's a nice opportunity. NEXUS is moving into full market release in this quarter. We should get E-vita OPEN NEO, our last of the new JOTEC products, approved this quarter, and we'll announce that when it's ready. And throughout the year, we think JOTEC supply will improve to the point where in Q4, it's no longer an issue. And we talked about taking out our TMR handpiece revenue for the full year because we're being very conservative on it. And our guidance without it, if you take it out of last year and this year, is 9% to 10%.

So I think that's a pretty good target for this company. We are investing in our channels, we're investing in our pipeline, and we're investing in building a company. We're also going to be looking at a rebranding initiative because we don't feel that the current brand represents what we do given all the changes we've been through.

So we're very excited about the future, and we look forward to giving you updates on our progress throughout the year. Thanks for attending.

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Operator [38]

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