Artivion, Inc. Q4 FY2023 Earnings Call

Greetings, and welcome to the Artivion Fourth Quarter and Year-End 2023 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to Laine Morgan from the Gilmartin Group. Thank you. You may begin.

Good afternoon and thank you for joining the call today. Joining me today from Artivion's management team are Pat Mackin, CEO; and Lance Berry, 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 and 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. You can also find a brief presentation with detailed highlights on today's call on the Investor Relations section of the Artivion website. Now, I'll turn it over to Artivion's CEO, Pat Mackin.

Thanks, Laine, and good afternoon, everybody. I want to start off our call today by welcoming Lance Berry, our new Executive Vice President and Chief Financial Officer. Lance most recently served as Executive Vice President, Chief Financial Officer and Operations Officer at Wright Medical until acquisition by Stryker in November of 2020. We are thrilled to have Lance join our team during this exciting time. I am confident his broad expertise and proven leadership in med-tech will add significant value to Artivion as we enter the next phase of profitable growth. I'd also like to thank Ashley Lee for his many years of dedicated service to Artivion. His contributions no doubt help make Artivion the outstanding company we are today. Now, on to our fourth quarter and full year 2023 results. 2023 was an outstanding year for Artivion and I'm pleased to report that we achieved total company constant currency revenue growth just over 12% for the full year of 2023 compared to 2022. In addition to exceeding our top-line growth revenue target, we achieved adjusted EBITDA growth of nearly 30% year-over-year, enabling us to deliver positive free cash flow while making strides in advancing our clinical programs and further expanding our global footprint. Our achievements throughout 2023 culminated in a particularly strong Q4 as we delivered constant currency revenue growth of 15% year-over-year, resulting in $93.7 million in revenue. Our performance was driven by improved revenue growth in our On-X business, which increased 19%, followed by tissue processing at 18%, BioGlue at 11%, and stent grafts at 8% growth. Each compared to the fourth quarter of 2022, all on a constant currency basis. We've also benefited from the expansion of our commercial footprint through regulatory approvals across new geographies, especially in Latin America and Asia-Pacific. Our strong top-line performance led to $15.3 million in non-GAAP adjusted EBITDA in the fourth quarter, which is a 40% increase compared to the fourth quarter of last year. We expect our strong momentum in the fourth quarter to continue into 2024. From a product perspective, On-X revenues increased 19% compared to the fourth quarter of last year on a constant currency basis, as we continue to take market share globally, having the only mechanical aortic heart valve that can be maintained at an INR of 1.5 to 2.0. We believe our valve is the best aortic valve on the market. Our market share gains each year and the recently presented results of the On-X post-approval data, which showed an 85% reduction in major bleeding, clearly support our view. Tissue processing revenues increased 18% compared to the fourth quarter of last year on a constant currency basis, due primarily to pricing initiatives and the increase in volume of the Ross procedure. We expect continued double-digit growth in our tissue business in 2024, driven primarily by our significantly improved supply of our proprietary SynerGraft pulmonary valve. Lastly, stent graft revenues grew 8% on a constant currency basis in the fourth quarter compared to the fourth quarter of last year, driven by improved supply and strong performance in AMDS outside the U.S. We anticipate demand to remain strong through 2024 and beyond for our stent graft products, which should sustain and continue our strong revenue performance. Our results were also driven by the continued progress we are making expanding into new markets through new regulatory approvals and commercial footprint expansion in Asia-Pacific and Latin America, both delivering constant currency revenue growth of 19% compared to the fourth quarter of last year. We expect these regions to be important growth drivers over the coming years as we continue to leverage our industry-leading product portfolio further into these regions. Additionally, we continue to advance our clinical programs and show leadership in the aortic field with two late-breaking science presentations at the STS Annual Meeting in San Antonio. First, the full data set from the AMDS PERSEVERE clinical trial and second, the interim data from the NEXUS TRIOMPHE clinical trial. Firstly, in November of last year, we completed the trial enrollment for PERSEVERE, our IV clinical trial for PMA approval, which consists of 93 patients who've experienced an acute Type A dissection. I'm pleased to report that the trial methods combined primary efficacy and safety endpoints demonstrated a statistically significant reduction in all-cause mortality in the primary endpoint of major adverse events, as well as no occurrence of DANE, which are associated with increased risk for reintervention and mortality. The recently presented 30-day data at STS showed only 28% of the patients had greater than or equal to one major adverse event, representing a 52% reduction compared to the standard of care hemiarch procedure. As for DANE tears, they can occur up to 70% of patients following hemiarch repair without AMDS. Results from the full IDE data set have shown there have been no DANEs detected in any patients treated with AMDS. Critically, the data up to 30 days also demonstrated a statistically significant 72% reduction of all-cause mortality, a truly revolutionary result. Secondly, the interim data from the NEXUS TRIOMPHE U.S. IDE trial included 22 patient study participants, demonstrating a 9% mortality, and no detected strokes, paraplegia, or renal failure in any patients treated with the NEXUS aortic arch stent graft system. As of today, there have been 42 of 60 patients enrolled in the primary endpoint of the NEXUS trial, which remains on track for approval in 2026. In summary, we are very excited about these two new data prints, which should accelerate stent graft growth in markets where the products are currently approved. If these PMA processes proceed as we anticipate, we would expect PMA approval for AMDS in 2025 and NEXUS in 2026. At that time, again, assuming we exercise the option for Endospan, these two products would significantly increase our adjustable market opportunity. Lastly, on our R&D pipeline, our third-generation Frozen Elephant Trunk used to replace the entire aortic arch called Arecibo LSA is in the final testing stages, and we currently expect to start the U.S. IDE trial later this year. I look forward to providing additional updates on our proprietary progress in future calls. With that, I'll now turn the call over to Lance.

Thanks, Pat, and good afternoon, everyone. Before I begin, I'd like to remind you to please refer to our press release published earlier today for information regarding our non-GAAP results, including a reconciliation of these results to our GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis and revenue growth rates will be in constant currency unless otherwise noted. Revenues were $93.7 million for the fourth quarter of 2023, up 15% compared to Q4 of 2022. Non-GAAP adjusted EBITDA increased approximately 40% from $11 million to $15.3 million in the fourth quarter of 2023. After generating $5.8 million of free cash flow in the third quarter of 2023, we generated $7.4 million of free cash flow in the fourth quarter. Importantly, we were free cash flow positive for the full year 2023, representing a critical milestone achievement for Artivion. As importantly, we expect that free cash flow will continue to be positive in 2024. From a product line perspective, On-X revenues grew 19%, tissue processing revenues increased 18%, BioGlue revenues increased 11%, and stent graft revenues grew 8% in the fourth quarter of 2023. On a regional basis, revenues in both Asia-Pacific and Latin America increased 19%, while North America increased 17% and EMEA increased 10%, all compared to the fourth quarter of 2022. Gross margins improved to 65% in Q4, compared to 64% in the fourth quarter of 2022. This increase was driven by price increases in product mix, partially offset by inflationary impact on materials and labor. General administrative and marketing expenses in the fourth quarter were $50.3 million, compared to $38.5 million in the fourth quarter of 2022. Non-GAAP general administrative and marketing expenses were $47.7 million, compared to $41.9 million in the fourth quarter of 2022. R&D expenses for the fourth quarter were $7.6 million, compared to $8.3 million in the fourth quarter of 2022. Other income and expenses include $5.8 million in net interest expense and foreign currency translation gains of approximately $2.2 million. On the bottom line, we reported GAAP net loss of approximately $4 million or $0.10 per fully diluted share in the fourth quarter of 2023. Non-GAAP net income was $4.6 million or $0.11 per share in the fourth quarter. As of December 31, 2023, we had approximately $58.9 million in cash and $312 million in debt. It is important to note that this does not contemplate the impact of our recently closed comprehensive credit agreement, which I will speak to shortly. For our initial outlook for 2024, we expect to continue building on our momentum, enabling us to achieve reported revenues in the range of $382 million to $396 million. At current FX rates, the year-over-year impact on revenue is expected to be negligible. Therefore, this range represents revenue growth of 8% to 12%, both as reported and on a constant currency basis. With our continued top-line revenue growth and general expense management, we expect adjusted EBITDA to be in the range of $68 million to $72 million for the full year 2024, representing 26% to 34% growth over 2023 and a 280 basis points increase in adjusted EBITDA margin at the mid-point of our ranges. We expect gross margins to remain at levels similar to 2023. We expect to continue to drive significant leverage from our global sales force and G&A infrastructure. R&D expense is expected to remain relatively flat as a percentage of sales. I would like to proactively note that our guidance range is below the $75 million that we originally targeted for 2024 at our March 2022 Investor Day. There has been no change to our commitment to drive significant adjusted EBITDA growth in 2024, as evidenced by our expectation for 30% year-over-year growth at the mid-point of our range, which is 3x our mid-point top line growth rate. We're driving this level of improvement while maintaining our investment levels in R&D as a percentage of sales. Driving strong adjusted EBITDA growth is a top priority, but not at the expense of the investments we need to make for the future. We feel that the strength of our underlying business, our longer-term growth outlook and our balance sheet today validate this approach. Regarding our capital structure, we are very pleased to have recently closed a comprehensive non-dilutive financing for $350 million of senior secured, interest-only credit facilities with six-year maturities. The facilities include an initial $190 million term loan, a $60 million revolving credit facility, and an additional $100 million in unfunded delayed draw term loan that may be drawn to refinance our convertible bonds at any time prior to their maturity in July 2025. Our convertible notes do not contain any financial covenants. The initial $190 million term loan and $30 million from the revolving credit facility were drawn at close, along with the use of some cash on our balance sheet to retire the existing senior secured credit facilities and pay related transaction expenses. Overall, this credit agreement, coupled with our strong financial performance, gives us flexibility with no near-term debt maturity overhang as we continue to evaluate the best options to address our convertible debt. We also intend to file a shelf registration statement on Form 3 with the SEC following the filing of our 10-K. We view this strictly as a matter of good corporate housekeeping and prudent considering the reestablishment of our WKSI status. As it relates to free cash flow, we are not giving formal guidance. However, we are confident in our ability to be free cash flow positive in 2024. The $16 million of incremental adjusted EBITDA at the mid-point more than covers the $5.7 million of additional interest from the new credit facility, which provides us room for working capital expansion to support the growth of the business while still being free cash flow positive. Finally, I want to make a few comments on quarterly cadence to assist you with your modeling. As it relates to revenue seasonality, the third quarter is typically our lowest growth quarter, particularly due to the impact of the European vacation season. Q1 is our most cash-intensive quarter due to the payment of annual bonuses and due to normal activities such as sales meetings and industry conferences, which are heavier in the first quarter. Despite our expectations for free cash flow to be negative in Q1 because of these items, we still expect cash flow to be free cash flow positive for the full year of 2024. In summary, we are thrilled with our 2023 performance and are excited about the prospects of the business in 2024 and beyond. With that, I will turn the call back to Pat for his closing comments.

Hey, thanks, Lance. As you heard from Lance, we're extremely pleased with our 2023 performance and continue to deliver on our mission to build a world-class aortic company. We finished strong with 50% revenue growth and 40% adjusted EBITDA growth in the fourth quarter. We continue to expand our markets and meaningfully advance our clinical pipeline, positioning us well for long-term growth. We also executed a non-dilutive capital structure, giving us a six-year runway with no financing overhang. Our strategy to deliver sustained, profitable growth is working and we look forward to the continued momentum we've built in 2023 through 2024 and beyond. More specifically, our growth this year will be driven by the following: number one, our continued growth in our stent graft business driven by the recent 30-day PERSEVERE data presented at STS showing a 72% reduction in mortality and a 52% reduction in major adverse events compared to the standard of care literature control. Number two, continued market share gains for On-X, driven by data recently presented in Europe of 510 patients in our aortic valve showing an 85% reduction in major bleeding. Number three, continued growth of our proprietary SynerGraft pulmonary valve driven by price increases, growth of the Ross procedure as well as our ability to capture that growth from our efforts to improve supply. And fourth, our continued growth in Asia-Pacific and Latin America from our channel investments and new regulatory approvals. So, in conclusion, we are more confident than ever in our near and long-term prospects for our business. Finally, I want to thank all of our employees around the globe for delivering an exceptional year. So with that operator, please open the line for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of John McAulay with Stifel. Please proceed with your question.

Hey, Pat. Hey, Lance. This is John on for Rick today. Just want to start off with AMDS. You had some really positive, strong data readout at STS recently and I just wanted you to maybe remind us about just how clinically meaningful this is in the eyes of doctors, how the technology is performing in Europe today, and how we should be thinking about the U.S. opportunity as we look ahead to 2025.

Yes, I'll take that one. So, clearly, this is a very exciting technology. I've been in the field in cardiac devices for 30 years associated with a lot of breakthrough technologies. I've never seen one that actually has the patient benefit that we've seen in this device. An acute Type A dissection is a very extreme disease state where patients are typically in the middle of the night. This trial was done in patients with malperfusion, which means they have kind of blood not flowing to the brain, to the kidneys, to the legs. This device, in an FDA trial of 93 patients, the largest series ever done in acute Type A dissection patients, showed a statistically significant reduction of 72% in mortality as death, right? It also showed reduction in the major adverse events of strokes, requiring kidney dialysis and myocardial infarctions. We saw a 52% reduction in those four major adverse events. I think this is truly a lifesaving technology. Our investigators are excited about this. It's about a $150 million market opportunity in the U.S. We'll have to go through all the steps required for the adoption of a new technology. But we're alone in the market. The competitor is a hemiarch, a surgical graft that's been done for 50 years, with no innovation. This is a highly patented and protected product. We feel that this is a market that Artivion will own for a very long time, and we're super excited about getting it out to patients.

Thanks. That's helpful. And then just to follow-up on the guidance, I understand the logic on adjusted EBITDA reinvesting in the business. Just curious, one, exactly what particular areas of focus are you reinvesting in, innovating in, and then on the revenue side, I noticed that in the fourth quarter, stents grafts on an organic basis were more like high-single-digits. And then the preservation tissue business was high-teens. So just as we think about that into 2024, should we expect similar growth rates from those two, or maybe find somewhere in the middle?

Yes, let me take the first one. I'll let Lance take the second one. So, as far as the investments, as we've said, we're building an aortic company. You've seen a significant investment in AMDS, in the U.S. FDA trial PERSEVERE, which you just heard about. We're literally starting as that one's getting ready to get to market. We're literally starting our next-generation device to replace the entire aortic arch called ARCEVO. We've been developing it for several years and it's a breakthrough technology as identified by the FDA. We'll start that clinical trial this year in the U.S. and Europe. We have some technologies behind it. But as Lance noted, we can do this in our P&L and not increase our percentage of R&D as a percentage of revenue because we're growing the top-line as well. We are being very pragmatic about being financially disciplined—growing the top-line, expecting a mid-point of our range 10% and bottom line 30%, while still being able to invest in innovation.

Sure. So I think the question was about stent graft growth and tissue processing growth and how those flow into 2024. On stent grafts, Q4 was normal for the level of quarterly fluctuation on growth rates for the full year; stent grafts grew in the mid-teens. That’s how we’re thinking about that business going into 2024; you may see some variation quarter-to-quarter. On tissue processing, we are benefiting from the price increases we took in the second quarter of 2023 on our SynerGraft technology. We began to see some of the improved supply in the fourth quarter, which helped that. For the full year, we think about tissue processing more as a double-digit grower as we have discussed in the past.

Our next question comes from the line of Mike Matson with Needham. Please proceed with your question.

Yes. Thanks. So I guess I'll just start with the financing, the new credit facility. Can you tell us kind of where you'll be with regard to your leverage ratio following that transaction and where you kind of ended the year last year in terms of EBITDA?

Yes. Go ahead, Lance.

Yes. So I don't know it right off the top of my head, but we did $53.8 million of EBITDA at the end of 2023. Post-transaction, you're thinking about net debt of about $260 million. Do the math on that roughly 4.8 leverage ratio. We think we'll get to the mid-point of the range and some cash flow. We'll be approaching 3.5 to 3 by the end of 2024 with some good progress there. I would point out that there are covenants in the new debt, but they are well above that level. We also have a favorable definition of EBITDA in the credit agreement.

Okay. Thanks. That helps. And then just on AMDS, the data looks really good. Do you expect to have the FDA require a panel for that or do you think they'll just approve without a panel?

We haven't gotten to that level of detail yet. I am not going to opine on what the FDA is going to do, but obviously I think the data speaks for itself, right? This is a super sick population with phenomenal results. We're obviously going to work with them to get the technology out as soon as we possibly can. I can't really comment on whether there will be a panel or not.

Okay. And then as far as ARCEVO goes, would that be really more 2027 at this point or could it be earlier than that?

Yes, that's probably late 2027. We expect to get the IDE approved this year and hopefully can get some patients enrolled. There’s a lot of bureaucracy in the startup of a trial. I expect our enrollment to go pretty well since the centers involved are some of the top ones in this field who are very excited about this technology. But there is a one-year follow-up and then you have to go through the FDA PMA cycle, so late 2027 is probably a good timing for that.

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

Pat, Lance, can you hear me all right?

Yes, we hear you fine.

Pat, let me start with the congratulations. I mean, you guys have consistently even through COVID, probably one of the few that has consistently beaten numbers every quarter so congrats once again. I know, Pat on AMDS, a number of questions have been asked, Pat, just for the audience, again, the size of the U.S. market, how do you define the low hanging fruit?

Yes. If you look at the various ways to slice up the market, we come up with a number of $150 million. The ASP on that device is about $25,000. So there are about 6,000 acute Type A dissections done in the U.S. So that’s kind of the rough math. We've done market research with a number of physicians and you could talk to some of those involved in the trial. This technology shows substantial patient benefits. I have not seen other trials where significant results were achieved. The mortality in the standard of care control group was 35% at 30 days. We were at 9.7%. This is a significant technology for extremely sick patients. We are an aortic company and this is significant innovation in acute Type A dissections in 50 years. I’m super excited about it and believe this will change lives.

Fair enough. Pat, Lance, I'll throw a bunch of questions your way and hop back in queue. Lance, for you, let's discuss ASB's impact in the quarter, and for Q1, how should we think about the sequential growth? Pat, in terms of On-X mitral label, I know the FDA process is behind us, but just kind of give us the next steps and the status of it. At this stage, do you think the portfolio is optimizing? If not, what else needs to be done? Thank you for taking my questions and congrats again.

Sure, I'll take the last two. I’ll let Lance work on the numbers while I'm talking. As for the pro act mitral, as we talked about at the end of Q3, we ended up withdrawing the PMA because we missed our statistical endpoint. That said, this is the largest body of evidence with a mechanical mitral valve. We recently presented at STS in January. There is no close comparison from a significance in level of data. The mitral business grew 20% in 2023. We’re not promoting off-label, but people recognize that you can lower the INR if that’s the physician’s choice. So, Lance, you can grab a couple of the other ones.

Yes. So on ASB, without giving you an exact number on the total company, it’s tough with different products and mixes in different countries. The tissue business benefited from the price increases we took in Q2 of this year on SynerGraft technology. In Q1, we will still benefit from that, and we’ll annualize that in Q2. We’ve had some favorable pricing on On-X as well for a portion of the year. We’re also taking price increases.

Yes, and to answer your question about the portfolio, we've done three acquisitions and one distribution agreement with an option to acquire Endospan with the NEXUS device fairly quickly over the four- to five-year period. We feel like our portfolio is in excellent shape. We’re transitioning from the AMDS U.S. FDA trial to the ARCEVO FDA trial, and we have more stacked behind that. We don't need to acquire anything; we are well set up from a portfolio standpoint. We dealt with significant price increases on SynerGraft pulmonary valves in 2023 that are set to enhance our growth as we appropriately handle supply.

Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

Hi, Pat, Lance, how are you?

Good. How are you?

I'm good. Thanks, Suraj for segue right into my first question, which is 59% on tissue forms. That's an all-time high for the company. Is that sustainable? Or how should we think about that tissue business for 2024?

As I just mentioned, we had significant increases on SynerGraft in 2023, giving us benefits in the first quarter. We've developed significant yield improvements, nearly doubling the availability of our pulmonary valves. We sell every one that comes off the line, thanks to the rapid growth of the Ross procedure. So yes, we believe this growth is sustainable.

Wonderful. Could you comment a little bit on geographies? I know you mentioned Asia and LATAM at that 19% rate, but any specific geographies? How does that tie into specific product lines?

Every region grew double digits. Asia-Pacific and Latin America are smaller markets, growing at 20%. We’re seeing double-digit growth across all four of our regions.

Okay. Got it. Can you talk about the prevention of a tear in the structure? Are clinicians and hospitals looking at that as a cost associated or is it just about avoiding mortality?

It's probably not a topic many people understand. Until we got into this specific area, I personally didn't know what DANE was. In the current standard hemiarch, think of it like plumbing; you have a tear in the pipe. If you fix that part, you risk a subsequent leak. About 35% to 70% of the time, they end up with a leak in that connection needing re-operation, which can lead to higher mortality. It’s a real issue— the FDA has shown interest in DANE and had us add it as a primary efficacy endpoint.

Thank you. Our next question comes from the line of Frank Takkinen with Lake Street Capital. Please proceed with your question.

Hey, this is Nelson Cox on for Frank. I'll start maybe internationally as well. Can you refresh us on the current size of the sales force there and maybe discuss the team size there throughout the year? Obviously, you've seen nice growth there, but walk through your thinking.

Yes. We’ve discussed Asia and Latin America. When I started, we had one person in Asia, and nobody in Latin America. Now we have probably about 30 people in Asia and roughly 15 in Latin America. Latin America is at a feasible size. Asia is a significant opportunity for us. We'll add more as products get approved. Essentially, we manage that growth based on approvals and market size potentials, a pragmatic venture capitalist approach.

I'll switch over to On-X. Obviously a strong quarter there. Can you talk a bit more about the competitive landscape? What are you seeing from other competitors? Can you give insight into their investments or lack thereof?

Certainly. Our recent 510 patient study on the On-X valve shows an 85% reduction in major bleeding reported in a post-approval trial. We've conducted market research with 100 cardiac surgeons, revealing that we continue to gain share over the next three years and can basically double our share, emphasizing the meaningful new data set we have.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

We appreciate everyone’s time here. We’re super excited about 2024. We had the great PERSEVERE readout on AMDS with 72% reduction in mortality, 52% reduction in major adverse events. We're going to work with the FDA to get this technology to the U.S. We also have approvals around Europe, Canada, and Asia where we’re using that data to drive growth. I just discussed the impressive On-X trial showing an 85% reduction in major bleeding, and we’re pursuing additional market share. We're also advancing our pipeline, starting with the third-generation Frozen Elephant Total Arch Repair System called ARCEVO LSA later this year. We continue building our aortic company and are excited to deliver for you in 2024. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.