Artivion, Inc. Q1 FY2023 Earnings Call

Good day, ladies and gentlemen. Welcome to the Artivion First Quarter 2023 Financial Conference Call. All lines have been placed in listen-only mode, and there will be an opportunity for questions and comments after the presentation. It is my pleasure to hand over the call to your host, Brian Johnston, VP of Gilmartin Group. Please proceed.

Thank you. Good afternoon and thank you for joining the call today. With me from Artivion’s management team are Pat Mackin, CEO; and Ashley Lee, CFO. Before we begin, I’d like to remind you that the following statements 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 and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements 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 it over to Artivion CEO, Pat Mackin.

Hey. Thanks, Brian, and good afternoon, everyone. I am pleased to report that in the first quarter of 2023 our business performed well, enabling us to deliver constant currency revenue growth of 10% year-over-year. Our strong performance was led by our On-X platform, which grew 24%, followed by BioGlue at 8%, stent grafts at 8%, and tissue processing at 7%, all compared to the first quarter of 2022 on a constant currency basis. Our first quarter success demonstrates that our strategy is working. Under this strategy, we are driving increased revenue within existing markets, as well as in new geographies through the expansion of our commercial footprint and by expanding our addressable markets through our additional clinical pipeline. To that end, we recently received an approval order from the FDA for the PerClot PMA and expect approval for our recent PMA inspection once our recent inspection is finalized. We have even more confidence in our ability to deliver on our financial commitments for 2023. Given our first quarter performance, we likewise are even more confident in our ability to deliver strong bottom-line growth in 2023 and beyond. As you will recall from our Investor Day in March of 2022, we have committed to delivering annual double-digit constant currency revenue growth through 2024 and are focused on driving further operating leverage across our business to deliver adjusted EBITDA of over $75 million in 2024. Our focus is clearly paying off. As I mentioned earlier, On-X revenues grew 24% on a constant currency basis in the first quarter compared to the first quarter of last year. We saw double-digit constant currency year-over-year revenue growth in On-X across all geographies. We remain confident that we will continue to take market share globally with the only mechanical heart valve that can be maintained in an INR of 1.5 to 2.0. Additionally, stent graft revenues grew 8% on a constant currency basis in the first quarter compared to the first quarter of 2022. Demand for our stent graft portfolio remains high and we expect it to grow even higher. To meet this demand, we hired additional staff in Germany last year, who are now contributing to our increased stent graft production and whose productivity we expect to improve throughout the year. We anticipate in 2023 and beyond being able to better meet the strong demand for our stent grafts and accelerate the growth in revenues for these products. We are also executing extremely well on our initiative to grow product sales in APAC and Latin America through new regulatory approvals and commercial footprint expansion. In APAC and Latin America, we delivered first quarter constant currency revenue growth of 18% and 34%, respectively, compared to the prior year period. We continue to expect these regions to be important growth drivers over the coming years. As mentioned earlier, we expect FDA approval for PerClot soon. Following this approval, we will receive a $14.3 million milestone payment, net of the amounts owed to our former partner, and we will begin shipping revenue-generating products to Baxter. As for PROACT Mitral, we are in dialogue with the FDA and look forward to potential approval in the second half of this year. As we mentioned in our last call, approval for PROACT Mitral in 2023 is not factored into the current forecast and would represent further upside from our revenue growth outlook for 2023. In addition to our progress in each of these three initiatives, we continue to make progress on the AMDS trial. We have now enrolled 51 patients in the PERSEVERE trial, which is our U.S. IDE clinical trial for PMA approval and up to 30 U.S. centers and approximately 100 patients who have experienced acute type A dissection. The combined primary efficacy and safety endpoints of the trial are reduction in all-cause mortality, new disabling stroke, myocardial infarction, new onset renal failure requiring dialysis, and the re-expansion of the true lumen of the aorta. We anticipate completing full enrollment in PERSEVERE in the second half of this year. Following a one-year follow-up period, assuming the trial meets its endpoints, we anticipate receiving FDA approval for AMDS in 2025. In addition, our partner Endospan is making progress on the U.S. IDE called TRIOMPHE for its NEXUS aortic stent graft system. In that trial, there are approximately 44 patients enrolled and treated and a total number of 53 patients approved for treatment. Endospan estimates enrollment completion later this year and PMA approval in 2025, again, assuming the endpoints are met. To reiterate, if these PMA trials proceed 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 adjustable market opportunity by an estimated $900 million. Looking ahead, we intend to build on our strong growth in 2023 but continue to drive growth in the On-X aortic stent grafts, as we have clear differentiation and pricing power. We also expect to benefit further from our investments in commercial channels and new regulatory approvals in Asia-Pacific and Latin America.

Thanks, Pat, and good afternoon, everyone. Total revenues were $83.2 million for the first quarter of 2023, up 8% on a GAAP basis and up 10% on a constant currency basis, both compared to Q1 of 2022. On a year-over-year basis in the first quarter of 2023, On-X revenues increased 23%, BioGlue increased 7%, tissue processing revenues increased 6%, and aortic stent grafts grew 3%. On a constant currency basis compared to the first quarter of 2022, On-X grew 24%, BioGlue and stent graft revenues both grew 8%, and tissue processing revenues increased 7%. On a regional basis, first quarter 2023 revenues in Asia-Pacific increased 17%, Latin America increased 36%, North America increased 10%, and Europe decreased 1%, all compared to the first quarter of 2022. On a constant currency basis, revenues in Asia-Pacific increased 18%, Latin America increased 34%, North America increased 10%, and Europe increased 5%, all compared to the first quarter of 2022. Gross margins improved sequentially from the fourth quarter to 64.6% in Q1, compared to 65.7% for the first quarter of 2022. The decrease compared to Q1 of 2022 was driven by inflationary impacts on materials and labor, as well as geographic and product line mix. G&A expenses in the first quarter were $50.4 million, compared to $39 million in the first quarter of 2022. Excluding non-recurring acquisition-related business development expenses and benefits, and other nonrecurring charges, G&A expenses were $45.2 million for the first quarter of 2023, compared to $39.7 million in the first quarter of 2022. R&D expenses for the first quarter were $7.2 million, compared to $10.1 million in the first quarter of 2022. The decrease in R&D spending primarily results from savings from the cessation of the PROACT 10A trial. Other income and expenses include $6 million in net interest expense and foreign currency translation gains of approximately $1 million. On the bottom line, we reported a GAAP net loss of approximately $13.5 million or $0.33 per fully diluted share in the first quarter of 2023. The net loss for the first quarter of 2023 includes a pretax charge of $4.8 million related to contingent consideration for the acquisition of AMDS and the impact of valuation allowances on our deferred tax assets. Non-GAAP net income was $769,000 or $0.02 per share in the first quarter. Non-GAAP income includes foreign currency gains and excludes business development and other non-recurring charges. As of March 31, 2023, we had approximately $30.8 million in cash, $314 million in debt, and the full $30 million available to us under our revolving credit facility. Non-GAAP adjusted EBITDA for the first quarter of 2023 was $10.8 million, compared to $10 million for the first quarter of 2022. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results. And now for our outlook for the remainder of 2023. Given our momentum in Q1, our price increase initiatives, anticipated improvement in supply of stent grafts, and anticipated FDA approval for PerClot, we are raising our revenue guidance and now expect constant currency revenue growth of between 9% and 12% for the full year of 2023, compared to the previous range of 8% to 12%. We expect revenues to be in a range of $337 million to $348 million, compared to our previous range of $331 million to $343 million. We continue to expect revenue growth will accelerate more meaningfully in the second half of the year compared to the first as recent hires in Germany become fully productive, as we continue to pursue price increases for products where we have clear clinical differentiation, and with the approval of PerClot. With our strong first quarter performance, continued topline revenue growth, general expense management, and a decrease in R&D spending, we are also raising our adjusted EBITDA guidance from a minimum of $50 million to a minimum of $52 million for 2023. 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 anticipate the need to raise additional capital to fund our debt obligations, our investments in our channels, or our pipeline in the foreseeable future. We expect we will be able to comfortably service our debt and continue to invest in growth. And 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. Overall, we are laser-focused on continuing to deliver strong top and bottom-line growth to afford even greater flexibility as we consider our future obligations and efforts to deliver meaningful shareholder value. I will turn the call back over to Pat for his closing comments.

Yeah. Thanks, Ashley. So as you just heard, 2023 is off to an excellent start and we expect that momentum to continue. Our strategy is working and generate what we expect to be meaningful EBITDA growth this year. We also took guidance up this quarter and believe that we will deliver on our financial commitments for the following reasons. First, continued strong On-X performance, together with potential for PROACT Mitral later this year. Second, stronger performance in our stent graft business due to recent staffing improvements at our German facility and other supply chain improvements. Third, continued strong performance in Asia-Pacific and Latin America. Fourth, growth in BioGlue and PerClot due to recent regulatory approvals. And then finally, these two U.S. clinical trials with AMDS PERSEVERE and Endospan NEXUS TRIOMPHE are currently enrolling and should enroll this year. Combined, we expect our total addressable market will increase by $900 million in 2025, assuming we exercise the Endospan option. Through the remainder of the year and into 2024, we continue to expect to grow double digits on a compounded annual growth basis and generate greater than $75 million in adjusted EBITDA in 2024, which will end up reducing our net leverage to less than three times, despite the headwinds we face from inflation and its impact on gross margins. In conclusion, we continue to advance our goal of being the market leader in aortic repair and we expect 2023 to be a standout year for the company. I want to thank all of our employees around the globe for delivering on our exceptional first quarter results and their continued dedication to our mission. With that, Operator, please open up the line.

Thank you. Our first question comes from Rick Wise from Stifel. Go ahead, Rick.

Good afternoon. Hi, Pat. Hi, Ashley. It's great to see the quarter and to hear the PerClot news. I have a couple of questions regarding PerClot. Can you elaborate on some of the comments made in the press release? Once the inspection is complete, can you clarify what that entails and when it will take place? Additionally, when do you expect to start shipping, and when will the $14.3 million come in? How do you plan to utilize those funds? Thank you.

The first point is that the process involves a pre-approval inspection which was completed about a month ago. The next step is for them to prepare their report and send it to the branch. We are currently waiting for that. This could happen at any time, and once it does, we expect to receive the green light for approval. I am cautious about predicting the regulators' actions, but we are nearing the end of this process. We have received the approvable letter and are just waiting for the inspection paperwork to be finalized. Once that is completed, we should be able to ship product to Baxter fairly soon. They will need to complete some paperwork on their end, but they have already begun working on that since we received the approvable letter. Therefore, we anticipate shipping product within this quarter. Ashley, could you also provide insight on the timing for when we will receive the cash?

Yeah. I mean, I think it’s within a couple of weeks after we transfer all of the PMA documentation to Baxter. So, again, assuming that we get the final approval from the FDA, which we expect, we should get those funds later in the second quarter. And then, in regards to what we plan to do with it, it will certainly help to strengthen the balance sheet and we will continue to move forward and drive revenue growth and cash flow. And in the event that we don’t find good alternative uses, we will consider paying down debt at some point in the future.

Yeah. That sounds good. Maybe just turning to the sort of a larger picture, you have been clear; we have heard a lot this quarter, Pat, I am sure you have listened to some of them from other MedTech companies larger and smaller, that the environment is improving, that volumes are recovering, that the macro is getting less of a headwind, supply chain, blah, blah, blah. I am just curious from your perspective and from Artivion’s vantage point portfolio, etc., how are those factors affecting you, how does it benefit this quarter and how do we think about that kind of dynamic, improving macro dynamics giving you confidence about the rest of the year? Just if you could put all that in context for us.

We haven't really faced significant staffing impacts due to the nature of our procedures. We experienced growth in every quarter during COVID except one. While staffing issues can delay cases by a day or two and create some inefficiencies and stress for our commercial team, our operations have been relatively stable. There was some disruption in Europe recently due to strikes, but that did not have a major effect on us. Our portfolio has insulated us from these challenges. Ultimately, if staffing issues arise, we find ways to ensure that cardiac procedures are completed, driven by urgent patient needs and the profitability associated with them. Overall, we've been fortunate not to be heavily affected by staffing concerns, and it appears that the situation is improving.

Good. Good. Ashley, I want to ensure I understood your comments and what you were referring to. You mentioned price increases, and I am hearing a lot about that in MedTech as well. Could you reiterate what you said about the positive impact of items or pricing in the first quarter? What are you including in your guidance and expectations?

Yeah. Let me take that one, Rick. So we are not going to get specific because of competition and things like that. So just suffice it to say that we had some technologies in our portfolio that are very proprietary that nobody else has. We also have a very high demand for those technologies. So we are in those cases raising prices significantly and you haven’t even seen them in our numbers yet. So those are going to be things that you are going to see in Q2, Q3, and Q4. So I am just going to leave it at that and not going to get more specific.

Okay. I totally get it, but good to hear. Thank you so much. I appreciate it. Thank you.

Thanks, Rick.

Thanks, Rick.

Our next question comes from Suraj Kalia from Oppenheimer. Go ahead, Suraj.

Hi, Pat and Ashley. This is James on behalf of Suraj.

Hey. Hi.

How are you?

Congrats. I am good. I am good. Thank you. Congrats on the quarter and thanks for taking the questions. So I guess to start off kind of what are the kind of key sales and marketing changes in our rep commission territory assignments that you will do post-Mitral Approval?

We haven't really begun, but the Mitral situation is quite unique. This is one of the few product launches I’ve participated in where the product is already available. It’s essentially a label change we're discussing. If we receive approval, it would just involve altering the label for the INR. From a launch perspective, we’ve already established our commission plans and everything is in place. For example, On-X grew 24% in the first quarter without PROACT Mitral. Therefore, we don’t expect to make significant changes besides our launch and marketing strategies, as well as surgeon education. Our commercial teams are already prepared, and their compensation plans are set. The product is often already on the shelf; we just need the label change and then we can proceed with marketing. This is a different type of launch compared to the traditional rollout of a new product directly from the assembly line since it's already available.

Got it. Thank you. And kind of just one more product as I believe you said is supposed to be published this weekend...

Productivity will be presented at ATS in Los Angeles on Saturday afternoon by Lars Svensson, the Chief of Cardiac and Vascular at Cleveland Clinic.

Okay. And I guess on a follow-up on that publication details, I know you previously talked about a journal for it. Any idea on timing on that or are we still too far out?

I don’t have an update on the timing of that. This presentation is the trigger for it, and it's the first public data that will be available. The publication will follow, and as soon as we have an update, we will inform everyone.

Alright. Appreciate it. That’s all from our end. Thank you.

Sure.

Thanks, James.

And our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Go ahead.

Oh! Hey, Pat. Ashley, how are you?

Good, Jeff.

Hi, Jeff.

So a few questions from our end. Nice topline for the quarter, congratulations. Could you talk about the G&A line a little bit as far as some of those there’s $5 million noncash in the G&A line? And then maybe from a larger perspective, talk a little bit about the commercial organization. Does it seem like you are ahead of or catching up with the growth on the topline as far as your increased trajectory? Does it feel like your prep for the coming year or two or are there going to be more gains on that front and as that relates to leverage?

Sure. I will address the second question first and then let Ashley handle the G&A question. Regarding our channels, they are well established globally. In the U.S., we are not making any additions at this time. In Europe, our channels are similarly well set, with only a few direct hires in certain countries. The main growth has been in Asia, where we are carefully balancing our investments with growth. For instance, as we receive product approvals, we might add a representative, but that expansion is beginning to stabilize. The number of hires this year is lower than last year, which is allowing us to achieve better leverage in both regions. They are growing at a faster rate than our current investment. Overall, our channels are in solid condition, and we expect to see improved leverage as we increase product throughput. This is what we have been discussing as we approach 2024, which will contribute to an increase in EBITDA as we utilize our existing infrastructure more effectively. Now, Ashley, you can address the G&A question.

Yeah. So G&A reported was a little over $50 million. And as I stated, Jeff, there was approximately $5 million included in that for contingent consideration changes related to the Ascyrus acquisition. And that is a balance that changes every quarter, and there are multiple factors that go into determining what the adjustment is, their discount rates, their probabilities of success, there’s time, and so it’s kind of difficult to precisely predict what that’s going to be on a quarterly basis; but this quarter, it happened to be close to $5 million. If you look at the remainder of the G&A, about $45 million, it was higher than the prior year. But there were some things that we did in the first quarter of this year that we have not been doing over the last couple of years. We had sales meetings; we went to some really large major medical conferences in person. So our G&A expenses were elevated in the first quarter compared to where they were in previous first quarters, and likely, they are probably a little higher than what they are going to be for the remaining quarters of this year as well, because we are not going to be, again, having sales meetings throughout the year to that magnitude and although we will be continuing to go to some medical conferences, probably, not as heavy as the cadence we had in the first quarter.

Okay. I got it. And then I know the previous question on pricing, but I am more curious about the margin front. How does it feel out there as far as your cost, as far as labor, transportation, logistics, etc.? And is Q1 margin that you feel pretty comfortable with for the balance of the year?

I think margins are going to be...

Yeah.

So, margins, we anticipate being relatively flattish throughout the year, a lot of it’s going to depend on how successful we are at securing these price increases that Pat talked about a little bit earlier. Another thing that dynamically comes into play is, inflation was really high in the second half of last year and some of those layers of inventory are going to be flowing through 2023. So you have got that offsetting dynamic. But taking all of that as a whole, we think margins are going to be relatively flattish this year, especially compared to the prior year.

Okay. And then just one quick one, if I may. Do you see any or heard of any robotic placements going on of any equipment or robotic testing of placements going on?

We don’t really pay much attention to that, to be honest with you; it’s not really in our field.

Okay. Got it. Thanks for taking my questions. Appreciate it.

Thanks, Jeff.

Thank you. Our next question comes from Frank Takkinen from Lake Street Capital. Go ahead, Frank.

Hey. Thanks for taking the questions and congrats on the progress. I wanted to start with one on On-X; it looks like growth continues to be really solid there. Could you just take us a little deeper into what the primary growth drivers are there? Is it related to more competitive wins, does the market just feel better out there and you are getting a little rebound from a choppy market over the last few years or is it something completely different?

On-X has experienced double-digit growth over the past few years, with a compound annual growth rate of around 13% to 14% over the last five years. This significant increase is evident across all markets where we grew double digits. A key factor contributing to this success is the strong data emerging about our product. Our representatives are well-trained, and the valve has established itself as the preferred choice, becoming the leading mechanical valve in the U.S. Additionally, we are the only valve that offers a low INR, which has helped solidify our position globally, leading to continued strong performance.

Okay. Maybe one follow-up directly to that. I think, obviously, the stock price reflected pure panic when the data came out on PROACT 10A, and I think maybe there was some assumptions around the demand profile of the device when that occurred. It occurs to me that, that has not at all manifested in how the product is growing. Would you agree and do you think this continues to be a 20%-plus grower maybe now?

We provided guidance back in March last year for 10% to 15% growth for On-X throughout the planning period up to 2024, and last year we achieved a 13% growth for On-X. The compound annual growth rate has been within that range, though it was higher in the first quarter. There is significant international activity contributing to this. Therefore, we will not rush to alter our guidance on On-X, and we feel confident about maintaining a growth expectation of 10% to 15%. Regarding the PROACT 10A trial, the issue was with the drug itself, which failed, and not with the valve. Eliquis was unable to protect the valve, and that data will be presented on Saturday. The On-X Valve has demonstrated excellent performance with very low INR levels in multiple studies, which should reassure people. Ultimately, the problem did not lie with the valve, but with the drug.

Right. Good color. One last one for me. APAC and Latin America continue to outpace growth of the rest of the organization; looks good. Can you just maybe run through what you are looking at for 2023 as the key catalysts or regulatory approvals or investments that need to be made in that geography to maintain that growth profile?

Yes. It’s a pretty simple kind of algorithm. We get product approvals of our portfolio in new markets. So I was in Australia in the first quarter. We now have our Frozen Elephant Trunk approved there, the NEO. We have got our thoracal abdominal system approved there in a market we have never been in. We are waiting for approval of our AMDS in Taiwan, right? So just as these approvals come through, these are our existing products that are just getting paperwork to get the regulatory approvals, and in some cases, when we get enough critical mass, we put feet on the street. And as mentioned earlier, we have overinvested the growth rate or around the growth rate previously, but we are now backing that down. So you are now going to start not only getting the good growth, but you are going to start getting leverage around those regions. But it’s a simple equation: get product approvals and add reps, and it works, right? We said we think those regions can grow 25% to 30% through 2024 and we have done that last year; we are doing it now. So I think the playbook is working.

Thanks. Thanks for taking the questions. I will stop there.

Thanks, Frank.

And that appears to be the last question at this time. I would like to now turn it back to management for any closing remarks.

Yeah. Like I said, we are pleased with the quarter and we feel like we have got momentum coming out of Q1. You heard in my comments, I just mentioned a few things: we have hired a big chunk of people in our manufacturing facility in Germany in the fourth quarter. They were trained in the first quarter and they are just now coming online. So we expect the supply to improve and that to grow significantly. I talked about our pricing power with some of our proprietary devices, which we think we can get meaningful price increases from starting kind of now. As we haven’t even seen that in the gross margin. PerClot, we have got an approvable letter from the FDA. We are just kind of waiting on the final inspection to get closed out. We beat the first quarter. We have raised our guidance on the top and bottom line and we just need to execute, keep doing more of the same, and we feel like we are set up for a very good 2023 and we expect to enroll two PMA trials this year in the second half of the year. So things are moving forward, and we are very bullish on what’s in front of us. So thanks everybody for joining in on the call.

Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.