Artivion Inc (AORT) 2017 Q4 法說會逐字稿

Greetings, and welcome to the CryoLife Fourth Quarter and Year-End 2017 Financial Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Pat MacKin, Chairman, President and CEO; and Ashley Lee, CFO for CryoLife. Thank you. And you may begin.

Good morning, and thanks for joining the call. I'm Ashley Lee, the CFO of CryoLife.

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 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. These forward-looking statements are subject to a number of risk, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements.

Additional information concerning certain risk and uncertainties that may impact these forward-looking statements is contained, from time to time, in the company's SEC filings and in the press release that was issued last night.

Now I'll turn it over to our CEO, Pat MacKin.

Thanks, Ashley, and good morning, everyone. I'm very pleased to announce that we had a very solid fourth quarter capping off a highly successful 2017. As you'll hear on today's call, we have an abundance of good news to report on. We generated double-digit growth in tissue processing, BioGlue and On-X. Our sales organization is direct to more geographies than ever before and the list is growing. And our clinical programs are advancing, on or ahead of schedule.

Furthermore, we expanded our gross margin, while at the same time, we made significant progress integrating JOTEC. Over the past several years, CryoLife has transformed considerably with THE acquisitions of On-X and JOTEC, and we've increased our addressable markets by more than $2.2 billion.

In addition, the On-X acquisition has been a success and is now generating the type of returns we envisioned when we completed the transaction. Further, you will hear today that the integration of JOTEC is also well on track and we are even more excited than we were about On-X for JOTEC's potential to drive growth.

Finally, one of the first things I did after coming to CryoLife was to begin the process of building a leadership team that was capable of running a much larger company, and I'm confident we have done so. I have little doubt the successful integration of On-X and the acquisition and rapid integration of JOTEC is due in part to the quality of our current leadership team driving that process. Even more indicative of our leadership team's strong capabilities was our ability to post strong Q4 results, while integrating the acquisition of JOTEC. So now let's get into specifics.

During the fourth quarter, we delivered double-digit revenue growth across all 3 of our non-JOTEC core product lines, while continuing to expand our gross margins. One reason we were able to generate double-digit revenue growth in tissue, On-X and BioGlue and expand margins was our decision to move to direct -- to go direct in select markets. We expect to continue that strategy in key European countries where JOTEC was already direct, where we were previously using distributors.

That should drive future revenue increases and gross margin expansion as evidenced by the recent positive initial results in Canada and Benelux after going direct in those regions. As you know, we also divested certain non-core product lines in 2016 and the result has been a more focused, highly competitive product offering.

We also now have more than 125 trained sales reps worldwide that sell our focused product offering. We also continue to advance our BioGlue China and PerClot U.S. clinical trials, and believe these new indications, if approved, will position us as a strong competitor in these large markets.

With the addition of JOTEC's pipeline to our product portfolio, we also have the potential over the next 5 years to introduce highly differentiated innovative JOTEC products into the U.S. market as well as to introduce innovations on existing JOTEC products in existing markets due in large part to JOTEC's significant R&D expertise. I'll cover those topics in more detail at the end of the call when I discuss our 2018 objectives.

I'll now move on to our quarterly review of our 2017 key initiatives. Our first key initiative for 2017 was to achieve our full year 2017 financial guidance. In the fourth quarter of 2017, we delivered revenues of $52.8 million, representing an increase of 17% over the fourth quarter of 2016. Excluding the $4.1 million in revenue generated from JOTEC in the fourth quarter, revenues were $48.7 million, an increase of 8% compared to the fourth quarter of last year. Excluding the contributions from JOTEC, our full year 2017 revenues were $185.6 million, which exceeded our updated guidance range of $184 million to $185 million.

We achieved double-digit revenue growth across all 3 of our major non-JOTEC product lines, which include tissue processing, BioGlue and On-X. Despite the adverse revenue impact from our decision in the back half of 2017 to go direct in 3 countries. This growth in the face of these revenue reversals highlights the strength of our sales organization and the competitiveness of our products. Ashley will provide more details in his financial commentary.

Regarding our fourth quarter 2017 earnings, we delivered non-GAAP EPS of $0.11 per diluted share, resulting in non-GAAP EPS of $0.40 per diluted share for the full year, which was within our guidance range of $0.40 to $0.43.

Our second key initiative for the year was to expand in the On-X business and deliver low double-digit non-GAAP revenue growth on the On-X portfolio in our direct markets, excluding the OEM business. As I just mentioned, we continue to post double-digit growth for the On-X portfolio in direct markets. In the fourth quarter, we were up 22% in those markets, which include 9% growth in our European direct markets, despite not having the AAP product line available to us.

In North America, On-X revenues for the fourth quarter increased 24% compared to the fourth quarter of 2016. Our U.S. sales force continues to open new On-X accounts with approximately 24 new On-X accounts added during the fourth quarter. In total, On-X revenues, excluding the OEM business, were $9.7 million, which is a 10% increase year-over-year. We believe the continued double-digit growth of the On-X products in our direct markets is indicative of our growth potential for the On-X portfolio. We are very pleased to see that our rationale for acquiring On-X is playing out as expected.

We were confident when we acquired On-X that our experienced direct sales teams could educate customers regarding the highly compelling PROACT data associated with the On-X mechanical valve and drive meaningful market share gains and grow revenue. Well, that's exactly what's happened, and what's continuing to happen. Since the acquisition, we have picked up almost 800 basis points of market share in the U.S. mechanical valve market.

Our third key initiative for 2017 was to transition our Canadian and Benelux distributor channels to direct channels. We started selling direct in Benelux in June and in Canada in July. While these transitions lowered revenues in the first half of 2017, we're beginning to benefit from the direct sales of CryoLife's portfolio in these markets at higher end use pricing and margin.

Our fourth key initiative for 2017 was to make significant progress in our clinical trials for BioGlue China and PerClot in the U.S. Regarding the BioGlue trial that we were conducting in China, we began enrollment in the study in November of 2017. We now have full site activation at 7 institutions and have more than 103 patients enrolled in the study today, with a total enrollment goal of 189 patients. We remain on track for the approval of BioGlue in China sometime in the second half of 2019.

Since restarting the PerClot study under revised protocol, we now have full site activation at 20 centers, where patients are currently being enrolled in the trial. We have more than 140 patients enrolled in this study to-date with an enrollment goal of 324 patients. In addition, we expect another 4 sites to be activated in the second quarter of 2018. Our current enrollment rate keeps us on track for FDA approval in the second half of 2019.

Our fifth key initiative for 2017 was to evaluate potential business development opportunities to enhance our focus and build critical mass in cardiac and vascular surgery. We have clearly made significant progress on this front with the closing of the JOTEC acquisition in December.

Let me take a few minutes to update you on what's transpired since we announced the transaction 5 months ago. Since that time, we've been working very hard to integrate JOTEC and have made great progress. As of January 1st of this year, we went direct with JOTEC products in France, and on April 1st this year, we will go direct in Spain, Italy and Poland for CryoLife's products.

We now have 75 European reps calling on cardiac and vascular surgeons. The legacy CryoLife cardiac surgery team has been cross-trained on JOTEC's vascular graft portfolio and its Frozen Elephant Trunk product called E-vita OPEN PLUS. Similarly, the legacy JOTEC sales team that calls on vascular surgeons has been cross-trained on BioGlue. Some regions within those countries will still be served by distributors where required, but the vast majority of those markets will be direct.

Also on April 1st, the back office, which includes customer service and finance integration will be complete and we'll be up and running on the same IT system in all 4 of these key European markets. We've accomplished this major undertaking in a relatively short period of time.

We remain focused on completing the integration of JOTEC before we look for any new opportunities. The JOTEC acquisition gave us access to the $2-plus billion global stent graft market with a number of differentiated branch products. JOTEC posted 14% year-over-year growth in 2017. We anticipate that over the next 5 years, the JOTEC acquisition will be accretive to our revenue growth, gross margin, operating margin, non-GAAP earnings and cash flow generation. We will seek to enter the U.S. market in the next 5 years with JOTEC's most differentiated products, which we anticipate being a future growth catalyst for CryoLife.

And with that, I will now turn the call over to Ashley for his financial review.

Thanks, Pat. I'll now review our results for the fourth quarter.

Compared to the fourth quarter of the prior year, total company revenues increased 17% to $52.8 million. Excluding revenues from the JOTEC acquisition, fourth quarter revenues were $48.7 million, an increase of 8%. Importantly, we saw double-digit growth in tissue processing, BioGlue and On-X despite temporary disruption as we transition to a direct sales model in Spain, Italy and Poland as a result of the JOTEC acquisition.

On a geographical basis, Q4 North American revenues, which includes the U.S. and Canada were $36 million, an increase of 7% year-over-year. The increase was driven by a 24% increase in On-X revenues and a 9% increase in tissue processing revenues.

Revenues from our European region, excluding JOTEC, were $8.2 million, an increase of 6% compared to the prior year, despite the fact that we elected to terminate distributors and go direct in Italy, Spain and Poland.

Revenues from Asia-Pacific and Latin America, excluding JOTEC, were $4.6 million for the fourth quarter, an increase of 26% compared to the prior year, primarily as a result of distributor ordering patterns.

I'd like to spend some time focusing on our individual product lines, and specifically on On-X tissue processing and BioGlue. On-X revenues for the fourth quarter were $10 million, an increase of 10% year-over-year despite the distributor terminations that we've discussed. On-X revenues in our North American direct markets were up 24% year-over-year, excluding the OEM business and increased 9% year-over-year for the fourth quarter in our European direct markets.

On-X revenues decreased 19% in Asia-Pacific and Latin America, primarily due to distributor ordering patterns.

On-X revenues decreased 4% overall in Europe, primarily due to the loss of 4Q revenues from distributors who were terminated in the third quarter.

Total tissue processing revenues for the fourth quarter were $17.7 million, an increase of 10% from $16.1 million for the fourth quarter of 2016. During the fourth quarter, vascular revenues increased 5% year-over-year on a 7% increase in units shipped. Cardiac tissue processing revenues increased 16% year-over-year on a 16% increase in units shipped. We remain confident about the overall prospects for the tissue processing business.

BioGlue revenues in the fourth quarter increased 12% year-over-year to $17.8 million. North American BioGlue revenues were $9.6 million in Q4, which was an increase of 2% year-over-year despite a competitive product trial which we have previously spoken about. OUS, BioGlue revenues increased 26% year-over-year to $8.2 million.

BioGlue revenues were up 11% in Europe and increased 58% in Asia-Pacific resulting from distributor ordering patterns. We continue to expect upside in BioGlue from an improving outlook in Brazil, our ongoing strategy to go direct in select OUS markets, the cross-selling opportunity from having the 45 JOTEC sales reps that call on vascular surgeons and the anticipated regulatory approval in China in 2019.

Our overall gross margin for the fourth quarter was 69% similar to the fourth quarter of 2016. Gross margins in the fourth quarter include a charge of $584,000 related to a step-up in basis related to acquire JOTEC inventory. Excluding that charge, non-GAAP gross margin for the fourth quarter was 70%, tissue processing gross margins were 56% for the quarter and product gross margin was 75%.

SG&A expenses during the fourth quarter were $30.2 million. Excluding $6.6 million in business development and related expenses, SG&A expenses were $23.6 million, which includes SG&A expenses for the month of December 2017 for JOTEC.

Our tax rate for the fourth quarter of 2017 was 28%. The tax rate for the full year was a benefit of 4%. The full year tax rate reflects a windfall benefit from stock compensation expenses that was partially offset by non-deductible JOTEC-related transaction expenses.

In regards to the recently enacted tax legislation, we did not have a material P&L or balance sheet impact from the transition due to either the differential in tax rates or due to repatriation.

On the bottom line, we reported GAAP net loss of $3 million or $0.09 per fully diluted share in the fourth quarter of 2017 and non-GAAP net income of $4 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 March 5, 2018, we had approximately $34 million in cash, cash equivalents and restricted securities on hand.

We are also issuing our 2018 financial guidance as detailed in the press release that we issued last night. We expect full year 2018 revenues will be in the range of between $250 million and $256 million, representing an increase of between 32% and 35% on a GAAP basis, and between 6% and 8% on a pro forma basis. For the first quarter of 2018, we expect revenues to be between $59 million and $61 million.

We expect gross margins to be between 65.5% and 66.5% for 2018. That includes approximately $3.5 million in stepped-up basis in acquired JOTEC inventory and inventory repurchased from terminated distributors. Excluding the inventory step-up, non-GAAP gross margins would be between 66.5% and 67.5%.

We expect R&D expense to be between $23 million and $25 million for 2018. With the enactment of the new tax legislation, we expect our effective tax rate in future years to be in the mid-20% range. However, due to a few factors, including our expectation of close to breakeven GAAP net income in 2018, non-deductible expenses related to the JOTEC acquisition and effects of stock compensation expense on our tax rate, our tax rate could vary significantly from the mid-20% range from quarter-to-quarter in 2018 and for the full year of 2018.

On the bottom line, we expect non-GAAP earnings per share of between $0.29 to $0.32, assuming 37.5 million fully diluted shares outstanding. We have also used a 25% effective tax rate in calculating non-GAAP earnings.

Regarding non-GAAP EPS, we have not included interest expense as an add back to arrive at non-GAAP income. The incremental interest expense in 2018 versus 2017 results in an approximate $0.24 dilution in 2018 compared to 2017.

I've some additional detail to help you better understand 2018. First, we expect to incur approximately $4 million in integration and related expenses during 2018. Of that amount, we expect to incur approximately $2.6 million in the first quarter and the remainder throughout 2018.

Second, I mentioned earlier, that we recorded a $584,000 charge in Q4 related to acquired JOTEC inventory. We have approximately $3.5 million more that will run through our cost of goods sold during 2018. Approximately, $1.5 million to $2 million will run through the first quarter, about $1 million through the second quarter, with the majority of the remaining charge occurring in the third quarter.

Third, regarding our credit facility, our interest rate floats at LIBOR plus 400, which currently puts our interest rate at 5.7%. Our current expectation is that interest expense will be between $15.5 million and $16 million in 2018.

Lastly, we expect our depreciation expense to be approximately $7 million to $8 million for 2018, and we expect amortization expense to approximate $11 million to $12 million for 2018.

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

Thanks, Ashley. Before we move to take your questions, let me outline our key operating initiatives for 2018.

First, we are focused on achieving our 2018 financial guidance that Ashley just outlined. Second, we'll complete the integration of JOTEC business in 2018 and strive to deliver double-digit non-GAAP revenue growth for the JOTEC business. Third, we'll continue the momentum in On-X and expect to deliver double-digit revenue growth in 2018 for the On-X business. Fourth, we look forward to completing the transition to direct sales for CryoLife products in Spain, Italy and Poland. Fifth, through our acquisition of JOTEC and investment in our pipeline, we will expand our current total addressable market opportunity from roughly $600 million to approximately $3 billion over the next 5 years.

These initiatives include: continuing to pursue future growth drivers for the company through our clinical programs, which include the completion for patient enrollment in BioGlue China and PerClot clinical trials and the initiation of the PROACT 10a trial.

As a reminder, the PROACT 10a trial will seek to obtain FDA approval with the On-X aortic valves using Eliquis rather than Coumadin as the blood thinner. We will provide more details on this exciting trial if and when we receive FDA approval for the IDE.

In addition, by this time next year, we're expecting to be launching the following new products in Europe. Our next-generation Frozen Elephant Trunk called the E-vita Open Neo, our next-generation thoracic stent graft called E-nya and our next-generation thoracoabdominal device called E-nside. These are the same products that we'll be seeking to bring to the U.S. markets and expect to commence U.S. clinical trials this time next year.

So in closing, we are very pleased with all that we have accomplished in 2017, and I'm very confident 2018 will be another successful year for CryoLife. The company has never been better positioned, more competitive on a larger addressable market opportunity than it does today. The combination of highly competitive products with a well-trained 125-person direct sales force is a strategy we worked hard to put in place since the day I arrived. We expect the combination to drive strong performance in 2018 and beyond.

I would like to thank all of those at the company for their contributions that brought us to where we are today. We've always taken pride in the difference our products make in people’s lives, and now with JOTEC on board, we'll be helping even more patients around the world.

With that, we'll now open the lines for questioning. Operator, please proceed.

(Operator Instructions) The first question comes from the line of Jason Mills with Canaccord Genuity.

So several questions, and again, congratulations on a strong fourth quarter. Maybe a surprising strength really up and down the P&L, but especially, on the top line in the quarter. Maybe we'll start with the question of how sustainable you think the double-digit growth you saw in your 3 core organic franchises as you move into 2018? And that sort of segues to the second part of that question, which is your 2018 guidance. On the top line -- your organic growth of 6% to 8% is sort of in line with what you've been doing for a little while, I'm just wondering the upside potential there as you continue to integrate and cross-train. It sounds like that's going well and the potential of where organic growth could go? And I guess, the other thing with respect to the top line, that is what organic growth is implied in the guidance if you assume you owned JOTEC for all of 2017 and you included that part in the organic growth calculation. And then also, as far as the guidance goes, Ashley, maybe give us a sense for the gross margin, even adding back about $3.5 million your gross margin infrastructure for 2018 is a little lower than what we were modeling. I'm just wondering what -- where you see gross margins going once you sort of mature the integration of the JOTEC acquisition over time?

Thanks, Jason. Yes, some good questions. Let me start with the revenue. Yes, I mean, we're very pleased with the fourth quarter. I mean, I think one of the things that we talked about with our M&A strategy, the product lines, the core product lines for CryoLife, the legacy product lines, tissue and Glue have been growing kind of in the mid-single digit range. And we commented previously, particularly on tissue, that we expect tissue to kind of grow in, let's call it the 5 -- 4% to 6% range. We grew tissue 6% last year. Some quarters were 4%, 5%, some quarters were 9% or 10%. It can be kind of a lumpy business, we've talked about that.

But I think the important part of the message is we executed an acquisition strategy to drive growth for the corporation. And if you look at BioGlue and tissue as the legacy product lines growing in the kind of a mid-single digit range and then you book in those product lines with On-X and JOTEC, both growing double-digit, that was the strategy and that's pretty much what you're getting with the guidance and what we're expecting.

When we announced the On-X transaction, we said we thought we could get double-digit growth over the next 5 years. When we announced the JOTEC acquisition, we thought we could get double-digit growth over the next 5 years. And so when you put those kind of bookends up against our core, and you add together the double-digit growth of those new products with the kind of mid-single of our legacy products, that's where you get to the revenue growth that we're at.

So your second question was kind of the -- if you do the pro forma as if we owned JOTEC for all of '17 compared to 2018, what does that look like? And that's the kind of the 6% to 8% number that Ashley gave you. So one of the things you always get, and you're well experienced at this, Jason, is back in October, we notified our distributors in Spain, Italy, Poland for CryoLife, and in France, we notified the JOTEC distributor that we were going to be working with them to kind of separate -- go our own separate ways and that takes time. We had revenue reversals, we had depressed revenues in the fourth quarter, which we communicated. There is a tail that in Q1. And the nice thing is that as we exit the first quarter, a lot of that's behind us. We talked about April 1 having our back-office, our sales channels and the majority of the direct to distributor -- I mean, distributor to direct in those markets is done.

So yes, we'd expect growth to accelerate through the year. And I think that's one of the reasons you're seeing kind of the range of 6% to 8% that we think will be for the full year because of a little bit of a lag in Q1 because of the distributor transition. Maybe Ashley, you can address the margin.

Yes. So if you look at our consolidated gross margin guidance, it's -- if we at the top end of the range, we'll be in the upper 67% range. For 2018, there are couple of things that are impacting that. One is that the JOTEC gross margins are slightly below where our consolidated corporate gross margins were prior to the acquisition. So that's having a little bit of an effect to weigh down the margin number. The other thing is, we're expecting a slight decrease in our tissue processing gross margins for the year. We've implemented some processes to optimize our inventory levels, that's resulted in a little bit of reduced throughput to our facility, which is slightly impacting our unit cost. We're still expecting tissue processing gross margins to be in the low 50% range. But that's down slightly from the mid-50% range that we posted last year.

Okay. That's helpful color. I guess, Pat and Ashley, as we think about this business, and Pat you gave some color to this in your remarks for my first question, just how you see the growth in JOTEC and On-X in double digits and then the other parts of the business maybe mid-single digits.

As you look at the P&L next 3 years, understanding you're probably not prepared to give granular to your guidance here. But just trend guidance, trend analysis here for us. As you look over the longer-term, how do you see this business developing sort of on a baseline basis? Or maybe you can think about best and worst case growth rates and margin percentages. You've talked in the past about this business now been really set up to deliver not only strong top line growth, but bottom line performance, I presume you still think that? And then maybe as the last question, I'll get back in queue. Just maybe give us an update on the AAP certification for On-X in France?

Thanks, Jason. Yes, so I think, I mean one, we're very excited about what's happening with On-X and what's happening with the recent JOTEC acquisition. I mean, I think it's, in both cases, they pretty much -- On-X, we have a couple of years under our belt and you heard about market share gains we've had, I mean, same with JOTEC. The more I learn, the more excited I get. I think there is a -- but there are few things about, if you look over the next 3 years, that are going to be new for our shareholders. One, when you look -- and start at the top of the P&L, if you have double-digit growth in On-X and double-digit growth in JOTEC and we kind of keep the core to mid-single, that's going to -- and if we can push the growth rates on the newer products, the On-X and JOTEC, that could get us in the higher end range of this upper single digits. That's the first piece.

The second piece is, as you move down the P&L into the gross margin, we really have not done a lot as a company on kind of cost down, which is a discipline in larger companies is quite good. Our new Head of Operations is a gentleman I brought in from -- that I worked with previously at Medtronic. His last job, was a Head of Global Supply Chain for Baxter, and their $2 billion supply chain. One of his goals -- his major goals over the next 5 years is to take costs down in our cost of goods line and we're going to be looking to move margins from 70 to 75 over the next 5 years. So I can't tell you exactly what that's going to look like, but that's the goal. We want to see continued margin expansion as we launch new products as well as we take costs down.

Again, if you take another step down P&L and look at the kind of the G&A, we largely have our infrastructure in place. We've got 75% channel -- direct channel in Europe, we're direct in every market, expect the Nordics. We've got 60% channel in North America after going direct in Canada. Those 2 channels are largely fixed. We may add a few people here or there, but we're going to start to leverage that P&L.

And then as you move down the next line into R&D, we've got an amazing pipeline guys. We talked about BioGlue China and PerClot hitting kind of late next year. But we're also going to be launching, I mentioned in the script, in Europe, we're going to be launching a next-generation Frozen Elephant Trunk, a next-generation thoracic stent graft, a next-generation branch thoracoabdominal graft through our 75% channel. We're going to then take those products and bring those into U.S. PMA IDE clinical trials, which we'll start next year.

So you're going to start to see a pretty significant pipeline out of this company to add growth to the already double-digit, On-X double-digit, JOTEC mid-single digit core. And when you do all that, when you drive the top line, when you expand your gross margin, when you leverage your G&A in the middle of the income statement, when you have a pipeline, we are now going to start to see operating margin acceleration and we're going to be pushing hard to get up into the 20% range. So I think as you see this unfold and we -- this is an execution story now. We don't need to do any other deals. The deals that are done or have been done. We may do a tuck-in here, tuck-in there, but it would be very small. And I think that we've got a great opportunity if we execute.

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

My apologies for the background voice. So Ashley, the 9% year-over-year decrease in On-X in the select geographies, I guess, when I look at Canada and Benelux, I think it was more precise information, what were the gross margins and what were ASP increases, if any?

Yes Suraj, the background noise is really hard to hear. I think what I heard you ask is full year On-X growth?

Yes. So in our direct markets, we were up 22% year-over-year...

In the fourth.

In the fourth quarter, and that was 9% in our European direct markets and 24% in our North America direct markets.

And then I think the second question was the impact of Canada and Benelux, what happened with the margin and the pricing when we go direct in those markets?

Yes. And it obviously it just varies country by country. We get anywhere from a 30% to 70% increase in ASP with the increase in costs. And again, so it just varies in the various countries within Benelux and Canada.

Yes, I think the other important part, we don't just go direct to get a onetime benefit out of -- eliminate the middleman and get the end-user pricing, end-user margin, that's the first kind of benefit. The second benefit is, we hired 3 great reps in Canada. We've got a rep in Montréal, a rep in Toronto and rep in Vancouver. They're carrying the whole product line. That business is growing significantly fasting, 5x as fast as the company. So it's not just getting rid of the middleman, it's putting your own people in with our sophisticated product portfolio, their contact with customers on tissue, on On-X, on Glue in driving our products into the marketplace, because they're the best-in-class and that's really what we do it from a more strategic standpoint.

Got it. And again, apologies for the background. JOTEC, 14% year-over-year growth in FY '17. I presume there must be some disruption from salesforce perspective integration, because that growth was slightly lower than, if I remember correctly from the previous years?

Yes, I would say, look -- so I would say, I don't think there was that much disruption in the channel. I would tell you, JOTEC is an extremely well-run company when we acquired them. Their CEO, who is now the Head of our European Operations from a commercial standpoint is extremely professional, is an excellent leader. And if we had him locked up for 8 months doing this acquisition, even it's a small company, and you know the amount of due diligence we have to do on financials, on patents, on employment, it's just a lot of work. And we literally had him totally consumed last year for the majority of the year, where he wasn't out driving the business and they still posted 14% top line growth. So I don't think there's really been much of a channel disruption. And now that we've got this transaction behind us and the integration is well on its way, I expect to have all the right people driving towards -- driving the top line. So I'm not surprised, but again, it was still good growth.

And finally, it's a surprise that people not paying that much attention to PROACT 10a. We have talked about multiple times, but I'd like you to, for the audience, how this could be a game changer? I know this is my pet peeve, I just -- I'm extremely bullish on the past that you guys going down under, if you can for the audience at large, just kind of walk them through why -- or how this could help you target certain aspects and even in the prosthetic valve, any color for the audience at large would be great?

Thanks, Suraj. This has been -- one of the things -- so what we used to call the PROACT II trial, which is kind of the follow-on to the PROACT I trial. We're now calling it PROACT 10a because we're going to be studying a one of the novel anticoagulants, which is 10a inhibitor, that -- hence the name PROACT 10a. This is a, what I would call kind of a game changer for aortic heart valve surgery. One of the downsides of having to -- when you get a mechanical value over a tissue valve is having to take a blood thinner. And the tradeoff is, do you take a blood thinner or do you -- have to experience a reoperation if you get a tissue valve. And we obviously made a big step in the right direction with the PROACT I trial, where we could reduce about 50% of the amount of Coumadin that a patient takes, and hence get a 65% reduction in bleeding. That's a great step forward.

But still the fact of the matter is Coumadin requires you to, let's call it, maintain your INR level to check the level how thin your blood is to make sure your blood is not going to clot and cause a stroke with your value. And that requires you to go to a cardiologist clinic every week, almost like a diabetic patient, prick your finger, check your blood. So you're somewhat kind of tethered to your blood thinner and always constantly monitoring and maintaining a certain INR level. You also have some diet restrictions. Coumadin is a Vitamin K antagonist. So if you eat too much salad, you can actually throw off your INR levels.

Switching to Eliquis. I would just say that universally, Coumadin is not exactly -- it's actually an effective drug, it's not a very well-liked drug by patients or cardiologists. Conversely, Eliquis, and you've probably seen the commercials on TV is the fastest-growing of the NOACs, it's taking the most share, it's probably the most widely prescribed by cardiologists. It's a very popular drug with cardiologists for atrial fibrillation and has been studied widely. And always has shown in much better bleeding profile than Coumadin.

That being said, our thought is we believe that we have a unique valve in the On-X valve as shown in PROACT. And we think that if we could, in the trial that we're exploring in PROACT 10a is basically comparing the Eliquis anticoagulant versus the current standard of care, which is Coumadin, in a large number of patients up to almost 1,000 patients randomized and these would be existing patients with -- patients that already have an On-X valve. We had randomized them into 2 groups, 1 group gets Eliquis, 1 group stays on Coumadin, and we see what happens over several years. We've done a lot of market research in this area. And we believe if that trial is successful, it will be a game changer. It will change the standard of care for aortic valves. And the market research we've done basically shows that the average age of a mechanical valve patient today which is 58, jumps to 68, that's 10 years more.

And if you look at the number of patients that -- those are currently getting tissue valves, would all switch to the On-X mechanical valve. We also believe that if that -- if the trial with Eliquis is successful, that the majority of surgeons would switch their patients to Eliquis and put On-X valves instead of other valves. The current mechanical valve market worldwide is $250 million, and our estimate on the tissue valves, we would take just in the U.S. alone is probably in the $100 million range. So you guys can do the math, I mean this is a significant opportunity. And frankly, the reason we're doing this is just a -- we think that the best of both worlds for a patient is to have 1 operation that lasts in their life and have it -- is least burdensome on their lifestyle by taking a blood thinner that's much friendlier. And we think it will change the standard of care, and we're very excited, we've had discussions with FDA and as soon as we have an IDE and protocol, we'll let everybody know.

The next question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

I was hoping you could just talk a little bit about the plans for getting JOTEC to the United States. I know it's not for a bit of time. But can you just talk us through sort of the outlook over the next couple of years for moving here?

Yes. So we mentioned -- I mentioned this a little bit in the script. I mean, our plan basically is the JOTEC team -- they've got a great R&D team. They've come up with some fantastic products. And because the U.S. market is quite rigorous when it comes to getting these approvals, we want to make sure we have the latest products available, because it takes you several years to get these things into the market. So one of my comments was that, at the end of this year, at the end of '18, the JOTEC R&D team is going to deliver a next-generation Frozen Elephant Trunk called the E-vita Open Neo. They're going to deliver a next-generation thoracic stent graft called E-nya, and they're going to deliver a next-generation branch thoracoabdominal graft called E-nside. We're going to take those 3 devices. We will launch those in Europe about this time next year. But those will be the 3 devices that we take to the FDA and get our IDs set up for the PMA clinical trials. So we will start to have those meetings with the FDA this year, it's one of our goals. And to really get ready to start enrollment about this time next year in those 3 clinical trials. Again, those are all PMA trials. And from -- you go from enrolling to a year follow-up to a year approval, it's a 4 -- probably a 4-year time frame you're looking at once you get the trial started.

And along the way, Pat, you expect to drive growth in the other products in Europe and the U.S., that kind of bridge you to the time when you get significant JOTEC products to the U.S.?

Yes, and again, it's almost like to your point, I mean, as an investor, that's a long time to wait. And one of the things we liked about the JOTEC transaction is we think we can see nice growth over the next 5 years as we're waiting for these U.S. products to hit. Once those -- I mean U.S. market for stent grafts is $1 billion. And we are going to be well poised to hit that market in the next 5 years. But along the way, you're going to see nice growth, as I commented earlier, between the core products, the geographical expansion, the R&D pipeline outside of the JOTEC and the U.S.

Great. And then the only other one I have was, any update on the wound products that you've developed and were talking about, maybe finding a partner for?

Yes, I think, so we believe we've got a great product. This is a product called NeoPatch. It's an amniotic membrane used for diabetic foot ulcers, the DFU market. It's a big market. It's fast-growing. This product have been developed, and I thought it was a good idea to -- [crylok] did a nice job developing a product. We don't have a sales force. So we did a clinical trial called CLOSURE. The product was very effective. And basically, we've been in partnership discussions, looking for a partner to distribute this for us. We're still active in those discussions. I mean, from a shareholder standpoint, we're not spending -- really spending any money on it. It's kind of it's already been developed, it's already been trialed. We're now just in kind of BD discussions. If we find a partner, it's all upside; if we don't, I mean, there's just kind of no harm or foul. But it is a potential upside. But it's not really material to what we're doing as a company.

Your next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann.

So just a couple of issues. A lot of my questions have been addressed already. But can you talk a little bit about pricing, price increases, specific territories or which prices have been fluctuating, particular areas where you've swapped to go direct a little bit and as far as that effect?

Yes. We -- I think, I've mentioned this before on previous calls. When I got to CryoLife, I was a bit surprised that in the markets I've been competing in, the price pressures were intense. And it wasn't, are you raising prices, just like how far your prices going down? When I got to CryoLife, they've been raising prices pretty substantially every year. And I think there's a point in this health care environment, where you kind of -- you can only go so far. And I think we -- our prices are very stable, frankly. And I'll let Ashley comment. He commented earlier about when we go direct, it varies by country and who your distributor is, and what the market is, and which product you're talking about, but those, by eliminating the middleman, you kind of can get between 30% and 70% of an increase in your pricing. It just depends on the country and the products. But in general, in pricing, I mean, our prices are very stable. If you looked at tissue in the quarter, we had a 16% increase in cardiac units and a 16% increase in revenue, there was no difference in pricing. When I look across all of our product lines, we just don't see much pricing movement. And Ashley, I mean, from your perspective.

No, I don't think I have anything further to add. That's pretty accurate.

And then secondly, could you give us a little color on Japan specifically, specific product lines being sold there now, introductions that you anticipate over the next year or two, and perhaps some further clinical work?

Yes. So we currently have BioGlue in Japan and we have On-X in Japan. Both are growing nicely. I don't have those growth rates at the top of my fingers. I would say that Japan BioGlue has been growing 20% after the new indication and we reported on that a number of times. We still see nice growth in Japan in BioGlue after we got an indication approval. On-X is actually doing quite well in Japan and growing. We don't have other products; JOTEC has no products there. So there are discussions about taking some of the key JOTEC products to Japan, and we're in the middle of exploring those opportunities as we speak.

There are no further questions at this time. I would like to turn the floor back over to Pat MacKin for closing comments.

Yes. I want to thank everybody for joining today. As you can hear from the transcript and the call today, we're very excited. We had a great Q4, double-digit growth in all of our key products. We hit our -- we beat our top line, we beat the bottom line. So 2017 was, I think, a nice finish, particularly, with the transaction closing for JOTEC on December 1st. We've been working very hard over the last 5 months. We started integrating this transaction the day we signed. So we've been actively and aggressively integrating for 5 months.

We're very excited to go live in our direct countries, Italy, Spain, Poland on April 1, the back-office is being set up. And we're looking forward to a very successful 2018. Our channels are in place, our products are in place, we've got a great leadership team and our pipeline is extremely powerful. Everything from BioGlue China to U.S. PerClot hitting in the second half of '19 to -- you heard my comments about PROACT 10a, you heard my comments about stent grafts, next-generation stent grafts, almost every product line in Europe and outside the U.S. coming this time next year and then using those products to trial in the U.S. going forward. So we're very excited and look forward to working with you as we build the company.

It sounded like there was another question. Do you have someone in the queue for -- is there anyone else in the queue?

Yes, I wasn't to interrupt you. We have another question from the line of Joe Munda with First Analysis.

Sorry, having some issues getting into the queue here. Can you hear me okay?

Yes. We hear you fine.

Yes. I'll make this quick. Just a lot of questions answered already. What was the total debt at the end of quarter?

It was right at $225 million.

$225 million. Ashley, other thing is, real quick, in the breakout GAAP versus non-GAAP, for the diluted weighted average shares outstanding 34,025 million, but then on non-GAAP you have 35,090 million. Can you, I guess, give us some color on the delta there, maybe I'm missing something on my end?

You mean, between the forecast at 37.5 million for 2018 compared to...

The fourth quarter, the reconciliation from GAAP to non-GAAP for this year...

The additional shares that we issued was part of the JOTEC acquisition were only outstanding for 1 month during the quarter. So that's why you have a lower share count in the fourth quarter.

Okay. That makes sense. And then Pat, just real quick, BioGlue put up a really solid quarter in the fourth quarter, you gave us some key points here. But can you give us a little bit more granularity? I know U.S. is up despite trialing against the competing product, but I mean, a little bit more color from our end would be very helpful, because this seemed like really nice solid breakout quarter for BioGlue?

I think one of the things, so we actually -- it was nice to see growth in the U.S., and it was up a couple of percent, and we had pressure again because of the competitive trialing we talked about all year. We saw nice growth in Europe. I think the big swing was -- and we've talked about this before as well, both to the upside and the downside. Some of the distributor ordering patterns I can't control and we obviously had a big order, I think, coming out of Japan late in the year, which kind of boosted up the revenue. So I mean, look, we see that with tissue and Glue sometimes or depending on the distributors you're going to have a big quarter, one quarter and then the next quarter is a little lighter and then you kind of -- it smooths out, and I made that comment previously. So I think the Glue growth was excellent, we did have a big -- I think the only thing -- the order was a big order in Japan late in the year.

Okay. And then last question here. Ashley, you talked about unit growth, vascular about 7% overall growth, it was roughly 5% in the quarter. Are you seeing pricing pressure, competition in the space? You talked about gross margins coming down for tissue. Just was wondering, some of the dynamics there, is pricing at risk as far as some of the tissue business is concerned?

No. I think that the decrease that we're projecting in margins for 2018 versus '17 is more a function of reduced throughput to the facility as we optimize our inventory levels.

It's on the COGS side, not on the price side.

Yes.

We manage our inventory and our throughput. And if you have hot throughput, your margins are better; and if you back off your throughput, your margins come down a little bit. That's just the nature of the math. But it's not a price issue, it's a COGS issue.

And as I indicated, we're still expecting gross margins for our tissue processing business to be in the low 50% range.

There are no further questions, I hand back to Pat MacKin for closing comments, once again.

Okay. So I'm not going to do this all over again. So I just want to thank everybody for joining on the call and look forward to keeping you updated with our progress. Have a great day. Thanks.

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