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CryoLife (CRY) Q1 2019 Earnings Call Transcript

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CryoLife (NYSE: CRY)
Q1 2019 Earnings Call
April 30, 2019 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the CryoLife first-quarter 2019 financial conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Lewis from the Gilmartin Group. Thank you, Ms.

Lewis. You may begin.

Lynn Lewis -- Investor Relations

Good morning. This is Lynn Lewis from the Gilmartin Group. Thank you for joining the call today. Joining me from CryoLife's management team are Pat MacKin, CEO; and Ashley Lee, CFO.

Before we begin, I'd like to make the following statements to comply with the safe harbor requirements 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 those forward-looking statements.

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

Pat MacKin -- Chief Executive Officer

Thanks, Lynn, and good afternoon, everyone, and thanks for joining the call. As you'll hear today, we're off to a great start in 2019. I'd encourage you to measure us in two ways, first, our near-term quarter performance, and second, the progress we've made against our clinical and R&D programs. I'm happy to report that met and exceeded expectations on both fronts this quarter.

You may recall from previous earnings calls that we expect to drive consistent growth from our current portfolio while at the same time we work toward a series of product approvals, new market introductions and produce enhancements. Some of these initiatives have the potential to dramatically change the growth profile of the company. Our first quarter once again illustrates our ability to simultaneously product strong organic revenue growth and achieve key development milestones, including one, we submitted regulatory approval for BioGlue in China. Two, we completed enrollment for the U.S.

PerClot clinical trial. Three, we submitted for CE mark the E-nya thoracic skin graft. And four, we submitted the E-nside branched thoracoabdominal skin graft. I will touch on each of these in more detail throughout the call.

Regarding organic revenue growth, total revenue for the quarter was $67.5 million, reflecting year-over-year growth relative to the first quarter of 2018 of 9% on a GAAP basis and 11% on a non-GAAP constant-currency basis. This strong consistent growth was driven primarily by our Jotec and On-X product lines. For the quarter, relative to the first quarter of 2018, Jotec grew 10% on a GAAP basis and 18% on a non-GAAP constant-currency basis, as our Jotec project line continues to take market share. We expect this trend to continue throughout 2019, given how our Jotec products stand out from the competition.

We are also the only company to offer a full suite of aortic stent grafts covering the ascending aorta through the abdominal aorta. We expect to introduce three new next-generation Jotec products into key international markets by the end of the year. Turning to On-X, relative to the first quarter of 2018, our first-quarter On-X revenue increased 14% on a GAAP basis and 15% on a non-GAAP constant-currency basis, with non-GAAP constant-currency revenues in North America growing 18%. We continue to expect On-X revenue growth to remain solid as it is the only mechanical aortic valve in the world that carries the FDA label, allowing patients to be managed three months after their initial surgery at an INR level of 1.5 to 2.0, compared to an INR level of 2.0 to 3.0 for our competitors' mechanical aortic valve.

We believe we will have this competitive advantage for a considerable period in the future, as it is unlikely to be replicated by a competitor, given the cost and time it would take to conduct a successful clinical trial and obtain regulatory approval. Despite our better than expected overall revenue beat in the first quarter, our gross margins were slightly lower than anticipated, driven by the mix of stronger revenue from our distributor markets. Ashley will review our first-quarter financial performance and 2019 outlook in more detail later in the call. I would now like to discuss some of our recent business highlights, as well as near and long-term growth catalysts.

Starting with Jotec, we are on track to introduce three new Jotec products in select international markets in 2019. This past quarter we submitted our next-generation thoracic stent graft called E-nya and the first-ever off-the-shelf branched thoracoabdominal device called E-nside for CE mark, both of which we anticipate will be approved later this summer. We are confident that the ability of our branched thoracoabdominal device will offer meaningful benefits for both patients and surgeons, as it will be the first time a branched stent graft will be available off the shelf, thus eliminating days of waiting for a patient-specific custom graft to be built. Further, we remain on track to submit for regulatory approval our next-generation frozen elephant trunk called E-vita Open Neo this summer, with the goal of receiving CE mark by the end of this year.

Moving to BioGlue, we submitted for BioGlue regulatory approval to the Chinese FDA in the first quarter. As a reminder, the approval cycle in China can take up to two years. We do not know what the visibility will be as we go through this process, but we'll keep you updated on progress when available. In addition, we're pleased to report that we completed enrollment in our U.S.

clinical trial for PerClot. We expect to submit our PMA in early 2020 with a potential FDA approval coming later in 2020. Regarding our global reach, we have begun expanding our sales operations in Asia Pacific and Latin America, with our two new commercial leaders, both of which come with extensive large med-tech company experience. Over the next several quarters, we will be adding approximately 20 people in Asia Pacific and 8 to 10 people in Latin America.

We currently use distributors in many of these regions and we'll selectively migrate toward a direct sales model where it makes financial sense. For example, we were in the process of going direct of BioGlue and On-X in Brazil, as we were able to leverage existing direct operations put in place by Jotec before we acquired them. Based on the success and experience gained when we migrated to direct sales in our European territories, we expect these moves to direct sales in the regions will begin to produce strong and consistent results. Finally, I would like to discuss our tissue and On-X mechanical valve business.

On the tissue side, we are driving solid growth in our pulmonary tissue valve business, which we believe is based on the continuous stream of positive long-term performance data on these tissue valves. Adding to this dataset will be the results of Dr. Paul Stelzer's Ross procedure study that will be presented later this week at the annual AATS meeting in Toronto. Dr.

Stelzer performed the Ross procedure in over 600 patients with great success and we're looking forward to the readout of those results. We are confident that the incremental positive data will continue to drive growth in our pulmonary tissue valve business. As a reminder, the Ross procedure is a double-valve operation where the pulmonary Allograft is used to replace the patient's native pulmonary valve, which has been moved to the aortic position. Moving to our next leg of long-term growth for the best-in-class On-X mechanical valve, we are currently working with the FDA to finalize what is needed for our Proact 10A trial.

We anticipate that we'll have an approved IND from the FDA this summer. Before closing, I would like to share with you my thoughts on the recently announced Partner 3 TAVR date and its potential impact on our On-X business. At a high level, this is something that we've been expecting and have factored into both our 2019 guidance and the longer-term future of our business. So we do not expect a material impact.

From a market opportunity standpoint, the average age of a patient population in the Partner 3 trial was 74 years old and currently the average age of an On-X patient is 58 years old. We believe that over time TAVR valves will be implanted in patients closer to 70, but we also expect with positive data from Proact 10A that the On-X valves will be implanted in patients up to 65 years old. With this change in the age populations being treated by these two devices, we believe the target patient population for On-X will actually increase and the target population for the two devices will generally remain mutually exclusive. With that, I will now turn the call over to Ashley.

Ashley Lee -- Chief Financial Officer

Thanks, Pat. I will now review our results for the first quarter, as well as our financial outlook. Total company revenues increased 9% to $67.5 million and grew 11% on a non-GAAP constant-currency basis compared to the first quarter of 2018. We saw year-over-year revenue increases across all four of our major product lines.

Looking at our product lines, On-X revenues for the first quarter increased 14% on a GAAP basis and 15% on a non-GAAP constant-currency basis, both compared to the first quarter of 2018. Jotec revenues in the first quarter increased 10% on a GAAP basis and 18% on a non-GAAP constant-currency basis, both compared to the first quarter of 2018. This large difference in reported versus constant-currency growth rates is due primarily to the year-over-year weakness in the euro versus the U.S. dollar.

BioGlue revenues in the first quarter increased 8% on a GAAP basis and 10% on a constant-currency basis, both compared to the first quarter of 2018. Revenues were particularly strong in international markets, including a 7% constant-currency increase in our European region, which resulted from cross-selling efforts from our enhanced direct distribution channel. Total tissue processing revenues for the first quarter increased 4% compared to the first quarter 2018. During the first quarter, cardiac tissue processing revenues increased 10% and vascular tissue processing revenues decreased less than 1% year over year.

Cardiac tissue processing revenues were favorably affected by recently published long-term performance data of our tissue valves. Vascular tissue processing revenues decreased primarily due to a decrease in average sales prices resulting from competitive pressures. However, we do expect vascular revenues to be favorably affected following recently implemented initiatives to increase near-term supply. Our gross margins were 66% for the first quarter, which is slightly less than our full-year guidance.

These results were largely due to a more significant portion of revenues being generated through our indirect international distribution channels versus our direct distribution channels. We believe our full-year gross margins will be higher than what we experienced in the first quarter. SG&A expenses during the first quarter include $1.1 million in integration and business development related expenses. Those charges include expenses associated with evaluating business development opportunities and costs related to the completion of SOX implementation in Europe and audit procedures related to acquisition accounting.

Our income tax expense was favorably affected in the first quarter by excess tax benefits associated with stock compensation. Excluding those benefits, our effective tax rate would have been in the mid-20% range. On the bottom line, we reported GAAP net loss of approximately $300,000 or $0.01 per fully diluted share in the first quarter of 2019. Non-GAAP net income was $1.5 million or $0.04 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 April 29, 2019, we had approximately $43 million in cash, cash equivalents and restricted securities. We had approximately $222 million outstanding under our term loan B, invest in our credit documents, our current gross leverage stood at approximately four times and our net leverage was approximately 3.5 times. We expect our net leverage to be around three times adjusted EBITDA by the end of the year.

Our aggregate interest rate on our term loan was 5.85% at the end of the first quarter. We can comfortably service our debt and have no financing needs to support our current business model. During the quarter, we adopted ASC 842, the new lease accounting standard. This required us to recognize a right of use asset and a corresponding liability for all long-term leases.

The adoption of this standard resulted in the recording of a right of use asset of approximately $23 million. We are reiterating our full-year 2019 financial guidance and we expect second quarter revenues of between $70 million and $71 million, reflecting the impact of a strong dollar on our euro-denominated business. Our second quarter guidance reflects between 5% and 7% growth on a constant-currency basis. Note that 2Q of 2018 is our toughest quarterly revenue comp for the year, when we posted revenues of $68.5 million.

That concludes my comments and now I'll turn it back over to Pat for closing comments.

Pat MacKin -- Chief Executive Officer

Thanks, Ashley. In closing, we had a very successful start to the year of putting the business squarely on track to produce high single digit top line growth in 2019. Equally important was our progress advancing our strategic long-term growth objectives. While that important work doesn't show up on the top line today, it is critical to our future success and should take CryoLife to the next level.

Our robust pipeline and clinical endeavors have increased the company's total addressable market to $3.5 billion. We arrived at that forecast after considerable market analysis. That is why we believe it's important to track not only our quarter-to-quarter financial performance, but also our development programs. If we execute on them, which we are confident that we will, we expect to be significantly larger and a more formidable company in the coming years.

We're getting close to the expected launch of the first of our next-generation products with Jotec and plan to introduce new products and product enhancements in key markets for years to come. As a result, we offer investors an excellent balance of consistent near-term performance and exciting long-term growth opportunities without having to make another significant acquisition. Today we oversee a highly differentiated product portfolio backed by an experienced sales team. We're doing an excellent job capitalizing on our competitive strengths to take market share.

Moreover, our sound financial position gives us the ability to execute on our transformational pipeline of clinical and R&D programs. Our decision to become more focused and deeper in our given markets is yielding the results we had expected. As such, we believe we're in an excellent position to remain a market leader in the select areas that we focus on. As we introduce new offerings, we will further solidify our leadership position in select markets for the treatment of aortic disease.

Our strategy is clearly working. Our recent acquisitions are performing as or better than expected. Our sales network has been significantly strengthened and we have a clear path toward transformational growth opportunities. We understand the execution of plan is paramount and we have assembled a proven leadership team to see it through.

The better you get to know the company, the more you'll understand our best days lie ahead. Last, I'd like to thank all of our employees who helped make our first quarter a success. Your important work not only benefits the company, but also the many people and their families around the world. With that, we will now turn the line over to the operator to open for questions. 

Questions and Answers:

Operator

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

Jason Mills -- Canaccord Genuity -- Analyst

Congrats on a great start to 2019. Pat, first question is asked sort of from the perspective of geographical representation of your business, U.S. international, and really will ask you to sort of touch on your strategy from a sales perspective, as well as a product pipeline perspective. And then I have a follow-up or two, if you don't mind.

But you grew this quarter obviously with Jotec having a great quarter. You grew really a little over 10% international, under 10% U.S. to sort of net out your 9% reported and 11% organic. And it sounds like over the course of the next several quarters, the products that you'll be bringing to market, new products bringing to market and really the trends, the stronger trends in your business are outside the U.S.

Could you talk about that and the strength outside the U.S., as well as what you may be doing before, let's say, On-X, 10A and PerClot can have an impact on your business in the U.S. to maybe further augment your U.S. growth profile?

Pat MacKin -- Chief Executive Officer

Yes, no and I think one of the things that is just inherent in the current model is we don't have any of the Jotec products approved in the U.S. And we have Jotec approved obviously everywhere in Europe and then we're starting to get approvals around the world in Asia Pacific and Latin America, which is benefiting the growth. So we fully in our planning for the year, in our strategic plan, we're expecting more growth in the international markets than the U.S. just because of the portfolio.

We do think we can boost growth in the U.S. with the items you mentioned. The U.S. approval of PerClot will obviously be a big deal, as well as we think Proact 10A once that trial is approved and the word gets out about what we're doing there will be a big deal.

But we pretty much -- we actually had a very good quarter in the U.S. But just again, given the product lines and what we have in the different markets, we're going to be expecting faster growth outside the U.S. on a consistent basis.

Jason Mills -- Canaccord Genuity -- Analyst

OK. Great. And then sort of seguing into that discussion about the U.S., it certainly wasn't lost on me the spending in the quarter on business development activity. I know that you've got a lot on your plate.

You've executed two relatively large deals, the two largest deals in the company's history in the relatively recent past. But are you seeing assets out there that are notable and that fit within your framework from a valuation margin and growth perspective more so today than you've seen in the past? Because I don't believe I've seen a callout such as this in recent quarters.

Pat MacKin -- Chief Executive Officer

Yes. I mean, there's always, we've said that we would be opportunistic as it relates to M&A. I can tell you that there's a handful of assets that are available and out there and we're always looking. But I can tell you that based on kind of where we are right now with our five-year plan and Ashley mentioned this in his comments.

We really don't need to do any acquisitions. We have positive cash flow. We can service our debt. We don't need to raise shares.

We can support our business model and we're actually generating cash. So we don't need to do any deals. That being said, I mean we would always be interested in potentially I think more interesting is a tuck-in that could potentially boost our growth rate even higher. The real advantage we've got now is kind of around the world we've gone direct in many countries in Europe.

We're putting infrastructure in place in Asia Pacific. We're putting infrastructure in place in Latin America. We're going to have 180 direct reps at the end of this year. And if you can bring a tuck-in once you get your approval and I can sell that by 180 direct reps around the world, it has amazing pull-through on your P&L.

So I think my message to investors would be, we're not looking at doing another kind of Jotec-sized transaction. If we were to do anything, it would be a tuck-in. And we would not dilute anybody in the process of doing that.

Jason Mills -- Canaccord Genuity -- Analyst

Yes. Great. And lastly, I appreciate your commentary with respect to Partner 3 as it relates to On-X. But maybe talk about and level set us with respect to the mechanical heart valve markets mix, U.S.

OUS. It's my understanding the majority of MHV market is outside the U.S. And in emerging markets, just really in a lot of places can't afford $30,000 a pop for transcatheter valves and your point is well taken with respect to the mutual exclusivity of the age group. So maybe talk about the dynamics that face positively and negatively your On-X business as you look sort of beyond the real near term, as we digest Partner 3 data into the next couple of years.

It sounds like you've got a business even excluding 10A that could remain a solid grower for you for a while.

Pat MacKin -- Chief Executive Officer

Yes, no. It's a good question. I mean just to level set on your question, I mean, the mix of mechanical valves, U.S. is about 30% of mechanical valves and OUS is about 70% of mechanical valves.

And the primary driver of that is basically economic, as you point out. There are many countries around the world that just can't afford a $30,000 TAVR valve and the economics are driving the therapy. I think the other thing is these indications have been, I think, widely adopted in many countries around the world, but they just can't afford -- the lower-risk patient population, they just can't afford it. And we've still been growing the On-X business double-digits.

So we see the On-X, I mean, you just saw U.S. On-X grew 18% again in the first quarter. We had good performance outside the U.S. We think the Proact 10A and this is an interesting kind of dynamic.

As the Partner 3 kind of lower-risk patient population, the average age of a TAVR patient goes from kind of the low-80s to the mid-70s, and maybe even down -- call it down to 70. We think that On-X, the average age of an On-X as I mentioned in the script is 58. But we think Proact 10A starts to move that up to 68. So while Partners and TAVR may be moving kind of south on age, we're moving north on age.

And maybe we meet at 70. So these two populations today are frankly mutually exclusive. In fact, if you were at ACC and listened to the presentation, even the PIs in the trial stated they believe that surgical valves should be the therapy of choice in anybody under the age of 65. So again, I just think this TAVR thing is -- I think it's interesting.

But don't forget, I mean, the tissue used in a TAVR valve is the same tissue you use in a bio-prosthetic valve. And we know from a major meta-analysis that was published in JAK just recently, that performance of a tissue valve is much worse in younger patients. The valve deterioration, the explants, etc., etc. It's just the tissue does not stand up in a younger patient.

So there's actually a clinical reason why you don't want to put a tissue or a TAVR valve in a younger patient. They don't last that long.

Operator

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

Mike Matson -- Needham and Company -- Analyst

I guess I wanted to ask a few questions about Jotec. So I wanted to start, I thought there was a fourth product there that you were expecting to get a CE mark on potentially this year, the E-ventus self-expanding peripheral stent. So can you maybe talk about that and what is the market opportunity there or market size in Europe for that product?

Pat MacKin -- Chief Executive Officer

Yes. So just to refresh, there were four Jotec products. We had never predicted that the E-ventus was coming this year. We were hoping to submit for CE mark this year.

But the three main Jotec stent grafts: E-nya which is the thoracic stent graft, E-nside which is a branched thoracoabdominal and E-vita Open Neo which is a frozen elephant trunk. The first two have been submitted and we're highly confident that we're going to get approval this summer. The third, which is the E-vita Open, we will submit this quarter and we're confident we should get an approval by the end of the year. So those are the three stent grafts that we had talked about in our plan.

The E-ventus, what you asked about, is a self-expanding covered stent, PTFE covered stent, which is basically the primary technology we use as the bridging stent on our branched grafts, whether it's the iliac or the thoracoabdominal device. This is a product that fell right in this kind of chasm from the medical device directive and the medical device regulation, this kind of shifting kind of tectonic plates in Europe on the regulatory front. And we were hoping to get that product in kind of under the MDD, the old MDD without having to have clinical data. And we don't think that's going to happen, just because the door is kind of closing on all the notified bodies.

So I mean the good news is we didn't have any revenue in our guidance for that product. The bad news is we're going to have to do pre-market clinical data. So it will show up later than we wanted, but there was no revenue in the plan. That being said, it's a significant opportunity.

The global market for a PTFE covered self-expanding stent is a half a billion dollars. And we have a great product. So it's probably one of the most exciting things in our platform. We really haven't talked a lot about it.

Unfortunately with this kind of MDR situation, we're not going to get in Europe this year or next year. But we'll be doing the clinical work to bring it to market both in Europe and the U.S. and it's a significant opportunity.

Mike Matson -- Needham and Company -- Analyst

OK. And then just I guess a follow-up on that would be related to the MDR comments that you made, or MDD I guess. Just with the three products that you are expecting CE marks this year for, you don't expect any issues there either in terms of timing or you're confident you're not going to need data for those?

Pat MacKin -- Chief Executive Officer

Yes. So I think going into the year, this was -- we typically would put about a quarter amount of timing from an approval standpoint. We actually doubled it, just because of this shift from MDD to MDR. I'm very confident that the first two products we submitted, so the thoracic stent graft and the branched thoracoabdominal, I'm very confident those are going to get approved this summer.

We submitted them on time in the first quarter. We've had very few questions back. So again, I think I have very good kind of visibility and I think those are in great shape. We're going to submit our frozen elephant trunk in Q2, so I think probably in June.

And I think it should go on kind of the same path. But I have better visibility to the first two, because we've already submitted and already been dialogue with the notified body. We have not submitted the third. But again, I think we're very confident that we think we can get that approved this year as well.

So we should have all three of those Jotec products approved before the kind of MDR door closes, if you will.

Mike Matson -- Needham and Company -- Analyst

OK. And then my final question is just another one on Jotec. So with those three products, are those higher gross margin? Would there be any kind of margin benefit when those are launched, if the growth at Jotec kind of accelerates?

Pat MacKin -- Chief Executive Officer

No. I mean, I think the challenge because it's going to be in the same geographies, right? So we're going to be launching the same products in the same geographies. And a lot of those are pretty -- those markets have pretty good pricing already. And so the only way we're going to pick up margin is on the cost side.

And I think in the early days of the rollout, you typically have some ramp-up time to get your lines and all set up. So I don't think there's a lot of margin opportunity in those. I mean we've kind of baked it into the guidance. The bigger change would come when those products come to the U.S., which is obviously a ways away, when you get to kind of the higher pricing in the U.S.

market, which we don't have at this point. So I don't see a real margin opportunity for those products. Because we've already kind of figured that into the guidance.

Operator

[Operator instructions] Our next question comes from the line of Suraj Kalia with Northland Securities.

Suraj Kalia -- Northland Securities -- Analyst

Congrats on a great quarter. So Pat, let me start out. You've given a great sort of 30,000-feet level view on how the business is progressing. You guys are hitting on all the numbers and the roadmap you have laid out that you can share Pat, can you walk us through what's going on in the trenches --

Pat MacKin -- Chief Executive Officer

Hey Suraj, we lost you right have you said trenches. Sorry, right after you said trenches, the line went dead and then you just came back up.

Suraj Kalia -- Northland Securities -- Analyst

Sorry, Pat. So I was just asking, what kind of metrics you can provide us? Let's that this was what Jotec was doing in Europe, these many hospitals, this was the utilization rate. This is how we've turned it around. For that matter, On-X and Jotec in Europe and On-X, any color so that we can get a sense of you know what, here is the under-utilization.

Here is how much capacity we have, understanding that 180 reps are going to be on board.

Pat MacKin -- Chief Executive Officer

Yes. I think it's -- again, there's kind of a couple different ways you could look at it. I mean the first point I would make is, when we acquired Jotec, Jotec had been growing 20-plus percent for the previous five years. So we didn't acquire an asset that needed a lot of turnaround.

It was a highly performing organization with a great product line, a great salesforce, a great leadership team. So I mean and Jotec has kind of performed even better than we thought. As you know, it grew 25% last year. We had 18% growth constant currency in the first quarter and we're on the heels of launching three new products this year.

We've also gone direct in multiple countries. So we took, for example, we took the Jotec team, the Jotec product line direct in France. Because we were direct there and they weren't. We're adding 20 people in Asia.

We're adding 10 people in Latin America. Frankly, we haven't even really gotten to the whole opportunity, because there's a number -- I mean, Jotec was a small, private company that did a great job. But at the same time, they didn't have kind of the global reach that we had or the resources that we have. And just taking the current portfolio from Jotec and getting regulatory approvals in different markets in Latin America and different markets in Asia Pacific are going to start adding to our growth.

And you haven't even really started to see that yet. So I think there's a number of different ways you could look at this. Ashley mentioned in his comments about BioGlue. BioGlue in Europe grew 10% this past quarter.

That was a product line that was growing kind of low single digits and the fact that we added the 50 Jotec reps to the product line or gave that product to the Jotec reps, we're now growing that business double digits. So it's just there's a number of different things we've seen by kind of the CryoLife plus Jotec is like a one plus one equals three. And the same in the distributor market. We've seen significant opportunities in the distributor markets where we had different relationships than Jotec had.

And we're leveraging those. So again, I think there's a multitude of things you could look at, at how kind of Jotec with CryoLife is not only kind of has the opportunity to kind of grow faster, but it is more broad around the globe and even more direct around the globe.

Suraj Kalia -- Northland Securities -- Analyst

Got it. Pat, I don't have my notes in front of me. I'm driving. But has there been a delay in Proact 10A IND being approved? Is the FDA hung up on something or this is just normal process that you guys had factored? And forgive me.

I don't have my notes in front of me.

Pat MacKin -- Chief Executive Officer

Yes. Yes. No, I think I always -- it's kind of dangerous business to predict what regulatory agencies are going to do. And we try to give kind of what we think in the window that we think something is going to get approved.

I can say that we've been in constant discussions with the FDA about this trial and they've been very helpful and I think very kind of open to working with us. The last piece of the puzzle is really the statistics and the powering. And it gets very kind of technical. But we've got some of the world's best statisticians working with us and working with the FDA.

So I'm pretty confident that we're going to have something here, have an IND approved this summer. Our goal is to start this trial, enrolling this summer. And I think once we get the IND approved, then we can start kind of kicking off opening centers and so it's I think we're on track with pretty much what we told people.

Suraj Kalia -- Northland Securities -- Analyst

Got it. And final question, Ashley, cadence of gross margins, how would you guide us through the year, just given FX and the impact on the different businesses? Thank you for taking my questions.

Ashley Lee -- Chief Financial Officer

Yes. You know, as I mentioned earlier in the call, Suraj, they were a little bit lower than we anticipated in the first quarter and that was primarily due to the mix between distributor business versus our direct markets. We're still anticipating that the gross margins for the full year are going to be 67-plus percent for the full year. So you know, I think that again in any given quarter, it can be affected by product mix and geographic mix.

But those things set aside, we're expecting the gross margins to be relatively the same for each of the remaining three quarters with the full year again being 67-plus percent for the year.

Operator

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

Joe Munda -- First Analysis -- Analyst

Pat, first off in your prepared remarks, you talked about adding roughly 20 people in Asia Pac and 10 in Latin America. Just going back and looking at my notes here, you were talking about adding distributors in China in the second half and building out a distributor network in Latin America. I'm just wondering, had something changed or is this complementary to what you're doing in both markets?

Pat MacKin -- Chief Executive Officer

No. It's actually complementary. So if you start with kind of Latin America, so the first piece on Latin America is Jotec was already had a direct operation in Brazil and was direct with the Jotec portfolio. They'd invested a lot of time over the last few years to build up that operation.

So one of the things we're doing and it's just starting. We talked about it last -- I guess we talked about it in Q3 that we started unwinding our distributor in Brazil with BioGlue and started destocking them to prepare to go direct with BioGlue in Brazil. And that's just starting now. Obviously we have to hire some direct people in Brazil to support the BioGlue and the On-X product lines.

That's some of the people from that are there. The second is having some infrastructure in Latin America from a marketing and education standpoint to either consolidate or open up new distributors in countries that we may not be in or upgrading in countries that we think we can do better. So it's kind of an additive. There's two pieces going on.

One is that there are some direct people going in and there's also some infrastructure going in to support the distributor market. Kind of the same with Asia Pacific. There are some countries where we're actually going to be going direct. So we're going to be putting kind of feet on the ground in Asia Pacific.

And similar to Brazil, in China we're going to have some local infrastructure supporting our distributor there and managing the agents and the sub distributors. So again, it's kind of a hybrid. Typically we use a hybrid model in a place like China. So it actually is kind of two things happening at once, right? Some direct people on the ground that will be supporting and working with distributors for the country.

Hopefully that makes sense.

Joe Munda -- First Analysis -- Analyst

Yes. I was wondering, just to take it one step further, if you could give us some color on what the revenues were, per se, from Latin America and maybe China, so we can have a point of reference.

Pat MacKin -- Chief Executive Officer

Yes. We're not going to break out down at that geographic level. I think something we probably will do in the future is as we kind of roll out our five-year plan, as those geographies become more meaningful to the company, we can start talking about what we think those numbers will look like. But I think it's premature at this point to give out kind of breaking out line items for Latin America and Asia right now.

Joe Munda -- First Analysis -- Analyst

OK. And then Ashley, in regards to R&D, I mean, you guys have a lot of moving pieces going on with different trials going and initiatives. I was wondering if you could give us some color, perhaps, on how we should think about R&D going forward this quarter. Maybe a little bit lighter than I or the rest of us would have thought, given all the initiatives going out.

Ashley Lee -- Chief Financial Officer

Yes. It was a little bit lighter than probably our own expectation. But for the remainder of the year, we're anticipating R&D expenses for the full year to be in the high single digits, approaching 10% of total revenues for the year. And as it relates to the last three quarters of the year, we expect each quarter to be roughly the same over the balance of the year, again, culminating in high single digits for R&D as a percentage of revenue up to 10%.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Pat MacKin -- Chief Executive Officer

Well, I just want to thank everybody for joining on the call and we've obviously switched to a new format where we're releasing the press release at the end of close of market and then doing our call. That was basically some feedback we'd gotten from our investors that they would rather have us do in this format. So hopefully it works for more people. We really appreciate everybody joining and we're excited about what we've got going on, and look forward to updating you on your next quarter's call.

Thank you.

Operator

[Operator signoff]

Duration: 44 minutes

Call Participants:

Lynn Lewis -- Investor Relations

Pat MacKin -- Chief Executive Officer

Ashley Lee -- Chief Financial Officer

Jason Mills -- Canaccord Genuity -- Analyst

Mike Matson -- Needham and Company -- Analyst

Suraj Kalia -- Northland Securities -- Analyst

Joe Munda -- First Analysis -- Analyst

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