CryoLife, Inc. (CRY) Q3 2021 Earnings Conference Call November 4, 2021 4:30 PM ET

Company Participants

J. Patrick Mackin - Chairman, President and Chief Executive Officer
D. Ashley Lee - EVP, Chief Operating Officer, and Chief Financial Officer

Conference Call Participants

Suraj Kalia - Oppenheimer & Co

Operator

Good day, ladies and gentlemen, and welcome to the CryoLife Third Quarter 2021 Financial Conference Call. [Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host, Brian Johnston. Sir, the floor is yours.

[Technical Difficulties]

J. Patrick Mackin

This is Pat Mackin CEO of CryoLife. We posted a solid quarter despite the headwinds caused by the Delta variant. Our results for the third quarter were $72.2 million, 5% growth on a pro forma constant currency basis compared to Q3 2019, which were right in the midpoint of our Q3 guidance.

Our performance benefited particularly from our new stent and stent graft product launches and strength in our On-X aortic valve business in the U.S. More specifically, in the third quarter of 2021 compared to the third quarter of 2019, our stents and stent graft segment grew 22% and On-X grew 10%, each on a pro forma constant currency basis. The On-X product line growth was led by the On-X aortic valve revenue growth in North America, which grew 16% compared to 2019. I'm encouraged by these results given that we had three significant headwinds in the quarter that are all showing signs of improvement as we move into Q4.

First, the spike of the Delta variant had an impact on procedure volumes, and therefore, an impact on our Q3 results. We have seen over the past month, however, the COVID cases have declined nationally, which we believe means that in Q4, procedure volume should stabilize and increase.

Second, our cardiac tissue declined 10% in the third quarter compared to 2019, resulting from a backlog in review of donor and tissue charge to release this tissue, which, as you will recall, had been temporarily quarantine as a result of our previously discussed Tris issue. In the third quarter, we added staffing capacity and have been able to release more charts. As a result, we've already seen significant improvement in cardiac tissue revenue with an 8% year-over-year growth in October compared to 2019.

Third, we did not sell any TMR handpieces in Q3 and expect to begin selling them this month, which should add to our Q4 revenue growth. Given our mitigation of these three headwinds, in Q3, we expect to post double-digit revenue growth in the fourth quarter of this year compared to the fourth quarter of 2019. We're also reiterating our full year 2021 guidance. Ashley will provide more commentary on our outlook for the remainder of the year later in this call.

Moving on to a more granular review of our progress in the third quarter, as I explained in our last call, our near-term plan is to accelerate revenue growth with three main initiatives. Our first initiative is to commercialize our five new aortic stent and stent graft products in Europe. These include AMDS, NEXUS, E-nside, NEO and E-nya. Our second initiative is to continue to expand into Asia Pacific and Latin America by gaining regulatory approvals and expanding our local channels. Our third initiative is to secure regulatory approvals in major markets for PerClot in the U.S., PROACT Mitral in the U.S. and BioGlue in China.

I will walk you through an update on each of these three initiatives. Starting with AMDS, the world's first arch remodeling hybrid device for use in the treatment of Acute Type A aortic dissections, we remain very optimistic. During the third quarter, we posted $1.3 million in revenue, an increase of 68% on a pro forma constant currency basis over the third quarter of 2019. This growth occurred despite regional lockdowns in Europe, where we have the majority of our AMDS sales. We also secured marketing authorizations in four additional countries this quarter, including Hong Kong and UAE, which position us well for further growth with AMDS.

Second, NEXUS posted $502,000 in revenue, an increase of 66% on a constant currency basis compared to the third quarter of 2020 as NEXUS was not approved in the third quarter of '19. We believe these revenue results would have been better for NEXUS as well as for other products, if not for renewed COVID-19 lockdowns and travel restrictions in Europe during a portion of the third quarter. Given the anticipated decline in COVID-19 infection rates and other factors, we expect to see an uptick in NEXUS procedures in Q4.

Third, E-nside, which is our newest device in our portfolio to treat thoracoabdominal aneurysms with endovascular stent grafts. Our revenues for this product line, which include E-nside and our E-xtra Design Engineering grew 45% on a constant currency basis when compared to Q3 of '19.

Fourth, the NEO devices, our newest product in the frozen elephant trunk category to treat dissections and aneurysms of the aortic arch. Revenues from this product line, which include the NEO device plus E-vita Open Plus, grew 60% on a constant currency basis compared to Q3 of 2019.

Fifth, regarding E-nya, our limited market release continues and we expect to move to a full market release in early '22. We expect the demand for these five products to continue to build as the market adoption for the product expands as well as the vaccine levels in Europe continue to rise.

Moving on to our next initiative, international expansion. In Asia Pacific and Latin America through new regulatory approvals and commercial footprint expansion, Asia Pacific revenues grew 31%, while revenues in Latin America grew 40%, both on a pro forma and constant currency basis in the third quarter of '21 compared to the third quarter of '19. We continue to expect growth across these regions over the coming years as we continue our initiatives in these regions.

Regarding our third initiative, we continue to make progress on achieving three regulatory approvals in major markets. More specifically, we submitted the PerClot PMA earlier this month, we submitted the PROACT Mitral PMA during the third quarter, and we continue to have dialogue with the Chinese regulatory authorities to facilitate the approval of BioGlue in China.

For PerClot, we expect to receive approval from the FDA during the second half of 2022. Following the FDA approval, we'll supply product to Baxter and generate revenue for a period of approximately two years under our transition services agreement. We also expect to receive PMA approval for our lower INR label for the On-X mitral valve. This is similar to our lower INR label for On-X aortic valve. We expect this approval to come in the first half of 2022.

As a reminder, the On-X aortic valve has a significant clinical advantage for patients over competitor valves in that, it's the only FDA-approved mechanical aortic valve that can run at a lower INR of 1.5 to 2.0 rather than the standard of care 2.0 to 3.0. If our new label is approved, patients with the On-X mitral valve will be able to be maintained on a lower dose of Coumadin compared to patients implanted with other mechanical valves.

A reminder, our label, if approved by the FDA, would be a 2.0 to 2.5 INR versus a standard of care 2.5 to 3.5. This will translate to significant clinical benefits for patients. We believe this approval for the On-X mitral valve will enable us to take significant market share just as we took market share with the On-X aortic valve.

Lastly, as it relates to the regulatory approval of BioGlue in China, we remain actively engaged with NMPA and look forward to providing an update on our approval time line when we have further clarity.

In addition to our progress on each of these initiatives, we also continue to make strides on our midterm pipeline with key products currently in U.S. clinical trials and others expected to start later this year. These three products are PROACT Xa, NEXUS and AMDS. We continue to make significant progress on the enrollment of our PROACT Xa trial. This is our prospective randomized clinical trial to determine if patients with the On-X aortic valve could be maintained safely and effectively on Eliquis versus warfarin. We currently have 471 patients enrolled in this study. Feedback from surgeons and patients participating in the trial remain very positive.

We anticipate completing enrollment in the trial during the second quarter of next year. And assuming the trial meets its endpoints, we believe we can achieve FDA approval for this new indication by late 2024 or early 2025. If we successfully obtain such approval, we believe the On-X aortic valve should become the market share leader in aortic valve patients under the age of 70.

As for AMDS, we submitted the IDE to the FDA during the third quarter and we hope to begin our AMDS clinical trial by year-end. In addition to the PROACT Xa trial and the AMDS trial, our partner, Endospan continues to make progress on its U.S. IDE trial for NEXUS known as TRIOMPHE. If these trials proceed as we expect, we anticipate FDA approval for PROACT Xa, AMDS and NEXUS by late '24 or early '25, which would give us - give the company an additional $1 billion of market opportunity at that time.

With that, I'll now turn the call over to Ashley, our CFO.

D. Ashley Lee

Thanks, Pat. And before I move on, I'd like to remind everybody that this call does contain forward-looking statements, and you should refer to the forward-looking statements contained in our press release that we issued this morning and in the risk factors in our 10-Q that we'll file tomorrow.

So, total revenues were $72.2 million for the third quarter, up 11% on a GAAP basis and 9% on a pro forma constant currency basis, both compared to Q3 of 2020. Revenues came in above the midpoint of our guidance despite the impact of the Delta variant, slower than anticipated cardiac valve chart clearances and the delay in restarting sales of our TMR disposable handsets.

On a year-over-year basis, in the third quarter of 2021, aortic stent and stent graft revenues increased 37%, reflecting increased procedure volumes and improved JOTEC inventory position, the addition of the AMDS in September of 2020 and improved adoption of NEXUS in the EU. On-X revenues increased 16% and BioGlue revenues increased 5%, reflecting improving procedure volumes relative to the third quarter of 2020, and tissue processing revenues decreased 5% due to a temporary delay in cardiac valve tissue releases.

On a pro forma constant currency basis compared to the third quarter of 2020, aortic stent and stent graft revenues increased 27%, On-X revenues increased 15% and BioGlue revenues increased 3%. On a pro forma constant currency basis compared to the third quarter of 2019, On-X revenues increased 11%, aortic stent and stent graft revenues increased 22%, BioGlue revenues increased 5% and tissue processing revenues decreased 7%.

On a regional basis, third quarter 2020 revenues in EMEA increased 21%, Asia Pacific increased 26%, Latin America increased 88% and North America increased less than 1%, all compared to the third quarter of 2020. On a pro forma constant currency basis, revenues in EMEA increased 17%, Asia Pacific increased 25% and Latin America increased 83% and North America decreased less than 1%, all compared to the third quarter of 2020.

Our gross margins were 66% for both the third quarters of 2021 and 2020. G&A expenses in the third quarter were $39.1 million compared to $33.7 million in the third quarter of 2020. The increase primarily relates to a $4.9 million increase in personnel-related expenses, including salaries, commissions and travel and an increase of $1.5 million of amortization and fair value adjustments related to contingent consideration resulting from the Ascyrus acquisition in September 2020.

We also recorded a $15.9 million pre-tax gain on the sale of PerClot, reflecting our $25 million payment from Baxter, partially offset by a $6 million payment to SMI and the write-off of certain intangible assets.

R&D expenses were $10 million in the third quarter of '21 compared to $5.8 million for the third quarter of 2020, primarily reflecting increased spending related to the PROACT Xa trial and work to advance our aortic stent pipeline in the U.S. Third quarter interest expense of $4.1 million includes approximately $2.5 million of expense related to our Term Loan B, $1.1 million related to our convertible debt and approximately $500,000 in amortization of debt origination cost. Other expense in Q3 includes $2.6 million in realized and unrealized foreign currency translation losses.

On the bottom line, we reported GAAP net income of approximately $10.6 million or $0.26 per fully diluted share in the third quarter of '21. Non-GAAP net loss was $1.2 million or $0.03 per share in the third quarter. GAAP and non-GAAP earnings includes the pre-tax loss of $2.6 million or approximately $0.05 per share related to foreign currency translation losses and the prior year included a $0.04 per share gain from FX. Reconciliations of GAAP to non-GAAP income and EPS are included in the press release that we issued this afternoon.

Adjusted operating income was $4.7 million for the third quarter of '21 compared to $8.1 million for the third quarter of 2020. Adjusted operating income reflects add-backs of amortization expense and acquisitions and other non-recurring charges to operating income. As of September 30, 2021, we had approximately $65.1 million in cash, $318 million in debt and our full $30 million available under our revolving credit facility.

Adjusted EBITDA for the third quarter of '21 was $9.3 million compared to $12.2 million for the third quarter of 2020. Gross leverage, as defined by our credit facility stood at 5.7 times and net leverage stood at 4.6 times. You can 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, we are maintaining our second half of 2021 pro forma constant currency growth outlook of between 7% and 10% compared to the second half of 2019. But because of the dollar strengthening since our last call, our revenue forecast for the full year is now between $296 million and $299 million, and we expect fourth quarter revenues of between $76.5 million and $79.5 million, reflecting pro forma constant currency growth of between 9.5% and 13.7% over the fourth quarter of 2019.

There are several factors that give us confidence. Our new product launches AMDS, NEXUS, E-vita OPEN NEO and E-nside continued to perform very well. We anticipate seeing continued strong performance from On-X in North America. We are already beginning to see improved cardiac tissue releases.

We expect to continue to see strong performance from APAC and Latin America, and we anticipate restarting TMR handset sales this month. Our guidance also reflects the fact that the dollar has strengthened versus our prior expectations, which has an approximate $1 million drag on our nominal revenue guidance during the fourth quarter.

Finally, our guidance assumes that the impact of COVID throughout the quarter will continue to diminish. Additionally, if as anticipated, we receive IDE approval to begin our AMDS clinical trial in the fourth quarter, we anticipate recording charges of approximately $4 million in fair value adjustments to contingent consideration related to the AMDS acquisition. These amounts will be included in SG&A.

Regarding our ongoing investments designed to fuel future growth, we intend to continue to invest in our commercial channels in Asia Pacific and Latin America as well as in our R&D pipeline. We believe that we will be able to fund these investments through our ongoing operations and that we can comfortably make these investments and service our debt without having to raise additional capital.

I will now turn the call back to Pat for his closing comments.

J. Patrick Mackin

Thanks, Ashley. In closing, as you've heard this afternoon, the three headwinds that we faced in Q3 2021, the surge of the Delta variant, cardiac tissue chart processing and lack of a TMR handpiece are all improving. This positions us well for double-digit growth in Q4 2021 versus Q4 of 2019. We also expect this momentum for Q4 '21 to continue into 2022. As I explained throughout the call, we've built a plan that has three initiatives that will drive growth from now through the end of 2024.

First, we should see continued growth in our five new aortic stents and stent grafts, AMDS, NEXUS, E-nside, NEO and E-nya. Second, we anticipate further upside from our investments in our channels and new regulatory approvals in Asia Pacific and Latin America. Third, in 2022, we expect to get PMA approval for PerClot as well as PMA approval for the On-X PROACT Mitral low INR indication.

Finally, we have a robust midterm pipeline with three U.S. PMAs that are all currently enrolling like PROACT Xa and NEXUS TRIOMPHE, we're about to start enrolling the AMDS persevere trial. I'm very confident in our plan, and we're relentlessly focused on delivering double-digit growth on a consistent basis.

Before I turn it over to questions, I'm going to actually have Ashley reread the forward-looking statements, because I don't think those were picked up as I started because we were having technical difficulties at the beginning. Ashley, could you just quickly run through that?

D. Ashley Lee

Yes, absolutely. So, comments that we made during the 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 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 we issued earlier today.

J. Patrick Mackin

Okay. Thanks, Ashley. So, I apologize for the technical difficulties at the start. We've now read the forward-looking statements. And operator, could you go ahead and open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Suraj. Please go ahead.

J. Patrick Mackin

We can't hear him.

Operator

Suraj, if your line is muted, please unmute your line?

Suraj Kalia

Pat, can you hear me?

J. Patrick Mackin

I can, now.

Suraj Kalia

Oh, my goodness, having issues. So, Pat, Q2 '22 PROACT Xa enrollment finishing, can you expand on that in terms of - I know the DSMB is looking at every one to two quarters, as we understand it. When is the earliest we could get some visibility on an interim basis on PROACT Xa?

J. Patrick Mackin

Yeah, I think we've talked about this previously. So, this is - it's an interesting - the trial design, because it's such a - thromboembolic events with valve are very low, which is why we have a 1,000 patient trial. And the way this is set up as a non-inferiority to Coumadin. And so there really is no interim look. I mean you could get to a situation where you had the trials, and you're very familiar with how this works from a statistic standpoint, where you can have a trial stop early, but they would have to be a significant difference between Coumadin and Eliquis, which, again, we don't think is going to happen. This is powered for non-inferiority.

So, I think, maybe the way I would answer it is we're assuming the trial enrolls in the second quarter next year. That means that you've got 1,000 valves, half on Eliquis, half on Coumadin. And we started this trial, as you know, in May of 2020. That means we will, at that point, have already had some of the first patients on Eliquis for two years. And I think the way to think about this trial, once this trial enrolls, every quarter that goes by, it's another quarter with 500 patients on Eliquis. So, in the end, we won't know the answer to the question until we get to our full 2-year enrollment. So, I think that's probably the best I can answer at this time.

Suraj Kalia

Pat, I'll just plug in. Pat, can you still hear me?

J. Patrick Mackin

Yes.

Suraj Kalia

Just one additional question on PROACT Xa and I'll hop back in queue and let others chime in. So, Pat, remind you on PROACT Xa, let's say Suraj gets enrolled in March 2020, fine. And the trial enrollment gets completed March 2022, right? He's already two years in follow-up. But let's say, Pat Mackin gets enrolled March 22, right? You need to your follow-up for Pat also. And by the time Suraj is alive on Eliquis for four years, right?

J. Patrick Mackin

That's right.

Suraj Kalia

When the final data is presented, would the subgroup analyze by duration of follow-up also? And the reason I ask is, these event rates over time multiply the cumulative incidence increases, right? I know there is a mean and we are looking at two years, but I am just curious if that kind of data stratification also is eventually going to be presented, because it's going to be interesting, patients with longer term, how they could - how they do on Eliquis. Thank you for taking my questions.

J. Patrick Mackin

Yeah, no problem. So, I mean, I think one of the points back to your earlier question is, we're - a typical FDA valve trial is about 800 - you need about 800 patient years of follow-up. So, for example, I mentioned the PROACT Mitral PMA has been submitted. That bar is an 800 patient years of follow-up. We're collecting 1,600 patient years of follow-up in this trial. And I think part of that is because any time you're going to change a drug, both our clinicians and the FDA wanted to see two years of data.

But you're right. Under your example, Suraj will have been on Eliquis for four years and I would have been on Eliquis for two years. So, the last enrolled patient in this trial will have to be followed for two years and then we do the Kaplan-Meier analysis on area under the curve. So, there is no interim analysis. The DSMB, as you mentioned earlier, meets every six months and reviews the data. And as long as the trial keeps going, then it's a green light.

Suraj Kalia

Thank you.

J. Patrick Mackin

Okay. We can take the next question

Operator

There are no further questions at this time. [Operator Instructions] Mr. Mackin, there are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

J. Patrick Mackin

Yeah, and again I apologize for the difficulties at the beginning of the call. As we talked about, I think we had a solid quarter. We had some headwinds with Delta, with some headwinds with our cardiac tissue just clearing charge. But the good news is we've got lots of tissue. We just need to clear those charts. And that's actually - that the situation is improving as we speak. We're already growing tissue 8% in October. And we're about to send out our TMR handpieces after not having them for a couple of years.

So, I think with all those headwinds kind of being mitigated, we're in good shape for the fourth quarter and look forward to putting up a double-digit growth number. The pipeline is advancing. We got two PMAs with the FDA right now that we expect to get approved next year and we've got three PMA clinical trials that are either enrolling or will be enrolling by the end of the year. So, again, we're very confident in the portfolio we have and look forward to putting up a double-digit growth number this quarter.

Thanks for joining in.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines and enjoy the rest of your day.