Earnings Call: H1 2018

Aug 31, 2018

Morning, good afternoon, everyone. Welcome to today's conference call. John, please begin the call and I'll be standing by for the question and answer session. Thank you. Good evening and good morning, and thanks everybody for dialing in. This is the H1 2018 Result Conference Call for MicroPort, and this is John Wu from Citi. Today we're very honored to invite the management from MicroPort for this conference. They are CFO, Mr. Martin Sun, Chief Technology Officer, Mr. Qiyi Luo, Chief International Business Officer, Mr. Jonathan Chen, and finally, the Board Secretary and also Vice President, Ms. Lina Li. I'm going to pass over the time to the management to start talk. Thank you very much. Please, Jonathan. Thank you very much, John. Welcome everyone to MicroPort Scientific Corporation 2018 Interim Result Conference Call. I'm Jonathan Chen, and with me today is Mr. Martin Sun, Mr. Qiyi Luo, Ms. Lina Li, and for the next hour, I will provide comments on the business highlights of our first half of fiscal year 2018. Then our CFO, Martin Sun, will discuss the financial results. After our prepared remarks, we'll be more than happy to take your questions. Unless we say otherwise, reference to our first half growth rates are in comparison to corresponding period of 2017, and all year-over-year growth rates are given on a constant currency basis, which is adjusted for fluctuation of exchange rates. The growth rate details before exchange rate adjustment are available in our interim result announcement, which was released on the website on August 30th, yesterday. 2018 is the 20th anniversary of MicroPort, and over the past 20 years, MicroPort has not only maintained solidly our leadership position in China, but we've also expanded its reach to more cutting-edge technologies for treating aging and chronic diseases such as endo, ortho, TAVI, and CRM. Today, one of our products is used in every 12 seconds. We have a hospital coverage of over 8,000 worldwide and among over 100 products that has been granted CFDA Green Path in China. There are 14 products that have achieved the Green Path designation, and we own a consistent pipeline with over 100 ongoing R&D projects. We have a global workforce of nearly 5,000 employees and with the well execution of MicroPort strategy of globalization and diversification, in the first half of 2018, our business from MicroPort has further expanded our revenue and achieved rapid growth at 35%. Apart from our U.S. 42.8 million revenue contribution from our international CRM business and the revenue of our other businesses in the first half represented a strong growth of 16.6% year-over-year. This robust growth is underpinned by the great performance of our key market segments. Our orthopedics business achieved rapid growth at 8.4% year-over-year, continuing the highest growth rate in past reporting periods. With the well execution of our defined turnaround plan, our orthopedic international business grew 6.5% year-over-year and recorded a net loss of $3.2 million U.S., which further narrowed by 42% compared to the same period last year. Our China orthopedic grew 46% year-over-year, and our domestic cardiovascular business realized solid growth of 23.5% year-over-year, among which Firehawk grew 38% and Firebird 2 grew 16%, which further fortifies our number one market share position in China. Attributed to our increasingly comprehensive product portfolio with innovative technology and premium quality, as well as our mature sales channel, other business segments also achieved fast growth, such as our endovascular business growing at 51%, neurovascular growing at 34%, and our EP business growing at 46% year-over-year. Compared to the same period of 2017, our gross profit increased by 39% during the reporting period. We achieved net profit of $24.2 million U.S., representing a growth rate of 17% year-over-year, and net profit attributable to the shareholders is $23.8 million U.S., growing at 11.2% year-over-year. Our R&D and clinical affairs also realized great achievements in the first half of 2018. We have five products that gained CFDA approval, and they are extending six new sizes of Firehawk, Tubridge from our neurovascular business, Columbus second generation, and EasyFinder 3D steerable curve mapping catheter from our EP business, and CompassAnalyzer PSA from our CRM business. We also have three products that gain registration approval in the international markets. They are CCK system and Evolution stem tibia instrumentation from orthopedics, our Platinium 4LV SonR CRTD from our CRM business. Our 13th and 14th products have been granted CFDA Green Path designation, which are the Retrievable Artery Target Eluting Stent from neuro and the Fontus surgical stent from our endovascular business. In the second half of 2018, we expect our domestic need products, the Minos AAA stent and our TAVI product to gain CFDA approval and the three Tesla MRI compatible pacemaker, XFINE leads, and a tablet-based programmer will be commercialized from our international CRM market. During the reporting period, we had grand release for three major clinical follow-up results. The most important and probably most impressive is our TARGET AC one-year clinical follow-up result, which we announced at this year's EuroPCR conference in which Firehawk achieved all the primary endpoints of that clinical trial. Of note, this is the first randomized control study conducted in Europe, in which a China-based manufacturer has been shown to be clinically equivalent to the best-in-class drug-eluting stents from Western medical device companies. The clinical results of this TARGET study has been accepted for publication in a very prestigious world-class medical journal, which will be announced early next week. We are very proud of this achievement, and we believe that MicroPort is the first China-based company to achieve such a feat in the interventional cardiology device industry. Our DES Firesorb released the two-year results of its first-in-man clinical trial, called FUTURE I, with all of its all-cause mortality rate of 0% and thrombosis rate of 0%, which preliminarily proved the safety and effectiveness of Firesorb. Our TAVI product, called VitaFlow, also announced one-year clinical results in March, and the occurrence of all-cause mortality is as low as 2.7%, and no patient experienced major stroke or moderate or severe paravalvular leakage. Compared to similar products in the industry, we believe that VitaFlow will be very competitive compared to other TAVI products. After briefing the big picture, I will give more details on the progress of each business segment in the first half of 2018. We will start with our OrthoRecon business. In the first half of 2018, we have well executed on our brand strategy, further expanding our market coverage in the OrthoRecon business. During the reporting period, OrthoRecon business, including the international and China business, achieved revenue of $122 million U.S., a rapid growth of 8.4% year-over-year. Our international non-China OrthoRecon business grew at 6.5% year-over-year, which is another reporting period with the highest revenue growth in our hip and knee lines. The sales performance had some very favorable comparables compared to first half of 2017. Our North America business grew at 8.9%, our Japan business grew at 5.1%, and our European subsidiaries grew at 5.4%. This solid performance was the result of increased sales coverage and a continued focus on training and medical education, as well as the launch of targeted products across these key markets. The strong sales performance, as well as continuous expense control and discipline, resulted in a $2.3 million net loss improvement in the first half of 2018 compared to the first half of 2017. In our China OrthoRecon business, we achieved stable growth with a revenue growth of 46% year-over-year. Specifically, the revenue from our joint products grew 45% year-over-year, which is attributable to the premium performance of our exclusive medial-pivot designed knee system, with its implant volume increasing significantly by 93%, and its revenue growth at 100% year-over-year. We also see great effect of our branding strategy, as at during June 30, our knee products were sold in about 600 hospitals in China, with 202 hospitals newly penetrated. As the world's first total hip arthroplasty minimally invasive technique, SuperPath facilitates faster return to function for more aging patients, among which the oldest patient that has received SuperPath surgery is a patient at 105 years old. Our instrument business achieved significant breakthroughs. Our self-developed instrument kit for advanced total knee system was launched, and this kit optimized 80% of the imported instrument design and reduces the cost by more than 55% and decreases the quantity of instruments by more than 25% per kit. The kit will also significantly improve the allocation efficiency of these instrument sets throughout China. Nevertheless, over half of the tools in this kit can be used in operation with the Evolution knee system, which will contribute to the development and mass production of domestic instrument kits for the Evolution total knee system. By 2018, our exclusive medial-pivot knee system has been on the market for 20 years, and the results demonstrate excellent clinical outcomes for both satisfaction at 95% and survivorship at 98.8% at 17 years. This is one of the longest clinical data sets for knee products with this highest survivorship rate. In February, a third party published a retrospective comparative study in the Journal of Arthroplasty that evaluated patient satisfaction after total knee arthroplasty using our Evolution medial-pivot knee system and a posterior stabilized knee system. The study show that patients who underwent surgery with our knee scored significantly better than those who underwent posterior stabilized knee replacement, particularly with regard to deep knee flexion and stability of the prosthesis. I'll next summarize our cardiovascular device business, which grew 21% year-over-year, and this solid growth is driven by the great sales performance of Firehawk and Firebird2. During the reporting period, domestic revenue of Firehawk, the world's first and only target-eluting stent system, grew 38% year-over-year, and sales volume grew 47% year-over-year. While the revenue and sales volume of Firebird2, which has been the market for nearly 10 years now, grew 16% and 25% respectively. The revenue grew rapidly. Gross profit margin of Firehawk and Firebird2 is further improved, and revenue of Firehawk and DES increased from 27% in the first half of 2017 to 31% in the first half of 2018. While sales volume increased from 16% to 19%. Revenue from our balloon products maintained robust growth at 70% year-over-year. As at June 30, our drug-eluting stent system covers 1,573 hospitals in China, including Hong Kong and Taiwan, while Firehawk has penetrated in 543 hospitals, and Firebird2 covers 1,470 hospitals. We also gained significant progress in expanding hospital coverage in counties with 100 new county-level hospitals penetrated in 23 provinces in the first half of 2018. In the area of clinical research, as I mentioned before, Firehawk showed very promising results from our TARGET AC trial, and it's proven that Firehawk can provide the same efficacy by carrying only one-third of the dosage of drug versus similar stents, making it the world's lowest drug stent dosage. According to Dr. Marty Leon, one of the industry's most respected interventional cardiologists, he stated at this year's EuroPCR Congress that these impressive clinical results from our TARGET AC trial further demonstrates that Firehawk belongs in the elite club of the world's best stent systems in the industry. We continue to advance the robust clinical program supporting the Firehawk stent with the initiation of the TARGET DAPT study, that targets to assess the effectiveness and safety on shortening DAPT therapy for PCI patients with Firehawk implantation. The enrollment of this trial, TARGET DAPT, is expected to complete by the first half of 2020. I will next describe our newly acquired MicroPort CRM business. We closed the acquisition of the CRM business from LivaNova on April 30 of this year, and this acquisition established us as the fifth-largest CRM business in the world, providing a high-end product and technology portfolio for high-end CRM products to be introduced into China. During the reporting period, which only included two months of reporting performance from the CRM business, the CRM business contributed $43.8 million in revenue and $3.4 million in net loss. The international CRM business, this is a non-China CRM business, recorded revenue of $42.8 million, and influenced by the global CRM market experiencing flat growth, as well as our less competitive product portfolio, which needs to be invested over the next few years. The CRM international business experienced some pressure on business growth. However, based on 40 years of dedicated investment and focus on R&D, we expect that the international business will have all MRI-compatible pacemakers and our own pacing leads by the end of 2019 and beginning of 2020. In the coming years, we will launch various products, including the MRI-compatible ICD and CRTD devices, Bluetooth pacemaker devices, along with the unique advantage of being the smallest device with the longest service on battery life in the world. We expect that our CRM international business will further enhance its competitiveness in the coming years. CRM China business, which is previously known as our joint venture, MicroPort Sorin CRM, in the first half of 2018, benefited from the launch of the domestic pacemaker with a world-class quality and domestic price, as well as continuously expanding coverage of hospitals and revenue of our CRM business grew rapidly and expanded into 67 new hospitals, which were penetrated with MicroPort Sorin products. Since the first implantation of the first batch of the Rega family of pacemakers in March, as of June 30, our Rega family pacemakers were implanted in 45 hospitals in 11 provinces and received great feedback from doctors and clinicians. Our imported pacemakers is now selling in 22 new hospitals, and in terms of R&D progress, our Beflex pacing leads is expected to gain CFDA approval in second half of 2018. In the foreseeable future, we will speed up the optimization of the internal resources and leverage the advanced technology from our international CRM business to speed up the realization of our continuous goal of innovating in China. I will move on to describe our progress from our endovascular business. Compared to the first half of 2017, the endovascular business recorded strong revenue growth of 51%, well exceeding the market average growth rate of 13%-15%. It was driven by the rapid growth in the revenue of our original products and the successful release and marketing of our new product called Castor. During the reporting period, revenue from our TAA products grew 57%, among which Castor marks the new height of our R&D ability, which delivered exceptional sales performance. Our AAA products grew 32% year-over-year. Driven by further optimization and economies of scale in manufacturing, our gross profit margin for the endo business was substantially improved by 33.2 percentage points, now achieving a gross margin 80.7%. With our products' proven quality and mature sales channel, we penetrated 55 new hospitals in the first half of 2018. Through June 30, Castor has been sold in 100 hospitals in China. To describe some of our other business lines that also had excellent performance, in the first half of 2017 compared to 2018, our neurovascular business grew 34%, with revenue of Apollo and Willis growing 31% and 11%, respectively. Our sales contribution from our Tubridge since the second quarter is the first domestic intracranial flow-diverting stent with CFDA approval. It is designed for the treatment of large and giant cerebral aneurysms. As the only domestic provider with our total solution of 3D and magnetic orientation ablation treatment for cardiac arrhythmia, our EP business recorded robust growth of 46%, where domestic sales grew 42% and international sales grew substantially at 74% year-over-year. In the first half of 2018, we saw significant increases in our 3D mapping technology, which drove substantial growth of the 3D consumables at 156% compared to last year. This led to a 3.6 percentage point improvement in the gross profit margin compared to the first half of 2017. As of June 30, we have penetrated 61 3D clinical EP centers in China. As for structural heart business, our TAVI product called VitaFlow is on track with its registration process with the CFDA, and we expect to gain approval, as I said before, by second half of 2018. At the same time, we continue to progress the VitaFlow second generation product, which started patient enrollment for clinical trial in China and becoming the first TAVI product with retrievable function to enter the clinical trial. We will also initiate a CE clinical trial in the second half of 2018 for this exciting product. I will now turn it over to our CFO, Martin Sun, to provide you with some further details for the first half of 2018. Okay, thanks, John, and good morning and good evening, everyone. This is Martin Sun, the CFO of our company. Now I am going to spend the next few minutes taking you through our interim financial performance as well as the guidance for the second half year. Before we start the financial review, I just wanted to quickly highlight the two changes to our group consolidation scope, brought by the completion of CRM acquisition on April 30. The first one is the acquired international CRM business began to be consolidated since April 30. Therefore, our consolidation interim results have included the results of the business. Revenue for the two months amounted to $42.8 million, and net loss is $0.9 million. The second point is the China CRM business. Previously, this is called MicroPort Sorin JV. It has become our wholly owned subsidiary and also began to consolidate since April 30. Prior to the acquisition, the group used to recognize the 51% share of its loss in the account of share of losses of the joint venture. By April 30, the investment balance had been fully written down through the equity pickup of the accumulated losses. As a result of acquisition, the group needed to consolidate the full loss of the China CRM business from April 30. The revenue from the China CRM business for the reporting period amounted to $1 million, and net loss is about $2.5 million. The total impact to the consolidated results about the CRM acquisition is additional revenue of $43.8 million and net loss of $3.4 million. Now I will go through the first half year financial review and update our guidance for the second half year of 2018. Regarding the revenue, firstly, consolidated revenue during the first half year, we generate totally about $309.9 million, achieving growth rate of 35.3% at constant currency basis. Excluding the impact of the CRM acquisition, the revenue of the other non-CRM segments increased 16.6%, which is slightly above our previous guidance given, and I am pleased that we deliver our commitments. As Jonathan introduced early, all of the major segments and the core product maintain strong growths. I will give you more information about the second half year guidance about revenue. As we will have a six months of additional CRM revenue compared to two months in first half year, we anticipate a consolidated revenue growth of 60% in second half year. So overall, for the full year-on-year growth is expected to be approximately 50%. Just wanted to update some key segments of revenue. First, the cardiovascular business is expected to maintain its high growth rate at 20% for the full year, higher than our previous guidance about the 15%. This would still be driven by the strong momentum of Firehawk, the third generation of drug-eluting stents, and the Firebird2 in the China market. In the international market, sales growth will mainly benefit from the entrance into new emerging economics countries, and we also expect to strengthen our position in the EU market with support from the positive feedback received through our post-market clinical trial, TARGET AC. For the orthopedics segment, we expect the revenue to grow at 5%-10% as a range for the full year. With this, the China orthopedics is expected to maintain the robust momentum and grow double digits through the rapid market penetration. The international orthopedics business is expected to continue on the right trend and grow further at modest 5%-6% in 2018, which will be driven by the strength in the U.S. and the Japan market. Again, we want to emphasize, despite the small loss in the first half year, this international orthopedics business is still committed to achieve a full-year breakeven by the end of 2018. The sales of CRM business will be affected by the EU summer holidays in second half year. Therefore, we anticipate second half-year revenue will be approximately $110 million, and the full year is $115 million. That consolidated eight months. The remaining key segments will keep high double-digit growth. Endovascular, 30%, electrophysiology is about 32%, and neurovascular is 26%. Those all are expected to grow very fast. Now moving on the other aspects of our income statement. First is gross margin. Our gross profit increased to 38.6% during the first half year, which was driven by additional contribution of CRM business. Our margin dropped to 2.1% from the last year, 72.9% to this right now is 70.8%. This was also driven by the dilutive impact of the CRM business, with a lower gross margin than the average of the group. First is the gross margin of CRM business for the first half year was recorded at 52%, which is lower than the average of our other business segment. Excluding the adverse impact of inventory step-up amortization, the adjusted gross margin was over 60% for the first half year. The guidance for the second half year of our CRM gross margin, that will be approximately maintain the 52%. On the other hand, the non-CRM business segment margin combined have also made a continuing improvement with overall an increase from the 73% in 2017 to 74% in the first half year of 2018. The increase in margin reflects our improved sales mix, especially with the higher DES sales, and more importantly, we have continued to increase our manufacturing efficiency. For the second half year, our non-CRM margin will continue to improve, and for full year margin will reach to 75%. Overall, the consolidated gross margin, again, should be at about 72%, also including the CRM dilution and the non-CRM improvement. Now let's talk about the operating expenses. Further down the P&L, the total operating expenses relatively to revenue went up 1.3% to 56.8% in the first half year, mainly due to the CRM business. To break it down, we will see the CRM business had OpEx to revenue ratio is about 60.5%, which was higher than the average of other business segments, therefore driving up our overall consolidation expenses ratio. The non-CRM segments were relatively flat at 56.2%, just up 0.4% compared to the same period last year. In short, this effect increases due to our R&D spendings, but offset by a reduced SG&A. Our non-CRM R&D expenses account for 13% of the revenue in the first half year, slightly above the 12% last year. This is more linked to the phasing of major R&D projects which have been progressing well according to the schedule. The non-CRM SG&A expenses, which include the distribution cost and administrative expenses, went down 0.8%, from 43.9% last year to the 43.1% this year. The guidance for OpEx spending in second half year is usually higher than the first half year. The full year ratio we will maintain is about the 61%, slightly higher than prior year of 60% due to, again, the CRM impact. Regarding the other revenue, other gain, and other operating expenses, there are three major accounts, including the foreign exchanges, have had significant changes from the last year. However, they are offsetting each other, therefore, the impact insignificant on the combined level. Just to name three major items. First, professional fee incurred for the CRM acquisition. That is about $5 million expenses. Second is our investment loss for Lombard. We will continue to write down the remaining of the $5.5 million in the first half year. The third one is our FX gain, and that is compared to the last year, $4.8 million loss. This year, first half year, we have a $3.6 million gain. So move to the net profit. Bottom line was the 2018 interim results will close at the net profit of $24.2 million, up 17% year-on-year. The EPS increased by 9% to 1.64 Hong Kong cents. Regarding the balance sheet and cash flow, in terms of cash flow, our net operating cash flow was $15 million, increased 19% year-on-year. Very healthy cash flow will position us well for further development of the business. During the first half of the year, the company completed acquisition of CRM business and paid initial consideration of HK$195.8 million to LivaNova. Source of the funding, including PE, equity contribution of $50 million, new bank loan of $88.8 million, and the retained earning, $57 million. This has caused our gearing ratio to increase a bit to 73%. Above is the review and guidance for the overall, but I want to give a further more for the CRM business, as that is the first time we give the guidance to the investors. I just want to take this opportunity to summarize as below the two segments. First is international CRM, the second is China CRM. For international CRM, the total revenue, as I mentioned before, is full year is $115 million, plus or minus. This is affected by the EU summer holidays and product portfolio. We anticipate the second half year revenue will be relatively lower at $110 million. So total is, to consolidate eight months, about $115 million. The gross margin, again, the normalized level is 60%. The SG&A expenses is 44%, and the R&D expenses is 19% of total revenue. As Jonathan mentioned earlier, it is imperative for the international CRM business to enrich its product portfolio to stand future growth and increase margin. The team has developed a clear R&D roadmap to fulfill such objective. Therefore, R&D spending will be relatively high. This year, however, for this international CRM business, it will be affected by some one-off cost for some acquisition impact. Firstly, one-off item is the inventory step-up amortization. The impact is expected to be at $10 million for the full year, which will drive down the gross margin from the normal level, 60%, to roughly 52%. This step-up will be fully amortized by the year-end. The second one-off item is transition expenses, which is approximately $4 million-$5 million in total for the full year. This includes the cost incurred for the transition service provided by LivaNova and other transition preparation work, for example, IT system related expenses. The second is China CRM. As for the China CRM business, since it is still in the early stage, focused on the localization, R&D, and production, the net loss is anticipated to be $5 million-$8 million for the eight months since April 30th we consolidated. Remind again, this will be fully consolidated into our group since then. So summary, above was the overview of our interim financial results and the 2018 updated guidance for the enlarged group, including the CRM. Overall, we are pleased with the fact that in the first half year, our group have overcome the potential significant adverse impact of the CRM acquisition to our P&L and cash flow, and that all the financial indicators have shown steady improvements. That is all. Thank you for listening, and I will now hand over to John. Thank you, John. Well, thank you very much, Martin, and thank you very much, Jonathan. Operator, could you please announce the methodology to raise a question and then please hand it over to me afterwards? Thanks. Sure. Ladies and gentlemen, the question and answer session now begins. If anyone wish to ask a question, please press star one on the telephone keypad. Thank you very much. Probably I should start with two questions from the investors, if Martin, if you could answer. First question is about the CRM business, and congratulations on the strong start. Thanks for the detailed breakdown of the margins and guidances. Just want to, before we actually go through models, could you just give us a rough estimate, what is the internal targets, like when the CRM business overall will turn profitable, in which year? That's the first question. Related to the CRM also, in the longer term, when are we going to see a more significant market share from Chinese domestically made pacemakers? And longer term, what is our estimated potential market share in China? The second question about policies on our existing businesses. We've seen uncertainties about the high value consumable price negotiations in China that's led by the government. So far, we haven't seen it actually materialize yet. Not sure if we're actually expecting some price cuts that could potentially affect our ortho business and also the drug-eluting stent business. If so, what is the timing and also the magnitude of price cut? Also on the two-invoice policy that a lot of investors are interested in, could you please give us more updates on how two-invoice policy is being pushed forward in the device sector? Thank you very much. Okay. Thank you, John. Thank you for your question. I will take in your first question about the international CRM business. As you know, in the CRM business, the revenue full year is about $200 million, but we are loss-making. We think during the first two or three years, our first target is to filling the portfolio gap and continue gaining a bit market share. So our bottom line, we don't set a very hard target, say, which year we should break even. We think compared to the previous acquisition, OrthoRecon, also ReCon acquisition, we spent about three years to turn around that business, and we feel very comfortable that within three years, we will turn around the CRM business from the loss-making to the profitable. Again, we not set a very clear target, say, which year we should break even. The follow-up is about market shares. So John, can you? John, this is Jonathan Chen. I will respond on the China. I think your question was China CRM market, and what is the long-term target for market share. As we've described previously, we were the first domestic China CRM manufacturer to get a China pacemaker approved late last year. There's one other local manufacturer in addition to the already multinational companies that are already selling in the China marketplace. So we do believe that we can be the number one market share leader amongst the domestic manufacturers, and we believe we can achieve that in a short period of time since we were the first to enter the market. However, as Martin alluded to, we do foresee that for the next 2 to 3 years, there will be investment that will be required to make the portfolio competitive on par with all of the other manufacturers, and this will impact the China CRM business as well. We are waiting to get some MRI-compatible leads that will be approved in China over the next couple of years. As those approvals come, we can then anticipate to be gaining more market share as a result of having a complete portfolio. Longer term, we do think that the CRM business in China has the potential to be 20% market share or even greater, but that is a long-term target. Right now, our China CRM sales, as you know, are fairly small at this point, at a couple of million dollars. For the policy question, I'll turn it over to Lian to address the policy question. Okay. Thank you, Jonathan. I will respond to the questions. The first one is how the central price negotiation by government going to impact our business. On September 7, 2017, the National Health and Family Planning Commission of the PRC issued the notice of carrying out corporate application to participate government negotiation on price of high-value medical consumables. Government will initiate central price negotiation on DES, HIP, ICD, and CRT, four products. So far, MicroPort has complete our declaration process for relevant product in accordance with the notice. The application is more like a signing-up process right now. We filed the application with the retail price of our products, and up to now, there is no progress on the implementation of this notice. As everyone knows that after the two sessions held in March this year, several important administrative state organizations went through reconstruction, including the National Health and Family Planning Commission of the PRC, who is issuing this notice. The function of this commission to supervise the consumable bidding has been integrated to the Bureau of Medical Security Administration. It's an organization newly established. The industry is watching for future direction of this price negotiation policy, and therefore, there is no impact on our product sales at this moment. If the negotiation is going to be carried forward, we expect price pressure of the selected products, but it's still too early to tell the extent of the price deduction. In our forecast, we always put a 5% price drop every year in our budget for Firebird2 and Firehawk. So in terms of the question regarding the two-invoice system, what the impact to our business. To date, the target to have a nationwide implementation of two-invoice system on drugs by 2018 is achieved. So there is another notice on continuously deepening the comprehensive reform of public hospitals issued in 2018, indicates to gradually roll out two-invoice policy on high-value medical devices, which will provide industries and companies of medical devices a transition period. So far, only Shaanxi, Anhui, and Fujian provinces, which have promoted a two-invoice system for medical device at the provincial level, therefore, very limited impact on our current business. In the longer term, if the two-invoice system implemented nationwide, MicroPort actually made some preparation for this potential change. We have already signed strategic partnership agreement with multiple large logistic and distribution companies like China Medical Instruments. So to sum up, given that the two-invoice policy and the central price negotiation policy will have impact on every company in this industry, we believe only those technology-driven with high quality and large-scale company will be benefiting from these two policies. Thank you. Thanks all for answering questions. Operator, could you see if there is- Sorry, John, we do not have question at this point of time. Just reminder, if you wish to ask a question, please press star one on the telephone keypad. The next question is come from Doris Chang from CSOP Hong Kong, and Doris, please go ahead. Hi, Doris? Hello. Can you hear me? Yes, please go ahead. Okay. Hello, thanks for taking my questions. I have two questions. First of all, can you share with us if you have any incentive plans for the management of the CRM business, for better earning results? Secondly, would you please kindly share with us, the current status of TAVI? Thanks. So hi, Doris, this is Jonathan. On your first question, I will take your first question on incentive plan, and then Qi will take your second question on TAVI. In terms of the incentive plan for the CRM business, we have review plan to put in place a long-term incentive plan for the employees of the CRM business, and that will be we are currently designing that program and putting that in place. We will consist of obviously the president and the senior leadership team of the CRM business, which is approximately 35 plus individuals from the CRM business. Okay. Doris, your second question regarding the status of TAVI. Our first generation TAVI one, it is still in the approving cycle, and it is with the CFDA. We still, as what we said before, expect to get approved by the end of this year. We also start our second generation clinical trial, so we already start patient enroll at this stage. This one is the same implant, but with a retrievable delivery system. So physician can adjust the position if the first deploy is not satisfied. You can reposition it at a good position, so that will satisfy the valve. By doing this, pretty much the surgeon or physician will not have any failure in terms of the delivery or positioning of the TAVI. So we have been much improved in terms of the safety and efficacy. Okay. Thanks, Jonathan and Dr. Luo. May I further ask a question about since the TAVI will soon be launched, what is your pricing or maybe your sales strategy on TAVI? Thanks. The pricing, of course, we will be negotiating after we get approved. We have to go through the hospital entry of tender or those things. But if you look at whatever a lot of competitors which are already on the market in front of us. They have their price, and they use the price that has the 240,000 RMB. We cannot say exactly what the price will be, but as the clinical data, we are since have a more competitive edge compared with their product. But of course, we will put the price accordingly based on the market size, based on the other factors. We have not really decided on the price yet. We are building our sales and marketing team as we speak, and so we will get ready by the time we get the approval. Of course, we have to go through hospital by hospital, also train all those surgeons as well as those interventional cardiologists. They have to be trained. The whole heart team has to be trained to use this device. So it is a lot of preparation going on right now to get ready for the approval. Yeah, this is Martin. Adding more to talking about the sales strategies, we wanted to share one more comment, is that according to right now, MicroPort, we have a solid sales team on the cardiovascular segment. Distribution network as well. Yeah, as well as the strong distribution network. From group level, we think we will leverage essentially these strengths to promote our target products in China market. Okay. Thank you, Miss Priscilla, and thank you, Martin. Thanks. Thank you, Doris. Thanks. Thank you. Our next question comes from Matthew Law from Orient Securities, Hong Kong. Matthew, please go ahead. Hi, can you guys hear me? Yes. Hi. Well, first of all, congratulations on the good results. I am very excited to hear that. I have two questions. I guess one part is that for one, could you sort of repeat the guidance for endo, neuro, and EP? I think I missed that. I got 30% for endo, 20% for neuro, and I missed EP. My second question is to build on your point on the sales network, because seeing your good results, and mainly driven on the volume side, I assume that you guys added new sales people and new sales team. How much of the sales growth in this half was driven from a more elaborate sales network? If you touch upon that and give us a little bit more info on, do you think the current sales team that you have is enough to continue to maintain this sort of level of growth? Thank you. Okay. For the EP and full year guidance is 32%. 32? Yes. Okay, great. Thank you. Yeah. Matthew, to answer your second question, Yes is the current sales force sufficient to sustain growth? Yes, we believe that the current sales force and the current distribution network is sufficient to continue to grow. Where we see the growth coming from our domestic coronary business is predominantly new hospitals that are new cath labs that are being opened, as well as a deeper penetration from our Firehawk. Firehawk now, as I mentioned, is penetrated in over 500 cath labs in China. Just to refresh your memory, the cath labs in China probably total around 1,400 to date. We still have, as you can see with the Firehawk, amongst our existing coverage, currently even amongst the 1,400 cath labs, our sales force probably covers 95% plus, or our distribution channel covers 95% plus. You can see that just with Firehawk alone, only penetrating 500 hospitals, we still have significant headroom to expand into our current distribution channel before we even have to consider expanding our coverage. You can see our coverage is already pretty good at 95% plus. Got it. If I could follow up with one more question. Compared to when you guys launched Firebird or Firebird 2, would you say Firehawk is even gaining more market share compared to when Firebird and Firebird 2 first launched or during the first, say, first one or two years? Yes, I would say that from a clinical efficacy standpoint, Firehawk is technically a stronger performing stent than the Firebird2. Also, we now are getting world-renowned recognition on the Firehawk platform. As I mentioned, our TARGET AC trial results, which showed the first China manufacturer stent to show clinical equivalency to what's considered the best-in-class stent from non-China companies. That's the first time any Chinese manufacturer has demonstrated that. We have the ability now to penetrate even hospitals in China that traditionally have gone towards multinational products. That's partly the reason why you're seeing such a strong penetration or high penetration of Firehawk that we've experienced to date. Okay, great. Thanks. Thank you. Just a reminder to everyone, if you wish to ask a question, please press star one on the telephone keypad. Hi, management. I think we're probably good for an hour. Probably we can just wait for one more minute, and if there are no more questions, I will suggest we can probably wrap up the call. Great. Thank you, John, and thank you very much for participating in MicroPort's 2018 first-half earnings call. We look forward to seeing all of the investors. Our management team will be on the road in Hong Kong next week, and then also we will be in the U.S. at the Morgan Stanley Healthcare Conference in a couple of weeks. If you investors would like to meet with us, we look forward to meeting with you over the course of the coming weeks. Thank you very much, and have a good day. Thank you. Bye-bye. Thank you. Bye-bye. Thank you. The conference call has been concluded. Thank you for your participation.