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. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Jake Elguicze, Treasurer and Vice President of Investor Relations. Sir, you may begin.
Good morning, everyone. Thank you for joining us on this conference call to discuss the announcement we made this morning regarding the acquisition of NeoTract. 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, and a replay will be available by dialing 855-859-2056, or for international calls, 404-537-3406, passcode 79859449. 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. 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-K, which can be accessed on our website. With that said, I'd like to now turn the call over to Benson.
Thank you, Jake. 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 turn the call over to Liam, who will provide an overview of NeoTract and how their product works, 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&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&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. 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 Vascular Solutions, we told our business development group to continue to look for that next great asset. It is our belief that we found it in NeoTract. Founded in 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.
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 Vidacare, 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 and constant currency revenue growth. NeoTract has experienced robust clinical adoption and significant revenue growth since initiating product commercialization in 2014. 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 NeoTract's gross margins, which exceed 70% today, as well as allow us to capitalize on a significant international infrastructure to drive further penetration of NeoTract's UroLift system outside the U.S. As some background, during 2015, NeoTract generated revenue of approximately $18 million. This quickly accelerated to approximately $51 million during 2016. While during 2017, we estimate that revenue will be between $115 million-$120 million, and that 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 510 clearance by the FDA in 2013, NeoTract's UroLift system has been the subject of significant number of studies in urology. 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, NeoTract has 62 issued patents and another 30 patents that are pending. This helps create a very wide competitive moat with significant barriers to entry. As you recall, two of the key tenets of Teleflex M&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 NeoTract checks both of these boxes.
Turning to reimbursement, NeoTract's UroLift system has broad and sustainable reimbursement already in place. That includes dedicated category 1 CPT codes specific to the UroLift system procedure, as well as 100% coverage by Medicare, which translates to approximately 174 million covered lives in the U.S. 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 NeoTract 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.
We do not anticipate adjusting our previously provided 2017 adjusted earnings per share guidance range as a result of the transaction. Turning to 2018, it is our belief that the acquisition will become breakeven, while in 2019, we expect that it will contribute between $0.35 and $0.40 of adjusted earnings per share, and that it will be increasingly accretive thereafter. Turning next to the details of the transaction. Teleflex will be purchasing NeoTract for an amount that is not to exceed $1.1 billion. This consists of an upfront cash payment of $725 million at closing and up to an additional $375 million upon the achievement of certain commercial milestones related to the sales through the end of 2020. It is important to understand that maintaining moderate gross leverage levels continues to be an objective for Teleflex.
Following the release of second quarter earnings and prior to entering into this acquisition, we assessed cash located outside the U.S. and repatriated it back to the U.S. and repaid our revolver borrowings by $475 million. This debt reduction allowed us to reduce our gross leverage level to approximately 2.5 times in advance of entering into the NeoTract acquisition. We intend to finance the transaction at closing through borrowings under our revolving credit facility. It is also important to understand that this management team has a proven track record of successfully integrating acquisitions and quickly de-levering. It has been the case for the last three sizable acquisitions that Teleflex completed, LMA, Vidacare, and Vascular Solutions, and it is our belief that we will be able to rapidly de-lever 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 30 days. That completes my prepared remarks. I would now like to turn the call over to Liam for him to provide you with an overview of NeoTract 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, NeoTract'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, heating, or removing prostate tissue. NeoTract has approximately 70 direct salespeople within the U.S., 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 NeoTract's international registrations, such as in Japan, coupled with Teleflex's established international footprint.
Over the past several years, NeoTract'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 NeoTract 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 NeoTract's 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. As they age, BPH becomes increasingly more common in men. In fact, as the data on this slide indicates, approximately 40% of men in their 50s suffer with BPH, while approximately 90% of men in their 80s do. This translates into approximately 22 million men in the U.S. alone who live with moderate to severe symptoms, 12 million of which are actively managed BPH patients. I've spoken many times of the aging population in the U.S., 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.
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 NeoTract's UroLift system, which we estimate to be greater than $30 billion. Today, the patient population that NeoTract UroLift product focuses on are the 8.5 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, there are approximately 1.5 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 billion. 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 cystoscopic BPH diagnosis procedure. This procedure starts with lidocaine first being applied to the urethra, 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. Why are healthcare systems adopting the NeoTract UroLift system? 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 L.I.F.T. 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&A criteria of providing hospitals with better clinical alternatives while correspondingly providing them with a cost benefit. We also are quite enthusiastic regarding NeoTract'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 offerings. That completes my prepared remarks. I will now turn the call over to Tom for him to provide you with a financial overview of the transaction. Tom?
Thank you, Liam, and good morning, everyone. Before I get into the financial benefits of today's acquisition, I am pleased to tell you that in a separate and unrelated transaction, Teleflex created a pathway to tax efficiently repatriate approximately $850 million of international cash. $465 million was repatriated in August, and we expect to repatriate the remainder over the next several years. Using the recently repatriated cash and other cash on the balance sheet, Teleflex repaid $475 million of revolver borrowings, thereby reducing our gross leverage to approximately 2.5 times in advance of this transaction. The $725 million 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 million through free cash flow generation of the combined entity and through future repatriations of international cash.
Post-closing, we may look to opportunistically term out approximately $500 million of revolver borrowings. Pro forma 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 de-lever fairly quickly. Turning on to NeoTract 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 NeoTract, 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, NeoTract 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. We are maintaining our previously provided adjusted earnings per share guidance range. We expect that the acquisition will break even 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 fourth quarter of 2017 and also includes expense related to the resumption of medical device tax beginning in 2018.
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 that NeoTract 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. 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&A.
Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Thank you. 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 NeoTract, and does that change at all under Teleflex leadership? Thanks.
It's Liam here. 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. 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. Just kind of 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 effective, and the way that they train the clinicians to use the product, and they adopt a strategy of going deep rather than going wide. 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. The plan is that in the first quarter of 2018, we will roll out the UroLift 2 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 1 to UroLift 2. The UroLift 2 offers a significant advantage to the customer, we think that they will adopt to this very quickly.
You can leave the scope in during the procedure, so you visualize 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 or the site center to have to dispose of. There's nice advantages to this product over the UroLift 1. We think adoption will be rapid.
Thanks, guys.
Thank you. Our next question comes from the line of David Turkaly with JMP Securities. Your line is open.
Good morning.
Good morning, Dave.
How are you? Just to go back quickly on the strategically here, an update. We look at LMA, Vidacare, Vascular Solutions, certainly all growth companies. This is really hyper-growth. Obviously, the price kind of reflects that. 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?
I'll take that first, and then Liam may have some color to add. To answer the last part of your question, yeah, we feel really confident. This, in many regards, has some similarities to Vidacare, 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. It does have a very high growth profile, probably higher than anything else we have, certainly of that size, in our bag. It's for that latter reason that we've largely decided to have most of NeoTract, in fact, substantially all of NeoTract, remain as a standalone business within the Teleflex franchise. They will be continuing to operate as they have been for the last several years. That will certainly ease the integration process.
We've also reached key agreements with the senior management of NeoTract to stay in place for several years during the transition. We think that will help. 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. We expect this to be seamless in terms of the change of ownership over the next couple of years. You're right, to get to your question about are we going to buy more NeoTract, if we can find them we'd be keenly interested in them. There's not many devices 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.
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. Appreciate that. Yes, I was familiar with the NeoTract folks. Just to refresh our memories here, I want to say that I thought the ASP on these devices were somewhere around maybe $4K to $5K for a procedure which would maybe be four to five implants. Is that ballpark fair still? 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. It depends on the site, but the net payments for an in-office is close to $750. In an ASC, it's $3,000, in a hospital setting, it's $3,800. Those are the net payments. If we just look at the hospitals, compare that $3,800 to a TURP, a TURP is $2,260. 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. The long-term studies, the L.I.F.T. study, showed 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.
Yeah, just to summarize the part of your question, there is no economic disincentive for the urologist to choose a different therapy over this.
Thanks, congrats on the deal.
Thank you.
Thank you. 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, Benson, just to start off, you're obviously acquiring a disruptive growth asset in a space you don't materially play in currently at a premium. What does it say about your confidence in your underlying organic growth? Are you still comfortable in mid-single-digit organic growth excluding NeoTract at the Analyst Day this November?
I'll take that. Yeah, I would say the short answer to your question is yes. We believe that certainly our non-NeoTract business has the same potential it had before we began entertaining thought and interest in the NeoTract product. It is slightly outside of our existing call point. We certainly see this as part of our larger surgical business. Again, intend to maintain this as a separate focus of operation.
Yeah. Again, given our guidance for the year of, if you exclude the VSI acquisition of 4%-5% at the half year, we were at 4.6% versus our guidance. We feel pretty confident on where we're at through the half year, as we said on our earnings call, David. Obviously VSI will roll off and add a percent to that once it comes off the M&A accounting methodologies. This will just accelerate our growth beyond that. 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.
None of our existing sales resources, which are driving net growth, are going to be siphoned off to be able to drive this growth. 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 was a mid-single digit organic grower. That's where you were heading, and that's your guidance sort of this morning, is that NeoTract increases your confidence in mid-single digit organic growth, yet NeoTract should at least add 2 points of operational growth once it becomes part of the business. It just seems that that mid-single digit is either conservative or your expectations for the core are a little lower. It sounds like perhaps conservative is the answer.
We have not changed our expectations for the core.
This adds about 1%-2%, David, as we said in our prepared remarks. That's just simply because the denominator gets bigger.
Yep. Sure. Okay, Liam, just in following up, I think the reimbursement question was interesting here. There's certainly no disincentive to use this procedure. There is actually a favorable reimbursement for the physician. 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 that those two hold? I had one final question for Liam.
Yeah, sure. First of all, I'd like to say that the CPT I code uses specific language that is unique to the UroLift System. 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, 7-10 years. The CPT I code being so specific meant that they would not be able to attach onto that. We also used some external companies to assist us in looking at the environment. The feedback from that was it was very unlikely to be any change to the reimbursement environment over the coming years. We have a high level of confidence reimbursement will continue. 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. The whole environment is beneficial to the hospitals and the ASCs that are performing this procedure.
Okay. Very helpful. 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 under-penetrated. Is you really going to focus ex-U.S., or is the core focus here the next two to three years really the U.S. penetration? Thanks so much.
David, an excellent point. 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. 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 non-invasive medical devices, and we think that will be another opportunity for this. We have a footprint, as everybody knows, overseas, and will give us an opportunity to penetrate that market probably faster than NeoTract would've 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. We look at, obviously, a multi-year extended product growth cycle for this. 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. 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 med tech tax, can you just remind us 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'd be about $0.04 and increasing to $0.05 and $0.06 in the later years.
Okay.
Yeah, actually, I'll correct it. It's always been in our 2018 forecast. Because it was temporary, we had not removed the med tech device tax from our 2018 forecast.
Yeah. The numbers I cite are relative to NeoTract alone.
Oh, so sorry. I'm talking about for Teleflex, what the contribution is because it's been out of numbers. When it comes back in, just what's the amount of hit to Teleflex? Was that the amount for Teleflex or were you saying?
When we took it out.
With NeoTract.
two years ago, it was roughly $12 million.
Okay.
Yeah.
Yeah
It's Jake. I think we're not today giving guidance on 2018 for Teleflex, obviously. We'll talk about that when we ultimately give guidance for the company, and that'll probably be in the February timeframe of next year. The numbers that Tom referenced were just NeoTract only.
Okay. When we think of the accretion that you've given us for 2019 and then the neutrality impact to EPS for 2018, we should be thinking of that off of a med tech tax impacted number.
Correct.
Okay. Got it. Just going back on 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. 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. 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 growing. You are correct that the majority of the growth will be coming from the U.S., with a small contribution, a reasonable %, but a small growth dollar. 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 and reimbursement in some of those key geographies.
Okay. Anything on the competitive horizon that we should be aware of or to keep an eye on here, and that you, 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 it. Some of the IP runs to 2028, others to 2033, and there are also opportunities to file for additional IP that we saw during our due diligence. 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 7+ 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.
Yeah. Just in general, obviously for decades, the standard treatment for BPH had been a transurethral resection, which had been delivered through an electrosurgical device. In more recent years, there has been a drift towards ablative therapies. There are some improvements that are going on in ablative therapies, but they still require a catheterization period afterwards, and it takes up to 90 days for the patient to feel any symptomatic relief. There are greater issues in terms of side effects relative to sexual function and other areas. 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, congrats on the deal.
Thanks.
Thank you.
Thank you. Our next question comes from the line of Lawrence Keusch with Raymond James. Your line is open.
Thanks. Good morning, everyone.
Morning, Larry.
Just, I want to go back to the international expansion opportunities. It sounds like Japan is in process. Again, I just want to make sure I'm understanding it correctly, that process to move that product into that region is actually underway. I assume there are other areas for product registration that you can go after over the next couple of years. What would be the other big market opportunities here?
Okay. Let me start with Japan. It's in process insofar as that NeoTract had a meeting with PMDA. The submission is expected towards the latter quarter 4 of this year. Larry, that takes anything from a year to 18 months to work through the system. Because it's a novel technology, 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 under-penetrated. Doing reasonably well in the U.K., but a lot of penetration to go on within other parts of Europe. If you look at the number of men that suffer with BPH, you've got 12 million in the United States, you've got 14 million in Europe, and you've got 45 million in Asia.
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, then moving into China, where we will do the registrations within China. It's already reimbursed in Australia. In Latin America, there's another 11.3 million patients. That's more longer term and be a little bit more opportunistic in the medium term. 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. I guess, two quick ones potentially for Tom. Just, again, I want to make sure I got this correctly. It sounds like you are anticipating terming out some of this in the fourth quarter. 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. 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. 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 million in size, and we expect there to be about 125-150 basis point spread between our cost on the revolver versus high yield. Right now we'd expect high yield pricing somewhere in the five-ish range. That's built into the model going forward. With regard to the outlook and upside, are you referencing the broader Teleflex financial projection?
Yeah. For 2017.
We don't intend to update guidance for Teleflex on this call. Rather, we were incorporating the impact of this acquisition. We continue to drive towards delivering the numbers we guided to at the last earnings call. I think we cited a couple 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.
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.
Terrific. Thanks, guys.
Thank you. Our next question comes from the line of Matthew Mishan with KeyBanc. Your line is open.
Good morning, thank you for taking the questions.
Good morning.
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 million acquisition or a $1.1 billion acquisition?
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 happy we paid the milestones because this will have exceeded or achieved our expectations on the revenue line. We're looking at this as a $1.1 billion transaction because we firmly believe that we're going to achieve those revenue milestones and to pay the $1.1 billion. Obviously, you'd want to look at the net present value of that which would be reduced from that $1.1 billion figure, because clearly the milestones are paid in years out.
I would say just in terms of the realism of the milestone payments, if you looked 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 milestones. That's kind of a background gauge we use in terms of assessing the likelihood that those payments will be made. As Liam said, we'd be delighted to make those payments.
Okay. That's very helpful. I think in your prepared remarks, I think you mentioned expanded indications for use. 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. That will give us another 10% access to that patient population.
All right. Thank you very much. Congratulations on the deal and the repatriation.
Thank you.
Thank you.
Thank you. 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. 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?
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 80% of the BPH cases. 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 and adoption rate as well above the standard curve that we would expect with a technology that is this novel.
Okay. 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 you even talked about accelerating that, what that could look like over the next couple of years?
Actually, one thing NeoTract have done really well, Raj, 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. They have been very focused on training everybody within that urology center, from the urologist to the administrators, so they can work through the reimbursement. They have done an excellent job. 900 of the, as I said, urologists are trained of a total of 5,500. Still significant ways to go. The target is really focused on when you have completely trained one urology center. 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.
In those currently trained urology centers, what they are seeing is an increase in utilization. As they get into your urology center, train the urologist, the utilization increases. A lot of their revenue is actually coming from existing centers that have been trained. To give you a little bit of a benchmark on that, I think that their revenue by customer type, existing customers in the quarter 2 contributed 66% of the growth. That's an important benchmark. Rather than just look at it as a target of training urologists, they and us will be more focused on getting a return per urology center and going deep rather than wide. We will continue that strategy.
There's another, I think, important consideration or understanding about this product is there's a fairly large segment of patients who are initially prescribed drugs. That's the first line of treatment for these patients. They are unhappy with the side effects, but they are also uncomfortable with the idea of going in for a TURP. 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 blade or for TURP. Part of this is educating the urologist about having that conversation with that patient who's unhappy with their drug regimen and getting them to start offering this as an alternative. To Liam's point, that's where that go deep strategy has really paid off.
No, it's helpful. Maybe just another point of clarification. Within those centers that you've trained, so those urology practices, do you have any statistics or data on what percentage of the BPH procedures UroLift captures within those practices relative to laser or some of the more resective procedures?
The penetration rate is pretty low at this stage, which is what makes it so attractive to us, that there's such a market to go after. Of the total $30 billion 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 1.5 million 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. That's a $6 billion 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 billion market in the United States.
No, no. Understood. I was more getting at within urology practices that you've 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. I think it does go back to the penetration, 1% is the penetration.
No, understood. Yep.
Yeah.
Understood. Maybe just lastly.
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. 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 million covered lives. 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?
There are only three payers that don't cover at this stage. We are obviously following up with the L.I.F.T. data, the five-year data. The more data we get, the more compelling the argument is. The level of penetration is pretty high. Obviously, Medicare is 100% covered. Sorry, what was the second part of your question, Raj? I apologize.
Well, I was curious what the average age was.
Average age. Well, the condition is that the product is indicated for people 50 years plus. As you saw on the slide, BPH becomes more prevalent the older you get. 40% in men in their 50s, up to 80% in men in their 80s.
I would just add that one of the really important milestones that UroLift just recently passed was the publication of their five-year data. We think that will go a long way in convincing those few remaining carriers who don't cover it, because there was some questions about, okay, how long will this last for? That was a question that was in some urologists' mind, and the five-year data is 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 to additional coverage and answering those same questions from urologists.
No, it's helpful. Thank you, congratulations.
Thanks, Raj.
Thank you.
Thank you. Our next question comes from the line of Mike Matson with Needham & Company. Your line is open.
Good morning. Thanks for taking my questions.
Good morning.
Good morning, Mike.
I 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.
One thing that's come through in our research and UroLift adoption is about knowledge. It's about educating, first of all, the urologist 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, the 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 15 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 this or minimally invasive this procedure is. 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.
Okay, Tom.
I'm at that age where when I'm sitting around the golf club, this topic comes up a lot. I would say there's nobody at the table who's gone through a TURP or even an ablative therapy who goes, "Oh, you guys should have one of those." 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. Again, avoids a lot of the potential side effects that come with those standard therapies. This just solves a lot of 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, the product has tremendous support from the American Urological Association. They are very positive on the product because they can see, especially now with the L.I.F.T. five-year data, that the product is very efficacious and has very solid patient outcomes.
Okay, thanks. I understand there's obviously a huge amount of growth potential with this 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?
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 product 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. 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. Again, we haven't built any revenue synergies into this model, and we don't expect them to be significant.
All right, fair enough. Thank you.
Thank you. Our next question comes from the line of Chris Cooley with Stephens Inc. Your line is open.
Thank you. Appreciate you taking the questions.
You're welcome.
Just two at this point from 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 could 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. 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 10% of that dropout rate?
Can I make the assumption that with the second gen, it's now applicable to 100% of that targeted dropout market rate? Thanks so much.
Chris, just before I give it to Tom, I just want to clarify that point.
10% of the patients have a median lobe. Our product is applicable to 90% of the patients.
Okay. Thank you.
Now once we plan to remove that contraindication, therefore it'll be applicable to 100% of the patients with a prostate that's 80 grams or less.
Understood.
Okay. With regard to the returns, in terms of the investment, we'll obviously put in the upfront purchase price. Milestones will go in. CapEx does not require that significant of investment. We're talking kind of the $5 million-$8 million per year range of CapEx. Not that significant there. In terms of sales force investment, as mentioned, we expect to maintain this as a standalone business unit. We look to continue to invest in the sales force. What you should expect to see is continued growth in the selling line reflecting that investment.
Understood. If I could maybe squeeze one other quick one in. Is there any further publication here near term? Because I think the L.I.F.T. data was originally published in Europe at the start of this year. I guess more directly put, how would you characterize domestic awareness? Is it limited because unfortunately being a smaller, independent company maybe versus a larger integrated entity selling in this space? Just trying to get a gauge of what you think the overall awareness is of the technology and its clinical benefit.
I would say awareness within the urology community is excellent and continuing to growing rapidly as more urologists become aware of this technology. Patient awareness is dependent on the urologist 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. With the patient population that is available too, I think that's going to be an important aspect is getting that communication and to the patients directly. 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 L.I.F.T. with eight-year data, and with 10-year data, that will be the goal to continue to show efficacy of the product longer term.
Sounds great. Congratulations on the transaction.
Thank you very much.
Thank you.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press the star and then the number one key on your telephone keypad. Again, that is star one for questions. I'm showing no further questions at this time. I would now like to turn the call back to Mr. Jake Elguicze for any closing remarks.
Thanks, operator, and thanks to 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.