Artivion, Inc. (NYSE:AORT) Q2 2022 Earnings Conference Call August 4, 2022 4:30 PM ET

Company Participants

Brian Johnston - Gilmartin Group
James Mackin - Chairman, President & CEO
David Lee - EVP, COO & CFO

Conference Call Participants

Frederick Wise - Stifel, Nicolaus & Company
Suraj Kalia - Oppenheimer

Operator

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

Brian Johnston

Thanks, operator. Good afternoon, and thank you for joining the call today. Joining me from Artivion's management team are Pat Mackin, CEO; and Ashley Lee, CFO. Before we begin, I'd like to make the following statements to comply with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements.

Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. Now I'll turn it over to Artivion's CEO, Pat Mackin.

James Mackin

Thanks, Brian. I'm pleased to report we've delivered another strong quarter following 2 consecutive periods of double-digit constant currency top line growth. Constant currency revenue growth was 9% compared to Q2 of 2021 this quarter, putting us at a 10% constant currency revenue growth in the first half of the year.

Overall, we remain on track to deliver on each of the commitments we made at our investor meeting in March. Once again, our growth was driven primarily by aortic stent grafts, our On-X mechanical valves as well as tissue processing segments. More specifically, on a constant currency basis, comparing to Q2 -- when we compare Q2 of 2022 to Q2 of 2021, stent grafts grew 23%, On-X grew 12%, tissue processing grew 7%.

As we expected, BioGlue revenue in the second quarter decreased compared to the second quarter of last year, primarily due to delays in securing our CE Mark renewal as well as tough comps in the North America market for BioGlue in the first half of 2021.

To that end, we've made significant progress on the CE Mark since our call last quarter. In June, our notified body completed their in-person inspection of our U.S. facility as well as our inspection of our German facility. We now expect to have our CE renewal near the end of the third quarter.

In the meantime, we've continued to make substantial progress in securing country-specific derogations, enabling us to sell product. These derogations collectively now cover approximately 80% of our BioGlue business in Europe through the third quarter.

Our success on all these fronts has reinforced our confidence that we can deliver on our 3 key growth initiatives that we outlined at our Investor Day in March, in which we believe will drive double-digit constant currency revenue growth over the next 3 years. As a reminder, our 3 initiatives are as follows.

First, we will drive continued growth in On-X and our aortic stent grafts. Second, we will continue to benefit from our investment in our channels and our new regulatory approvals in Asia Pacific and Latin America. And third, in 2022, we will drive growth through PMA approvals in the U.S. for PerClot and the On-X PROACT Mitral low INR indication.

For stent grafts, revenues in the second quarter increased 23% on a constant currency basis compared to the second quarter last year. We saw broad strength in this category for the quarter. For On-X, we posted 12% constant currency revenue growth in the quarter -- in the second quarter compared to the second quarter of last year.

The feedback we are receiving from customers on each of these product lines is that the superior clinical differentiation has been extremely positive, and we anticipate the demand for these products will continue to build as market adoption increases and hospital staffing shortages abate.

Moving to our next initiative, expanding our presence in Asia Pacific and Latin America through new regulatory approvals and commercial footprint expansion remains on track. I'm pleased to report they were continuing to execute very well on the strategy as demonstrated by second quarter constant currency revenue growth of 38% and 59% in Asia Pacific and Latin America, respectively. We expect these regions to be important contributors of growth over the coming years as we execute on this strategy.

Regarding our third initiative, we continue to make progress on achieving regulatory approvals for our low INR On-X mitral valve and for our PerClot by the end of the year. With respect to the On-X mitral valve, we continue to expect to receive PMA approval in 2022. If approved, we believe we will take significant market share in the U.S. with the On-X mitral valve, just as we've done and are continuing to do with our On-X aortic valve.

For PerClot, we continue to work closely with the FDA and expect to receive approval during the second half of 2022. If approved by December 31, 2022, we'll receive a $25 million payment from Baxter, which is a milestone due to us based on our divestiture agreement. And we'll begin to generate revenue from supplying PerClot to Baxter for approximately 2 years thereafter.

In addition to our progress on each of these 3 initiatives, we also continue to make strides on our midterm pipeline with 3 key products currently in U.S. clinical trials. These 3 products are PROACT Xa, NEXUS and AMDS. Regarding the PROACT Xa trial, we continue to make significant enrollment progress in this prospective randomized clinical trial to determine if patients with the On-X aortic mitral -- On-X aortic valve be maintained safely and effectively on Eliquis versus warfarin.

As of today, we've enrolled over 800 patients, and feedback from surgeons and patients participating in the trial remains very positive. We anticipate completing enrollment in the fourth quarter of 2022. Assuming the trial meets its endpoints, we expect FDA approval for this new indication by early '25.

We believe the On-X aortic valve using Eliquis rather than warfarin will become the market share leader in the aortic valve market for patients under the age of 70, given significant patient benefits using Eliquis over warfarin.

As for AMDS, I'm pleased to announce we recently enrolled our first patients in our pivotal trial called PERSEVERE for the AMDS device. And as of today, we have 4 patients enrolled in that trial. PERSEVERE is a nonrandomized clinical trial in up to 25 U.S. sites of approximately 100 participants who have experienced an acute type A aortic dissection.

The combined primary efficacy and safety endpoints of the trial are the reduction of all-cause mortality, new disabilitating stroke, myocardial infarction and new-onset renal dialysis -- new-onset renal failure requiring dialysis as well as the re-expansion of the true lumen of the aorta. We are now anticipating completing full enrollment during the first quarter of '23. Following a 1-year follow-up period, we expect -- or we anticipate, if the trial meets its endpoints, we should receive approval for AMDS in early 2025.

In addition to the progress we've made in the PROACT Xa trial and the AMDS IDE, we are pleased to report that our partner, Endospan, is also making progress on its U.S. IDE TRIOMPHE trial for the NEXUS aortic arch stent graft system. In that trial, there are approximately 23 patients already treated and a total of 34 patients approved for treatment. Endospan is currently estimating trial completion in June 2023 and PMA approval in 2025, again assuming the trial endpoints are met.

To reiterate, each of these 3 PMA trials proceeded as anticipated. We anticipate FDA approval for PROACT Xa, AMDS and NEXUS in 2025. At that time, assuming we exercise our option for Endospan, these products would increase our addressable market by an estimate of $1.3 billion. With that, I'll now turn the call over to Ashley.

David Lee

Thanks, Pat, and good afternoon, everyone. Total revenues were $80.3 million for the second quarter, up 6% on a GAAP basis and up 9% on a constant currency basis, both compared to the second quarter of 2021. As Pat mentioned, we benefited particularly from strength in aortic stent grafts, On-X and tissue processing.

On a year-over-year basis, in the second quarter of 2022, aortic stent graft revenues increased 13%, On-X revenues increased 10% and tissue processing revenues increased 7%, reflecting new product launches and improving procedure volumes relative to the second quarter of 2021.

BioGlue revenues decreased 11%, reflecting the CE Mark renewal delay as well as tough comps in 2021 in North America. On a constant currency basis, compared to the second quarter of 2021, aortic stent graft revenues increased 23%, On-X revenues increased 12%, tissue processing revenues increased 7%, and BioGlue revenues decreased 9%.

On a regional basis, second quarter 2022 revenues in Asia Pacific increased 37%, Latin America increased 69%, North America increased 5% and Europe decreased 4%, all compared to the second quarter of 2021. On a constant currency basis, revenues in Asia Pacific increased 38%, Latin America increased 59%, North America increased 5% and Europe increased 6%, all compared to the second quarter of 2021.

Gross margins were 65% in the second quarter compared to 66% in the second quarter of 2021. The decrease was driven by product mix within our aortic stent graft and BioGlue product lines and inflationary impacts on materials and labor. G&A expenses in the second quarter were $39 million compared to $40.8 million in the second quarter of 2021.

Excluding nonrecurring acquisition-related and business development benefits of $3.1 million in 2022, which primarily consists of a noncash $3.2 million benefit related to fair value adjustments for Ascyrus contingent consideration and rebranding charges of $289,000, and excluding nonrecurring acquisition and business development charges of $3.4 million in 2021, G&A expenses were $41.8 million for the second quarter of '22 compared to $37.4 million in the second quarter of '21.

On the bottom line, we reported GAAP net loss of $4.3 million or $0.11 per fully diluted share in the second quarter of '22. Non-GAAP net loss was $1.3 million or $0.03 per share in the second quarter. GAAP and non-GAAP net loss includes $3.8 million or $0.07 per share in losses on foreign currency revaluations. Excluding these amounts, non-GAAP net income would have been $1.5 million or $0.04 per share.

As of June 30, 2022, we had approximately $40 million in cash, $316 million in debt and the full $30 million available under our revolving credit facility. Adjusted EBITDA for the second quarter of '22 was $10.3 million compared to $12.8 million for the second quarter of 2021. Please refer to our press release for additional information about non-GAAP results, including a reconciliation of these results to our GAAP results.

And now for our 2022 outlook. We continue to expect constant currency growth of between 9% and 11% for the full year of '22 compared to 2021. In our last call, we stated that we faced an $8 million currency headwind in '22 versus '21. Since that time, the dollar has continued to strengthen, resulting in additional FX headwinds of approximately $2 million.

Considering our better-than-anticipated performance in Q2, partially offset by the continued strengthening of the dollar, we continue to anticipate full year revenues in the range of $317 million to $323 million. Due to the continued volatility in the FX markets, we want to provide a little more information on what we see for the balance of the year.

At a euro-USD FX rate of approximately 1.03, our prior year Q3 2021 adjusted revenue is approximately $69 million, and our fourth quarter 2021 revenue is approximately $76.5 million, reflecting FX headwinds of approximately $3 million in each quarter. We expect that growth in both the third and fourth quarters should be consistent with our full year guidance of between 9% and 11% constant currency growth.

We believe that we can comfortably continue to invest in our commercial channels in Asia and Latin America, our R&D pipeline and service our debt without having to raise additional capital. I will turn the call back to Pat for his closing comments.

James Mackin

Thanks, Ashley. So to summarize, our third consecutive quarter of strong execution leaves us more confident than ever in our ability to execute on our growth initiatives and achieve our goal to become a world leader in aortic repair through innovation. We're expanding our global commercial footprint and investing in our clinical programs.

In the next 3 years, we expect revenue to grow double digits to approximately $400 million. We anticipate a 200-basis point increase in our gross margin. We expect to generate between $75 million and $80 million in adjusted EBITDA and reduce our net leverage to less than 3x. Our success in the second quarter positions us well to deliver on these metrics.

First, we saw 23% constant currency growth in our stent graft program, 12% growth in our On-X franchise and 7% growth in tissue processing. Second, we posted 59% constant currency growth in Latin America and 38% growth in Asia Pacific, and we're continuing to invest in these regions. Third, in 2022, we expect to receive PMA approval for PerClot and the On-X PROACT Mitral low INR indication.

We also have a very robust midterm pipeline of 3 U.S. clinical trials that are currently enrolling. We expect these trials of PROACT Xa, NEXUS TRIOMPHE, AMDS PERSEVERE will all expand our total addressable market by $1.3 billion in late '24, early '25.

At this point, we have all the essential pieces in place, and we pivoted our focus to execution. Having led highly effective commercial organizations over the years, I know that the key to successful execution is having the right team in place. I'd like to thank our management team and all of our employees for their hard work and dedication. So with that, operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question today is coming from Rick Wise of Stifel.

Frederick Wise

Pat, just to start off, it's great to see how much progress you continue to make and the year's on track and all these programs are on track. I'm sort of curious -- I was a little anxious coming into the quarter not knowing what to expect from a macro perspective.

I mean we've heard all the companies this quarter talk about the staffing impact, inflation, transportation. You know the long list. So the question is how did all that affect you? Would the numbers have been -- or the progress have been even better? And how are you thinking about it as you frame the rest of your second half guidance?

James Mackin

Yes. So thanks, Rick. And I do think one of the key messages here is -- and I've seen a lot of other companies report, and we're seeing the same stuff, right, is foreign currency has obviously been a headwind with the euro. Inflationary -- inflations is at a 50-year high. So your cost of goods, your materials and your labor costs are going up, which is affecting gross margin.

There's been staffing issues, both COVID-related and more -- actually, I think more just overall staff turnover. And I've had a chance to talk to a number of our customers, and I do so on a regular basis. And it's just -- it's kind of on the edges. So I can't really tell you how much better we would have done, but I know it's out there. But I think our mantra here is that this is execution.

So we face headwinds all the time, and we power through them. As far as how it kind of affects us kind of going forward, I mean, I think the one thing is that we have a tool we can use if these inflationary pressures exist, which is price. And so if these things don't abate soon, we're going to continue to take price. And it's basically something we have to do. And we have a product line that is a very high-end portfolio with not a lot of competition.

So we have a lot of pricing power in the market with the ability to take price. So I mean all these -- all the things you talked about existed in the second quarter, and we powered through and had a good quarter. So I mean we'll manage the same in the back half.

Frederick Wise

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

James Mackin

Yes. So we're over 800. I think we're at about 805 as of, I think, yesterday out of 1,000. We should enroll -- we will enroll this trial in the fourth quarter, hopefully before the next earnings call, so in the next 90 days. One of the things about this trial is the way it was designed, is as long as it keeps enrolling, then that means things look okay.

The Data and Safety Monitoring Board meets on a regular basis to review the data. And the only -- if the trial stops, that's obviously bad news. And the fact that the trial has over 800 patients -- we enrolled our first patient in May of 2020, so over 2 years ago.

We have 400 patients on Eliquis right now. So I think that, that bodes well. And obviously, we don't know until the end of the trial. So -- but I think that the more time that goes by and the more the patients keep adding up, the more years of follow-up that you get and the more -- the higher the probability of success.

We are also, I think, very confident that if this trial gets approval by the FDA. This will be a significant shift in the market. And I've said it a number of times, and we'll show people. But this will be the market-leading valve in patients under 70 years old. And you can run the math and see what that means.

Frederick Wise

Yes. No, for sure. Maybe just one last one for me, gross margin. You -- obviously, the quarter came in, in a reasonable way. Gross margins have been sort of hanging in there in the 65%, 66% of sales range. How do we think about the second half here? Again, given the puts and takes from exchange, inflation, et cetera, et cetera, is this the right way to think about it in the second half as well?

James Mackin

Yes. I think that -- I'll let Ashley jump in. A couple of comments on gross margin. So one, we definitely saw an impact on BioGlue, just because we were selling -- we were having to sell different sizes because we were running out in Europe. And so there was a little bit of noise around the BioGlue CE Mark issue.

The biggest headwind on gross margin for us has been what everybody is seeing, right, is the materials -- increase in materials costs, increase in labor costs. And so we're going to get more aggressive on the pricing front. And I already made that comment. Maybe Ashley, you can chime in.

David Lee

Yes. So Rick, we estimate that inflation has had about a 150-basis point impact on gross margins. We anticipate that's going to be the impact for the full year. Now with that being said, we have been taking some price in the first half of this year that's allowed us to mitigate maybe about half of that impact.

And as Pat said, we're going to look to get more aggressive on pricing in the second half of this year. As you look out over the balance of this year, we've been hanging around the 65% range. Last year, we ended up just a little bit over 66%. We anticipate that we're going to be closer to the 66% range than 65% for the second half of this year. But again, a lot of it's going to depend on what we continue to see in regards to inflation as well as the success that we have in the second half in regards to taking additional pricing.

Operator

[Operator Instructions]. Our next question is coming from Suraj Kalia of Oppenheimer.

Suraj Kalia

Pat, Ashley, can you hear me all right?

James Mackin

Yes.

David Lee

Yes, Suraj.

Suraj Kalia

Gentleman, congrats on a great quarter considering the circumstances. I think some -- you guys have consistently delivered throughout COVID. Pat, jumping in between a couple of calls. Did you mention the number of patient years already in the bag on PROACT -- and the reason I ask is...

James Mackin

I did not. I actually don't have that at the tip of my tongue. I mean we've enrolled 805 patients as of yesterday with the goal of enrolling 1,000. Our first patient was enrolled in May of 2020. So I actually don't -- I don't have the patient years. That's something I can actually get fairly quickly, but I don't have that at my fingertips.

Suraj Kalia

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

James Mackin

Yes, it's a great point, Suraj. I mean we are -- we plan on enrolling in this trial in the fourth quarter, and we are going to approach the FDA about submitting with 60 -- so if you think about a trial like PROACT Mitral, which is our low INR mitral which you're well aware of, that's a 1-year follow-up, which is 800 patient years.

They wanted 2 years of follow-up, which is 1,600 patient years. We will hit 1,600 patient years in less than a year. So I think that's something we're going to explore. We don't have any definitive guidance on that yet, but that's something we're going to pursue.

Suraj Kalia

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

James Mackin

Yes. I mean -- so I mean, we had a solid quarter in Europe. The only real issue was the derogations, it was the BioGlue CE Mark. And when we were on our call last quarter in mid-February, we had 1 derogation out of like 20, and we've subsequently gotten like 15 of them. So we did a great -- our team did a great job getting these derogations. So we -- I think we've got 85% of the BioGlue revenue covered, and we had a great inspection with the regulators, and we're tracking for our CE Mark under MDR to be back at the end of the third quarter.

Germany, I think it's kind of -- I've been there twice in the last quarter, I was there twice aside from the travel nightmare, I think things are running as usual. We've talked to our local team about the power grid and how we get power and everything else. And I think we feel pretty confident -- I mean, I can't predict what's going to happen geopolitically. But I think as things stand today, we don't really see that as an issue for us in the second half.

Suraj Kalia

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

James Mackin

Thanks, Suraj. Yes, so there's about -- this is off the top of my head. There's about 800 hospitals that do aortic and mitral valves. Some of them do very few. So I mean, our major focus is on like 600 accounts. And we're probably in like 450 of those 600 accounts. And again, some of them are just smaller accounts and don't have a lot of volume. One of the things we saw with PROACT aortic is we would be in a center with one surgeon, but then when the data came out, we would spread that to multiple surgeons. So it's not just being in the account, it's actually how deep you are in the account. Also kind of, to your point, opening up new accounts.

So we've talked about PROACT Mitral as a $40 million opportunity for us just taking mechanical share. We would be the only -- assuming we get FDAapproval in the second half, we'll be the only mitral valve in the mechanical space that has a low INR. And we've showed you what we've done with the PROACT aortic. We're the market leader in the mechanical aortic space at this point. So at least in the U.S., where we have good share data, we expect to do the same thing with the PROACT Mitral.

Operator

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

James Mackin

So thanks for joining today. And we're pleased that we've strung together 3 nice quarters. We're growing 10% halfway through the year. We've got, I think, a very simple approach with 4 key growth drivers. We focus on our key products, On-X and stent grafts, they're both growing. One's growing 23%, one is growing 12%.

We focus on expanding in Asia Pacific and Latin America. One is growing 59%, one's growing 39%. We're focused on getting our 2 PMAs approved, PerClot and PROACT Mitral, and we're focused on enrolling our 3 PMA clinical trials, which will get us with $1.3 billion in 90% gross margin revenue. That, if all get approved, will be in the market in 2025. So this is really an execution story.

As you heard from some of the questions, we're delivering even in the face of a lot of challenges, and we've reiterated our guidance for the rest of the year and feel confident that we can deliver it. So thanks for joining, and we'll see you next quarter.

Operator

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