Good day, ladies and gentlemen, and welcome to the Teleflex Incorporated Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr.
Jake Elgouise, Treasurer and Vice President of Investor Relations. Sir, you may begin.
Good morning, everyone, and thank you for joining us on this conference call to discuss announcement we made this morning regarding the acquisition of Neotrack. The press release and slides to accompany this call are available on our website at www.teleflex.com. As a reminder, this call will be available on our website A replay will be available by dialing (855) 859-2056 or for international calls, (404) 537-3406, passcode seven million nine hundred eighty five thousand nine hundred and forty nine. Participating on today's call are Benson Smith, Chairman and Chief Executive Officer Liam Kelly, President and Chief Operating Officer and Thomas Powell, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to remind you that some of the matters discussed in the conference call will contain forward looking statements regarding future events as outlined in our slides.
We wish to caution you that such statements are in fact forward looking in nature and are subject to risks and uncertainties and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today and our filings with the SEC, including our Form 10 ks, which can be accessed on our website. With that said, I'd like to now turn the call over
to Benson. Thank you, Jake, and
good morning, everyone. I'll begin this morning's presentation by providing an overview of the strategic rationale behind the acquisition and an overview of the transaction itself. I'll then turn the call over to Liam, who will provide an overview of NeoTrak and how their product works and then to Tom, who will provide a summary of what the transaction means from a financial perspective. Finally, I'll provide a few closing remarks before opening up the call to Q and A. We are extremely pleased to announce this definitive agreement with NeoTract as this acquisition significantly advances our offering of urological product solutions and represents another important step forward in our strategy.
I'm sure that at least some of you may be a bit surprised that Teleflex is once again active in M and A so quickly after announcing the acquisition of Vascular Solutions. Well, we are not as we have made significant progress with the integration of Vascular Solutions into Teleflex. And this is in large part due to our strategic business unit structure, which allows one business to integrate and manage an acquisition, while a separate business unit can then evaluate and integrate a different acquisition opportunity. In fact, even when we were completing the acquisition of Vastra Solutions, we told our business development group to continue to look for that next great asset. And it is our belief that we found it in NeoTraC.
Founded in 02/2004, NeoTract is a privately held company based in California that has developed and commercialized the UroLift system, a novel, minimally invasive technology for treating lower urinary tract symptoms due to benign prostatic hyperplasia or BPH. And for those of you who may not be familiar with BPH, it is an age related male condition that results in larger than usual prostate which squeezes the urethra. Symptoms of BPH include needing to urinate frequently, difficulty starting urination, a weak urinary stream and a feeling of incomplete bladder emptying. With a revenue growth profile that exceeds that of VitaCare, this acquisition accelerates Teleflex's near term sales growth trajectory and provides us with a significant sales channel opportunity. Most importantly, this acquisition enhances Teleflex's long term organic growth profile and solidifies our ability to substantially generate mid single digit organic constant currency revenue growth.
NeoTraC has experienced robust clinical adoption and significant revenue growth since initiating product commercialization in 2014. And this acquisition positions Teleflex to expand our current presence within the urological call point. Additionally, we expect this acquisition will enable us to improve our margin profile due to NeoTrax gross margins, which exceed 70% today, as well as allow us to capitalize on a significant international infrastructure to drive further penetration of NeoTrax UroLift system outside The United States. As some background, during 2015, NeoTrak generated revenue of approximately $18,000,000 This quickly accelerated to approximately $51,000,000 during 2016. While during 2017, we estimate that revenue will be between $115,000,000 to $120,000,000 and that it will grow at least 40% in 2018.
In addition to its track record of revenue growth, there are several other reasons we are enthusiastic about acquiring NeoTract. These include the strong intellectual property and clinical data that supports their product offering as well as the established mechanism for reimbursement for the product that is already in place. Beginning with the clinical data, since obtaining CE Mark in 2010 and '5 ten clearance by the FDA in 2013, NeoTrax UroLift System has been the subject of significant number of studies in urology and that includes nine studies of which two were randomized, 23 peer reviewed publications including multiple meta analysis and over 1,000 patient years published with five year follow-up data. In addition to a wealth of clinical data that shows the benefits of UroLift system, NeoTraC has 62 issued patents and another 30 patents that are pending. This helps create a very wide competitive moat with significant barriers to entry.
And if you recall, two of the key tenants of Teleflex M and A criteria is to acquire products that provide superior clinical benefit to existing alternatives and to find products that have long product life cycles that benefit from patent protection. I am pleased to say that NeoTraC checks both of these boxes. Turning to reimbursement. NeoTraC's UroLift system has broad and sustainable reimbursement already in place. That includes dedicated Category one CPT codes specific to the UroLift System procedure as well as 100% coverage by Medicare, which translates to approximately 174,000,000 covered lives in The United States.
Finally, this acquisition has a compelling long term financial profile that we expect will substantially improve Teleflex's revenue growth, margins, earnings and cash flow generation capabilities for years to come. However, unlike the last three scale acquisitions that Teleflex has completed, this acquisition does not offer Teleflex a significant cost synergy opportunity as we intend to manage NeoTrak as a separate business unit to ensure that its growth trajectory continues. As such, we expect that this transaction will be slightly dilutive to adjusted earnings per share in 2017. However, we do not anticipate adjusting our previously provided 2017 adjusted earnings per share guidance range as a result of the transaction. Turning to 2018, is our belief that the acquisition will become breakeven, while in 2019 we expect that it will contribute between zero three five dollars and $0.40 of adjusted earnings per share and that it will be increasingly accretive Turning next to the details of the transaction.
Teleflex will be purchasing Neotrack for amount that is not to exceed $1,100,000,000 This consists of an upfront cash payment of $725,000,000 at closing and up to an additional $375,000,000 upon the achievement of certain commercial milestones related to the sales through the end of twenty twenty. It is important to understand that maintaining moderate gross leverage levels continues to be an objective for Teleflex and following the release of second quarter earnings and prior to entering into this acquisition, reassessed cash flows catered outside The United States and repatriated it back to The U. S. And repaid our revolver borrowings by $475,000,000 This debt reduction allowed us to reduce our gross leverage level to approximately 2.5 times in advance of entering into acquisition. We intend to finance the transaction at closing through borrowings under our revolving credit facility.
It's also important to understand that this management team has a proven track record of successfully integrating acquisitions and quickly delevering. It has been the case for the last three sizable acquisitions that Teleflex completed, LMA, Rite of Care and Vascular Solutions and it is our belief that we will be able to rapidly delever following the NeoTract acquisition as well. In addition, the completion of this transaction will not prevent Teleflex from completing other strategic initiatives such as the continuation of our restructuring plans, distributor to direct conversions or other acquisitions. As we believe that we will continue to be able to fund these types of activities through free cash flow generation and over the long term, Teleflex intends to maintain its gross debt to adjusted EBITDA level at approximately three times. Finally, this transaction is subject to regulatory approval and other customary closing conditions.
We expect the acquisition to close within the next thirty days. That completes my prepared remarks. I would now like to turn the call over to Leo for him to provide you with an overview of NeoTrak and their product offering. Liam?
Thank you, Benson, and good morning, everyone. It is a pleasure to be speaking with you today. Through their FDA cleared UroLift system, NeoTraC's focus has been on improving the standard of care for patients that suffer from BPH. The UroLift system allows the clinician to deliver permanent implants through a minimally invasive transurethral outpatient procedure, which relieves prostate obstruction and opens the urethra directly without cutting, eating or removing prostate tissue. Neotrack has approximately 70 direct salespeople within The United States.
And to date, they've had very little penetration internationally. We expect that international penetration of the UroLift product will accelerate in the future due to Neotrack's international registrations such as in Japan coupled with Teleflex's established international footprint. Over the past several years, Neotrack's revenue growth performance has been incredibly consistent as evidenced by the fact that in 13 of the last 14 quarters, they've achieved sequential quarterly revenue growth of 20% or greater. We fully expect this revenue growth to continue and we anticipate that NeoTrax could add between one to two percentage points towards the Teleflex organic constant currency revenue growth rate for the next several years. Next, I would like to spend a few moments to explain just what the market opportunity is for NeoTrax UroLift System and how the product works.
For those of you who may not be aware, BPH impacts men typically over the age of 45. And those men who suffer from moderate to severe cases of BPH often experience a reduction in the overall quality of life. This includes a disruption in sleep patterns, an impaired sex life, an interruption in leisure activities, and it can often lead to social isolation and depression. And as they age, BPH becomes increasingly more common in men. In fact, as the data on this slide indicates, approximately forty percent of men in their 50s suffer with BPH, while approximately ninety percent of men in their 80s do.
This translates into approximately twenty two million men in The United States alone who live with moderate to severe symptoms, twelve million of which are actively managed BPH patients. I've spoken many times of the aging population in The United States, Western Europe and Japan as an accelerant for demand of Teleflex products. And that trend will also have a positive impact on the demand for UroLift. And when examining why men decide to visit a urologist, as this chart depicts, BPH is at the top of the list. These statistics translate into a large addressable market for NeoTraC's UroLift system, which we estimate to be greater than $30,000,000,000 Today, the patient population that NeoTrak UroLift product focuses on are the eight point five million men who are either currently using some type of medication or have recently stopped using medication to address their BPH issues.
Within this group, are approximately one point five million patients that have BPH symptoms, tried a pharmaceutical solution, but have dropped out. This patient population alone equates to a market opportunity of approximately $6,000,000,000 And how does the UroLift product work? Using this product is quite simple and straightforward as this slide indicates. In a typical procedure, a man suffering with BPH will have an outpatient procedure performed, which is similar to a systolic BPH diagnosis procedure. This procedure starts with lidocaine first being applied to the urethra and then the stainless steel urethral end piece is inserted.
With direct visualization, the clinician will then gently push aside the tissue and deploy the customized implants into the patient. On average, four to six implants are typically used for each procedure. These implants relieve the prostate obstruction and the patient is normally discharged the same day without the need for a urinary catheter. And why are healthcare systems adopting the NeoTrack UroLift system? Well, the reason why healthcare professionals, systems and societies are adopting the NeoTract UroLift system is because of its safety and efficacy profile.
In addition, NeoTract has recently published their five year lift data on the UroLift system, which demonstrated long term effectiveness for the patient's BPH symptoms. Once again, you can see how the UroLift product fits our M and A criteria of providing hospitals with better clinical alternatives, while correspondingly providing them with a cost benefit. We also are quite enthusiastic regarding NeoTraC's product pipeline, including their next generation UroLift device, which has already received FDA clearance and their ability to expand indications for use of their product offering. That completes my prepared remarks. I'll now turn the call over to Tom for him to provide you with a financial overview of the transaction.
Tom?
Thank you, Liam, good morning, everyone. Before I get into the financial benefits of today's acquisition, I'm pleased to tell you that in a separate and unrelated transaction, Teleflex created a pathway to tax efficiently repatriate approximately $850,000,000 of international cash. Dollars $465,000,000 was repatriated in August and we expect to repatriate the remainder of the next several years. Using the recently repatriated cash and other cash from the balance sheet, Teleflex repaid $475,000,000 of revolver borrowings, thereby reducing our gross leverage to approximately 2.5 times in advance of this transaction. The $725,000,000 upfront acquisition payment will be financed through a draw on our existing revolving credit facility.
We expect to finance the remaining milestone payments of up to $375,000,000 through free cash flow generation of the combined entity and through future repatriations of international cash. Finally, post closing, we may look to opportunistically term out approximately $500,000,000 of revolver borrowings. Pro form a gross leverage post transaction is approximately 3.7 times. Given the strong earnings profile and free cash flow generation of the combined company, we expect to be able to delever fairly quickly. Now turning on to NeoTrak financial highlights.
This transaction has a very compelling financial profile and it meets several of the criteria we look for in an acquisition. Liam just mentioned that this transaction will accelerate top line growth for years to come. Given the higher margin profile of NeoTrak, we also expect an immediate acceleration of our gross margin and an acceleration of our operating margin and EPS over time. More specifically, we anticipate that by 2019, NeoTrack will add approximately 125 to 150 basis points to Teleflex's adjusted gross margin and approximately 30 to 40 basis points to Teleflex's adjusted operating margin with meaningful further accretion in subsequent years. We anticipate that the acquisition will be slightly dilutive to adjusted EPS in 2017.
However, we are maintaining our previously provided adjusted earnings per share guidance range. We expect that the acquisition will be breakeven to adjusted EPS in 2018 and will deliver between $0.35 and $0.40 of adjusted earnings in 2019 and will be increasingly accretive thereafter. I'd like to point out that the adjusted earnings per share numbers that I just referenced assume that we would complete a note offering during the 2017 and also includes expense related to the resumption of medical device tax beginning in 2018. Additionally, the high growth, high margin profile of NeoTract provides for an attractive return on investment. In the third full year, we expect return on invested capital will meet the company's cost of capital.
And in the fourth full year, we expect the return will exceed the company's cost of capital. That completes my prepared remarks. I'd like to now turn the call back over to Benson for some brief closing remarks.
Thanks, Tom. In closing, we are very excited about this transaction. It is our belief that the combined company will offer tremendous benefits to the customers who purchase our products as well as the patients who use them. We anticipate the new track will accelerate the Teleflex organic constant currency sales growth trajectory by between one and two percentage points for the next several years, provide an opportunity to leverage our direct sales channel internationally and increase our adjusted gross and operating margins for several years to come. Finally, we believe that this transaction creates tremendous value for our shareholders as it is expected to drive significant adjusted earnings per share and free cash flow in the future.
That completes my prepared remarks. And at this time, I will turn the call back to the operator for Q and A.
You. You. And our first question comes from the line of Brian Weinstein with William Blair. Your line is open.
Good morning guys. This is Andrew in for Brian today. I want to start with the sales force. Where is that today? What is the expansion plan under Neotrack?
And does that change at all under Teleflex leadership? Thanks.
So it's Liam here. So the sales force today is north of 70 sales consultants in the market. We see this transaction as an investment profile. And we continue to see an increased investment in the sales force, and we intend to expand the sales force within North America over the next number of years. Additional to that, we will also leverage our international footprint.
NeoTract does not have an international footprint except for in The U. K. And Australia. And we have a solid urology business in Europe and we have a global footprint obviously in Asia. And we think we'll be able to leverage that over time to take advantage of the countries where they have already got reimbursement registrations.
Great. Thanks. And then just kind of follow-up following up on that. You mentioned the second generation device coming out. It's already received FDA approval.
Could you talk a little bit about how the sales force is planning on training the docs for use of that new device? Thanks.
Yes. The UroLift sales force have been very, very effective in the way that they train the clinicians to use the product. And they adopt a strategy of going deep rather than going wide. And what I mean by that is they will go into urology practice and they will focus on that practice until they have every urologist within the practice trained. So the plan is that in the first quarter of twenty eighteen, we will roll out the UroLift two into four regions and train the clinicians within the four regions, use that experience then to expand the product throughout the remainder of the year and to move the customers from the UroLift one to UroLift two.
The UroLift two offers a significant advantage to the customers, so we think that they will adopt to this very, very quickly. You can leave the scope in during the procedure, so your visualization the entire time. It's much easier to change the scope onto the handle or the UroLift delivery mechanism onto the handle. And there's less waste for the hospital to or the site center to have to dispose off. So there's nice advantages to this product over the UroLift one.
So we think adoption will be rapid.
Thanks guys.
Thank you. And our next question comes from the line of Dave Turkaly with JMP Securities. Your line is open.
Good morning.
Good morning, Dave.
How are you? So just to go back quickly on strategically here an update. We look at LMA, VitaCare, Vascular Solutions, certainly all growth companies, but this is really hyper growth. And obviously, the price kind of reflects that. So just from your managerial kind of philosophy here, are you expecting more transactions like this?
And how confident are you that you can manage a company that's growing at this rate?
So I'll take that first
and then Liam may have
some color to add. But so to answer the last part of your question, yes, we feel really confident. This is in many regards has some similarities to VitaCare where it's largely a one product or one technology kind of company. User education is a big feature of the overall marketing of the product. And it does have a very, very high growth profile, probably higher than anything else we have, certainly of that size in our bag.
And it's for that latter reason that we've largely decided to have most of in fact, substantially all of NeoTrack remain as a stand alone business within the Teleflex franchise. So they will be continuing to operate as they have been for the last several years. And that will certainly ease the integration process. We've also reached key agreements with the senior management of EuroTraC to stay in place for several years during the transition. So we think that will help.
And we're going to continue essentially the same policies and practices with their sales force that they've been accustomed to over the last couple of years. So we expect this to be seamless in terms of the change of ownership over the next couple of years. And you're right, there are to get to your question about are we going to buy more NeoTrax, if we can find them, we'd be keenly interested in them. There's not many devices that are growing at that are this size, growing at 40% and not only have high gross margins to begin with, but the opportunity for margin enhancement over the next several years. So we're not necessarily counting on discovering a whole lot of these over the next couple of years, which again makes us so excited to be able to pull this into our bag.
I got you. I appreciate that. And yes, was familiar with the NeoTract folks. So But just to refresh our memories here, want to say that I thought ASP on these devices were somewhere around maybe 4 to 5 ks for a procedure, which would maybe be four to five implants. Is that relatively is that ballpark fair still?
And then can you just remind us sort of what the doc is getting for these procedures versus some of the other kind of ablative or heat based therapies and other technologies for BPH?
Okay, Dave. So it depends on the site, but the net payments for an in office is close to $750,000,000 In an ASC, it's $3,000 and in a hospital setting, it's $3,800 Those are the net payments. If we just look at the hospitals, compare that 3,008 to a TURP, a TURP is $2,260 So this is a profitable procedure for the hospital. It is a better procedure for the patient. It is less invasive, no catheterization, very little bleeding.
And the long term study, the LIFT study showed very, very compelling data for the procedure. And it's very strongly supported by the urology societies, both in The U. S, in Europe and also in Japan. Yes. Just to summarize the part
of your question, there is no economic disincentive for the urologist to choose a different therapy over this.
Thanks and congrats on the deal.
Thank you.
Thank you. And our next question comes from the line of David Lewis with Morgan Stanley. Your line is open.
Good morning. Just a few questions this morning. For Liam or Benson just to start off, so you're obviously acquiring a disruptive growth asset in a space you don't materially play in currently at a premium. So what does it say about your confidence in your underlying organic growth? And are you still comfortable in mid single digit organic growth excluding NeoTraC at the Analyst Day this November?
So I'll take that. Yes, I would say the short answer to your question is yes. We believe that certainly our non NeoTraC business has the same potential it had before we began entertaining thought and interest in the NeoTraC product. It is slightly outside of our existing call point. We certainly see this as part of our larger surgical business.
But again, we tend to maintain this as a separate focus of operation. Yes. And again,
given our guidance for the year of if you exclude the BSI acquisition of 4% to 5% at the half year, we were at 4.6% versus our guidance. So we feel pretty confident on where we're at through the half year, as we said in our earnings call, David. And obviously, CSI will roll off and add 1% to that once it comes off the M and A accounting methodologies. And this will just accelerate our growth beyond that. So we see all of these attributes coming together to put forward an incredibly strong organic growth story for Teleflex with non revenue dependent margin expansion happening at the same time.
And none of our existing sales resources, which are driving that growth are going to be siphoned off to be able to drive this growth. So we don't see really any interruption in our other businesses plans moving forward and opportunities moving forward.
Okay. The reason I ask guys is that I think most investors thought this is a mid single digit organic grower. That's where you were heading and that's your guidance sort of this morning is that NeoTrak increases your confidence in mid single digit organic growth, but yet NeoTrak should at least add two points of operational growth once it becomes part of the business. So it just seems that that mid single digit is either conservative or your expectations for the core are a little lower. And it sounds like perhaps conservative is the answer.
We have not changed our expectations for the core.
And this adds about 1% to 2% David as we said in our prepared remarks. And that's because just simply because the denominator gets bigger.
Yes, sure. Okay. And just following up, I think the reimbursement question was interesting here. And there's certainly no disincentive to use this procedure. There is actually favorable reimbursement for the physician.
So to get to your long term returns in the model, you certainly need reimbursement to hold. How did you get comfortable that favorable reimbursement in the ASC for the physician in the outpatient market too, I should say, they're kind of independent. How did you get comfortable with those two hold? And I had one final question for Liam.
Yes, sure. So the first of all, I'd like to say that the CPT one code uses specific language that is unique to the UroLift system. So one thing that made us very comfortable was that a fast follower, first of all, to get the level of clinical data, the five year data that UroLift has, it would take them a number of years, seven to ten years. The CPT one code being so specific meant that they would not be able to attach on to that. We also used some external companies to assist us in looking at the environment.
And the feedback from that was it was very unlikely to be any change to the reimbursement environment over the coming years. So we have a high level of confidence reimbursement will continue. And it comes back to basic economics as well, David. It's a lower cost for the institution. It's also a procedure that the clinician, the urologist will make money at.
So the whole environment is beneficial to the hospitals and the ASCs that performing this procedure.
Okay. Very helpful. And Liam, this last one, I'll jump back in queue. You mentioned the international opportunity, but based on your public remarks here this morning, it seems that The U. S.
Opportunity is very underpenetrated. So is you really going to focus ex U. S? Or is the core focus here the next two to three years really U. S.
Penetration? Thanks so much.
Yes, Dave, an excellent point. So the key focus for the next couple of years will definitely be The U. S. They have got reimbursement and positive NICE guidelines in The U. K.
So obviously a secondary focus will be there. Australia also has very strong reimbursement. Another market in the next two years or so that we will put some focus on is Japan. NeoTract had a very positive meeting with PMDA regarding submitting for reimbursement in Japan and for registration within Japan. That, as everybody will be aware, is a market with an aging population, a market that has a high degree of penetration of noninvasive medical devices.
And we think that will be another opportunity for this. And we have a footprint, as everybody knows, overseas and will give us an opportunity to penetrate that market probably faster than NeoTract would have been able to on their own.
I would just add, Dave, when we look at an acquisition like this, you are correct that the first couple of years growth primarily is going to come from The United States. But we look at obviously a multiyear extended product growth cycle for this. So in the outer years that international growth becomes more and more important.
Great. Well, thanks guys. Congrats on the deal. I'll jump back in queue.
Thank you. Thank you.
Thank you. And our next question comes from the line of Richard Newitter with Leerink Partners. Your line is open.
Hi guys. Thanks for taking the questions. Just a couple here. Actually the medtech tax, can you just remind us what how much from an EPS standpoint we should be thinking about that impacting you guys now that you're putting it back into your outlook?
Sure. In 2018, it would be about $04 and increasing to $05 and $06 in the later years. Actually,
I'll correct it. It's always been in our 2018 forecast. We've never because it was temporary, we had not removed the MedTech device tax from our 2018 forecast.
Yes. So this so the numbers I cite are relative to NeoTraC alone.
Oh, so I'm talking about for Teleflex what the contribution is because it's been out of numbers. So when it comes back in just what's the amount of hit to Teleflex? Was that the amount for Teleflex? Or you're saying So
when we took out two years ago, it was roughly $12,000,000 in Okay.
Yes, Rich, it's Jake. I think when we we're not today giving guidance on 2018 for Teleflex obviously. So we'll talk about that when we ultimately give guidance for the company and that will probably be in the February timeframe of next year. But the numbers that Tom referenced were just NeoTrack only.
Okay. But when we think
of the
accretion that you've kind of given us for 2019 and then the neutrality impact to EPS for 2018, we should be thinking of that off of a medtech impacted medtech tax impacted a number? Correct.
Correct.
Okay. Got it. And then just going back to one of the other questions, you gave guidance or sorry, NeoTract revenue outlook for 2018. I guess, it sounds like that's all coming from The U. S, if I heard your answer to David's question correctly.
Or is there any kind of contemplation of OUS, either synergies or what you can leverage through your channel internationally embedded in that?
The majority of it is coming from The U. S. There is already NeoTract has a sales force in The U. K. And that is growing rapidly.
They also have in Australia a sales force, and that will be coming growing. But you are correct that the majority of the growth will be coming from The U. S. With a small contribution a reasonable percent, but a small growth dollar. So I would say the correct focus in the next couple of years is to focus on The U.
S. And thereafter, we will see acceleration overseas as we get the registration reimbursement in some of those key geographies.
Okay. And then anything on the competitive horizon that we should be aware of or to keep an eye on here and that you kind of as you did your diligence here, you got comfortable with the IP defending off?
Our actual patent lawyers that looked at this said to us that this was one of the strongest IP portfolios that they had ever seen because it's a method IP on the UroLift that protects us. The IP runs some of the IP runs to 2028, others to 02/1933. And there are also opportunities to file for additional IP that we saw during our due diligence. So it's difficult because of the IP landscape for a fast follower. And it's also difficult because the reimbursement, as I said earlier, is very specific to UroLift.
And the clinical data required would take seven plus years to get that level of data to even be a fast follower if you were able to find a way around the IP, which we think it would be incredibly difficult anyway given that it's method IP rather than product specific IP. Yes. Just in general, obviously for decades,
the standard treatment for BPH had been transurethral resection which had been delivered through an electrosurgical device. In more recent years there has been a drift towards ablative therapies And so there are some improvements that are going on in ablative therapies, but they still require a catheterization period afterwards. And it takes up to ninety days for the patient to feel any symptomatic relief. And there are greater issues in terms of side effects relative to sexual function and other areas. So this there are some improvements in ablative therapies, but we don't think they solve the underlying problems and are unlikely to diminish the growth of UroLift as we've projected it.
Okay. Thanks a lot and congrats on the deal.
Thanks. Thank you.
Thank you. And our next question comes from the line of Larry Keusch with Raymond James. Your line is open.
Thanks. Good morning, everyone.
Good morning, Larry.
So just I want to go back to the international expansion opportunities. It sounds like Japan is in process. So again, I just want to make sure I'm understanding it correctly that, that process to move that product into that region is actually underway. But I assume there are other areas for product registration that you can go after over the next couple of years. So what would be the other big market opportunities here?
Okay. So let me start with Japan. It's in process insofar as that NeoTrack had a meeting with PMDA. The submission is expected towards the latter quarter, quarter four of this year. And Larry, that takes anything from a year to eighteen months to work through the system.
Because it's a novel technology, it's a we're hoping that it's going to be in the shorter time span of a year to get through. The other geographies, Europe is incredibly underpenetrated. So doing reasonably well in The U. K, but a lot of penetration to go on within other parts of Europe. And if you look at the number of men that suffer with BPH, so you've got twelve million in The United States, you've got fourteen million in Europe, and you've got forty five million in Asia.
So clearly, within Europe, we'll be focused on the Benelux, Germany, Italy and Spain while putting also some investment into The U. K. To accelerate that. Japan will be a key early focus and then moving into China where we will do the registrations within China. It's already reimbursed in Australia.
And in Latin America, there's another eleven point three million patients. We'll be that's more longer term and will be a little bit more opportunistic in the medium term. So you're right, Larry, a significant opportunity overseas with the number of men suffering from BPH. It's a global phenomenon. It's not just a U.
S. Condition clearly.
Okay, terrific. And then I guess two quick ones potentially for Tom. So just again, want to make sure I got this correctly. It sounds like you are anticipating terming out some of this in the fourth quarter. So just wanted to get a sense of what assumptions were included in the deal model for accretion relative to interest rate assumptions around this and timing of that term loans.
And then I guess the other quick question is just on the outlook for 2017. I recognize that you're saying this is slightly dilutive and you don't anticipate changing your guidance. But to the extent that there was upside in the model, is this really taking up all that upside? Or should we still think about there are potential opportunities to still do better?
Okay.
So in terms of the financing, our assumption is that in the model, I should say the assumption on financing is that we do a high yield offering in the fourth quarter of $500,000,000 in size and we expect there to be about 125 to 150 basis point spread between kind of our cost on the revolver versus high yield. And right now we'd expect high yield pricing somewhere in the 5 ish range. And so that's built into the model going forward. And then with regard to the outlook and upside, are you referencing the broader Teleflex 'seventeen.
Well, you know, don't intend to update guidance for ACE Teleflex on this call. Rather, we are incorporating the impact of this acquisition. But we continue to drive towards delivering the numbers we guided to at the last earnings call. I think we cited a couple of areas where there could be some upside. Currency is certainly holding more beneficial than what we'd expected previously.
Sales and the rest of the business is tracking as we expected. The integration of Vascular Solutions is tracking as expected. So we continue to execute against that base plan and we're hopeful we can continue to deliver upsides, but we'll give more update on the base Teleflex as we get to the third quarter earnings call.
Okay, terrific. Thanks guys.
Thank you. And our next question comes from the line of Matthew Mishan with KeyBanc. Your line is open.
Good morning and thank you for taking the questions.
Good morning.
Just on the milestones, could you give us a sense for how achievable those are? And the way we should be looking at the base cost of this acquisition, should we be looking at this as like a $725,000,000 acquisition or a $1,100,000,000 acquisition?
So the milestones are revenue based, Matt. There's one milestone that is paid six months into 2018. And then at the end of each year, there is a revenue milestone. Matt, if we pay the milestones, we'll be really, really happy we pay the milestones because this will have exceeded our achieved our expectations on the revenue line. So we're looking at this as a $1,100,000,000 transaction because we firmly believe that we're going to achieve those revenue milestones and to pay the 1,100,000,000.0 Obviously, then you'd want to look at the net present value of that, which would be reduced from that $1,100,000,000 figure because clearly the milestones are paid in years out.
And I would say just in terms of the realism of the milestone payments, if you look at the dollarized growth that they are anticipating of 2017 over 2016 and you just took that same dollar amount for the next three years, that gets you very much in line with what would be required to fully pay out the milestone. That's kind of a background gauge we use in terms of assessing the likelihood that those payments will be made. And as Liam said, we'd be delighted to make those payments.
Okay. That's very helpful. And I think in your prepared remarks, I think you mentioned expanded indications for use. Kind of what were you referring to there?
Good question, Matt. What I was referring to there was the median lobe. Currently, the product is contraindicated for a median lobe indication. We believe that, that contraindication will be removed. It currently limits the product to about 10% of large prostates.
So that will give us another 10% access to that patient population.
All right. Thank you very much.
And congratulations on the deal and the repatriation.
Thanks, Mike. Thank you. Thank
you. And our next question comes from the line of Raj Denhoy with Jefferies. Your line is open.
Hi, good morning. I just had a couple of quick questions. So in the deck you mentioned a target of about 5,400 urologists in The United States. I'm curious how many have you currently trained on the procedure?
So currently we have trained approximately 900 of a total of 12,000 urologists, Raj, in The United States. Of those, 5,500 urologists are really focused on BPH and they cover about eighty percent of the BPH cases. And we have currently trained about 900 urologists.
Okay. It kind of begs the question as to why such a small number? Is there a reason for the pushback? Or is it simply just again with a new procedure it takes time to get folks on board?
No, they just started commercialization in 2014. We actually see their success in adoption rate as well above the standard curve that we would expect with the technology that is this novel.
Okay. And you mentioned training of clinicians is obviously a big focus. Do you have a target for how many clinicians on an annual basis you can train? Or how you even talked about accelerating that, what that could look like over the next couple of years?
Actually one thing NeoTract have done really, really well, Raj, and I think I said it earlier on, is they have gone deeper rather than wide. They have been incredibly focused in getting into these large urology centers. And they have been very focused on training everybody within that urology center from the urologists to the administrators so they can work through the reimbursement. And they have been done an excellent job. 900 of the, as I said, urologists are trained of a total of 5,500.
So still significant ways to go. The target is really focused on when you have completely trained one urology center. So rather than set an arbitrary number, our focus and their focus has been on getting that urology center completely trained and up and running before you move to the next one. And in those currently trained urology centers, what they are seeing is an increase in utilization. So as they get into your urology center, train the urologist, the utilization increases.
So a lot of their revenue is actually coming from existing centers that have been trained. And to give you some a little bit of a benchmark on that, I think that their revenue from by customer type, existing customers in the quarter two contributed 66% of the growth. So that's an important benchmark. So rather than just look at it as a target of training urologists, where they and us will be more focused on getting a return per urology center and going deep rather than wide and we will continue that strategy.
Another I think important consideration or understanding about this product is there's a fairly large segment of patients who are initially prescribed drugs and that's the first line of treatment for these patients. And they are unhappy with the side effects, but they are also uncomfortable with the idea of going in for a TURT. And this presents an opportunity for the urologist to really present to that patient an extremely quick non invasive or minimally invasive procedure. They're going to have almost instantaneous relief and avoid a lot of the potential complications that come from either a platelet or QRP. So part of this is educating urologists about having that conversation with that patient who's unhappy with their drug regimen and getting them to start offering this as an alternative.
That's, to Liam's point, that's where that go deep strategy has really paid off.
That's helpful. And then maybe just another point of clarification. Within those centers that you've trained, so the serology practices, do you have any statistics statistics or data on what percentage of the BPH procedures UroLift captures within those practices relative to laser or some of the more resected procedures?
So the penetration rate is pretty low at this stage, which is what makes this so attractive to us that there's such a market to go after. So of the total $30,000,000,000 market, there's a 1% penetration rate. I think that the market that we're more focused on Raj are the people who have the 1,500,000 men who have recognized that they have a BPH. They have tried a pharma solution and that has not worked and they have stopped taking the pharma solution. So that's a $6,000,000,000 opportunity in The United States if we convert those men who have BPH have stopped taking a pharma because of the side effects and therefore they don't have a working solution today to address their BPH.
If we could penetrate that market, as I said in my prepared remarks, that would be a $6,000,000,000 market in The United States.
No, no, understood. I was more getting at within urology practice that you trained, if you had any statistics or data around what percentage of BPH procedures UroLift captures within those trained practices?
We don't have that data right now. But I think it does go back to the penetration 1% is the penetration. Understood.
One maybe just last one. Here's some sideline data. Once a urologist starts doing four a month, their utilization starts to increase rather dramatically as they get really comfortable with the procedure. As they start to hear the patient feedback from their own patients about this, they get patients who've come in from those patients who are very satisfied with the procedure. But I would go back to the point that this is still very early in its commercialization for a device like this.
No, completely understood. Just maybe one last one. You mentioned 174,000,000 covered lives. How what's the average age of these patients that get UroLift? And who are the commercial payers that currently don't cover at this point?
So there are only three payers that don't cover at this stage. And we are obviously following up with the latest data, the five year data. The more data we get, the more compelling the argument is. So we're the level of penetration is pretty high. Obviously, is 100% covered.
Sorry, what was the second part of your question Raj? I apologize. I
was curious what the average age
On average age, well, condition is that the product is indicated for people 50 years plus. And as you saw on the slide, BPH becomes more prevalent the older you get, forty percent in men in their 50s, up to eighty percent in men in their 80s.
One of the I would just add that one of the really important milestones that UroLift just recently passed was the publication of their five year data. And we think go that a long way in convincing those few remaining carriers who don't cover it, because there were some questions about, okay, how long will this last for? That was a question that was in some urologist's mind. And the five year data is very, very compelling in terms of its longevity with these patients. We were delighted that that was something that they had just completed and think that that will be an accelerator additional coverage and answering those same questions from urologists.
No, it's helpful. Thank you and congratulations.
Thanks, Raj. Thank you.
Thank you. And our next question comes from the line of Mike Matson with Needham and Company. Your line is open.
Good morning. Thanks for taking my questions. Good morning.
Good
guess, let's see, I'm just curious what you think the biggest factor is preventing some of these patients on drugs or the drug dropout patients from pursuing an intervention?
So one thing that's come through in our research and UroLift adoption is about knowledge. So it's about educating, first of all, the urologists about the availability of this procedure and then getting the urologist to educate the patients. Most men will know about TURP and they'll know that it's a very invasive procedure. Again, more people that use this procedure and the more urologists as we go deep within the urology community, it will be explained more to men when they're in the hospital. It's sometimes, Mike, as simple as the urologist asking a question, how are you getting on with your current pharma?
Would you like a better quality of life? One procedure that I witnessed myself, the patient, it took about fifteen minutes. The patient that was actually halfway out the door and one of the assistants had to call them back. That's how non invasive or minimally invasive this procedure is. So it's very quick.
It's very minimally invasive and the impacts are pretty immediate. If you use a TURP, for example, it can take a number of months before the benefits of that procedure are evident. And there's obviously a healing time, catheterization,
none
of which normally apply in this case.
I'm at that age where when I'm sitting around the golf club, this topic comes up a lot. And I would say there's nobody at the table who has gone through a TURP or even an ablative therapy who goes, Oh, you guys should have one of those. And that is what they hear from patients who've had this procedure. It is quick.
It is easy.
Most patients don't even require a catheter. They feel the symptom relief right away. And again, avoids a lot of the potential side effects that come with those standard therapies. So this just solves a lot those issues that would prevent someone from being enthusiastic about
doing something when drug therapy isn't working well for them. And I would just add Mike, we have the product has tremendous support from the American Urology Association. They are very positive on the product because they can see, especially now with the LIFT five year data that the product is very efficacious and has very, very solid patient outcomes.
Okay. Thanks. And then I understand there's obviously a huge amount of growth potential with single product, but just curious if you think there's any kind of pull through opportunity with some of your other urology products. Can having this in your quiver kind of help you from a branding perspective or help you sell some of the more commoditized type of products in that bag?
So I think from a sales execution standpoint, we want to keep this separate because it's a very high margin product. And therefore, we want the sales force to be focused on selling the highest value products that we have within Teleflex. I think as we get to overseas, we have a pretty solid endourology business in parts of Europe and there may be some opportunities there. And obviously, when we are at conferences and exhibitions, there's obviously an opportunity to talk to these urologists about some of our other surgical urology products that we have available in our bag and we might get some revenue synergies there. But again, we haven't built any revenue synergies into this model and they we don't expect them to be significant.
All right. Fair enough. Thank you.
Thank you. And our next question comes from the line of Chris Cooley with Stephens Inc. Your line is open.
Thank you. Appreciate you taking the questions. Just two at this point for me. Maybe Tom, would you walk us through the underlying assumptions? You mentioned that the return from the acquisition was expected to equal the cost of capital in its third full year and exceed it in its fourth.
Just kind of curious if you can maybe give us some broad strokes on what type of investment both in the sales force as well as maybe from a capital standpoint from manufacturing as I think you alluded to better margins over time would be implicit there. And then just as a follow-up I guess then for everyone, if I'm hearing this last line of questioning correctly, is the real gating factor for this technology at this point just the fact that it has a limited indication only applicable to about ten percent of that dropout rate. And so can I make the assumption that with the second gen, it's now applicable to one hundred percent of that targeted dropout market rate? Thanks so much.
So Chris just before I give it to Tom, I would just want to clarify that point. Ten percent of the patients have a median lobe. Our product is applicable to ninety percent of the patients.
Okay. Okay. Thank you.
And now once we lose if we can move and we plan to remove that contraindication and therefore it will be applicable to one hundred percent of the patients with a prostate that's 80 grams or less.
Understood.
Okay. And with regard to the returns, so in terms of the investment, we'll obviously put in the upfront purchase price milestones will go in. CapEx does not require that significant investment. You know, we're talking kind of the 5,000,000 to $8,000,000 per year range of CapEx, so not that significant there. In terms of sales force investment, you know, as mentioned, we expect to maintain this as a standalone business unit.
We look to continue to invest in the sales force. So what you should expect to see is, you know, continued growth in the selling line reflecting that investment.
Understood. If I could just maybe squeeze one other quick one in. Is there any further publication here near term? Because I think the LIFT data was originally published in Europe at the start of this year. Is this I mean I guess more directly put, how would you characterize domestic awareness?
Is it limited because of the type of unfortunately being a smaller independent company maybe versus a larger integrated entity selling into this space? Or just trying to get a gauge of what you think the overall awareness is of the technology and its clinical benefit?
So I would say awareness within the urology community is excellent and continuing to grow rapidly as more become aware of this technology. Patient awareness is dependent on the urologists having the conversation with the patient. And I think that is an area where we will continue to put some focus. And that is also growing rapidly. But with the patient population that is available to, I think that's going to be an important aspect is getting that communication and to the patients directly.
So they're aware this procedure is minimally invasive, very efficacious. And there are always clinical studies going on, Chris. And clearly, we will follow-up on the list with eight year data and with ten year data that will be the goal to continue to show efficacy of the product longer term.
On the transaction.
Thank you very much. Thanks.
Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Jake Elgouise for any closing remarks.
Thanks, operator, and thanks everyone, for joining us on the Teleflex Incorporated NeoTract acquisition conference call this morning. That concludes the call. Have a nice day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.