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SurModics (NASDAQ:SRDX)
Q1 2020 Earnings Call
Feb 05, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Surmodics first-quarter fiscal 2020 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tim Arens, vice president of finance and chief financial officer. Please go ahead.

Tim Arens -- Vice President of Finance and Chief Financial Officer

Thank you, Todd. Good afternoon, and welcome to Surmodics fiscal 2020 first-quarter earnings call. Before we begin, I would like to remind you that during this call, we will make forward-looking statements. These forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Surmodics' future financial and operating results or other statements that are not historical facts.

Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements, resulting from certain risks and uncertainties, including those described in our SEC filings. Surmodics disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. We'll all refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results.

This conference call is being webcast and is accessible through the Investor Relations section of the Surmodics website where the audio recording of the webcast will also be archived for future reference. A press release disclosing our quarterly results was issued this afternoon and is available on our website at surmodics.com. I will now turn the call over to Gary Maharaj. Gary?

Gary Maharaj -- President and Chief Executive Officer

Thank you, Tim. Good afternoon, and thank you for joining us. We're off to a solid start in fiscal 2020 with both our medical device and IVD businesses contributing to top-line growth. Total revenue for the quarter grew 2% to $22.6 million as compared to $22.2 million in the first quarter of 2019.

We also reported diluted GAAP earnings of $0.01 per share and non-GAAP earnings of $0.05 per share in the first quarter. During the first quarter, we made important progress in each of our three major strategic objectives for fiscal 2020. As a reminder, these are, first, to ensure the continued success of SurVeil, specifically to perform high-quality patient follow-up for the primary endpoint analysis to obtain the CE mark and to make substantial progress toward achieving FDA approval; second, to continue to make meaningful advances in the product development and regulatory approvals across our entire product pipeline; and finally, to continue to optimize revenue and cash flow performance from the legacy offerings in our medical device and IVD businesses to fuel our strategic growth initiatives. Starting with SurVeil, we announced completed enrollment of our TRANSCEND clinical study in the fourth quarter of last year.

The trial enrolled 446 patients across 65 global sites and will evaluate the safety and efficacy of the SurVeil DCB compared with the commercially available DCB in treating peripheral artery disease in upper leg. The results from TRANSCEND will ultimately provide insight into clinically important question regarding long-term, patient-level data out to five years, which is especially important given the current matter concerning paclitaxel-containing devices. We are committed to a robust data collection and look forward to sharing these data at the appropriate time. In regard to our CE mark submission for SurVeil, we submitted all required modules to the European-notified body before the end of fiscal 2019.

However, as we previously discussed, given ongoing dialogue containing paclitaxel-coated devices, the organization decided to temporarily halt the review of CE marks for new paclitaxel devices, pending more follow-up data from studies on current paclitaxel devices. We have had ongoing communications with the notified body but do not yet have a clear line of sight on the timing and probabilities of obtaining the CE mark. We do, however, remain quite confident in the strength of data that support the granting of a CE mark SurVeil. Moving to our innovative product pipeline, which is our second strategic focus for this year.

Our pipeline stretches across three main platforms: drug-coated balloons, thrombectomy devices to treat thrombosis in multiple vascular beds and the treatment of vascular disease via the radial artery. Starting with Sundance, our sirolimus-based, drug-coated balloon for below-the-knee disease remain on track to begin enrollment in the first-in-human study in the back half of fiscal 2020. We're in the process of securing the required regulatory approvals in the specific geographies where we intend to conduct the study. As a reminder, during the first quarter of fiscal 2020, Sundance was granted breakthrough device designation status by the FDA.

Given the preclinical data we have generated and analyzed, we believe Sundance has the potential to becoming the standard of care for the treatment of critical limb ischemia. We also recently completed enrollment in our first-in-human study for AVess, our arteriovenous access drug-coated balloon, and I expect the data from this study by early third quarter of fiscal 2020. We will update you on the next clinical development steps for AVess later in the year after we have evaluated the results from our in-human trial. Our radial artery access and thrombectomy platforms are also progressing nicely.

We remain committed to accelerating the development of these platforms and expect to submit for 510(k) clearance of at least three new devices during fiscal 2020. Starting first with POUNCE, our thrombectomy device, we continue to make advancements on its design and feasibility. Early feedback from the physicians has been exciting. In fact, in early November, we unveiled the device to 10 expert clinicians at the VIVA annual conference, each of whom performed clot retrievals with the device in the benchtop simulated model.

We received valuable feedback about its ease of use and ability to remove organized clot from peripheral vessels without capital equipment and with the potential for less blood loss. We continue to target regulatory clearance for POUNCE by the late third quarter of fiscal 2020. Turning to our radial access platform. We received 510(k) clearance of our Sublime guide sheath in fiscal 2019 and expect to secure 510(k) clearance of our 2.5-meter Sublime .014 transradial PTA balloon catheter by the third quarter of fiscal 2020.

Our 2.5-meter length Sublime .014 with transradial PTA is a first of its kind, and we're currently responding to the FDA's request for further data and clarification. In addition, we continue to make substantial progress on other radial access therapeutic devices, including the .018 transradial PTA balloon catheter designed to treat the more proximal femoropopliteal vessels and the superficial femoral artery. These will provide complementary therapeutic devices for Sublime radial guide sheath. As you know, late last year, we signed an agreement to commercialize our Telemark coronary support catheter in United States and Europe with a leading multinational medical device partner.

I'm pleased to announce that this partner is Medtronic. While they have yet to formally launch Telemark, we believe that Medtronic is an excellent commercialization partner whose interests are aligned with ours to provide physicians and patients innovative technologies to improve outcomes. Regarding our third strategic priority, our medical device and IVD business segments, they continue to deliver solid performance. While our medical device business segment faces significant headwinds this coming year due to the patent expirations of our generation-four hydrophilic-coating technology, we're continuing to see growth and uptake of our generation-five Serene coating, which offers advanced performance, including lower particulates and best-in-class lubricity.

Net of the patent expirations, we continue to expect revenue from the medical device coatings portfolio to grow in the low to mid-single digits. In our IVD business unit, we continue to outperform immunoassay market growth rate of 3% driven by our focus on customer service and support and our gold-standard products performance. Revenue from IVD business unit was up 5% this quarter versus the prior year while generating excellent operating margins. These legacy offerings will continue to provide investment funding to fuel our strategic growth initiatives.

As part of our commitment to conducting rigorous clinical research to demonstrate clinical safety and efficacy of our devices, such as SurVeil, AVess and Sundance drug-coated balloons, we announced earlier this week that we are pleased to have added Dr. Nusrat Sultana, MD, to our leadership team as vice president of clinical affairs. Nusrat brings more than 20 years of experience and a proven track record of success in major interventional clinical trials to make it the ideal person to drive our clinical strategy and lead our clinical affairs team. Welcome, Nusrat.

Overall, we are encouraged by our performance this quarter as we continue to enhance the foundational elements needed to drive our near long-term growth. We're confident our efforts will help us build highly differentiated platforms that position us to create durable value for our shareholders. As we look ahead to the remainder of 2020, we're acutely aware that the paclitaxel matter will continue to influence the future of the therapeutic modality, including our own drug-coated balloon application. Despite these headwinds, our goal remains to deliver double-digit revenue growth on an annual basis which we expect will resume in fiscal 2021, and we're also targeting EBITDA margins of greater than 25% beginning in fiscal 2022.

I'll now turn the call over to Tim to provide more details on our first-quarter fiscal 2020 results, as well as our outlook for the remainder of fiscal 2020. Tim?

Tim Arens -- Vice President of Finance and Chief Financial Officer

Thank you, Gary. Revenue for the first quarter of fiscal 2020 grew 2% to $22.6 million as compared with $22.2 million in the first quarter of 2019. Our first-quarter revenue includes approximately $700,000 from a onetime catch-up payment for a previously underreported hydrophilic-coating royalty revenue. Looking at our two business units, medical device grew 1% to $17.4 million in the first quarter.

For in vitro diagnostics business, first-quarter fiscal 2020 revenue grew 5% to $5.2 million compared with the year-ago period. Within our medical device business, strength in our medical device coating offerings offset expected lower SurVeil license fee and milestone revenue, as well as a decline in our legacy balloon catheter sales. Our first-quarter royalty and license fee revenue totaled $10.1 million, up slightly from the prior-year period. During the quarter, our SurVeil distribution and development agreement with Abbott vascular generated revenue of $1.3 million, down $1.1 million from the prior-year quarter and in line with expectations.

Growth in our medical device holdings license portfolio of $1.1 million, which includes the previously mentioned $700,000 onetime royalty payment, offset the decline in SurVeil revenue for the quarter. The expiration of our fourth generation hydrophilic-coating patent had an insignificant revenue impact in the quarter as expected. For the full fiscal year, we continue to expect revenue headwinds from this patent expiration of $5 million to $5.5 million. Product sales of $10 million were essentially flat with the year-ago period.

Growth in coatings reagents was offset by weakness in our legacy Bloom catheter products. R&D services revenue of $2.5 million was up 4% from the prior-year period with consistent demand from our medical device coatings customers. The medical device business reported an operating loss of $423,000 in the quarter, compared to operating income of $357,000 in the year-ago period. Medical device operating results were impacted by $1.3 million of increased operating expense, excluding product costs, reflecting continued investment in our strategic initiatives to support our future growth.

IVD revenue in the first quarter was up $229,000 or 5% compared with the prior-year quarter, in line with expectations. IVD operating margin in the first quarter was 50% as compared with 49% in the prior-year quarter. Product gross margins for the quarter were 68% as compared with 64% in the prior-year quarter due to favorable mix in our medical device business. For the full fiscal year, we anticipate product gross margin percentage to be in the mid-60s.

As a percentage of revenue, first-quarter fiscal 2020 R&D expenses, including cost of clinical and regulatory activities, totaled 54%, compared with 52% in the year-ago period. R&D expense was $12.1 million for the quarter, up $656,000 from the year-ago period. The increase in R&D expense was driven by increased spending on the development of our medical device pipeline, including activities to further advance our AV access and below-the-knee, drug-coated balloons. As Gary mentioned, during fiscal 2020, we expect to initiate a first-in-human clinical study for our Sundance below-the-knee sirolimus drug-coated balloon and advance development efforts on several products, including those related to our POUNCE thrombectomy and Sublime radial access platforms.

Consistent with our initial guidance, we continue to expect R&D expense to range in the mid- to high 50s as a percentage of revenue in fiscal 2020. SG&A expenses in the first quarter of fiscal 2020 were $6.9 million or 31% of revenue, compared to 27% of revenue in the prior-year period. Contributing to the increase in SG&A expense during the quarter were increased investments to support product pipeline development and preparation for product market evaluations. We recorded an income tax benefit of $250,000 in the first quarter as compared with an income tax benefit of $176,000 in the prior-year period.

Both periods reflect the impact of nontax benefited amortization and operating losses in Ireland. On a GAAP basis, our diluted earnings per share were $0.01 in the first quarter as compared with $0.09 in the prior-year quarter. On a non-GAAP basis, our earnings per share were $0.05 in the first quarter of fiscal 2020 versus $0.12 in the prior-year quarter. Moving to the balance sheet, cash and investments totaled $48.3 million at quarter end.

During the quarter, we paid $3.2 million to satisfy the remaining contingent earn-out obligations associated with our fiscal 2016 acquisition of Normedix, as well as $1.7 million for capital expenditures. Turning now to our outlook for 2020, we are reaffirming our fiscal 2020 guidance. We continue to expect fiscal-year 2020 revenue to range from $87 million to $91 million. We expect GAAP diluted earnings per share will range from a loss of $0.60 to a loss of $0.30 per share.

Finally, we expect non-GAAP diluted earnings per share to range from a loss of $0.44 to a loss of $0.14 per share for fiscal 2020. Todd, this concludes our prepared remarks. We would now like to open the call to questions.

Questions & Answers:


Operator

[Operator instructions]. And we'll take our first question from David Saxon of Needham & Company.

David Saxon -- Needham and Company -- Analyst

Hi. Good afternoon, Gary and Tim. Thanks for taking the questions. I'll start with, I guess, the partnership with Medtronic.

Just wondering if you could talk about how their sales force is being incentivized when they're planning on launching and I guess the cadence ordering you're assuming in guidance.

Tim Arens -- Vice President of Finance and Chief Financial Officer

David, thank you for the question. This is Tim. Just a few things here. In terms of how things are going with Medtronic, what I can say is we've already shipped several orders, both in Q1 and Q2.

And the expectation is that we would expect over the next several months that it's likely they'll be launching Telemark. And I think also, you'd also ask how the ongoing orders would be rolling out. I think I'd just point back to the guidance and the comment that we provided previously in our October earnings call, which was we're not distinguishing across the various partnered products, meaning the .014, the .018, PTA catheter and the Telemark coronary support catheter. What we've said previously and we continue to look at it from this perspective, our revenue that we expect from these products should range somewhere between $0.5 million to $1 million in fiscal 2020 for each of the three products.

David Saxon -- Needham and Company -- Analyst

OK. That's helpful. And then I guess, just on the notified body in Europe, I think there was something that they were going to move to the Continental Europe given Brexit. Any update there and maybe what that means for potential CE mark for SurVeil? And any other developments, kind of, in that dialogue, other than what you've said in the prepared remarks?

Gary Maharaj -- President and Chief Executive Officer

Yes. There are no updates that give clarity and a probability, and so that's why we can't really say much because I want to -- we want to say anything. We want to make sure that impacts the probability of getting it, but, however, the notified body has gotten its registration on the Continental Europe side. So that is not an issue for us, and we're working with multiple bodies on this and multiple channels of communication that given the timing of these things, I hope but I can't commit, by the next earnings call, we would have much more clarity on the pathway, not necessarily an approval.

But clearly, working through the process and ensuring that we get what I would consider a fair shake and a fair review.

David Saxon -- Needham and Company -- Analyst

Great. Thanks, guys.

Gary Maharaj -- President and Chief Executive Officer

Thank you, David.

Operator

Thank you. We'll take our next question from Jim Sidoti of Sidoti & Company.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

Good afternoon. Can you hear me?

Tim Arens -- Vice President of Finance and Chief Financial Officer

We can hear you just fine, Jim.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

Great, great. So with regards to the Medtronic agreement, is it exclusively for Telemark? Or do they get the right of first refusal for other devices that are under development as well?

Gary Maharaj -- President and Chief Executive Officer

Thank you for the question, Jim. This is specifically for Telemark. There are no rights to other technologies or options to other technologies.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

All right. And the $54,000-question related to the CE approval. Can you just give us any indication how often you're in touch with those folks at that regulatory agency? And I mean, is it something that you work on, on a weekly basis? Or are you kind of in a wait-and-see mode now until you hear back from them?

Gary Maharaj -- President and Chief Executive Officer

No. I would say the touch points in the last four weeks have been at least maybe half a dozen touch points and communication, so weekly is not a bad way to think about this.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

OK. And as far as you know, they are continuing to approve other devices with this coating?

Gary Maharaj -- President and Chief Executive Officer

Well, the initial thing was devices that already have a CE mark as long as they're not asking for line extensions that had longer balloons or increased total drug content, they were fine doing that. So those, I believe, are going -- I can't speak to those because I haven't seen anyone's gotten a CE mark since, but I know of a couple that are going through just from our industry contacts. But I will say we are having discussion. These are not -- I wouldn't call them one-sided or sort of closed-door type things where there is no door, but we continue to work through what that process is so that we have -- again, we believe in our data, and we want to make sure the data that we do have, we believe, meets the expectations and the requirements.

But we want to make sure that that's also agreed upon before going any further steps.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

And just to be clear, in the U.S., the FDA has continued to improve devices with the coating.

Gary Maharaj -- President and Chief Executive Officer

We have seen the recent Medtronic AV get through. I'm not sure when -- I know the Boston range at some point, maybe getting approval. So -- but back to the European-notified body, what we want to be able to communicate something when we have a better ascertainment of probability. I don't want conjecture and have it be interpreted one way or another, but I can't say we're working through this.

But the probability looks like -- we feel better. I think we will say something at that point.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

And then with regards to the performance in the quarter. SG&A was up about $1 million. Is that some of the folks that you've added for clinical support? Or is that more? Or maybe you could just say where did that -- what is the majority of that $1 million compared to a year ago?

Gary Maharaj -- President and Chief Executive Officer

So really, if you think about it, Jim, it does include headcount to support some of the activities that we've described previously, including clinical evaluations. It looks like it's up significantly from the prior-year quarter, up about $1 million. But if you go back and take a look at Q4, I think we came in around $7.2 million. So from a sequential perspective, we're down just a little bit.

But as we've said back in October, at the last call, you can kind of expect that on an annualized basis, we'd be looking at that $7.2 million over four quarters. So it gives you a sense of how SG&A is going to be coming through for the year, which would probably put us in about the low 30s as a percentage of revenue. But yes, we're making those investments, and we're excited about getting product out to get some evaluations and making sure that the team is helping us as we think through from a product development perspective, the features, the benefits, the attributes that we need to make sure that we have best-in-class technology, innovative technology to help support improved outcomes. So I'm sure we'll talk a little bit more about that over the next couple of calls, but I think that kind of frames it up for how you should be thinking about 2020 in SG&A.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

OK. So roughly around that $7 million per-quarter type number.

Gary Maharaj -- President and Chief Executive Officer

Yes. You won't be far off using that as guidance.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

OK. And then last one for me. I mean, do you expect any impact, positive or negative, from the coronavirus? I mean, does it help the IVD business? Does it slow procedures in some areas?

Gary Maharaj -- President and Chief Executive Officer

Yes. It is a great question, one that we had asked the general manager of the business unit earlier in the week. And expectation is this is going to have no impact on the IVD business.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

OK. And on the medical devices and if you would think that no negative impact?

Gary Maharaj -- President and Chief Executive Officer

We're not hearing of any.

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

OK. Thank you.

Gary Maharaj -- President and Chief Executive Officer

Thank you, Jim.

Operator

Thank you. We'll take our next question from Frank Takkinen of Lake Street Capital Markets.

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Tim, thanks for taking my questions. I just got a couple for you here today. Starting off with SurVeil, I was curious if there is any U.S. SurVeil milestones expected this year? And then as a two-parter, could you also touch on what could happen to SurVeil milestones if we did have some positive products in the EU?

Tim Arens -- Vice President of Finance and Chief Financial Officer

Yes. Frank, great question. Thank you. I think Gary mentioned on the last earnings call that there was a milestone associated with the CE mark receipt.

We have not communicated any of the additional milestones that might be earned as a result of the progress with the development activities on SurVeil, so we'll just ask you to stay tuned on that. But I will tell you simply this, that in terms of the potential for milestone payments in fiscal-year 2020, I'd say the most likely possible milestone would be, in fact, attaining that CE mark.

Frank Takkinen -- Lake Street Capital Markets -- Analyst

OK. That makes sense. And then taking a step back on the Medtronic agreement, could you just walk through the mechanics of that agreement for us?

Tim Arens -- Vice President of Finance and Chief Financial Officer

Sure. It's pretty straightforward. I've characterized this in the past. It's really a supply and distribution agreement.

So Medtronic is a partner. We manufacture Telemark, and we ship it to Medtronic. We satisfy or fulfill their orders at POS that they submit. And as you can imagine, we receive a transfer price or product sales for each unit that we ship, and there are no license fees or milestones.

I think we may have talked about that on the last call as well. So basically, it's pretty straightforward. We manufacture product. We ship it and voice it and recognize the revenue.

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Great. Thanks.

Tim Arens -- Vice President of Finance and Chief Financial Officer

Thank you, Frank.

Operator

We'll take our next question from Mike Petusky of Barrington Research.

Mike Petusky -- Barrington Research Associates -- Analyst

Hi, guys. Good evening. A couple of questions. On the Telemark, did I hear you say that you don't expect a commercial launch for the next several months.

Is that what you said? Or did I mishear?

Tim Arens -- Vice President of Finance and Chief Financial Officer

No. You heard that right, and I would probably characterize that more as a -- probably a more robust launch. I know that they're preparing, and so I don't have full details in terms of what that will look like. But I would suspect that it's not uncommon to bring it out to a couple of select accounts, Mike.

But in terms of a full launch, we'll just have to wait, and we'll let Medtronic comment on that.

Mike Petusky -- Barrington Research Associates -- Analyst

OK. So I just want to understand that the orders that you've shipped, have you -- do have to wait to recognize that revenue or is there some of that revenue already been recognized?

Tim Arens -- Vice President of Finance and Chief Financial Officer

No. Some of it has been recognized in Q1 and also will be in Q2. So just to be clear, once we manufacture and ship the product, we recognize the revenue.

Mike Petusky -- Barrington Research Associates -- Analyst

OK. And then on the .014-, .018-PTA balloon catheters, you still -- obviously, you're guiding to revenue roughly in line with the Telemark. So I mean, is the timing on commercialization for those products roughly the same in the next several months? Or would you possibly expect those to actually be commercialized sooner?

Tim Arens -- Vice President of Finance and Chief Financial Officer

Yes. I think -- I'm hopeful that when we get to the next earnings call, we'll be able to talk a little bit more about the partner and what's going on with the .014, .018. I would tell you that you're probably not far off the way that you're thinking about it and the way you posed the question.

Mike Petusky -- Barrington Research Associates -- Analyst

OK. The fact that you haven't announced the partner -- I mean, should I take from that that it can't be Medtronic?

Tim Arens -- Vice President of Finance and Chief Financial Officer

I would tell you that there was another question that was asked earlier on the call as to whether or not Medtronic had rights to any other products, and the answer was no. So I'll let you read into it a little bit more.

Mike Petusky -- Barrington Research Associates -- Analyst

All right. OK, fair enough. Just a quick question. In terms of sort of the holdup with the CE mark, has that changed your thinking in terms of how you allocate capital to R&D projects in fiscal '20 or beyond? Have you guys changed your thinking at all in terms of allocation of R&D dollars?

Gary Maharaj -- President and Chief Executive Officer

For the drug delivery programs, I mean, the European Union, clearly, is a significant market. And clearly, our commercialization partner, that's a commitment we made as part of this partnership to get it. As far as the nondrug delivery devices, the short answer is now we have to be a little more thoughtful because in the nondrug delivery domain, it's taking quite a long time to get to CE mark as well. And so when you look at that and you saw staging sources of revenue and the effort involved, and this is my opinion, even though the U.S.

FDA and 510(k) program can take a couple of turns, we started recognizing that we're getting 510(k) approvals. I don't want to jinx it faster than CE marks, and that's because of some bottleneck issues. And clearly, some of the MDR standards are going to be in place here in May of 2020. So pipeline analysis, it does come into play because if it takes a year and a half to get to CE mark for a market that's 20% the size of the U.S.

market, we do have to fine-tune that and decide where to allocate the capital. Is this going to change the fact that we don't have devices for our partners in the European Union? I don't think for long term. It's just the timing of cash flow. And clearly, the CE mark also has an impact on other geographies that use the CE mark to ease their regulatory to get their regulatory approvals in their geographies.

So short answer is it may change our minds on a pipeline product. But what the real impact is, it's going to take longer.

Tim Arens -- Vice President of Finance and Chief Financial Officer

And just to add a little bit more color, Mike, and to be perfectly clear, Gary's response in terms of the allocation of capital is accurate. It does not mean that we're changing guidance with regard to R&D spend. That was already determined at the time we issued guidance back in October. And I'll just remind the folks on the call here that the guidance for R&D is maybe about $3 million less than what we spent in 2019, and that's by design, mainly.

I think I mentioned previously that is a result of the TRANSCEND study. Costs are coming down, but we're starting to see incremental expenses with Sundance in the course of VAS, just on some of the development activities. But I'll just remind you that as part of the guidance, we did not reflect in the guidance, any AV access, clinical funding, and that was primarily because, I think, as we've mentioned previously, the first-in-human clinical data coming from the initial study will be available sometime here in our third quarter. And at that point, we'll have a conversation or expect to have a conversation with our partner, Abbott, about their interest in the technology.

So it's really not -- it doesn't have anything to do with the CE marking. It's more about whether or not we would be negotiating with a partner with regard to who would be funding the study. So just want to make sure we're putting a little bit finer point on it so that you understand what's in and out with regard to the R&D guidance for the year.

Mike Petusky -- Barrington Research Associates -- Analyst

Terrific. Thank you.

Tim Arens -- Vice President of Finance and Chief Financial Officer

Thank you.

Operator

At this time, we have no further questions in queue. I'd like to turn it back to Gary Maharaj for closing remarks.

Gary Maharaj -- President and Chief Executive Officer

Well, listen, thank you, everyone, and have a great meeting – evening. Until our next quarterly update. Goodbye.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Tim Arens -- Vice President of Finance and Chief Financial Officer

Gary Maharaj -- President and Chief Executive Officer

David Saxon -- Needham and Company -- Analyst

Jim Sidoti -- Sidoti and Company, LLC -- Analyst

Frank Takkinen -- Lake Street Capital Markets -- Analyst

Mike Petusky -- Barrington Research Associates -- Analyst

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