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Avanos Medical, Inc. (NYSE:AVNS)
Q4 2018 Earnings Conference Call
Feb. 26, 2019 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Avanos fourth-quarter 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dave Crawford. Please go ahead.

Dave Crawford -- Vice President, Treasurer, and Investor Relations

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos fourth quarter earnings conference call. With me this morning are Joe Woody, CEO; and Steve Voskuil, senior vice president and CFO. Joe will begin with a brief review of our 2018 accomplishment, followed by an update on the outlook for our business and an overview of our 2019 priority.

Then Steve will review our results, offer details on our financial performance and share our earnings outlook for 2019. We'll finish the call with Q&A. A presentation for today's call is available on the investors section of our website, avanos.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions and our industry.

No assurance can be given as to the future financial results. Actual results could differ materially from those in forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today's press release and our prior filings with the SEC. Additionally, we'll be referring to adjusted results and outlook.

The press release has information on these adjustments and reconciliations to comparable GAAP financial measures. Now I'll turn the call over to Joe.

Joe Woody -- Chief Executive Officer

Thanks, Dave. Good morning, everyone, and thank you for your interest in Avanos. 2018 was a year of transformation and achievement as we completed the S&IP sale, increased investment to accelerate growth and initiated our cost savings program. I'm pleased with our performance against the five priorities outlined last year.

First, build on our top-line momentum. Second, close the S&IP divestiture and deliver on our TSA commitment. Third, execute strategic investment to accelerate growth. Fourth, begin to rightsize our cost structure to support our leaner, more agile business.

And finally, strategically deploy capital through M&A. I will review these accomplishments and their expansion in 2019. First, we sustained our top-line momentum in 2018. For the year, sales grew by 7% to 652 million, slightly ahead of our revised expectations, and we earned $1.93 of adjusted diluted earnings per share, exceeding the high end of our outlook.

We continue to see strong demand for our Coolief, digestive health and respiratory health products throughout the year. Combined, these businesses grew 8%. Additionally, organic sales in the international markets increased from 1% in 2017 to 5% in 2018 in constant currency. As discussed during our third-quarter conference call, the regulatory issues around the industrywide drug shortage and pre-filler disruption continued to pose challenges for our acute pain customers.

This, coupled with the inventory consolidation initiatives of two of our IV infusion distributors, impacted our overall performance for the year. The number of customers working with our exclusive pump-filling partner continued to increase as we saw a 25% increase in sales in all Leiters accounts for the quarter. In addition, drug supply for ropivacaine is beginning to return to the market, and we expect it to take several months to work for the supply chain based on our experience last year when supply was interrupted. We continue to see significant growth potential for acute pain, Given the large addressable market of more than 20 million applicable U.S.

surgical procedures annually and the growing demand for surgeons for effective opioid-sparing pain treatment. Our well-trained sales force has focused not only on expanding market penetration in orthopedic pain and healing but in new growth areas for us, such as OBGYN specialties or ON-Q and make a meaningful difference in patient's lives by enabling opioid-free C sections and hysterectomy. Our second priority was to complete the S&IP divestiture and deliver on our TSA commitment. We are pleased to be progressing as scheduled with our TSA commitment.

Our third priority was to accelerate strategic investment to drive our near- and long-term growth with the goal of achieving sustainable, high single-digit growth over time. Our investments were focused on three key areas: interventional pain, R&D and international. Let me highlight some examples. First, in interventional pain, our fastest growing business, we made significant investments in Coolief, the only FDA-cleared RF treatment for OA knee pain.

These investments are in advance of the expected 2020 CPT1 code for genicular nerve oblation. To raise patient awareness of our unique and effective therapy, we launched our first direct-to-patient television commercials in selected U.S. market. We were excited about the results, which generated a 35% sales lift in those markets over our normal growth expectation.

Also, we saw a significant increase in patient awareness. Additionally, to further differentiate Coolief and bolster our position in the payer community, we increased our investment in clinical research. As a result, company-driven Coolief publications have grown from just one in 2016 to an expected seven in 2019. Three key studies, when published, intend to show Coolief's benefits against the use of steroids for the treatment of knee pain, the health economic benefit for Coolief and new results for our study against hyaluronic acid for knee pain, which could enable us to target this billion-dollar market.

We're optimistic about the study and expect to publish more details in the near future. In addition to raising awareness, we're advocating for the adoption of reduced in-door non-opioid alternative to help combat the opioid crisis in the U.S. To this end, we strengthened our government relations efforts. Members of my leadership team and I have met personally with members of congress to lobby for improved reimbursement of opioid-sparing therapy.

We're encouraged by the opioid crisis response act, which contemplates the removal of financial incentives for prescribing opioids rather than medical devices, such as ON-Q and procedures like Coolief. Furthermore, we have strengthened our reimbursement capabilities. When I started a year and a half ago, our reimbursement team was a single person. Today, we have built a team of nine, primarily focused on expanding coverage for Coolief but also working on several initiatives in our ON-Q business.

Second, we continue to investing in R&D to strengthen our capabilities to commercialize new products and to build a robust pipeline of innovative medical devices. Our increased investment and breakthrough technologies are showing signs of returns. We were one of eight companies for more than 250 submissions selected by the FDA for its opioid innovation challenge. In addition, we continue to make strong progress across our breakthrough initiatives and are excited to be starting our first in-patient trial around new methods to treat postsurgical pain.

Turning to international, we increased our focus on this business, restructured the leadership team and prioritize our investment around selected growth market. Arjun Sarker leads this business and has laid out his strategic plan and growth framework, which includes prioritizing geographies where we can win and build scale, acquiring top device industry talent, evaluating our distribution channels and determining how to rationalize our channel partners. Overall, we expect international's growth rate to accelerate each year and become a double-digit grower by 2021. These are just three areas of strategic investment we made in 2018 to position us for future growth.

Transforming our cost structure was another 2018 priority. As we've mentioned on previous conference calls, we're taking a phased approach to this transformation. As a reminder, the first phase was the rightsizing our organization to align with our growth model. Second was our IT restructuring, where we've initiated deployment of our new ERP system.

When the implementation is completed in late 2019, it will reduce our structural cost, enable more efficient inventory management and improve the information available to speed up and enhance decision-making. The third phase, which is supposed to begin later this year, will optimize our power supply, global distribution and network and procurement. To drive this process, two months ago, I appointed Dave Ball as senior vice president of global supply chain and procurement. I'm excited to have Dave as a member of my senior leadership team.

In my previous experience with him, he has demonstrated the ability to optimize cost structure, drive continuous improvement programs and increased efficiencies in manufacturing. Combining the three cost transformation phases, we anticipate reducing cost by 30 to 40 million by the end of 2021. These savings will be initially reinvested to help accelerate our growth. Strategically deploying capital through M&A to drive shareholder value was our final 2018 priority.

I am pleased with the game ready acquisition. It's meeting our expectations, and we expect its growth to be faster than our organic growth rate. Moreover, it strengthens our access to the orthopedic and healing call points, broadens our access to postoperative pain management market and demonstrates our disciplined approach to capital deployment. We are committed to executing deals that meet our criteria, and we will remain disciplined ensuring our acquisition criteria are met.

Our pipeline remains robust, and we are evaluating potential deals ranging in size that will complement our business. Now I want to highlight our core priorities in 2019. First, accelerating top-line momentum remains our top priority. To drive growth, we will increase investment.

We continue to see our chronic care business as a mid-single-digit grower and expect to launch multiple new products to maintain our leading share positions. We're also investing behind our market-leading Cortrak tube-tracking technology as our goal is to establish it as the standard of care for bed-side placement of small-bore nasoenteric feeding tubes. Chronic care also provides the foundation for us to accelerate our international growth in the near term. To build on our momentum in Coolief, we've already expanded our successful direct-to-patient advertising into 13 new and large U.S.

market, accelerating investment for new clinical trials and expanding the sales team by 20%. We have seven clinical studies currently under way and in total, 13 planned over the next three years. During the first half of this year, we expect six-month results from the hyaluronic acid study to be published, as well as the health economic study that shows nerve ablation is more cost effective than the current standard of care. Turning to acute pain, we're focusing on regaining growth.

As the drug supply gradually improves, we anticipate our sales performance will begin to meaningfully accelerate in the second half of the year. Second, on the international front, we'll continue investing in our growth framework, including strengthening our sales and marketing capabilities and hiring regional management and customer-facing roles. Again, we see this business as a double-digit grower over time. Similar to 2018, our investments will temporarily impact margin.

But we expect these investments to lead to accelerated growth and significant market expansion after 2019. Also, post-2019, we will curtail our level of investment once we've established an appropriate level of support for our future growth initiatives. Turning to cross transformation. This year, we will begin the third phase and execute on multiple projects.

These include simplifying our current distribution network to optimize transport cost, enhancing productivity in our plants through product insourcing and the phased rollout of our new IT platform that will simplify, streamline and standardize our global systems and processes. We anticipate providing more details about the next stage of our cost takeout program during the second quarter. Overall, we expect savings of 7 to 10 million in 2019. With the establishment of our IT infrastructure, we expect additional savings of 14 to 18 million in 2020.

And finally, deploying capital for M&A will enhance our plan. We are well positioned to succeed in 2019 as a pure-play medical device company. Our diverse product portfolio and leading positions in large, growing market, our scalable infrastructure, our focus on key strategic initiatives and our talented team give me confidence, we'll accelerate growth. With that, I'll turn the call over to Steve.

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Thanks, Joe, and good morning, everyone. Let me also say how pleased I am of our accomplishment and the effort of our teams throughout the year. As Joe said, completing the S&IP divestiture was a major accomplishment, which transformed us into a pure-play medical device company and enabled us to focus on accelerating growth and increasing investment in our strategic growth initiative. These investments are paying off and position us for success in 2019 and beyond.

Now let's begin with a review of our fourth-quarter result. Overall, we delivered sales of 170 million, an increase of 2%. Sales from our game ready acquisition contributed 5% of the growth. Excluding game ready, we saw another quarter of double-digit growth in interventional pain, driven by our continued investment in direct-to-patient advertising and the increased adoption of Coolief.

In digestive health, demand remained strong for our Corpak and legacy enteral feeding product. In respiratory health, growth was below its normal mid-single-digit rate due to the expected reduction in our lower-margin oral care business. Growth was offset by the expected lower volumes in acute pain due to the continuing regulatory issues impacting the industrywide drug shortage and drug pre-fillers, along with the impact of inventory consolidation between several of our IV infusion distributors. During the quarter, our ON-Q franchise performed ahead of expectation but was offset by our lower-margin IV Infusion category.

Overall, these factors resulted in lower sales volumes of 2%. Unfavorable product mix and lower selling prices impacted results by 1%. For the quarter, adjusted gross margin of 60% was in line with our expectation and compared favorably to 55% last year, which included costs previously allocated to the S&IP business. Sequentially, adjusted gross margin contracted due to last quarter's above-average manufacturing performance and the planned downtime in our manufacturing site.

Adjusted operating profit came in at 20 million for the quarter compared to 7 million a year ago, and operating margin was 12% compared to 4% last year as last year's results were impacted by 30 million of cost allocated from discontinued operation. As we discussed, we continue to increase investment for near- and long-term growth. The higher level of investing, coupled with the expected the dyssynergies from the S&IP divestiture, impacted operating profit. Adjusted EBITDA for the quarter was 22 million compared to 64 million a year ago as results from last year included discontinued operation.

Adjusted net income totaled 14 million compared to 35 million a year ago. For the quarter, we earned $0.30 of adjusted diluted earnings per share, which was above our expectation. Two factors contributed to our strong performance: First, net sales came in above expectation, largely driven by chronic care as we continue to see distributors holding elevated level of inventory in our digestive health product. We expect during the first quarter, inventory will revert to its normal level.

Second, we saw a favorable adjusted tax rate due to a change from our initial assumption when the final purchase price allocation for our S&IP divestiture was completed. Now for a brief recap of our full-year 2018 result. Net sales totaled 652 million, an increase of 7% compared to the prior year, including game ready, which contributed 3% of the growth. As a reminder, due to the divestiture, we were required to allocate shared costs previously allocated to the S&IP business entirely to continuing operations in the prior year and for the first four months of 2018.

Prior to closing the transaction on April 30, 2018, four months of these previously allocated costs to S&IP totaled 37 million and were allocated to continuing operation. For the full year of 2017, these allocations totaled 116 million. As a result, our year-over-year comparisons are skewed. With that, for the year, we delivered adjusted diluted earnings per share of $1.93 compared to $2.35 in the prior year.

Shifting to our balance sheet. We ended the year in a strong financial position with 385 million of cash on hand. Our balance sheet remained strong and we are well positioned to invest in future growth initiative. Now let me turn to our 2019 outlook and the key planning assumption.

Based on current trends in our business, including our expectation for improved acute pain performance, beginning in the second half of 2019, we expect net sales on a constant currency basis to increase 6 to 8%, including game ready, compared to the prior year. As I've mentioned, in 2019, we're making investments in our growth initiative, most of which will happen during the first half of the year. During the first quarter, we're expanding our Coolief direct-to-patient television advertising into new markets and are continuing to build our international team. Overall, we expect our investments for the first half of 2019 to exceed our second-half investment.

Also, in the back half of the year, we expect cost savings to build as we transition our focus from IT implementation to cost savings program. Given the acceleration of investment for the year, we expect to earn between $1.15 and $1.35 of adjusted diluted earnings per share. In summary, I'm confident, our increased investment will accelerate our growth. We have a strong financial profile and a disciplined approach to deploying capital to drive organic growth and execute M&A.

With that, operator, we are ready to take questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Larry Keusch with Raymond James. Please go ahead.

Larry Keusch -- Raymond James -- Analyst

Thanks. Good morning, everyone. Joe, I was hoping that maybe you could talk a little bit about the drivers or the components of the 6 to 8% growth. And I guess as part of that, what I'm really trying to understand is how are you mapping out ON-Q for the year?

Joe Woody -- Chief Executive Officer

So Larry, thanks for the question. We've said before that ON-Q is progressing quarter-to-quarter. We actually beat our internal goals in Q4. Drug is coming back, especially on the ropivacaine side, but really the second half is where we see the growth there.

Remember that our business outside of the drug supply was about 7 to 8% organic growth for the year. And the drivers are real similar, mid-single digit for chronic care. We're real -- also, really happy with Corpak, and it had its highest, best sales in the fourth quarter for us. And we think we have an opportunity to make that standard of care for hospitals and visualization for the placement of feeding tubes.

Coolief continues to double-digit growth in the overall business and then higher double-digit growth in Coolief. The investment that Steve outlined in the script, we're taking advantage of going to the 13 more markets in direct-to-patient. These clinical studies are going to help us with commercial payers, I think, differentiate us alongside as well of another platform coming out in the summer, a new platform in that category. So all of the same elements, if you sort of fall back to H1 2018 and saw that growth or sort of in place for us, and the drivers remain.

The one sort of unknown is the exact plan of when the drug comes back and the filler comes back fully for acute pain. And remember, also for us, game ready is about 3% organic growth for the year for 2019.

Larry Keusch -- Raymond James -- Analyst

OK. And just a quick follow-up on that one. So is it fair to assume that your assumptions built into that 6 to 8% growth for ON-Q are sort of similar trends in the 1Q from the 4Q? Or do we actually see some improvement there? And then are we actually normalized from your vantage point right now in the second half of the year? And then I guess, lastly, a question on M&A. You mentioned the pipeline was robust.

Again, any thoughts on your expectations to be able to get a deal done in 2019?

Joe Woody -- Chief Executive Officer

Yes. So the -- we expect improvement from Q4. And obviously, the big lever, Larry, is acute pain, and to the extent that we get into growth, let's say, in the end of the first half and start to see a better position for H2, that would be a big impact for the current plan. On M&A, our criteria remains the same, sort of we're focused in or around the channel and pain, obviously, and also enhancing the portfolio in the chronic care business.

We did get the one acquisition done in game ready, which we're very pleased with the performance. I think that's going to enhance orthopedic pain and healing. We actually had another one that we are very close to, and through diligence, we decided to back off. So the good news is we have a good discipline around that being the right deals for shareholders.

We have two sets of deals for '19. We have a number of sort of, let's call it, Corpak or game ready, more accretive deals, deals with EBITDA. And we also have a good batch of growth deals that are important as well for our business. I'm very confident that we would -- basically can transact at least one deal in 2019, if not more.

Larry Keusch -- Raymond James -- Analyst

Great. Thanks very much, guys.

Joe Woody -- Chief Executive Officer

Thank you.

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Thanks, Larry.

Operator

Our next question comes from Matthew Mishan with KeyBanc. Please go ahead.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Hey, good morning, Joe. Steve, first question is how confident are you that you guys would turn the growth in the first quarter of '19? And that these select 4Q issues are going to be relatively transitory? And can you tell us a little bit about the headwind you're going to be lapping in the flu?

Joe Woody -- Chief Executive Officer

So I'll start, and Steve can sort of add anything that he wants. One thing we talked about all the way back to Q3 is that Q1 has the potential to be softer for us because you've got the cold and flu season coming through, particularly in respiratory, then we obviously start to work our way out of that in Q2. We also talk about the ON-Q recovery. Still, with us, even though the drug for ropivacaine is back, it's working its way through the distributors, we did see a little bit of inventory build in digestive health in Q4 that could have a Q1 impact.

And then our investment peaks in Q1 because we're taking advantage and getting back into these direct-to-patient areas. Obviously, we have some spend around these clinical studies that we outlined, and we're actually driving, next week, a big global sales meeting that is very important and getting the training out across the whole world really for our initiatives for the year. But maybe Steve wants to comment a little bit further.

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Yes, just a little more color on the top line on the first quarter, Matt. Certainly, we'll have growth in total in the first quarter with game ready on top. I think from an organic standpoint, we can -- we'd like to be flat as we go forward. I think that might be a bit of a challenge.

And part of it is the still -- the ramp-up on the acute pain side. And one of the things I talked about on the call is we had a -- we had some distributor inventory building in chronic care toward the back end of the year, where I think we're going to see that start to bleed out in the first quarter, so we're having a little bit softer -- in addition to the flu impact, the year-over-year flu impact, we're having a little bit soft around the chronic care side in the first quarter. And I think a combination of the flu comp, the destocking by distributors and the acute pain side are going to put some pressure on organic growth sequentially. But then clearly, as Joe said, you look to -- look forward and over the quarters, as acute pain ramps back up and we have mid-single-digit expectations for chronic care on a full-year basis.

And then obviously, a big Q4, as we have acute pain fully back on the gas and have the seasonality and so forth. That's what kind of brings me back from the full-year guidance standpoint.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

OK. And then on Slide 9, I noticed that you have the cadence of savings from your cost initiatives. But it says that annual savings are reinvested for growth. Are all of the savings, like, not dropping down and going to be reinvested? Or is there a portion of that's going to kind of drop down the margin?

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Yes. So first off, we're getting the savings. So the savings are real. That 7 to 10, a portion of which is in the gross margin side, a portion of which is in the SG&A side, all actioned and all real savings, which will help to build upon as you see on Slide 9 going forward.

But we are investing this year all of that back into the business in one way or another. And if you think about -- just step back on, take SG&A as an example, you really have three things on SG&A in 2019. One is you've got some reset of targets from softer sales performance that we talked about in the past on 2018, significant investment behind Coolief and international, as Joe talked about on the remarks and then depending on what your comps is, some additional SG&A related to game ready for that half year that we pick up if you look year-over-year standpoint. So the savings are real.

The savings are coming through, but we're choosing, just given the opportunity we have on Coolief with that CPT code coming in 2020 to be on the gas from building that business this year.

Joe Woody -- Chief Executive Officer

Yes, I think the only thing I would add, Matthew, Steve's outlined it very nicely, it was a strategic decision part on our part because we've talked about getting back to mid-single digit, but our real goal is high single digit and then double digit. And we just have such an opportunity right now with the CPT code, with direct-to-patient advertising and even some things that we're doing across the other business and in particular, also international, which by the way grew high -- or mid-single digit for the fourth quarter and is going to improve from there for the full year. And so obviously, putting the people in place there. These are things that are going to really get us to that high single digit in the longer term.

So again, it was very strategic decision.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

OK. Got it. And lastly, on the free cash flow. It was another outflow for the fourth quarter.

What is still driving that? What are your expectations for 2019 and some of the major moving pieces for that free cash flow? And with the 2018 outflows, did it change any of your dry powder expectations for M&A?

Joe Woody -- Chief Executive Officer

Yes. Great question. Maybe I'll just walk right through those pieces. So you're right, from a Q4 standpoint, negative free cash flow, really three bigger pieces inside there.

Actually, CAPEX is one. We spent 18 million on CAPEX. Big piece of that is IT. And that'll be a carry-over theme as we talk about 2019 as we get that kind of disproportionate amount of CAPEX investment for IT behind us.

Q4, we also had a large tax payment, so that was a factor. And then finally, as you see from the press release, still pretty high separation and restructuring cost, roughly 14 million in the fourth quarter. So those combined were the drivers for the negative Q4. As you look to 2019, you say, how's that going to last.

It may be positive in total. I expect, we'll be negative probably in Q1 and Q2 and then turning positive in Q3 and Q4. I mean, the drivers in the first half are very similar to what we just talked about in Q4. You're going to see the rest of the CAPEX spending, following mostly in those two quarters on the IT side.

Not -- normal capital spending beyond that but the increment for IT, still the higher separation of restructuring costs through the first half as we get the full disconnect from the OMI segment, offsetting that benefits from the business itself generating cash.

And then we -- yes, just to pick up on your question about capacity, we believe our capacity is about 650 million at the moment. However, things can change that, right, EBITDA-generating acquisitions, etc. So over time, we don't see a change in our strategy for deploying capital for M&A.

Operator

Our next question comes from Jonathan Demchick with Morgan Stanley. Please go ahead.

Jonathan Demchick -- Morgan Stanley -- Analyst

Hello, thanks for taking the questions. I had a quick question just on the earnings guidance and mainly, I guess on how wide the range is. I was just hoping to get a little bit of a better understanding on what can kind of drive us to really both ends of the ranges. I think it implies a couple points of potential, like margin variation.

And so just really just looking for, like, what you guys are expecting on the margin side.

Joe Woody -- Chief Executive Officer

So Jonathan, just a couple of things. I mean, obviously, that wide, that dispersion of keeping our eye on acute pain. Obviously, we're also making those investments that we talked about, and they're front-end loaded. That's kind of the main perspective.

And Steve looks like he wants to make a comment.

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Yes, I would say, as we always probably say at this point of the year, the -- we'd be disappointed to be on the low end of that range. But at the other time, we're early in the year. We got a lot of assumption on the top line based on that recovery in Acute pain, which we have confidence in. But you don't want to see that prove itself out here as we go a couple of quarters into the year.

I think from an OPEX standpoint -- we talked about some of the key drivers on the investment side. And depending on the top line, we've got some discretion on how we deploy, although, I'll say, we're going to deploy some of that investment early in the year as we talked about on the conference call to get a fast start on the iInterventional pain side.

Joe Woody -- Chief Executive Officer

Some of our benefits have been tax related, and we think we'll go to a more normalized tax rate as well. So really, all of the above.

Jonathan Demchick -- Morgan Stanley -- Analyst

Understood. And just a couple quick ones on Coolief. Just really trying to understand a couple of different parts of it, like how much of this business is I guess focused on the knee versus spine. And then how are each one of those I guess growing? And then also, when we talked about the CPT code into next year, just wondering what level of reimbursement you think is necessary there to really be, I guess, as market expands to as you're hoping for.

Joe Woody -- Chief Executive Officer

Right. So today, still the greater majority, Jonathan, and the business is spine. We obviously also have shoulder and hip in that business. The big opportunity is knee.

In fact, in the near term or I would say inside the next couple of weeks here, we're going to be reporting some data on the visco supplementation trial and what our pain belief looks like in six months. And we're very encouraged and optimistic about that. But at the moment, we're also providing invoices. We've had RUC committee meetings.

We have additional meetings with Medicare, and they'll be the proposed rule, who are OA coverage for the knee in July of 2019. And we've got a big strategy with physicians, patients' societies, etc. And the final rule is going to be published in '19. And essentially, it really needs to be moving the code up from sort of the low hundreds for the ambulatory surgical center to more up toward $1,000 or so would be an excellent outcome, and there's sort of a mid -- outcome would be more like in the 700 range and obviously having physician fees go up as well.

That's another reason we're investing. I think everyone needs to clearly understand that because these studies are going to be impactful, very important. They're going to make major statements, and I think that's what commercial payers want and what the Medicare wants in order to make decisions like this.

Jonathan Demchick -- Morgan Stanley -- Analyst

Thank you very much.

Operator

Our next question comes from Kristen Stewart with Barclays. Please go ahead.

Kristen Stewart -- Barclays -- Analyst

Hey, guys.

Joe Woody -- Chief Executive Officer

Good morning.

Kristen Stewart -- Barclays -- Analyst

Just wanted to go back to kind of the revenue assumption for this year. If I kind of think about that mid-single-digit growth for the chronic care business, about a 3 percentage point, I guess, contribution overall to game ready for the full year, it's probably like 17 million incremental within the pain business. It sort of gets me to this, call it, 3% growth for organic pain. And I would assume that interventional Coolief probably is double digit.

So that seems to imply ON-Q down maybe something in the mid-single digits. Is that kind of fair in terms of back of the envelope for ON-Q expectations for 2019?

Joe Woody -- Chief Executive Officer

No. That's not the way we're viewing it at all. I mean, I actually see the possibility that we get back to some small positive growth in ON-Q in maybe as early as Q2. But we actually see the greater majority in H2.

A couple of reasons. One, we'll be back to the full supply. Remember, also, there's still going to be 30% of the market not available to the end of the year. Frankly, we do have some pretty soft comparators as well in H2.

So we see growth in ON-Q for the full year.

Kristen Stewart -- Barclays -- Analyst

OK. And then how are you guys just thinking about the longer-term forecast? You guys outlined last year at the investor day, sounds like you're investing maybe a little bit more near term to help kind of drive the performance over the longer term, and maybe that's why 2019 EPS came in a little bit below where the street was expecting. But how confident do you still feel about some of those numbers you gave in terms of the margin performance of the business? Is this near-term kind of reinvestment? Should we think about that as really truly a sustained, permanent level of reinvestment that is really needed to get you to that mid- to high single-digit growth profile?

Joe Woody -- Chief Executive Officer

So a couple of things on the top line, and then looks like Steve wants to make a few comments. But remember, outside of acute pain, we had a 7 to 8% organic growth performance on the rest of our business. International is coming out. There's no doubt that we're investing a bit in the business because we want to take advantage of some real opportunities, and obviously, our goal of getting quickly to high single-digits as quickly as we can anyway.

And obviously, I think everybody understands that M&A enhances -- the one thing I would say is, I think, Steve wants to make a comment or he certainly looks like he wants to make a comment. But we are going to get, despite the investments, 7 to 10 million out this year and then 14 to 18. We've also done well in '17 as well. So that all starts to kick in.

We back off the investment. We're going to have to keep this level of investment in these areas going forward. Past 2020, we sort of get to a point where we get the drop-through. Obviously, M&A would enhance some of the shortfall that we've experienced from the acute pain top line.

Steve?

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Yes. No, Joe captured it. This is not something we see increasing in '19 and then sticking. If you think about the things like direct-to-patient with the CPT code coming, that has great ROI in the year we do it but also has a lot of stickiness in terms of raising awareness, and we're doing it as much to raise the awareness and build the brand and have that visibility, so when the CPT code comes and reimbursement improves, we can be out on the front foot.

And so -- but that's not something that you just continue to scale up. And likewise, other areas like clinical, I think, as Joe came in and said, hey, 2016, we did one clinical study, and we were targeting to do seven to publish this year that we sponsored. That's more of what we need to take advantage of if it's kind of the unique opportunity that we have right now. And it's kind of the same thing we saw in R&D.

If we think back in the story to when R&D was 1% of sales, and we kind of got it up to a sustainable level and it plained out, and in fact, it's kind of trimmed out nicely. SG&A seems to be the same thing. We've got to get to just -- especially given the growth opportunities in international and Coolief, get that investment in now. And then I expect it'll be curtail and plain out, if we go forward.

Kristen Stewart -- Barclays -- Analyst

And so the LRP targets, are those still firmly in place and achievable?

Joe Woody -- Chief Executive Officer

Yes. Those are still the targets that we're using internally as our goals. I mean, so no change on that side. We'll obviously update if we think there's a material change at some point.

But right now, those are still the targets we're shooting for.

Kristen Stewart -- Barclays -- Analyst

OK. Thank you.

Operator

[Operator instructions] Our next question comes from Rick Wise with Stifel. Please go ahead.

Drew Ranieri -- Stifel Financial Corp. -- Analyst

It's Drew Ranieri on for Rick. I guess I just had several questions on ON-Q that I'll just toss in together. But Joe, you've talked before about in 2018, you converted several 100 orthopedic surgeons to ON-Q. And that was a year that was hindered by the drug shortage.

So can you talk about your expectations for 2019? Doc conversions with supply resolution insight. And just with supply recovering, can -- you touched on this a little bit, but can you give us a little bit more detail on the progression for ON-Q growth through the year, especially since you said meaningful sales acceleration in the second half, but what does meaningful mean to the Avanos team?

Joe Woody -- Chief Executive Officer

So for us, I mean, obviously, meaningful, first step of we getting back to mid-single-digit growth. And full year, there's a potential for or some of that's comparator, but also the drug is coming back. The same level of physician conversion on incisional seems to be happening around the total knee and orthopedic space. But we're also very focused in the C-section and then also working a little bit around the rib fracture, and we're getting good traction there.

So as the supply comes back, that's why we feel strong about H2 now because we are getting those conversions. And as you know, there's still a good series of patients that are -- sorry, positions that are looking for the five day for their patients in the titratable nature of the ON-Q. The other thing I think that the market is learning and I think investors are learning is that often times of these long-lasting locals, there's still questions on duration and drug leaching and falls and things like that. But they're using both products, really, in a lot of cases.

So do we do feel like when drug supply, then that is when drug supply is back. And we already have a relationship obviously with Leiters for the filling that we'll be in a good spot to get to back to where we were sort of in H1 -- actually, H2 '17 and part of H1 '18.

Drew Ranieri -- Stifel Financial Corp. -- Analyst

Got it. And then just on the opioid addiction innovation challenge. Can you talk maybe about potential timing on the potential product or milestones that we should look through -- look to in 2019? And then just maybe some timing around some of the breakthrough products that you're also working on?

Joe Woody -- Chief Executive Officer

Yes. So you -- the award was around utilizing AI technologies for better visualization for an anesthesiologist or really any physician using ultrasound to place the catheter, which would be a speed and ease-of-use component to the actual procedure itself. Our breakthroughs are moving along. In our internal milestones, we have a couple that are in human now, which is great progress for us.

But like we've said, it's really sort of a 2022 kind of an impact on the business but still important because we're working toward sustainability in our growth.

Drew Ranieri -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

Our next question comes from Ravi Misra with Berenberg Capital Markets. Please go ahead.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Hi, good morning. Joe, Steve, I was hoping you could help us kind of parse out some of the cadence around the revenue growth. I mean, it sounds like from an organic perspective, you're saying, flat seems to be kind of an as-hoped-for scenario in the first quarter. But any kind of commentary on the remainder of the year would be helpful.

And then maybe just a second one on some of these Coolief studies that you're putting together and the timelines on that. Wouldn't -- would we kind of expect something potentially as soon as AAOS? Or how should we think about the publication around those?

Joe Woody -- Chief Executive Officer

So the publication is forthcoming. We're having the data worked on now, and then we'll be likely putting a press release out of some sort in the next couple of weeks. And again, we're very optimistic on that. So coming soon.

And on the revenue growth, yes, Steve outlined sort of getting to, from negative perspective organic to more a level-ish Q1. And then the desire obviously from there is there's a significant move-up that we feel confident about actually. But probably low to mid-single in Q2, and then moving up from there. Again, all of the drivers are in place on the businesses outside of acute pain, and obviously, you're seeing and we talked about strong performance in international in Q4.

And that's important -- an important part of our plan. So obviously, lever being the faster that drug is fully back in the market or the faster progression with the movement through the distributor channels to -- through the Mckessons and Cardinals of the world, the better that that plan can be.

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Yes, I think that's exactly right. The -- it's sort of the reverse of 2018. 2018, the fourth quarter hurt because that's typically a larger seasonal impact on ON-Q, and we have to throttle back the sales team based on drug availability. And so if I kind of reverse that into 2019, we've got high expectations for the back half of the year.

And I say, as Joe said, signs look positive that it's coming that way.

Ravi Misra -- Berenberg Capital Markets -- Analyst

Great. And then maybe just one, maybe two follow-ups. Just on the gross margin kind of profile, kind of appreciate you saying that there was -- there's some kind of timing issues in the fourth-quarter plan. How do we then kind of consider the ramp in 2019? I mean are -- is kind of the 60s, the low 60s still the right place to think about this? Or are you trying to say that with sales increasing as the year goes on that gross margin should improve?

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Yes. On balance, low '60s is the right place. Kind of picking up your point, if we got softer volume in the first quarter, you may have some more absorption in the first quarter so you might expect a -- on a relative scale, a little bit lighter gross margin there and stronger toward the back half where you're producing more. I say were also conscious that we built some inventory in 2018.

I know that's one area we want to bring back down, and we've got some rebranding activity that has to flow through the supply chain, as well as the warehouse optimization. So we're going to be a little bit cautious there. But from a gross margin standpoint, I would think if the lighter volume -- early part of the year is going to be a little softer than the back half, and we'll have higher volumes.

Operator

Our next question comes from Chris Cooley with Stephens. Please go ahead.

Chris Cooley -- Stephens Inc. -- Analyst

Hey, good morning and thanks for taking the questions. I just want to revisit the OPEX kind of guide that's implicit here and kind of try to reconcile that with the adjusted earnings. Am I thinking about this correctly then in terms of the savings that you are to realize in '19? You're essentially assuming that you're going to be reinvesting about 7 to 8 million of that. It sounds like more so toward Coolief or about $0.10 to $0.11 that would have dropped through.

And then similarly, I'm trying to think about the tax guide here. I noticed the upper bound was 25%, which is a little bit perplexed by with the growth abroad. But that would seem to imply about $0.02 to $0.05 in incremental earnings headwind relative to what we had been modeling previously from an effective tax rate standpoint. Am I kind of reconciling the amount there correctly? And then I've got one quick follow-up.

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Sure. On the OPEX side, yes, you're in the right zip code. We're reinvesting that savings largely toward Coolief, maybe international, maybe -- that's the right order of magnitude to think about. On the tax side, 2018, we had a -- maybe talk -- we have talked about this probably in a couple of calls, but we had a pretty big benefit midyear from the options exercised of some past executives that in the new tax world allowed us about a 200 basis points benefit to ETR in 2018.

And then as you saw, we talked about here in the call a little while ago, some additionally benefit in the fourth quarter related to purchase price allocation from the sale. And so if I sort of reset our level set against that that's what brings me back into that 23% to 25% guidance range. Now our goal is still to go lower than that over time. And so we still have, as we've talked in the past, some planning opportunities that we're putting in place.

I would say we're targeting a little more for 2020. Once we get past the IT implementation because there is some IT -- I think about invoicing changes and so on that's from an IT implication there that we got to be a little bit careful about doing in 2019 given the IT transformation. But that's -- hopefully, I helps, Chris, in terms of we're all taking our foot off the pedal from a tax standpoint, but we did get some fortunate benefits this year that are repeatable.

Chris Cooley -- Stephens Inc. -- Analyst

No, appreciate the additional color. And I just wanted to go back to Coolief. I think it's great that you're moving forward now both of the DTC effort but also expanding the sales force. And you mentioned I think in your prepared remarks, you're increasing the headcount by approximately 20%.

Could you just remind us where you are now both domestically and how you maybe see that sales force ultimately scaling as you more aggressively go after the ortho indications? And well, I'm assuming there's going to be a heightened focus on in-office procedures as we enter 2020.

Joe Woody -- Chief Executive Officer

Yes. We really haven't disclosed the exact number of sales force but obviously, giving you a percentage. And when you do that, it's a combination of clinical people and selling bodies. But you're right, it's sort of gearing up because we have frankly a lot of opportunities still with our spine business and our shoulder business and our hip business.

But I want you to be ready for the CPT codes that when it comes out to be able to drive that, especially with the right to reimbursement. And then obviously, we've talked about this study that we're going to be having a press release in making that more public in the near term. We think that's going to be an impact as well. So mainly, getting ready for that but also frankly seamless investment is just helping us enhance the existing core business as well.

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Yes. And thinking ahead too, we get that CPT code in the future and we do have a stronger event orthopedic call point at that point, where you might see ON-Q and game ready and Coolief, all hitting into that orthopedic space. And we want to make sure we're playing that game ahead, getting a team in place now, getting scaled up. So as that comes to fruition, we're not playing catch up on what is a great opportunity for us.

Chris Cooley -- Stephens Inc. -- Analyst

Thank you, guys.

Operator

Our next question comes from Dave Turkaly with JMP Securities. Please go ahead.

Dave Turkaly -- JMP Securities -- Analyst

Thanks, good morning. I think you mentioned beefing up your reimbursement expertise folks to nine, and I think you said you're primarily focused on Coolief. I was just wondering from a broad stroke if there's any way to kind of categorize the -- for Coolief and ON-Q. What does the reimbursement landscape look like today? Maybe even if it's a percent that you could throw out, but something to give us an idea of what kind of percentage of those procedures, both for Coolief and ON-Q are getting covered today.

Joe Woody -- Chief Executive Officer

So just -- Dave, this is Joe Woody. ON-Q is covered as part of DRG. And it's -- there's no real problem, although, we asked some government affairs who were going on to see if we can expand better reimbursement into the ambulatory surgical center. And in terms of Coolief, it's pretty much covered by most commercial payers.

But it's in the hospital setting with the interventional pain specialist. And so what we're driving to is trying to get this as available to the ambulatory surgical center and the orthopedic surgeons, especially for the OA treatment for the knee. Where we invest in reimbursement is sort of twofold. At the government affairs level and working with consultants and obviously working with folks on the hill and reimbursement specialist, but then also sort of day-to-day embedded in the interventional pain business would be specialists that work with the commercial payers to sort of show our studies, show the comparison of our technology, the length of pain relief, the outcomes of the health economic studies that we invest in as well there.

But just broadly, what we have said is that a big catalyst for the business would be reimbursement and the ambulatory surgical center for OA and the study that we'll be talking about in the near term on the visco supplementation, which is the injections of synovial fluid into the knee that you would normally get an orthopedic surgeon. That's a billion-dollar market for us. And if we have better results, then that's where you sort of have a catalyst for the business.

Dave Turkaly -- JMP Securities -- Analyst

Got it. Thank you.

Operator

Our next question is a follow-up from Kristen Stewart with Barclays. Please go ahead.

Kristen Stewart -- Barclays -- Analyst

Hey, guys, it's me again.

Joe Woody -- Chief Executive Officer

Hey, Kristen.

Kristen Stewart -- Barclays -- Analyst

Just wondering if you could help out, maybe just talk about the cadence for earnings for the year because it does seem like you are reinvesting a fair amount back into the business. Should we think about those reinvestments being more front-half loaded, which I suspect they are? So how should we just think about the cadence from a revenue perspective?

Joe Woody -- Chief Executive Officer

Yes. If I kind of flip -- we have an unusual year that's a year from a profile. We talked about the revenue a bit already. Probably lighter in the first quarter.

As we get drug supply back and we have a little bit of chronic care destocking at distributors, ramping up as we go through the quarters with a larger back half and a larger finish, taking advantage of the seasonality and drug availability. On the OPEX side, we talked a little bit about it on the prepared remarks, but R&D will be heavier in the first half than the second half. And it's just more of the timing of projects than anything else. So we'll have more of that in the first half.

And OPEX profile, similarly. So we're on the market right now in 13 markets. In fact, we're in Atlanta on TV right now with Coolief. And so we wanted to get an early start on both the sales force hiring and the DTP, and that's going to pull more OPEX as well into the first half, including the first quarter.

So if I'm profiling the earnings, our earnings are definitely going to be softer in Q1 and then build as we go forward as the OPEX kind of ramps -- starts to taper off and the revenue begins to pick up.

Kristen Stewart -- Barclays -- Analyst

OK. That's helpful. And then could you maybe just comment, just broadly, on how you think about some of the potential risks with new drugs coming on the market for ON-Q later this year and to what extent you have built that into your forecast or whether it's the case of, you believe, there's just so much overwhelming demand for non-opioid use that you feel like there's still a long runway of growth for the ON-Q franchise.

Joe Woody -- Chief Executive Officer

I think the market is big enough, 4 billion-plus, and there differentiation between their products. So again, for us it's the five days, the titratable nature. And the other thing is -- and I think the market is learning and the physicians are learning. And in a lot of cases they use both or they use these technologies at the same time.

We're very different. I mean they all have homes. I mean, they -- the long-lasting locals, the -- and obviously, there are formulas that the surgeons use themselves, and then obviously we have a competitor in the market now and one coming. What'll be different about those products is that they're still going to have an issue on duration.

There are some issues around drug leaching and falls and just the number of procedures or the type of procedures that are available. So I don't think if -- from -- for our goals anyway for this market, which is few to mid-single-digit growth, then the high and drive it through a very focused area around total knee, C-section, and then we'll be moving into rear fracture as well. I think there's room for everybody.

Kristen Stewart -- Barclays -- Analyst

OK, perfect. Thanks very, much guys.

Operator

[Operator instructions] At this time, there are no further questions, and this will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Joe Woody for any closing remarks.

Joe Woody -- Chief Executive Officer

I'd like to thank everybody for your interest in Avanos, and I think you can tell from our discussion today that we're confident in the business outlook and essentially our ability to achieve these goals. Fundamentals are solid, and we're well positioned to deliver, we think, value for our shareholders. As a reminder, Steve will be presenting next Wednesday at the Raymond James' institutional investors conference in Orlando, and there is information on how to access the presentation on the investor relations section of our website, avanos.com. Thank you very much.

Operator

[Operator signoff]

Duration: 57 minutes

Call Participants:

Dave Crawford -- Vice President, Treasurer, and Investor Relations

Joe Woody -- Chief Executive Officer

Steve Voskuil -- Senior Vice President and Chief Financial Officer

Larry Keusch -- Raymond James -- Analyst

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Jonathan Demchick -- Morgan Stanley -- Analyst

Kristen Stewart -- Barclays -- Analyst

Drew Ranieri -- Stifel Financial Corp. -- Analyst

Ravi Misra -- Berenberg Capital Markets -- Analyst

Chris Cooley -- Stephens Inc. -- Analyst

Dave Turkaly -- JMP Securities -- Analyst

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