Avanos Medical, Inc. (AVNS) Earnings Call Transcript & Summary

Thank you. Good afternoon. I'm Joe Woody. I'm the CEO of Avanos, and I thank you for your interest in Avanos. Before we get started, I just want to share with everyone how excited I am that Michael Greiner has joined us as our Chief Financial Officer. He comes to us from AngioDynamics. He has over 20 years of experience in executive financial management, and he's going to be a critical part of us advancing our growth, expanding our margin, and importantly, he'll have the IT organization reporting directly into him. I imagine that he is listening right now back in Alpharetta. He did not make the trip with us because he is, in fact, going to be studying up and immersing himself in the business. He will be joining us on the earnings call in the last week of February, and he'll be out at Raymond James as well as at Barclays in Miami. And from there, he'll be on the circuit. So we welcome him aboard. Today, I'm going to talk about the strategy of the business. We'll talk about where we are with the transformation of our business. And we'll talk a little bit about the catalysts, not only for 2020 but what are the catalysts for our long-range plan. Of course, everybody's favorite slide. I will be talking about forward-looking information and non-GAAP financial metrics. To the extent you're more interested in our risk profile, please visit the avanos.com and look at our SEC filings. So who we are. I've been onboard my tenure now for 2.5 years, and we're well on our way to a transformation to a pure-play medical device company. I can tell you that started with the sale of our S&IP business. And for me, 2020 is a time and a year where we can start to begin to put some of the complexities associated with divestiture behind us. Our strategy to create shareholder value is organic growth acceleration, optimizing our cost structure and of course, M&A. We are now -- in 2018, rather, a $650 million business, well on our way to $700 million. And we are in very big addressable markets, $10 billion across our portfolio. Importantly now, international represents 25% of our business, and we're in 90 countries. We think there's a great opportunity for us to duplicate the success in the U.S. to our International business. In the United States, we have 8 market-leading positions, which allows us to put bolt-ons next to these products and really allows us to build from a position of strength. So as we go through the presentation in terms of organic growth, I'll be focusing on COOLIEF. I'll be talking about our international opportunity. We'll talk some about our cost structure, which is really focused heavily on COGS, our overall cost and some of the exciting things that we think are forward in our integrations. And just for a moment on M&A and execution, I really feel like that's a capability and a competency that we have demonstrated. We've now put 5 bolt-on acquisitions into the business, 4 since I've been onboard, and they've been really acquired at multiples of 1.5 to 1 and 2x revenue, very accretive to our business and very nice for the channels that we're participating in. The first thing I'm going to do is really talk about our 2 franchises. The first is chronic care, and the other is pain management. At chronic care, we have leading positions, and our strategy is to protect those positions and grow internationally but add bolt-on acquisitions to keep our growth profile on track. We're in very addressable markets, both in respiratory and digestive health, $400 million for respiratory and $1 billion for digestive health. And on the right-hand side of the slide, you can see some of the newer products in our chronic care portfolio. We are going to be launching the MIC-KEY SF that you see there to help us continue to maintain high market share and long-term feeding. In nasogastric feeding, in 2016 before I arrived on the scene, the management team bought Corpak. That's been a big success for our business, and that product allows for the visualization without x-ray of enteral feeding tubes. We believe this could be a standard of care change that we're going to work hard on this year and might be a catalyst that we'll be talking about in the future. But what I really want to draw your attention to is NeoMed, an acquisition in 2019, and endOclear, both examples of us adding bolt-ons to the channel here that are very accretive and can allow for us to expand in these categories. This business is about 60% our overall business and is our largest source of cash and EBITDA. Pain Management. The way to think about the pain management franchise, this is the franchise where we have the highest potential for future growth. And in both instances, both in an interventional pain and acute pain, we're really lessening the need for opioids or, in some cases, removing the need for opioids. Both markets are large and greater than $4 billion. In the bottom left there, you see that 100 million Americans are in chronic pain each year. They are suitable for utilizing COOLIEF, and we target over 20 million U.S. surgical procedures in the acute pain portfolio. Just to move on to a little bit about the portfolio, ON-Q is an elastomeric pump. We utilize ropivacaine and bupivacaine for the treatment of postsurgical pain. We acquired Game Ready in 2018. ON-Q, that business, about 50% of it is orthopedic. So adding an orthopedic speed to healing product made a lot of sense for our business. We've been able to positively affect the top line of that business. And last year, toward the end of the year, we purchased Summit Medical for the Acute Pain business, which gives us entrance into electronic ambulatory pumps, allows our customers to program boluses. It really takes some of the supply chain challenges out of the realm of the customer. In the bottom there, you see COOLIEF. COOLIEF is our flagship product for interventional pain. We're the only FDA-cleared RF treatment for OA of the knee, and we will be innovating on this technology this year with a new console you see there on the bottom right as well as new probes as we end the year and enter into 2021. And before I go on and talk about the catalysts, I just want to talk about some of the obstacles that are being removed in terms of value creation for our business, and really, the dynamic is twofold. In one instance, we've had a market dislodgement in acute pain that's really caused slower growth in our business. And the second, we've deployed a new IT system that in the third quarter did not allow us to ship $5 million in revenue that changed our growth profile for the year. The first, on the challenge side, some of you may be aware and others not. There's been a 2-year drug shortage in ropivacaine and bupivacaine, and frankly, all of the caines, lidocaine included, but more importantly, a heavy regulatory focus on 503B compounding pharmacies meant that most of them in the U.S. were closed with the exception of Leiters, where we have a sole relationship. So that's been an impact to our growth, and we're doing things and taking action about it. We're going to take -- talk about that in a couple of slides. Second obstacle for us was in the third quarter and rolling out our new IT system. Again, we weren't able to ship about $5 million in revenue. And we talked about that coming into Q4 and Q1 as a potential headwind as well. And all of that IT system resulted in increased cash cost for the transformation. That said, we're very focused on the 2020 priorities and really feel like that we're building momentum in acute pain. In 2021, we have the chance to move our business to mid-single-digit growth and certainly improve from '19 to '20. Every month, our IT system is stabilizing. We're seeing improvements in the backlog and inventory visibility that we have, and this will allow us to then, in the second half of 2020, integrate the acquisitions that we made in 2019. We're committed to positive free cash flow in 2020 and then a real inflection point, frankly, in 2021. So 2020, again, I think a lot of the complexities are starting to move behind us. There have been complexities associated with the divestiture associated with deploying a new IT system, but we're ready to move on from them. Now I just want to sort of move our attention more to some of the specific milestones and actions and initiatives around the catalysts in our business. It's very important for our business to continue double-digit growth in COOLIEF, again the flagship product for our Interventional Pain business. In 2019, you saw a lot of investment in direct-to-patient advertising. We expanded our channel. We had a very positive CMS decision on OA reimbursement for the knee, and we started to lay out clinical studies and publish clinical studies that would really differentiate from a therapy perspective but also from a competition perspective as well. In 2020, that allows for us to continue to educate commercial payers, extending -- expanding the base for COOLIEF. We'll roll out new products, as I talked about in the upfront in terms of a console and probes. And you'll see a published study on hyaluronic acid, which is going to allow us to, over time, address what is a $1 billion market as we improve reimbursement in the ambulatory surgical center as well. In 2021 and beyond, I think that's an inflection point as these studies are all published. Equally, we have a study of COOLIEF against standard RF, and we'll work with CMS to get reimbursement in the ambulatory surgical center, which I've talked about in terms of important for orthopedic surgeons to be able to enter our market space. So at the bottom left there, think about first starting setting the stage with all the clinical studies that we need to differentiate our therapy and to expand our business and differentiate from competition. The awareness coming from direct-to-patient advertising and the work we do with physicians and then being able to broaden the market by expanding our coverage. We've really developed an expertise, both on a technology side and a practice development side, in this business. And ultimately, we believe this will lead to breakthrough-type of growth in 2021 and beyond. Those of you familiar with surgical pain know it's important that we set the stage for a return to growth in this business. Again, 2 years of a drug shortage, the shutdown of all the 503Bs in a regulatory environment have really slowed the growth in this business. But we've taken a lot of action around the business, partnering with Leiters. And now 50% of the customers that were filling with 503Bs or compound pharmacies have now moved back to Leiters, and we've continued to see sequential improvement quarter-to-quarter. We entered the electronic pump phase with Summit Medical. We announced a $5 million investment in BioQ to develop an advanced pump that would involve a cartridge and remove the need for drugs being purchased directly and actually take the supply chain issues with filling out of the equation. The important thing is we're very committed to this market and this space, and we've invested likewise because, at the end of that slide and in our New York Investor Day, we talked about an internal project around electronic nerve block that we think is going to be revolutionary and could obsolete some of the technologies along this pathway. We're believing that we can make this business more of a level business year-over-year in 2020, and we're really excited about the potential going forward. Another catalyst for our business is international growth, and some are familiar. Some are not. It represents about $155 million of our overarching business. When I started with the company, we had 0 growth in this category. We moved to 3% and then to 5% growth. We've now reached mid-single-digit growth, and I think we'll plateau there for a while as the market dynamics of adoption for the pain products take hold and we move from distributors thinking about tender management to more underlying growth in their various territories. Our strategy is threefold: geographic expansion, go-to-market execution and market development. Think of that in terms of developed markets, places like Germany where we've gone direct with pain or emerging markets where we've done similar things in South Korea and in India. And the other element that's additive to the growth here is that we can take the products from NeoMed, from Summit, from Game Ready and all of the acquisitions we make in the future, and roll them over the countries. Go-to-market execution is the next piece of the strategy. Again, a specific example is taking our distributors and allowing them the resources and the tools and clinical studies, the health economics that we have in our direct markets like the U.S. And we are going direct in some targeted markets outside the United States. Last, market development is probably the most important part of the strategy, which is getting the disease state awareness and referral pathway in the right place in countries outside of the United States. Key opinion leaders in medical education is a part of the equation and then where we've invested in reimbursement and health economics, taking those capabilities to the individual health care systems across the world, which ultimately allows for defining the standard of care. And what I mean by that is it's quite common, if you have pneumonia in a hospital in the U.S., to be put on closed suction respiratory. Not so much outside of the U.S. and obviously, the same holds true for a product like COOLIEF when you're seeking treatment for osteoarthritis of the knee. But over time, this can grow from a mid-single-digit growth, and we're very happy. This could be a catalyst that's as important as COOLIEF because of the fact that it's $155 million today. One of the other things that we're going to focus on as a company is our cash flow that we think would strengthen what is already a very strong balance sheet. We're certainly going to have fewer unusual or nonrecurring expenses as we move into 2020. I'm saying we'll move into 2020, we're actually in 2020 because, certainly, we won't have the same focus on the IT unusual expenses. In the second half of 2019, we did return to a more normalized capital spending rate, which is about 3% of sales for us. And the management team is very confident that we have an opportunity to recapture the prior year working capital and inefficiencies in our business. We believe we have a repeatable free cash flow acceleration opportunity and obviously, that's also fueled by the integrations that we make and, obviously, the progression of our overarching business. 2020 certainly won't be a peak year for cash flow for us, more of an inflection point in 2021, but we'll be moving in the right direction. So my takeaway for everyone is that, number one, our strategy is intact. The thesis for investment in our business is intact. And the underlying fundamentals of our business really have not changed. We have had an impact on a market dislodgment in acute pain and some of our own execution on the IT system that we rolled out that's given us a lumpiness to our progression to our ultimate goals. But if you look back to 2019 and you think about what we did do, I think we invested in the priority areas for our business to enhance growth in and around the Acute Pain business, making an acquisition in Summit Medical, certainly setting the stage for further sustained growth in COOLIEF with the clinical studies, putting the right people in place in our International business to take that $155 million of business and grow it. We've been very disciplined in our pursuit of complementary M&A with the acquisition of NeoMed, Summit and endOclear. And I believe that's really going to help us obviously in 2020 but really throughout the long-range plan in general. As you think about 2020 and again, these complexities moving behind us and we're stabilizing our IT system, I think that you'll see a lot of focus on overall costs, not only in COGS in our business but certainly in SG&A, corporate costs and generally, in all of our expenses. And then we'll have an opportunity to integrate really 3 new acquisitions in the second half of 2020. We're setting the stage in 2020 to begin to accelerate our international sales and stabilize our ON-Q business and get that business back to growth in 2021. And ultimately, in 2021, I believe this all sets the stage for gaining our earnings leverage for our business, an ability for us to accelerate our margins and also bring innovative -- innovation of new products to the market. So again, I want to thank everyone for listening to the Avanos story, and I look forward to the Q&A session. Thank you very much.

This is Joe Woody, CEO of Avanos, and we're in the Q&A session. And...

Dave Crawford, Treasurer and Head of Investor Relation for Avanos.

I guess we'll take our first question.

Just a question on ON-Q. So I mean, as of Q3, I think mid-single or maybe high single-digit declines still in that business, but in the presentation, you're talking about stable in 2020. What gives you the confidence that you get there? I guess what are you seeing with -- [ you sold ] 50% of the business, sounds like it's come back, recontracted the other 50%. Like what are you seeing that -- with those customers that gives you the confidence that the business does stabilize?

And so for those listening, the question is around ON-Q and the stabilization and what are the reasons to believe essentially for that. One of the things I mentioned in my presentation was sort of the bigger issue versus this drug shortage was about 30% of our business in that category was filled through 503Bs that are no longer in existence. We have a sole source agreement with Leiters, and now we have about 50% of those customers back in filling with Leiters. And then they obviously have to get back to the volume levels that they had previously. And we are seeing sequential improvement quarter-to-quarter in that business. Obviously, we have been making efforts from a channel perspective where we feel like we're starting to see the bottoming of that, to your point, that negative 4%, negative 5%, negative 6%. We're also confident in the potential for Summit, so having an electric pump where a customer can attach a bag. They don't have to order drug or fill through a 503B. We also track large customers that we've been working to come back into the fold of utilizing ON-Q. So it's really all the actions that we talked about on the slide and the monitoring of the business as we watch it sequentially.

I'd say the other aspect, too, is that a couple of members of the leadership team who have now visited site that the business is run out in Irvine, California, the summertime when the business was off its plan, built a new plan, and we've largely delivered that in the back half of the year. So that's encouraging that we've understood what's going on and have better visibility going into the business as we go into 2020.

Thank you. We have another question? Sure.

You had some back orders coming out of the IT implementation. Can you just speak to that at all in terms of if those have largely been filled and to the extent of which you suffered customer defections as a result of that?

Yes. For those listening into the call, the question was around the backlog associated with our IT deployment. And one of the things that we're happy to communicate is that we've made progression that is significant. We're obviously not reporting our Q4 numbers. We didn't quite get all the way to our normalized backlog but close. We did talk on our earnings call about the potential for that to somewhat be present in Q4 and Q1, but we really focused primarily on our customers with this IT stabilization and really the inventory visibility and the inventory ability for us to ship. So we're going to see a large improvement there. We've got a lot of confidence that we're improving month-to-month, and we certainly are on track with the stabilization into the spring, early summer that we spoke to. So we're very encouraged.

And just on the customer side?

And on the customer side, we certainly have had some frustrated customers but not large movements. And for those of you listening, I'm going to repeat that part of the question, which was have we had large losses of customer base due to the backlog issue, and that has not been the case for us. While we have had some frustration with our customers, we've been very responsive to them, and we're not seeing large loss of our customers to part in any of our categories because of this. Next question if anyone would like to ask, and then I'll repeat it for those listening.

I'm kind of new to the story, so I see plenty of companies do IT implementations [indiscernible] cause significant disruption in the business [indiscernible]

And those listening, the question was what type of disruption did the IT implementation cause, and the question comes from a questioner that's a little bit newer to the story. So when we sold our S&IP business to OMI, part of the sale was our IT system, and we have now deployed a new S/4Hana cloudless -- cloud-based, sorry, system. In the third quarter, we reported on the top line that there were about $5 million in sales that we were unable to ship, and that caused us to change our guidance for the year. That has improved. We're going to show market improvement as we talk about in February -- the last week of February earnings call, about our sales. We also experienced a little bit of accounts payable issue and accounts receivable, and that affected our cash position in the quarter, over [ $50 million ] impact. We're also working there. And what we've communicated is that toward the spring and early summer, we should be through most of this. No new issues with the IT implementation have come forward. I don't know if you want to add anything.

The only other thing I'd add to Joe's comments is we were working on prioritizing the issues, focusing on the customer and addressing those needs first and then getting to some of the more back end such as the receivables and payable issues into 2020.

Thank you for the question. I'll now open up to another question, and I'll repeat the question for those listening. I'm working hard today, CEO and moderator. But last year, I forgot to repeat the question, so working hard. Next question?

So you mentioned some increased investments in COOLIEF in 2019. And specifically, with regards to the DTC, do those investments roll off into 2020? Or is that a sustainable level of investment going forward?

So the question was, is there a sustained level of investment in COOLIEF. And we made some significant investment in COOLIEF, not only in direct to patient but expansion of the channel, obviously, the clinical studies. Some of the clinical studies are going on, but there's not any additive or we aren't going to invest at that level. We will be still doing direct to patient, and we'll be doing it through different channels, social media as well as some advertising, but we won't be spending more in 2020. Next question? 18 minutes available. Yes. So we have 2 questions. So please. Yes.

I'm still pretty new to the story. But how much of your business is hospital-based, big acute care versus ASC and ambulatory?

Most of our business is hospital-based with the exception of our COOLIEF product, which is our flagship for interventional pain. That's a cooled RF for treatment of chronic pain for spine, shoulder, hip, knee, and we have an approval for osteoarthritis of the knee, but the bulk of it really is a hospital-based business. Like most of the med device companies here at the meeting, we are seeing a move to ambulatory surgical center. We're working, for example, for reimbursement for COOLIEF and even our ON-Q product in the ambulatory surgical center. And over time, I expect that to be a trend that progresses. And I forgot to repeat the question. So what I just answered for everybody online was the portion of our business that is hospital-based versus ambulatory surgical center. And I would just add that the COOLIEF product is primarily sold in the hospital outpatient department. Thank you. I think we have a question in the back there. Yes?

Just when you do report the fourth quarter and talk about the outlook for 2020, will you at that time also say anything about the outlook beyond that, the next couple of years' time line to get to the longer-term goals and so forth?

The question is when we report earnings in the last week of February, what type of outlook will we give? We will give some guidance on 2020. We'll certainly report the fourth quarter. And then in terms of a refresh of our view of the long-range plan, we definitely want to give Michael Greiner, our new CFO, a good 6 months or so to get his feet on the ground. He's coming up to speed very quickly, and then we're likely to talk more about the next 3 years, sort of in the early to midsummer time frame.

I would add, though, I think we've said before at other conferences is that the goals of the long-range plan that we had put out 1.5 years ago are things that we're going to aspire to and continue to see line of sight to, but they are delayed because of the step back that we've had in the ON-Q business.

That's right. I would just add to Dave's comment that we think that the metrics that we laid out in New York in 2018 in sort of my second year are achievable, albeit on a longer time frame. You can obviously see that with the market dislodgement in acute pain and some of the IT rollout that's been in our way but getting behind us. Next question?

Just back to COOLIEF. Are you seeing any competitive impact from Medtronic's new RF system or otherwise?

So the question is are we seeing any competitive impact yet from Medtronic. I believe Medtronic has been out in the market well over a year. We're not seeing really any meaningful impact in the -- from that technology. We're hearing that they're discussing a relaunch potentially at some point earlier this year that might involve sort of marketing in a different approach to the business. I can't validate that or not. That's coming from the field. Nonetheless, Medtronic is a very good company, and they will eventually have their act together in this market. My view has been that we obviously have a very strong #1 position, and we have clinical studies. We have our own innovation coming out. And I believe that we have an opportunity to maintain our #1 position. I don't necessarily think it's a bad thing that a strong company is coming into the market. There's a potential for expansion in the market and greater awareness. And in fact, as we worked on the CMS final decision, our health economics and reimbursement team reached out to Medtronic, and I think they made some positive, helpful comments about the marketplace.

I don't know if I missed this but did you talk at the beginning about the inventory drawdown that you saw that was unexpected that kind of turned or got better or got worse?

Just a question again on the inventory-associated backlog with IT, and we did say that it has improved markedly. We're not obviously reporting the Q4 numbers right now. We're not exactly back to the standard backlog numbers that we would have, but we're really confident about the progression. And I would say that doesn't mean it's completely gone in terms of some inventory visibility or the movement of product to sterilization through the transportation process but not at the level that you saw in Q3, and it's in a much smaller orientation now. Yes.

So in the presentation, you talked about being free cash flow positive in '20 and then, call it, the potential inflection in '21. So it would seem like some of the working capital, as you've just been talking about, and the shipping issues would be normalized during '20. So can you just be a little specific about the drivers of the inflection in '21, whether that assumes that ON-Q rounds, whether they're -- assumes -- realize the benefits of the new IT system kind of longer than 12-month basis, things like that?

We still -- the question was about our positive cash flow in '20 and the inflection point in '21. And we still will have some unusual costs and structural costs in '20, but I'm going to have our Treasurer and Investor Relations Vice President work for a living over there.

Thank you. I think you're going to continue to see cash flow improve, one, for -- given fewer unusual costs as we get into 2021 as we get through some of the IT and restructuring that's still going to go on in 2020 along with the cash flow that's attributed to the integration of the assets in 2020. Not having that will improve cash flow. CapEx, both years '20 and '21, will be very similar, but I think the inflection point also comes from getting working capital back in the business, not just in recapturing the inefficiencies, but I think we can use the system favorably to make progress in working capital related to inventory. That's a big opportunity for us. And obviously, we believe in order to hit the margin targets and growth to the business, we're going to see a much more positive earnings profile in 2021 versus 2020 as well, which could contribute to cash flow.

Thank you. We can accept another question. We have 11 minutes. But if we have no further questions, we'll conclude, but we're happy to answer another question.

What are you seeing on flu so far this year?

The question is what are we seeing on flu this year. Definitely from Australia and from Asia, the reports are of a pretty significant flu season. That said, the severity of that flu where you would see some kind of an effect, for example, with us on closed suction respiratory does not appear to be severe. So we're not anticipating any sort of unusual bolus at the moment. Most all the companies here, if there is any kind of a bolus, are going to see that toward the end of February and into March. You typically wouldn't see it in the Q4. We have 2 more questions. Okay. I warmed everybody up.

In the presentation, you mentioned that you're going to be integrating some of the acquisitions you did more recently in the second half of '20. Is there any reason you can't go out and do another acquisition in the second half of '20 given the capacity you do have? Or is that taking on too much?

Correct. The question is would we -- as we're integrating the 3 acquisitions we've made, are we looking to make another acquisition in the first half. And what we've decided to do is focus on the IT stabilization, which then allows for the second half of the year to integrate the 3 that we have. And we've been running Game Ready freestanding and NeoMed freestanding. And so this doesn't mean that we would not take advantage of an opportunity that we thought we would miss out on. Again, we have a very full pipeline on both the pain side of the franchise and also on chronic care. But generally, it would more likely be in the second half of the year for us. And there was a question back here. Yes?

This is acquisition-related also. Just in terms of the deals you've been doing, typically they're relatively small in size. And just if we think about that, the -- what is the upside in terms of your appetite for the integration involved and the risk associated with it, but doing a larger transaction? Would you do -- would you be comfortable bringing in a $100 million, $200 million revenue business?

The question is would we do a larger transaction than we've been doing before. And I would say we would do one of those. In the near term, I don't see that, and in the midterm, we're highly focused on the bolt-on. And we like the multiples we've been paying. We like how accretive the deals are. They're right on our strategy. They're very manageable. That said, we've looked at 1 or 2 that are larger. So we don't -- if we think it's strategic for the business and we think it's transformational, we would certainly look at it. So you never say never on those things, but that's not the near and midterm projection.

I think there are OUS issues, in the quarter 2, maybe tenders in Latin America or something. And you also talked about in terms of the product rebranding? Can you just talk about how that's gone?

Yes. So the question was the International business and the performance in Q3. And we talked about backlog issues. We talked about -- some of it was associated with rebranding and registration in countries. And then we also talked about in Mexico a couple of tenders for several million that did not come through that were anticipated. We did not include those tenders in our projection for the fourth quarter. We're just assuming they don't come in. And we did improve pretty significantly the backlog issues for International business and in particular, made improvements in EMEA where that was an issue. So we're happy with the progress.

Yes. I think longer term, we're going to continue to see kind of mid-single-digit growth out of the International business that we saw last year. As we go forward, that can still -- can be a catalyst for higher growth as we approach high single digits in outer years. We've seen pockets of that in Asia Pacific region. They've got a very strong 2020 -- or 2019. The team is getting more seasoned in Europe as we've brought that team in, so hopefully, we can accelerate growth there. And so longer term, we have the ability to be a catalyst for growth from our International business as a whole.

Thank you. Yes, we have another question.

With another long-acting bupivacaine launching in the market next year, do you see sort of those types of products changing any trends in that marketplace?

Are you referring to the Heron product? Okay. So the question was with the Heron long-lasting local introduction, once it's FDA approved, how do I see that in the market. I actually think it's a good thing for the market. I think there's going to be further awareness about nonopioid solutions. We really are in a segment of this $4 billion that is the anesthesiologist or the surgeon that wants 5 days of pain relief. Maybe they want to see a patient stand the same day that they have a total knee repair. The other thing I would say is we're not trying to boil the ocean. We're not trying to grow 20% in that space or 15% or 10%. And we are going to see, I think, an opportunity as we shift to electronic pump to expand some of our business. But we really have our eye on the ball, like the market, and are investing in the market because we're in patients now with the [ E-block ], which we think obsoletes a lot of the technologies, including our own, when we can get that to the market. But generally, because this is a $4 billion market and I think you've seen success with Pacira and Exparel, you'll likely see success with Heron. And we're going to meet, as we get through the supply issues, our own success, opportunity for all of these approaches. And it's interesting because if you walk into an OR, it's not as if some -- most of these facilities are one way or another. They're using local one shots of their own. They're still using some opioids differently. They're use long-lasting locals, and they're certainly, when they feel it's appropriate, using elastomeric pumps. We have another question.

Just on that product, is the development pathway clear to you? Or do you need to come up with incremental innovation that would be enabling for that [ E-block ] technology?

The question was is the pathway clear and the technologies clear for that technology that -- for those of you listening, and the gentleman responsible is sitting right behind you, and they are very clear on the regulatory pathway. The technology is in a form of working and being tested on patients today. But it's further out, obviously, which is another part of your question. It's not going to be something that happens in '20 or '21, but it's out more in the '22, '23 time frame.

But do you think you have line of sight on where you're going and how to get there?

Yes, yes. Thank you. Any -- yes, we have another question.

Obviously, it seems like probably reinvigorating the growth engineers is the main focus. I mean is operating leverage not the right way to think about this year?

So we think we'll definitely -- the question, sorry, I got to repeat this question, was operating leverage next year and moving the growth forward in 2020. We'll definitely move the bar in our organic growth. We've talked about some opportunity for a small amount of margin improvement but really more of an inflection in '21. Some of the things we talk about are short-term incentive coming back into play, other inflationary costs as well.

I'd say too, the other key priorities are really stabilizing and getting the efficiencies out of the IT system and integrating the assets, so we can have the acceleration in margins and growth into 2021.

We are down to about 3 minutes. So we probably can take another question. I've got a secondary job if I ever need one as a moderator. We'll give it one more shot. Otherwise, I think we'll close out the session. Okay. Thank you for your interest in Avanos, and we'll close out the session. Thank you.