Artivion, Inc. Q1 FY2022 Earnings Call

Greetings and welcome to the Artivion First Quarter 2022 Financial Conference Call. As a reminder, this conference is being recorded. I will now turn the call over to Brian Johnston from the Gilmartin Group. Thank you. You may begin.

Thanks, operator. Good afternoon and thank you for joining the call today. Joining me today from Artivion’s management team are Pat Mackin, CEO and Ashley Lee, CFO. Before we begin, I’d like to make the following statements to comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company’s SEC filings and in the press release that was issued earlier today. Now, I will turn it over to Artivion’s CEO, Pat Mackin.

Hey, thanks, Brian. I am pleased to report that after an exceptional performance in the fourth quarter of last year, we followed up with a very strong first quarter this year. Constant currency revenue growth was 11.2% compared to Q1 of 2021 despite substantial COVID headwinds in the first half of the quarter. This is our second consecutive quarter of double-digit constant currency revenue growth. Our growth in Q1 was driven by our aortic stent grafts, On-X mechanical valves, and tissue processing. More specifically, on a constant currency basis comparing Q1 of ‘22 to Q1 of ‘21, stent grafts grew 34%, and On-X and tissue processing both grew 11%. As many of you know, we held an Analyst and Investor Day on March 23 in New York City. If you were not able to attend, I would encourage you to listen to the webcast replay. We provided a detailed overview of our goals and our strategy for the next three years. We also had KOLs share their experience using our products and had members of our leadership team provide a review of our products and pipeline. It was an excellent event and a great way to understand why we are so excited about the future of the company. We announced three key growth initiatives that we will focus on over the next three years to drive double-digit constant currency revenue growth. They are as follows: First, we will continue to drive growth in On-X and aortic stent grafts. Second, we will generate further upside from our investments in our channels and our new regulatory approvals in Asia-Pacific and Latin America. And third, in 2022, we will drive further growth through our PMA approvals in the U.S. for PerClot and the On-X PROACT Mitral low INR indication. This quarter, we made solid progress on each of these initiatives. So let me take a few minutes to review them. Starting with our stent graft offerings; revenue in the first quarter increased 34% on a constant currency basis compared to the first quarter of last year, building on our performance in Q4, where we posted 33% year-over-year growth in stent grafts. We had particular strength in our E-vita OPEN NEO frozen elephant trunk product as well as AMDS. For On-X, we posted 11% constant currency revenue growth in the first quarter of ‘22 compared to the first quarter of last year, in the fourth quarter of 2021, where we posted 13% year-over-year growth compared to the fourth quarter of 2020. We anticipate demand for these products will continue to build as adoption improves and hospital staffing shortages abate. We believe that we are just beginning to see the full potential of our portfolio in an environment not significantly hampered by the effects of the pandemic. Moving on to our next initiative, international expansion in Asia-Pacific and Latin America through new regulatory approvals and commercial footprint expansion; I am pleased to report that we are executing very well on the strategy as demonstrated by first quarter constant currency revenue growth of 39% in Asia-Pacific and 93% in Latin America. We continue to expect these regions to be important contributors to our growth over the coming years as we continue to execute on this strategy. Regarding our third initiative, we continue to make progress on achieving regulatory approvals for On-X mitral and PerClot. First is our application in the U.S. for a lower INR label for the On-X mitral valve, which we believe will provide significant clinical benefits for patients. We are in active dialogue with the FDA and continue to expect to receive PMA approval for the lower INR label for the On-X mitral valve, just like our low INR label for the On-X aortic valve sometime in 2022. If approved, we believe we will take significant market share in the U.S. with the On-X mitral just as we’ve done and continue to do with the On-X aortic valve. For PerClot, we continue to work closely with the FDA and expect to receive approval during the second half of 2022. If approved, we will receive a $25 million milestone payment due to us under the divestiture agreement we have with Baxter, and we will begin to supply PerClot to Baxter and generate revenue for approximately two years thereafter. In addition to our progress on each of these three initiatives, we also continue to make strides on our midterm pipeline with key products currently in U.S. clinical trials and others about to start later this year. These three products are PROACT Xa, NEXUS, and AMDS. We continue to make significant enrollment progress in PROACT Xa, which is our prospective randomized clinical trial to determine if patients with the On-X aortic valves can be maintained safely and effectively on Eliquis versus warfarin. We have currently enrolled 698 patients in the study and feedback from surgeons regarding the patients participating in the trial remains very positive. We anticipate completing the enrollment in this trial around the end of the third quarter of 2022. Assuming the trial meets its endpoints, we believe we can achieve FDA approval for this new indication by early 2025. If approved by the FDA, we believe the On-X aortic valve using Eliquis rather than warfarin should become the market-leading aortic valve for patients under the age of 70, given the significant benefits to patients of using Eliquis rather than warfarin. As for AMDS, we recently received FDA approval to begin our pivotal clinical trial called PERSEVERE. The PERSEVERE trial is a nonrandomized clinical trial across up to 25 sites in the U.S., in which we expect to enroll around 100 patients. These patients will experience a Q-type A aortic dissection. The combined primary efficacy and safety endpoints of the trial include the reduction in all-cause mortality, new disability including stroke, myocardial infarction, and new onset renal failure requiring dialysis as well as the expansion of the true lumen of the aorta. We anticipate enrolling the first patient this month and completing full enrollment by the end of the year. Following a one-year follow-up period, we anticipate receiving FDA approval for AMDS in early 2025. In addition to the progress we’ve made on PROACT Xa and AMDS, we are also pleased to report that our partner, Endospan is making progress on its U.S. ID trial for NEXUS known as TRIOMPHE. Approximately 19 patients have been treated, and up to 24 have been approved for treatment. Endospan is currently estimating the completion of the trial in September of 2023, likely leading to a PMA approval in Q2 of 2025. If each of these three trials proceed as we anticipate and we gain FDA approval for PROACT Xa, AMDS, and NEXUS in 2025, this would increase our addressable market opportunity by an estimated $1.3 billion. With that, I will now turn the call over to Ashley.

Thanks, Pat, and good afternoon, everyone. Total revenues were $77.2 million for the first quarter, up 8.6% on a GAAP basis and up 11.2% on a constant currency basis, both compared to Q1 of 2021. Revenues benefited from strength in aortic stent grafts, On-X, and cardiac tissues. On a year-over-year basis, in the first quarter of 2022, aortic stent grafts revenues increased 26%, reflecting increased procedure volumes and revenues from our new product launches. On-X revenues increased 10%, and tissue processing revenues increased 11%, reflecting improving procedure volumes relative to the first quarter of 2021. BioGlue revenues decreased 12%, reflecting lower procedure volume in the U.S. in the first half of the quarter primarily due to hospital staffing shortages. On a constant currency basis compared to the first quarter of 2021, aortic stent graft revenues increased to 34%. On-X and tissue processing revenues both increased 11%, and BioGlue revenues decreased 11%. On a regional basis, first quarter 2022 revenues in EMEA increased 5%. Asia-Pacific increased 38%. Latin America increased 88%, and North America increased 4%, all compared to the first quarter of 2021. On a constant currency basis, revenues in Europe increased 12%. Asia-Pacific increased 39%, Latin America increased 93%, and North America increased 12%, all compared to the first quarter of 2021. Gross margins were 65.7% in Q1 compared to 67.3% for the first quarter of 2021. The decrease was driven primarily by product mix within our aortic stent graft line and BioGlue being a smaller portion of our revenues. G&A expenses in the first quarter were $39 million compared to $38.6 million in the first quarter of 2021. Excluding non-recurring acquisition-related and business development benefit of $1.6 million in 2022, which primarily consists of a non-cash $1.8 million benefit related to fair value adjustments for Ascyrus contingent consideration and rebranding charges of $883,000, and excluding non-recurring acquisition and business development charges of $1.5 million in 2021, G&A expenses were $39.7 million for the first quarter of ‘22 compared to $37.2 million in the first quarter of ‘21. On the bottom line, we reported a GAAP net loss of $3.4 million or $0.08 per fully diluted share in the first quarter. Non-GAAP net income was $1.1 million or $0.03 per share in the first quarter. As of March 31, 2022, we had approximately $51 million in cash, $317 million in debt, and a full $30 million available under our revolving credit facility. Adjusted EBITDA for the first quarter of ‘22 was $10 million compared to $11.4 million for the first quarter of ‘21. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of those results to our GAAP results. And now for our 2022 outlook; we expect constant currency revenue growth of between 9% and 11% for the full year of ‘22 compared to ‘21. In our last call, we stated that we faced a $6 million currency headwind in ‘22 versus ‘21. Since that time, the dollar has continued to strengthen, resulting in additional FX headwinds of approximately $2 million. Considering this, we anticipate full-year revenues will now be in a range of $317 million to $323 million for the full year. Though we want to be clear that we will not be issuing quarterly guidance going forward, we felt it would be best to provide a little bit more information on what we see for the second quarter. Given our assumption of a euro-USD FX rate of $1.08 for the second quarter, our prior year Q2 2021 adjusted revenue is $73.6 million, which accounts for an anticipated $2.4 million currency headwind. As we have previously communicated, since our notified body for BioGlue exited the market in 2019, we received an extension for our CE mark until December 31, 2021. Due to COVID-related travel restrictions, our new notified body was unable to complete the recertification process by that time and will now not be able to recertify BioGlue until Q3 of this year. As we have previously indicated, we have been seeking derogations in certain EU countries pending recertification, but that process, too, has been delayed by factors beyond our control. As a result, BioGlue revenues in the second quarter could be adversely affected by up to $3 million. If revenues are affected by $3 million, constant currency growth in the second quarter will be in the range of 4% to 6%. If not for this temporary delay in BioGlue recertification, 2Q constant currency revenue growth would be in the range of 8% to 10%. Despite the delays in Q2 and a similar $3 million potential headwind in Q3, we still expect full-year constant currency revenue growth in the range of between 9% and 11%. If we receive additional derogations, the impact to Q2 and Q3 could be significantly less. Our guidance assumes no other significant impact from COVID during the remainder of this year, and a return to a more normal operating environment, meaning limited deferred surgeries and staff shortages and more in-person selling. We believe that we can comfortably continue to invest in our commercial channels in Asia-Pacific and Latin America, our R&D pipeline and service our debt without having to raise any additional capital.

Thanks, Ashley. So to summarize, our goal is to become a world leader in aortic repair through innovation. We firmly believe we have the necessary pieces in place to deliver on these growth initiatives and what we laid out on our Investor Day. We’ve made key acquisitions in the past few years and have provided us with products and a pipeline to deliver solid revenue growth for years to come. Our direct sales channel is broad and expanding. We’ve invested in manufacturing and have significantly increased our manufacturing capacity. In the next three years, we expect to grow double digits and become a $400 million business. We also anticipate a 200 basis point increase in our gross margin, and we expect to generate $75 million to $80 million in adjusted EBITDA while reducing our net leverage to less than 3x. Our first quarter was our first successful quarter that moves us much closer to delivering on these metrics. First, we saw a 34% constant currency growth in our aortic stent graft portfolio and 11% growth in our On-X and tissue processing portfolios. Second, we posted 93% constant currency growth in Latin America and 39% growth in Asia-Pacific, and we’re continuing to invest in these regions. Third, in 2022, we expect to receive PMA approvals for PerClot as well as On-X PROACT Mitral low INR. And we have a robust midterm pipeline of three U.S. clinical trials, either enrolling or about to start enrolling. These trials, PROACT Xa, NEXUS TRIOMPHE, and AMDS PERSEVERE should expand our total addressable market by $1.3 billion in late ‘24, early ‘25. In closing, our business momentum is strong. We believe that we have the strategy, the products, and the team in place to continue that trend for the foreseeable future. Thank you for your time and continued interest in our Artivion. Operator, please open the line for questions.

Our first question comes from Rick Wise with Stifel. Please proceed with your question.

Hi, good afternoon, Pat, and great to see the solid progress in the quarter. Maybe to start off with – just to start somewhere, start off with the On-X performance, another solid quarter from On-X. As you know, we did some doc due diligence work. And I for one came away impressed that the docs really feel like this is an important product. They are going to use it more. They are focused on a lower INR. And the engineering is competitively differentiated. So just reflecting all that, how are you – what are the next steps in getting the message out on On-X? And maybe just as part of that discussion, how does the PROACT Mitral opportunity play into that or complement what you’re already doing on the aortic side?

Yes. Thanks, Rick. The things that are interesting about On-X is that this has been – we acquired that company almost six years ago. And with the PROACT aortic, which is the first-ever low INR approval by the FDA in the mechanical valve segment, we’ve taken about 30 points of market share against some big competitors. Our sales force at that time when we launched that product had been selling tissue valves, aortic and pulmonary tissue valves, and they had not had experience in the mechanical segment. They have now gained six years of experience, selling not only the aortic low INR but also building relationships with all the cardiac surgeons in the U.S. as well as in Europe and Asia, who implant heart valves, whether it’s an aortic or a mitral; they are the same group. So I think that the proxy of using the PROACT aortic as a surrogate for what we’re going to do with the PROACT mitral is a good one because we’ve got a highly trained sales force. The mitral valves are on the shelves of lots of hospitals. Once we get this label change, customers are used to a lower INR for a valve like the On-X aortic, so the transition, I think, will be easier. I also think that, as we talked about in our Investor Day, the mitral position is a low-pressure valve situation, which requires a higher INR. Any reduction from the standard care is even more meaningful for the patient and their lifestyle. I also think that we’re almost at 700 patients enrolled in PROACT Xa. We are not marketing that from a commercial standpoint, but we’ve got 60 centers involved in that trial. So I think the combination of the On-X PROACT aortic continued adoption, the pending On-X Mitral approval, and our plan to complete enrollment in the PROACT Xa trial here in the next quarter really highlight the brand and the technology around On-X that we do things differently with that brand. Because of the technology, we can operate at lower INRs, and we’re also conducting a massive clinical trial to see if we can prove that we can use all of this going forward with the real game-changing technology. So I think On-X is just continuing to evolve, and we had another great quarter and look for more of the same, look forward to the mitral approval later this year.

Great. And can you talk on the darker side of the world regarding the BioGlue delayed research? I’d be curious to hear what steps you can take to help accelerate this and resolve it? I appreciate you being very clear, and it’s great to understand it. But I’d be curious to hear if there is anything that you can do as a company to push this forward? And what are the next steps?

Yes. Thanks, Rick. This is obviously very frustrating. This situation has nothing to do with the product's safety or performance. There is still great demand for the product. This is, frankly, a regulatory administrative issue triggered by our previous notified body for BioGlue deciding that the new MDR regulations would be too big of a burden, and they opted out. This left us needing to find a new notified body well in advance of the full effect of MDR in May of 2024. We’ve done that; however, the recertification process was supposed to happen with a site visit last fall, which would have put us in plenty of time to get the approval by the end of the year. They literally delayed it due to COVID travel restrictions. Now, they are not able to visit until June. We've gone through a derogation process, which has taken a lot longer than expected. We’ve been successful in some areas, but we have some other significant countries still in the process. We wanted to be transparent about the situation; the numbers Ashley discussed are kind of the worst-case for BioGlue. We have a few large countries in the works right now that could come through, but they are in the hands of government agencies. We’re also going through a European-wide derogation, which again has not occurred frequently because no one else has faced this issue before. However, there are other companies dealing with similar situations. This is a transient issue and has nothing to do with the business. This product has almost three million units implanted around the world. It’s approved in Japan and the U.S. We have no safety issues with the product, and we’re still shipping and selling elsewhere. It’s a regulatory issue compounded by administrative factors such as COVID. We have offered to fly them on a private jet, but they declined. We are doing everything we can to expedite this, and as soon as we get our inspection done in June, we can resume business. We expect to be back in business by Q3. That’s the full picture regarding this situation.

I appreciate it. Thanks so much.

Thanks, Rick.

Thank you. Our next question comes from Suraj Kalia with Oppenheimer. Please go ahead with your question.

Hey, Pat. Hi Ashley. Can you hear me alright?

Yes, Suraj.

Perfect. Pat, congrats on a great quarter. So Pat, if memory serves me right, this is the first quarter where international sales were greater than domestic sales. Please correct me if I’m wrong. I’m curious since there are FX headwinds; you referenced that at your Analyst Day about a month or so ago at $1.13 for the euro. Obviously, Latin America nearly doubled in the quarter. Just walk us through what the drivers are. More importantly, how sustainable do you see these?

Yes, thanks, Suraj. One thing that is interesting about this business is that, as we’ve talked before, we’re quite different from many companies of our size. Many of them focus mostly on the U.S. market with just a couple of products; however, we have many different products spread across 100 countries. We are very diversified in our products as well as our channels. What happened this quarter is that in the first half of Q1, U.S. staffing challenges in hospitals were a significant issue. I know you’re hearing this from all your calls. We experienced real staffing shortages, not due to patient influx in ICUs with COVID but because hospital staff were either infected or unable to work. Consequently, we saw a shortfall in BioGlue and vascular tissue from the U.S. in Q1, affecting our growth by about 15%. Simultaneously, we observed recoveries from COVID in Latin America and Asia-Pacific. We have been talking about this investment in Asia-Pacific and Latin America for some time. We follow a simple procedure: we secure new approvals for our products and hire salespeople, who then go to work. At our Analyst Day, we indicated we are expecting 25% to 30% growth in Asia-Pacific and Latin America for the next three years, and we had a strong quarter right out of the blocks in both areas. Our European business has a multitude of new stent graft technologies, contributing to overall success. We expect to see faster growth outside the U.S. though we were caught off guard by how significantly the Omicron variant affected U.S. operations in the first half of the quarter.

Right, okay, fair enough. Hey Pat, a multi-layered question. So on On-X, how should we think about U.S. versus international contributions in the quarter? When is the DSMB for PROACT Xa meeting? Forgive me; I have multiple calls going on, perhaps you referenced this already; as to when you’ll expect the DSMB to meet this month? And also, Pat, if I could just throw in the mitral – On-X mitral PMA approval status? Gentlemen, congrats, and thank you for taking my questions.

Okay. Yes, I’ll address those one at a time. Regarding On-X, the U.S. versus international performance was affected by U.S. staffing issues that caused On-X to underperform relative to expectations. However, we still managed to achieve solid results. Growth was considerably better outside the U.S. because we were not hampered by staffing issues there, so while it was not ideal, it was not surprising given the overall circumstances. As for PROACT Xa, the DSMB meeting is scheduled for the end of May. We do not put out press releases on this kind of information but anticipate this will happen by the end of the month. Regarding the On-X mitral, we expect to receive approval probably in the second half of this year. We are working closely with the FDA in real-time on both the PROACT mitral and PerClot PMAs. We are excited about the opportunity to launch the sister valve to the PROACT aortic, and our team is ready to go. We just need to finalize the approval, expected in the second half.

Thank you.

Thanks, Suraj.

Thank you. Mr. Mackin, there are no further questions at this time. I’d like to turn the floor back over to management for any closing remarks.

Well, thanks for joining, and we appreciate your time. As I said, at the Investor Day, we laid out kind of a clear plan for the next three years, and you can measure our progress. We told you we’re going to grow our focus products, On-X and stents and stent grafts in the high teens to 20%. We grew 34%. We told you we’re going to grow On-X 10% to mid-teens; we grew 11%. We told you we’re going to grow the overall business, 9% to 11% this year; we grew 11%. We told you that Asia-Pacific and Latin America should grow 25% to 30%; they grew at 39% and 93%, respectively, in Asia-Pacific and Latin America. We said we’d secure two PMA approvals and we’re tracking towards both PerClot and PROACT mitral in the second half of this year. Our midterm pipeline includes PROACT Xa, NEXUS TRIOMPHE, and AMDS PERSEVERE; we expect to enroll in PROACT Xa and PERSEVERE and improve NEXUS enrollment. Overall, we are pleased to have met our targets in light of challenges such as Omicron here in the U.S. Thank you for your support, and we look forward to connecting with you next quarter.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.