Greetings. Welcome to CryoLife's Third Quarter 2019 Financial Conference Call. [Operator Instructions] Please note, this conference is being recorded. It is now my pleasure to introduce your host. I will now turn the call over to Greg Chodaczek. Thank you, Greg Chodaczek, you may now begin..

Thank you. Good afternoon, and thank you for joining the call today. Joining me today from CryoLife's management team are Pat MacKin, CEO; and Ashley Lee, CFO. Before we begin, I 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 on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future.

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

Additional information concerning these -- concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. Now I'll turn the call over to Cryolife's CEO, Pat MacKin..

Thanks, Greg, and good evening, everyone. Thanks for joining us. Total revenue for the third quarter was $67.9 million, reflecting year-over-year growth of roughly 5% and 6% on a non-GAAP constant currency basis. Revenues were at the midpoint of our revenue guidance that were driven by revenue growth in both our On-X and JOTEC product lines.

We also saw in line performance in our tissue processing business. We also executed an exclusive distribution agreement with Endospan, which we believe will provide additional growth and cross-selling opportunities in the future.

Demand for our innovative product portfolio remains robust, and we continue to make good progress on the advancement of our product pipeline. Turning first to JOTEC. JOTEC grew 9% on a year-over-year non-GAAP constant currency basis. Growth for the quarter was solid but tempered by continued supply issues.

We expect to resolve these supply issues over the next few quarters anticipate growth trends for our JOTEC products to accelerate as E-nside, E-nya E-vita OPEN NEO hit the European market early next year.

With respect to E-nside, many of these patients are treated with risky, invasive open-surgical procedures, which are characterized by lengthy hospitalization periods and prolonged recuperation.

With our custom-made stent grafts, which can take up to -- or they can be treated with our custom-made stent grafts, which can take up to 90 days to manufacture.

E-nside is the only off-the-shelf precannulated thoracoabdominal stent graft with inner branches that eliminate the waiting period experienced by approximately 70% of patients who would normally receive custom-made stent grafts. The E-nya thoracic stent graft system is our next-generation, low-profile solution for patients with aortic disease.

This includes both the aortic aneurysms and aortic dissections. The E-nya delivery system addresses one of the major challenges of a low-profile TAVR devices, which are high-deployment forces. This squeeze-to-release mechanism is simple and gives physicians much more control while treating both simple and challenging anatomies.

As one of the most versatile grafts in the market, E-nya is the perfect complement to our E-vita OPEN PLUS hybrid stent graft system as well as a line of custom-made devices providing clinicians with the complete portfolio of products.

Finally, regarding the E-vita OPEN NEO, which is our next-generation frozen elephant trunk, we expect to receive CE Mark in the first quarter of 2020. Switching gears to On-X. Revenue increased 12% on a non-GAAP constant currency basis driven by the strength from our aortic valves, which were up 11% in the quarter.

Revenues in North America grew 10%, while our OUS markets grew 14%. We expect On-X revenue growth to remain in the high single or low double digits as we continue to take market share.

We also expect to receive in the fourth quarter an IND approval to begin our PROACT 10A trial, a prospective randomized clinical trial to determine if patients with an On-X aortic valve can be maintained safely and effectively on Eliquis versus warfarin.

We believe the commencement of the PROACT 10A trial alone will drive additional market awareness from physicians and health care providers regarding the proven clinical benefits of the On-X aortic valve.

Based on recent discussions with the FDA, we now expect the PROACT 10A trial will consist of approximately 1,000 patients at up to 60 sites in North America and potentially some sites in Europe. This is down from our previous estimate of up to 1,200 patients.

As the only mechanical valve with FDA approval for use with reduced amounts of warfarin, the On-X aortic valve reduces patient bleeding by over 60% compared to competitive mechanical valves.

If the PROACT 10A trial is successful in improving, the On-X aortic valve recipients can be maintained effectively on Eliquis, we believe CryoLife will become the market share leader in the mechanical valve market while simultaneously taking share from existing bioprosthetic aortic valves.

Such an indication has significant potential to accelerate growth in our On-X business. Moving to our tissue business. We continue to see in line performance in our tissue business, which was up 5% led by our cardiac tissue valve business, which delivered year-over-year 19% growth.

We continue to experience strong demand for our pulmonary tissue valves, which we believe stems from a renaissance and the Ross procedure as well as improved availability of our pediatric heart valves. We are confident that these tailwinds will continue to drive growth in our cardiac tissue business.

BioGlue continues to deliver solid results, increased 1% on a non-GAAP constant currency basis in the quarter. We submitted our application for regulatory approval to the Chinese FDA earlier this year, and look forward to sharing updates on the process when available. Regarding U.S.

PerClot, the trial is now complete, and we remain on track to submit our PMA to the FDA in early 2020.

Lastly, we recently announced our EU distribution agreement with Endospan, an Israeli-based, privately held developer of the NEXUS device, which is the only endovascular stent graft system currently CE Marked for the repair of both aneurysms and dissections in the aortic arch.

As part of our collaboration with Endospan, we become the exclusive distributor for the NEXUS stent graft system in Europe. Additionally, we extended a loan of $5 million and a commitment to loan up to an additional $10 million to Endospan to support Endospan's U.S. clinical trial for NEXUS and its commercialization of NEXUS in the EU.

As a reminder, there are approximately 36,000 procedures worldwide that are treatable with NEXUS and E-vita OPEN NEO, which places the total addressable market opportunity at just over $1 billion. We estimate that approximately 75% of the worldwide market, or just over $800 million, can be addressed through an endovascular approach with NEXUS.

And approximately 25% of the worldwide market or just over $250 million can be addressed in an open surgical approach with the E-vita OPEN NEO.

In Europe alone, there are approximately 7,000 arch procedures done annually, placing the overall EU market for aortic arch repair products at over $200 million, where the endovascular portion of the market is about $150 million.

We expect our market share to grow as NEXUS' unique value proposition affords our commercial European team with access to current competitive accounts expanding our reach across the European market.

Our current European commercial infrastructure, which includes an 88-person direct sales team, provides for significant cross-selling opportunities between NEXUS and our JOTEC portfolio given NEXUS' synergies with our highly differentiated surgical hybrid graft, the E-vita OPEN NEO.

We will leverage this infrastructure to not only drive adoption of NEXUS in Europe, but also to drive further market penetration of our branch technologies as well as our other competitive JOTEC product offerings. Over the coming months, we will focus on training sales reps as well as surgeons on NEXUS.

We will target the top 50-plus centers performing these sophisticated, new, complex procedures. While we expect to commence cases in the fourth quarter, we do not anticipate material contributions from NEXUS this year.

As the most comprehensive and technologically advanced aortic stent graft portfolio, our JOTEC products addressing the entire aorta from the aortic valve to the iliac arteries.

We believe the addition of NEXUS to E-vita OPEN NEO, E-nya and E-nside, along with the rest of our aortic repair products, position us to drive accelerating revenue growth in Europe through 2023 and beyond. Before I turn the call over to Ashley, I'd like to take a few minutes to talk about our fourth quarter guidance.

As a reminder, over 40% of our revenue is derived from customers based outside of the U.S. And as a result, we are affected by fluctuations in currency exchange rates. At the end of the third quarter, our year-to-date GAAP and non-GAAP growth rates were 6% and 8%, respectively, a 200 basis point difference.

In addition to these currency headwinds, we also experienced an issue with the sole supplier of our TMR handpieces. And as a result, we will not have TMR handpieces during the fourth quarter and possibly longer. We're, therefore, updating our outlook for 2019 with expectations for revenue now in the range of $276.5 million to $278.5 million.

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

Ashley?.

Thanks, Pat, and good evening, everyone. Total company revenues increased 5% to $67.9 million and grew 6% on a non-GAAP constant currency basis compared to the third quarter of 2018. We saw year-over-year revenue increases across all 4 of our major product lines. Looking at the product lines.

JOTEC revenues for the third quarter grew 5% and increased 9% on a non-GAAP constant currency basis, both compared to the third quarter of 2018. JOTEC's supply is continuing to improve, and we expect that growth will accelerate beginning in 2020 with this improved supply and the launch of 3 next-generation JOTEC products.

On-X revenues for the third quarter increased 12% on a GAAP basis and 12% on a non-GAAP constant currency basis, both compared to the third quarter of 2018. Aortic valve revenues increased 11% compared to the third quarter of 2018. Revenues increased double digits in both domestic and international markets.

BioGlue revenues in the third quarter were flat on a GAAP basis and increased 1% on a non-GAAP constant currency basis, both compared to the third quarter of 2018. We expect growth to accelerate as we continue to see the benefits of our direct strategy in [selected] European markets and Brazil and the anticipated approval of BioGlue in China.

Total tissue processing revenues for the third quarter increased 5% compared to the third quarter of 2018. During the third quarter, cardiac tissue processing revenues increased 19%, and vascular tissue processing revenues decreased 9% year-over-year.

Cardiac tissue processing revenues were favorably affected by strength in the pediatric market and renaissance in the Ross procedure. Vascular tissue processing revenues decreased primarily due to a temporary shortage of long-segment vein grafts to meet our existing demand and a decrease in average sales prices resulting from competitive pressures.

However, as we have mentioned previously, vascular tissue availability has been improving, and we expect that to positively affect vascular tissue revenues going forward. Our gross margins were 66.6% for the third quarter. The margins were 60 basis points higher in Q3 versus Q2.

Our income tax expense was favorably affected in the third quarter by the expiration of certain federal tax statute of limitations.

On the bottom line, we reported GAAP net loss of approximately $134,000 or $0.00 per fully diluted share in the third quarter, reflecting $1.2 million in business development expenses primarily related to the Endospan transaction. Non-GAAP net income was $2.2 million or $0.06 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 October 28, 2019, we had approximately $33.2 million in cash and cash equivalents. This is after the $15 million in cash payments paid in September related to the Endospan transactions.

As of September 30, 2019, we had approximately $221 million outstanding under our Term Loan B. And based on our credit documents, our current gross leverage stood at approximately 4.1x, and our net leverage was approximately 3.6x. We expect our net leverage to decrease to the low 3x adjusted EBITDA range by the end of the year.

The interest rate on our term loan was 5.35% at the end of the third quarter. We can comfortably service our debt, and have no financing needs to support our current business model. As Pat mentioned earlier, our TMR handpieces are supplied by a large contract sole supplier.

That supplier decided to move the location of manufacturer of our TMR handpieces, which required that we secure a PMA supplement approval from the FDA for a change in manufacturing location.

As part of the process to approve the PMA supplement, the FDA conducted an inspection of the new proposed manufacturing site and issued our supplier observations, which the supplier does not anticipate resolving until late this year or early next year. In our view, the observations do not relate to any product-related complaints or safety issues.

As a result, we will not have any TMR handpieces until our supplier resolves these observations to the FDA's satisfaction. We have, therefore, removed TMR handpiece revenue for the fourth quarter from our full year guidance.

We will update you as appropriate about the timing of receipt of approval of the PMA supplement, and when we expect to resume selling TMR handpieces, which we hope to be during the first quarter of 2020.

As Pat mentioned earlier, due to this and other matters, we are adjusting our full year 2019 financial guidance to a range of between $276.5 million and $278.5 million. Our full year guidance reflects the temporary lack of availability of TMR handpieces and the impact of FX rates on our top line, specifically, the weakness of the euro versus the U.S.

dollar. We estimate that currency will impact -- will adversely affect our revenues by over $3.5 million for the full year. If not for the impact of currency in 2019, and the issue with TMR handpieces in the fourth quarter, we would have been within our initial range of revenue guidance of between $280 million and $284 million.

Despite these factors, our guidance reflects between 4.8% and 7.8% growth on a constant currency basis in the fourth quarter, and between 7.2% and 7.9% growth on a constant currency basis for the full year. We continue to expect our full year non-GAAP EPS to be between $0.28 and $0.32 per share.

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

Thank you, Ashley. Through the first three quarters of 2019, we delivered constant currency growth of 8%, which places us at the high end of our original guidance. However, the continued currency headwind, coupled with the short-term issues, have taken us off that original guidance.

With that said, we believe these issues are transient and we have several catalysts, which position the company for growth. Specifically, we're looking forward to the upcoming launch of our 3 next-generation JOTEC products in early 2020 as well as the anticipated commencement of the PROACT 10A trial.

Additionally, NEXUS should drive growth and enhance our ability to cross-sell. And we have a deep pipeline with near-term catalysts such as BioGlue in China and PerClot in the U.S, that will expand our total addressable markets and fuel solid growth for years to come.

We are deeply committed to improving the lives of patients with the aortic disease and remain steadfast in our efforts. Now before closing, I'd like to thank our employees for their innovative spirit in execution of our strategy. With that, we'll now open the line to questions. Operator, please open the lines..

[Operator Instructions] Our first question comes from the line of Jason Mills of Canaccord Genuity..

This is Cecilia on for Jason. I just wanted to ask about JOTEC portfolio, just in light of kind of the recent trends in the business, that as you look to 2020 between supply issues easing, the 3 new products coming online and then now Endospan being able to drive pull-through sales.

What do you view as kind of the biggest incremental drivers of growth?.

Yes. So I think the one thing that we were surprised by this year is that showing up this quarter is we had budgeted twice as long to get JOTEC approvals.

We typically -- it takes us -- in the old days, it took us three months, we added three more months just to be safe in this new kind of regulatory environment in Europe, and we obviously still don't have the approval. So we're very confident that for the thoracic stent graft and the branch thoracoabdominal that we should have those approved in Q4.

We potentially could get the NEO, the third product in the fourth quarter. That's probably more going to slip into early Q1. But I think for us, starting 2020 with really four brand-new endovascular stent grafts with a 90-person channel with improving supply, I think we'll just get stronger kind of as each quarter rolls out.

So first thing is you get the approvals, which we're confident we'll get in the -- couple this quarter and maybe 1 early in the next quarter, and NEXUS is already approved. So I think those four new devices, we've got a great sales force.

And then make sure we execute on the supply chain side of things, I think we'll see JOTEC strengthen each quarter that goes by..

Great. And if I could also ask just on On-X, heart valve trends that you saw in Q3. I know you talked about seeing some tissue valves get pushed into younger patients in Q2. I was just curious what you saw in Q3 on the heels of low-risk approval and just your expectations going forward..

Yes. No, I think we don't get kind of perfect information about what's happening in the market, it's really kind of anecdotal from customers in the field. We saw good growth in On-X in the quarter. We saw double-digit growth with On-X. I think that the PROACT 10A trial, and we're very confident we're going to get that in the fourth quarter as well.

We think that, that news and that excitement around a very unique anti-coagulation trial that no one's -- it's only been done 1 other time, and it was -- I think this is a very unique opportunity for the company. So I think both the current messaging around On-X, the fact that we're the only mechanical valve in the U.S.

that can have a 60%-plus reduction in bleeding because of our low-INR label. Followed by a clinical trial with Eliquis in 60 centers, I think is going to really create a lot of kind of excitement around the On-X valve and the On-X story..

Our next question comes from the line of Mike Matson of Needham & Company..

Just wanted to start with JOTEC with the CE Marks, kind of as a follow-up to the prior question. So clearly, it's been delayed, is this just simply an issue of the backlog over there and notified bodies, I mean, everyone I've talked to has indicated, it's just things are just really, really backed up there.

And then I guess second part would just be, what is your confidence around the early next year guidance that you're giving now. I'm not worried about the products not getting approved. I'm just worried about additional delays, I guess..

Yes. I think the one -- and I alluded to this on the first question. I mean, we clearly underestimated the bottleneck at the notified bodies with this transition from medical device directive to MDR. They are overwhelmed. We've seen some notified bodies kind of exit the field.

And the ones that are still there are in the process of trying to get MDR certification. And all companies are just overwhelming them. So I think that it's really a bottleneck issue to your question.

I mean, I feel pretty confident that the products that we've got in the queue on the stent graft side -- As I said earlier, I think we'll get a couple of them this quarter. I'm hoping to get all three this quarter, but 1 of them may slip into. We actually submitted 2 back in February and 1 in August.

So there's a little bit of a difference in the timing of when we submitted, which you could say would -- kind of you would follow that on the requisite approvals.

I think the thing for us is disappointing as you go into '20, is if we have got these in the middle of '19, as we had planned, we could have done our rollouts, our training, train the reps, train the physicians, get the inventory out there, and you could have kind of hit the ground in full stride on January 1.

What this does is it basically just pushes things back a quarter or 1.5 quarter, depending on when these come in. And so we're still very bullish on that portfolio. But I think that it's going to be -- it's just delayed 1 quarter, 1.5 quarter just because of the timing of the approvals..

Okay.

And then just on the PROACT 10A trial, I mean, with the reduction in the size of the trial, I mean, is there any material benefit to your -- to the cost of the trial or the timing -- the amount of time it's going to take to run the trial?.

Yes. I mean, not really. I mean, again, it's 200 less patients. So you could say it's -- whatever that would be like 18% less. But at the end of the day, I mean, it's still -- it's a big trial, right? If you -- in heart valves, 1,000-patient trial is a big trial. And we have a lot of excitement. We've already done some site visits.

The centers are extremely interested. Patients are interested. So my hope is it actually enrolls again, we haven't -- no one's ever done a trial like this, where it's actually existing valve patients. So that's, I think, another important point is that it's 1 year, 1.5 year to enroll, a couple year follow-up. So it's a 3- to 4-year endeavor.

So I don't think that the cost savings going from 1,200 to 1,000 is really going to make that big of a difference. It's still -- it's an expensive trial....

Okay.

Can you guys still hear me?.

Yes. We can hear you, Mike..

Okay. Sorry my phone cut off for a second there.

Just a final question, PerClot, is that going to -- do you have any idea if that will require an FDA panel?.

We don't know yet. I would be surprised. I mean, obviously, regulations have -- I'm never surprised by itself on the regulatory front. But I would be surprised if it needed a panel, to be honest with you. I think it's a pretty clean low-risk -- it's not an implantable device.

It's a hemostatic agent, interoperative, with no safety issues, good clinical results. I would be surprised. But again, we'll obviously cross that bridge when we get to it. I'm hoping it's going to be a fairly easy approval..

Our next question comes from the line of Jeffrey Cohen of Landenburg Thalmann..

Ashley, firstly, what's the $2.4 million other expense on the income statement..

Those are predominantly unrealized FX losses on intercompany payables and loan balances. They're primarily noncash items. And it kind of follows from the comment that Pat made earlier about the impact of FX rates on the top line. It's having a big impact on our intercompany payable and loan balances..

Okay, got it. Can you talk about the sales force a little bit. I know you mentioned it was at 88 or 90 direct, both U.S. and ex U.S., can you talk about maybe the potential ex U.S.

as it relates to product introductions from JOTEC and/or NEXUS and/or adding new territories directly?.

Yes. So we -- our U.S. channel is about 60, and we don't plan on making any changes to that channel going into '20. The European channel is about, I guess, 88 today. We are going to be adding on the margins. We're going to add a handful of people to support the NEXUS launch. Again, we already have a big team of people that are highly trained in this area.

So those people are getting trained. But we're also going to add some specialists on the NEXUS side because it's obviously a very technical procedure. We want to make sure we have the case support available for that. And then we'll also look at different geographies. I mean, if we're seeing a specific geography that's growing very quickly.

We will potentially add people there. We've done that on a historic basis. So -- but nothing in the -- I say, it's under 10 in the European realm. The other geographies, Latin America and Asia Pacific, we continue to invest in feet on the street in both of those regions. And we'll talk more about that as we move into 2020..

Perfect. Got it. Okay. And then can you talk about the tissue side.

It looks like this appears to be more of a trend as far as cardiac picking up steam at a fairly high rate relative to vascular? Is it pricing? Or is it demand?.

Yes, I think -- I mean, the cardiac tissue is really a great story. I mean, we saw 19% growth in the quarter. I think part of it reflects that our procurement group has done a wonderful job communicating the benefits of the xenograft technology, which is proprietary to CryoLife.

We're the only company that has a decellularized heart valve, and the results are meaningfully different than a nondecellulized heart valve. So that message has gotten out there and it's shifted procurement to CryoLife preferentially. I think the second thing that's going on is the clinical data on the Ross procedure continues to be very strong.

Numerous publications showing that it's a fantastic option for younger patients, and we just -- we see kind of a resurgence. There's been a big kind of momentum in Canada for the Ross. We see big centers in the U.S. looking to add Ross creating Ross centers. So I think that trend continues. Our procurement is in a very good position.

I think it's almost a tale of 2 cities. On the vascular side, we got ourselves in a position -- and we talked about this on our previous call, we got ourselves in a position where we didn't have a very good inventory position on our long saphenous vein, which is what the customers require -- or prefer.

And we've gone through a kind of a tiger team approach over the last 6 months, and we've totally resolved that issue. In fact, we're going to have a very strong position on long saphenous vein going through the fourth quarter and into 2020, where that will be an opportunity for us as we move into 2020..

Got it. Okay.

And then lastly, could you talk about the upcoming PROACT 10A trial as far as the timing on getting the centers up and running and enrolling?.

Yes. So we've had a great -- the FDA has been great from an interaction with us on this, and we've had a number of meetings. Because obviously, it's a complex area, and they've been very participatory. And we've worked very well with them back and forth. We're literally at the kind of at the finish line.

All the final documentations kind of ready to go, so I'm hoping in some time in November, December, we're going to have the final protocol. We've -- as I mentioned earlier, we've already gone out and started doing site qualifications. I think we've been out to like 15 or so of the 60 centers. We'll probably hit another 15 this quarter.

So we'll have half the centers will be ready to roll when the protocol comes out, and then we're going to kind of shoot the protocol out to everybody. We'll probably have an investigator meeting at the STS in January. And we should be enrolling patients for sure, in Q1, maybe we could have hit a center in Q4..

Okay.

And any hypothesis about how that might enroll?.

Yes. I mean, it's hard to say because we've actually never done it. I don't think anybody has ever done a trial like this. This is a very unique and that all the patients that are going to be in this trial -- I'd say the majority of the patients are going to be in this trial are walking around with On-X valves with them today.

And what's going to happen is the surgeons and cardiologists that put that valve in are going to consent those patients to see if they're interested in being in the trial. And it literally involves us having them going for a physical and a visit to the doctor's office, and then they get randomized to either be on Coumadin or Eliquis.

And if they're on Eliquis, we mail them Eliquis, and if they're on Coumadin, we mail them Coumadin. And so I think that this sets up for potentially enrolling pretty quickly. We're budgeting about 1.5 years. Partly due to the time it takes to get centers up, doing the contracts, all this kind of paperwork-type stuff.

But I think, let's say, we start the trial on January 1, we think it's going to -- we'll enroll that trial it will take us all of '20 and half to '21..

Our next question comes from the line of Brooks O'Neil of Lake Street Capital..

You've talked a lot about some of the detailed questions. I'm hoping, Pat, you might reflect you just past your 5-year anniversary with CryoLife. I'm hoping you might talk a little bit about how you assess your first 5 years there, and perhaps what you see as your biggest opportunities for the next 5..

Yes. I mean, I guess, when I look at it, the company is, I think, extremely well positioned. I mean, if you look back, we acquired On-X in 2016 -- beginning of '16. We acquired JOTEC at the end of '17. We just did the Endospan deal. We had 20 reps in Europe when I started. We now have 88. We had probably 35, 40 reps in the U.S., we now have 60.

We had 1 person in Latin America and Asia Pacific, we now have probably close to 40. And if you look over the next 5 years, the acquisition of those 3 companies -- or the 2 acquisitions and the 1 distribution agreement with the option with Endospan creates a significant pipeline opportunity.

The ability to -- the PROACT 10A trial that we talked about; the ability to bring the JOTEC stent grafts to Europe; the new devices, then to take those into the U.S., simultaneously, we'll be investing in the infrastructure in Asia Pacific and Latin America.

So I think that the pipeline that we have -- we have 10 or 12 products in the pipeline that will be coming out over the next 5 years, and the critical mass that we're going to be realizing in Asia Pacific and Latin America.

When you combine those 2 things, the pipeline and the channel, I think it's just -- we continue to build the company to the point where we'll be at critical mass over the next 5 years. And then every incremental product that you add is going to have significant drop-through for the company..

So let me just ask 1 more slightly more detailed question. Obviously, BioGlue was 1 of your biggest businesses.

Can you talk just a little bit about how you see it fitting into the current CryoLife, and what your outlook is for that piece going forward?.

Yes. I mean, it's interesting. BioGlue is an integral technology into the aortic portfolio. I mean, one of the things we talk about is that CryoLife is an aortic company, everything from an aortic valve to an arch replacement to an aneurysm or dissection from the aortic valve all the way down to the iliac artery. BioGlue is sold around the world.

It's a staple in the operating rooms for a life-saving procedure in aortic dissections. The frozen -- the new frozen elephant trunk goes hand in glove with BioGlue. Our On-X valve with the -- some of the additional technologies that are used in the ascending arch are used with BioGlue.

The fact that this expansion in Asia and Latin America, where they're still heavily dominated by surgery, where BioGlue will continue to grow. And then the addition to China, I think will be a very nice opportunity for us. So I think it's integral.

It's a great product because it's -- it has to be on the shelf in a cardiac surgery OR because of the aortic dissections. And it's high margin, and it funds a lot of the infrastructure as we move into markets, and it is a critical technology for aortic surgery..

That's Great. I'm excited about the future. Congratulations on all you've accomplished..

Thanks, Brooks..

Our next question comes from the line of Joe Munda of First Analyst..

A couple of questions here. First off, on the TMR business.

Can you give us some sense of how much the SoloGrip handpieces were as a percentage of revenue for that segment?.

What I can tell you, the amount of the impact that we expect it's going to have in the fourth quarter is about $1.5 million. And this was -- and Joe, this is one that -- I mean, unfortunately, I've not been through a lot of these in my career where this stuff happens all the time.

I don't know if people are aware, but when you have a PMA product, if you change anything, a supplier, a component, you move it, it requires an FDA filing. And we were aware of it. We partner -- we were working with our partner.

We built a bunch of inventory in anticipation of the move and unfortunately, it just -- all the things that could go wrong went wrong. And again, there's nothing wrong with the product. In fact, I think there was no quality problems. There was no patient issues at all. It's just the FDA -- we just -- by the time they're going to get it done.

We ran out of handpieces, and we built up a year of inventory. So it's not like we didn't know about it. It's not like we weren't prepared, it just took a lot longer than we anticipated. So we're hopeful we can -- this will be resolved in this quarter. But it's a changing issue..

So it's sole-sourced handpiece, and -- where your supplier got 483 observations from the FDA, and nothing related to the handpieces is what you're saying..

Yes. No. So it was basically a manufacturing move, right? So the products that they had built for us and built for us for years, and we have -- extremely high quality. We have really no issues. And the FDA goes in and inspects the new facility, and they found the typical stuff that you'll find in a 483.

The training records, procedures not fallen -- being followed in order. I mean, I think, again, it was minor stuff. But still, it rose to the level where the FDA wasn't going to let them release product until they rectified it, and they got to go back in and inspect. So that's where the time comes in. It's disappointing.

But I mean, it's -- like I said, it's a transient issue. And it's -- I mean, it's, frankly, not a strategic product line for us. And we think it's going to be kind of a 1 quarter delay, maybe a little bit longer, but it's not going to be material from a business standpoint..

Okay. And then flipping over to JOTEC, you had some sterilization issues in the first quarter. I'm assuming those are gone, based on the commentary. And then I'll wait with a follow-up..

Yes, that was in the second quarter. That was really, I'd say....

Sorry, the second quarter..

Yes, yes, that was a total one-off. I mean, it was double sterilized in our sterilizer. It was just -- somebody made a mistake, and we put processes in place to make sure that never happens again. So I mean, that was really kind of a one-off that's behind us..

Okay. And then as you look out to '20, you guys gave us some encouraging guidance that the growth in JOTEC should accelerate going forward. I'm just curious, Pat, you've got current manufacturing constraints, right, because these are custom-made products, and then you're going to go to an off-the-shelf offering.

I guess, how do you guys balance or think about capacity with those two product lines, essentially going on at the same time?.

Yes. Well, I'd say the first thing -- the great news about the JOTEC product line is that we have so much demand that we can't keep up with it. And we grew 9% in the quarter. And that was with no new products and some supply constraints. We have tons of opportunity on JOTEC. Our Asia Pacific and our Latin America business are growing extremely fast.

Europe's got all these new products coming. So it's really just getting the supply chain in order. We've been hiring. We've hired new people. We're putting processes in place to make sure that we keep up with supply.

So like I said, it's another transient issue, but I'm very bullish on JOTEC and on the new products as we kind of get them out and get the pipeline filled with products as we move through the -- into 2020..

And then lastly, Ashley, I guess, on PROACT 10A. I guess, how should we think about incremental R&D spend there or cost per trial? Any thoughts there would be great..

Yes. I mean, we've kind of spoken about this in the past. But if you look at our business right now, and this is not guidance. But let's say, we're going to be around $300 million next year, 10% of revenue is about $30 million.

And we think that as we go out over the next 3 to 5 years, we can easily fund our pipeline by keeping R&D spending at 10%, give or take, of revenues on an annual basis. So we think that we've got plenty of capacity to handle this R&D pipeline, including PROACT 10A within those guidelines..

The only caveat I would say on that is, and it goes back to Jeff's question he asked earlier. I mean, we predict what we think the enrollment is going to do.

If the enrollment accelerates, you could, in fact -- we've even talked about calling out what we think it's going to cost, and so that you guys can be aware of -- we expect to enroll 70 -- 60% of the trial this year. And this is what it will cost. If it goes faster, it's going to cost more. If it goes slower, it's going to cost less.

I would think investors would be excited if it went faster, right? So I can't necessarily control every patient getting in, and if it goes faster, that's great, but it could go up a little bit in a year or down a little in year based on enrollment rates.

But I think to Ashley's point, if you look at the macro next 3 or 4 years, 10% to 11% R&D, some year might be 11%, some year might be 9%. But around 10% should be able to afford us the opportunity to fuel the pipeline..

[Operator Instructions] Our next question comes from the line of Suraj Kalia of Oppenheimer..

So Pat, all my questions, I just want to keep them to On-X. Pat, can you give us a framework of the U.S. versus OUS on On-X. And the reason I ask is, as PROACT 10A ramps up, just give us some baseline where we could map out how fast things are going..

As far as the enrollment?.

Yes.

The enrollment and just the step-up in On-X, organic On-X versus because of a pull-through because of PROACT 10A?.

Yes. I mean, we we're careful here because, I mean, we're running a trial and we don't have an approval. So I think the point is there's going to be a lot of people talking about On-X and the trial that we're doing. We're still in discussions right now about -- we're looking at a handful of European centers.

It gets complicated when you start getting into the drug side in Europe because, as you can imagine, I mean, we -- one of the key reasons this took so long in the U.S, we originally started with CDRH, and then we ended up at SEDAR, and then we went back again. So that same thing could happen in Europe, and I don't want to delay the trial.

So I think we may have a -- we're going to talk about having maybe a couple of centers in Europe. But the majority of this trial is going to be in North America, U.S. and Canada. And as far as the speed of enrollment, we talked about that earlier, I mean, it's a -- we think, 1.5 years, we can enroll this trial.

It could take -- could be faster, it could be longer, just -- we have never done a trial like this before..

Okay. And Pat, remind me on PROACT 10A, my memory fails me here. For a patient enrolling in PROACT 10A, what would be the average duration of Coumadin use before the switch to Eliquis?....

It's a -- yes. So we -- are you talking about post surgery? Or are you talking about how long they've done Coumadin before....

Either or because there is -- there will be a difference in endothelialization most of the acute events are out of the way. Just how do you look at a certain cohort and map it out and say Pat Mackin came in, he was 3 months in Coumadin, moved over to Eliquis, blah blah blah. Here's what his rate was, so he took some....

Yes, I got the question. Yes. So that's -- it's actually a very important question. In fact, the only other trial that was done with a novel anticoagulant with a mechanical valve was called RE-ALIGN, and the majority of their events were in the first 90 days.

And if you look at our original PROACT 1 trial, we had a 90-day blanking period where you had to be on full-dose Coumadin for that first 90 days for exactly the reason you mentioned. You want to make sure that the valve is fully endothelialized. And after that point, that's when we randomized to lower INR.

That's exactly the same thing we're doing here. This trial will be for On-X patients who are at least 3 months out from surgery..

Got it. Okay. And finally, Pat, last question. Remind me, is there an interim look now in the final trial design. Is it a penalty because obviously, you'll have reduced the patient size? So there must be some change in the event rate assumptions.

I'm curious if there also an interim peak and a penalty thereof?.

No, it's a good -- there is -- under either design, the 1,200 or 1,000. There was no interim analysis. And the reason it gets -- I mean, you know your statistics well, this is a noninferiority trial. And the way this is powered, it's a 2-year cumulative end point.

So I think the way to answer the question the other way, is there is no interim analysis because it's a 2-year end point. The other way to look at this is the -- if the trial doesn't stop, then it's successful, right? So there's obviously a Data Safety Monitoring Board, DSMB.

And they -- if they see problems that they're going to obviously have to stop the trial. But conversely, you could think about it this way, right? If it takes us 1.5 years to enroll all the patients after 18 months are in, your first patients have already had it for '18 months.

Every day that goes by, and the trial doesn't stop is your probability of success goes up, if that makes sense..

At this time, there are no further questions over the audio portion of the conference. I would like to return the conference back over to management for closing remarks..

Yes. Just one, thanks for joining the call. And just to wrap up very quickly. Through three quarters, we're 8% constant currency growth, which is at the high end of our guidance range. Constant currency -- I mean, currency has been a headwind, and we had this unfortunate kind of transit issue with TMR in the quarter.

That being said, I mean, we're very bullish on the opportunities we have going into 2020. We've talked about our 3 JOTEC stent grafts. The NEXUS opportunity, our expansion in Asia Pacific and Latin America, the PROACT 10A trial. And then we've got on the later in the year, we're pushing hard to get PerClot in the U.S. and BioGlue in China.

So we feel very good about the state of the business and look forward to executing as we move out through the rest of the year and getting this 2020 set up. So thanks again for joining..

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day..