Earnings Call: H1 2017

Aug 25, 2017

Morning and good evening, everyone. Welcome to today's conference call. John, please begin the call and advance everybody for the question and answer session. Good morning and good evening. Thanks, everybody, for dialing in MicroPort H1 2017 Result Conference Call. Today, we are very happy to invite the full house of senior management from MicroPort, Mr. Martin Sun, CFO, Mr. Luo Qiyi, the Chief Technology Officer, Mr. Jonathan Chen, the Executive Vice President and also the International Operation and IR, Ms. Leanne Li, the Secretary of Port. I am John Yung from Citi China Healthcare, and thank you again for dialing in. To save time, I will just pass this along to the management. Jonathan, why don't you just start? Thank you. Thank you very much, John, and good morning, everyone. Welcome, everyone, to MicroPort Scientific's corporate earnings call. John already provided the introductions. My name is Jonathan Chen, Executive VP of International Operations and IR. During the next hour, Martin and I will provide comments on the results of our first half this fiscal year, 2017. After our prepared remarks, we will be happy to take your questions. Just a reminder, unless we say otherwise, reference to our first half results, increase or decreasing, are in comparison to our corresponding period in 2016. All of our year-over-year growth ranges are given on a constant currency basis, which adjust for the impact of foreign currency. The growth range details before constant currency adjustment are available in our interim result announcement, which was released just last night, August 24th. Begin our formal remarks, the first six months of 2017 was tremendously successful for MicroPort. The key highlights for our first half achievements are as follows. Firstly, we successfully achieved revenue of $217 million, representing a growth rate of 13%, which is the fastest organic growth rate at MicroPort for any six-month period at the company over the last five years. Secondly, our key segments and our core products maintained robust growth. We had strong growth of 25% from our core cardiovascular business, led by robust growth of Firehawk sales, which realized 130% growth in both domestic sales and international sales. We also have robust growth from our China businesses, such as 22% growth from our endovascular business, 41% growth from our neurovascular business, and 38% growth from our EP device business. Thirdly, our international orthopedic business continued its strong momentum for growth after achieving positive growth in top line for the first time in seven years in 2016. In the first half of 2017, our international orthopedic business recorded $104 million in revenue with a growth rate of 3.3%. This is the best interim result since we acquired the OrthoRecon business from Wright Medical. Each geographic region achieved growth higher than market average. Notably, our U.S. and Japan business grew over 5.8% and 5.1%, respectively. In addition, our European subsidiaries grew 5.8%. Notably, in the case of Japan, this marks the end of a negative sales trend that lasted in the previous four years for our Japan orthopedic business. Meanwhile, our net loss of our international orthopedic businesses was substantially narrowed to a net loss of $5.5 million for the first half. Number four, driven by strong performances across all the major business segments, MicroPort successfully achieved net profit of $20.6 million for the first half of 2017. We tripled our $5.5 million in the first half of 2016, and we exceeding all of the 2016 fiscal year net profit. Number five, other than our achievements in revenue growth, we also gained substantial achievements for our key pipeline products in registration and/or clinical development, which will drive future business growth for the business. Six products obtained CFDA approval, including Firefighter, which is our PTCA balloon dilation catheter, Castor, which is a branched aortic stent graft, the world's first and only of its kind, ReWarm, which is our peripheral balloon dilation catheter, FireMagic 3D ablation catheter, OptimAblate irrigation pump, also an EP device, and lastly, PathBuilder transseptal guiding introducer needle, also an EP device. We also had two major pipeline products approved for fast track Green Path by the CFDA, Minos, which is our ultra-low profile AAA stent graft system for endovascular business, and FlashPoint, which is our renal artery RF ablation catheter for EP. We also had eight key products that are at various stages of clinical trials. In our cardiovascular business, we have our post-market trial for Firehawk, which is the European all-comer study. Also we've initiated in Malaysia, the TARGET Malaysia registry, also to continue the clinical work for Firehawk. We have Firesorb, which is the FUTURE-II clinical trial. That is our China clinical trial for our bioabsorbable. We have VitaFlow, which is our TAVI device, which entered pre-marketing clinical trial in China. In our endo business, we have clinical trials that we began for Minos, our AAA stent, and Fontus, our branched surgical stent, ReWarm, our drug-coated balloon. Finally, in pacemakers, we have pacemaking leads that are undergoing clinical trials. In the first half of 2017, Firehawk obtained regulatory approval in Mexico, in South Korea, and Aruba. Also further advancing the overall product portfolio or registration approvals for Firehawk. Lastly, number six, we achieved other important milestones on the corporate strategic front. To validate the value of our subsidiary businesses. Our subsidiary, MicroPort EP, was quoted on the national exchange, the NEEQ, on August 15th, which is expected to provide a good platform for EP's financing and to reflect the fair value of our EP business. Meanwhile, MicroPort also achieved premium valuation for our endo and our TAVI subsidiaries. Our subsidiary, Endovastec Shanghai, brought in China Renaissance and CICC as strategic partners on March 10, 2017, with a valuation of 1.85 billion RMB. Secondly, our subsidiary, CardioFlow, also brought in China Renaissance, CICC as strategic partners on August 22, and completed this round of financing with a valuation of 2.1 billion RMB. Now I will give some formal remarks of our orthopedic business. In the first half 2017, MicroPort Orthopedics global business continued to build our corporate brand of full function faster and continued to execute well strategically while maintaining a tight focus on operating expense management. Our orthopedic business maintained momentum, steady growth during the first half of 2017, with revenue of $109 million, representing growth rate of 2.9%. The international orthopedic business realized the highest growth rate in the first half of 2017. We realized strong revenue results across the world, resulting from increased sales coverage, improved sales mix and gross profit margins, and increased focus on training and medical education, as well as successful launch of targeted products across our international markets. During the reporting period, the international business grew 3.3% with tight control on expense management, and our net loss results improved to $5.5 million in the first six months of 2007, from $12.9 million during the same period last year. More specifically, MPO performed beyond the market average in various countries and geographic regions. Our North American subsidiaries grew operations in 5.8%, and Japan business grew 5.1%, and European subsidiaries grew 5.8%. Meanwhile, despite a global price pressure environment, our gross profit margin improved from 59% in prior year to 65% in the first half of 2017. This is attributed to strong focus on manufacturing efficiencies, improved sourcing, and better product mix. From the standpoint of product marketing, we are launching more products than ever done before from our MPO business. For example, our Evolution Revision Tibia received U.S. FDA approval in March of 2017. In the U.S., we launched the Procotyl Prime Acetabular Cup System, which is a culmination of great clinical insights from a world-class group of KOLs, coupled with intelligent engineering design to produce one of the most successful product launches in the history of MPO. In the orthopedic business in China, we accelerated the promotion and awareness of the full function faster concept among Chinese surgeons and patients. As of first half of 2017, our joint products have been promoted to almost 500 hospitals in China, with 32 hospitals newly developed. During the reporting period, the OrthoRecon business in China also brought on board new senior leadership team to provide a solid foundation for sustainable growth of our China OrthoRecon business. During the first half of 2017, we also launched an arthroplasty robotics project to initiate the innovation of arthroplasty surgery along the lines of national key technologies for the R&D program. This is a multidisciplinary project that will advance the robotics field and will offer a new innovation for China robotic surgery, and China orthopedic surgery field. Our spine and trauma business focused on enhancing sales channels as well as adjusting and optimizing product mix, leading to positive growth and revenue. Our global supply center, responsible for purchasing, supplying, and logistics of surgical instruments and consumable joints of spine and trauma businesses, continued to lower the cost of overall optimization of operational expenses. Now, I focus some remarks on our cardiovascular device business. During the 6 months ended H1 2017, our cardiovascular device business achieved rapid growth of 25%, which further demonstrated our leading position in the device field in China. Specifically, Firebird 2 had a steady growth of 4%, while Firehawk, the world's first and only TES, kept the robust growth momentum and continued to deliver impressive results of 130% growth rate in the domestic market. The unit volume and revenue share of Firehawk has respectively increased 16% and 27% in H1 2017, which compares from 8% and 14% in H1 2016. As of June 30, 2017, our DES has covered over 1,300 hospitals in 30 provinces in China, of which Firehawk has penetrated in over 420 hospitals in 27 provinces. In addition, the overseas revenue growth of Firehawk has increased substantially by about 130% as compared to H1 2016. As I mentioned before, Firehawk is now commercially available in 30 countries with 3 newly entered markets in Mexico, South Korea, and Aruba. At the same time, we are improving the gross profit margin for both Firebird 2 and Firehawk by approximately 1% by enhancing our manufacturing supply chain. That benefits the reduces of the unit cost. As for our clinical registration process, Firehawk received excellent results in the post-market clinical trial, in China, with a thrombosis rate of 0% at the 5-year mark. Recently, in this year's EuroPCR conference, we announced the 3-month OCT results of our Firehawk TARGET AC trial, which further demonstrated the safety and efficacy of Firehawk in the global market. As I mentioned, we also initiated the TARGET MR clinical trial for Firehawk in Malaysia, which aims to raise the profile of Firehawk globally, by conducting a large clinical registry in Asia Pacific. In India and Mexico, we completed the first implantation of Firehawk this year, H1. The pipeline for the cardiovascular business continues to progress. The preliminary results for the FUTURE series clinical trial for the Firesorb bioresorbable has demonstrated its safety and efficacy earlier this year. In March 2017, we launched the pivotal study of Firesorb, which is FUTURE-II, clinical trial, with patient enrollment scheduled to begin in the first half of August of this year. FUTURE-III clinical trial is expected to be launched in the fourth quarter of 2017. Focusing on our TAVI product, our VitaFlow has completed 6-month follow-up for pre-marketing clinical trial. The clinical data results show great performance of TAVI and demonstrates the safety and efficacy of this device. As disclosed earlier, our subsidiary, CardioFlow, brought in China Renaissance, CICC, Huatai Securities as strategic partners on August 22nd, completing this round of financing with a valuation of 2.1 billion RMB. This is our first project to win high recognition with notable high-class investors, while still at a clinical trial stage of development. This transaction fully demonstrated the recognition of high-profile investors in the future development of CardioFlow, as well as the confidence of the capital markets in providing promising prospects for our cardiac valve interventional medical device and in the cardiac valve interventional market. Now I will give some comments on our endovascular business. During the six months ended the first half of this year, our endovascular business achieved great performance with 22% growth of revenue compared to H1 2016. This growth was primarily driven by outstanding product performance, which significantly strengthens our market competitiveness in the field of endovascular AAA repair. In the first half, for instance, our Hercules low-profile TAA graft experienced 29% growth year over year, led by the growth rates of Hercules low-profile TAA branch graft, which also stood at 14%. Our effort in cultivating the market also paid dividends in terms of the business revenue. In the first half of 2017, we penetrated 67 new hospitals, of which over 50% are country-level or second-tier hospitals. We also have achieved substantial advancements of key pipeline products in registration and clinical development. As of June 30, 2017, our Castor branched aortic stent graft device and Reewarm peripheral dilation catheter obtained CFDA approval. Castor is the first endovascular device used to preserve the branch artery while repairing the thoracic aorta with no competitors in the market currently. Our Minos ultra-low-profile AAA stent graft also gained Green Path status and is expected to obtain CFDA approval in 2018. Looking forward, we believe our endovascular business will continue to contribute to MicroPort's overall profitability as it maintains the leading position in its field globally with an extensive product pipeline. Referring to our strategic partnership with Lombard, that continues to be on track. In the first half of 2017, we made significant progress in helping to reduce manufacturing costs for both of Lombard's devices, Aorfix and Altura. After evaluating current manufacturing process and setup costs, our endovascular manufacturing team is in a position to begin to manufacture device components of the Altura device by the second half of this year. Meanwhile, we plan also to start manufacturing Aorfix components during the first quarter of 2018. Such of these OEM component projects will significantly reduce the manufacturing cost for Lombard's product by almost approximately 30% or more. We are preparing for the application of submission of the CFDA for Green Path for Altura and are working on the submission of Aorfix CFDA approval to complete the strategic partnership activities. Now I give some formal comments on our neurovascular device business. In the first half of 2017, our neuro business achieved 41% revenue growth. Specifically, our APOLLO intracranial stent system has been on the market for over a decade and maintained steady revenue growth of 28% year over year. The growth was driven by the great performance of APOLLO and the increase of thrombectomy procedures in the neuro market. Our WILLIS intracranial stent graft system for hemorrhagic aneurysm also realized rapid growth of 34% year over year. This was driven by growth in market demand and strong collaboration with our neuro KOLs. In first half of 2017, our APOLLO device entered 197 hospitals, while WILLIS entered 44 hospitals, continuing deepening their penetration in the market. In January of 2017, APOLLO was approved for large sizes by the CFDA, which will meet further unmet clinical needs for large sizes intracranial stent, and further strengthen our leadership position in the neuro interventional market. Our Tubridge flow diverter device is indicated for the treatment of large and giant aneurysms and expected to attain CFDA approval in the second half of this year through the CFDA Green Path. The neuro business is also a very healthy product pipeline, and the pipeline includes other breakthrough devices such as a vertebral artery stent, coil embolization devices, and clot retrieval devices, which will allow the business to continue to provide a full range of solutions for the neuro field. For our EP business, prospects are also very bright. As the only domestic provider of comprehensive 3D solutions for the diagnosis and treatment of arrhythmias, our EP business aims to offer multiple solutions for physicians to cut down expenses for patients. In the first half of 2017, our EP devices delivered strong performance by realizing 38% growth year-over-year, attributed to our expanding market as well as optimizing our own EP sales channels. In China, we have entered 43 hospitals in the first half of 2017, and our products are being used by over 230 EP clinical centers. In the overseas market, we received our first order in South Korea and maintained sales in multiple countries and regions. Our EP business also achieved great progress in R&D and clinical trials progress. During the reporting period, our FireMagic 3D ablation catheter, OptimAblate, PathBuilder, all attained CFDA approvals. Our FlashPoint renal artery renal ablation RF catheter gained CFDA Green Path. Globally, our FireMagic and EasyFinder received regulatory approval in South Korea, and four products, including FireMagic 3D, received registration in Thailand by the Thailand FDA. As disclosed earlier, we believe that the EP quotation on the NEEQ will bring in more strategic investors to finance for R&D and sales progress in the future. Our MicroPort Sorin CRM joint venture also has been executing on schedule after establishing its strategic path of serving China, made in China and innovated in China. In the first half of 2017, the implantation volume and sales revenue of Sorin's pacemaker continued to increase with a growth rate of 148% and 20% respectively, compared to the same period of last year. As for clinical regulatory achievements, our made-in-China pacemaker is expected to gain CFDA approval in second half of 2017. Our innovated-in-China self-developed BonaFire pacing leads completed clinical follow-up in China, and our in-house developed pacing system analyzer also initiated its pre-market clinical trial in China. With the policy support of the government and our domestic pacemaker with the same quality but lower price, will gradually replace import pacemakers and eventually better serve doctors and patients with cost-effective treatment. I will now turn it over to Martin, our CFO, to provide you with further financial details for the first half of 2017. Thank you, John. Hi, good morning and good evening, everyone. Now I am going to spend the next few minutes taking you through our financial performance in the first half year, as well as an update for the full year guidance. During the first half year, MicroPort generated total revenue of $217 million, up 13% year-on-year growth. As Jonathan has already provided a lot of comments on this revenue area, I just want to add in more comment. The revenue side is in line with the guidance we provided previously. Let us move to the gross margin. In the first half year, we have a lot of the solid progress was made, up 4% year-on-year growth from the 69% to 73%, which are again in line with our previous guidance. This reflects our improved sales mix, especially with higher BES sales, and we continue to take in load into delivering manufacturing efficiency. Notably, gross margin of international orthopedics business increased 6% from 59% to the 65% year-on-year growth through well-executed cost improvement initiative and a favorable geographic mix from higher U.S. and Japan sales. Further down the P&L, total operating expenses relatively to revenue went down 3% to 56%. This was mainly as a result of lower distribution costs and the G&A expenses relative to the revenue. The distribution cost went down 1.9% relative to the sales from 31.2% to the 29.3% of total revenue. The G&A expenses went down 1.6% relative to sales from 16% to the 14.4%. This was achieved through our continued focus on the areas such as reduce the third party spending, process optimization and improve the sales and the market efficiency. R&D expenses remain flat as approximately 12% of the total revenue. Driven by the strong performance across all major business segments, MicroPort successfully achieved a net profit of $20.6 million for first half year, compared to the $5.5 million for the same period last year. The increase resulted primarily from a gross profit boost of $21 million, driven by a strong top-line growth across major business segment and a significant cost improvement achieved, especially at the international orthopedics segment, as I mentioned before. The profits attribute to the shareholders also increased from $4.7 million in the last year, first half year last year to the $21.4 million in the 2017, the first half year. The EPS increased from $0.33 cents last year to $1.5 cents basically, and $1.46 cents diluted this year. In addition to the significant improvement in our P&L, we also have built a much stronger and healthy balance sheet. The introduction of new strategic investors into the endo business, brought in cash proceeds of about $28 million in the first half year and enlarged our capital base. The cash was used to repay our shareholder, Otsuka, by $40 million and other bank loan by $50 million during the first half year. As a result, our gearing ratio dropped from 86% at the year-end last year to a more sustainable level of 60% at the end of June 2017. Our cash flow is also improving with a $6.6 million increase in operating cash flow from $36 million last year to $42 million this year. Overall, I would say that it has been another very successful half year for MicroPort Group, with very encouraging results both financially and operationally. We attach significant importance to such success, as this is the third profitable interim in a row since we turned around to net profit this time last year. After acquiring the large size loss-making OrthoRecon business in 2014, it signals that we are starting to establish an upward trend beyond the turning point. The healthy balance sheet and the cash flow we built is also going to lay a good foundation for our future growth and a better return to the investors. Now I would like to give some brief update on the full-year guidance. Starting with the top line, our current estimate, 13.3%, is our guidance and still in line with our previous guidance we provided. Some key segments guidance previously. The cardiovascular business is still expected to accelerate its growth from the 12% increase in 2016 to a 20% increase in 2017. This would still be driven by our Firehawk. Domestically, we expect to see the Firehawk to expand rapidly into new provinces and hospitals at premium price. The international sales growth will mainly benefit from a new launch into some emerging markets such as India, Mexico, Korea. Meanwhile, we also expect to strengthen our position in the EU market. We support from the positive feedback received since our post-market clinical trial. Firebird 2 is expected to be a stable year around 2%. The orthopedic segment is expected to grow at 6% in 2017 versus 2016, it is just only 1.6%. The remaining key segments will keep high double-digit growth. Endovascular, EP, and neurovascular are all expected to grow at 30%-40%. The growth will stem from the take-off of new product sales and excellent market recognition of the existing products. In terms of the gross margin, our guidance for the full year will remain that it will stay at the first half year's level of roughly 73%, which represent an increase of 3% versus the full year 2016 margin. Two main drivers for gross margin. The first is lowering manufacturing cost, which is our continued focus, especially at the international orthopedics business. We have seen in first half year, its gross margin already increased 6% as expected, resulting from the further cost improvement initiatives. Second is favorable sales mix from the growing weight of non-orthopedic sales, especially Firehawk, in total revenue. So overall, we feel comfortable in achieving the improvement in gross margin. On the expenses side, in the second half year, the distribution cost and the R&D expenses will be higher than the first half year due to a seasonality and R&D project timeline, respectively. However, from a full-year perspective, the total operating expenses are under good control as a result of our continued focus on the improving operating efficiency. Therefore, our full-year forecasts remain the same as our last guidance. That is, the total OpEx as a percentage of the revenue will drop year-on-year by 2%. That means it will reach to the 59%, below 60% of total revenue. The financial cost will also go down by 1%-3% of the total revenue as a result of several major loan repayments. To sum up, everything is in line with the previous guidance, except for some temporary fluctuation, such as in China orthopedic sales reorganization. However, the magnitude of the impact should be limited due to the relatively small size of the business at present. Now I think that is all I wanted to share with all the investors. John, please let's go to the Q&A session. Great. Thank you very much, Jonathan and Martin. We're going to start the Q&A very soon. Besides, just to use the keypad to ask questions, you're also welcome to send me email with your question. My email is john.yung@city.com. Probably, let me just first ask three questions on behalf of investors that submitted the request previously. Number one to the management, it's about the future product question. May I ask, what is the progress that is going on with the Firehawk post-commercialization trials in Europe, and when we're expecting that to be done? What kind of sales expectation that we see in Europe because of this completion and then since then, we will be able to reimburse via the public insurance by then? That's the first question on the Firehawk in European market side. Secondly, it's on the pacemakers. For pacemakers, it seems like we are still quite optimistic that it could be launched in 2017. What is the expected sales for our domestic-made pacemaker in 2018, and what will be the price difference between our domestic version comparing to the foreign version? That's the second question on pacemakers. Thirdly, could management please comment a bit more on the potential joint products, the hip and also the knees? What is the timeline, and what kind of sales that we're expecting in the current market landscape? If you can shed more light on the current competitive landscape of joint orthopedic devices in China, that will be great. So that's the third question about joints. Lastly, just a quick question on the quite well-discussed topic on two-invoice policy, and then we've seen impact on the pharmaceutical side. What is the progress on the device side? Orthopedic or stent going to be affected by the implementation of this policy. What is our strategy to cope with that? Thank you very much. Okay, John, this is Jonathan. Very good questions. We have four that you've identified, and we will going to tag team this with all of our management team. I will answer the Firehawk question, and then Qi will answer the pacemaker question. Martin will answer the China orthopedic question, and Lian will answer your two-invoice policy question, okay? On the Firehawk question, for our European TARGET trial, you will recall that we concluded the enrollment of that trial in October of last year. The clinical endpoint of that trial requires one-year follow-up. By this October, in basically two months, we will formally have the one-year clinical data for that TARGET AC trial. We will likely spend probably Q4 of this year to do the statistics and analytics of the clinical data. Once we have that data scrubbed, then we will look to publish that data in an industry conference, probably likely EuroPCR, which is held in May of 2018. That will be the time that we will formally present that data to the interventional cardiology community. You will recall for Firehawk, the TARGET AC trial is what we call a post-market trial. We've been selling in Europe, even though we have not had the full advantage of that clinical data. We published in this year's PCR, some early look three-month OCT data, but the full dataset will be available in May of 2018, and that's when we will look to really drive sales with that clinical data. Okay. Qi, you want to- Yes. For the- Thank you. Okay. For the CRM questions, we are very exciting to anticipate we are going to get the approval from the CFDA for our domestic made pacemaker, which will be the first Chinese local made high performance pacemakers. We are going to have eight different models, from the single chamber to double chamber, and we are going to cover the full spectrum of the pacemakers. Compared to the MNC's product, we are going to have all the basic models, intermediate, and high-end. In terms of this, of course, you have to go through the tenders, pricing, all those things. Even we can get this approved this year, I was thinking in next few months we will get approved. But, the sales probably will gradually start by the end of this year, from the beginning of next year, 2018. It depends on how fast we can go on the tender, and as well as enter into the hospital. The price, we cannot know exactly until we go through a tender process. But I believe will be lower than imports one, for sure. The purpose is to make more people affordable, more hospital willing to do it, so you can grow this market significantly with a good domestic made pacemaker. That is the strategy, but by the time we get all those approved, we have to step by step to go through all those steps before we can realize all the sales. Thanks. Great. Thank you. Okay. Now it is my turn. Hey, John. For your question about China orthopedics. First of all, I would like to share the market landscape of about the China orthopedics, so you can have some general information. Right now, in China, for joints, the segment and the total market size is about $800 million, and there are top five multinational players still strongly take big market shares, such as the first one, the top one, Zimmer Biomet, have about over 15% market share. The second one to the fifth one, in total, they have about over 60% of total market share. But we will see there, the market growth of those multinational players, is just about 10%-15% year-on-year growth. But, if we look at the local players, right now, we will see more and more new players enter this market. So far, like, Chunli Medical, AK Medical, they have about 10% of the market share. But this made in China and local player, their growth is very fast, year-on-year growth is very fast. They almost achieve to the 30%. That is the market landscape. Back to MicroPort, you will see that so far, our total revenues comes from our import products, which means like made in U.S. import products. Right now, we only have about 1%-2% market share of total Chinese market. But our future is our made in China project. The hips products, we expect to get an FDA approval in next year, 2018. Our knee products, knee product line, local made, we wish to get the approval in 2019. That is our plan. As we said, as the local made products, the growth, that will be very faster than the import products. But so far it is very hard to give you a very solid revenue numbers. That is our high expectation of high growth driven factors for our Chinese orthopedics top line. I see. Thank you. Hi, John. This is Yan. In regards of the two-invoice system, firstly, a little bit background. On January 9th, the State Council of PRC issued regulations related to the rollout of the two-invoice system on pharmaceutical procurement in public medical institution. This is a trial implementation, and the new rules will allow only a maximum of two invoices between a manufacturer and the hospital. State Council policy centralizes the drug supplies and encourage pilot provinces to implement two-invoice policies, aiming at a nationwide implementation by 2018. But this all targets the pharmaceutical industry. However, the status of two-invoice implementation for medical device differs significantly across provinces. Without a policy at a state level. Currently, the Shaanxi province is the first and only province which has promoted a two-invoice system for the medical device, with identified agenda and timeline. The implementation of two-invoice system in Shaanxi started on January 1, 2017, with transition period for about 6 months. The current policy rollout is for pharmaceutical industry only at the nationwide level. The rollout for medical device industry is going to follow the pattern of pharmaceutical industry and to be promoted from pilot region to different levels. This will provide the medical device industry and the companies with a transition period. As the two-invoice implemented level by level from pilot, MicroPort has already planned ahead of the schedule. In H1 2017, we signed strategic partnership agreement with China Medical Instrument and with Shanghai Pharmaceuticals Medical Device, respectively. Try to work out a mode of a collaboration with mutual benefits in two-invoice system. We hope that MicroPort could leverage the profound channels, resources, and favorable policies to realize resource sharing and advantage complementing, and to cut the cost of product delivery in different hospitals and regions. The implementation of two-invoice system for medical device will be rolled out only in Shaanxi province this year. We therefore anticipate that it's not going to have any financial impact on our business this year. From long-term perspective, it is commonly believed by the industry that no significant impact is going to affect the bottom line if the policy is addressed properly. To sum up, that pharmaceutical industry now takes the lead in executing the two-invoice system and is sure to provide more experiences as well as longer transition periods for the medical device industry. Given that the two-invoice policy will be implemented nationwide and will have impact on every company in this industry. Therefore, we believe only those technology-driven with high quality and the large-scale company will be benefit from this, the two-invoice system. John, back to you. Thank you. Thank you very much, Lian. Thank you for answering my question. Operator, could you just open up the line for investors? Thank you. Thank you. If anyone wishes to ask a question, please press star one on the telephone keypad. Our first question has come from Yolanda from Morgan Stanley Hong Kong. Please go ahead. Thanks for taking my questions, and congratulations on the strong results. I have two questions. First, your OrthoRecon segment recorded quite high growth after acquisition. North America grew over 5%, Japan turned around. Was it mainly because of the profit-oriented market strategy you mentioned in the press release, or that you have conducted more promotions in these regions? Also, I noticed that China sales declined by 4%. Can you give us more color on the internal restructuring? Do you think the regional growth will be similar in the second half? My second question maybe is for Dr. Luo. Congratulations on the deal for TAVI. We know there is a huge market for this product. Maybe can you help us compare your technology versus the Qiming Medical or Edwards, and how are the trials going so far? When is the earliest you expect this product can be officially launched? Thank you. Okay. Okay. You first. Hi, Yolanda, this is Jonathan. Maybe I will answer your question on the OrthoRecon, particularly for the overseas OrthoRecon business. Martin will take the China orthopedics. Qi will answer your TAVI question. We did see very strong growth in the U.S. and Japan regions for our orthopedic business. That's largely in the U.S., largely because we've been very proactive in bringing on board new KOLs and new distributors that have strongly contributed to the business and business growth for the first half. We also, in the first half of this year, also have some new product launches. Our other major initiative for this year for 2017 or pipeline product is the acetabular cup, which was launched in the U.S. just in June. That contribution from the cup project is not reflected in the first half numbers. Since the product was launched late June, we do expect to have a very sizable contribution from that product in the second half of this year. In Japan, as you know, as we've told investors in previous investor updates, our Japan business had some management changes that we had to execute and just, I would say, less than ideal execution from that business group. Certainly, the first half of this year, we began to see the turnaround in the second half of 2016, which has continued in the first part of this year. We do expect that that trend will continue and expect a very strong performance from Japan in the second half of this year. Hello, Yolanda. This is Martin. Regarding the China orthopedics decrease for the first half year by about 4%, our management believe that's just a temporary decline due to our internal reorganization, as well as our outside sales channels adjustment. As we mentioned before, the two-invoice policy, we just prepare one or two reorganize our sales channel to face some challenges for the two-invoice policy. Also, we will adjust the inventory level of the distributors. Also, we invite several new experienced orthopedic talents from the multinational company. We will review our sales and marketing team for China strategy, especially, we're preparing a strong team for our Made in China project. This first half year, the group decided to make a little bit change for the China orthopedics team. Again, just in sum, it's just temporary. For your question about our second half year for our China orthopedics business, we believe that we will turn back to the growth. Over the whole year growth, we will be about over still back to the double digit growth, for sure. We believe. Thank you. For the TAVI, I think your question is two-part. One is what is the feature compared with the Qiming, and the other one is what time we are going to get approved. For first concerns, questions for the features of TAVI device, I think by comparing to the Qiming, because it is already get approved, they are the first to get approved product in China. For our product, of course, we are coming a little bit late than Qiming, but we have better feature. This has been proved in the clinical trial and also being feedback by most physicians use both devices. I think we have a skirt, which means we can prevent paravalvular leak. We get rid of paravalvular leak, which Qiming's product do not have this feature. In terms of this one, it is most concerned for the valve implantation because for the efficacy, it is very important for paravalvular leak. That is number one. Another one is, I think, the easy of the use. We use electrical delivery system, and it is much easier to control. Also by our design feature for people to position involved, it is easier and more safe and more accurate. This feedback is what we get from the most physicians to use the both. With those features, our clinical result, because we almost done one year clinical follow-up, we already pretty much know our number of the clinical result is better than what they have. That is in terms of feature different. In terms of timeline, we expect to get submission by the very early 2018. The approval, since we are in the Green Channel in the CFDA registration, we are going to get it within 2018 for the approve. Hopefully I answered your question. Yes, that's very helpful. Thank you. Thank you. Thank you. Just a reminder, if you wish to ask a question, please press *1 on the telephone keypad. Once again, if you wish to ask a question, please press *1 on the telephone keypad. Hi, thank you so much for dear management team. This is Cui from Citibank. I want to ask four questions on behalf of my clients. Firstly, for Martin. For Ortho segment, we see that the impressive gross margin expansion in the first half to 65%, would you expect the earlier than expected profit would even in Ortho segment? How would you project the future gross margin trend in the next two years across the domestic joints products to launch the market? Also, do we consider to dispose China Ortho Spine business here? The second question for Johnson, for pacemaker, we have already know that Lifetech has already received approval for electrode catheter, are we at the similar pace here? Third question for Dr. Luo. Could you please share with us the progress of EP listing? What is the current pricing for 3D navigation system and also 3D catheters? My last question is for Lian. For our preparation for two-invoice policy, I understand that we have already have collaboration with Sinopharm and Shanghai Pharma. As devices distributor used to be more technical driven, which requires academic marketing knowledge rather than the pure logistic as for pharma industry distribution. Going forward, would you take care of the marketing yourself or do you have to rely on the external distributors to some extent? Thank you so much. Hello, this is Martin. I am taking your first question for orthopedics segment. Overall, as I mentioned before, our international orthopedics business achieve over about 66% gross margin. Compared to the last year same period is a 6% increase. That is mainly due to the cost improvement initiatives. Due to that, the gross margin improvement, as well as the cost control, and also our revenue recover, we believe that our international orthopedics business will make break even in our Q4 this year, quarterly. We also believe, for next year, 2018, our international orthopedics business will break even for whole years and also as well as a very positive EBITDA and a positive cash flow. For our China orthopedics business, there still we are on the investment stages. As we talked about before, our Made in China project right now is still on the trial stage and pending for the CFDA's approval. After we get approval for this local made product line of hips and knees, for our gross margin at the beginning is still not very attractive. It is probably about 30%-40% of gross margin due to the limited volumes. I think after maybe the two or three years after the approval, then the volumes comes to a meaning size, we believe that the local made products margin will reach to the current industry level that is about 70%. That is our target. Overall, we believe that the orthopedics segment will be very successful for the next year and also following years after the Made in China project launch. Okay. Yeah. This is Jonathan. I think you had your question on pacemaker was regarding leads. As in our remarks, we reminded everyone that we do anticipate for our pacemaker device, we do expect to get approval sometime second half of this year, so 2017. For our leads, we do develop our own self-developed pacing leads, which is called BonaFire. We completed clinical follow-up for the trial in China in this year. We do anticipate that our leads will get approval probably in 2018. Thank you. It is for me? Yeah. For Qi, I think. For the EP, we already list on the so-called NEEQ. On NEEQ. On NEEQ. Since the 15th of this month, we are already on there. For the price for the 3D mappings equipment we sell, we have a price about 1.5 million RMB. That is to the end user price. To give to our distributor will be lower than that. Also, for the ablation catheter for the 3D, the final tender price is about 17,000 RMB. I just want to make sure it is 17,000. 17,000 RMB. That is the end user price. Okay. Thank you, Dr. Luo. Thank you. Hi, this is Yan. In regard of the two-invoice system, we think that no matter whether and once the two-invoice system will be implemented nationwide, we as the manufacturer, will always focus on the marketing, including the promotion awareness of our product among the surgeons and patients and those medical training. We will always put resources and our sales focus on marketing our products. In terms of the two-invoice system, the distributor between the manufacturer and the hospital, they will play a more important role in this supply chain. As you just mentioned, China Medical Instrument and Shanghai Pharmaceuticals Medical Device, they are very professional in terms of supply chain. At this stage, we think they haven't got enough resources or focuses on the marketing side of the product. We will definitely continue to promote our product with our sales force in the market. Thank you. Thank you, Lian. Thank you so much. All right. I think we are running out of time. Operator, could you see if we have one more question? Sure. If anyone wishes to ask a question, please press star one on the telephone keypad. John, we have no questions at this point. Okay. If there are no questions, I would like to thank everybody again for dialing in and thank you for your time and thank you for the support. I will just hand over the time to management for the closing. Yeah. Thank you, John. Thank you everyone for participating on a very promising and good results from the first half of this year. We look forward to speaking with and meeting with the investors in upcoming one-on-one meetings. The management team will be in the U.S. starting in the beginning of September, in New York and Boston. We look forward to hearing from you and, if there are any questions, please feel free to contact any one of us on the management team. Thank you for participating, and have a great day and the rest of the summer. Thank you. Thank you. That concludes the call. Thank you. Bye-bye. Thank you. The conference call has been concluded. Thank you for your participation.