CryoLife, Inc. (CRY) Q3 2020 Earnings Conference Call November 4, 2020 4:30 PM ET

Company Participants

Lynn Lewis – Gilmartin Group
Pat Mackin – Chief Executive Officer
Ashley Lee – Chief Financial Officer

Conference Call Participants

Suraj Kalia – Oppenheimer
Jeffrey Cohen – Ladenburg Thalmann

Operator

Greetings, and welcome to CryoLife’s Third Quarter 2020 Financial Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host. I will now turn this call over to Ms. Lynn Lewis from the Gilmartin Group. Thank you. You may begin.

Lynn Lewis

Good afternoon and thank you for joining the call today. Joining me today from CryoLife’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 requirement 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 those 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’ll turn the call over to CryoLife’s CEO, Pat Mackin.

Pat Mackin

Thanks, Lynn and good afternoon, everyone. Thanks for joining us. I’m pleased to report that we had a solid third quarter as trends continued to improve from the first day of the COVID crisis. We attribute our recovery to the critical indications [Technical Difficulty]. Additionally, our team’s efforts have been extraordinary over these past two quarters. They have proven they can supply devices and support procedures, both in-person and virtually. They can also employ creative solutions to ensure continued customer service and patient care.

I have no doubt that their incredible dedication and resolve have helped save many patients’ lives throughout this pandemic. I want to sincerely thank our entire organization for their outstanding performance during these challenging times.

Today, I’ll provide some color on our Q3 performance, as well as our expectations for the remainder of 2020. Then Ashley Lee, our CFO will review the third quarter financial results and liquidity in greater detail. I will then make closing remarks and open up the call to your questions.

As I will explain later in more detail, through the third quarter, we advanced on a number of our key initiatives and delivered solid results. Our third quarter revenue performance was driven by the fact that the vast majority of our products are used in procedures that cannot be postponed at all, or they cannot be delayed for very long.

In Q3, we achieved revenues of $65.1 million, which reflects a decrease of 4% versus third quarter 2019, both at GAAP and constant currency basis. If you exclude TMR revenues for the third quarters of 2019 and 2020, total revenues decreased 2% on a constant currency basis. As we saw in the second quarter of this year, throughout the third quarter, we saw improving procedure volume. In fact, revenues in September increased over – in September 2020, increased over September 2019. These trends corroborate our belief, the hospitals and providers have become increasingly adept at managing procedural continuity during the COVID-19 pandemic.

As we look to Q4 revenue performance, we were optimistic that we could return to growth versus 2019. In fact, our October 2020 revenue performance was a strong 99% of October, 2019. Unfortunately, this pandemic is a fluid situation and in the past two weeks, we’ve seen spikes and inflection rates in both U.S. and Europe, and more recently have seen lockdowns in Ireland and the UK as well as other countries in Europe.

As a result, we are less optimistic that we’ll see the return to growth in Q4, but we do anticipate that we will begin to benefit from recently-launched or soon-to-be-launched next-generation JOTEC products; AMDS and NEXUS in our continued expansion into Asia Pacific and Latin America, as well as positive news on the regulatory front that should benefit us, beginning in 2021.

We’re particularly optimistic on the outlook for AMDS. This is the world’s first arched modeling hybrid device used for the treatment of acute Type A aortic dissections, which we now own as a result of our acquisition of Ascyrus Medical back in September. The acquisition of AMDS aligned exceptionally well with our vision to provide the most technologically advanced, simple and elegant solutions for patients with aortic disease.

As we discussed on our call immediately following the Ascyrus acquisition, AMDS has the potential to reduce complications as well as reoperations associated with acute Type A aortic dissections, which should improve patient care and reduce hospital costs. We believe the hemi-arch repair with the AMDS technology added has the potential to become the new standard-of-care for the treatment of acute Type A aortic dissections.

So far, we’re off to a great start. We posted revenues of approximately $465,000 for the month of October, which was a 295% increase over October of 2019. Regarding our operations fortunately, nothing has changed since our last update, as we’ve continued to run at or near capacity across our three manufacturing facilities with few if any disruptions and it continued to avoid any significant supply chain disruptions. At each of our sites, the work from home and safety protocols we implemented earlier this year remain in place, and we believe they’ve been very effective in minimizing the impact of COVID-19 on our workforce.

As mentioned previously, the slowdown in procedures in the past few months has allowed us to continue to improve our JOTEC inventory decision. We also remain on track to have a second source sewing supplier by the end of the year, assuming considering the worsening pandemic conditions in Europe, don’t allow or preclude our notified body for coming in and conducting their inspection.

As we look ahead, we remain in a position of strength by continuing to mitigate operational risk diligently, managing our expenses and strategically investing for growth now and when the pandemic subsides. In fact, we’ve been able to make significant progress on several strategic initiatives in R&D projects.

First, we made continued progress on our JOTEC product launches. Our limited market release for the E-vita OPEN NEO Open NEO and E-nside are progressing very well. And today, we received very positive customer feedback on those technologies. We also remain on track to initiate a limited market release for E-nya this quarter, and have already resumed the limited launch of NEXUS.

We continue to anticipate full market release for all three new JOTEC products in early 2021. As mentioned on our last earnings call, our teams are continuing to gear up to train physicians as well as build supply to support the full market launches in these three new JOTEC products.

Second, with the improvement seen in late Q2 – seen in Q2 and Q3, we’ve ramped up our enrollment efforts in the PROACT 10A trial, which is a prospective, randomized clinical trial to determine if patients with the On-X aortic valve can be maintained safely and effectively on Eliquis versus warfarin.

We currently have 34 sites fully qualified to begin enrollment and 54 patients already participating in the study and feedback from surgeons and patients has been very enthusiastic. Enrollment to-date represents solid progress towards our approximately 1,000 patients’ enrollment target across 60 North American sites that we expect to roll over the next year.

As a result of our progress despite pandemic headwinds and assuming the trial meets its endpoints, we believe, we can still achieve FDA approval for the use of Eliquis with On-X aortic valve in 2024, which we believe will contribute to the On-X aortic valve becoming the market leader in mechanical valve segment, as well as taking share from existing bioprosthetic aortic valves.

On the regulatory front, we remain on track to file our PMA for PerClot in the U.S. and also to our response to the Chinese FDA for BioGlue before year-end.

and finally, Endospan received FDA approval to begin their U.S. clinical trial for NEXUS and anticipates enrolling the first patient later this quarter.

With that, I will now turn the call over to Ashley for a detailed review of our financials in the quarter. Ashley?

Ashley Lee

Thanks, Pat and good afternoon, everyone. Total company revenues were $65.1 million for the third quarter, down 4% compared to the third quarter of 2019, due primarily to the impact on our business from COVID-19 in the absence of TMR revenues. excluding TMR revenues, third quarter revenues were down only 2% compared to the third quarter of 2019.

In the third quarter of 2020 versus the third quarter of 2019, BioGlue revenues increased 1%, tissue processing revenues decreased 2%, On-X revenues decreased 4% and JOTEC revenues, including NEXUS and AMDS decreased 3%. performance in each of these products lines was adversely affected primarily due to the COVID-19 pandemic. But as expected, we saw improved sequential revenue performance for each product line in the third quarter, compared to the second quarter.

On a regional basis, third quarter 2020 revenues in EMEA decreased 1%, North America decreased 4%, Asia Pacific was flat and Latin America decreased 36%, all compared to the third quarter of 2019.

Our performance in Latin America during the quarter primarily reflects the state of the pandemic in Latin America during Q3, and especially in Brazil, where the majority of our revenues in Latin America are generated.

Our gross margins were 66% for the third quarter compared to 67% for the third quarter of 2019, reflecting an actual decrease of approximately 50 basis points year-over-year, a slight decrease in gross margins is primarily due to revenue mix.

Interest expense of $4.9 million includes approximately $2.3 million of expense related to our Term Loan B, $1.1 million related to our convertible debt and approximately $1.4 million in non-cash interest expense and amortization of debt origination cost.

Other expense includes $4.9 million related to milestone payments made to Endospan for their recent IDE approval, partially offset by $2.1 million in realized and unrealized foreign currency translation gains. The impact of the milestone payment to Endospan is included in our business development expenses for the quarter for non-GAAP calculations.

On the bottom line, we reported a net loss of approximately $2.9 million or $0.08 per fully diluted share in the third quarter of 2020, excluding business development expenses of $6 million, amortization of $3.4 million and non-cash interest expense of $1.4 million, non-GAAP net income was $4.9 million or $0.13 per share. note that we have excluded non-cash interest expense of $1.4 million in the determination of the third quarter of 2020’s non-GAAP income calculations.

With the completion of our convertible debt financing in late Q2, we’re now including non-cash interest expense as an add-back in the determination of non-GAAP earnings for all periods presented including prior years.

as of September 30, 2020, we had approximately $300 million in debt. Adjusted EBITDA for the third quarter of 2020 was $12.2 million compared to $13 million for the third quarter of 2019. As of October 31, 2020, we had approximately $61 million in cash and cash equivalents, as well as the full $30 million available under our revolving credit facility. please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results.

So in summary, the third quarter demonstrated the effectiveness of our strategy – sorry, pardon me there – due to the continued uncertainties resulting from the impact of COVID-19, we will not be reinstating 2020 financial guidance at this time. However, with the recovery we have seen in the business and prudent expense management, we remain confident that we not only have adequate liquidity to run the business, but also have sufficient capital to support our growth initiatives and comfortably service our debt.

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

Pat Mackin

Thanks, Ashley. So in closing, as you’ve heard this afternoon, despite having to manage through a global pandemic, our business is performing well. I look forward to the days when we can operate in a more normalized environment and the true potential of the company can be realized. CryoLife is prime for growth over the next few years like never before.

our addressable market opportunity in 2015 was approximately $600 million. in just five years and for transformative transactions later, we’ve increased our total addressable market tenfold to over $6 billion. Our product line-up is now filled with innovative, highly-differentiated products that are either in development or in many cases, just starting to realize their potential.

As a result of these opportunities, we have growth for years to come, and these are truly exciting times of CryoLife. We couldn’t be more pleased with On-X, JOTEC, NEXUS and now AMDS. We are fortunate to have these four outstanding products, which when combined with our legacy products form a highly competitive line-up, particularly given our highly-experienced and talented sales and service organization, and our ability to go direct and key markets around the world. and as Ashley said, CryoLife rose on a sound financial structure, which allows us to continue to execute on our goals and objectives.

So in summary, the third quarter demonstrated that the effectiveness of our strategy to focus on aortic repair in the emergent nature of our product portfolio. borrowing any adverse impacts from the resurgence of COVID-19 in our key markets, we are confident about our prospects for success through the remainder of the year and beyond.

With that, we’d like to open up the call to questions. operator, please proceed.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Suraj Kalia with Oppenheimer. You may proceed with your question.

Suraj Kalia

Hey, Pat, Ashley. congrats on a great quarter.

Ashley Lee

Thank you.

Pat Mackin

Thanks, Suraj.

Suraj Kalia

So Pat, forgive me just hopping in-between calls. So, you might have mentioned this, would the supply issues at JOTEC resolved in the quarter? The numbers look pretty good, but I just wanted to make sure I didn’t miss that.

Pat Mackin

Yes. So, two things, the kind of a silver lining in a difficult time with this pandemic is as the supply or the demand for the products kind of waned for all products in Q2, and we’ve come back very strong going into Q3. We took the opportunity to run our factories at full tilt. So, we’ve increased our JOTEC supply significantly, and we didn’t really stop there. We’ve got our second source supplier, as I mentioned in the comments that we should be getting our inspection from our notified body this quarter.

And again, COVID could kind of slow that down if they can’t get an inspector into that country. But between the inventory build we made, in the JOTEC product line during the pandemic, when the demand was slowed down, we are at a very strong inventory position, and with the second source sewing supplier coming online, I think we’re going to be very well poised for 2021 from an inventory standpoint.

Suraj Kalia

Got it. Pat specifically, in terms of On-X in the U.S., walk us through center utilization metrics as you see them progressing. And in Europe specifically, can you walk us through the cross-selling that you have witnessed, if you normalize for COVID between On-X and JOTEC?

Pat Mackin

Yes. So, the first question, if I look on a global basis, basically, the On-X portfolio is [Technical Difficulty] that showed growth in some areas and slowdowns in other areas, it’s just mostly pandemic driven. So On-X has been very resilient in that, it’s basically performing, where it was last year. So, the other comment I made is that we are starting to ramp up PROACT 10A and there’s a lot of excitements. We’ve now got 30 plus centers towards the goal of getting to 60 centers, and we’ve got like 54 patients already enrolled in the trial.

So, we think it’s actually doable to enroll that trial in 2021. And that, I think that added excitement is going to show up in just the customers’ interest in that product from a future standpoint. As far as the cross-selling, I mean, it’s one of the things that I’ve been reiterating from the very beginning when we started this journey of acquiring these four companies over the last five years. JOTEC is got an aortic stent craft portfolio that goes from basically, the aortic valve all the way down to the iliac.

On-X has an aortic valve, mitral valve, as well as a device it treats the ascending arch. NEXUS treats the aortic arch with a catheter. Ascyrus treats the aortic arch, for an acute Type A dissections. literally, we’re going to have – we’re going have three U.S. IDE trials in the next 12 to 18 months. we’re going to be running Endospan, just started. They should enroll their first patient this quarter. PROACT 10A is already enrolling. This time next year, we should be able to start the AMDS, Ascyrus U.S. trial for acute Type A dissections. And then we’ll follow closely behind that with our E-vita OPEN NEO Frozen Elephant Trunk device.

So, our customers are very interested in these cutting edge technologies and or as a result, we’re in front of them a lot more. And Europe has – the great thing about Europe is they’ve got that entire portfolio available to their customers today. So, the cross-selling opportunities between On-X and AMDS and E-vita OPEN NEO, and then if you flip to the vascular side, the Endospan and E-nside, just we’ve got cutting edge technologies that are customers lines, and it does nothing but provide tremendous cross-selling opportunities for the company.

Suraj Kalia

Got it. And Pat, in terms of PROACT mitral, remind me when we could see some data and at the same time, would there be any subgroup analysis based on risk stratification? Thank you for taking my questions and congrats on a great quarter.

Pat Mackin

Yes. PROACT mitral [Technical Difficulty] enrolment that trial last year, so, it was about a 400-patient clinical trial that’s going to be – it’s a kind of sister trial to PROACT aortic, where we reduced the amount of blood thinner for the mitral position. We’ve been in follow-up all year with a one-year follow-up for the FDA trial. So, once we hit the follow-up, which should be, I think early in Q1 [ph] we will pull the data together and we should be submitting that PMA in the second quarter to the FDA.

as far as the subset, your question about subset analysis, that that trial was powered to just – can you reduce the INR from 25 to 35, which is the standard of care from mitral to 20 to 25 and it’s – you’re not going to be able to, I don’t believe you’re going to be able to do any subsets with any statistical powering. So, it’s a kind of a non-inferiority complex design or trial design that we have with the PROACT aortic.

So, we should be submitting that the next thing, you’ll hear from us is the submission of that PMA. And I think we’re still looking at when we want to have that data presented. We obviously would like to have a conference with people in the room versus WebEx. So, we’ll see what the timing of that looks like and how that lines up with when the data will be ready, but we should have that data ready to submit to the FDA by the second quarter of 2021.

Suraj Kalia

Thank you.

Operator

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

Jeffrey Cohen

Hi, Pat and Ashley, how are you?

Pat Mackin

Good.

Ashley Lee

Yes.

Jeffrey Cohen

Congrats, Pat on the [indiscernible] award. I didn’t notice.

Pat Mackin

Thank you.

Jeffrey Cohen

No problem. Ashley, first for you. Can you just run through the international segments again? I missed those specific numbers from the quarter – from...

Ashley Lee

Yes. Let me get my notes back out here. Just we’re happy to do that. Yes. So, on a regional basis, EMEA decreased 1% year-over-year, North America decreased 4% year-over-year, Asia Pacific was flat and Latin America decreased 36% year-over-year.

Jeffrey Cohen

Okay, got it. Thanks for that color. And sorry to jump around here a little bit further color, Pat, on the PROACT 10A trial, as far as the implants to-date are most of them, recent surgical implants or implants over the past weeks, months, quarters.

Pat Mackin

Yes. Jeff, I don’t have the breakdown on – I don’t obviously see the day-to-day data on that. So, I’m not exactly sure. I would that the trial design as we talked about is very unique in that. you have to be 90 days out of surgery, which was consistent with what we did in the original PROACT aortic trial, because you want to be on your full dose of Coumadin while the valve gets set in. So, the patient has to be 90 days out of surgery and they can go out to, I think, three or four years post-surgery. So, I don’t have any visibility to how long – I mean, there’s only 54 patients in the trial right now. So, I don’t really have any visibility into – are these like early post-surgery or these people had the valve for three years? I don’t have that data.

Jeffrey Cohen

Okay. Got it. We had a small amount of revenue for AMDS for third quarter. I think about $1,000 versus zero for the quarter and the commercialization started, you’d made a reference to some October numbers.

Pat Mackin

Yes. So I mean, that was actually a real highlight of the quarter. So, we acquired the company in the middle of September. We started shipping devices kind of the next day. Our October revenue for this year was up 295% over last year. So, we did almost a $0.5 million, $465,000 in the month of October.

Jeffrey Cohen

Okay, got it. That’s a strong start and anything to call it on the JOTEC portfolio as far as strength with any specific devices and could you talk specifically about any territories that stood out either stronger or weaker in Europe, please?

Pat Mackin

Yes. So, we’ve talked all year about these new devices and we’ve conducted the – we always started with a kind of a limited market release, where we get a number of centers to trial the device and get the training protocol worked out, et cetera. And we were very strong feedback overall. E-vita OPEN NEO, which is the Frozen Elephant Trunk device, which we actually created that market, JOTEC created that market 10 years ago. And one of the competitors in the field had come out with a newer device. So, we lost a little bit of share there. We’re actually doing extremely well. The fee – I’ve talked to a member of KOLs in Europe, who’ve used our device and we’re getting kind of rave reviews, it’s got a new delivery system, it’s got a bunch of new features.

So, I think that device is going to do extremely well. We’ve also started doing cases in Asia, and we’re actually having – we actually had a proctor from Germany on a Webex, teaching the surgeon or – teaching, but assisting the surgeon remotely, which is something you have to do in these kinds of COVID times. And I think the same on the E-nside, which is our off-the-shelf branch thoracoabdominal device; we’ve gotten fabulous feedback in Europe from the centers that have used this. The challenges, with these intermittent lockdowns, it’s – people aren’t letting you travel from country to country. In some cases, you can’t go from one town to another town. They’re not letting reps into the hospitals.

So, it’s just – it’s just kind of putting a government on the ability to launch with all these kind of flare-ups here and there. So, we’re very excited about what we’ve seen from the initial, and I’m talking about talking to one or two cases, I’m talking like 50 cases. The customer feedback has been kind of off-the-charts from a positive standpoint. So, we’ve got the supply, we’ve got the channel, and we’re looking forward to kind of, when things kind of ease up a little bit, and the business is actually performing well. We – as I said in the script, October was a 100% of last year. So, we’re basically back to where we were last year.

Jeffrey Cohen

Got it. That’s great. And along those lines, I know it’s hard to look into the crystal ball for the balance of the year, but what have you been seeing the last handful of weeks or so in North America, are you seeing flare-ups and if so, specific to geography and how’s that affecting the business as you head into and through the strong quarter?

Pat Mackin

Yes. So, one of the things that everybody’s experiencing, right. This is a very dynamic fluid situation. In fact, coming into the fourth quarter, I mean, we had a super strong September. We actually grew in September. We were flat to last year in October, and we – with the product line-up that we have between what we’ve already talked about, we’ve got NEO, we’ve got E-nside, we’ve got NEXUS, we’ve got AMDS, and we expected to actually return to growth in the fourth quarter. And literally, it’s like the tectonic plates are moving under your feet. We had these forecast of returning to growth in the fourth quarter. And then all of a sudden, two weeks ago, you start – Ireland shuts down, five days ago UK locks down.

Then we start hearing noise about it’s more in Europe, Jeff, I would say, and that’s the other thing about our company versus a lot of companies, our size, we’ve got a big business in Europe. And a lot of our growth has come out of Europe and they tend to be more stringent in their lockdowns. I think the U.S. has actually done a great job, the hospital administrators that I’ve talked to, hospital CEOs, they’ve figured out how to manage COVID and elective cases. So, I think the – I have not seen as bigger impact in the U.S. We’ve seen a bigger impact in Europe. But I think the one thing that can reassure our investors about is we know how to manage a business during a pandemic.

In the worst month of this thing, back in April, we did 62% of the prior year, and we cut our expenses and we were able to – we’re able to put up a very strong quarter. If this thing rages again, we will adapt our expenses to line-up with the revenues. So, I have no – I have no challenges running this thing in during a pandemic. We know how to do it. I will tell you that we’re seeing a lot of positive feedback, but I can’t get, as you guys all can let control the virus. So, if this then clear up in Europe and as we manage the best we can under the circumstances.

Jeffrey Cohen

Got it. And then lastly from me, just a question on BioGlue China, you said, you’re expecting a response by the end of this year. I imagine this calendar end of year. And what would you expect? What are the permutations as far as what the response we’ll be looking for more information or any further data that the authority will be seeking or would that be some finality into an approval there?

Pat Mackin

Yes. So first of all, this pandemic has not helped at all with BioGlue China. I mean, a lot of these meetings are supposed to be face-to-face. None of them have been face-to-face all the way back to our panel back in March. So, this thing has clearly dragged on longer than it would have normally, if we could have met face-to-face. We are going through kind of a real-time review process, if you will. We’ve got some missions going in, I think this week to answer some of their questions.

So it’s kind of a back and forth, right. You submit, they give you feedback, you submit, they give you feedback. Our assumption is that we should have an approval in the second half of 2021. That’s our current assumption right now. It could be earlier than that. It could be Q2, it could be Q3. It could be Q4. I just, it’s very hard to predict in a pandemic working with a regulatory body, how long this is really going to take. So again, we’re working in hard and we’ll see – we’ll give updates as we get more information.

Jeffrey Cohen

Got it. Okay. Great quarter. Thanks for the question.

Operator

Mr. Mackin, there are no further questions at this time. I would like to turn the call back over to management for closing remarks.

Pat Mackin

Yes. And I’ll be brief. So, thank you for joining the call. And obviously, we’re actually excited about how we perform in the quarter and we’re watching this kind of resurgence, but I will say that as we’re – as we’re getting ready to go into 2021, we couldn’t be more excited about the opportunities in front of us. We’ve got kind of four buckets of opportunities in 2021, and I’m skipping 2020 as a copier – I’m using, 2019 is the copier. We’ve got new products we’ve launched. We’ve talked about E-vita OPEN NEO. We’ve talked about E-nside. We’ve got – we’re going to start our limited market release for any of this quarter. So, those are the three new products. It’s not about BioGlue China; we’ll be launching BioGlue China in the second half of next year.

On the [Technical Difficulty] side, we had the acquisition of Ascyrus. We have NEXUS. We’ve also got our distribution agreement with Misonix on our NeoPatch device and we’ve also got the continued kind of growth we’re expecting from Asia Pacific and Latin America. So, we’ve got like nine different vectors in 2021 that we didn’t have in 2019. So, we are expecting to accelerate our growth profile and look forward, we’ll manage through the pandemic, but I think as we come up the other side of this, we’re going to be very well positioned for accelerating our top-line growth.

So, thanks again, for participating in the call and good night.

Operator

Thank you for joining us today. This concludes today’s conference. You may disconnect your lines at this time.