Artivion Inc (AORT) 2011 Q2 法說會逐字稿

Greetings and welcome to the CryoLife Second Quarter 2011 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Anderson, President and CEO for CryoLife. Thank you. Mr. Anderson, you may begin.

Good morning, everyone. This is Steve Anderson, CryoLife's CEO and I would like to welcome you to CryoLife's second quarter conference call. With me today is Ashley Lee, the Company's Executive Vice President, Chief Financial Officer and Chief Operating Officer.

This morning we announced CryoLife's second quarter 2011 operating results. Revenues were a record $29.4 million. These results are in line with our expectations. Importantly, our growth was led by our new recently acquired and launched products. During the quarter we also continued to execute on our new product initiatives and made strong progress on the integration of Cardiogenesis, positioning us well for ongoing success.

The agenda for the call this morning is as follows. Ashley will review this morning's press release and will discuss revenues by product. He will also discuss the recent investment that the Company made in valve exchange and early stage prosthetic heart valve company.

I will discuss the first full quarter of BioGlue sales in Japan. I will also discuss our early sales progress with PerClot, the powdered hemostat that we licensed from Starch Medical late last year and that is approved for sale in Europe. I will also discuss our recent acquisition of Cardiogenesis and the integration of that company into CryoLife.

After my comments are completed, Ashley will return to give you some financial guidance for the rest of the year. After Ashley's guidance comments are completed, we will open the call up for questions.

At this time, Ashley will review this morning's press release that discusses CryoLife's second quarter and year-to-date results.

Thank you, Steve. To comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995, I'd like to make the following statement.

Comments made in this call that look forward in time involve risk 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, including the guidance for 2011 that I will provide in a moment.

Additional information concerning risk and uncertainties that may impact these forward-looking statements is contained from time to time in the Company's SEC filings, including the risk factors section of our previously filed Form 10-K for the year ended December 31, 2010, and our Form 10-Qs for the quarter ended March 31, 2011 and for the quarter ended June 30, 2011, which we expect to file shortly, and in the press release that went out this morning.

On the call today I will discuss certain non-GAAP financial measures, you can also find the comparable GAAP measures, and the reconciliation of these non-GAAP measures to the applicable GAAP measures in the press release that went out this morning, a copy of which is contained on the investor relations portion of our website.

This morning we reported our results for the second quarter and first six months of 2011. We set an all time second quarter revenue record of $29.4 million. Importantly, gross margins expanded to 65% in the second quarter of 2011, compared to 61% in the second quarter of 2010. I'll have more on the improvement in margins later in my comments.

As of June 30, 2011, we had $25.1 million in cash, cash equivalents and restricted securities, which includes $1.5 million received from the DOD for the development of BioFoam, and $5.3 million in restricted securities. Our balance sheet is strong and we remain well positioned to leverage our capital resources and cash flow from our more mature business segments to invest in complementary products and technologies in high growth areas of cardiovascular surgery.

Net income for the second quarter of 2011 was $1.8 million or $0.07 per basic and fully diluted common share, compared to $2.9 million or $0.10 per basic and fully diluted common share for the second quarter of 2010. Excluding pretax transaction and integration expenses of $1.4 million related to our acquisition of Cardiogenesis and other business development activities, non-GAAP adjusted net income for the second quarter of 2011 was $3.3 million or $0.12 per basic and fully diluted common share.

Net income for the first six months of 2011 was $3.5 million, or $0.13 per basic and fully diluted common share, compared to net income of $4.9 million or $0.17 per basic and fully diluted common share for the second quarter of 2010.

Excluding pre tax transaction and integration expenses of $2.6 million related to our acquisition of Cardiogenesis and other business development activities, non-GAAP adjusted net income for the first six months of 2011 was $5.7 million or $0.21 per basic and $0.20 per fully diluted common share.

Revenues from the Cardiogenesis product line are tracking slightly ahead of plan, and were $1.2 million for the second quarter. Revenues from sales of surgical sealants and hemostats, which include BioGlue, BioFoam, PerClot and HemoStase, were $13.4 million for the second quarter of 2011, compared to $14.1 million for the second quarter of 2010.

Surgical sealant and hemostat revenues were $27.8 million for the first six months of 2011, compared to $28.1 million for the first six months of 2010. The decrease in overall revenues for the three and six month periods for surgical sealants and hemostats were primarily due to a decrease in HemoStase revenues.

However as compared to the prior year periods, worldwide BioGlue revenues were up 4% for the second quarter and 2% for the six month period. These increases were due to a combination of changes in foreign exchange rates, increases in volume of milliliters sold and increases in average selling prices. Steve will provide additional detail on some of the early and promising results for BioFoam and PerClot.

Vascular revenues decreased 2% for the second quarter of 2011, compared to the second quarter of 2010, but increased 2% for the first six months of 2011 compared to the first six months of 2010. As compared to the prior year, unit shipments of vascular tissues decreased 1% for the quarter and increased 1% for the six month period.

Cardiac revenues for the second quarter of 2011 decreased 2% compared to the corresponding period in 2010, and decreased 4% for the first six months of 2011 compared to the corresponding period in 2010. As compared to the prior year, unit shipments of cardiac tissues were up 2% for the quarter and flat for the six month period.

In July, we made an equity investment in ValveXchange, a privately held company that is developing a lifetime tissue valve replacement system. This agreement gives us the first right of refusal to acquire valve exchange. This investment is consistent with our strategy to invest in differentiated technologies that address large growing segments of a cardiovascular market.

Their first generation system is complementary to our cardiac tissue business and fits well with our expertise and sales channels into surgical valve replacement markets. Additionally, ValveXchange also has a minimally invasive TAVI product under development that leverages the same technology as the first generation system and has substantial promise.

As I previously mentioned, total gross margins were 65% and 61% for the second quarters of 2011 and 2010. Total gross margins were 63% and 60% for the first six months of 2011 and 2010.

Gross margins for both periods were favorably affected by an increase in preservation services gross margins, primarily resulting from decreased unit cost associated with increased manufacturing throughput, and increases in surgical sealants and hemostats margins resulting from product mix. The Cardiogenesis product lines generated gross margins of 78% during the second quarter.

General, administrative and marketing expenses for the second quarter of 2011 were $13.7 million, compared to $11.7 million for the second quarter for 2010. The second quarter of 2011 included approximately $1.4 million in costs related to our acquisition of Cardiogenesis and other business development activities.

We expect to complete the integration of the administrative and support functions related to our Cardiogenesis acquisition during the third quarter, at which time we expect to close our Irvine California facility.

General, administrative and marketing expenses for the first six months of 2011 were $28 million, compared to $25.5 million for the first six months of 2010. Expenses for the first six months of 2011, included approximately $2.6 million in costs relate to our acquisition of Cardiogenesis and other business development activities. Expenses in the first six months of 2010 included approximately $550,000 in business development activities.

R&D expenses were $1.6 million and $1.2 million for the second quarters of 2011 and 2010. R&D expenses were $3.4 million and $2.5 million for the first six months of 2011 and 2010. R&D spending in 2011 primarily focused on PerClot, SynerGraft tissues and products, BioFoam and BioGlue.

The effective income tax rate for the second quarter of 2011 was 52%, which primarily results from transaction expenses for the Cardiogenesis acquisition that are not deductible for tax purposes. You may refer to our SEC filings for detailed discussions of factors affecting our results of operations including our Form 10-Q that we plan to file shortly.

Now, I'll turn it back over to Steve.

Thank you, Ashley. Clearly, we're making progress on our goal to expand our business into high growth areas and drive sales of higher margin products such as BioGlue, PerClot and Cardiogenesis. We believe we have positioned the Company for improved performance, and our second quarter results are only scratching the surface in terms of reaching that potential.

I'd now like to give you and update on some specific results and milestones related to these products that are indicative of both our initial traction and growth potential.

As you'll recall, we announced BioGlue's approval in Japan on October 7, 2010. We initially estimated that we would sell about $600,000 of BioGlue in Japan for the first 12 months that it was on the market. We are very pleased to tell you that during the first six weeks that BioGlue was on the market in Japan we sold over $500,000 of BioGlue to Century Medical, our exclusive distribution partner in Japan. This vastly exceeds our and our distributor's expectations.

Japanese BioGlue sales in early July continue to be very strong and demonstrate that the product is being well received. BioGlue is also doing very well in Brazil, where our distributor is on track to buy $1 million during calendar 2011. Sales of BioGlue in Brazil have increased from $150,000 for 2005 to about $1 million in 2011. BioGlue is projected to comprise 40% of company sales in 2011. As you'll recollect, BioGlue's gross margins are in excess of 80%.

We are also very pleased with the early European market acceptance of PerClot. During the second quarter of 2011, sales of PerClot in Europe increased 76% over the sales of HemoStase, the product we formerly distributed for the same timeframe a year earlier. Sales of PerClot for the first six months of 2011 in Europe were $1,271,000 versus $721,000 of HemoStase for the same period in 2010.

In our opinion, PerClot is a more effective product than HemoStase. We believe that PerClot is a second generation powered hemostatic agent and the doctors are genuinely pleased with what it does in the surgical setting. Sales in Australia have also been excellent.

During the first quarter conference call, we stated that we had filed our US IDE for PerClot with the FDA. The FDA had a number of questions and comments regarding our initial IDE submission. We have been addressing the FDA's issues and are working on our responses.

It's important to note that HemoStase's gross margins were 55% and that when approved in the United States we have replaced that product with PerClot whose gross margins will be in excess of 80%. I believe that PerClot sales will be a revenue and earnings growth engine for CryoLife going forward.

On May 17th, we announced that we had completed the acquisition of Cardiogenesis Corporation of Irvine, California. Cardiogenesis markets a holmium laser system which includes the holmium YAG laser console and single use fiber optic hand pieces for performing transmyocardial revascularization, a procedure known as TMR.

TMR is used for treating patients with angina or chest pain that is not responsive to standard medications. We believe that the acquisition of Cardiogenesis is highly complementary to our vascular and cardiac reconstruction business.

The assimilation of the experienced Cardiogenesis direct sales team has been completed and has served to nearly double CryoLife's cardiac surgery specialist sales force. We have fully trained the CryoLife sales force on TMR, and our reps began selling the product in July.

In only six weeks of revenue contribution from Cardiogenesis through the end of June, we were able to generate $1.2 million with gross margins of about 78%, putting us on track to meet our expectations for the remainder of the year. Cardiogenesis had sales of about $11 million in 2010, and about 3.1 million in Q1 of 2011. We estimate that the total US market for Cardiogenesis products is about $175 million.

Patients undergoing treatment with Cardiogenesis products have been shown to have angina reduction, longer event free survival, reduction in cardiac-related hospitalities and increased exercise tolerance. The product and procedure are approved in the United States and Europe and it is Medicare reimbursable.

Cardiogenesis also developed the Phoenix combination delivery system, which is designed to combine the intramyocardial delivery of biologic materials with TMR.

The synergy of injecting biologics, such as stem cells or growth factors with TMR may increase the angiogenesis response and the associated clinical efficacy of TMR in treating ischemic heart disease. The stem cells would be recovered from the patient's own bone marrow and then spun on a centrifuge to concentrate the cells prior to their being injected into the patient's heart.

We anticipate conducting a 30 patient prospective single arm multicenter investigation at three to four sites in the EU. These patents will have Class IV angina, with an ejection fraction of greater than 30%. We believe that we will have the investigators selected by October of this year with an investigator's meeting to be held in December of 2011. We anticipate that the study will begin in April 2012 and that enrolment will take approximately one year with six months follow up.

In addition to the EU study, we anticipate requesting a pilot IDE study in the United States sometime in 2012. The pilot IDE study would be for up to 15 patients at three to four sites, and would be followed by a larger pivotal study. We believe that the acquisition of Cardiogenesis is highly complementary to our vascular and cardiac reconstruction business.

The new product lines that we have added, PerClot and Cardiogenesis, all have gross margins near or greater than 80%. Both of these new products plus the approval of BioGlue in Japan place us in markets that are expanding in low double digits, and that will lend substantial muscle to our operating margin.

That concludes my comments. And now, I'll turn the call back over to Ashley for his financial guidance for the rest of the year.

We are maintaining our expected total revenue guidance for the full year of 2011 of between $122 million and $125 million, which includes revenues of between $500,000 and $1 million related to the use of funds received from the US Department of Defense in connection with the development of BioFoam.

We expect tissue processing revenues to increase between low single and mid single digits on a percentage basis in 2011 compared to 2010, combined BioGlue and BioFoam revenues to increase in low single to mid single digits on a percentage basis in 2011 compared to 2010. And revenues from powdered hemostats, including PerClot and HemoStase, to be between $5 million and $6 million. We expect revenues from the Cardiogenesis product line to be between $4 million and $5 million in 2011.

We expect R&D expenses to be between $10 million and $12 million in 2011. And we expect earnings per share of between $0.23 and $0.27 in 2011, excluding the effects of any potential acquisitions or other business development costs during the second half of 2011.

Excluding transaction and integration expenses related to the acquisition of Cardiogenesis and other business development charges of approximately $0.05 per share incurred in the first six months of 2011, and the affects of any potential acquisitions or other business development costs during the second half of 2011, we expect non-GAAP adjusted earnings per share of between $0.28 and $0.32 in 2011.

We expect the effective income tax rate for the second half of 2011 to be in the mid to upper 30% range, excluding the effects of any potential acquisitions during the second half of 2011. We believe we are successfully executing on our strategy of positioning the Company for accelerated revenue and earnings growth by expanding our addressable market opportunities through our internal development and business development activities.

Looking forward, we have several key milestones that we expect to complete in the upcoming months. One is refilling our PerClot IDE, and begin with clinical trials late this year or early next year, positioning us to potentially enter the US market with the next generation hemostat by 2014. Begin human trials in the EU using the TMR procedure in conjunction with otologist stem cells, and continue evaluating potential acquisitions that will allow us to enter large, high growth segments of the cardiovascular market and accelerate the growth of the Company.

That concludes my comments. And now, I'll turn it back over to Steve.

At this time, we'll open up the call for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Brooks West with Piper Jaffray. Please proceed with your question.

Good morning.

Morning.

Good morning.

Couple things. On the preservation services, again, the underlying dynamics there is it more of a supply issue or a demand issue for you guys at this point?

I'd say it's more of a demand issue. I think that we have adequate supply to meet any demand that we might have for our products for the foreseeable future.

Okay. And then on Cardiogenesis, on the guide, realizing it was a May acquisition, how much actual contribution, thinking about time or number of days, did you have in Q2?

I think that we closed on that acquisition around May 17th I believe. So, it was right at a month and a half in the second quarter that we actually had that product line.

Okay. And so, anything with the underlying performance there that makes you more or less enthusiastic about the product for the rest of the year?

I think right now that it's tracking according to plan. You know I think as it's trending right now, we're probably looking at being at or near and hopefully above the top end of our guidance. And if that's in fact the case, then we'll come back and address that in the third quarter call. But things are going according to plan right now.

Great. And then maybe one last one for me, just on the acquisition pipeline. You guys mentioned you're still going to be active. Can you give us a sense of what the near term pipeline looks like? And I mean, should we look for something yet this year or do you feel like you got enough on your plate? Thanks.

I think you should look for something additional this year.

Okay, great. Thanks, guys.

Thank you. Our next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed with your question.

Yes, hi, guys. Good morning.

Good morning.

Hey, Matt.

Just looking at a couple of things on the revenue side, the base business is you mentioned demand there on the previous question. Were there any maybe distractions related to the Cardiogenesis acquisition that might have slowed things down there in the interim? And then as another follow on, why is the revascularization guidance so low relative to what you put up in only six weeks?

I don't think that we encountered any real significant distractions. It's an integration process and inherently those take some time to work through, but I don't think that we encountered any unexpected issues there.

As it relates to the guidance and I alluded to this when I answered Brook's question a second ago, if things continue to trend the way they are, then it looks like that we will be at the top end or hopefully above our range of guidance. And if the trends continue, then we'll com e back and address our guidance in our next conference call.

Okay. And then shifting to gross margin, which was really strong in the quarter, maybe you can just help us understand how that plays out, especially as we layer in Cardiogenesis. What's a good number to think about going forward?

If you look at the balance of 2011, I think the margins -- gross margins are going to be affected by product mix. If you recall, in the third quarter typically with Europe being on vacation, BioGlue is a little bit less of our revenue mix as compared to the other quarter.

So, it probably would not surprise us to see the margins trend downward slightly during the third quarter of this year, but certainly above where they have been historically before the acquisition of Cardiogenesis.

I think longer term, I think that we fully expect our margins to expand and potentially significantly with the addition of the Cardiogenesis product line, those gross margins we anticipate being 80% or better going forward. Once we get PerClot, the manufacturing process transferred here and approved in the US that's going to be an 80%-plus gross margin product.

So longer term, we fully expect to see margin expansion. In the nearer term, we expect the margins to be better than they have been historically, leading up to the acquisition of Cardiogenesis, but it's going to be affected somewhat by product mix. And so, that's what in a nutshell what we expect in the second half.

In addition to that, we're working hard on getting PerClot approved in Brazil and in Canada and we're making good progress on that it's just a matter of working our way through the bureaucracy that involved in approval in those countries. And so they should come on here in the next six to nine months and that product then would be looking at significant sales increases as a result of that and the success we're having in Brazil with -- of course with BioGlue, it will sort of piggyback on that.

And so I would expect that with the larger volumes next year -- late this year and next year with PerClot that those margins probably will continue to increase.

Okay. Looking at R&D, your expectations imply a doubling of spend on average in each of the next two quarters. Maybe you can walk us through that Ashley. Is that the right way to think about it?

Yes. And, again, that's largely going to be dependent upon the timing of enrolment of the BioFoam IDE and how much progress we make on refilling the PerClot IDE and beginning enrollment in the fourth quarter. So those numbers could prove to be a little bit high, but it's going to be largely dependent upon the timing of getting these IDEs approved and beginning enrollment.

If you look at the two quarters for the balance of the year, I think that the expenses - the guidance that we gave -- the expenses would probably be a little bit skewed toward the fourth quarter as opposed to the third quarter.

Okay. And then the last one is just kind of a point of clarification on adjusted EPS if I look at the adjustments you made in Q1 plus the adjustments in Q2, its greater than the $0.05 adjustment you're making on the guidance for the year. So, can you help us just put that all together and what's included and what's not in those numbers?

It's all transaction and integration related costs, predominantly related to Cardiogenesis and also other business development activities. I think maybe what that $0.05 may be not including is some of the tax effect for the second quarter. The tax rate in the second quarter was 52% and that $0.05 may not include any effect related to that abnormality in the tax rate that we saw in the second quarter of the year.

So you're calculating it on an annual basis for the full year guidance versus what we've seen as $0.08 year-to-date. On -- because --

I'd have to look at that in a little bit more detail, Matt, and get back with you on that.

Okay, thanks.

Thank you, our next question comes from the line of Raymond Myers with Benchmark. Please proceed with your question.

Thank you for taking the questions.

Hello, Ray.

Hey, Ashley. First one is actually for Steve. You were talking about the $500,000 of BioGlue that have been sold in Japan already in just six weeks, how much of that is stocking orders? How can we think of that as a -- in terms of a run rate?

Of course, they're filling their distribution network. No question about that. It's hard for me to know though exactly how much of that is stocking order. I know that they have been surprised, as we have, that the repeat orders that they've made here. I think they've made a total of three large purchases in that short period of time.

Did you have a sense of what you would expect to sell say in a 12 month period in Japan?

Based on how we're doing, I would put it at slightly over $1 million.

Okay, that's pretty good. Originally when we talked about BioGlue in Japan, we thought that opportunity would be quite large and then you got approval there for a very specific aortic dissection indication that was about a $10 million market.

Yes.

On the last call I asked you about this, and you were a little more cautious at that time about Japan BioGlue sales. Because that market was small, you said that you thought you would have to do an additional clinical study to enter the $150 million general surgical ceiling market in Japan. And I wonder are we being -- are we more optimistic now that we can broaden the use before having to do that study?

I think it's evident that the Japanese physicians are using it off label for other uses. I think it's too early -- I don't happen to know where they're using it at this time, but it's obvious from the volume that they're using it in addition to -- in other place in addition to aortic dissections.

We are going to do an additional clinical study, but we have the same exact approval from the FDA initially when we -- when we marketed that product in the states. And, of course, then it ended up being used a lot for certain neurological indications and maybe that's where its being used in Japan. I would have to ask our distributor if he happens to know that. I don't at this early stage.

I think it's also fair to say too, Ray, that we're pretty early in the roll out right now. So, it certainly has exceeded our expectations up to this point, but maybe a little bit too early to have a lot of market intelligence.

But I think that will -- as we continue through the rollout over the next quarter or two we'll be getting a lot of that intelligence and we'll probably be in a better position to know exactly what it's going to look like over the next year or two. But we're certainly optimistic about it, based on the performance today.

Okay. Well it's good to see we're making progress in Japan and Brazil with BioGlue. But if you take out the upside of those markets, it would appear that the US BioGlue or perhaps international is lower than might have been anticipated. Is that correct?

No, actually I think that US is probably trending close to where we had anticipated and in fact, BioGlue is actually a little ahead of plan for the full year to date company wide. So I think that US and Europe it's been -- we've had challenges there and we've talked about hose over the last several quarters.

But I think that that business is pretty much trending to where we expected it to be. Overall, worldwide we're a little ahead of where we expected to be and that's largely due to some of the excessive successes that we're having in Japan and other international markets.

Okay, that's good to hear. Then folding into that, in the last call you had talked about competitive and perhaps pricing pressures and I think particularly in the US across the -- several markets. Can you update us on those?

I think that those continue to persist and those are things that we've been dealing with over the last several quarters, and I think that we'll continue to deal with over the next several quarters. But we really haven't seen any significant changes in the cost environment or competitive activities. It still remains tough. But with that being said, we are seeing some successes all be them not significant growth, but we are seeing some successes in our legacy businesses.

One thing we can definitely say is that PerClot and BioGlue together in Europe give us an opportunity to bundle the adhesive hemostatic agent together in certain bidding situations, and that definitely has been an advantage to us. And I think it will continue to be an advantage to us going forward.

Once PerClot is on the market in the United States I would think that that type of bundling procedure for various hospitals or pharmacies would continue to give us an edge in the marketplace once it's approved in the states, but it certainly is helpful to us to be able to do that in Europe.

Okay, that's helpful.

I'll add too, Ray that -- and I alluded to this a little earlier in my comments. Our legacy businesses are maturing and -- but they are profitable. They generate a fair amount of cash for us and they've allowed us to go out and execute on the business development front and invest in our internal pipeline.

And if you look at over the next few quarters and couple of years, we see growth coming from a lot of these things that we've been able to execute on -- the acquisition of Cardiogenesis. We think that we're going to see significant growth in PerClot in international markets and with BioGlue in certain international markets.

So that's' where we see the growth coming from over the foreseeable future, excluding any other things that we might be able to execute on on the business development front.

One last thing, did you update us on the BioFoam US IDE?

No, we're still in the early -- very early stages of enrolling patients in that trial. So, that's very early on.

Can you remind us how many patients you plan to enroll, and how many have enrolled?

We're looking at doing I think 20 patients in a pilot study. The way that it's currently designed it's a two year follow up, but we anticipate going to the FDA hopefully with six month data to allow us to move forwarded on the pivotal study.

And how long do you think it will take to enroll the 20 patients?

Longer than we had anticipated when we began the trial. As I think I alluded to in previous calls, the inclusion criteria for the trial were [restrictive], and we have gone back to the FDA on a couple of occasions to get those criteria loosened. They have done that once, and we expect to hopefully get another accommodation that will allow us to increase the inclusion -- expand the inclusion criteria so that we can get the enrollment going.

Okay, great. Well, thanks for all the updates. Appreciate it.

Thank you.

Thank you. Our next question comes from the line of Joe Munda with Sidoti and Company. Please proceed with your question.

Hello, Joe.

Good morning, guys. Good morning, Ashley. Just real quick, two questions. What was the CapEx spend for the half year?

CapEx?

Yes.

About $1.2 million.

Okay. With the growth that you guys are seeing in BioGlue and PerClot, I mean can we assume to see increase in CapEx going forward to support the growth that you're seeing?

Not necessarily. That's one of the parts of our business that we think is very leverageable. We've got the infrastructure here currently at our facility to ramp production for BioGlue. We don't foresee any significant spend on CapEx for PerClot.

And getting that manufacturing process migrated to our US facility, it's going to be well less than $0.5 million dollars in total to get that production facility up and running. So, you're not going to see anything significant.

And my other question was just on inventory, I know that you guys are seeing great growth in BioGlue and PerClot. I mean, can we expect also a tick up in inventory going forward? It seems like inventory has kind of ticked down a little bit, from December.

I think that we do a pretty good job of managing our inventory levels. For BioGlue I wouldn't see anything significant and probably wouldn't see a significant increase ramp in PerClot inventory levels until we got an approval in the US.

Okay. All right. Thanks, guys.

Okay.

Thank you. Our next question is a follow up question from the line of Brooks West with Piper Jaffray. Please proceed with your question.

Hi, guys. Just a quick follow up on the R&D spend. Ashley think you said $10 million to $12 million guidance for the year, and year-to-date you're only at $3.4 million, $3.6 million. Just wondering what the big delta is in the second half.

Anticipated enrollment in the BioFoam and PerClot IDEs predominantly, as well as some additional R&D work that needs to be done on PerClot to support the IDE submission. So to the -- if the enrollment is delayed then likely the guidance for R&D is high. But we've guided assuming that we will be enrolling, especially in the fourth quarter of this year.

Okay, great. Thanks, guys.

Okay.

Thank you. Mr. Anderson, there are no further questions. I'd like to turn --

All right. Well, then we will close the call and thank you for joining us. And we look forward to talking with you at the close of the third quarter.

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