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

All right. Good morning, everyone, and thank you for joining us on day 3 of the Morgan Stanley Healthcare Conference. My name is Calvin Chu, and I am part of Morgan Stanley medtech equity research team. It's my pleasure to have with us today, Pat Mackin, Chairman, President and CEO; and Ashley Lee, EVP, COO and CFO of CryoLife. So before we begin, here's our disclaimer for the event. So please note that this webcast is for Morgan Stanley clients and appropriate Morgan Stanley employees only. This website -- this webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please refer to the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, Pat and Ashley, thank you so much for joining us today.

Hey, good morning.

Good to see you, Calvin.

So just to kick off, for investors that are perhaps less familiar with CryoLife, could you spend just a minute to walk us through the story of the business and the market that you're in?

Yes. So CryoLife is a company focused on aortic disease. So we cover it from both ends of cardiac surgery as well as vascular surgery, so everything from aortic valves to aortic dissections where BioGlue, our surgical sealant, is used; to our most recently acquired product, the AMDS stent, is used in acute type A dissections. And as you work your way around the arch, we have a frozen elephant trunk for aneurysms in the arch. We also have an endovascular treatment through our partnership with Endospan for the arch. And then as you work your way down the aorta, we have a series of stent grafts for the thoracic, thoracoabdominal AAA down into the iliacs. So really, it's a company focused on the aorta, and the 2 main segments are aortic aneurysms and dissections as well as structural heart for the valves, and that's really the combination of all the products that we have.

Perfect. Thanks for that. So why don't I start here with near-term COVID-19 recovery trends? It seems to be the top of mind for everyone. So Pat, you said on the earnings call that the things -- things were progressing nicely, with July getting better after your April, May, June improvement, although there were some variances between resurgent hotspots, Texas, Florida and Arizona. So could you just give us an overview on if August continued on that improvement and perhaps what you've seen in the first half of September?

Yes. So when we -- at our Q2 earnings call, we basically disclosed our kind of granular detail around the month. So we did 62% of our prior year in the worst month of the pandemic, which is April. That improved to 78% in May and 85% in June. And we said publicly that we thought July would be better than June, and that was the case. And so what we're -- this is where -- this is the first we've come out with any Q3 comments publicly. We are currently tracking better than 90% of last year in the third quarter. So we've seen positive improvement from June to July, and that has continued through the third quarter. And we got a couple of weeks left to go, but we feel like the business is in very good shape. And I think you -- as you mentioned, these hotspots keep popping up, whether it's in the U.S. or Europe. It's just a constant kind of one step forward, one step back with the COVID pandemic. However, the fact that we're running ahead of 90% of last year in the third quarter gives us some confidence in how the business is performing.

That's very helpful. So you commented also on the back half. You were cautiously optimistic in terms of recovery, and you're expecting to see continued improvement in 3Q and 4Q. Are you -- sort of as of today, do you feel good about returning to sort of full normalcy in 4Q?

Yes. We actually -- and even inside of Q3, we've seen September has looked better, even more positive than the 90%. The big wildcard here for everybody, right, is what happens in the fourth quarter. I think we could return to growth in the fourth quarter if the pandemic stays as it is today. You've read the late press about what Dr. Fauci and the Head of the CDC is saying that the winter is going to be tough. So I can't predict the pandemic. What I can say is that you've seen how our business performs in the worst month of a pandemic. Our worst quarter of a pandemic, we did 80% of last year. So depending on what happens with the pandemic, if it stays like it is today, I think we'll return to growth in the fourth quarter. So I think that's your kind of your range of what -- where we think we'll be.

Awesome. That's very helpful. So maybe looking a little ahead to 2021 before we dive into some of the business items. So understand it may be somewhat challenging to predict 2021, but given your pipeline, you've expressed confidence in 2021 being a strong year. So on a perhaps comp adjusted basis, do you feel confident about 2021 organic growth accelerating relative to 2019 organic growth?

Yes, absolutely. And again, I put the caveat out there. I mean one of the tough things as a CEO of a public company in a pandemic is we haven't put guidance back out for the very reason of we can't control what this virus does. What I feel very comfortable with is, when you compare '21 to '19, which I think is the right comp because 2020 is such kind of a funky year, we've got 7 catalysts in '21 that we didn't have in '19, right? So we're going to be in full market release for the E-vita OPEN NEO, our next-generation frozen elephant trunk, in Europe and other markets. We're going to be in full launch of our thoracic stent graft, E-nya. We're going to be in full launch of our E-nside thoracoabdominal device. We're in full launch for NEXUS, our Endospan device for the arch endovascular. We just acquired AMDS, and we're already selling that product. BioGlue should get approved in China and PerClot should get approved in the U.S. I mean there's 7 catalysts that we're going to have in '21 that we didn't have in '19. So if the pandemic is not around, we're pretty confident we can grow double digits in '21 over '19.

Right. That makes perfect sense. I definitely want to dive into some of the pipeline products that you just mentioned in a minute. I just want to talk a little bit about acquisitions. So over the past 5 years, you've done sort of 5 large transactions, the most recent one being Osiris. Can you just maybe quickly run through for us the vision there, how it complements your existing portfolio and your -- how it complements your already robust pipeline?

Yes. I think, look, for me, I've spent almost 30 years in cardiac devices and run some of the biggest cardiac device businesses out there. What I saw as the opportunity for CryoLife, as a smaller public company competing against some very big companies, that we needed to set a stake in the ground on where we're going to focus. Focus is the key in a small company. And we focus on the aorta. And in the last 5 years, we did the On-X transaction, which gave us the On-X valve and now the PROACT trial. We then did the JOTEC acquisition, which gives us a full complement of stent grafts from the aortic valve all the way to the iliac artery. We did the partnership with Endospan that gives us the only endovascular treatment of the aortic arch, and that U.S. trial is about to start this quarter coming up. And then we just did Osiris. So we've literally picked up every kind of proprietary aortic technology that's out there in the last 5 years. And specifically to Osiris, I mean this is a -- we think it's a game-changing device. There's 50,000 acute type A dissections done a year worldwide. This is a devastating disease. The mortality rate is 1% to 2% per hour, and it's about 48% to 50% at 2 days. We think that this device will actually improve mortality. It will improve morbidity. And our goal, over the next several years, is to change the standard of care from the current standard of care to being used with an AMDS Osiris stent. That's a $540 million market at 90% gross margin. We start with Europe. We already have approval in Europe and Canada. Our reps are already selling. The company was on a run rate of about $3 million with 2 reps. We have 33 reps in those 2 markets. And then we're going to be working on running the U.S. trial and getting access to U.S., Japan and China, which will get us access to the remaining $450 million.

Great. It's a very helpful overview. So given the technology fits nicely in your existing portfolio, can you talk a little bit about cost synergies potentially? I think you've spoken to, commented on gross margin benefits. But what about other sort of cost synergy opportunities? Are there any low-hanging fruits, any quantitative comments you can share?

Well, most of the new products that I listed off, so NEXUS, AMDS, E-nside, NEO, BioGlue China, PerClot, most of those products, all the new products that will be coming out when they get to the U.S. market are 80% to 90% gross margin. So all of our new products are at a gross margin significantly higher than the company, so you're going to see a margin expansion just off the new product launches. The NEXUS device is currently at about a 70% gross margin as a distributor. But when we take that, if we acquire that technology after U.S. approval, it goes to 90%. AMDS is 90% out of the block, so that's one clearly. Two is our expansion in Asia and Latin America. As we expand -- so for example, we just went direct in Vietnam, we went direct in Thailand. We previously used a distributor. We cut out the middleman. Our end-user prices go up, our gross margin goes up. We also have cost-down programs in all of our different manufacturing facilities. So I think through the combination of new products, geographical expansion by cutting out the middleman as well as our cost-down programs, we expect to see our gross margin expand over the coming 5 years, maybe to about 1 point per year each year.

Okay. That's very helpful. So I think I want to segue into some of the near-term product opportunities you have spoken to, so these 3 JOTEC products in the near term, so E-vita, E-nside and then E-nya. So first off, is E-nya still on track for October limited market release?

It is. Yes.

Okay. Great.

And we've basically kind of -- we've got so many new products that we had to kind of titrate. We had the cardiac surgery team focusing on the NEO launch and the vascular surgery team focusing on the E-nside launch. And as those launches get underway, then we'll bring in the next wave of launches. So we're looking at E-nya starting in the fourth quarter.

Got you. And so how has the limited market release for E-vita and E-nside been doing? Do you feel well positioned for sort of a full market release later on in the fourth quarter?

Yes. And again, I think the pandemic -- launching new products in a pandemic is certainly new to me. I mean it adds a whole new complication. The nice thing about the E-vita OPEN NEO, that's a device that's -- it's an arch device used in dissections and aneurysms, so kind of life-saving type surgeries. We've had phenomenal response. We've done, I think, 30 cases already so far with that product. We just had the full market release to our commercial teams yesterday, so we're out and we're aggressively going to be going after market share. And that -- we have one competitor, and we feel like we've got a better product and a better sales force, so we're going to be aggressively going after share. E-nside, similarly, is a little earlier in the limited market release, but we've had a number of very positive cases with clinicians. This is the first off-the-shelf brand thoracoabdominal device in the market, and we're very excited about what that product holds. So really, our plan is to have -- with the E-nya limited market release kicking off in the fourth quarter, that we hit kind of January 1 full product supply, all reps trained and ready to kind of hit the ground running on all 3 of those products.

Okay. Great. Very clear. So I want to maybe dive into a couple other near term, maybe 2021 through 2022 revenue opportunity. Well, first off, PROACT mitral. On enrollment, can you just maybe provide an update on the latest on enrollment? Has it maybe seen a little bit of a delay due to COVID? But you -- it sounds like you still feel good about completing the follow-up period in December and maybe for a first half 2021 submission.

Yes. So as a reminder, PROACT mitral is the sister trial of the PROACT Aortic where we proved that we could reduce the blood thinners in half and reduce bleeding by 65%. PROACT Mitral is similar. Actually, by protocol, they run at higher blood thinning because of the nature of that disease, so it would actually have a more dramatic impact. That trial was fully enrolled at the end of last year. We're in the 1-year follow-up phase right now. And the issue we've seen is, I think many companies have seen, is just the ability to get your monitors into hospitals during a pandemic to check the charts and do the things you have to do to keep the trial compliant. So we think that may cost us about a quarter, we've been picking up as of late. But we expect to submit that PMA probably in the first half of 2021 for a 2022 approval.

Okay. So I was going to just follow up, so if we think about maybe 6 to 9 months of a process timing, do you feel good about it contributing kind of meaningful revenue in 2022?

Yes. I think 2022. And this is, again, when you look at the leverage of the organization, where that product is going to be -- assuming it may get FDA approval, we've got 60 existing reps in the U.S. They're already selling the mitral On-X valve, but they're now going to be selling the exact same valve with the new label. So there is no cost to the launch per se, except maybe marketing materials and training and education. We can also do the exact same thing in Europe once we get that through its regulatory approval and the same thing in Asia and Latin America. So this is a true global launch of a product we're already selling around the world with a new label and a new indication. So that should be a very exciting launch and I think what is the best mechanical mitral valve in the market.

Understood. Okay. So I think besides On-X mitral, you also have the U.S. PerClot PMA and then the BioGlue China opportunities. Can you just remind us what the cadence of the revenue contributions of those products are in terms of timing, order and then perhaps the materiality, if you can?