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Edited Transcript of CRY earnings conference call or presentation 30-Jul-19 8:30pm GMT

Q2 2019 CryoLife Inc Earnings Call

KENNESAW Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of CryoLife Inc earnings conference call or presentation Tuesday, July 30, 2019 at 8:30:00pm 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

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Conference Call Participants

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* David Kenneth Rescott

Canaccord Genuity Corp., Research Division - Associate

* Jeffrey Scott Cohen

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

* Joseph P. Munda

First Analysis Corporation - VP

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

* Suraj Kalia

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Gregory Peter Chodaczek

Gilmartin Group LLC - MD

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Presentation

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Operator [1]

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Greetings. Welcome to the CryoLife's Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note, this conference is being recorded.

At this time, I'll turn the conference over to Greg Chodaczek from the Gilmartin Group. Thank you. You may now begin.

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Gregory Peter Chodaczek, Gilmartin Group LLC - MD [2]

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Thank you, operator. Good afternoon. This is Gregory Chodaczek from the Gilmartin Group. Thanks for joining the call today. Joining me today from CryoLife's management team are Pat MacKin, CEO; and Ashley Lee, CFO.

Before we begin, I'd like to make the following statements to comply with the safe harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today.

Now I'd like to turn it over to CryoLife's CEO, Pat MacKin. Pat?

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

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Thanks, Greg, and good afternoon, everyone, and thank you for joining us. Our second quarter delivered in line results despite unexpected headwinds that impacted the quarter. We demonstrated, once again, our differentiated portfolio can drive consistent results even while facing short-term challenges. In the quarter, we simultaneously produced solid organic revenue growth and made further progress towards a number of our key development objectives. Those of you who have been following the company know that in the second half of 2019, we expected to launch 3 next-generation JOTEC products along with continued progress on other pipeline opportunities. I'm pleased to report execution on our strategy and delivery of our 2019 objectives is still on track.

Turning to our second quarter performance. Total revenue for the second quarter was $71.1 million, reflecting 4% on a GAAP basis and 7% on a non-GAAP constant currency basis as compared to the second quarter of 2018. This strong consistent growth is delivered primarily by BioGlue, On-X and JOTEC product lines. JOTEC grew 8% on a non-GAAP constant currency basis relative to the second quarter of 2018, driven by increased penetration in our international markets.

During the second quarter, our primary sterilization partner experienced a failure of one of its sterilization lines that caused us to lose product. Excluding the loss of revenues stemming from this situation, our JOTEC growth rate would have been approximately 11% on a non-GAAP constant currency basis. Looking forward, we expect the growth trends for our JOTEC products to continue driven by the platform's differentiation as well as the introduction of 3 new next-generation products into key European markets by the end of this year.

Turning to On-X. Revenue increased 5% on a non-GAAP constant currency basis as compared to the second quarter of 2018, with non-GAAP constant currency revenues in North America growing 6%. Despite a softer-than-expected growth in the second quarter, we expect On-X revenue growth to remain solid as we continue to take market share from our competitors, given On-X's superior design and FDA label.

BioGlue -- both BioGlue and tissue businesses continue to deliver solid results. BioGlue increased 7% on a non-GAAP constant currency basis as our direct sales team and distributors in Europe and Asia Pacific continue to demonstrate the strength, effectiveness and economic advantages of our surgical adhesive in these markets. During the second quarter, our tissue business was up 4% on a non-GAAP constant currency basis led by another strong quarter in our cardiac tissue valve business.

Before turning the call over to Ashley, who will review our second quarter financial performance, I would like to discuss some business highlights as well as near-term and long-term growth catalysts.

Starting with JOTEC. We remain on track to introduce 3 JOTEC products into our European markets in 2019. In the first quarter of 2019, we submitted our next-generation thoracic stent graft and the first-ever off-the-shelf branched thoracoabdominal device for CE mark. Based on typical time frames, we would anticipate receiving CE mark for these products in the third quarter of 2019. As a reminder, our next-generation branched thoracoabdominal device, which is named E-nside, will be the first time a branched stent graft will be available off the shelf, eliminating days of waiting for a patient-specific device custom graft to be built.

Further, next month, we will submit our next-generation Frozen Elephant Trunk, called E-vita Open Neo, for regulatory approval and expect to receive CE mark by the end of the year. As the next driver of long-term growth for our best-in-class On-X mechanical valve, we're currently working with the FDA to finalize the design of our PROACT 10A trial. And we hope to receive an approved IND from the FDA in the third quarter. We continue to be very excited about this trial as we expect it to demonstrate that the unique design and technology of our On-X mechanical aortic valve will allow patients to use Eliquis versus using Coumadin and having to go to the doctor to monitor -- and eliminates going to the doctor to monitor and manage their post-procedure INR levels. As you know, such an indication would be a substantial benefit to patients and we believe could accelerate growth in our On-X business.

Moving to BioGlue. Our application for BioGlue was submitted for the regulatory approval to the Chinese FDA earlier this year. Regarding our PerClot product, enrollment in our U.S. PerClot trial is complete, and we remain on track to submit a PMA to the FDA in early 2020.

Turning to our tissue business. As previously mentioned, we continue to experience strong demand for our pulmonary tissue valves, which we believe stems from recent long-term performance data. Adding to these positive data were results from Dr. Paul Stelzer's Ross study, which presented -- which was presented in early May at the AATS meeting in Toronto. In this retrospective review of 213 patients who underwent the Ross procedure over a 20-year period, the demonstrated -- the data demonstrated survival at 10 and 20 years of 89% and 71%, respectively, as well as freedom from reoperation for Ross failure at 10 and 20 years that was 92% and 85%, respectively. For those who are not familiar with the Ross procedure, it's a double-valve procedure where the pulmonary allograft is used to replace the patient's native pulmonary valve, which has been moved to the aortic position.

Finally, we continue to make good progress in the expansion of our sales operations in Asia Pacific and Latin America. The recent additions of our 2 commercial leaders have already impacted sales penetration in these areas, capitalizing on our portfolio's competitive strengths as well as cross-selling opportunities. Over the next several quarters, we remain on track to expand our commercial teams in Asia Pacific and Latin America as we migrate toward direct sales in selected territories. The experience we gained through our shift to direct sales from distribution partners in Europe has helped us implement a smoother direct process in Latin America and Asia Pacific.

I will now turn the call over to Ashley for a detailed review of our second quarter results and our financial outlook. Ashley?

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

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Thanks, Pat, and good afternoon, everyone. Total company revenues increased 4% to $71.1 million and grew 7% on a non-GAAP constant currency basis compared to the second quarter of 2018. We saw year-over-year revenue increases across all 4 of our major product lines. As Pat mentioned, we lost a very large JOTEC production run during the quarter that would have generated approximately $500,000 in additional revenue, which would have resulted in reported revenue growth of approximately 5% and non-GAAP constant currency growth of approximately 7%. Recall that we posted strong revenue growth in the second quarter of 2018, which has created our toughest quarterly year-over-year revenue comp.

Looking at individual product lines. JOTEC revenues for the second quarter were flat and increased 8% on a non-GAAP constant currency basis, both compared to the second quarter of 2018. This large difference in reported versus constant currency growth rates is due primarily to the year-over-year weakness in the euro versus the U.S. dollar. Considering the impact of the lost production run, reported JOTEC revenue growth would have been approximately 5% and non-GAAP constant currency growth would have been approximately 11%.

On-X revenues for the second quarter increased 4% on a GAAP basis and 5% on a constant currency basis, both compared to the second quarter of 2018. BioGlue revenues in the second quarter increased 5% on a GAAP basis and 7% on a constant currency basis, both compared to the second quarter of 2018.

Revenues were particularly strong in international markets where we experienced a 20% year-over-year increase in revenues on a constant currency basis. We saw growth in every OUS geography during the quarter. The growth has been augmented by the expansion of our direct strategy.

Total tissue processing revenues for the second quarter increased by 4% compared to the second quarter of 2018. During the second quarter, cardiac tissue processing revenues increased 16% and vascular tissue processing revenues decreased 7% year-over-year.

Cardiac tissue processing revenues were favorably affected by recently published long-term performance data of our tissue valves and a renaissance in the Ross procedure. Vascular tissue processing revenues decreased primarily due to a temporary shortage of long-segment vein grafts to meet our existing demand and a decrease in average sales prices resulting from competitive pressures. However, as we mentioned during our last conference call, the initiatives that we implemented during the second quarter to increase near-term supply are in place, and we expect vascular revenues to be favorably affected going forward.

Our gross margins were 66% for the second quarter. Gross margins were about 40 basis points higher in Q2 versus Q1, and we expect that margins will continue to improve over the balance of this year. Our income tax expense was favorably affected in the second quarter by excess tax benefits associated with stock compensation. Excluding those benefits, our effective tax rate would have been in the low 20% range. On the bottom line, we reported GAAP net income of approximately $2.8 million or $0.07 per fully diluted share in the second quarter of 2019. Non-GAAP net income was $4.1 million or $0.11 per share. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results.

As of July 26, 2019, we had approximately $44 million in cash, cash equivalents and restricted securities. We had approximately $222 million outstanding under our term loan B. And based on our credit documents, our current gross leverage stood at approximately 4.2x and our net leverage was approximately 3.5x. We expect our net leverage to be around 3x adjusted EBITDA by the end of the year.

Our aggregate interest rate on our term loan was 5.58% at the end of the second quarter. We can comfortably service our debt and have no financing needs to support our current business model. We are maintaining our full year 2019 financial guidance, and we expect third quarter revenues between $67.5 million and $68.5 million. Our third quarter revenue guidance reflects temporary supply issues with the JOTEC product line and the impact of currency on our business.

Regarding JOTEC supply, quantities to support the transitioning and initial stocking of the enhanced distributor networks in Asia Pacific and Latin America, quantities needed to support consignment in our direct markets and the units to support testing for next-generation product line introductions in various worldwide trials supporting new approvals have created temporary supply issues with our JOTEC product line. We expect supply of JOTEC products to increase beginning in the third and fourth quarters. Despite these factors, our third quarter guidance reflects growth of between 5% and 6.5% on a constant currency basis, and our constant currency growth for the full year is still expected to be between 8% and 9%, which is consistent with our previous comments of delivering high single-digit growth.

That concludes my comments, and I'll turn it back over to Pat.

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

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Thanks, Ashley. So as you've heard today, we're making great progress advancing on our key objectives. We expect to launch 3 of our next-generation JOTEC products over the next 2 quarters. We filed our BioGlue application for regulatory approval in China. We expect to start the PROACT 10A trial in the third quarter, and we anticipate submitting our PerClot obligation to the FDA in early 2020.

We believe we have the pieces in place to drive consistent growth and take the company to the next level. That is why I can say with confidence, our best days are still ahead.

I'd also like to thank all of our employees who've helped make the second quarter a success. Your important work not only benefits the company but the many people and families around the world.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

First question comes from the line of Jason Mills with Canaccord Genuity.

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David Kenneth Rescott, Canaccord Genuity Corp., Research Division - Associate [2]

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Pat, actually, this is David Rescott on for Jason. Can you hear me all right?

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

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Yes. We can hear you fine, David.

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David Kenneth Rescott, Canaccord Genuity Corp., Research Division - Associate [4]

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So firstly, I wanted to start on 2 questions, maybe on JOTEC. So looking forward, could you provide some color on kind of where you think the JOTEC product rollouts in Europe look going forward? Kind of how we should think about the commercialization process for those? And as kind of the second part to that one, where do you think will you kind of see any type of acceleration coming from either the U.S. or European rollout? And really, just trying to get a better sense of how we're thinking about or how you guys are thinking about setting up commercialization ahead of the rollout.

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

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Yes, so -- I mean, a couple of things. Number one, we said from the beginning that with the CE mark applications, that we've added a little bit extra time, and we've always contemplated, and we talked earlier on in the year about the first 2 submissions: the thoracic stent graft, E-nya; and the branched thoracoabdominal graft, E-nside, that we expected kind of a Q3 approval, and we still feel like that's on track. Obviously, we're in the early days of Q3, but we feel like we're going to get that, both of those devices approved in Q3. The third device, which is the E-vita Open Neo, which is our Frozen Elephant Trunk device, we will be submitting that in the next week, and we expect to get that approval in the fourth quarter.

So I mean, we will obviously -- as those products get approved, we'll be -- and that's one of the reasons you see kind of an acceleration in the second half because we think those products will meaningfully add to the top line. I think probably the most important message around that is, I mean, we're extremely bullish, and we had kind of a softer growth rate around 8% constant currency, but it was all -- frankly, we talked -- we had a sterilization problem in the quarter, and we've got some supply challenges in the near term, but I'm extremely bullish on the JOTEC product line, particularly with these 3 launches coming up.

I think it's like 60-plus percent of our portfolio is getting upgraded. So we expect to see improved performance in the second half. And as the supply kind of loosens up and becomes more prevalent, we certainly expect to see better growth rates of JOTEC exiting '19, but we think '20 is going to be a very nice year for all those products in Europe.

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David Kenneth Rescott, Canaccord Genuity Corp., Research Division - Associate [6]

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Okay. Then maybe the second one, talking about margins, I guess, for the second half of this year and maybe looking into next year. I guess could you go into detail of some of what kind of the initiatives you have in place as far as what's kind of boost margins, whether it would be product mix, structural changes, some levers in the product launches or the OUS direct sales force transition? If you could provide some detail around that, that would be great.

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David Ashley Lee, CryoLife, Inc. - Executive VP, COO & CFO [7]

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Yes. David, we've touched on a couple of these in previous calls, but there are several things that are going on within the company that we think are going to result in gross margin improvement over the next several years. First and foremost, one of the things that we started to focus on this year is just cost-down initiatives. It was just a discipline that -- as a small organization, that we had not previously had. And with the enhancement of our management team and some of the new ops people that we've brought in, it's a focus of the organization now. So we think that just cost down is going to help to drive margins higher this year and over the next 3 to 5 years.

In addition to that, there are some things that are going to help enhance margins, both nearer term and long term. The initiatives that we have going on around the world where we are going direct in certain markets, and we've talked about some of those previously, just after the JOTEC acquisition, taking both company's product lines direct in markets where we weren't currently direct in Europe. We are taking the former CryoLife product lines of On-X and BioGlue direct in Brazil. And that initiative has really just kicked off in the second quarter of this year.

Another thing that we're working on is enhancing our distributor networks, both in Asia Pacific and Latin America. And by doing that, we're optimizing our distributor networks, that's allowing us to capture margin as well. And then the last thing, a little bit longer term, as On-X continues to grow and as we look more into the future with getting the JOTEC product line in the U.S., we think that those are both going to be margin-expanding opportunities for the company in the future.

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Operator [8]

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Next question is from the line of Mike Matson with Needham & Company.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [9]

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I just wanted to start with On-X. So the growth was a little slower there. And I didn't hear a lot of commentary, maybe I missed it, but [going down] the reasons for that. I've heard a lot on, kind of, JOTEC. I understand what's going on there, but just curious what happened with On-X.

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

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

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [11]

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Okay. Just to clarify, when you say pushing tissue valves, you mean SAVR or TAVR in the younger patients?

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

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TAVR, which again is...

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [13]

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TAVR.

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

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Yes, which again is -- yes, and it's part of this -- to me, this is just something that -- with the recent PARTNER III data that came out. I don't think people ask us, "Is TAVR having an influence on your mechanical valves?" And I think that's a very far reach. If one looks at the trial, less than 7% of the patients were under 65 years old. So this was a trial that was 65- to 80-year-old patients, and the average was 74. So I think that the thought of putting a TAVR in a patient that's under 65 years old is not well supported in the clinical community. That -- what we have heard is some people saying, particularly cardiologists saying, "Well, put a SAVR tissue valve in, and then we'll give him a TAVR valve later."

And again, I think that if patients were informed with the data, that's not something that they would accept. There's extensive literature about inferior performance of tissue valves in patients under 65. It's well documented. They have more structural valve deterioration leading to reoperation. There's an increase in mortality. So again, I think this -- the tissue in younger patients has already been proven out. In fact, the kind of the most eye-opening data that I heard kind of this quarter from a surgeon meeting was, the mean time to a bioprosthetic failure in the valve and valve registry was 8 to 10 years, and that was in 77-year-olds. So you can imagine, if you start putting tissue valves in younger patients, what's going to happen there.

So again, I think we feel very strongly that On-X in the under-65 patient population with a lower INR is a great solution, and even better is the PROACT 10A trial, which, as I commented in the script, we're looking at bringing out in the -- we will, hopefully, get it approved in the third quarter. So we feel like we have a great solution for this patient population. I think that the PARTNER data was great for patients at 75 years old. By the way, it was 1-year data. So again, I think for a certain patient population it makes sense. I think the other thing people got to remember is, there are now bicuspid valves in those trials and that's the majority of patients who are under the age of 65. So I think there's a lot of reasons why TAVR is not coming into our kind of turf. It's more kind of them trying to bring tissue in, and that's not a kind of a bright strategy given the data.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [15]

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Okay. That was super helpful. And then just a couple on BioGlue. So curious, any updates or any visibility at all on the Chinese timing? And then also, there was really strong outside U.S., 8% I think, growth constant currency. So is that cross-selling or just more feet on the street? Or what's going on with that?

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [16]

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Yes -- no. So on BioGlue China, I mean it's a little bit of a black box, to be honest with you. I mean we looked at the approval time lines of other PMA-like products in China, and it's 1 to 2 years. From the feedback we've gotten from our partners on the ground in China, we should be hearing back probably in Q4 kind of the initial feedback, what kind of questions we're going to get, and if and when we're going to go to panel. So as we get more color from that feedback, we'll certainly share on a future call kind of what the status is, but we don't really have anything new at this point.

As far as international BioGlue growth, the majority of our sales outside of kind of U.S. and Europe, which are our heavy direct markets, it's all through distributors. So I mean, this is not uncommon to see kind of lumpy buying patterns where you have a big quarter one quarter and then a little softer the next, where the distributor may stock up or unwind. It doesn't necessarily tie into your kind of 90-day reporting quarter. So we obviously had a good quarter with BioGlue internationally. But again, that can be somewhat lumpy throughout the year.

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Operator [17]

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The next question is from the line of Jeffrey Cohen with Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [18]

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So 2 questions, if I may. So firstly is just, does it feel to you like your reps are getting more efficient or were more efficient for the quarter? Was that as a result of some of the activities in Europe or any specific call-outs on that front? Looks like they did more with less.

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

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Yes. I mean I think the one thing we're very excited about -- I mentioned this earlier. I mean over the last few years, we have significantly strengthened our channel in Europe. I think we're sitting at roughly 85 reps in Europe right now. We are on the heels of, basically, a total revamping of the JOTEC portfolio, which we think is going to provide meaningful growth, particularly in '20. I mean as many of you know who are in this field, you get the approval, you got to get your launches and all these kind of things. You got to get your consignment inventory out and train your reps and train your customers.

So it takes a little bit to get up and going, but we're very excited, particularly in this new regulatory environment in Europe where this transition to the -- from the medical device directive to the medical device regulation, which is going to basically close the door on a lot of people getting approvals without premarket clinical data. So we feel like we're going to have a world-class thoracic aorta portfolio with a really strong channel to kind of end this year and to kick off '20. So I think that, that channel is very well prepared to accelerate growth.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [20]

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Okay. Got it. And then could you talk a bit more about this production run and this $0.5 million? I'm just trying to get a better understanding of...

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [21]

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Yes. It was just -- yes, there's 2 things that are going on, on the JOTEC front, right? The first one is, frankly, just a mistake. I mean we have a -- like many companies, we have a partner that does our sterilization. They basically sterilized a lot of about $0.5 million worth of product twice. So they kind of cooked it twice, which means you've ruined the product. That hurt us to the tune of about $0.5 million, as Ashley commented in his remarks. The second thing that's going on is JOTEC was primarily a -- it was a European -- German-based, European-focused company that sold to distributors outside of Europe. And we've put in some very strong commercial leaders in Asia Pacific and Latin America.

And we're bringing on new -- as you heard in the comments, we're bringing on new distributors. We're hiring direct people. And to bring in the inventories to cover cases, launch products, launch distributors, we're just kind of at max capacity at JOTEC right now. So it's just -- it's not something you can just kind of wave a wand and all of a sudden, you can just spit out as many more units as you want. It takes some time to get the people trained and get them up and running. So we're a bit manufacturing-constrained right now. And that is our biggest kind of -- slowing down our third quarter a little bit, but as I said, we will rectify this. It will get better into Q4. And as we get these launches coming up, I think we're going to hit into 2020 kind of in full stride.

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

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And then what about the footprint there, Pat? I know that previously, I think the facility was 50% or 60% or 70% capacity with 2 runs, and there's some availability to construct another structure. What's the story there? And how is that kind of...

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

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

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

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Okay. And your sole sourced now as far as the sterilization on that front?

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

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Yes. I mean we use lots of different sterilizers around the world for different products. So I won't say we're -- for -- I'd have to check specifically for JOTEC, but we've addressed the issue.

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Operator [26]

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(Operator Instructions)

The next question is from the line of Kalia, Suraj with Northland Securities.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [27]

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Can you hear me all right?

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [28]

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Yes. It's kind of a scratchy connection. We can hear you.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [29]

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

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [30]

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

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [31]

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

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [32]

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Yes. You're actually dead wrong. This is a big confusion. Low risk does not mean young age. I mean it was a kind of a tricky way to do this, but I mean less than 7% of the patients in PARTNER III were under the age of 65. So this trial was predominantly -- 93% of the patients in this trial were 65 to 80, right? The average age of PARTNER III is 74, right? There is 0 durability study of a patient at the age of under 65 with TAVR. So I mean I'm not to say that it won't happen, but again, I think that the data out there does not support it. In fact, the surgeon KOLs I talked to basically feel like TAVR is not indicated in patients under 65.

There's a couple of reasons for it. Number one, there's no long-term performance data with how does that tissue valve work in an under-65-year-old because we know prosthetic valves don't work in under-65-year-olds very long. The second is the majority of the patients under 65 have a bicuspid valve, and bicuspid valves were not studied in PARTNER III. So you can talk about age creep, but they didn't study bicuspid valves, which is the majority of the issue for patients under 65, right? And then you get into the whole tissue -- tissue doesn't last in kind of under-65-year-olds to begin with.

Now you're going to put a TAVR with tissue inside. I think this data out of the valve and valve registry that I commented on earlier, the mean time to failure for the bioprosthetic valves in that valve and valve registry was 8 to 10 years in 77-year-olds. So what's the failure rate going to be patients under 65? So again -- look, people are going to do what they're going to do, but I think at the end of the day, the reason patients don't like mechanical valves is because they don't like taking Coumadin. And with the On-X valves today, you can take half the amount of Coumadin and still get a mechanical valve, which is way better than what our competitors do.

And the second piece is PROACT 10A, we hope to start enrolling that trail this year. And that's a total game-changer for patients under 65. It's going to get down to the question, do you want one valve for life or do you want a life full of valves?

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Operator [33]

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Our next question is coming from the line of Joe Munda with First Analysis.

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

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Can you hear me okay?

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David Ashley Lee, CryoLife, Inc. - Executive VP, COO & CFO [35]

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Yes.

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [36]

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Yes. We can hear you fine.

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Joseph P. Munda, First Analysis Corporation - VP [37]

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

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [38]

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

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Joseph P. Munda, First Analysis Corporation - VP [39]

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

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [40]

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Yes. Well, I think there's a couple of things. I mean one, currency has been a big issue for us this year, I mean, there's no question. So our constant currency On-X growth was in the kind of the 8% range. We did some market checks on key accounts in the U.S. as well as overseas accounts. And I said the only noise we heard was some noise around the kind of the -- this kind of move to tissue to setup for TAVR. That being said, I mean, I think that the PROACT 10A trial is a total game-changer in the field. So it's not like we're kind of standing still.

We think that a one valve for -- again, we're talking about -- we're not talking about -- we're talking patients under the age of 65. For that patient population, the idea of getting multiple valve operations over a lifetime doesn't make a lot of sense for the patient or the payer. So if you can have a more benign anticoagulant like Eliquis, we think it would really change the landscape of the On-X valves in the aortic position in patients under 65. So it's not like we're just sitting still and going to have to deal with the kind of the PARTNER III, and we've got a very unique clinical trial kind of coming this quarter.

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Joseph P. Munda, First Analysis Corporation - VP [41]

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

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [42]

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Well, I think they are tied together. I mean this is been a real issue and we've made significant improvements in that area, and we expect our vascular tissue to be much stronger in the second half, as we commented kind of last quarter. But it's -- the 2 kind of trigger each other, right? So we can't cover a long saphenous vein case because we don't have product. And then they call the competitor and the competitor drops price. So we've kind of let him into our accounts. And so by eliminating the supply problem, we eliminate the competitive problem. So I think we're -- the CryoLife brand is extremely strong. We've been doing this for 30 years. If we get our field the full supply of saphenous vein, we'll eliminate this issue.

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Operator [43]

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Mr. MacKin, there are no further questions at this time. I'll turn the floor back over to management for closing comments.

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James Patrick MacKin, CryoLife, Inc. - Chairman, President & CEO [44]

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Good. Well, thanks, again, for joining the call. And I think one of the points I would -- we set out our number for Q2 and actually beat the top line and the bottom line even in the face of the currency challenges. So I'm proud of our team for delivering on that.

The second thing is we've got a lot coming in the back half. We've talked about -- we expect to get the PROACT 10A trial approved in Q3. We expect to get our next-generation thoracic stent graft, our next-generation thoracoabdominal stent graft approval in Q3. We've got our E-vita Open Neo, our next-generation Frozen Elephant Trunk, that should get approved in Q4. Our JOTEC supply and our vascular tissue supply should both be improving in the second half.

So again, we feel like as we work through this kind of JOTEC supply issue in Q3 that Q4 will be strong, and we'll be heading into a really strong '20 because then we've got kind of BioGlue China and PerClot in the U.S. hitting. So we had a -- I think a -- it was a solid quarter. We had some headwinds, but we're going to deal with them and move forward to a stronger Q4 and then I think with nice momentum going into 2020.

So thanks again for joining.

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Operator [45]

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