Pat Mackin - Chairman, President and Chief Executive Officer Ashley Lee - Chief Financial Officer.

Jason Mills - Canaccord Genuity Suraj Kalia - Northland Securities Brooks O’Neil - Lake Street Capital Markets Jeffrey Cohen - Ladenburg Thalmann Jo Munda - First Analysis.

Greetings and welcome to the CryoLife Fourth Quarter and Year End 2017 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce 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 am Ashley Lee, the CFO of CryoLife. Before we begin, I would 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 risks, 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 will turn it over to our CEO, Pat Mackin..

Thanks, Ashley and good morning, everyone. I am very pleased to announce that we had a very solid fourth quarter capping off a highly successful 2017. As you will 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 in 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 have 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 am confident we have done so.

I have little doubt the successful integration of On-X in 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 with 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 three 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 – 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 in 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 continued 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 will cover those topics in more detail at the end of the call when I discuss our 2018 objectives. I will 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 three 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 three countries.

This growth in the face of these revenue reversals highlights the strengths 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 on 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 included 9% growth in our European direct markets despite not having the AEP 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 was 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 team 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 are 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 are conducting in China, we began enrollment in this study in November 2017. We now have full site activation at seven institutions and have more than 103 patients enrolled in this study to-date, 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 a 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 four 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 have been working very hard to integrate JOTEC and have made great progress.

As of January 1 of this year, we went direct with JOTEC products in France and on April 1 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 1, the back office, which includes customer service and finance integration will be complete and will be up and running on the same IT system in all four of these key European markets.

We have 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 will 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 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 have 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 to 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 had 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 continued to expect upside in BioGlue from an improving outlook in Brazil, our ongoing strategy to go direct and select all OUS markets, the cross-selling opportunity from having the 45 JOTEC sales reps that call-in 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 acquired JOTEC inventory. Excluding net 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 have 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 will 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 will complete the integration of the JOTEC business in 2018 and strive to deliver double digit non-GAAP revenue growth for the JOTEC business.

Third, we will 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 the 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 valve 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 are 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 [indiscernible] and our next generation thoracoabdominal device called [indiscernible].

These are the same products that we will 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 am very confident 2018 will be another successful year for CryoLife.

The company has never been better positioned, more competitive, but 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 the 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 the contributions that brought us to where we are today. We have always taken pride in the difference our products make in people’s lives and now with JOTEC on-board we will be helping even more patients around the world.

With that we will now open the lines for questions, operator please proceed..

Thank you. [Operator Instructions] The first question comes from the line of Jason Mills with Canaccord Genuity. Please go ahead..

Hi, thank you very much, Pat and Ashley. Congratulations on a good quarter. Just as aside there, I think folks are having problems entering the queue, so just FYI. So, several questions and again congratulations on the strong fourth quarter bit of surprising strength really up and down the P&L, but especially on the top line in the quarter.

Maybe we will start with the question of how sustainable you think the double-digit growth that you saw in your three core organic franchises is 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% sort of in line with what you have been doing for a little while.

I am just wondering the upside potential there if you continue to integrate and cross-trained, it sounds like that’s going well and potentially 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, you have been adding back that $3.5 million to gross margin infrastructure for 2018 is a little over than what we were modeling.

And I am just wondering where you see gross margins going once you sort of mature the integration of the JOTEC acquisition over time?.

Yes. Thanks, Jason. Yes, so good questions. Let me start with the revenue. Yes, I mean we were very pleased with the fourth quarter.

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 have commented previously particularly on tissue that we expect tissue to kind of grow in the let’s call it 4% to 6% range. We grew tissue 6% last year, some quarters were 4% or 5% some quarters were 9% or 10%.

It can be a kind of a lumpy business we have 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 the mid single-digit range and then you book in those product lines with On-X and JOTEC both growing double-digits that, that was the strategy and that’s pretty much what you are getting with the guidance and what we are expecting.

When we announced the On-X transaction, we said we felt we can get double-digit growth over the next 5 years. When we announced the JOTEC acquisition, we felt we could get double-digit growth over the next 5 years.

And so when you put those kind of bookings up against our core and you add together the double-digit growth of those new products with kind of mid single of our legacy products that’s where you get to the revenue growth that we are 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 6% to 8% number that Ashley gave you.

So, one of things you always get and you are 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 ways and that takes time, we had revenue reversals, we had depressed revenues in the fourth quarter which we communicated. There is a tail to that in Q1.

So in – the nice thing is that as we exit the first quarter a lot of its behind us, we talked about April 1 having our back office, our sales channels and majority of the direct to distributor or I mean distributor to direct in those markets is done. So we would expect growth to accelerate through the year.

And I think that’s one of the reasons you are seeing kind of the range of the 6 to 8 that we think will be for the full year because you have 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 are at the top end of the range, we will be in the upper 67% range. For 2018 there are a 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 acquisitions, so that’s having a little bit of an effect to way down the margin number. The other thing is we are expecting a slight decrease in our tissue processing gross margins for the year.

We implemented some processes to optimize our inventory levels that’s reduced – that’s resulted in a little bit of reduced throughput through our facility, which is slightly impacting our unit costs.

We are 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, in fact you gave some color to this in the remarks to my first question just how you see the growth in JOTEC and On-X was double-digits and then the other parts of the business that you had single digits as you look – as to P&L over the next 3 years and you are standing here probably not there to give granular 3 year 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 our baseline basis or maybe you can think about best and worst case growth rates in margin percentages.

You have talked in the past about this business now being really setup 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 will get back in queue, just maybe give us an update on the AEP certification for On-X in France? And thanks I will get back in queue.

Congrats on the good quarter..

Thanks, Jason. Yes. So I think I mean one I can say we are 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 the market share gains we have had.

I mean the same with JOTEC I mean the more I have learned, the more excited I get. And I think there is a – but there are a few things about if you look over the next 3 years that are going to be new for our shareholders.

One, when you look – you 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 at the mid-single that’s going to and if we can push the growth rates on the newer products the On-X and the JOTEC that could give us – get us in the higher end range of this upper single-digits, that’s the first piece.

The second piece is as 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 disappoint in larger companies is quite good. Our new Head of Operations is a gentleman I brought in from that I worked with previous at Medtronic.

His last job was the Head of Global Supply Chain for Baxter, their $2 billion supply chain. One of his goal – his major goals over the next 5 years is to take off down in our cost of goods line and we are 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 cost down. Again if you take step down the P&L and look at the kind of the G&A, we largely have our infrastructure in place. We have got 75 person channel direct channel in Europe.

We are direct in every market except the Nordics. We have got a 60 person channel in North America after going direct in Canada. Those two channels are largely fixed. We may add a few people here or there, but we are going to start to leverage that P&L. And then as you move down the next line into R&D, we have got an amazing pipeline guys.

We talked about BioGlue China and PerClot hitting kind of late next year, but we are also going to be launching I mentioned in the script, in Europe, we are going to be launching a next-generation frozen elephant trunk and next-generation thoracic stent graft and next generation branch thoracoabdominal graft through our 75 person channel.

We are going to then take those products and bring those into U.S. PMA IDE clinical trials which will start next year. So, you are 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 are going to be pushing hard to get up into the 20% range.

So, I think as you see this unfold and this is an execution story, 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 have got a great opportunity if we execute..

Thanks, Pat. Thanks, Ashley..

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

Good morning gentlemen.

Can you hear me alright?.

Yes, good morning..

Good morning..

Pat my apologies for the background noise.

So, Ashley, the 9% year-over-year decrease in On-X in the direct geographies, I guess specifically that you are going to look at Canada and Benelux, can you give us more precise information, what was in gross margins and what were the ASP increases, if any?.

Yes. Hey, Suraj, it’s the background noise it’s really hard to hear.

I think what I heard you ask is, so full year On-X growth?.

Yes. So, in our direct markets, we were up 22% year-over-year in the fourth quarter and that was 9% in our European direct markets and 24% in our North American direct markets..

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

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

Yes, I think the other important part, if I could just hold a bit, we don’t just go direct to do get a one-time 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 have three – we hired three great reps in Canada.

We have got a rep in Montréal, a rep in Toronto, a rep in Vancouver. They are carrying the whole product line. That business is growing significantly faster, 5 times as fast as 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 are the best-in-class and that’s really why we do it from a more strategic standpoint..

Got it. And again apologies for the background, Pat.

On JOTEC, 14% year-over-year growth in FY ‘17 I presume there must be some discussion from a sales force perspective integration, because that growth was slightly lower, then 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 during this acquisition thinking it’s a small company and you know the amount of due diligence we have to do on financials, on patents, on employment and 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 has really been much of a channel disruption and now that we have got this transaction behind us and the integration is well on its way, I expect to have the – all the right people driving towards – driving the top line, so I am not surprised, but again it was still good growth..

And finally Pat, it’s surprised that people are not paying that much attention to select PROACT XA, but we have talked about it multiple times, but I would like you to give the audience how this could be a game changer and I know this is my [indiscernible] I am just – I am extremely bullish on the path that you guys are going down under as you gain further audience at large, just kind of walk them through why or how this could help you hit our targets on aspects and even in the [indiscernible] valve any color for the audience at large will be great? Thanks for taking my questions and congrats on the quarter..

Thanks Suraj. Yes. 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 are now calling it PROACT XA because we are going to be studying one of the novel in a coagulant, which is a XA inhibitor that has been PROACT XA.

This is what I would call a kind of a game changer for aortic heart valve surgery. One of the downsides of having to – when you get a mechanical valve over a tissue valve is having to take a blood thinner. And the trade off 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 enhanced 65% reduction in bleeding.

That’s a great step forward, but still the fact of the matter is Coumadin requires you to it’s called maintain your INR level to check the level how thin your blood is to make sure that your blood is not going to clot and cause a stroke with your valve.

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 are 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 vita – is a vitamin K antagonist, so if you eat too much salad, you could actually throw off your INR levels. Switching to an Eliquis, I would just say that universally Coumadin is not exact – it’s actually an effective drug, it is not a very well like drug by patients or cardiologists.

Conversely, Eliquis and you have all probably seen the commercials on TV is the fastest growing of the no acts, it’s taking the most share, it’s probably the most widely prescribed by cardiologists, it’s a very popular drug with cardiologist for atrial fibrillation and has been studied widely.

And always it’s showing a much better bleeding profile than Coumadin. That being said, our thought is we believe that we have a unique valve and the On-X valve as shown in PROACT.

And we think that if we could in the trial that we are exploring in PROACT XA is basically comparing the Eliquis anticoagulant versus the current standard of care which is Coumadin in a large number of patients up to almost thousands patients randomized. And these would be existing patients with – patients that already have an On-X valve.

We would randomized amino 2 groups, one group gets Eliquis, one group stays on Coumadin and we see what happens over several years.

We have 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 have done basically shows that the average age of mechanical valve patient today which is 58 years jumps to 68 years 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 Eliquis – 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 $100 million range. So you guys can do the math, I mean this is a significant opportunity.

And frankly, the reason we are doing this is – it’s just a we think that the best of both worlds for a patient is to have one operation that lasts in their life and have it is least burdensome on their lifestyle by taking a blood thinner that’s much more – a much friendlier.

And we think it will change the standard of care and we are very excited we have had discussions with the FDA and as soon as we have an ID and a protocol well everybody know..

Super. Thank you..

Your next question comes from the line of Brooks O’Neil with Lake Street Capital Markets. Please go ahead..

Good morning guys and congratulations on the quarter, 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 good morning Brooks and thanks for the comments. So we mentioned – I mentioned this a little bit in the script. I mean our plan basically is the JOTEC team is – they have got a great R&D team. They have 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 us 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 next generation frozen elephant trunk called a Vita Open Neo, we are going to deliver next generation thoracic stent graft called [indiscernible] and they are going to deliver our next generation branch thoracoabdominal graft called E-inside.

We are going to take those three devices, we will launch those in Europe about this time next year, but those will be the three devices that we take to the FDA and get our IDE setup 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 three clinical trials.

Again those are all PMA trials and from – you go from enrolling to your follow-up to your approval, it’s a four – probably 4-year timeframe you are 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.

to kind of bring you to the time when you get the significant JOTEC products to the U.S.?.

Yes. And again it’s almost like to your point, I mean as an investor, I mean 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 are waiting for these U.S. products to hit. Once those – I mean the 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 are going to see nice growth as I commented earlier between the core products, the geographical expansion, the R&D pipeline outside of the JOTEC in the U.S..

Great.

And then the only other one I had was any update on the wound products that you developed them we are talking about maybe finding a partner for it?.

Yes. I think look – so we believe we have got a great product. This is our product called Neo-Patch, it’s an amniotic membrane used for diabetic foot ulcers, the DFU market. It’s a big market, it’s fast growing.

This product had been developed and we – I thought it was a good idea to CryoLife did a nice job developing the product, we don’t have the sales force, so we did a clinical trial called closure, product was very effective. And basically we have been in partnership discussions looking for a partner to distribute this for us.

We are still active in those discussions from. I mean from a shareholder standpoint, we are not spending really spending any money on it. It’s kind of it’s already been developed, it’s already been trialed. We are now just in kind of BD discussions and if we find a partner it’s all upside, if we don’t, I mean it’s – there is kind of no harm of valve.

But it is the potential upside, but it’s not really material to what we are doing as a company..

Okay. Thank you very much..

Thanks Brooks..

Our next question comes from line of Jeffrey Cohen with Ladenburg Thalmann. Please go ahead..

Hi Pat and Ashley, can you hear me, okay?.

Yes. Good morning Jeff..

So just a couple of issues, lot of my questions have been addressed already, but can you talk a little bit about pricing, price increases, specific territories in which prices have been fluctuating particular areas where you have swap to go direct a little bit and as far s that affect? Thanks..

Yes. We – and I think I have mentioned this before on previous calls. I mean when I got to CryoLife, I was a bit surprised that in the markets I have been competing and the price pressures were intense and it wasn’t are you raising prices, it’s like how far your price is going down.

When I got to CryoLife, they have been you raising prices pretty substantially every year. And I think there is a point in this healthcare environment where you kind of you can only go so far. And I think we have – our prices are very stable frankly.

And I will let Ashley comment, he made a comment earlier about when we go direct it varies by country and who your distributor is and what the market is and which product you are 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. I mean 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 any further to add. That’s pretty accurate..

Okay.

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 my fingers. I would say that Japan BioGlue had been growing 20% after the new indication and we have reported on that a number of times.

We still see nice growth in Japan in BioGlue after we get that 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 are in the middle of exploring those opportunities as we speak..

Okay, got it. That does it from me. Thanks, again. Nice readout on the year..

Thanks, Jeff..

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

Well, I want to thank everybody for joining today. And as you could hear from the transcript in the call today, we are very excited we had a great Q4, double-digit growth in all of our key products. 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 1.

We have been working very hard over the last 5 months. We start integrating this transaction the date we signed. So, we have been actively and aggressively integrating for 5 months. We are very excited to go live in our direct countries, Italy, Spain, Poland.

On April 1, the back office is being setup and we are looking forward to a very successful 2018. Our channels are in place. Our products are in place. We 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 are very excited and look forward to working with you as we build the company. It sounds like there was another question. Do you have someone in the queue for – is there anyone else in the queue..

Excuse me. Yes, I wanted to interrupt to. We have another question from the line of Jo Munda with First Analysis. Please go ahead..

Hey, Pat and Ashley. Sorry, having some issues getting into the queue here.

Can you hear me, Okay?.

Yes, we hear you fine..

Yes, I will make this quick. Just lot of questions answered already.

What was total debt at the end of the quarter?.

It was right at $225 million..

$225 million. Ashley, other thing is real quick, the breakout GAAP versus non-GAAP for the diluted weighted average shares outstanding 34 million, a 25 but then on the non-GAAP you have 35.90 million.

I guess give us some color on the delta there maybe I am missing something on my end?.

You mean between the forecasted 37.5 million for 2018 compared to?.

No, the fourth quarter, the reconciliations from GAAP to non-GAAP for this year has been on?.

The additional shares that we issued as part of the JOTEC acquisition, we are 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 it means could you give us a little bit more granularity, I know U.S.

was up despite trailing against competing products, but I mean a little bit more color from our end would be very helpful, because it seems like a really nice solid breakout quarter for BioGlue?.

Yes. I think one of the things, so we actually it was nice to see growth in the U.S. I mean, it was up a couple of percent and we had some pressure against because of the competitive trial and we have talked all year. We saw nice growth in Europe.

I think the big swing was – and we 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 – we had a big order, I think coming out of Japan late in the year, which kind of boosted up the revenues.

So, I mean, look we see that with tissue and Glue sometimes, where depending on the distributors, you are going to have a big quarter, one quarter and then it’s – the next quarter is a little lighter and then you kind of it smoothes 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 out of the ordinary was a big order of Japan late in the year..

Okay. And then last question here, Ashley, you talked about unit growth on the vascular, about 7% for overall growth is roughly 5% in the quarter.

Are you seeing pricing pressure competition in the space? You talked about gross margins coming down for tissue, I just was wondering some of the dynamics there, is pricing at risk as far as the some of the tissue business is concerned?.

I think that the decrease that we are projecting in margins for 2018 versus ‘17 it is more a function of reduced throughput to the facility as we optimize our inventory levels..

Yes, it’s on the COGS side, not on the price side..

Yes..

We manage our inventory and our throughput. And if you have high throughput, your margins are better and if you back off your throughput, your margins come down a little bit, I mean, that’s just the nature of the math, but it’s not a price issue, it’s a COGS issue..

Yes. And as I indicated, I mean, we are still expecting gross margins for tissue processing business to be in the low 50% range..

Okay, thank you..

There are no further questions. I hand back to Pat Mackin for closing comments..

I am not going to do this all over again. So, I just want to thank everybody for joining on the call and I 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..