Artivion, Inc. Q2 FY2022 Earnings Call

Greetings, and welcome to the Artivion Second Quarter 2022 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brian Johnston of the Gilmartin Group. Thank you, sir. Please go ahead.

Thanks, operator. Good afternoon, and thank you for joining the call today. Joining me 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 provisions 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'll turn it over to Artivion's CEO, Pat Mackin.

Thanks, Brian. I'm pleased to report we've delivered another strong quarter following two consecutive periods of double-digit constant currency top line growth. Constant currency revenue growth was 9% compared to Q2 of 2021 this quarter, putting us at a 10% constant currency revenue growth in the first half of the year. Overall, we remain on track to deliver on each of the commitments we made at our investor meeting in March. Once again, our growth was driven primarily by aortic stent grafts, our On-X mechanical valves, as well as tissue processing segments. More specifically, on a constant currency basis, comparing Q2 2022 to Q2 2021, stent grafts grew 23%, On-X grew 12%, and tissue processing grew 7%. As we expected, BioGlue revenue in the second quarter decreased compared to the second quarter of last year, primarily due to delays in securing our CE Mark renewal as well as tough comparisons in the North America market for BioGlue in the first half of 2021. To that end, we've made significant progress on the CE Mark since our call last quarter. In June, our notified body completed their in-person inspection of our U.S. facility as well as our inspection of our German facility. We now expect to have our CE renewal near the end of the third quarter. In the meantime, we've continued to make substantial progress in securing country-specific derogations, enabling us to sell product. These derogations collectively now cover approximately 80% of our BioGlue business in Europe through the third quarter. Our success on all these fronts has reinforced our confidence that we can deliver on our three key growth initiatives that we outlined at our Investor Day in March, in which we believe will drive double-digit constant currency revenue growth over the next three years. As a reminder, our three initiatives are as follows. First, we will drive continued growth in On-X and our aortic stent grafts. Second, we will continue to benefit from our investment in our channels and our new regulatory approvals in Asia Pacific and Latin America. And third, in 2022, we will drive growth through PMA approvals in the U.S. for PerClot and the On-X PROACT Mitral low INR indication. For stent grafts, revenues in the second quarter increased 23% on a constant currency basis compared to the second quarter last year. We saw broad strength in this category for the quarter. For On-X, we posted 12% constant currency revenue growth in the second quarter compared to the second quarter of last year. The feedback we are receiving from customers on each of these product lines is that the superior clinical differentiation has been extremely positive, and we anticipate the demand for these products will continue to build as market adoption increases and hospital staffing shortages abate. Moving to our next initiative, expanding our presence in Asia Pacific and Latin America through new regulatory approvals and commercial footprint expansion remains on track. I'm pleased to report we're continuing to execute very well on the strategy as demonstrated by second quarter constant currency revenue growth of 38% and 59% in Asia Pacific and Latin America, respectively. We expect these regions to be important contributors of growth over the coming years as we execute on this strategy. Regarding our third initiative, we continue to make progress on achieving regulatory approvals for our low INR On-X mitral valve and for our PerClot by the end of the year. With respect to the On-X mitral valve, we continue to expect to receive PMA approval in 2022. If approved, we believe we will take significant market share in the U.S. with the On-X mitral valve, just as we've done and are continuing to do with our 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 by December 31, 2022, we will receive a $25 million payment from Baxter, which is a milestone due to us based on our divestiture agreement. And we'll begin to generate revenue from supplying PerClot to Baxter 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 three key products currently in U.S. clinical trials. These three products are PROACT Xa, NEXUS, and AMDS. Regarding the PROACT Xa trial, we continue to make significant enrollment progress in this prospective randomized clinical trial to determine if patients with the On-X aortic valve can be safely and effectively maintained on Eliquis versus warfarin. As of today, we've enrolled over 800 patients, and feedback from surgeons and patients participating in the trial remains very positive. We anticipate completing enrollment in the fourth quarter of 2022. Assuming the trial meets its endpoints, we expect FDA approval for this new indication by early 2025. We believe the On-X aortic valve using Eliquis rather than warfarin will become the market share leader in the aortic valve market for patients under the age of 70, given significant patient benefits using Eliquis over warfarin. As for AMDS, I'm pleased to announce we recently enrolled our first patients in our pivotal trial called PERSEVERE for the AMDS device. And as of today, we have four patients enrolled in that trial. PERSEVERE is a nonrandomized clinical trial in up to 25 U.S. sites of approximately 100 participants who have experienced an acute type A aortic dissection. The combined primary efficacy and safety endpoints of the trial are the reduction of all-cause mortality, new-disabling strokes, myocardial infarction, and new-onset renal failure requiring dialysis, as well as the re-expansion of the true lumen of the aorta. We are now anticipating completing full enrollment during the first quarter of 2023. Following a one-year follow-up period, we expect that, if the trial meets its endpoints, we should receive approval for AMDS in early 2025. In addition to the progress we've made in the PROACT Xa trial and the AMDS IDE, we are pleased to report that our partner, Endospan, is also making progress on its U.S. IDE TRIOMPHE trial for the NEXUS aortic arch stent graft system. In that trial, there are approximately 23 patients already treated and a total of 34 patients approved for treatment. Endospan is currently estimating trial completion in June 2023 and PMA approval in 2025, again assuming the trial endpoints are met. To reiterate, each of these three PMA trials proceeded as anticipated. We anticipate FDA approval for PROACT Xa, AMDS, and NEXUS in 2025. At that time, assuming we exercise our option for Endospan, these products would increase our addressable market by an estimate of $1.3 billion. With that, I'll now turn the call over to Ashley.

Thanks, Pat, and good afternoon, everyone. Total revenues were $80.3 million for the second quarter, up 6% on a GAAP basis and up 9% on a constant currency basis compared to the second quarter of 2021. As Pat mentioned, we benefited particularly from strength in aortic stent grafts, On-X, and tissue processing. On a year-over-year basis, in the second quarter of 2022, aortic stent graft revenues increased 13%, On-X revenues increased 10%, and tissue processing revenues increased 7%, reflecting new product launches and improving procedure volumes relative to the second quarter of 2021. BioGlue revenues decreased 11%, reflecting the CE Mark renewal delay as well as tough comparisons in 2021 in North America. On a constant currency basis, compared to the second quarter of 2021, aortic stent graft revenues increased 23%, On-X revenues increased 12%, tissue processing revenues increased 7%, and BioGlue revenues decreased 9%. On a regional basis, second quarter 2022 revenues in Asia Pacific increased 37%, Latin America increased 69%, North America increased 5%, and Europe decreased 4%, all compared to the second quarter of 2021. On a constant currency basis, revenues in Asia Pacific increased 38%, Latin America increased 59%, North America increased 5%, and Europe increased 6%, all compared to the second quarter of 2021. Gross margins were 65% in the second quarter compared to 66% in the second quarter of 2021. The decrease was driven by product mix within our aortic stent graft and BioGlue product lines and inflationary impacts on materials and labor. G&A expenses in the second quarter were $39 million compared to $40.8 million in the second quarter of 2021. Excluding nonrecurring acquisition-related and business development benefits of $3.1 million in 2022, which primarily consists of a noncash $3.2 million benefit related to fair value adjustments for Ascyrus contingent consideration and rebranding charges of $289,000, and excluding nonrecurring acquisition and business development charges of $3.4 million in 2021, G&A expenses were $41.8 million for the second quarter of 2022 compared to $37.4 million in the second quarter of 2021. On the bottom line, we reported a GAAP net loss of $4.3 million or $0.11 per fully diluted share in the second quarter of 2022. Non-GAAP net loss was $1.3 million or $0.03 per share in the second quarter. GAAP and non-GAAP net loss includes $3.8 million or $0.07 per share in losses on foreign currency revaluations. Excluding these amounts, non-GAAP net income would have been $1.5 million or $0.04 per share. As of June 30, 2022, we had approximately $40 million in cash, $316 million in debt, and the full $30 million available under our revolving credit facility. Adjusted EBITDA for the second quarter of 2022 was $10.3 million compared to $12.8 million for the second quarter of 2021. Please refer to our press release for additional information about non-GAAP results, including a reconciliation of these results to our GAAP results. And now for our 2022 outlook. We continue to expect constant currency growth of between 9% and 11% for the full year of 2022 compared to 2021. In our last call, we stated that we faced an $8 million currency headwind in 2022 versus 2021. Since that time, the dollar has continued to strengthen, resulting in additional FX headwinds of approximately $2 million. Considering our better-than-anticipated performance in Q2, partially offset by the continued strengthening of the dollar, we continue to anticipate full year revenues in the range of $317 million to $323 million. Due to the continued volatility in the FX markets, we want to provide a little more information on what we see for the balance of the year. At a euro-USD FX rate of approximately 1.03, our prior year Q3 2021 adjusted revenue is approximately $69 million, and our fourth quarter 2021 revenue is approximately $76.5 million, reflecting FX headwinds of approximately $3 million in each quarter. We expect that growth in both the third and fourth quarters should be consistent with our full year guidance of between 9% and 11% constant currency growth. We believe that we can comfortably continue to invest in our commercial channels in Asia and Latin America, our R&D pipeline, and service our debt without having to raise additional capital. I will turn the call back to Pat for his closing comments.

Thanks, Ashley. To summarize, our third consecutive quarter of strong execution leaves us more confident than ever in our ability to execute on our growth initiatives and achieve our goal to become a world leader in aortic repair through innovation. We're expanding our global commercial footprint and investing in our clinical programs. In the next three years, we expect revenue to grow double digits to approximately $400 million. We anticipate a 200-basis point increase in our gross margin. We expect to generate between $75 million and $80 million in adjusted EBITDA and reduce our net leverage to less than 3x. Our success in the second quarter positions us well to deliver on these metrics. First, we saw 23% constant currency growth in our stent graft program, 12% growth in our On-X franchise, and 7% growth in tissue processing. Second, we posted 59% constant currency growth in Latin America and 38% growth in Asia Pacific, and we're continuing to invest in these regions. Third, in 2022, we expect to receive PMA approval for PerClot and the On-X PROACT Mitral low INR indication. We also have a very robust midterm pipeline of three U.S. clinical trials that are currently enrolling. We expect these trials of PROACT Xa, NEXUS TRIOMPHE, AMDS PERSEVERE will all expand our total addressable market by $1.3 billion in late 2024, early 2025. At this point, we have all the essential pieces in place, and we've pivoted our focus to execution. Having led highly effective commercial organizations over the years, I know that the key to successful execution is having the right team in place. I'd like to thank our management team and all of our employees for their hard work and dedication. So with that, operator, please open the line for questions.

The first question today is coming from Rick Wise of Stifel.

Pat, it's impressive to see the progress you continue to make, and the year is on track along with all the programs. I was a bit anxious coming into the quarter, uncertain about the macro environment. Many companies have discussed the impacts of staffing, inflation, and transportation, among other factors. How did those issues affect your performance? Could the numbers or progress have been even better? Additionally, how are you approaching your guidance for the second half of the year?

Thanks, Rick. One of the key points here is that foreign currency has been a challenge, particularly with the euro. Inflation is at a 50-year high, which is increasing our costs for goods, materials, and labor, thereby impacting our gross margin. We are also experiencing staffing challenges, both due to COVID and general staff turnover. I regularly speak with many of our customers, and the issues are present but not overwhelming. While I can't quantify the potential improvements, I do believe opportunities exist. Our focus remains on execution despite these headwinds, and we will push through them. Looking ahead, we have the option to manage inflationary pressures by adjusting our prices. If these pressures persist, we will continue to raise prices as needed. Our high-end product line faces little competition, providing us with significant pricing power. All the challenges mentioned were evident in the second quarter, yet we managed to perform well, and we plan to maintain this strategy in the latter half of the year.

Got you. And it was also encouraging to hear about your PROACT Xa enrollment progress, over 800, as you said, if I heard it correctly. And I know you're blinded here, but is it a good way to ask how many years of follow-up will the next look include? Just trying to get a sense of where we are and any pointers that might encourage us on PROACT Xa.

We're currently over 800 patients enrolled, specifically around 805 as of yesterday, out of a target of 1,000. We expect to finish enrollment for this trial in the fourth quarter, ideally before our next earnings call, within the next 90 days. The design of this trial indicates that as long as enrollment continues, it suggests positive conditions. The Data and Safety Monitoring Board regularly reviews the data, and a halt in the trial would signal negative news. With over 800 patients enrolled since we began in May 2020, we currently have 400 patients on Eliquis, which is a positive indicator. While we can't predict the outcome until the trial concludes, more time and patient additions increase the likelihood of success. We are quite optimistic that if we obtain FDA approval for this trial, it will significantly change the market dynamics. I have mentioned this previously, and we will provide further insights, but I believe this will become the leading valve for patients under 70 years old, and there's considerable potential here.

Yes, I have one last question regarding gross margin. The quarter has been reasonable, with gross margins lingering around 65% to 66% of sales. How should we approach the second half considering factors like exchange rates and inflation? Is this perspective applicable for the second half as well?

Yes. I'll let Ashley add some comments on gross margin. We definitely experienced an impact on BioGlue due to selling different sizes because of limited availability in Europe. There was some noise surrounding the BioGlue CE Mark issue. The primary challenge to our gross margin has been the increase in material and labor costs that everyone is facing. Therefore, we plan to take a more aggressive approach to pricing. Maybe Ashley can provide additional insights.

Yes. So Rick, we estimate that inflation has had about a 150-basis point impact on gross margins. We anticipate that's going to be the impact for the full year. Now with that being said, we have been taking some price in the first half of this year that's allowed us to mitigate maybe about half of that impact. And as Pat said, we're going to look to get more aggressive on pricing in the second half of this year. As you look out over the balance of this year, we've been hanging around the 65% range. Last year, we ended up just a little bit over 66%. We anticipate that we're going to be closer to the 66% range than 65% for the second half of this year. But again, a lot of it's going to depend on what we continue to see in regard to inflation as well as the success that we have in the second half in regards to taking additional pricing.

Our next question is from Suraj Kalia of Oppenheimer.

Pat, Ashley, can you hear me all right?

Yes.

Yes, Suraj.

Gentlemen, congratulations on a great quarter considering the circumstances. You have consistently delivered throughout COVID. Pat, while transitioning between a couple of calls, did you mention the number of patient years already secured on PROACT? The reason I ask is...

I don't have that information readily available. We have enrolled 805 patients as of yesterday with a target of 1,000. Our first patient was enrolled in May of 2020. I can obtain the patient years quickly, but I do not have that information on hand.

Pat, are you still somewhat contemplating maybe we can rush this using a number of patient years for PROACT Xa filing?

Yes, that's a great point, Suraj. We plan to enroll in this trial in the fourth quarter, and we will approach the FDA about submitting with 60. If you consider a trial like PROACT Mitral, which is our low INR mitral, it has a one-year follow-up, which amounts to 800 patient years. They requested 2 years of follow-up, totaling 1,600 patient years. We will reach 1,600 patient years in less than a year. This is something we will explore. We don't have definitive guidance on that yet, but it is something we plan to pursue.

Okay. Pat, what is the status of proctoring in Europe? And more specifically, Pat, give us your bird's-eye view of how you view Germany in particular, with all the geopolitical issues going on. Just trying to preempt if or any issues could crop up later in the year with everything going on.

Yes, we had a solid quarter in Europe. The main issue was related to the derogations for the BioGlue CE Mark. During our last call in mid-February, we had one derogation out of about 20, and we have since secured around 15 of them. Our team did an excellent job in obtaining these derogations, so we believe we have 85% of the BioGlue revenue covered. We conducted a successful inspection with the regulators and are on track to regain our CE Mark under MDR by the end of the third quarter. Regarding Germany, I visited twice last quarter despite travel challenges, and things are operating as usual. We've discussed the power grid situation with our local team, and while I can't predict geopolitical developments, we currently see no major issues for the second half of the year.

A final question. I'll hop back in the queue. On-X. Walk us through in the U.S., how many sites are using On-X aortic? Would love to get some parameters on utilization rates, if you could share. And more specifically, when we look at On-X mitral, high-risk, just kind of compare and contrast, if you could tell us or give us an idea of what the low-hanging fruit could be post approval and when you start launching. Just trying to get a sense of what the immediate pull-through could be. Gentlemen, congrats again.

Thanks, Suraj. There are approximately 800 hospitals that perform aortic and mitral valve procedures, though some handle very few cases. Our primary focus is on around 600 accounts, and we are likely engaged with about 450 of those. Some of these are smaller accounts with lower volumes. With PROACT aortic, we found ourselves in a center with one surgeon, but once the data was released, we were able to expand our presence to multiple surgeons. It's not just about being in an account but also about the depth of our involvement there. In terms of opening new accounts, we've identified PROACT Mitral as a potential $40 million opportunity just by gaining mechanical share. If we receive FDA approval later this year, we will be the only mitral valve in the mechanical sector that offers a low INR. Our achievements with PROACT aortic have positioned us as the market leader in the mechanical aortic space, and based on solid share data in the U.S., we anticipate replicating this success with PROACT Mitral.

Thank you. At this time, I'd like to turn the floor back over to Mr. Mackin for closing comments.

So thanks for joining today. And we're pleased that we've strung together three nice quarters. We're growing 10% halfway through the year. We've got a very simple approach with four key growth drivers. We focus on our key products, On-X and stent grafts, they're both growing. One's growing 23%, one is growing 12%. We focus on expanding in Asia Pacific and Latin America. One is growing 59%, one's growing 39%. We're focused on getting our two PMAs approved, PerClot, and PROACT Mitral, and we're focused on enrolling our three PMA clinical trials, which will get us with $1.3 billion in 90% gross margin revenue. That, if all get approved, will be in the market in 2025. So this is really an execution story. As you heard from some of the questions, we're delivering even in the face of a lot of challenges, and we've reiterated our guidance for the rest of the year and feel confident that we can deliver it. So thanks for joining, and we'll see you next quarter.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and enjoy the rest of your day.