Earnings Call: H2 2019

Mar 31, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the MicroPort 2019 Post-Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I would now like to hand the conference over to your speaker today, Ms. Yolanda. Thank you. Please go ahead. Thank you. Good morning, everyone. This is Yolanda Hu, Morgan Stanley China healthcare analyst. With us today, we have Chief Financial Officer, Mr. Martin Sun, Chief Technology Officer, Dr. Qiyi Luo, Chief International Business Officer, Mr. Jonathan Chen, and also Board Secretary and Vice President, Ms. Ling. I will hand over to Jonathan first to give you a brief introduction of business. Thank you, Yolanda. Welcome everyone to the 2019 Annual Results Conference Call for MicroPort Scientific. My name is Jonathan Chen, Chief International Business Officer. During the next hour, Martin and I will provide comments on the annual results of our fiscal year 2019. After our prepared remarks, we will be happy to take your questions. Unless we say otherwise, a reference to the 2019 annual result increasing or decreasing are in comparison to the year 2018, and all year-over-year revenue growth ranges are given on a constant currency basis, which is adjusted for any impact for foreign currency translation. The growth range details before constant currency adjustment are available in our annual result announcement, which was published yesterday. First, I will give highlights of our 2019 annual results. In 2019, the company achieved a record year in total revenue and contributed to experience robust growth in key business segments in our core products. Revenue of the company reached $793 million, up by 22% year-on-year. This strong growth was led by revenue by our cardiovascular business increasing by 35.5% year-on-year, and sales of our Firehawk stents, which increased by 52%. In addition, the revenue of our endovascular and neurovascular business recorded 44.5% and 55.6% revenue growth respectively. For our CRM business in 2020, the financial results of the acquired CRM business will fully consolidate into the group's financial statements from January to December 2019. This represents an increase of four months revenue compared to year 2018. In 2019, the revenue of our CRM business grew rapidly 36.9% year-on-year with our made-in-China pacemaker business achieving sales rapidly growth of 157%. For our orthopedics business, the international non-China orthopedics business was affected by short-term fluctuations in the first half of 2019, and the revenue stabilized in the second half of the year. Thus, for the full year, revenue for the whole orthopedics business segment was basically flat year-over-year, but the revenue for our China orthopedics business increased by 57.1%. The company's overall gross profit increased by 20.1%. The gross profit margin reached 71.1%, up 90 basis points year-over-year, mainly attributable to better product mix. In addition, during the year, the group completed the transfer of shares of EP business, resulting in a one-time gain of approximately $56 million. As a result, profit attributable to equity shareholders of the company was $46.3 million, up by 93.5%. Now I will give a brief overview on the R&D achievements in 2019. The company made great achievements in R&D and clinical affairs in 2019, which lays a solid foundation for the company's sustainable development. In 2019, we had 18 Class III medical devices gaining NMPA approval, and 3 products entered into the Green Path channel. By the end of the year 2019, the group already had 18 products that entered Green Path cumulatively, which represents the number 1 medical device company in the industry for the last 5 consecutive years. In addition, the group has also many products receiving clearances in the overseas market, which I will summarize now. First, for our cardiovascular device business. FireCondor coronary rapamycin-target eluting stent with improvements in the delivery system, Firefighter NC PTCA balloon catheter, and the Waltz cobalt chrome coronary stent system all obtained NMPA approval, which helped to build a multi-layer product portfolio. In addition, a guide wire, guiding catheter, and new specifications for angiographic guide wires attained NMPA approval and further complemented the group's PCI accessories product line. In our overseas market, the group obtained 46 initial registration approvals in 17 countries or regions outside of China, among which the new generation Firehawk Liberty coronary rapamycin TES and the Firefighter NC PTCA balloon catheter received CE mark. Currently, the group has 4 stent products and 4 balloon products being sold in the global market. For our orthopedics business in the China market, the domestically made Aspiration and SoSuperior medial stability total knee replacement systems both obtained NMPA approval in January 2019. The Goral total hip arthroplasty system obtained NMPA approval in February 2020. Therefore, the made-in-China joint product portfolio has been basically completed. Also, Arborez, the kyphoplasty balloon catheter and interlocking intramedullary nails and supporting tools, the acetabular screw, the posterior spinal fixation system, and other products also gained NMPA approval. In our overseas orthopedics business, the Evolution Stemmed Femur, a significant component of the Evolution Revision Knee System, has obtained approval and was launched in North America. The new-generation Evolution NitrX Knee System, the femoral head line extension, and knee tensioner instrument system also gained FDA approval and was launched in the U.S. Other products that have received clearance include the Prime Acetabular Cup System, the SLOCON Total Knee Instrument in Japan, and the BIOLOX delta Option System in Europe. These products further expanded the product portfolio of MicroPort's orthopedic business in the globe. For our CRM business in the China market, the group's in-house developed BonaFire passive pacing lead entered the Green Path channel and kicked off pre-clinical studies, completed first enrollment in China. Meanwhile, the group has also initiated the clinical trial for MRI pacemakers and is expected to launch the first made-in-China MRI conditional pacemaker. In our overseas market, the 1.5 Tesla and 3 Tesla MRI conditional pacemaker, called ENO, was launched in Japan. In Europe, the group saw significant progress in pacemaker platforms that features Bluetooth communication. In addition, the NAVIGO Quadripolar Left Ventricular Pacing Lead completed the clinical study, which will help to complement and upgrade our existing product portfolio. In our endovascular business, the Minos Abdominal Aortic Aneurysm and Delivery System obtained NMPA approval and CE mark in 2019. For our neurovascular business, the Fastrack Microcatheter System obtained NMPA approval. The Fastrack is the group's first approved product for neural pathway, which further complements the existing neural product pipeline. For our heart valve business, VitaFlow, the transcatheter aortic valve system, obtained NMPA approval. Lastly, for our surgical robot business, the group's self-developed DFVision 3D electronic laparoscope and the Toumai laparoscopic surgical robot were both granted Green Paths during the year. This year in 2020, we expect more products to obtain NMPA approval, including the FIREBIRD 2 NOVA, the rapamycin-eluting coronary cobalt chrome stent system, the hip instrument kit, our Reewarm paclitaxel drug-coated balloon, the Fontus branch surgical stent graft system, and the vertebral arterial rapamycin target-eluting stent system and coil occlusion system and the detachment system. During the reporting period, we also made significant progress in clinical trials. In March 2019, at the CIT conference, the group released the three-year follow-up results of the FUTURE-I research on Firesorb, our bioresorbable rapamycin-target eluting coronary scaffold system for the treatment of coronary artery disease. The results prove that Firesorb stent, based on the PLLA with thinner scaffold struts, is one of the more viable, safe, and effective second-generation scaffold solutions for patients with single de novo coronary artery lesions, as compared to the first-generation bioscaffold stents. For the FUTURE-II pivotal study, over 50% of the subjects have completed one-year angiography primary endpoint follow-up. The group has completed the preparation, including IRB approval, for starting subject enrollment for the prospective multicenter and single-arm objective performance criteria, or OPC, the large-scale study called FUTURE-III. In May, at the EuroPCR 2019 conference, the company initially released two-year data from our Target All-Comers trial. The data was simultaneously published online by the Journal of the American College of Cardiology, a well-known international medical journal. At the American conference, TCT 2019, which was held in September 2019, the group first released the follow-up data for our two years low-risk group, high-risk group Target AC trial. The results show that both in low-risk and high-risk groups, the two-year target lesion failure rate and the stent thrombosis rate of Firehawk were similar to the control group, which further demonstrated that Firehawk stent could achieve the same efficacy at the lowest drug load in the world with only one-third drug load of similar stent products. The safety increased significantly, showing the state-of-the-art Firehawk stent technology. In addition, the Firehawk stent also submitted registration applications to the Japan PMDA to explore registration approval for the Japan market. After giving a picture of the R&D, I will now give some more details of the progress for each business segment for 2019. Starting with our cardiovascular business. In 2019, China has become the world's largest PCI procedures by country. With the further development of the national diagnosis and treatment system, county-level hospitals have gradually improved PCI capabilities and have played an increasingly important role in the treatment of coronary heart disease, which has greatly increased patient accessibility. After more than 20 years of development, the group's cardiovascular business has maintained its leading position in the Chinese market since its launch, based on its excellent product performance. In 2019, our cardiovascular business achieved revenue of $265 million, an increase of 35.5% over the previous year. In the domestic market, the group's drug-eluting stent sales revenue increased by 32.8% over the previous year. Among them, the Firehawk stent revenue increased by 51.6% year-on-year, and the Firebird2 stent revenue increased by 22.9% year-on-year. In addition to the rapid growth of the domestic market, the successful bidding for centralized procurement also promoted sales growth revenue of Firehawk. As a percentage in total, DES stent sales increased from 35% in 2018 to 39% in 2019, while sales volume increased from 21% to 25%. During the year, the group has actively expanded penetration of the market. By the end of 2019, the number of hospitals covered by drug-eluting stents exceeded 2,000 for the first time, among which Firehawk covered 954 hospitals, a year-on-year increase of 41%, and Firebird2 covered 1,891 hospitals, a year-on-year increase of 18%. In addition, the group has also newly penetrated 256 county-level hospitals. In terms of new products, the FireCondor rapamycin DES with improved delivery system obtained NMPA approval and completed the first implantation during the year, which will also bring a new growth catalyst for 2020. In 2019, the overseas business of drug-eluting stents recorded revenue of $16.6 million, reaching a new record high, with an increase of 72.4% over the previous year. Among them, the revenue of Firebird2 increased by 187% year-on-year, and the revenue of Firehawk increased by 54.6% year-on-year. Firehawk has been included in French and Belgium medical reimbursement, which will help to actively expand sales in Europe for 2020. The group's balloon products maintain robust growth. Its global revenue increased by 54.5% compared with the previous year, which has exceeded 40% for four consecutive years. In the domestic market, our balloon products have covered more than 600 hospitals, an increase of 50.6% over the previous year. Especially, our Firefighter balloon catheter has been highly recognized by the industry expert since its launch and has newly penetrated 76 new hospitals during the year. In addition, Pioneer PTCA balloon catheter successfully won the bid during the government centralized procurement process, which also promoted its clinical use in certain regions. In our overseas markets, four balloon products have been registered and approved in 21 countries or regions, and 19 registration certificates were obtained for the first time in 12 regions for the year. Moving to our CRM business, 2019 marks the first full fiscal year for the consolidated CRM business. Revenue reached $209 million. The group actively adjusted its overseas strategy and the domestic and overseas R&D teams cooperated effectively to advance R&D projects. In our China market, the group strengthened promotion of our domestic pacemakers, and its sales growth beat expectations. In 2019, revenue for the international non-China CRM business was $201 million. For the Japan market, the group has basically completed the strategic transformation from the original distributor model to the direct sales model. It launched the 1.5 Tesla, 3 Tesla MRI conditional pacemaker, ENO series in Japan, and has completed the first implantation. The Japan direct business is steadily progressing and slowly scaling up its direct coverage of Japan hospitals. In the European market, the world's smallest 1.5 Tesla and 3 Tesla MRI conditional pacemakers called the OTO, ENO, and TEO series have achieved rapid growth of the implantation. After only one year since its launch, those pacemakers have contributed to more than half of the pacemaker revenue in Europe. In addition, the group has also explored some Asia-Pacific countries and Africa to further expand its global CRM business. The CRM China business recorded revenue of $8.2 million. The group continued to carry out brand building and academic promotion. For domestic pacemakers, the group developed new hospitals for cooperation. The recognition of the domestic brands has increased significantly, which led to higher than expectation of domestic pacemaker sales. By the end of 2019, the group's pacemaker products covered a total of 411 hospitals, an increase of 51% over last year. Made-in-China pacemakers products cover 278 hospitals, which doubled over the previous year. The Beflex active pacing lead, which was just launched in 2018, has been widely put into clinical use across the country and accelerated the conversion of the existing lead implantation. Beflex was widely recognized by doctors and also boosted the growth of the segment. Moving on to our orthopedics business. In 2019, the group effectively integrated the global resources to improve our global product portfolio, and at the same time, we strengthened our brand building and promotion of the product. Our two made-in-China knee products were obtained NMPA approval, and substantial progress has been made in terms of domestic production. During the year, the group's global orthopedics business achieved revenue of USD 232 million, basically flat over the previous year. The international non-China orthopedic business recorded a revenue decrease of 4.7% year-on-year, mainly attributable to the impact of the loss of one major U.S. distributor in 2019, sorry, 2018, and coupled with downward price trend pressure. Regionally, the U.S. revenue decreased by 7.1%. The group actively developed new customers and added new distributors for cooperation, and as a result, the U.S. revenue stabilized in the second half of 2019. Revenue from Japan achieved slight increase in revenue from Europe declined due to falling prices, but overall sales volume increased by high single digits. During the year, the group organized and participated in major international academic events, strengthened physician training, and conducted a number of clinical trials with industry experts and key opinion leaders, further verifying the effectiveness of SuperPath surgery under the concept of our accelerated recovery and medial pivot technology. In addition, the U.S. team developed a very exciting minimally invasive hip surgery approach called AnteriorPath, which will perfectly complement SuperPath. No matter if a surgeon prefers to use a posterior or anterior approach to hip replacement surgery, surgeons will now have a very compelling technology offering from MicroPort to address either approach. The U.S. team introduced the AnteriorPath to surgeons in November 2019 at the American Association of Hip and Knee Surgeons meeting in Dallas. To update you on the latest of our litigation with our U.S. distributor, we are pleased to announce that in February 2020, MPO was awarded $9.7 million in cash plus reasonable legal expenses in its legal case against its former U.S. distributor called Advanced Surgical Devices, and its principal owner, Mr. William Zorowski. An independent arbitrator found in favor of MPO and concluded that ASD did commit material breach on the agreements between MPO and ASD, and that MPO did perform its obligations under the agreement. As a result of this very favorable ruling, MPO has the ability to pursue a second stage of litigation and seek treble damages based on tortious interference and contract between ASD and MPO by industry competitor, Medacta. Typically, treble damages awards amount in between two to three times the initial award, so may lead to an outcome of $20 million to $30 million in MPO's favor. However, we caution investors that this outcome may take over a year to conclude the legal process, and we may not be successful in achieving this outcome. In the meantime, MPO will seek payment of this initial arbitration award as soon as possible. Lastly, in February 2020, MPO officially hired Mr. Benny Hagag to be the President of MPO. Benny comes to MPO from Stryker, where he was most recently General Manager and VP of MAKO for Stryker Asia Pacific. Prior to Stryker, Benny was one of the co-founders of MAKO Surgical Corporation, holding various R&D and business development positions. We are very excited to have such an experienced and respected executive to lead MPO into its future and look forward to his contributions. For our China orthopedic business, we maintained robust momentum and recorded a revenue growth of 57.1%, mainly because our imported joint products achieved rapid sales growth of 37.8%, far higher than market average growth. Based on the superior product concept, the Chinese sales team launched frequent marketing campaigns and conducted product training to expand brand influence. Hospital coverage has been increasing year-by-year. By the end of 2019, joint products newly penetrated more than 130 hospitals and have realized sales in nearly 600 hospitals across the country. In terms of domestic production, two made-in-China medial stabilized total knee replacement systems obtained NMPA approval. Besides Goral, total hip arthroplasty system attained NMPA approval in February of this year. Therefore, the made-in-China joint product portfolio has been completed. The diversified portfolio of both imported and made-in-China products will greatly enhance the overall competitiveness of our China orthopedic business. At the same time, our spine and trauma segment actively expanded its sales platform. We strengthened our clinical promotion and accelerated hospital access and continued to upgrade existing products and launch new products. During the year, revenue maintained rapid growth and gross profit margin continued to improve. The Global Supply Center, GSC, is operating steadily, supporting the development of global orthopedics business through global instrument delivery while reducing procurement costs. The center shipped more than 110,000 products and reached 38 countries of regions throughout the year. Now turning to our endovascular business. The endovascular business recorded a strong year-on-year revenue growth of 44.5%, far exceeding the average market growth. This was mainly driven by the sales growth of all major product lines. In particular, the Castor single branch thoracic aortic stent, the world's first thoracic branch stent, has been applied by over 300 hospitals in China with very positive clinical feedback. The Minos AAA stent system obtained NMPA approval, which further diversified the product portfolio and will bring new catalyst to the segment. During the year in the China market, the group continued to expand sales in the second, third, and fourth-tier hospitals, and newly penetrated more than 60 hospitals and cooperated with more than 100 distributors. Meanwhile, the Minos also attained CE mark, as the group began to explore the overseas market. For our neurovascular business, the neurovascular business recorded a robust year-on-year growth of 55.6%, which is much higher than the compound annual growth rate of 34.4% over the past 10 years. Among them, APOLLO, the intracranial stent system that has been on the market for 15 years, achieved a rapid growth of 31.7%. For Tubridge, the vascular reconstruction device, which obtained NMPA approval in 2018, the number of clinical application cases has increased by multiples after extensive doctor training, academic promotion, and multi-level market management, and the clinical effect has been well-recognized by experts. After only one year in its launch, the Tubridge has contributed over 30% of the segment revenue. In addition, the Fastrack microcatheter system was approved and launched in 2019, and it is the group's first approved product for the neural pathway, which further complemented the existing product line. Our coil occlusion system and the detachment system have completed clinical trials with excellent clinical results, and we will be excited to share that later on in 2020. For our heart valve business, 2019 marks the first year of commercialization. The group's in-house developed VitaFlow TAVI system obtained NMPA approval in July of 2019 as the first approved TAVI product made of bovine pericardial leaflets in China, and achieved revenue of $3.12 million in 2019. The group adopts targeted pricing and marketed strategy, and it focuses on core and medium and large hospitals and are actively engaged in academic campaigns and doctor training. By the end of 2019, VitaFlow had entered into 36 hospitals. Besides VitaFlow, the group offers total solutions of the TAVI procedures, including accessories of the Owide balloon catheter and Olpass catheter sheath, which are proved to be safer and more effective based on clinical data. Our VitaFlow II entered the green path in 2018 and is about to submit registration application in China. Meanwhile, the VitaFlow, its pre-launch clinical trial in Europe is also proceeding well. Lastly, for our surgical robots business, the group's in-house developed DFVision 3D electronic laparoscope is the first made-in-China product, has entered into green path and completed the first gallbladder removal surgery, marking the official launch of its clinical trial in China. The Toumai laparoscopical surgical robot has also entered into green path in 2019 and completed the first clinical study of radical prostatectomy, becoming the first made-in-China robot to complete one of the most difficult urological surgeries and officially launched its first-in-man clinical trial. Since there is no made-in-China 3D laparoscopic or laparoscopical surgical robot in the market, the grant of the green path will accelerate their registration process so as to benefit more patients in China. That is all for the operating performance in 2019. I will now turn it over to our CFO, Martin Sun, to provide you with further financial details for our 2019 results. Okay. Thanks, Jonathan, and good morning and good evening, everyone. This is Martin. I will now take you through our 2019 financial performance as well as the guidance for 2020. First, for 2019 revenue, MicroPort generated total revenue of $793.5 million, achieving growth rate of 22% at constant currency basis. Excluding the consolidation of CRM business acquired in 2018, our revenue of the base business increased by 17.4%, mainly driven by the strong growth of our cardiovascular business. As Jonathan mentioned early, all major business segments achieved a very rapid growth, so I will not repeat it again. For our gross profit in 2019, it was increased by 20%, with gross margin at 71.1%, up by 90 basis points from 2018. This was driven by a favorable sales mix, especially from the continuously increased cardiovascular revenue with a higher margin. Our operating expenses relative to revenue went up 630 basis points to 68.8% in 2019. Compared to 2018, the ratio is at 62.5%. This was mainly driven by the CRM business with relatively higher OPEX ratios. For your reference, our CRM business had an OPEX ratio of 86% relative to the revenue in 2019, which was much higher than 70% of 2018. Also higher than our other business segment. This was attributable to two factors. The first one is a continuously increased R&D spending for product portfolio improvement, especially focusing on MRI compatible leads for brady product line. Second spending is new investment in Japan to build up our own direct commercial foundation for the change of our business model from exclusive distribution to go direct model. The total OPEX of the non-CRM segments were at 62.7% of the revenue, mostly due to the increased investment on several major R&D projects, such as the TAVI and 12th project, surgical robotics, endovascular and neurovascular. There are some other major P&L items for your attention. There are two. First one is gain on disposal of subsidiaries. In the 2019, our income statement, we have a gain on disposal of the subsidiaries, which amounted to US$63 million. This represents the one-time gain recognized in connection with spin-off our EP business in the first half year of 2019. The second item is other net income. It was increased by $5 million compared with 2018, which was driven by increased government grant by $6.3 million. This was primarily linked to our continuous large investment in the R&D pipelines. So bottom line-wise, the 2019, our net profit was $29 million, up 57.5% year on year. The profit attributable to shareholders was $46.3 million, up 93.5%. Our EPS also increased by 79% to $0.0292. In addition to the P&L improvement, our balance sheet and the cash flow continued to strengthen during 2019. This mainly due to the following transactions. The first one is we separate listing of MicroPort Endovastec business on the Science and Technology Innovation Board of the Shanghai Stock Exchange in July 2019, which brought a cash inflow of USD 106 million. The second is we spin off the EP business, which brought cash receipt of around $33 million. The third transaction is in the second half year, MicroPort CardioFlow company subsidiaries completed a Series C financing and received a capital injection of USD 45 million. As at the end of 2019, the group's voting rights in the MicroPort CardioFlow was still keep up approximately 57%, and retain that control over MicroPort CardioFlow. All of the above help improved our cash liquidity and the capital structure in 2019. Also, there's two subsequent events for your attention. The first one is, in February 2020, all the outstanding convertible bonds of the group, which amounted to USD 84.4 million, were fully converted to the 95.9 million ordinary shares of the company at the conversion price of HK$6.84 per share. This will further enhance our capital structure and cash flows in 2020. The second subsequent event was related to the results of our arbitration cases with LivaNova regarding the purchase of the CRM business in 2018. As a background, according to our purchase agreement with LivaNova, the purchase price consideration is subject to the adjustment after the initial closing. As at the end of 2019, the group and LivaNova were still in the process of finalizing the adjustment amount. In March 2020, the arbitrator appointed by the MicroPort and LivaNova determined that LivaNova should refund a total of USD 16.4 million as the adjustment amount to the MicroPort. We have already received this fund in fully in this month. This will be positive impact to our 2020 profit and loss and cash flow. Those were some quick highlights of 2019 financial performance. Now I will provide the guidance for 2020. Before I go through the details, I want to say, as the outbreak of coronavirus has heavily affected the China economics in January and February. A series of precautionary and control measures have been and will continue to be implemented across the China, including but not limited to a temporary suspension of on-site works and a stringent control over the measures. Right now, the situation has successfully cooled down in the country since March. Our China sites have officially resumed work since early March. The spread of the coronavirus has had a relative limited impact on our overall operations in China. However, as we see the situation has entering a new phase with spread out outbreaks in other countries, especially in the European and U.S., it is difficult to foresee how it will involve over the coming months. The management will continue to monitor the development of the outbreak and evaluate its impact on the financial position and operating results of the MicroPort group. Given the dynamic natures, such impact could not be precisely estimated as of today. Therefore, the guidance I'm giving will focus on our original plan for 2020, as well as the management first outlook with consideration to the coronavirus impact. We will continuously update our forecast and guidance in conjunction with the interim report in August. Right now, I'll start to our guidance for 2020 revenue. From a revenue standpoint, management's original forecast was an overall growth of 13%-15% compared to 2019. Now, considering the coronavirus impact, we preliminary estimate will be just down to a single digit growth, which is within the 5%. I will highlight some key segments for your reference. For our cardiovascular business, we expect it to grow at 5%-10%. This growth will be driven by our Firehawk and the Firebird2 sales in the China market as well as the international market. We expect a steady rollout of the GPO policy in more provinces in 2020. Given the successfully track record previously, such as the Jiangsu province in 2019, we have confidence in winning the future tenders and therefore anticipated a solid volume growth year-on-year. As evidenced in our Jiangsu tender, where Firehawk won the mandatory group tender, sales volume increased significant and exceed our original forecast. In terms of the coronavirus impact, as the Chinese government has managed and successfully control this virus spread, we believe that impact to our cardiovascular business for the year will be very manageable. The consolidated orthopedic segment was expected to grow at 8%-10% originally before the coronavirus outbreak. Now we consider the potential virus impact in the coming months. We estimate the year-on-year growth could be a decline by 4%-6%. Within this, our China orthopedics business was expected to maintain the robust momentum and grow over 40% approximately. Now considering the virus impact being conservative, we are just down to those growth rate to 25%. The growth will be driven by two factors. The first one is the existing import joints business. We will still expect that import business double digits growth through the rapid market penetration. The second is we also expect the launch of our made-in-China hips and knees will become a new growth point. With regard to the international orthopedics business, as Jonathan Chen mentioned early, we have a new President, Benny Hagag, on board in February 2020. So for 2020, according to our original plan, we expected our international orthopedic sales to recover at a growth rate at a single digits. But now, if we consider the potential virus impact to the U.S. and European market in coming months, we anticipate a decline of around 10% for the sector's revenue. The third one is regarding the CRM business. The total consolidated CRM revenue was expected to grow at 2% or 3% year-on-year before the coronavirus' outbreak. Now considering the potential virus impact in the coming months, we estimate the year-on-year growth could be declined by a single digits for worldwide. To break it down, the first one, the international CRM business, originally expected to grow 1% or 2% due to completed product portfolio and Japan transition. Now, if we consider the potential virus impact to EU market, we anticipate it could be a decline about 10% for that international business. Our China CRM business was expected to increase 25%, driven by the newly launched made-in-China products we call the Rega pacemaker. But with consideration to the virus impact, we estimate the growth will be about 10%-15% for 2020. The remaining key segments are expected to keep high double-digit growth. Endovascular and neurovascular are both expected to grow over 30%. Our heart valve business realized first sales in second half year 2019, and it recorded $3 million of revenue within just four months. Giving this excellent market recognition, we anticipate that the VitaFlow revenue could be quickly ramping up in 2020. Let's move to the gross margin. In terms of estimations of the group gross margin in 2020, the management expects it will be flat year-on-year. That means 70%-71%. This will be as a result of the combined effect of the following two facts. The first one is upside from the favorable sales mix driven by the relatively fast growth of cardiovascular revenue. The second is downside from the manufacturing capacity expansion with a lower utilization. Our operating expenses for 2020, that is expected to be flat at 69%-70% of the revenue. By nature of expenses, distribution cost will be approximately 34%, R&D 20%, and general admin 16% relative to the revenue. In this critical period with high uncertainty in respect of the coronavirus development, especially overseas, we will take appropriate measures to adapt our cost, operations, and resource to better match our revenue. That's all for our first guidance for 2020. We will have more update available in conjunction with the first interim report in August. On behalf of the MicroPort management team, I wanted to stress that despite the uncertainty brought by the coronavirus this year, our group long-term mission remains unchanged. We strongly believe in our strategy of sustainable growth and are determined to continue on the long-term path despite this temporary fluctuation. Thank you for listening, and I will now hand over to Yolanda. Thank you very much. Thanks, Martin and Genesis for sharing. Operator, can you remind the audience how to raise questions? Then we can open up the lines for Q&A. Thank you. Sure. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your first question comes from the line of Shannon Ling from Macquarie. Please ask your question. Hi, management. Thank you for taking my question. I have a first question regarding the gross margin and then three questions on the orthopedic segment. The first question is that, could you share the gross margin by segment, like the cardio, the endo, the neuro, and also the total orthopedic and the China orthopedic, et cetera? Okay. This is Martin, and I try to answer your first question about the gross margin. Our gross margin by sectors and for our cardio is about 89%-90%. This is the range. Our endo business is 80%, neuro business about over 83%. Our orthopedics business in total, that will be 60.5%-61%. Our CRM business is just about 60%. That is the segment, by segment. Is there a breakdown, could you share the gross margin of the China orthopedic segment and also the China CRM segment? Our China orthopedics gross margin is around 50%. 50%, okay. Our China CRM gross margin is a little bit low because it just started for some made in China, the pacemaker, so that gross margin is about 25%. 25%. I see. Do you have a long-term target? Once you ramp up the China CRM, at which level would you see it to be? That will be about 55%. We get our leads approved in China. Am I- How long could you reach that level? Sorry? Do you- Oh, how long? There could be about two to three years. Two to three years. Thank you. You're welcome. Yeah. The three questions on the orthopedic side. The first one is that we have observed that the loss became larger in 2019. Could you give us the breakdown of the overseas and China parts? What are the reason of the enlarged loss? This is the first one. The second one is regarding the pricing strategy in China. I believe that currently, your imported products in China are for targeting for premium sectors, and the made in China are for the value sectors. Could you elaborate more on the pricing strategy on these two segments, and how do you differentiate the two? Also, what's the price level of your imported products versus other foreign brand products sold in China? The last one would be, is the imported orthopedics implants made in the U.S.? If so, is there any impact on the production side from the coronavirus outbreak now in the U.S.? Thank you. Okay. I try to answer your question for some numbers. Then I will hand over to Jonathan Chen, our Chief International Business Officer. He will answer your question from the business side. Our orthopedics business breakdown, the international and China. Our loss for China orthopedics is about $11 million. It was just powerful. And the rest of that is the international loss. That will be about $20 million. The total is about $30 million. For the value segment in China, the pricing for that product is about 30% of these premium products. You will see this, the premium and value. But just for your information, in China, our two product strategy doesn't mean that we use the pricing. Actually, we use a different marketing strategy and also differentiations those and how to say, the channels and the trainings and kind of like a lot of this. I think that Jonathan Chen may share with you our market strategy. Thank you. Yeah. Thank you, Martin. I will answer your question. I think your question was related to the manufacturing in the U.S. Yeah. Our manufacturing facility for orthopedics is based in Tennessee, and so far we see that that region, the state of Tennessee, has not been significantly impacted by the coronavirus. As of today, we are still currently manufacturing from our Tennessee facility. We will closely monitor that situation over the next several weeks and months, but the current situation is we're still able to produce product to service the import segment for the China orthopedics business. I remind you that for our China business, we now have a full domestic portfolio, both in terms of the local domestic knee approval and also the domestic hip approval. Even if the manufacturing from Tennessee is temporarily slowed down, our China orthopedic business should still be able to service customers through the local domestic manufacturing. I see. Sorry for just a follow-up on the loss. Because like you said, the loss in the international market of orthopedics is around $20 million. What are the reason of these enlarged losses? Yeah. Primarily for 2019, we transitioned from the loss of our significant distributor business in Southern California, which we described. We actually got recovery in terms of the arbitration award. But during 2019, we saw a significant loss in revenue from that distributor. However, we have replaced that distributor in Southern California, so during the second half of the year, we saw some recovery. But that was primarily driving the loss in our international non-China orthopedic business. I see. Thank you very much. Yep, I am done. Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. It is star one to ask your question. There are no further question at this time. Presenters, please continue. Maybe I'll just wrap up with the last question. I think investors are quite interested in the TAVI business. Can you walk us through your marketing strategy in China in terms of educating doctors and also to differentiate with the existing players, including those which will likely get approval within the next 6 months? Harvey? Harvey. Okay, this is Dr. Qi Luo. Regarding TAVI, I can give you some update. In China right now, I think the really bottleneck for this market to grow is still the physician training. That means the amount of the physician can do the TAVI independently. Right now, it's probably just less than 20 physicians can do it independently. Whoever tries to get into this market, will have to face a lot of education and training to do. I think previously, only one, for the transfemoral, only one player in China. It's a local manufacturer. They've been on the market for 2 and a half years. They did some training, but I think one company is always not enough. We coming up now, we also have to do a lot of education to train the physicians. Right now, we already think it's not a big problem, just they need some time, because each physician needed to do, I think, at least 20 cases before they can do it independently for the safety of the patient. Every hospital, every center wants to get their doctor to do this procedure, so we have to get in there to get people to go teaching them. You always need a proctor to do all those trainings. Everybody is working on that, MicroPort, we can leverage all resources to do this much more proficient and more efficient, and to get more hospital covered. That's what we are doing. With the self-expandable one, previously company on the market have a self-expandable TAVI product. We also have a self-expandable. By doing that, the basic training is similar for all the players on the market now in China. Even later on, for example, Edwards Lifesciences from the U.S., if they come in, probably late this year or early next year, they're going to have a balloon expandable one. Those are 2 different type of devices, and that would require totally different training. I think to educate all the physician and the market in next 2 to 3 years, still a faster-growing time in terms of training. It requires a lot of efforts to get the physician trained. We believe we have enough patients, we have enough physicians who want to do this procedure, and this speed of growth will be very, very fast. The coverage, it will be very steep to increase. I don't know if that addressed your concerns. Yeah, thank you. Operator, do we have more questions online? Oh, yes, we have one follow-up question from Shannon Ling from Macquarie. Please ask your question. Hi, management. Sorry, just some follow-up questions on the TAVI segment and also another one on the cardio segment. First on the TAVI segment, could you share the volume sold and the volume implanted in 2019, and what is your target in 2020? Then the second one is about the pricing strategy versus your peers, because we have heard it is 30% less than your peers, I just want to confirm that. Then the third one is on the gross margin, what kind of gross margin can TAVI achieve? Then the last one is, when do you expect this segment to reach breakeven? Okay. Again, this is Dr. Qi Luo. For TAVI, I try to answer you. The TAVI, your first question is, last year, what is the volume? I believe it is about 2,000 total TAVI procedures last year. 2,000 procedures in China, because previous year, probably is about 500 or 600. It is always at least a double growth. We expect this year will be 4,000 to 5,000, we think. Of course, after this coronavirus, we do not know how long this influence will be exactly, but now we see a lot of recover. Hospitals started to do the procedure now. We believe patients still there. For those patients, if you do not do it, patient will die. I think the patient is still there. If it is required to do the TAVI procedure, they have to do it. They may just delay a couple of months, but they have to do it. I believe this probably influence because of this virus, will be not as big as other devices, because the TAVI is some device to save the life for those people, they have to do it. This is your first question. You said the margin, I think right now, we probably cannot have clear numbers, because we just started to transfer from the R&D to production. Anything at this time of a number is not very meaningful, because it just a start. I think that is what I can say. Do you have another question I missed about TAVI? Yeah. Also, I would like to know the volume sold by MicroPort in 2019 and your target for 2020. Last year, we only did about three to four months. I think only we did the 300 something. Right, Andy? 200. About 200 cases. This year, our target at the beginning, we made the target around 2,000. Around. For us, yeah. I see. I want to confirm about the retail pricing. Is it 30% less than your peers, or is it higher? It is lower, about 25%-30%. We are not just grabbing from the air. We are not just want to go to the pricing war with these guys. We just think this is a reasonable price for China market, because you cannot use the U.S. or European price for China because, for example, the surgical price is so much different. Hospital cost is so much different. In the U.S., the price is so high is because of the hospital, the surgery, everything cost is very high in the U.S. So the TAVI procedure in the U.S. is about 10% lower than surgery. But in China, if you use the same price, that will be like three times higher than surgery. So we think that is not suitable for China. That's why we did a lot of survey, a lot of talking to the physicians, talked to everybody, and we decided, yeah, we have to be lower price a little bit. But now the volume is so low, I think in next 2 or 3 years, the price will not change that much for our price, because we think we're at a very reasonable price. Mm-hmm. Sorry, but on the gross margin side then, how do you say like this? Your peers have around gross margin around 83%. Do you think from long-term or at the most stable level, would your gross margin of TAVI be higher or lower than around 80% this level? And then the- I always think of will be between 70%-80%, this range, when we get everything on the track, yeah. I see. Sorry. The last one on TAVI, when do you expect the segment to reach break even? About two to three years later. We think it will be around 2022. 2022. Okay, I see. Thank you very much. Then just one last question on the cardio segment. We have noticed that your cardiovascular growth has accelerated to 44% last year, and congrats on that. Also your peer, Slingsby, also recorded around near 30% growth. Is the stronger growth in the market share again in 2019, mainly thanks to the GPO, or is there any other reasons behind it? There is a combination of the market original growth, double digit, and the GPO, both Slingsby and MicroPort win in several province in 2019. A lot of things because we have a portfolio is more complete. We have a full product on the market just for drug-eluting stents. We are at the much stronger competition in terms of mix of the product on the different levels. I see. Thank you very much. Yes, I am done. Thank you. Thank you. Thank you. Given the time limits, if there are no more questions, we will conclude today's call. Thanks everyone for joining, and have a good day. Thank you. Thank you everyone for your time. Thank you. Thank you. Thank you. Thank you, ladies and gentlemen. That does conclude our conference for today. You may all disconnect.