Artivion, Inc. (AORT) Earnings Call Transcript & Summary

Greetings, and welcome to the CryoLife Update Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Johnston. Thank you, Mr. Johnston, you may begin.

Thanks, operator, and good afternoon, everyone. Thank you for joining us on today's call. Joining me on the call are Pat Mackin, Chairman, President and Chief Executive Officer of CryoLife; and Ashley Lee, Chief Financial Officer of CryoLife. I would like to remind everyone that a slide presentation to accompany this conference call has been posted on the Investor Relations section of our corporate website. If you've not done so already, I encourage you to download these slides. Turning to Slide 2. This conference call and presentation contain forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from current expectations. 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 issued earlier. We encourage you to review this slide, which includes applicable risk factors, along with the risk factors contained in our Form 10-K for the fiscal year ended December 31, 2019; our Form 10-Q for the second quarter ended June 30, 2020; and our other filings with the Securities and Exchange Commission. Copies of our SEC filings and the news release for this call are available online from the SEC or by clicking on the Investor Relations section of the CryoLife website. With that, I'll now turn the call over to Pat. Pat?

Yes. Thanks, Brian, and good afternoon, everybody. Thanks for joining the call. So I'm very excited to be sharing with you the news of the acquisition of Ascyrus Medical Dissection Stent called the AMDS. This is the world's first arch remodeling hybrid device used for the treatment of acute Type A aortic dissections. This acquisition significantly advances our vision to provide the most technologically advanced, simple and elegant solutions for patients with aortic disease. If you look at Slide 3, this demonstrates just how comprehensive our portfolio for products in aortic repair are. Importantly, several of these products are highly differentiated with very little competition. We believe the addition of the AMDS to our existing portfolio of products further solidifies our position as a leader in providing solutions for patients with aortic disease. Turning to Slide 4. You can see how this acquisition of this technology fits so well with our strategy. One of the most significant challenges our customers face is treating patients with acute Type A aortic dissections. And with the AMDS, it provides a surgical solution to treat this life-threatening emergency. We expect that the addition of the AMDS in the European Union, through our highly differentiated aortic repair product portfolio, will enable us to deliver high single revenue growth beginning in 2021 and through 2023 and beyond, of course, assuming that the COVID-19 pandemic subsides and procedure volumes return to normal beginning in 2021. Turning to Slide 5. Over the past 5 years, we have successfully executed on our growth strategy, creating a faster-growing, more focused, efficient organization. We've brought in talented people, divested assets, streamline operations and made high-impact strategic acquisitions. This strategy has resulted in CryoLife assembling one of the premier aortic treatment portfolios in the world. In 2015, our legacy products, which consisted primarily of BioGlue, allograft tissues and PerClot, provided us with approximately $600 million in addressable market opportunity. After we locked in on our strategy, we started executing on the following 4 transactions, which have positioned us with a highly differentiated and comprehensive portfolio of products to treat patients with aortic disease. Beginning in 2016, with the acquisition of On-X, we began to build our portfolio to where it is today. We believe that if our PROACT Xa and PROACT mitral trials are successful, and our On-X mechanical valves, we'll recover over $800 million in addressable market opportunity. In 2017, we continued executing on our strategy with the acquisition of JOTEC and its portfolio of endovascular and open surgical products focused on aortic repair. The worldwide opportunity for the JOTEC portfolio, represented on the right side of the slide, exceeds $3 billion. In 2019, we continued executing on our strategy with the distribution and auction agreement for NEXUS, which has a global market opportunity of $800 million. And now in 2020, with the acquisition of the AMDS, we have grown our total worldwide addressable market opportunity to approximately $6 billion, allowing us ample runway over the foreseeable future to accelerate revenue and earnings growth. Turning to Slide 6. This slide highlights the reasons why we are so enthusiastic about the acquisition of the AMDS. It's for the treatment of acute Type A aortic dissections. The AMDS is used as a complement to, and in conjunction with, hemiarch replacement, which is the current standard of care and adds no technical complexity. We believe that with the AMDS acquisition, we have meaningfully increased our addressable worldwide market by approximately $540 million, assuming U.S., Japanese and Chinese regulatory approvals. You will recall how excited we were to bring On-X and JOTEC onboard given the uniqueness of their products, followed by our distribution agreement and option to acquire Endospan. We believe those transactions would take CryoLife to the next level, and they are certainly on their way towards doing that. Ascyrus is another opportunity that we believe will check all the boxes when we look for evaluating business development opportunities. It has the potential to drive growth over the next 5 years and beyond; we are gaining access to a truly innovative product, further solidifying our leadership position as one of the premier aortic repair companies in the world; and enhancing our ability to cross-sell and immediately leverage our EMEA sales team. Let me take a few minutes to highlight the key strategic rationale behind our acquisition of Ascyrus. We will then discuss each of these points as we go through the presentation. First, the AMDS is the world's first arch remodeling hybrid stent system for use in the treatment of acute Type A aortic dissections. The AMDS is used as a complement to, and in conjunction with, hemiarch replacement, which is the current standard of care. It currently has CE Mark along for commercial distribution in the European Union as well as Health Canada approval. We can begin immediate distribution of the AMDS in the European Union, Canada and after completing the registration process in many other countries around the world that recognize the CE Mark. Second, the AMDS provides for significant cross-selling opportunities in Europe with our JOTEC portfolio, BioGlue and On-X. We currently have approximately 88 direct sales professionals in Europe calling on cardiac and vascular surgeons, and the AMDS provides us the opportunity to leverage that sales force. Third, we intend to seek regulatory approvals for the AMDS in the U.S., Japan and China and register the product in many countries around the world that recognize the CE Mark. Those potential approvals and registrations would, if successful, give us access to a total addressable worldwide market opportunity of an estimated $540 million. Fourth, sales in markets where the AMDS is already approved and soon-to-be approved in markets that recognize the CE Mark, coupled with the potential approvals in the U.S., Japan and China, will allow us to drive our revenue growth, while accelerating gross margin and operating margin, non-GAAP earnings and cash flow generation. So for all of these reasons, we are again fortunate to have found an opportunity like AMDS or the AMDS system. We are confident the acquisition will make CryoLife a more profitable company over time and more formidable competitor for years to come. Moving to Slide 7. Ascyrus Medical was founded by Dr. Ali Shahriari in 2015 and is based in Florida. Ascyrus was privately owned and funded largely through angel and other private investors. In 2015, the company began development of the AMDS. And after conducting a 47-patient prospective, nonrandomized clinical trial, they received CE Mark in January of 2019. Although there's a great deal of excitement in the market about the AMDS, Ascyrus is currently selling the product in only a handful of countries. It is on track for pro forma revenue and an annual run rate of over $3 million. And we expect AMDS revenues will grow significantly faster on a percentage basis than our current base business. The technology is supported by a robust PAT portfolio. And a year ago, the AMDS received breakthrough designation status from the FDA. Turning to Slide 8 and the transaction overview. We have signed an agreement to acquire Ascyrus for up to $200 million, which includes regulatory- and revenue-based milestones. At closing, we paid Ascyrus $80 million in cash -- excuse me, $80 million comprised of $60 million in cash and $20 million in CryoLife stock. We funded the cash portion of the upfront amount through available cash on hand. In addition, we will pay Ascyrus $20 million upon the receipt of the IDE approval from the FDA to commence a clinical trial to seek approval for the AMDS in the U.S. That payment will consist of [Technical Difficulty]

It looks like Mr. Mackin was dropped. I will reconnect him now.

Okay, am I back on?

Yes, sir.

Okay. So sorry about that, I guess this call just dropped. That's an interesting phenomenon. So I'd ask, did you pick up where I left off? Or am I still...

I did not. You were speaking about the IDE approval.

It's okay. Yes. Yes. So I finished off before I dropped is that we'll pay Ascyrus $20 million upon receipt of the IDE approval from the FDA when they commence clinical trial to seek approval for AMDS in the U.S. That payment will consist of $10 million in cash, which we expect to fund from available cash on hand; and $10 million in stock. After that, we'll pay $25 million in cash upon PMA approval; $10 million in cash upon approval to commercialize in Japan; and additional $10 million upon approval to commercialize in China, assuming those 2 latter approvals are achieved on or before June 30, 2027. We will also pay revenue-based earnout of 2x non-European revenue, but those are incremental sales for the 36 months following PMA approval, capped at $55 million. That will move to $65 million or $75 million if Japanese or Chinese approvals are delayed beyond June 30, 2027. So in total, if all milestones are met, we will pay a total of $200 million in cash and stock for Ascyrus. Moving to Slide 9. Aortic arch disease includes both aneurysms and dissections, which can occur suddenly and usually without warning. An aortic aneurysm results from a weakening in the wall of the aorta, which causes it to balloon or expand in size. When the aneurysm gets too large, the wall of the aorta can split or tear, resulting in a rupture of the aorta with an increased risk for aortic dissection. Aortic dissection occurs when the innermost layer of the aorta tears and blood surges through the tear. Due to the nature of these diseases, most patients with the dissection in the arch also present with disease of the descending thoracic aorta. Left untreated, both the aortic dissections and aneurysms can lead to death. Aortic dissections can be divided into 2 types. Those that are classified as Type A involve the ascending aorta or the arch; and those classified as Type B, which is the descending portion of the vessel. The AMDS is indicated for use in acute Type A aortic dissections, where the primary entry tear in the wall of the aorta originates in the ascending aorta, coming down to the descending thoracic aorta. Worldwide, we estimate about 48,000 people suffer annually from acute Type A aortic dissections. Moving to Slide 10. This details the life-threatening consequences of acute Type aortic dissections. Patients usually experience excruciating pain in the back and chest, accompanied by shortness of breath, lightheadedness and dizziness. Acute Type A dissections can sometimes be difficult to diagnose until confirmed by imaging, when emergency surgery is a necessity to save their life. Left untreated, the mortality rate is reported to be between 1% and 2% per hour, resulting in up to a 50% mortality rate at 48 hours. So similar to many of the other products in our aortic repair portfolio, patients with this condition will be treated regardless of any other circumstances. Slide 11 highlights the current surgery option for these patients. This is called the hemiarch repair, which is pictured on the left. The picture on the right is the hemiarch repair, coupled with the AMDS, which we believe could quickly become the new standard of care. A hemiarch replacement procedure on the left utilizes a graph to replace the disease segment of the ascending order without involving the arch. The hemiarch replacement procedure typically addresses the most critical and pressing issues resulting from the acute Type A dissections. However, stand-alone surgical repair is often not enough as it does not address downstream reentry tears or it does not treat the false lumen beyond the ascending aorta, both of which could lead to issues such as continued flow in the false lumen and a large aorta in malperfusion with subsequent end-organ ischemia resulting from lack of blood flow. The complications that resolve are highly costly and dangerous, oftentimes resulting in death. Using the AMDS device in conjunction with the standard hemiarch repair adds less than 5 minutes to the existing standard-of-care procedure, and it is designed to seal the false lumen at the distal anastomoses and to maintain a pressurized true lumen allowing restoration of critical blood flow. The device aims to improve malperfusion and promote remodeling of the aortic arch in distal dissected aorta. The flexible uncovered stent is composed of a superhelical nitinol stent attached to a PTFE cuff, allowing it to be kink-resistant and highly adaptable. The device is loaded on a delivery system and is quickly deployed during an open procedure into the arch in the proximal descending aorta. The device is then sutured just proximal to the innominate artery, and a standard surgical graft is then used to replace the diseased segment of the ascending aorta. This allows for the replacement of the ascending aorta while opening and stabilizing the true lumen. Slide 12 highlights the benefits of the hemiarch repair coupled with the AMDS device versus the current standard of care. The AMDS has the potential to reduce complications and reoperations associated with acute Type A aortic dissections, improving the care of patients and offering significant cost savings to the health care system. In the 47-patient DARTS multicenter prospective nonrandomized single-arm trial that was used to support regulatory approval in Europe and Canada, use of the AMDS, in conjunction with the hemiarch repair, were shown to reduce overall mortality, mortality resulting from malperfusion, stroke and paralysis at 1 year. Remarkably, 100% of the patients treated with the AMDS benefited from arch remodeling and 74% had complete obliteration of the -- or thrombosis of the false lumen at 1 year. The benefits of the hemiarch, coupled with the AMDS, are clear. And based on these results and the numerous discussions we've had with the global physician community, we believe hemiarch repair plus AMDS technology is poised to become the new standard of care for the treatment of acute Type A aortic dissections. Slide 13 outlines the current worldwide $540 million market opportunity for the AMDS, along with our strategy for accessing these key markets. As I stated earlier, the AMDS received CE Mark and Health Canada approvals in 2019 and is currently being sold in 4 countries, 2 of which just recently commenced distribution. The combined market for these geographies exceeds $100 million, and Ascyrus is on pace to generate on a pro forma basis in excess of $3 million in revenues in these markets for 2020. U.S. regulatory approval, if achieved, would significantly expand the market opportunity. We anticipate receiving IDE approval to begin the U.S. clinical trial in the second half of 2021. Based on conversations with the FDA and other clinical trials, we anticipate the pivotal study for PMA approval will require approximately 80 patients with 1 year follow-up. If all goes according to plan, we could receive PM approval for the AMDS in late 2024, opening up another $150-plus million market opportunity. We will also seek approval for AMDS in Japan as well as China. Should we be successful in obtaining the Japanese and Chinese regulatory approvals for AMDS, that would open up another $250 million market opportunity as early as 2025. On Slide 14, you will see our global sales organization. Beginning in Europe, we currently have approximately 88 direct reps in Europe calling on vascular and cardiac surgeons. We will leverage this infrastructure to drive adoption of AMDS in Europe. We also anticipate being able to leverage our existing personnel to assist in training and marketing of the AMDS. An important benefit we expect to receive from selling AMDS around the globe is the expanded access to physicians. Because AMDS is simpler, it takes less time to deploy it compared to total repair. This technology offers a streamlined procedure for all users when time is of the essence during an acute dissection. We believe the addition of this technology, adjacent to our JOTEC portfolio, positions us with a well-rounded and highly competitive product offering to our surgeons and their patients. Turning to Slide 15. This details our impressive innovation pipeline, another by-product of the growth strategy we have executed over the past few years. Along with our existing portfolio of products that we are currently commercializing, our pipeline is poised to deliver near-term, midterm and long-term opportunities that should continue to add to our growth over the next decade. With the acquisition of the AMDS, we are more confident in our ability to deliver high-single growth beginning in 2021 through 2023. Shortly after which time, we anticipate receiving numerous potential product approvals, including NEXUS in the U.S. and Japan; AMDS in the U.S.; PROACT Xa and JOTEC approvals in the U.S. I will now turn the call over to Ashley to review the financial benefits of the transaction.

Thank you, Pat. Slide 16 outlines the key financial considerations anticipated of the transaction with Ascyrus. First, as Pat just stated, the addition of the AMDs gives us more conviction in our ability to deliver high single-digit growth beginning in 2021, assuming that the pandemic subsides and procedure volumes return to more normal levels. This growth will be fueled by our next-generation JOTEC products, which include the E-vita OPEN NEO, E-nya and the E-nside; approvals of PerClot in the U.S.; BioGlue in China; and a low INR approval for our On-X mitral valve in the U.S.; our continued expansion into Asia Pacific and Latin America; the impact of the NEXUS distribution agreement; and leveraging our existing direct sales organizations for cross-selling opportunities. Second, we anticipate further improvement to our already attractive gross margin with the addition of the AMDS to our portfolio. Third, we continue to anticipate operating margin expansion, especially beginning in 2023 as our investment in our OUS channels, in Asia and Latin America as well as our pipeline spending starts to plateau. We expect to leverage much of our existing infrastructure to drive commercialization of AMDS. Fourth, we expect the acquisition will be accretive to our cash flow and non-GAAP earnings per share. Fifth, we expect acceleration of growth in leverageable adjusted EBITDA over the next 5 years, allowing us to build cash, delever the balance sheet and potentially put us into a position where we can finance any milestone obligations through cash on hand or additional debt financing. I'll turn the call back over to Pat.

Thanks, Ashley. So in summary, I hope you get a better understanding of why we are thrilled that we were able to acquire Ascyrus. Turning to Slide 17. First, we now have the world's first arch remodeling hybrid stent for use in the treatment of acute Type A aortic dissections. The AMDS is used as a complement to, and in conjunction with, hemiarch replacement, which is the current standard of care. It clearly has CE Mark along with the commercial distribution in Europe. It also has Health Canada approval, so we can begin immediate distribution of the AMDS in Europe and Canada. And we will quickly start to register products in many of the other countries around the world that recognize the CE Mark. Second, the AMDS portfolio provides for significant cross-selling opportunities in Europe, with our JOTEC portfolio, our BioGlue product and the On-X portfolio. We can leverage our 88-person direct sales organization in Europe calling on cardiac and vascular surgeons. Third, the opportunity is still in its early days. We intend to seek approval for the AMDS in the U.S., Japan and China as well as to register the product in many countries around the world that recognize the CE Mark. Those potential approvals and registrations would, if successful, give us access to total addressable worldwide market opportunity in excess of $540 million. Fourth, the sales in markets where AMDS is already approved and soon to be approved in markets that recognize the CE Mark, coupled with potential approvals in the U.S., Japan and China, will allow us to drive our revenue growth while accelerating operating margin expansion, non-GAAP earnings and cash flow generation. So for all of these reasons, we're excited to have acquired such a standout product. We are confident the acquisition will make our company more profitable and more formidable competitor in the years to come. This opportunity, along with our current product lines, checks all the boxes we look forward to advance our vision of becoming the world's premier provider of technology-advanced solutions for patients with aortic disease. At this point, I'd like to turn the call over to the operator for questions.

Thank you. [Operator Instructions] Our first question comes from Cecilia Furlong with Canaccord Genuity.

Pat, I wanted to start with just your commentary around high single-digit growth in 2021 in the next several years. Could you just talk about kind of your outlook now versus prior to the acquisition, and then really what you're incorporating from the acquisition, either in terms of direct sales or really product pull-through sales of the rest of your portfolio?

Yes. So this is -- it's obviously an interesting time for everybody, right? So we're still in the middle of this pandemic, and we don't have guidance currently, published guidance given the pandemic. And so while we're very excited about the acquisition we've just made, putting numbers out there before this pandemic lifts, I think, is not a wise thing to do. So I think, one, we're very bullish about this technology, and I do think it has the opportunity to become the standard of care. But we're not going to kind of get out over our skis while this pandemic is still looming. So I think as we watch this unfold through the rest of this year, we typically give guidance out in February, assuming that things start to wind down with this thing, then I think we'll be in a much better position to give clear guidance going forward. We really haven't done a lot as it looks at the kind of cross-selling, but you can imagine just right off the top of your head, it's -- this is using acute Type A dissection, which is kind of the killer app for BioGlue. Every one of these cases could have BioGlues on it. We're going to be in front of pretty much every heart surgeon in the world with this product. So I think there's tremendous opportunity for BioGlue. Those are the same surgeons that put the On-X aortic and the On-X mitral valve in, so there's opportunity there. These are also the same surgeons that use JOTEC open surgical grafts as well as our frozen elephant trunk. So these are also the same surgeons that would be involved in a NEXUS case. So the number of technologies that we're bringing to bear on the aorta, I think, is truly impressive. And I do think there's going to be a kind of a knock-on benefit of our new relationships with surgeons we haven't been working with because we'll be working with pretty much all of them on acute Type a dissections. So we haven't even figured that into the numbers at this point.

Our next question comes from Mike Matson with Needham & Company.

So you've got a lot of new products in Europe now between NEXUS, this product and then the other new JOTEC stent grafts. So do you feel like you've got adequate sales force bandwidth to adequately launch all these new products there and train the physicians and support them?

Yes. So I think when we've expanded significantly, as you know, I mean, we're up to almost 90 reps in Europe. And it's important to really -- we have a team that calls on vascular surgeons and a team that calls on cardiac surgeons. The NEXUS product is primarily a vascular surgery product. Although those are typically done in cardiac and vascular, but they do those together. Clearly, the AMDS system is a clear heart -- because this is done in an open surgical aortic repair, although it's a stent, it's kind of a hybrid procedure. So they actually kind of go hand-in-hand. So there are some cases -- so think about this, the heart surgeon that there's both aneurysms and dissections in the aorta, so the aneurysms would use the E-vita OPEN NEO, whereas the Ascyrus AMDS would be used for an acute Type A dissection. So they're actually very synergistic. We have a rep that walks in to talk to a heart surgeon and he could bring the NEO for the aneurysms. He can bring the AMDS for the dissections. Similarly, if you look at on the vascular side, we have, a -- the NEXUS device that's used in the arch. We have the E-nya device that's used in the descending aorta. We have the E-nside device used in the thoracal abdominal region. So we really cover the aorta, both for cardiac and vascular kind of for the whole field that they treat. We do have a lot of technology in our hands, and that's obviously important from a turning standpoint. And that's something, obviously, we've been talking about on the calls with rolling out the JOTEC products. The one thing that's, I think, really impressive about this technology, it's kind of like the -- I make it -- equate it to like a Post-it note. It's like the most simple, elegant solution. It takes 5 minutes to -- adds 5 minutes to the procedure. The learning curve is 1 case. You can literally teach a surgeon because it's adjunctive to the standard-of-care hemiarch. So I don't think the training requirement for this is very high at all. And we've seen rapid adoption of this. They had 1 rep in Europe and 1 rep up in Canada, and they're doing over $3 million a year run rate. So I think when you put this with our team, I think you're going to see pretty impressive results.

Okay. No, that's helpful. And then just the cost of the U.S. trial, the IDE trial, I think you said in the past that you estimated that the JOTEC stent graft trials in the U.S. were kind of in that $6 million to $9 million range. Is this something that would be kind of in that ballpark?

Yes. I think -- so there's 2 parts, right? So there's the testing that's required, all the fatigue testing and all the biocompatibility testing before you start the trial, it's probably in the $1 million range. And then this trial is probably in the $5 million, $6 million. So I think you're probably talking $7 million from kind of when we start to get through the trial would be my estimate at this point.