Artivion, Inc. Q4 FY2022 Earnings Call

Greetings and welcome to Artivion’s Fourth Quarter and Full Year End 2022 Financial Conference Call. It is now my pleasure to introduce your host, Brian Johnston, Vice President at Gilmartin Group. Thank you. You may begin.

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 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. With that I will turn over to Pat Mackin.

Thanks, Brian and good afternoon everyone. Our strategy which I've discussed with you over the past few years, in which we further detailed in March of 2022, at our investor day, is to create significant shareholder value by driving sales of our innovative products, expanding into new geographies, and developing our pipeline of innovative products to substantially increase our addressable market. As you will hear today, we are doing just that. I'm pleased to report that our business continues to perform well as we closed out the full year 2022 with just over 9% constant currency revenue growth compared to the full year of 2021. I'm also pleased to report that we made significant progress on the regulatory front. We received the BioGlue CE mark under the new MDR framework. And based on our recent conversations and interactions with the FDA, we are confident we will receive approval for PerClot. You will also hear that we continue to remain on track to deliver our revenue and EBITDA commitments, with 2023 expected to represent a major step forward. Starting with our year-over-year revenue performance for the fourth quarter, we saw strong top line constant currency growth in stent grafts which grew 16% and On-X which grew 11%. For the full year, on a constant currency basis, stent grafts are up 20%. On-X was up 13%, tissue processing was up 8% and BioGlue was down 5%. All compared to full year 2021. As anticipated, fourth quarter 2022 constant currency revenue growth of 5% was strong, but slightly below the quarter growth delivered through the first three quarters of the year. As we mentioned on our Q3 call we expected some deceleration in the fourth quarter, because our EU customers had accelerated approximately 1.5 million of BioGlue purchases into the third quarter that they otherwise would not have made in the fourth quarter. This was done to protect their supply of BioGlue for the fourth quarter in the event the company was unable to obtain BioGlue derogation extensions beyond October 31. If customers had not made these increased BioGlue purchases in Q3, our total growth for the fourth quarter would have been around 7% on a constant currency basis compared to the prior year. We believe this BioGlue purchase was a one-time occurrence now that we have the CE mark for BioGlue, and we anticipate our customers to return to regular ordering patterns in the EU and in those countries where commercialization is based on the CE mark. As you will recall at our investor day in March of 2022, we committed to delivering compounded double-digit constant currency revenue growth through 2024 through three key initiatives. First, we'll continue to drive our growth in Aortic stent grafts and On-X. Second, we'll continue to benefit from our investments in commercial channels and new regulatory approvals in Asia-Pacific and Latin America. And third, we will benefit in 2023 and beyond from PMA approvals in the U.S. for Per-Clot and PROACT Mitral. As mentioned previously, stent graft revenues rebounded in the fourth quarter, increasing to 60% on a constant currency basis compared to the fourth quarter last year. We finished the full year with 20% year-over-year growth compared to '21 on a constant currency basis. The demand for our stent graft portfolio remains high. We've also made significant progress in hiring at our German manufacturing facility, which is now operating at nearly full staffing. As a result, we believe this will improve product availability significantly over time, serving as a catalyst to continue driving growth in our stent graft portfolio. As for On-X, revenue grew 11% on a constant currency basis in the fourth quarter of '22 compared to the fourth quarter last year, and 13% for the full year compared to '21. We remain confident we will continue to take market share globally with the only mechanical aortic heart valve that can be maintained at an INR between 1.5 and 2.0. We will also execute very well on our next initiative to expand our presence in Asia-Pacific and Latin America through new regulatory approvals and commercial footprint expansion. APAC and Latin America had fourth quarter constant currency revenue growth of 21% and 12% respectively, and 30% and 38%, for the full year respectively. We continue to expect these regions to be important growth drivers over the coming years. Regarding our third initiative based on recent discussions with the FDA, we are optimistic that we will receive a PMA for our Per-Clot product. Upon approval, we anticipate receiving approximately $19 million or $15 million net of amounts owed to a former partner, and we will then commence shipping a product to Baxter. As for PROACT Mitral, we are maintaining interactive dialogues with the FDA and look forward to a potential approval in the second half of this year. We do not believe that securing this approval is imperative to achieve our near-term and longer-term revenue growth forecasts, and we've not included the potential approval in our outlook for 2023. In addition, alongside our progress in each of these three initiatives, we continue to make progress in our pipeline, which includes the AMDS clinical trial and the Nexus PERSEVERE trial of our partner. We've enrolled 25 patients in our PERSEVERE trial, which is a non-randomized clinical trial of up to 30 centers in the U.S. with 100 patients who have experienced acute type aortic dissections. The combined primary efficacy and safety endpoints of this trial are reduction of all-cause mortality, new debilitating stroke, myocardial infarction, new onset renal failure requiring dialysis, and re-expansion of the true lumen of the aorta. We now anticipate completing full enrollment in the second half of this year following a one-year follow-up period, and assuming the trial meets its endpoints, we anticipate we would receive FDA approval for AMDS in 2025. In addition to that, our partner Endospan is making progress on the US ID called TRIOMPHE for its Nexus aortic arch stent graft system. In that trial, there are approximately 32 patients enrolled and treated, and a total of 47 patients enrolled and approved for treatment. Endospan estimates enrollment completion in mid-2023 with a PMA approval in 2025, assuming the trial meets its endpoints. To reiterate, if these PMA trials succeed as anticipated, we expect FDA approval for AMDS and NEXUS in 2025. At that time, assuming we exercise our option for Endospan, these products would increase our addressable market opportunity by an estimated $700 million. With that, I'll now turn the call over to Ashley.

Thanks, Pat, and good afternoon everyone. Total revenues were $79.4 million for the fourth quarter, flat on a GAAP basis and up 5% on a constant currency basis, both compared to Q4 of 2021. For the full year, revenues increased 5% on a GAAP basis and 9% on a constant currency basis. On a year-over-year basis in the fourth quarter of 2022, On-X revenues increased 8%. Tissue processing revenues increased 2%. Aortic stent grafts grew 2% and BioGlue decreased 12%. On a constant currency basis compared to the fourth quarter of 2021, stent grafts grew 16%, On-X grew 11%, tissue processing increased 2% and BioGlue revenues decreased 8%. On a regional basis, fourth quarter 2022 revenues in Asia-Pacific increased 20%, Latin America increased 13%, North America increased 4% and EMEA decreased 11%, all compared to the fourth quarter of 2021. On a constant currency basis, revenues in Asia-Pacific increased 21%, Latin America increased 12%, North America increased 4% and Europe increased 2%, all compared to the fourth quarter of 2021. Gross margins improved sequentially from the third quarter to 64.1% in Q4, which compares to 64.7% for the fourth quarter of 2021. The decrease compared to the prior year was driven primarily by inflation impacts on materials and labor, as well as product mix within our aortic stent graft line. While inflation rates globally remained persistently high and continue to weigh on our gross margins, we believe that gross margins will improve and stabilize in 2023 and then improve after that. G&A expenses in the fourth quarter were $38.5 million compared to $51.3 million in the fourth quarter of 2021. Excluding non-recurring acquisition-related business development benefits and other non-recurring charges, G&A expenses were $41.9 million for the fourth quarter of 2022 compared to $40.3 million for the fourth quarter of 2021. R&D expenses for the fourth quarter were $8.3 million compared to $9.5 million in the fourth quarter of 2021. R&D expenses in the fourth quarter of 2022 include $1.9 million for pre-launch Per-Clot inventory. If Per-Clot is approved, which we expect, then the majority of the Per-Clot sales to Baxter expected in 2023 will have no cost of goods associated with the sales. We have treated these costs as non-recurring and have excluded them for purposes of calculating adjusted EBITDA and non-GAAP earnings per share. Other income and expenses include $5.3 million in net interest expense, and foreign currency translation gains of approximately $4.5 million. On the bottom line, we reported GAAP net income of approximately $2.2 million or $0.5 per fully diluted share in the fourth quarter of 2022. Non-GAAP net income was $4.2 million or $0.10 per share in the fourth quarter. Non-GAAP income includes foreign currency gains and excludes business development and other non-recurring charges. As of December 31, 2022, we had approximately $39.4 million in cash, $306 million in debt, and the full $30 million available to us under our revolving credit facility. Adjusted EBITDA for the fourth quarter of 2022 was $11 million compared to $10.8 million for the fourth quarter of 2021. 2022 full-year adjusted EBITDA was 41.6 million compared to 44.3 million for 2021. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results. Now for our initial 2023 outlook. We expect constant currency revenue growth of between 8% and 12% for the full year of 2023. We expect the revenues to be in a range of $331 million to $343 million. We see the timing of the Per-Clot PMA and timing of supply upside following increased production staffing in Germany as key factors that could move us toward the lower or higher end of this range. As noted earlier, approval and initial revenue contribution from PROACT Mitral is not included in our 2023 outlook and could represent further upside. Our guidance also reflects a recent communication we received from our sole source supplier for TMR handpieces, indicating that they are exiting this business and will no longer supply us with handpieces effective immediately. We therefore expect to have minimal contribution from TMR revenues in 2023. We are currently evaluating our options for TMR, but none would contribute any revenues prior to 2024. For context, we generated approximately $3 million in revenue from the TMR product line last year and therefore do not see this as a meaningful impediment to long-term growth. For the first quarter, we expect to see an approximate $2 million revenue currency headwind compared to the first quarter of 2022. Additionally, given the meaningful contribution of stent grafts to our growth, we expect revenue growth for the first half of the year to be closer to the lower end of our range of revenue guidance, as recent hires in Germany will take time to become fully productive. We then expect growth in the second half of the year to be closer to the higher end of our range of revenue guidance. With the continued growth in our top line revenues, general expense management, and a decrease in R&D spending, we anticipate delivering 20% plus growth in 2023 and adjusted EBITDA to a minimum of 50 million dollars. This will put us on track to meet our 2024 adjusted EBITDA commitments we made in March of last year at our investor day. Further, we do not see the need to raise additional capital to fund our debt obligations, our investments in our channels, or our pipeline. Even if SOFR increases to approximately 5%, we should be able to comfortably service our debt and continue to invest in growth. Finally, our term loan B contains no financial covenants that would place us in default unless we were to have more than $7.5 million drawn on our revolving credit facility at the end of any calendar quarter, which we do not. As of now we have the full $30 million available under our credit facility and do not foresee the need to draw on it. Additionally, our convertible notes do not contain any financial covenants. I will turn the call back over to Pat for his closing comments.

Thanks, Ashley. We're pleased with our performance in 2022 and our position entering 2023, particularly considering the multitude of macro headwinds, including, among other things, COVID, significant staffing, and inflationary pressures. Our growth strategy is working and delivering on the results we’ve envisioned. To summarize, our stent graft business returned to strong growth in the fourth quarter. We expect recent staffing improvements in Germany to significantly benefit supply and drive future growth. On-X continues to perform well and we’re hopeful that PROACT Mitral will be approved later this year. Asia-Pacific and Latin America outperformed, and we expect more of the same moving forward. Our recent BioGlue CE mark should drive growth and we’re very optimistic that we’ll soon have approval for Per-Clot. In our two U.S. clinical trials, AMDS PERSEVERE and Endospan NEXUS TRIOMPHE are currently enrolling. Combined, we expect to expand our total addressable market for these two products by over $700 million in 2025, assuming we execute on the Endospan option. Through 2024, we expect revenue growth to grow double digits on a compounded annual basis, generating $75 million to $80 million in adjusted EBITDA and reducing our net leverage to less than three times despite the headwinds we face from inflation and its impact on gross margins. At this point, we have the essential pieces in place for sustained growth and can continue our focus on execution to create shareholder value. We are further solidifying our position as a leading company in aortic repair, thanks to our innovative products, accomplished sales organization, and experienced leadership team. We are confident our positive momentum will continue, and I want to thank all of our Artivion employees around the world for continuing to deliver for the people we endeavor to help. So with that, operator, please open the line for questions.

Thank you. Ladies and gentlemen, we will now start the question and answer session. Our first question comes from Charlie Montang with Lake Street. Please go ahead with your question.

Guys, congrats on a great quarter. Just a couple quick questions for me. My first one is can you kind of remind us on how we should be thinking about FX impact in 2023? I mean, when those headwinds might start to moderate when comparing year-over-year USD numbers.

Yes, Ashley, I will let you take that one.

Yes. A lot of it obviously depends on where primarily the Euro-USD relationship moves because that is the one that has the most outsized impact on our business. Based on where rates are currently, we expect that beginning in the second half of the year FX could actually become a tailwind for us. So again, it ultimately depends on where rates move. But based on what we’re currently looking at, we expect, again, FX to become a tailwind for us in the second half of the year.

Okay, great. Thanks for the clarity with that. And then my next one is that on your last analyst day you stated that On-X should grow high teens, preservation mid-single digits, and surgical sealants low to mid-single digits. Does this remain the case? And is there anything you are seeing today that could alter that trajectory?

Yes. I’ll take that one. I mean, if you look back at kind of what we presented in March of last year, we projected roughly 15% to 20% growth for stent grafts, and we came in at 20% for the year, so at the high end of that range. For On-X, we said kind of 10 to 15%, we came in at 13, which is the midpoint of that. So well in line. Tissue mid-single digits, we came in at 8%, kind of at the high end of that range. The only one that disappointed was obviously BioGlue, and the fact that it took us an entire year to get the CE mark through the MDR process was a big contributor to that. We had several countries that we couldn’t get derogations from, and in the countries we did get derogations, it took us longer than we thought. So the great news is we got the BioGlue CE mark right at the end of the year. That’s all behind us. We now have an MDR CE mark for BioGlue and we don’t have to hear about that anymore. So I think BioGlue should return back to kind of that low single digits and that was really the only outlier and one of the reasons we were at the lower end of the range for the full year.

Okay, great. Thank you. And then just one last quick one here. The supply chain issues within the stent business, are they resolved, and if not, what else needs to be done?

Yes. I mentioned this in my comments. It’s obviously a good problem to have. We have huge demand for our stent graft portfolio. And it's partly because we have such innovative products—this is a bit of a growth challenge. We're growing at the high end of our range of 20%. We had some issues hiring in one of our major factories in Germany. We actually changed our labor rates, and where we couldn’t find people at the lower rates, we all of a sudden, magically found a bunch of people. This is, again, inflation in action. We hired a number of people in the fourth quarter. They are being trained as we speak; it takes about 90 days to get up and trained. So as Ashley commented, we should expect to see kind of continued strength in our supply chain to support that growth, and hopefully, going beyond where we are as we get the new manufacturing employees trained and get the supply chain primed. So we should see growth probably kind of increase throughout the year on our stent graft business.

Our next question comes from the line of Jeffrey Cowen from Latin Bert, Dolman. Please proceed with your question.

So as you few quick ones, as far as guidance goes for '23, are you including or not including Per-Clot in that in the range?

That’s in the range.

Got it. Okay. And then, can you talk about margins a bit? Supply chain, it seems like '23 will remain challenging.

Yes, I mean margins, kind of one of our other challenges—other than the BioGlue CE mark taking forever last year—was the inflationary impact. The labor rate increases and the cost of materials was really one of our challenges as a headwind that many companies faced. I mean, we finished 2021 at around a 66% gross margin, and we finished '22 at about a 64-65%, so about a 150 basis point decline, all directly related to inflationary pressure. So those are somewhat baked into our gross margins we’re planning on kind of holding them flat this year, but a lot of those inflationary pressures are baked in. The supply chain issue—regarding TMR, people have been covering the company for a long time—was not exactly our future. But it was a decent product with good margin. We had multiple suppliers just go down. We don’t have a supply chain infrastructure really supporting that, because it’s such a small product and it’s not strategic. I think that’s a good example of it—just that it’s more probably effort than it’s worth. We’re going to evaluate whether or not we want to revive that. But at a minimum, we’re not going to see revenue from TMR for the next two years. So that’s a good example of where we don’t have a strategic focus; that kind of stuff can happen. We deal with it every day, but we’re able to support our faster growing larger product lines with a good infrastructure.

Got it. Thanks. And then lastly, for us, any commentary Pat as far as the stent graft platform out there in Europe and some more color on Nexus versus VEDA and what kind of reception and presence and growth you’re seeing?

Yes, I mean, we’re seeing really excellent growth. I mean, we summarized that decelerated as the year went on in 2022 primarily because of supply. Our sales team over there was moving product around because as I mentioned earlier, we had a hard time hiring in our facility in Germany, and once we changed those labor rates to get in line with kind of the German market rates, we were able to hire very quickly in the fourth quarter and filled the factory up, and those people are being trained now. But as far as the product lines, we’re seeing really good growth across all of our products. It’s really one of the opportunities we have; we’ve got such unique technology in the Neo frozen elephant trunk up in the arch, the two offerings in the thoracoabdominal area for inside in our extra design that we just got to make sure we have the product where it needs to be on time, and we can continue to drive this growth for all for a long period of time.

Our next question comes from the line of Rick Wise with Stifel. Please proceed with your question.

Good afternoon, Pat. A couple of questions. Sorry to make you go over the macro. Again, I just wanted to be absolutely clear that I’m hearing the messaging. A lot of the companies that have reported so far have felt would oversimplistically characterize, and I’d say they’ve been talking about a stable to improving environment. I just was wondering, is that how we should think about things in a general sense for you? I mean, I hear, and when I think about it, again, Germany getting better as the year unfolds, it sounds like supply chains are less of an issue, and currency has a lesser effect, staffing. I should make sure we’re real clear on the key macro driver being led in ‘23.

Yes. So if you think about I made a comment about just the number of—in 30 years of doing this, I’ve never had as many macro headwinds. You had COVID, you had staffing, hospital strikes, inflationary pressures, supply chain pressures, currency pressures. There was a lot, and I think we actually put up a pretty good year given all the stuff that was thrown at us. If you kind of unpack those, I mean, inflation you can read the papers, everybody’s kind of trying to figure out what’s going to happen. But we feel like our gross margins are going to be flat; that answers your inflation question. We took a 150 basis point hit last year, and we think we can be stable this year. So we’ve kind of got it baked in. COVID—I don’t really even see COVID being an issue. Now, again, who knows what happens in the future, but I really just don’t see it. We’re seeing staffing, here and there. I talked a lot to surgeons and there are strikes and Mount Sinai had a nurse strike and Minneapolis had a nurse strike, and Stanford had a nurse strike. I mean, at the end of the day, our procedures get done. So whether they strike for a week or two, it’s not going to change our macro procedure volume in a year. So I don’t see that as a big issue. We have heard a lot of noise out of the UK that NHS health systems are in kind of disarray. But again, our procedures are emergent; these aren’t facelifts, right, these are aortic arch repairs and heart valves. So I think we tend to—85% of our procedures are emergent. We’ve proven this through the pandemic. I think that is in a much better place. I think Ashley commented on currency in the second half. So I do think to your point, many of these dynamics are improved compared to last year. Yes, the supply chain stuff can jump up and bite you. But we’ve got teams in place to manage that. There is lots of kind of noise under the hood. But we continue to drive the business, and I think simplifying the product line—having a non-strategic product like a TMR, it’s just hard to manage under supply chain.

Yes, for sure. Can you take us through some of the key drivers in 2023 for the aortic stent graft portfolio? Obviously, you’re doing great. How do we think about just the blocking and tackling this year? Is it, to what extent is it important to add sales personnel? What are your top couple of priorities for that portfolio?

Yes, our fastest growing products are four of them within that stent graft portfolio. It’s really our differentiated portfolio. So if you kind of go from the top of aorta down on the surgical side, our Neo device is doing extremely well. We’re opening up new markets in Asia-Pacific and Latin America, and we’re also adding feet on the street there. We saw tremendous growth in Asia and Latin America as a combined business, but that was one of the underlying drivers. We continue to add some staff here and there as we see a very fast growing market, but that Neo device is growing quite well. We just launched our second-generation stent graft for the arch, the Nexus Duo, which is a two-branch device. You’re familiar with this from some of the work you’ve done with our physicians. The current Nexus that’s in U.S. clinical trials is a single branch in the denominator that’s got some limitations. We’ve got a two-branch device that was just launched in Europe that is getting very, very positive reviews. We expect that to be a growth driver. The AMDS for acute type A aortic dissections, which is approved in Europe, Canada, and a handful of international markets, is growing very rapidly. We continue to get more and more data out on that device. PERSEVERE is continuing to enroll, which obviously, some of the anecdotal things we’re hearing from U.S. surgeons are spreading across the oceans, and people are hearing about them. Our thoracoabdominal is a key player in that segment with two offerings; the only off-the-shelf inside and the custom-made extra design, and combined, we can treat really any thoracoabdominal anomaly. So it’s really those four unique technologies where we have very little competition, we may have one or two. But it’s a very unique space, and surgeons love the portfolio. It’s allowing them to treat patients they can’t treat with some of the other companies. Again, we had some challenges filling up the factory in the second half of last year, and we’ve now resolved that. It’s really just a matter of training and getting those employees up to speed. We expect to continue to grow our stent graft business pretty significantly.

Got you. Just a couple more from me, if you don’t mind, and I appreciate all the color; very helpful. If I remember correctly, your long-term guidance at the analyst day you talked about your aspiration for $400 million in 2024. How are you feeling about that number now?

Yes, I think, I mean, obviously currently, yes.

Great, about not so great maybe.

Yes, as we learned last year, I mean, when we launched that in March, I didn’t know the year was going to decline 16%. We have a big chunk of our business in Euros. So I think you’d have to, what would I say more to is the revenue chart that basically showed we thought we could grow 10% on average over the next three years. We grew nine this year. It’s never—as you know, businesses are never linear. There were a lot of challenges in 2022. I think that 10%, if you look at our guidance, we’re between 8% and 12%. We’re shooting for over three years of a 10% CAGR. So again, I think that the number has a lot of factors, including a big currency factor for us. But I think what we are holding to is our 10% growth rate, and I think that’s well within reach for the company.

Okay. And just lastly, I just wanted to make sure, again, maybe I’m just being dense about it. You guided PROACT Mitral, I think to the end of '22 before. Now it’s second half, can you share why the delay? What are the factors there? Why are you confident about the 2H '23? Thanks so much.

Yes, so it’s a good question, Rick. We had two PMAs for the FDA, and we had hoped to hear from about both of them by the end of the year. On the good news, we heard from the FDA on Per-Clot. I’m happy to report that they basically said this thing’s going to get approved. We’re working on labeling right now. I’ve been through a lot of these, and we are in the final steps of the process. Now, again, I can’t tell you exactly when the things get approved. But I mean, exactly what they told us is it’s going to get approved, and we’re working on labeling is a pretty good indicator. Conversely, if you look at PROACT Mitral, it wasn’t as clean. The trial wasn’t as clean. And you’ll understand this because you’ve done a lot of work here. If you look at the PROACT Mitral, which started a decade ago. This started a long time ago. It missed its primary endpoint of non-inferiority. It was a composite endpoint of bleeding and thromboembolic events. Okay. And that was exactly the same way PROACT Aortic was done. The FDA didn’t like that the two variables were commingled. Bleeding and thromboembolic event because one can drive a non-inferior event; a better performance on bleeding can mask a thromboembolic miss. In PROACT 10A, they made us separate those variables. They made us primary thromboembolic, secondary bleeding. So if you look at that trial, and you look at the fact that the average patient in the treatment group was 2.5 and the average was like 3.0, and average patient in the control group was around 3.0. One would suspect that the bleeding would be less. It just, I don’t know how you have a lower INR of 0.5, and there’s no difference in bleeding, but it wasn’t powered enough. But if you look at the totality of the data, I think you can run an On-X mitral valve at 2.5 compared to a non-On-X valve, it’s over 3.0, and have no difference in thromboembolic events. To me that’s meaningful for patients. The PI of the trial is telling us. It’s just going to take us longer talking to the FDA about it. We’re going to present what we think in the totality of that data. We might have missed the primary endpoint for the trial, but if you really look at all the data, we have surgeons that are looking at it that say that it truly shows that using On-X at a reduced INR level presents an option for patients. We need to put our best case forward and see what happens. I think in the end, the data is out there; the paper was published in December, and we are not promoting it off-label. I think surgeons, when I talk to them, see the benefit of the valves, and hopefully the FDA sees it the same way.

Our next question comes from the line of Michael Matson with Needham and Company. Please proceed with your question.

Yes, thanks. So I just want to make sure I understand the stent graft business. This is the second time that you’ve had this staffing challenge there in Germany. I mean, I understand that it’s a difficult labor market, but I guess you kind of have a forecast for how fast that business is going to grow. And is it growing in line with that forecast? So I guess when you try to—what can you do differently to try to get ahead of this? This doesn’t happen again next time you’re hiring.

Yes, it’s a fair question Mike. And again, I think part of this is I’ve been involved with this business going back; I ran the Medtronic business 20 years ago. It’s a very complex supply chain. If you have an individual case, you may ship in five or six pieces because there are different sizes that have to put different pieces together, and then two or three may come back. There's a lot of logistical excellence involved in it. We weren’t necessarily up to snuff with that. There’s also a lot of consignment involved where you actually put units on the shelf. So if you spread your units out in consignment, and you’re in the wrong places, you can see how you can get ahead of yourself. We actually brought in an outside firm to help us with this, and we’re kind of going through that right now. I agree with you; this is something we’re going to put to bed for once. We’re doing a lot around supply chain excellence and getting product back, as well as making sure our consignment accounts are having the right number of turns. So again, there’s a whole project going on in that area. It’s not just the factory; the factory is part of it. But there’s also a kind of supply chain excellence. We’re not going back to this, again; we expect this business to grow very fast, and we’re going to put the kind of supply chain infrastructure in place so that we don’t have to go back to this.

Okay, got it. And then I’m here just on the EBITDA. So I mean, the guidance is for in excess of $50 million, but you’re returning the guidance for $75 million for 2024. So I guess, I mean, if you come in closer to that $50 million number, I mean, that seems to be a pretty big step up—almost 50% growth to get to that $75 million in 2024. So how confident are you that you can get to maybe more like $60 million or $65 million this year, and that step up doesn’t look quite as difficult in 2024?

No, and that’s a fair question, Mike. If you just do the math, I mean, one of the things we said at the analyst day was that we were going to return 50% of the incremental gross margin as EBITDA, which is pretty much what we’re doing this year, that which again, gets you to the $50 million number. I mean, we’re driving for upside, right? To your point, we gave a range of 8% to 12% with a $15 million EBITDA number. So we want to come in as high as we can on that range. Every million dollars you get in every point of growth, every $3 million of growth, which is a point of growth, it gets you almost $2 million in profit. So we’re going to be pushing to get to a higher number than the $50. Because to your point, it’ll put more pressure on next year, but that’s what we’re shooting to do.

Okay, alright. And then this on the TMR thing. So it’s a little confusing to me. I know you went through the numbers, but I just wanted to revisit that because so that just can you tell me what the actual revenues were in 2022? Because I don’t know. I can’t remember if you were selling it every quarter. If you had some, you’ve had problems.

So just to give you some rough numbers, last year '21, we did about $3 million. We’re going to do about $500,000 I think in the first quarter until we run out of handpieces, and then we're out, and there aren't going to be any more for two years. So I think that pretty much tells you the numbers you need to know.

Yes. Okay. But I mean, it's the intention that this is dead and never comes back or I mean.

Yes. Part of the challenge with this might is it’s just we were notified a few days ago. So I need some time to kind of evaluate. I mean, we looked at potentially going to another supplier, but it was going to take us a couple of years and a couple million dollars of investment. I just don't know if it's worth it. But I also need some time to actually investigate. Like I said, we just got a letter from our contract manufacturers that we're done making this thing, and I really haven't had time to react other than the fact that I know that I'm not going to have TMR handpieces for two years. I do know that. I just need some time to see if it's worthwhile and how long it'll take and how much it'll cost. So you got me kind of in the middle of the sausage making at the moment.

Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Doing well. Hope all is well on you guys' side. Hey Pat. And one for Ashley questions for you and one for Ashley all on On-X. Maybe first question, Pat. Maybe I'm overreacting to this, but for the first time, I sensed some level of hedging in terms of PROACT Mitral approval. Am I overreacting in that?

No, I think that's fair.

It's not getting a specifically not getting approval or for a restricted label, high risk, whatever. Any additional color?

Yes. No, I think that's fair. I mean, part of it is we obviously learned where the FDA was, and I just in Rick's question, I tried to help and again probably more about this stuff than anybody on the trial designs. What I found interesting is that they didn't like PROACT—we I personally met with the FDA about PROACT A. They did not like the composite endpoint of PROACT Aortic because bleeding, reduction in bleeding drove the endpoint. So they made me just take them apart, right? So they made us take them apart. Thromboembolic is really the goal, bleeding secondary, which is what we did in PROACT A. What's interesting is that in PROACT Mitral, we missed the primary endpoint, which was a composite of the two. But when you do the way that they like it, which is when you take them apart, we actually are not inferior either for thromboembolic events, which is the big safety issue. There is no difference in bleeding which also makes no sense. But that's what the data shows. Even though the treatment group was at 2.5 and the control group was at 3.0, anyone would tell you there has to be more bleeding in that arm. So again, I think part of it is yes, I mean you learn more as you have the conversations with the FDA. I mean, we're going to present what we think you should look at in the totality of that data. We might have missed the primary endpoint for the trial, but if you really look at how they look at the data, which is take apart the endpoints, and you look at the totality of the data, you can run an On-X mitral valve at 2.5 compared to a non-On-X valve, it’s 3.0 or over, and have no difference in thromboembolic events. To me, that’s meaningful for patients and surgeons are telling me this. The PI of the trial is telling us. So it’s just going to take us longer talking with the FDA about it, because I think in totality, when you look at all the data, well, we might have missed the primary endpoint for the trial. If you really take a look at that trial design, I think the FDA is going to need to hear some clarification.

Got it. PROACT 10A, remind us again, when the publication and also post 10A the top line or the trial stoppage to the extent that you can Pat characterize the sales force productivity pre and post, if any additional handholding was needed, specifically as it relates to On-X in the field?

Yes. First on your first question on product 10A that will be presented. It's recent news, and I was going to cover this, hopefully, I will get that question. It's going to be presented in a plenary session at ATS in Los Angeles, like May, whatever the first week of May 5, 6, 7 around there. So that's going to be, I think, a very important presentation both for the field, as well as I'm very intrigued to see the control group how it performs. So I'll just leave you with that foreshadowing. I think from a field standpoint, it's very interesting. We've got a great sales force, and they went out after product today, they talked to all the surgeons, and we've heard great comments from our surgeons, that you guys were cutting edge. This would have been huge for patients, and you still got the best mechanical aortic valve and mitral valve, and you're still the only ones with a low INR on the aortic side. So kind of keep doing what you're doing. Right? So again, I don't think I didn't see much of a setback. I mean, I'm sure our competitors will try to jump on it. But I think the other piece to think about, Suraj, is the amount of things we’re doing in the aortic field. Everything from frozen elephant trunk with Neo to AMDS, to NEXUS, to nominal; I mean we are an aorta company, and we’re investing heavily in the space. And On-X is one of our platforms that’s best in class. So again, I think to me our sales force didn’t really require any handholding.

Got it. And Ashley, last one I’ll throw your way, and then I’ll jump back in queue. Do appreciate you guys taking all my questions. Ashley maybe I missed it. What’s the On-X split U.S. versus OUS?

Oh, gosh. It is roughly 60/40 roughly Suraj. And I can get back with you on the exact split. But I think that it's approximately around there.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Well, thanks for attending the call. We're looking forward to continuing to drive forward on our strategy and driving growth in our stent graft and On-X franchises, significant growth in Asia-Pacific, Latin America, and bringing the pipeline forward. We'll be back at you next quarter, and thanks for joining. Bye bye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your line at this time and have a wonderful day.