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

Good afternoon and thank you for joining us for the 4th day of the 2021, Morgan Stanley Healthcare Conference. I am Cecilia Furlong, medical device analyst and a member of the Healthcare Research team here at Morgan Stanley. It's my pleasure to have CryoLife with us today. Pat Mackin, Chairman, President and CEO. Ashley Lee, CFO and Dr. Marshall Stanton, SVP Clinical Research and CMO and before we begin, I'll run through our disclaimer for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that Pat, Ashley, Marshall. Thank you for joining us today.

Thanks for having us Cecilia.

And I wanted to kind of start high level about the business. Pat, you've executed multiple deals since your arrival at CryoLife [ On-X tech ] and the spend distribution agreement, Ascyrus most recently truly refocus the portfolio around aortic disease. PerClot was arguably the primary stand out in the portfolio that no longer meet strategic sense with the announced divestiture to Baxter. As you look across the CryoLife portfolio today, do you see other opportunities to further focus the portfolio either via acquisition or divestiture?

Yes, thanks for the -- again thanks for hosting us on this. Yes, I mean, I think PerClot as you mentioned was clearly, it's a great product, but it's -- 80% of its usage was forecasted to be outside of cardiac and vascular. And I think the -- strategically for us to de-focus our sales channel outside of cardiac and vascular did make a lot of sense. And I think, this is going to be a great product for Baxter. We've done, as you know, we've done a number of divestitures. We divested the HeRO product line several years ago, the ProCol product line. So HeRO went to Merit Medical, ProCol went to LeMaitre. PerClot is going to Baxter. I think the -- really the only, the only other one that is kind of like out of this position maybe is our TMR businesses, the transmyocardial laser business and we're actually just going right now to relaunch that. So I think, once we get that up and running, we may look to do something with that down the road, but I think that one is probably the only other one remaining that we would look to do something with.

Also just kind of along those lines, but how do you think about the strategic positioning of your legacy tissue portfolio together with your products portfolio and as your overall business is constituted today, how does your tissue business in the U.S. really play synergistically with the rest of the portfolio offerings and call points?

Yes. So as it stands, I mean, today the cardiac tissue is really integral. I mean, the same heart surgeons that use BioGlue and the On-X valve and will eventually use the AMDS or PROACT Xa or NEO or any of our new kind of products in the pipeline. They all do the same procedures and these aortic tissue valves, pulmonary tissue valves are a integral part of -- kind of what they do. So I think, over the next few years, this is -- the tissue business is obviously important to CryoLife. I think once you get into the late '24, early '25 assuming the approvals of PROACT Xa and NEXUS in the U.S. and AMDS in the U.S. and NEO in the U.S. There's such a difference in the growth rate and the gross margin of tissue versus our pure play devices. I mean, it will be interesting to look at that point, how big we think the other businesses will be and how relevant the tissue portfolio, particularly given the growth rate and the gross margin, but that's something that's obviously a lot further down the road.

And coming back to current times. Just thinking about COVID dynamics. It's been in focus with Delta but your 3Q guidance at the midpoint implies about $4 million sequential stepdown versus 2Q. PerClot about $1 million headwind and you also highlighted seasonality and caution around COVID at the time. I'm just curious, how the mix of headwind shifted as the quarters progress, and really what have you seen from a seasonality impact versus kind of your traditional seasonality levels and also COVID shifting geographic impact. Has Delta impact at this point, in your mind, plateaued?. Just curious kind of how the quarter relative to what you're expecting has played out.

Yes. So a couple of things on the quarter. Obviously, we're in the middle of the quarter. So we're careful about any comments that we make. But, you know, the -- we guided 71 to 73. We typically are down sequentially from Q2, just because of seasonality of the summer, particularly as it relates to Europe and that's an every year thing. Obviously PerClot coming out was about $1 million a quarter and we've sold it to Baxter. So that's really obviously a -- we figure that out into our guidance. COVID was actually changing under our feet as we were putting together our second-half forecast, I think, for everybody. We did take into consideration Delta. We obviously can't predict what's going to happen with it. We have seen actually pretty strong performance in the quarter in Asia Pacific and Latin America. In Europe. I think the U.S. is the one that's been kind of hit harder than we had expected. And we actually in the quarter. And I think, a really strong July and a little bit of in -- down from that in August, and it's kind of lingering in September. So it's clearly out there and you can just read the newspapers about hospitals being full and ICUs being full and pretty much everything we do involve an ICU. That being said, I mean, I think at this point in the quarter, we're still comfortable with the guidance we gave for Q3 and we got 3 weeks to go and we obviously will communicate the results once we have the quarter done in -- I think in the first week of November.

As you think about to just sequential acceleration in 3Q, 4Q. Where do you see the most potential upside, either On-X strength we've seen recently in North America, ramping stent graft portfolio momentum in Europe, tissue supply in the U.S. and as you think about sequential progression, are there any other headwind outside of COVID that you'd highlight?

Yes, I mean I can't, I can't predict. That's one thing I've proven over the last 18 months, as I've been not very good at predicting what's going to happen with COVID and so hopefully, this thing will kind of slow down as we go into Q4. We're expecting obviously a strong Q4. On-X continues to be very strong. The stent grafts are ramping as you commented. We've seen great performance out of AMDS, out of NEXUS, out of [ NSIDE ], out of NEO. We're getting ready -- we'll be going to the full market release for E-nya in the first year, but we're starting to do some cases there. The cardiac tissue supply should actually -- we should start to see nice improvement in Q4 and TMR should be coming back online in Q4. So I think, we've got a lot of kind of tailwinds on us. I can't obviously predict what's going to happen with COVID. But I mean, hopefully, that will subside, and we'll -- we're also seeing very strong growth in Asia and Latin America. So I think, those should hopefully continue and will help us put up a strong Q4.

And digging into On-X commercial in the North America region, it's -- your sales have been extremely strong in the past few quarters. What would you call out either from an adoption standpoint, center penetration standpoint or else impact from PROACT Xa just as drivers of awareness? And are there other near-term accelerants to further adoption you'd highlight ahead of potential expanded Eliquis indication?

Yes. I think, it's both. I mean, in the checks at -- with our team and being out with customers, I mean, we've had kind of wholesale conversions of big accounts that we didn't have previously. And then we've also had accounts that we were in that we're going deeper with. And I think, it's actually, it's hard to tease out exactly what it is because they don't send you a note after each implant until you either put it in. But I would say, there's a whole kind of a brand aura around On-X right now, right? We have the only product in the U.S. market with a lower INR for the aortic position. We're the only company doing the PROACT Xa trial with Eliquis. And we've already submitted the PMA for PROACT Mitral, which would give us, if approved, the only low INR mitral valve. So I think, it's just the continued messaging around we're the kind of mechanical valve company that treats anticoagulation differently than anybody else. And I think, we just continue to see strong performance even during the pandemic.

PROACT Xa2, I'm just curious, since Q2, what have you seen from an ability to enroll patient from that standpoint, if you've had any headwinds tied to COVID. Just anything you call out just on the trajectory of enrollment that you've seen recently.

Yes. So we're at 418. I think we were at 360 at the end of the quarter. So we're at 418. We're continuing to enroll. We've had some really strong months. I mean the nice thing about this trial is that it's existing On-X valve patients. You can also enroll a prospective patient, but you got to wait 90 days before you randomize. A lot of the patients that have enrolled are existing valve patients, and you can actually do the informed consent and get into the trial using telehealth. So I think, this trial is actually well set up for a pandemic. We actually started the trial last May and the first patient enrolled was via telehealth and didn't even have to go into the hospital. So I think, we're still progressing nicely with the enrollment. We're expecting to finish enrollment in Q2 of next year, which will set us up very nicely for -- what we'll have to do the 2-year follow-up, but obviously, a real game changer if this were to come through.

Can you just frame the opportunity for On-X share capture, mechanical heart valve, TAM expansion on the heels of a potentially positive clinical outcome?

Yes. So this is an interesting -- obviously, On-X is doing quite well in the mechanical segment, but the real opportunity -- I mean there's 2 opportunities with On-X if PROACT Xa is to get approved. One is we would be the only mechanical valve in the world that had the ability to use Eliquis. So if you are going to ask clinicians. I mean, if you could choose between Eliquis or Coumadin, I think, 100 out 100 are going to tell you, they are going to use Eliquis. Eliquis is a very popular drug. It's the fastest-growing drug in cardiology for anticoagulation in the #1 position. So I think that the mechanical valve market will come to us fairly quickly. What's really interesting is the tissue valves between 55 and 65, which is probably 20% of the aortic valve market. We feel impact by our research that a big chunk of those valves would come our way as well. The idea of doing a mini-thoracotomy, a 2-inch incision in the ribs, putting in an On-X valve and Eliquis. And that's it, and you're kind of done. We think, it's a very compelling opportunity. We think the margin on this will be 90% gross margin, and we think, it's a minimum $300 million opportunity if this were to get approved. So obviously, a very exciting program for us.

On the mitral side, too, can you just update us where you are submission and outlook for approval for lower INR label that you're pursuing? And then as you compare and contrast kind of what transpired on the aortic side with your lower INR approval versus how you're thinking about the opportunity for mitral. Just any differences also you'd call out between those 2 opportunities.

Yes. So we submitted the -- we've already submitted the PMA, I think, at the end of July, we're anticipating a first half 2022 approval. I think the great thing about the mitral is we've already done it with the aortic, right? It was exactly with the same playbook. We got an approval and then we just rolled it out into our accounts, where we've applied for a late breaker at STS at the end of January. And once again, this will be the only micromechanical valve that can be used on a lower INR. And it's actually more significant on the mitral side because aortics run 2 to 3 INRs. Aortics run 25 to 35. So they actually have to thin the blood more because of it's a low-pressure valve. So to have a low INR basically can pull the whole patient population down into a much safer anticoagulation zone, which the clinicians really like. So we're getting -- we're assuming approval in the first half, and it gets back to what I said about PROACT Xa. So the On-X franchise, we've had the On-X low INR in the market for several years, and it's done very well. We're doing the On-X aortic with Eliquis called PROACT Xa and then we're following within On-X mitral. So again, our surgeons are going to continue to hear about On-X, either lower anticoagulation or different anticoagulation. So I think, it's just another kind of stake in the ground on On-X, the brand of On-X is different and unique. And I think the uptake, we think, will mirror what we've seen on the aortic side.

Okay. Pat, I also wanted to ask on the tissue side of your business, you provided an update on the 2Q call and your ability to release that tissue. But as you think about that excess tissue flowing back into the second half of the year, how do you think about kind of the cadence between the third quarter and fourth quarter? And are there other dynamics tied to the bolus of tissue, we should contemplate as we think about tissue contributions, just looking out beyond the rest of this year?

Yes. So if you recall, we had this quality issue back at the end of the year. And luckily, we managed through it extremely well. We had no write-offs beyond that first initial tissue that were affected. So we actually have an entire quarter's extra worth of tissue in the freezer. And now, we've got to go through the kind of the quality chart releases, which involve hiring people, training people. And so we feel like, we're not going to see a lot of impact in Q3, but in Q4 and going into '22, we're actually very well set up for positive tailwinds on the tissue side.

Okay. Geographic expansion, that's been another focus since you came over to CryoLife going direct in additional markets. But as you think about Asia Pac, Latin America being kind of your more recent target, so when you highlighted the most, but can you walk through some of the regulatory approvals you're pursuing targets for bringing your portfolio to new markets? Just kind of how much that can incrementally add to your current business today?

Yes. So we -- it's really a simple strategy, right? We have really strong commercial leaders in Asia Pacific and Latin America. And they've put together a plan that combines adding feet on the Street where it makes sense and getting our portfolio regulatory approvals. So we have a number of products that have not been approved in many of those countries in Asia and Latin America. So the combination of product approvals and feet on the Street, I'll give you the perfect example. In the last week, we've got our inside off-the-shelf Thoracoabdominal and our frozen elephant trunk neo approved in Australia. So that's a nascent market for us, huge opportunity. We've got our NEO products in South Korea. So as we bring those portfolios, and each country has a different threshold from a regulatory standpoint. Some of them peg off of CE Mark. So we've got a whole kind of table worth of products we're planning on bringing in over the next 3 years into both of those markets. And we think the growth rate in those 2 regions will be contributing to the overall growth of the company going forward. So significant growth out of both of those regions.

As we think about to just your aortic stent graft portfolio in Europe today, can you provide an update on the 3 next-gen NeoTech launches in Europe? And where are you seeing initial traction and really, how you're broadening commercial portfolio, including NEXUS and AMDS is helping to improve commercial traction?

Yes. I would say the following. So in the portfolio is something we really like to highlight. I mean, we have a very unique portfolio for the aorta as it relates to stents and stent grafts. If you go from the aortic valve down, we now have AMDS for Acute Type A Dissections. We are the only ones there. That's been an extremely strong rollout. We're grown that business 65% last quarter. The NEXUS device is the only FDA-approved off-the-shelf branch device for the arch. We've had some challenges there. It was just proctoring during the pandemic because people's ability to travel from country to country has been somewhat limited. The inside off-the-shelf thoracoabdominal. We've had fantastic review. It's doing extremely well. E-nya is in the middle of its LMR. We're getting very good feedback on that device. So I would say the portfolio is doing extremely well. And your point about the portfolio approach, as our cardiac reps go in to meet with the surgeon, they use the On-X valve, they use BioGlue and they were bringing in AMDS and NEO. And then on the vascular side, they may use our AAA device or our thoracic device and then we're bringing in inside in NEXUS. And so it's just -- the whole thing works together quite well. And I think, our portfolio is a real, it's a stand out from other companies that are in Europe right now. And I think, the benefit of that's going to be felt for quite a while as a positive for us.

You've been launching these products effectively most of them during the pandemic, but I'm just curious, you've seen traction today, but how does that accelerate out of the pandemic when you're able to really fully access more sites?

Yes. I think for all of us, it's a little bit like running with a waste pack on your back, right? It's just you're never really in full stride because I'll give you an example like just this week, you have cases that are delayed or moved and the logistics of getting into accounts, of opening new accounts, and it's different by country. And I think Europe is actually doing much better now than they were kind of on the last kind of outbreak. But I do think, we're not in full stride. I think the other thing we've been able to do is all the while we've been priming the pump on the supply chain. You seldom see a company launch 3 or 4 new products at the same time in the space. It puts a pretty big stress on your manufacturing operation. I think -- so we've been able to use this as a way to keep product flow coming. We've had strong flow. But now, we're building inventory, putting consignment on shelves that should set us up really well for -- as we move in outside of the kind of the pandemic.

Where do you view Europe and what you're seeing today? And what we hopefully see kind of post-COVID world, but would you view that as a proxy for what we could see in the U.S. in the 2024 plus time frame. As you think about kind of the optimal portfolio that you bring to the U.S., just any other nuances you call out versus what you're seeing, the approach you're taking in Europe and what you're contemplating in the U.S. longer term?

Yes. I think what we've seen in Europe, and particularly, if you think about the cardiac side, with the On-X growth, the PROACT Xa we just talked about, if you can imagine a rep that selling On-X aortic and mitral today on the INR, in 3 years from now, they get PROACT Xa and then [ rate ] probably the same quarter, they get AMDS and then probably 9 months later, they get the frozen elephant trunk neo. I mean it's a -- we don't have to add any more reps. We already know all the customers. And these are devices with little, if no, competition. There's no competition for AMDS. There's no competition for PROACT Xa. There's 1 player in the frozen elephant trunk, and we think, we have the technology to beat them. All 3 of those are 90% gross margin items. So we just think, it's going to be a real opportunity for the company when -- as those approvals come through.

With AMDS and Venus being your most recent acquisition, can you provide an update, just your pivotal in the U.S. kind of where that stand from a timing perspective? And then also really what you've seen from a physician feedback standpoint around AMDS' role in augmenting procedures? And really, how you think about the road for AMDS really becoming standard of care in these types of procedures?

Yes. I think AMDS has lived up to our expectations and even exceeded them. The trial, we've submitted the IDE to the FDA. We're kind of in the back and forth going through their questions. We hope to have that. We're going to have about 20 centers. We think it will be around 100 patients, and we should have that trial kind of ready to go by the end of this year. So it could start enrollment as we kick off '22. We think it will take us about a year to enroll the 100 patients, a year to follow and a year for approval. So that puts us right at the end of 2024. Also, in the first 6 months of this year, I was out in the top 30 aortic centers, meeting with all the cardiac and vascular surgeons. And to a center, they think this is phenomenal technology. There's nothing else like it. And it really has the opportunity to become the standard of care. I mean, this is a -- kind of a total game-changing technology that we just need to get it in the trial, do the follow-up, submit it and get the approval. But we -- it's probably $0.5 billion worldwide opportunity once we get this into all the different markets, once again, at a 90% gross margin.

Pat, could you provide an update, too, just on NEXUS, any IDE updates in terms of enrollment timing? Any headwinds as well from COVID that you've seen with your partner?

Yes. I don't know, Marshall, if you've got any. It seems that, I think they were around the 12 to 13 enrollments at this point. I can't remember exactly.

Yes. And they had an investigator meeting recently went over things, and there's a lot of interest and excitement. One of the things they did hear from investigators is that COVID has really impacted a lot of the hospitals that they're in and limited the ability to do these chronic or semi-chronic cases.

I've had a chance to meet with a lot of the investigators who are in this trial and people who've done the implants. It's actually similar to what we hear in Europe. I mean the implant is actually for putting a stent graft in the aortic arch, which is no easy feat. This technology is very easy to use. The procedures have been fairly quick compared to what other technologies would take. So I think, it's kind of building up to add as it's been advertised. But these trials are also -- there's a lot of work that goes into these. And I think clearly, the pandemic is not helping with -- as Marshall just mentioned.

As you think longer term, with all of these pipeline opportunities, the U.S. 2024 plus time frame, how TAM expansive if you take all of these opportunities that you're pursuing, how much of an increase do you view in your U.S. TAM? And similarly, OUS, what's your plans to bring -- continue to bring new products to new geographies. What type of contribution to your total addressable TAM, can these expansion opportunities provide?

So just the ones we've talked about. So if you look at NEXUS in the U.S., PROACT Xa in the U.S., AMDS in the U.S. and NEO in the U.S., that's probably $700 million of 90% gross margin opportunity with no competition. And then if you look at outside the U.S., a lot of these trials that I just mentioned, so NEXUS, PROACT Xa, AMDS and NEO, we could probably leverage those trials -- these trials for the U.S. to get into Japan, and then we may have to do some separate trials in China. But a lot of those main -- those U.S. pivotal trials we can leverage to get those products in around the world. That portfolio is probably in the $1.3 billion, $1.4 billion range around the world. And again, what we -- as we've talked about in our strategy, we target products that are with very little competition, highly differentiated, patented, high gross margin, high growth in big markets. And they all kind of check the box. So of all those things I just mentioned, there's maybe one competitor on the frozen elephant trunk, and we have better technology, and there's probably one competitor on the arch side and we probably have better technology. So I think, it's not like we're coming into a market with 6 players and trying to get 5 points of share. These are kind of nascent taking over markets that haven't existed or very little competition that we think, we can actually take significant share.

I know, we're about out of time, but I wanted to thank you all for the time today. And Pat, just turn the floor back over to you for any last closing remarks.

Yes, I would say, I mean, I think we're at a really interesting inflection point for the company. I mean as we've talked, Cecilia, with all these new stents and stent grafts we're launching in Europe, we're seeing really good performance there even during the pandemic. On-X is performing extremely well. And our Asia Pacific, Latin America, kind of the second stool of the strategy is -- they're performing extremely well. And then we've got these near-term regulatory approvals, right? PROACT Mitral should be coming in the first half. PerClot should be coming in the second half of next year, which is a big milestone payment and revenue from Baxter. And then we're still pursuing BioGlue China. So we feel like we can -- as we talked, we feel like we can take in the next 3 years, those 3 strategies and deliver double-digit growth, while we're setting up that pipeline, which is going to require no additional external funding that will drive us to about $1 billion, $1.5 billion of revenue opportunity in the -- after '24.

Again, I wanted to thank you all for the time today. It was great getting to dive into the story with you.

Thanks, Cecilia, appreciate it.