Artivion Inc (AORT) 2018 Q2 法說會逐字稿

Greetings, and welcome to the CryoLife Corporation 2Q 2018 Financial Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Good morning. This is [Lynne Lewis] from [The Martin Group]. Thank you for joining the call today. Joining me 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 to Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time, involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from those forward-looking statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued last night.

With that, I'd like to turn the call over to CryoLife's CEO, Pat MacKin.

Thanks, Lynn, and good morning, everyone. I'm pleased to report we have a very successful second quarter. Our strong performance was driven by solid execution of our strategy, which is performing as expected. Our 2 transformative acquisitions, JOTEC and On-X, both were strong contributors in the quarter and their momentum continues to build. We are also seeing the benefits of the global realignment of our direct sales force. I will detail later on what is behind our market share gains, update you on the progress of the clinical front, and while we are confident, our best days are still ahead.

Our second quarter results reflect strong performance across all of our major product lines. Revenue was up to $68.5 million, up 10% on a non-GAAP basis. Currency is -- it's also at a constant currency basis. What's especially noteworthy was that the revenue from On-X and JOTEC were up 21% and 31%, respectively, on an organic basis. This performance further validates our market strategy and the ability of our products to compete. As a result, we are raising our revenue expectations for 2018 from the previous range of $250 million to $256 million to a new range of $256 million to $260 million.

Our solid results through the first half of the year are a direct result of the successful integration of On-X and JOTEC, and our strategic decision to focus our attention on the treatment of aortic disease. We believe our total addressable market for the products we market today to be approximately $2 billion, and based on our robust internal R&D pipeline, we expect this to increase by another 50% to an addressable market of $3 billion.

What we had envisioned when we transformed the company over the last several years is playing out in the market as expected. For those that are new to the company, CryoLife is a significantly different company than it was just a few years ago. We sought to raise our growth profile by bringing in technologically advanced and differentiated products that were backed by compelling clinical data and supported by an experienced and well-trained team of direct sales professionals. We delivered on that objective, which has allowed us to move market share meaningfully in a relatively short period of time. We also kept select legacy CryoLife products, while divesting others not in our current area of focus. The sum of these decisions has meaningfully increased our growth rate and our profitability.

We are seeing with our On-X line that our salespeople are -- and customers gain experience with the products, sales steadily improved. Immediately after the On-X acquisition, On-X growth was in the mid to high single digits now that its growth is exceeding 20%. In addition, our On-X market share in the U.S. is still only around 30%, which gives us lots of room for future growth. We believe the effective dissemination of the PROACT data, as well as the actual performance of the product are helping to grow our share.

We added only 12 new accounts in the U.S. in the second quarter, but sales were up 20%, highlighting the deeper penetration into existing accounts. A portion of this growth results from increasing usage of our mitral valves, and accounts that were brought online in previous quarters with the aortic valve that were -- and playing for non-aortic valves.

We have other catalysts to drive growth. First, at this time, we are selling very little into the Chinese market, which is an enormous market for both the On-X and JOTEC product lines. Second, we are also hopeful the On-X ascending aortic prosthesis or AAP will return to the European market later this year. Third, we are starting to see more traction in On-X and JOTEC product lines from cross-selling than ever before. Fourth, we are currently only seeing minimal incremental benefit from going direct in Spain, Italy and Poland because many tenders are still being managed by former distributors. This will change over time and bodes well for future growth. Fifth, France and the U.K. are just getting started to see the results of JOTEC being sold directly. We also expect those contributions to increase over time. So as you just heard, there is still a fair amount of untapped potential well within our sights.

Turning now to our second quarter performance. We remain on track with each of our 5 core initiatives. We are well on our way toward achieving these goals we set for 2018. The first key initiative we set for 2018 is to achieve our full year 2018 financial guidance. As evidenced by reported results and increase in revenue expectations for the year, we are well on our way to delivering on this initiative.

Our second key initiative is to complete the integration of JOTEC and deliver double-digit non-GAAP revenue growth in 2018. In the second quarter 2018, we posted non-GAAP revenue growth of 31% in the JOTEC portfolio over the second quarter of 2017. We saw strength across the entire JOTEC portfolio, specifically in our differentiated branch technologies. We believe these results demonstrate the significant potential of JOTEC's product portfolio in an overall market that is growing in the low-single-digits. We expect this momentum to continue.

Just as we saw with On-X, we are seeing our direct sales teams, especially in those countries where we just converted from a distributor, continue to gain experience and take market share. Moreover, you may recall, we plan to introduce 3 next generation products in Europe in 2019. We remain very excited about the prospects for the JOTEC business going forward.

Our third key initiative is to continue our momentum in the On-X business, and deliver double-digit revenue growth in 2018. We are off to a great start as the On-X portfolio grew 21% in the second quarter relative to the second quarter of 2017, including a 22% increase in North America, an increase of 25% in Europe, Middle East and Africa, and that's despite not having AAP available in that market, as well as a 9% increase in Asia Pacific, Latin America.

Our sales force continues to educate more and more physicians and other health care professionals that On-X is the only mechanical aortic valve that is FDA-approved for a 1.5 to 2.0 INR, which showed a 65% reduction in bleeding in the PROACT clinical trial. This information of clinical superiority is convincing more and more physicians to select the On-X valve for their patients.

Our fourth key initiative in 2018 is to continue to expand our current total addressable market opportunity through investment in our R&D product pipeline, including both JOTEC product line and our legacy CryoLife product lines. In that regard, we continue to make significant progress in our clinical trials for BioGlue in China and PerClot in the U.S. In the BioGlue China trial, we have now concluded enrollment in that trial. We remain on track for the potential approval of BioGlue China in the second half of 2019.

Since restarting the PerClot study under revised protocol, we now have full site activation at 22 centers. To date, we've enrolled 70%. That's 230 out of 324 patients needed to complete that trial. Our current enrollment keeps us on track for a PMA submission to the FDA in the first half of 2019.

We are also working to start the PROACT 10A trial. We look forward to providing more details about this exciting trial on future calls. And finally, we remain on track to launch several next-generation JOTEC products in international markets next year. These are the same products we will be seeking to bring to the U.S. markets, and expect to commence U.S. clinical trials next year.

Our fifth key initiative for 2018 is to complete the transition to direct sales channels in our legacy CryoLife products in Spain, Italy and Poland. I'm pleased to announce that we've achieved that objective, and as of April 1, we are positioned to service customers on a direct basis for CryoLife legacy products in each of those markets.

And with that, I'll now turn the call over to Ashley.

Thanks, Pat. I will now review our second -- our results for the second quarter as well as our financial outlook. Total company revenues increased 43% to $68.5 million when compared to the second quarter of the prior year. On a non-GAAP basis, total revenues increased 12% and 10% on a constant currency basis. On a geographical basis, second quarter North American revenues were $38 million, an increase of 7% year-over-year. The increase was driven by a 22% increase in On-X revenues, an 8% increase in tissue processing revenues, and a 3% increase in BioGlue revenues.

Revenues from our Europe, Middle East and Africa region were $24.2 million, an increase of 203%, and an increase of 25% on a non-GAAP basis compared to the prior year. Revenues from Asia Pacific and Latin America were $6.3 million for the second quarter, an increase of 41% and an increase of 3% on a non-GAAP basis compared to the prior year.

Looking at our individual product lines, On-X revenues for the second quarter were $11.9 million, an increase of 21% over the second quarter of 2017. On-X revenues in North America direct markets were up 22% over the second quarter of 2017. Europe, Middle East and Africa On-X sales increased 25% overall year-over-year for the second quarter and On-X direct sales in Europe, Middle East and Africa, excluding Spain, Italy and Poland, where we were currently in transition, grew 36%. On-X revenues increased 9% in Asia Pacific and Latin America.

JOTEC revenues for the second quarter were $17.2 million. Non-GAAP JOTEC revenues increased 31% compared to the second quarter of 2017. We saw strength across the entire portfolio, especially our branched thoracoabdominal and iliac graphs. On a constant currency basis, non-GAAP JOTEC revenues were up 19% in the second quarter.

BioGlue revenues in the second quarter increased 2% year-over-year to $17 million. Despite competitive activities, North American BioGlue revenues were $9.3 million in Q2, an increase of 3% year-over-year. OUS, BioGlue revenues increased 1% year-over-year to $7.7 million. BioGlue revenues were up 8% in Europe, Middle East and Africa, and decreased to 7% year-over-year in Asia Pacific, resulting from distributor ordering patterns. We remain positive on the prospects for BioGlue based on our ongoing strategy to go direct in select OUS markets, the cross-selling opportunity with 45 JOTEC reps, who call on vascular surgeons, and a potential regulatory approval of BioGlue in China in second half of 2019.

Total tissue processing revenues for the second quarter were $19.2 million, an increase of 8% compared to the second quarter of 2017. During the second quarter, vascular revenues and cardiac tissue processing revenues increased 10% and 7% year-over-year, respectively.

Our overall gross margin for the second quarter was 67%. Gross margins in the second quarter included -- include a charge of $1.2 million related to a step-up in basis for acquired JOTEC and other distributor inventory. We expect an additional $300,000 charge over the balance of the year, the majority of which is expected in 3Q. Excluding the $1.2 million charge, non-GAAP gross margin for the second quarter was 69%.

SG&A expenses during the second quarter were $34.7 million, which includes $1.3 million in integration and business development related expenses. Our tax rate for the second quarter of 2018 was a benefit of over 200%. The tax rate reflects excess tax benefits related to stock compensation expenses, partially offset by nondeductible transaction cost and executive compensation. Excluding these items, our effective tax rate would have been in the mid-20% range.

On the bottom line, we reported GAAP net income of $226,000 or $0.01 per fully diluted share in the second quarter of 2018, and non-GAAP net income was $3.9 million or $0.10 per share. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results.

As of July 31, 2018, we had approximately $33 million in cash, cash equivalents and restricted securities. We had approximately $224 million outstanding under our term loan B, and based on our credit agreement, our current gross leverage stood just over 4x, and our net leverage was just under 3x -- just under 4x, excuse me.

As Pat said earlier, as a result of our performance year-to-date and our growing confidence in our business model, we are increasing our 2018 full year guidance -- revenue guidance to a range of $256 million to $260 million from our previous range of $250 million to $256 million. All other guidance currently remains the same.

And last, we expect revenues for the third quarter of 2018 to be between $61 million and $63 million, which reflects the seasonality of our Europe, Middle East and Africa business during the European holiday season and to account for the dollar strengthening approximately 4% compared to the first half of the year.

That concludes my comments, and now I will turn it back over to Pat.

Thanks, Ashley. So as you've heard this morning, we are firing on all cylinders. Our sales momentum is strong. Our strategy is working. Our pipeline is advancing on schedule, and we are still in the early days in capitalizing on the large opportunity before us.

With both large acquisitions now integrated, we're able to focus even greater attention on market execution, and that is showing up in our results. All the pieces are in place for the continued growth. Our sales force has more experience selling the products, and there's ample market share for the taking. We also have a robust R&D pipeline set to deliver over multiple years. If approved, our pipeline will provide us with a tremendous incremental growth potential around the globe. What also excites us is that all the potential growth areas I've discussed this morning are already embedded within the company today. If we were able to execute on our plan, we'll have numerous new product launches, BioGlue in China, powerful PROACT data, the new PROACT 10A trial. Combined, those initiatives will vastly increase our growth potential. We do not have to make another acquisition, and we still have the ability to increase our addressable market by over $1 billion from our pipeline alone. This is precisely why I brought in several highly experienced individuals to lead critical areas of the business. We have assembled an exceptional management team, who are well-suited to deliver on objectives. I said in my opening comments, but it's worth repeating, our best days are still ahead.

So in closing, I am very proud of what we've been able to accomplish in a relatively short period of time. And I want to extend a sincere thank you to all of our employees, who had a hand in delivering another great quarter. With that, we will now open the lines for questions. Operator, will you please open the lines?

(Operator Instructions) And the first question comes from Jason Mills with Canaccord Genuity.

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

No, I think you -- there were no -- we weren't selling back orders. I think the constant currency growth for JOTEC was around 19%, and we're very excited -- as you know, when you acquire a company and you integrate, you're always nervous about what the quarters look like, the first quarter or 2. I could tell you that the European team, I think people -- just to remind people, the CEO of JOTEC remained onboard as the Vice President of Europe, Middle East and Africa. He's extremely strong leader. He's done a great job integrating the team. He now leads that entire organization commercially as well. And I can tell you, they're firing on all cylinders. They've done a great job as far as integrating the company, taking the CryoLife products direct in Spain, Italy and Poland, taking the JOTEC products direct in France and in Ireland, and again, we're still -- we still kind of are seeing the benefits of that going forward. So that business is really firing on all cylinders. And in fact, we actually had some back orders on our -- kind of our vascular and kind of our Dacron PTF graph lines. So we actually had back orders in the quarter that we are working on filling even with these numbers.

That's a superb number. So Pat, next question, just kind of longer term. I guess we have to look out a couple of years to see what the business may look like with PerClot in the United States and BioGlue in China. But if we -- could we -- could you give us a sense for the opportunity for those products from a revenue perspective in the first couple of years after approval? It seems to me, at least for PerClot, you're going to have the sales force in place. So it's just plugging it in, and really providing physicians with an alternative and what seems like a really strong alternative as well. And then in -- for BioGlue, your distributors, they're in place, I think, as well. So could you just talk about perhaps what you see from those 2 products, let's say, first full year, full couple of years after they're approved in those respective geographies?

Yes. So I'll take the BioGlue China, and it's actually rewarding to see that trial has now enrolled. And now we're really in the kind of wrapping up the clinical trial, and it was a significant study. It was about 180 patients in type aortic dissections in China. We conducted that trial in the 7 largest centers in China, and it's a good sized market. As you can imagine, it's pretty difficult to get great market data, so we really don't have super granular data like we can in Europe and the U.S. But our best estimate is that, that market alone, just the aortic dissection market in China is probably a $10 million market, and there's no competitor in that space. And that's kind of equivalent to what Japan is -- the Japan market opportunity is. So that, again, now we're in the approval window, and the CFD approval cycle, because this is kind of a life-saving technology, we're hoping to get faster approval, but those approvals could take 12 to 24 months, so we're going to have to work to see exactly kind of where that's going to land in the kind of the future revenue stream. But I think that that's a $10 million market opportunity, and a lot of those procedures are highly concert -- concentrated in big centers, where we did the trial and maybe a handful more outside of it, but I think it's a pretty easy market to get access to, so it gives you kind of a good sense on China. As far as PerClot, I mean, that trial, as I mentioned, is now 70% enrolled. We're hoping to finish enrollment by the end of the calendar year. It's just a 30-day follow-up, so there's not a long tail to the follow-up. We just need to package up the data, submit to the FDA. So that's probably a 9-month approval cycle, so we could see PerClot at the end of '19. So again, we're a little bit in the -- for both of those trials kind of at the tail end in one and done with the other. We're kind of in the regulatory cycle of, if everything goes great, we could get them at the tail end of '19, but I would say definitely in '20. The PerClot market is probably about $100 million market right now. And as you commented, we've got 75 direct reps in Europe. We've got 60 feet on the street in North America. So we've got a good 125 people direct reps that could be selling that product immediately upon approval. So we'll have to make some assumptions of what we think we can do with that product. We obviously have an extremely strong Cardiac and Vascular channel, but I think you could make some assumptions there on what we could do in that marketplace, going forward.

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

Yes. So for the full year of 2018, we maintained our gross margin guidance on a GAAP basis between 65.5 and 66.5 -- on a non-GAAP basis, excuse me. On a GAAP basis, we think, for the remainder of this year, they're probably going to be between 67% and 68%, and a lot of that is driven by product mix, geographical mix, as well as throughput through the tissue processing laboratory. We haven't given out any guidance for '19 and '20 on gross margin, but we've publicly stated with both the On-X and JOTEC acquisitions, that over the next 4 years or so that we expect to drive gross margins into the low to mid-70% range. So the cadence on how we get there, we may not get to the 70% range over the next couple of years, but it's a possibility, but we'll have more detailed guidance early next year on what we expect gross margins to be in '19.

Yes, and if I could add just a comment there. I mean, we clearly have a focus on -- you saw in the last 3 years, we've taken gross margin from 60% to 69% on a non-GAAP basis, and almost 1,000 basis-point improvement. We are highly focused on kind of our cost-down programs. I think I've mentioned on previous calls, we've got 2 new leaders on the operations side. Both came to us from Baxter. I've worked with previously one of them at Medtronic, really stellar individuals. One ran the global supply chain for all of Baxter, which is a $2 billion spend. He's going to be bringing that, and he's brought kind of a #2 guy in to manage that whole area of the business. So we're looking at a significant cost-down effort over the 5 years, and it's one of our major kind of competitive thrust to get margin expansion to the tune of up to 2% to 3% of cost down every year over the next 5 years.

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

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

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

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

Yes, I think it's multi-factorial. So I think one thing that's encouraging to us is that it's hard to say it's one thing. So I can give you -- I can probably list off 5 things that are contributing to the continued success of On-X. We took 10 points of market share in the last 24 months, so in a significant market against tough competitors. I'll tell you what's doing this. The PROACT trial, as you know, was published in JACC in June, so it really didn't even show up in Q2. That's a really important trial because it goes to cardiologists, and cardiologists are the ones that manage the blood thinners of the patients after they get the heart valve. So now you have a whole new group of clinicians that, frankly, the device companies don't call on, kind of the non-interventional cardiologist. They just got a massive paper telling you that you can put your patients on this valve and reduce their bleeding by 65%, which is a very meaningful clinical difference, as you know. So I think that dissemination of the PROACT data to cardiologist, you haven't even started to see that. Second, as I've mentioned on previous calls, we've done a significant amount of work on our patient website, and I would encourage people to kind of go and look -- search On-X aortic valve online. We've got patient stories. We've got doctor testimonials, we've got a surgeon finder. We have a team here in Atlanta that basically fields kind of a -- it's a patient group, and we're seeing a number of patients that want a different option for their heart valve. They want a lifelong solution with less bleeding. So I would say that the patient initiative has been very successful. Our sales force, we just took Canada direct last year. We've got 3 great direct reps up there. We just took the CryoLife, [hence] On-X direct in Spain, Italy, Poland back in April. So we're going to be putting direct people on the street there. Our U.S. team, we continue -- our leadership there has done a fantastic job bringing in kind of outstanding individuals. We have not increased the footprint, but we've brought in, to the extent, if people aren't doing a -- can't hit their growth numbers, we're bringing in better talent. We've got the PROACT 10A trial we just talked about kind of in the wing. So we've also got the PROACT mitral trial, which should be enrolled this year. So it's exactly -- it's the sister trial to the PROACT aortic, where you can reduce your blood thinners by half, and get a big benefit in bleeding, but we're running the same trial with the mitral valve, which will be enrolled this year, and will require a year of follow up, so it's a couple of years, but that's a 2020 opportunity. So it's just kind of keeps going and going and going. So to try to pin it down as to one thing, it's not one thing. And I think the more comfortable that our reps get selling the valve, the more momentum the product gets. I mean, we're growing the business 20% of flat market. So clearly, there's something to this. And I think the last thing is we're hearing from competitors that they're having a hard time dealing with us because they don't really have a comeback.

Got it. And so either Pat or Ashley, one of the things that you all have mentioned consistently in the past is, at some point, we will start seeing the fruits of our going direct strategy, especially in some of the Benelux centuries. Ashley, I heard you talk about 75 direct reps in Europe. I presume part of them have to be the legacy JOTEC reps. Specifically, for On-X, in Europe, can you quantify the impact of going direct in some of these countries, what is deemed the contribution to the top line? Earlier, you all were getting x, and now you're all x plus delta x, and the delta x is because of so many reps. Any color there would be great.

Yes, so I think -- maybe Ashley can do this, the 2 of us can kind of take this one at a time. So first, I would say just macro, we have about 30 reps in Europe. They call them heart services, selling the On-X valve. We've got about 45 reps in Europe that are kind of the legacy JOTEC reps that sell to kind of to vascular surgeons in the vascular product line. So that's the full 75. So you got 30 people selling the On-X aortic valve in Europe. In countries like Spain, Italy and Poland, each one is very different. I mean, I lived there and worked there for a number of years, so I have a good understanding of those markets. But Poland, for example, they hire direct reps almost immediately in January because that market is more direct, less tender. Whereas, if you look at Italy, you've got -- sometimes, you have tenders that last for 3 years, and those have to remain with the existing distributor. So you take business direct where you can. You leave some with the distributor, and then you kind of wean them off as you go forward. So again, it's really a different answer by country. But in each case, we're seeing, and again, Ashley can comment on the specific numbers, when we kind of remove the middleman, we're seeing probably between a 30% and 50% increase in revenue and the corresponding margin that would go with that.

Yes. So Suraj, I'll just give you a couple of examples. In my prepared comments, I had indicated that in our direct markets for On-X in Europe, Middle East and Africa, and this excludes Spain, Italy and Poland because we're currently transitioning right there. So we're not even beginning to see the full effect of this. Our sales in those direct markets were up 36% year-over-year, and as Pat indicated, it varies significantly by market. Just to give you a couple of examples, we have a larger sales presence in Germany, and our sales were up 120% year-over-year. Switzerland, they were up over 250% year-over-year, and again, it just depends on what specific market it is, but I think that we're confident that -- and Pat mentioned this in his prepared comments that some of these markets, like Spain, Italy and Poland, some of the tenders are still being managed by our former distributors, and we're really not even beginning to see meaningful impact yet from those countries as it relates to the legacy CryoLife products, and we think that's going to be a tailwind over the next 2 to 3 years as those tenders expire, and we're going to continue to see increasing benefit from the strategy.

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

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

Yes. So I think -- we don't really give out kind of specific country-level kind of rep numbers. But I would say that for each one of those, so for a Poland, for example, we had no direct CryoLife reps, if you will. Now they're all CryoLife reps, but there were legacy kind of JOTEC reps in Poland, and actually, it's our best team in Europe. They hired a couple of direct people back in January to represent the kind of the CryoLife product lines, On-X and BioGlue. So I think that, again, it's different by country, and those country leaders will put on direct people, as Ashley was just commenting, as you see the tenders unwind. Poland is less of a tender country, so you could put those reps on quicker. Spain has also got kind of heavy tender. So that country leader will probably add a rep this year, and then maybe add another rep next year. So it's just to kind of titrate the feet-on-the-street to the going direct opportunity.

I would say that the bigger question, I mean, a lot of the -- how many feet on the street we put will be kind of tied to the revenue opportunity and the growth opportunity. We're very bullish on Europe. We've got great leadership over there. We've got a 75% team. I mentioned in my comments, we're launching 3 brand-new products next year in the European market, and each one of them is a breakthrough in its own right. The off-the-shelf branched thoracoabdominal device, we think, is going to be a home run, and we will probably add feet-on-the-street to support this -- the potential, the huge potential of growth that, that will deliver. So a lot of it's going to be predicated upon when we launch the new products, what our expectations for those new products are, and there is more room for expansion on the commercial side in Europe as those products come out. I would say the same for the U.S. I think, the U.S., at least with the current portfolio, is in a bit of a holding pattern on feet-on-the-street until we have some of the new products that come in, and then we'll expand there as well. But we will make sure that the math works as far as that, the investment we make on the feet-on-the-street will drive the growth that will support the spending.

Okay, got it. And could you talk about the guidance a little bit, and the cadence? It seemed like, obviously, this quarter was tremendously strong, but it seems like you maybe a little cautious in the back half of the year. I guess, that being that your 2 most powerful segments are European based, which is typically the weakest quarter of the year, so how does that look for Q3 and then Q4 pulling through as well?

Yes. 2 things, and I'll let Ashley throw in some comments. I mean, you just hit on one of them. I mean, Q3 in Europe, I mean, I lived and worked over there. I mean, August, each country takes holidays at different times, and August is pretty much a throw away month over in Europe. So you have to factor that in to your Q3 numbers. Our Q3 is always our lowest of the year. I think the other thing, which is a real kind of a headwind in the back half is the dollar has strengthened 5 points from the first half. So that's just a math exercise. So if you're figure in the currency adjustment, if you figure in kind of the European holidays in Q3, that's -- we're still showing real great growth. So I mean, we figure that into the guidance. I don't know, Ashley, if you want to comment.

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

Okay. And then lastly, for me, as you think about now that you're a 10% grower with a couple of large targets coming on market, like PerClot and BioGlue, perhaps the end of next year, how do you think about M&A now? How's your appetite today versus 6 months ago? And how might your appetite kind of evolve over the next couple of years?

Yes. I know I think, again, I made some comments in my -- in the prepared remarks that one of the great things about both the On-X and the JOTEC acquisitions, as well as the internal CryoLife kind of legacy pipeline is the combination of all those things together. If you just -- if I just kind of rattle off some things that are coming down the pipe that I'm excited about, BioGlue China is enrolled, and we'll be bringing that product to market again hopefully, late next year, but definitely in '20. PerClot will be enrolled by the end of the year. Again, we'll probably -- that probably is more like a '20 product. We have 3 brand-new JOTEC products, a new thoracic stent graph, a new Frozen Elephant Trunk and a new first-ever off-the-shelf branched thoracoabdominal. We've got the PROACT 10A trial that we'll obviously give an update as we hear more about that. So we've got the U.S. bringing all those JOTEC products to the U.S. I mean, these 2 acquisitions, combined with CryoLife, make it so we actually don't have to do any M&A. That being said, I mean, we're always going to be very smart. We have a strategy and a vision that's focused on aortic disease. I think you will see more. If you're going to see anything from us, it will be tuck-in, which should be more of a product where we would buy a smaller company with -- maybe a one-product company that we would just take that product and drop it in our rep's bag. I think that's very different from what we've done with the kind of the 2 platform acquisitions of On-X and JOTEC. But again, we're inquisitive, but at the same time, we don't really need to do anything because we can deliver the kind of growth we're looking for with what we have.

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

So a couple of questions here. Pat, you touched a little bit in your comments about the new products, the 3 next-gen products. How should we think about the potential rollout of those products in '19? Do you envision them coming all online at the same time? Or would you expect them to be more of a staggered rollout? For our sake and modeling, how do you think we should take a look at it? Should it come on all? I'll let you comment.

Yes, so -- yes and a lot of these -- I mean, it's interesting because a lot of these -- there's probably 5 products that all fall in the same bucket: BioGlue China, PerClot, the JOTEC products, E-nya, E-nside and E-vita Open Neo. Those are the 5 products. They're all in various forms of coming out, and the last step is the regulatory approvals either in Europe, China or the U.S. And trying to predict what regulatory bodies are going to do, I find in my career, is quite difficult. So what we do is we look at how long it takes to get a CE Mark. We look at how long it takes to get an approval in China. We look at how long it takes to get a PMA approved in the U.S. and there's a range, right? People have taken 2 years to get stuff approved in China. People have done it in a year. So there's your range. So we -- and we tend to be conservative in our planning. We don't want to put things in our numbers that is kind of a wing and a prayer that it's going to happen. So for example, the JOTEC products, to your question, we'll be submitting -- 2 of those 3 products will be submitted for European approval at the end of the calendar year. Best case would be we could get that at the beginning of Q2. More likely is we're going to get it at the beginning of Q3. So when we do our modeling, we will probably...

(technical difficulty)

(Operator Instructions) And the next question comes from Brooks O'Neil with Lake Street Capital.

This is Frank Takkinen, on for Brooks O'Neil.

Brooks, can you hear us?

Yes. This is Frank Takkinen, on for Brooks O'Neil.

Can you hear us okay?

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

Yes. I mean, I talked a lot about the On-X. I mean, it's the only product that has FDA approval for a 50% reduction in blood thinners and a 50% reduction in the INR you have to maintain, which yields a benefit of 65% reduction in bleeding. Those results were published recently in the Journal of American College of Cardiology, a peer review journal, so that data is now being widely disseminated. If a competitor wants, in the U.S., if they want to claim that, they're going to have to do a 7-year $20 million clinical trial and get an FDA approval. So I made a comment in my -- in one of the questions and said, it's very hard for a competitor to counteract that because they can't promote a product for that indication. So again, I think that, typically, in the U.S. market, it's going to be hard for people to compete with us. As far as JOTEC, again, we talk a lot about this when we made our acquisition. The reason I was interested in JOTEC is not because they had a -- the 7th or 8th AAA on the market. It was because several of their products are very proprietary and novel that other people don't have. And if there are other people that have them, we typically have the best version of them. So the Frozen Elephant Trunk, we have one competitor in that market, and we do extremely well with that. Our custom branched thoracoabdominal devices, we have a -- our closest competitor is Cook, they have a -- it takes them 4 months to turn around a product. It takes us 18 days. So just gives you a sense, our branched iliac device, we're one of a couple of people that have it. We're doing extremely well with that device. A lot of the bigger players don't have that technology. So our whole philosophy is highly differentiated technology, backed by a very strong sales force, and it's obviously showing up in the results.

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

Yes. I made some comments on my prepared remarks. Based on our credit facility, our gross leverage is just over 4x, around 4.3x, and our net leverage is around 3.7x, and we've also made some comments previously in connection with the acquisition that, assuming that we execute on our plan, that we anticipate our net leverage to be in the low 3x by the end of 2019. We're comfortable with the leverage around those levels. We're going to be executing, and again, just -- we're comfortable with that. We have no current plans to do anything at this point. Pat was talking about the M&A a little bit earlier. If we found some opportunities to acquire tuck-ins and so forth, we would consider using leverage to do that. But I think longer term, we're probably more comfortable around the 3x range.

Yes, just to comment, it sounds -- I just got a note that on Joe Munda's question, the call went blank when I was trying to answer, so I'm not -- we were talking, I guess people couldn't hear us. So Joe's question was about the -- what assumptions he should make for the JOTEC products for the European launches next year. And my comments surrounded, a lot of our upcoming launches are now moving into the cycle of kind of the regulatory approval frame, and for things like BioGlue China, PerClot and the JOTEC products, we really go through a process where we look at not just our company, but what's the average amount of time it takes a company to get approval, kind of fastest, shortest, longest, and then we make assumptions for our planning purposes, where we're going to kind of peg those launches. And specifically, Joe, to the JOTEC EU products, we're submitting for CE Mark at the end of 2018, the fastest we've got that done before is probably 90 days. So we could have it at the beginning of Q2. More likely, it's kind of 180 days, which will be the beginning of Q3. So that's probably what we'll put in our planning is the second half, launching those products in the second half of 2019. So we would expect 2 of them, the E-nya and the E-nside to come in the kind of the Q3 time frame, and then E-vita Open Neo will probably be more in Q4 or even into 2020. So hopefully that got Joe's question because it sounds like we had a technical difficulty on the call.

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

No I don't.

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

Yes. So we want to thank you for joining this morning. We're very pleased with the results of the quarter. As I mentioned, we're hitting on all cylinders. I mean, we had 31% growth in JOTEC, 21% growth in On-X, 12% growth overall for the overall business. Tissue grew 8%. So again, we're very pleased with how the business is performing. I think the integration of JOTEC has gone extremely well. We're pretty much done, except for some IT kind of back-office work in Europe, which is still ongoing, and should be done at the end of the quarter. BioGlue China has enrolled. We're moving into the regulatory approval cycle. PerClot, 70% enrolled. We'll be moving into the regulatory approval cycle in -- by the end of the year. We have our -- we just talked about our 3 JOTEC product launches coming next year. We talked about our FDA Meeting with PROACT 10A. So we're very excited. We have lots of things to be excited about, and we look forward to keeping you posted on our progress at the end of next quarter. Thanks for joining.

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