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

Thank you for joining us for the second day of the Morgan Stanley Healthcare Conference. I'm Cecilia Furlong Medtech analyst here at Morgan Stanley. It is my pleasure to have [indiscernible] with us today, CEO, Pat Mackin. CFO, Ashley Lee, thank you both for joining us.

Yes, good to be here. Absolutely.

And quickly disclosures at morganstanley.com/researchdisclosures.

And with that, I want to start on the macro bit in your guide and a few moving factors as we think about from approvals upcoming, your back half guide, what, if anything, is really incorporated from either PerClot initial sales Baxter or else mitral as you think upon an expanded indication going on the INR curve. Is there any kind of impact that you're currently factoring in? Or would both of those represent upside?

Yes. So we factored in there was modest revenue for both of those but it was in the range of guidance that we gave at the beginning of the year. So we guided 9% to 11%. If we got those PMAs early, would have been closer to the 11% and got to wait were closer to 9%. We're 10% halfway through the year. So we're still comfortable with our guidance. And we're expecting both of those approval in the fourth quarter. So if they come early in the fourth quarter, there's probably some upside. If they come later, we'll be fine, but it's really about the timing of the PMA.

Okay. And as you look broadly -- broad geographic exposure, are you seeing still in certain markets some COVID pressures? Is there anything that stands out as you kind of contemplate [indiscernible]?

Not really. I mean I think the COVID, I mean, I'm sure there's some noise in different parts of the world at different times, but it really isn't it really isn't showing up. I don't know, Ashley, if you your thoughts?

No. I mean it seems like the discussion of COVID is kind of subsided to the background at this point. And we're just kind of like things have almost returned back to normal.

Or -- just looking forward to Latin America and some of your Asia Pac, those are 2 areas that you've really focused on expanding. You talk about 25% to 30% growth. Can you walk through just some of the product launches, how you're thinking about the specific growth factors in those markets over both the remainder of this year, but as you think about '23, '24? What are the key products that are supporting that growth profile?

Yes. So we -- it's a pretty simple algorithm. We have -- for each geography, we've got a series of regulatory approvals that are lined up across the various products, but mostly on the stand craft side. So this would either be AMDS getting approved or any of the JOTEC products getting approved. And what we've been doing is as we get approvals and we get a kind of a critical mass of approvals, then we actually put feet on the street, so go direct. So in Asia, we've gone direct in Vietnam, Thailand, markets we've never been before. And with the portfolios that we have, we're able to do that. We've recently got a bunch of things approved in Australia. So some of the geographies, like, for example, Latin America, Mexico has been taking a lot longer. So we've got a bunch of approvals that are lined up for going into '23. So each one of those regions has a number of approvals that are kind of stacked up over the next couple of years. And we've tried to link the addition of salespeople with the product approvals. And both of those, as you mentioned, both of those regions have been growing well above the 25% to 30% growth we've been projecting.

Okay. Just BioGlue CE Mark, just any updates that you have?

Yes. So we mentioned on the last earnings call, we had our inspection back in June. We had some minor findings. We answered the questions. That packet was completed and submitted by our regulators. They have to go out to the countries in early August. So we're kind of in that approval window. We are targeting the end of September. It's probably going to be into October just because as we know, August in Europe, lot of holidays are taken. So we think it will be kind of in the month of October is our best guess right now. And we're, I think, well positioned with the derigations that we got and some of the extensions we've got in that we shouldn't be exposed on from a revenue standpoint there.

The seasonality part, just anything that you would call out this year, I recognize portfolio skews much more to less deferrable procedures. But from a seasonality versus kind of pre-COVID times, is there anything that?

No, I think it's been pretty much -- I mean there's been some noise. We get asked a lot about the staffing issues. We hear about them here and there. They really haven't affected us. They're there, but they really haven't affected us that much. So there hasn't been that much of a difference in seasonality to kind of pre-COVID.

Okay. As you think longer term, too, you laid out an LMR earlier this year and a lot of products hitting , especially in the U.S., [ '24, '25 ] type of time. You look at your portfolio today per clot divested faster. TMR is probably arguably the one of logistical possible candidate. But as you for divestiture, as you look across portfolio, what is the longer-term role of the legacy tissue preservation business, especially with all those products coming out.

Yes. I mean it's been a great portfolio for the company. And it's how the company was founded. I mean, we're growing, I think, 8% halfway through the year. It's obviously a much lower gross margin product. It's in the kind of the low 50s versus the rest of the device portfolios probably in the 65% to 75% range. So clearly, it's -- as the new PMAs come on that are 90% gross margin that are going to drive our top line growth. I think that's the one that we'd probably take a look at, but we're not going to do anything with that portfolio until we see the contribution from the PMAs kind of in the '25 time frame.

Okay. On extraction, I think the numbers that you laid out at your Analyst Day, the LRP there, we're slightly ahead of kind of how we were thinking about it at the time. But just as you think, at least today, what you're seeing in the market, whether it's a, whether that's having a bit of impact in terms of how physicians are looking at this. But what is the growth drivers as you think from now until you get potentially the expanded indication, you'll have likely mitral contributing. But outside of that, how do you view kind of the share capture dynamics playing out?

Yes. So we obviously been successful taking quite a bit of share in that market. I think it's multifactorial. One, we've got -- we continue to, as we just mentioned, put more feet on the street kind of around the world. So we've seen really nice growth in Asia and Latin America. As we put feet on the street as the portfolio gets expanded, there's -- we have more direct people in those markets where we haven't had them before talking about On-X might will obviously be an added boost because that's a worldwide. And it's unique in that the mitral valves are on the shelves in a lot of these places. So our reps are trained, the valves that are on the shelf, we get an expanded label. So it's really a marketing effort, if you will. So I think the combination of expansions in -- with the channels in Asia and Latin America, the PROACT mitral and then the continued kind of, I think, the or around the On-X valve with PROACT Xa, as you mentioned. I think the combination of those things will continue to drive that business. I mean we're were up about 12% kind of halfway through the year, and we had kind of guided 10% to 15%. So...

In terms of just the TAM for aortic versus mitral being larger. Can you size the relative difference -- and then as you think to just where patients traditionally have been managed from an INR standpoint, mitral being higher. How much do you see kind of adoption because of that being faster than kind of what are your [indiscernible]?

So it's about 80-20, 80% aortic, 20% mitral. Now it depends on where you are in the world, if that's tissue versus mechanical, but I'd just say, in general, just the volume of procedures. And you're absolutely right, the INR for an aortic valve standard care is 2 to 3 and for a mitral is 2.5 to 3.5. So you actually have to give more blood thinner to a mitral patient because it's a low-pressure valve. So as you go up the INR curve, your bleeding goes up. So to your point, it's a much more significant thing to drop the INR lower off of the 2.5 to 3.5 than it was from the 2 to 3. And we've heard things what surgeons really care about a cardiologist, what they worry about is overshooting. So if you got a mitral valve, they're trying to keep you 2.5 to 3.5, but if they overshoot the 3.5, now you've got a much more significant chance of bleeding. So the ability to pull that back to kind of the 2 to 2.5 range. And if I overshoot you now, it's like 2.5 to 3, which is way less than a 4. And so I think that it's a more pronounced difference with the mitral position than the aortic position. So I think it should go faster. And the other piece is when we acquired On-X, our sales force had never sold the On-X valve. We had never sold the low INR, we've had 5 years to take our share up 30 points. So all of our reps are trained. They know the aortic, they know the mitral. They know to INR, they know their surgeons. So you could argue that the adoption would be faster for all those reasons.

Do you think Mitral has benefited prior to the indication expansion?

It's hard to say. I've heard some people say they've done it, but I don't have very good data on that. People tend not to do it, particularly in the U.S. because of the medical legal environment. They won't until they get the indication they won't do it. We've heard people outside the U.S., and I've heard here and there, people say that, but I don't think it's been huge.

Has that impacted volumes, so in terms of physicians looking at this kind of similar discussion with the aortic position, but potential to be able to manage at a lower INR down the road. Is that adding an impact today?

Yes. I don't have good data to support that or not, to be honest with you. I think they're going to wait for the approvals and then it will take off from there.

Okay. And then PROACT Xa, just from an enrollment standpoint, is 4Q still a good target in terms of...

I think it's -- I mean, like anything, it's a big trial, right? It's a 1,000 valve trial. -- we're at 848 today or I guess earlier this week, so call it almost 850 out of 1,000. So we should enroll in the fourth quarter. But we've had a lot of our big centers have already enrolled a lot of their patients. So we're kind of getting to the kind of the end of the trial. But I mean, it's the fact that we've enrolled -- we will enroll 1,000 valve trial all during a pandemic in less than 2.5 years is pretty impressive.

Stepping back to kind of commencement of the trial to now. How is if at all, has your view in terms some market share that you can capture with an expanded indication?

Yes. So we've done a lot of work, market research, physician checks, cardiology checks. And we were pretty convinced when we started the trial, where we went to start a $35 million trial if we didn't think it was going to have a payback. I've gotten more bullish as time has gone on as our clinicians in major centers have had a chance to be in the trial, put their patients in the trial. We started enrollment in May of 2020, and we said, we're sitting around almost 850 and the research we have done shows that we actually take a significant portion of the surgical tissue valve market. So if this product gets approved, I think it will have a significant impact on the company.

As you think about just the existing mechanical market, mechanical heart valve market today. Are there areas that if On-X isn't necessarily optimized either specific anatomies that maybe is a niche segment?

Yes. The one is our 19-millimeter valve or smallest valve. We just have had a hard time enrolling that because there's just not a ton of patients. I would think that's probably the one area where we're -- we don't have a that product in our portfolio, but we've been trying to collect data on it to get the regulators on board, but it's just taken us a lot longer than we'd like.

Okay. As you think, too, just about your pricing strategy, is this a premium do you take price with the [indiscernible].

Yes, it's a good question. So since the majority of the share we're going to take is from surgical valves, and just I'll take the U.S. market, the mechanical have, let's say, is 4,000, 8 tissue valve is 6,000. If I'm replacing a tissue valve with an On-X Eliquis valve, we're going to charge 6,000. So we're going to basically -- the hospital won't know the difference. But we are going to take a significant price premium from the mechanical because it's no longer a standard of care mechanical valve. It's the only valve in the market that will have Eliquis being used with it.

Okay. And as you think to -- sorry, turning back to mitral though, but the cadence, the ramp, the impact to your business, your volumes post the indication expansion, is that linear? Do you see an inflection? How do you think about that?

Yes. I think it will follow the approvals, right? So we'll spread the approvals from the U.S., then we have to go to Europe, and we have to go to Japan. So it will take us time with the approval. So there will be a kind of a built-in kind of governor, if you will, just because you've got to get approvals in the different markets around the world. I do think it should go faster than aortic just because of all the reasons I said earlier. We said on the mechanical side, there's about $40 million worth of business upside on the mitral mechanical market. And because we've -- our reps have all been selling to mitral, they've been selling the PROACT aortic with a low INR. They know the customers, the valves are on the shelf in many cases. I think that we should see pretty good uptick even compared to the aortic.

Do you see opportunity for taking price there too?

Yes. We haven't -- we chose on the aortic not to do it. I think it's an interesting question on particularly the environment win. So I think we will probably be more aggressive on pricing, given what's the recent inflationary situation we find ourselves in.

And just from a physician standpoint, too, where do you think awareness is today in terms of just the fact that you could have a lower INR?

For the mitral?

Correct.

Yes, I think it's -- depending on the market, I think it's pretty high here in the U.S. It's pretty high in Canada. I think Europe, probably not as high, Asia probably not as high, but I think it's pretty high that, that trial's going on.

Okay. Turning to your stent graft portfolio and looking at Europe specifically and biotech, you added on NEXUS MDS. What are you seeing from a pull-through standpoint, I think that was a big part of some of the additions not only a unique positioning in the market, but also the fact that you would have this comprehensive portfolio?

Yes. I mean we clearly have the most comprehensive aortic portfolio in the market today. And I think it's to have our rep be able to show up and can treat from the aortic valve all the way down to the iliac and pretty much are the only ones that can do that for all indications whether it's acute type A chronic Vs, I mean just kind of go down the list. So I think it's hard -- it's hard to measure that as far as like is it having an impact or not? The growth rate, I think our stents and stent grafts grew 30-plus percent in the first half of the year. So we're clearly seeing a lot of adoption even across our AAA and our iliac, which is AAA is a more kind of crowded field. We're growing double digits there as well. So I think we're definitely seeing our reps positions in the markets taking hold and actually growing the business -- the whole business.

And I think you were talking about some design modifications. What is the latest there?

Yes. So we basically kind of went back and got some customer feedback, have gone back, made some design modifications. We've basically has to go through a regulatory process with this kind of MDR kind of cloud out there coming in May of '24. We've got to go through a kind of a regulatory process to get those changes through. So it will probably be a little while to do that.

And in terms of just the JOTEC portfolio that you're now currently thinking about U.S. I'm assuming that is subsequent AMDS and Nexus. But what are the key products that you're still focused on from that?

Yes. So I think one of the things we've tried to do is bring our most differentiated technologies we talked before. I mean, bringing the 7th AAA to the U.S. is not that exciting to us. But there's no thoracoabdominal approved, and we're very strong in the thoracoabdominal the branch, thoracoabdominal space. So I think that's one we're looking at various regulatory pathways of how we bring that in. We're bringing our Neo will be the next one up on the block is our next-generation frozen elephant trunk. We'll be in the clinic probably starting of '24. So those are areas where we're very strong. We're either the market leader or the fastest growing. They're highly differentiated. And in the case of thoracoabdominal there's no approved product in the U.S. So I think those are the ones we've targeted. So after PROACT Xa, AMDS and Nexus, so those 3 PMAs brand thoracoabdominal, the Neo frozen elephant trunk. And then there are some other things we're looking at, but that gives you 2 more PMAs that we haven't even started on.

And AMDS prosper, that clinical trial, can you just give us an update of where you are?

Yes, I don't have the numbers on that one. I think we're in like the 10 patient range roughly. We'll give an update on the call coming up in November. But it's interesting. So this is acute type A dissections, which is where you get a little tear in your aorta, just above your valve. It's a big problem. And it's a medevac in the middle of the night. Here in New York, there's -- I think there's 4 centers here in the trial. What's interesting about that disease, unfortunately, is it's a fall/winter for some reason, I don't know why, but -- so we should see actually the cases pick up coming into fall/winter. So we were in 20 centers right now are signed up for the trial. I think we're active in 10 and the remaining 10 are basically going through the contracting IRB, the typical kind of ramp-up phase. There's a lot of excitement. This is a kind of a breakthrough kind of cutting-edge technology that it's the first advancement for acute type A dissections in 50 years. And I think has the ability to actually improve mortality. We had a case. I'm not going to get into the specifics on where, but we had a case where the patient basically because you create 2 tubes in the aorta, blood kind of flows to the wrong place. So this one patient had no blood flow to their lower limbs and was not going to be able to walk again. They put the AMDS in blood flows are stored and the guy walked out like 2 days later. So like really kind of life-changing technology.

How long in your view, post approval, does this really become standard of care? And just from a -- you think about just operators are used to a certain procedure dynamic, and you're adding this in. Is that an initial pushback in your..

No. And I've been doing this for a long time. One of the things that moves technology is a great outcome. So if the data is strong, it gets approved, and it shows a meaningful change to the patient from a morbidity mortality. So that's going to -- we'll have to see those results when they come out. Two is ease of use. I've been associated with some technologies that are really cool, but they're super hard to do, and you've seen it. They don't really go anywhere. This is very easy. This is like 5 minutes to a procedure. You do your standard of care operation and then you saw on this step. So it's -- anybody can do it. It's very easy. So I think if the data is strong, you will see a rapid uptake with this technology.

And then Nexus, just updates there.

Yes. NEXUS, I think there's about 20 patients enrolled in that trial, and there's a couple of different arms. The primary arm is a 60-patient dissection arm, chronic dissections and they're about 20, so about 1/3 of the way through that trial. And that's up and running in the U.S. as well.

And what you're seeing in Europe, too, with NEXUS with AMDS. So how does kind of that market where you're seeing adoption there? And then inform how you think about just the adoption rate in the U.S. post approval for both?

Yes. Yes. So I mean, we've seen pretty good uptake of the AMDS, I mean, almost immediately. Nexus, as we talked about over the -- during COVID, it was really kind of hamstrung during COVID just because we couldn't get surgeons in to train other surgeons and unfortunately, that kind of slowed down. We will be launching a second generation 2 branch system. So the current Nexus is a single branch that allows you to kind of put a branch in the dominant. We will -- won't be launching a 2-branch system at the beginning of 2023. So that should actually be another kind of step function up for the NEXUS system.

Turning to your legacy tissue business. Can you talk through because I think there were a few unique dynamics tied to COVID in terms of just what you were seeing from the peripheral side versus kind of the aortic side, but can you speak to that what you're seeing today? Is there any differential still in the market tied to go in?

Yes. I mean so through the first half of the year, what we've reported, we've seen very rapid growth in the valve segment. And we had talked about with the quality issue we had, whatever it was over a year ago. We had kind of a bolus of tissue -- but we've seen very strong double-digit growth on the valve side. Interestingly, the vast year tissue side was down. I don't know if it was an OR time, if it was a selective prioritization. I really can't tell what it was, but that was off. And it wasn't just us, it was often -- the market was off. So we hope to see that kind of normalize again. But the good news is the valves have been growing so strong that it's kind of masked any of the vascular or tissue issues. So we're up like 7%, 8% through the first half.

On the margin side, too, as you think about -- you talk about the gross margin profile of some of these products coming online [indiscernible] with the tissue gross margin. But as you sit here today, inflationary pressures and we think about the gross margin trajectory to '22 into '23, kind of what are the key puts and takes you think about it?

I'll leave the hard question for Ashley.

Yes. So I mean a new number came out today here in the U.S., and it was running hotter than I think people expected 8.2. In Germany, it's actually running hotter than that. So the first thing that we wanted to do is make sure that we retained our employees so that we have made several adjustments to wages globally to make sure that we retain employees because it's obviously a very competitive environment. In regards to addressing the impact that it has on margin, we're really focusing on pricing, and we're going to get much more aggressive on that, the balance of this year and into next year. But there are other things that we think are going to benefit margin and help to offset some of this next year as well. We're going direct in certain markets around the globe. We're going to be looking at cost down initiatives around the globe. We're selectively changing out certain distributors to capture pricing there. And I think all of that should help us to mitigate the impact of inflation over the next couple of years.

I mean, just to add on that, I mean, it's no surprise to anybody that labor costs have gone up. We see signs to work at Costco for $20 an hour. And if you have local factory employees that are making less than that. I mean, so you had to raise labor rates have gone up. Suppliers have sent us higher costs. So the COGS have gone up. We are being much more aggressive on the pricing side and the combination of those things, I think, will help to address the gross margin kind of going forward.

I think the other key factor too is if you look at our revenue growth that we expect to see over the next couple of years. A lot of it is going to come from higher margin product, which will also help to mitigate some of the impact of inflation as well.

Where are the greatest opportunities today that you see to take price, whether on a geographic basis or across your portfolio?

I look at 2 things, right? I look at the dynamics in the market from a contracting, right? So we don't do a lot of group purchasing contracts. So that's a problem, right? If you have a lot of GPOs with fixed pricing for a number of years. We don't really do that in the U.S. So in the U.S., we have a lot of ability to take price. If you look at kind of structurally in Europe, Southern countries, Spain, Italy, have a lot of long-term contracts. So it's harder to take price because you've got a long-term contract in place. So we're looking at the markets where we actually have the ability to do it from a contractual standpoint. We also look at where we're highly differentiated. The last thing you want to do is raise price in a market with 7 players and have and move share. So we basically have to look at a grid of can you change price? What's the competitive dynamics? And I think customers have been pretty understanding of that as we've rolled these price increases out.

Okay. I know we're running out of time, but just in terms of when you think about further expansion in Latin America, Asia PAC, you've talked about, I think, expanding your field force there and talked about going direct. But how does that flow through SG&A from a timing and cadence standpoint as?

Yes. So we plan on investing in those 2 regions. It's more in Asia. So Asia, we're going to probably double, we've got 25 there now and the next 2.5 years, we'll have 50. And then we kind of ask them to it out and it's kind of a fixed portion of your income statement. And those approvals are kind of lined up with that. But -- and so we're going to be driving 30% growth kind of through that period. So we're pretty comfortable with and we watch it. It's almost like a venture fund, right? We watch get the approval, put the feet on the street, do you get the growth, yes, invest more and it's been working so far. It's been a big contributor this year, and we'll be continuing to do that for the next kind of 2.5 years a [indiscernible], then it kind of flattens out.

On China, too, what is the latest on BioGlue there?

Yes. So we went through a whole approval process with them, and they asked us for some kind of longer-term animal data, which you can sometimes get back from regulators. So we're doing that. And it's mid-2024 opportunity now.

And TAM, how would you kind of?

It's hard to say. I was there and met with a bunch of the physicians that do this. We have great data in developed markets. We don't have great data there. We thought it was like a $10 million opportunity. It's probably a lot more than that, but I don't really know because there is no product like it there today. And just to give you an example, 1 hospital does a 2,000 acute type A dissections. There aren't 2000 dissections on the East Coast, right? So it's a massive market. And if we got it approved there with our infrastructure that we've set up from a distribution standpoint, I think the product would do extremely well. But again, we've got to go through this kind of process, and it's going to be a little while.

With that, I think we are out of time. But Ashley, Pat, and thank you very much for being here with us.

Yes. Thanks for having us.

Thank you.