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

Good morning, everyone. I'm Ashley Lee, the CFO at Artivion, and joining me today is Josh Wells, our VP of Development. Now before we get started, I just want to say that this presentation does contain forward-looking statements. So I wanted to maybe just to kind of give you a little bit of background on where we've been as an organization and kind of where we are, and where we're headed. Going back about 10 years ago, we had 2 main products. It was allograft tissue processing and BioGlue Surgical Adhesive. We were essentially an aortic company at that time. But as you can see that our addressable market opportunity was limited. We were profitable, and we were growing at the time. But we really didn't have an extended runway for growth. And so right about that time is when our current CEO, Pat MacKin, joined the company. And one of the things that he did when he came in was first to assemble a management team. And he brought along with him several of his key executives from Medtronic, our Head of Sales, our General Counsel, and our Head of Clinical are all ex Medtronic, all of our commercial leaders in our 4 major commercial geographies all worked for Pat at Medtronic. Our VP of Regulatory Affairs is ex FDA. We just added a new VP of R&D from Gore. So I guess the point is is that this management team has run significantly larger businesses and certainly has the capability to manage Artivion as we anticipate this growth going forward. So one of the things that we did after the management team was assembled was to essentially hone in on what our strategy was. And after spending a lot of time doing that, this is kind of what we settled on. I mean if you look at us today, we are a company that focuses on cardiac and vascular surgeons who perform aortic repair. And I think one of the things that really differentiates us from a lot of our competitors is really our customer intimacy. We really pay attention to exactly what our customers' needs are. And then we either will go out and acquire or develop technologies to meet those needs. And as a result of that, we believe that we can deliver double-digit growth through 2024. And at that point, when we expect a lot of our pipeline to start to begin to be commercialized here in the U.S., we expect that growth to accelerate. So if you look at the last 6 or 7 years, we've made a lot of investment to grow this organization. We've invested about $700 million over the last 6 to 7 years. And you can see, it's been in the form of M&A, developing our product pipeline, investing in capacity in our global manufacturing facilities and then also addressing and investing in our commercial channels. So I'll start a little bit about the M&A initiative. In 2016, we acquired On-X, mechanical valve manufacturer based in Austin, Texas. It is the only valve that can currently be implanted and maintained on a lower dose of Coumadin. That acquisition has turned out extremely well for us. In 2017, we acquired JOTEC, primarily an endograft stent graft manufacturer based just outside of Stuttgart in Germany. In 2019, we entered into a distribution agreement with an option to acquire Endospan. It's an Israeli-based company, who has a very unique aortic repair product. It's an endovascular technology. And then following that, in 2020, we acquired Ascyrus. This is a company that has a very unique stent that is used for the repair of the acute type A aortic dissections. The result of all that is this portfolio that you see on the page here. The interesting thing about this, if you look on the left side of the slide here, BioGlue and our tissue technologies on the lower left, those are the technologies that I spoke about, and then everything else on the slide here was either acquired. BioGlue and On-X are approved in essentially all markets around the globe; the tissue technologies on the bottom left are predominantly a U.S.-based business. But everything on the right side of the page is predominantly approved in Europe and then in certain other markets around the globe that acknowledge the CE mark. Therein lies one of the really big opportunities for the company is, we're going to be bringing the majority of this portfolio on the right side of the slide to the U.S. And when we do that, these are predominantly 90% gross margin products that will be commercializing the U.S. And at that time, we expect to see just a significant amount of operating leverage going forward. And we're getting very close to that. If you look at this AMDS technology, just set the pointer on it, let's see, yes, right here, this AMDS technology. That's currently in clinical trials right now. We're expecting that to enroll here sometime within the next month. This is a technology through our partner, Endospan. They're currently enrolling. Now both of those products, we anticipate getting approval in the U.S. in 2025. And then we're going to be following that with this particular device right here. We're expecting to start clinical trials on the NEO in 2024, followed by E-nside and then E-liac and E-ventus a little bit later. So we're going to have a steady cadence of PMA approvals in the U.S. over the next several years that we expect to really drive growth. We talked about investing in our channels. We currently have about 185 salespeople located around the globe. The areas that we're probably still doing some investing in is Asia Pacific and then to a lesser extent, Latin America. In EMEA, we'll probably look to go direct in a few select more markets over the coming years, but that's just going to be on a really opportunistic basis. So if you go out 3 or 4 years, you could see this channel expand to maybe 220, 225, but for the most part, the heavy investing in building out these channels has been made. The other thing that we spoke about was investing in our manufacturing facilities. You can see we have facility just outside of Atlanta. That's where we manufacture BioGlue and process our allograft tissues. Austin and Texas is where we manufacture our On-X valves and in Germany, where we manufacture our stent grafts. We just did significant expansions at both of these facilities right here where we've essentially doubled our capacity. So from a capital and an investment standpoint, we've really made all the investment that we need to really drive our growth for the next 5-plus years. And then our product pipeline. We received PMA approval for PerClot a little bit earlier this year. This is a product that we actually sold to Baxter. We're currently selling to them under a distribution agreement. At some point over the next, let's say, 1.5 years, we anticipate that they're going to be transferring that manufacturing to a third party. But until then, we're going to be shipping product to them at a transfer price. The PROACT PMA Mitral, that trial has completed and enrolled. We're still in discussions with the FDA as to what the status of that is, and we'll likely have an update on that in our third quarter conference call. The AMDS PMA, this is the aortic dissection stent graft. That trial should complete enrollment a little bit later this month. So we'll have an update about that in our conference call as well. We talked about NEXUS. This is the product, another novel aortic arch repair device through our partner, Endospan. They're anticipating enrollment completion next year and an approval in 2025. And then I just talked a little bit about NEO. This is a trial that we should be starting sometime during 2024. So we've got an extensive pipeline. And even after this, there are probably 2 or 3 other products that are in the pipeline. And so again, we should have a steady cadence of products coming out over the next several years. We also recently rebranded the company. We were formally CryoLife, which was probably more descriptive of a technology as opposed to a company, and so you can see here that we clearly have a focus on aortic repair. So again, I began the presentation in describing kind of like where we were. This was about 10 years ago. Again, low growth company, very profitable, not a lot of runway for growth, just vis-a-vis our small TAM. We're kind of like right here right now. We've done a lot of the heavy lifting, the M&A, putting together the product portfolio. We've got the pipeline in good shape, invested in facilities, invested in our channel. And through the first half of this year, we were growing just under 11%. We believe that once some of these other products that I just spoke about get approved that our growth should accelerate. So we're currently like right about here. And with this certainly significantly increased TAM that we have, we think that we've got a lot of runway for growth going forward. A couple of the slides. We presented these at our Investor Day back in March of 2022. We committed to delivering $400 million in revenue through the end of 2024. I will say that was at a euro-USD exchange rate of [ $1.13 ]. Obviously, the dollar is stronger than that at this point. But I will say that because of our large expense base that we have in Europe, just based on currency if we're a little bit below that, it's not going to have any significant impact on our cash flow. The other thing that we did was committed to delivering $75-plus million in adjusted EBITDA by the end of 2024. And if we do that, we expect that our leverage should decrease significantly between now and the end of 2024 to just around 3x. So just some quick financial highlights. You can see the last 3 years in the trailing 12 months ended in June of 2023. I will just point out here that -- sorry about that, we had talked about all this investment that we've made and really being an inflection point for the company right now. We really are now just beginning to see all of that manifest itself in our bottom line. And as you can see right here that the trends in our operating cash flow over the last 2 years, ending in the trailing 12-month period, there's certainly -- all these metrics are improving. Operating cash flow, free cash flow, this is trailing 12 months. We do think that we are getting pretty close to the point where we are going to be free cash flow positive on a trailing 12-month basis going forward. And again, as our business continues to grow and we see that leverage, we think that this should improve rapidly. You can see our bank EBITDA is just shy of $60 million, resulting in a net leverage of around 4.7x. The last thing that I'll mention here, too, is that we do have two late-breaking publications and presentations at the European Association of Cardiothoracic Surgery meeting in Vienna later this week on Thursday. The PERSEVERE is the clinical trial that I spoke about that we should be enrolling a little bit later this month. We're going to be presenting the first 52 of the 93 patients, the 30-day safety data. And these are like hard end points. These are like death, myocardial infarction, heart attacks, stroke, dialysis. These aren't -- whether you can walk an extra 15 steps, these are really hard end points. And this 30-day safety data is going to be presented on the first 52 patients a little bit later this week. And then On-X, we completed the trial and got an approval back in 2015 to use On-X with 50% less cumin as compared to competitors. And that's really fueled 13% compounded annual growth in that product line. Since then, the FDA mandated that we perform a 510 patient post-approval study for that valve and the results of that is also going to be presented on this Thursday as well. So again, just some quick highlights for some upcoming events. So I'll just leave it at that and maybe...

Hi, guys, welcome. My name is Anna Yang. I'm with the high-yield research team at Deutsche Bank, and we thank Ashley and Josh joining us today. We're going to go into some questions for a fireside, and then if we have time, we'll leave it to any questions from the audience. Okay.

Maybe we can start off with just sort of the macro environment in sort of 2023. You've given us guidance for 2023 and at the midpoint of your revenue guidance, we're halfway through the year, we're pretty much halfway there. But I think on the adjusted EBITDA side, halfway through, you were like $25 million. And based on the $52 million guidance that you've given us, you would have to do about $27 million in the back half. That implies some margin expansion in the back half of the year. Can you bridge us to what will be those driving factors of that margin expansion in the back half?

Yes. So we have a lot of like really good tailwinds working for us and the first is we had a major pricing initiative on a highly clinically differentiated product line back in May of this year. And in the second quarter, we saw some pretty good results for that price increase. They stuck and we're still seeing some good traction with that. So we're going to get the full benefit of that in the second half of this year. In addition to that, we're always looking to take price where we can, even in this environment. A lot of our portfolio is highly clinically differentiated. So it does allow us and afford us some opportunity to go out and grab price in certain situations. So that's one thing. The other thing or another thing is the supply of our SynerGraft pulmonary valves, we sell these for about $25,000 a piece, is greatly improving. We've made some process improvement initiatives. Recently, we're already starting to seeing the benefit of that. So we expect our tissue business to perform extremely well, not only into the second half of this year, but beyond that. Our stent graft supply in Germany over the last, I'd say, 6 to 9 months, maybe even a year, we've talked publicly about some of the challenges that we've had in our supply over there, predominantly related to labor. It's a very tough job market in Southwest Germany. We finally had to bite the bullet in August, September timeframe last year and significantly increase our wages there. We were successful in -- we hired 75 people in the fourth quarter -- in the first quarter of this year. A lot of those people became fully trained as the year went on in 2023. And now our supply challenges coming out of Germany have essentially been resolved. PerClot, the product that we sold to Baxter, we got a PMA approval for that earlier this year. We just started shipping to Baxter at the very end of Q2. We're going to have a full second half revenue from that arrangement. So we expect to benefit from that. These two publications that I just spoke about being presented in Vienna a little bit later this week, we have to wait and see. Obviously, what's it, but we feel pretty good about those two publications being able to help continue to drive revenue growth in those two particular product lines. So that's talking about like revenue opportunities. If you look on the expense side, we are very mindful of spending. As I've said during the presentation, we've made a lot of our investment already. We still got investment to do, but a lot of the heavy lifting has already been done. So we expect spending increases to certainly start to moderate and go down. The other thing is if you look at our R&D, we're currently spending somewhere in the $30 million, $35 million range on an annual basis. A lot of products that we -- projects that we have in our R&D pipeline are, I won't say discretionary, but we can defer them and really not impact our revenue outlook for the next 3 or 4 years. Some of these are like way out on the time horizon. So to the extent that we need to rein in spending, we do have some levers to pull, and we can defer some products -- some projects and spending should we need to. So I think the combination of all of that still gives us confidence that we'll be able to deliver on these commitments that we've made.

Okay. I guess you touched on the Germany facility and you sort of filled out the positions that you need to fulfil down. They're kind of up and running. So are stent supplies sort of back to where you expect them? Or is there a little bit more wood chop in terms of getting the supply out there?

No. We're exactly where we need to be at this point. We've got a pretty decent supply and we should be able to deliver on the growth targets that we laid out for that product which is between 15% and 20%.

And you also touched on sort of pricing and the ability to take additional pricing. What are those conversations that you're having with your clients in terms -- and I think when you think about health care, on the provider side and the hospital side, they're dealing with so much additional costs on their end. Are they giving you any sort of pushback in terms of your pricing strategy? Or are they kind of receptive? Because I think when you think about the product and where you service in terms of the benefits to some of those institutions in terms of being able to perform a procedure using one of your products, they are quite lucrative for those systems. So have you sort of had any sort of pushback from clients, in terms of like pricing just because on their end, they're having some of the additional costs?

Yes. Well, the first thing I'll say is like no customer likes price increases, [ no matters ] who you are. But I will tell you that a lot of our product portfolio is highly clinically differentiated. And so that certainly makes it a little easier when you go out and try to take price. We talked about the one major pricing initiative that we launched in May of this year, and that has gone pretty well. But the one thing that I'll say about a lot of the procedures where our products are used, these are very highly reimbursed procedures. So none of our products are reimbursed separately. They're all just covered under a DRG in the hospital and the procedures where our products are used are some of the most highly reimbursed procedures in the hospital. And they are some of the most highly profitable for the hospital. So we've been able to be pretty successful to this point in capturing price.

I'm going to jump to PerClot. You mentioned that you guys got the approval earlier this year and the agreement that you have with Baxter. Can you just kind of walk us through the relationship with Baxter. Like are you selling to them at a certain margin? And like what can we expect sort of the contribution, if you're willing to share for top line and then sort of what margins we can expect that at? And then beyond that, beyond sort of the 18-month agreement you have in place, is there an opportunity to maybe continue that relationship, or any discussions that you've had with Baxter on that end?

Yes. So right now, we sell PerClot to Baxter at a fixed transfer price. And the agreement was to run for 21 months, and it can be extended if necessary. So in the meantime, Baxter is looking to transfer that manufacturing process to another third party, and that is currently scheduled to happen probably sometime very late next year or sometime early in 2025, again, subject to extension if the parties deemed that that is desirable and necessary. As far as like expectations for revenue, we don't break that out separately. The PerClot revenue is included in our other revenue line, in our P&L. And -- so that PerClot, along with a couple of other product lines, but it's included there, and we don't break that out separately.

Okay. And just to confirm, that is contemplated in both your 2023 guidance and the longer-term '24 goals that you set out?

Correct.

Okay. Perfect. I guess we can move in terms of time line, PROACT Mitral. What has the discussion been with the FDA thus far? And it's taken a little longer, I think, than what you originally anticipated. And given the data readouts, has it been productive? Have they given you any indication of like what you need to do to get to the next step?

Yes. So we continue to remain in conversations with the FDA. I'm not going to get into like the specifics there. But we'll likely have an update on where exactly we stand on the PROACT Mitral PMA in our next quarterly conference call. We made this comment back, I think, it was in our last conference call that it would certainly be nice to have the PROACT, the PMA approval. It's a nice market. It's about a $40 million market. So it would obviously be nice to have it. But in the unfortunate event that we don't get the approval, it's not going to hinder our ability to deliver on the financial outlook that we have committed to.

Yes. So if you get the approval, it would be upside to the numbers that you've given us?

Right. Correct.

Okay. Okay. I guess we can sort of transition to the 2024 goal that you've given us around $75 million to $80 million of adjusted EBITDA. If we look at it today, LTM EBITDA is roughly around $46 million, and you expect to end the year around $52 million at a minimum, if not above that. But this sort of implies that adjusted EBITDA, there's a big sort of bolus to get from where we are today to that $70 million, even the $75 million number. So if you could help us kind of bridge what are the most important part to kind of get you to that guidance that you've given?

Yes. And I kind of went over those in an earlier question, but I do think it bears repeating. I think that we have several opportunities on the revenue front to really significantly grow revenue compared to 2023 levels, the pricing initiatives. The supply is improving in our tissue heart valve business. Supply is improving in our stent graft manufacturing in Germany. These pricing initiatives are going to -- we initiated them in May of this year, and they're going to annualize for the full year. We're going to have a full year of PerClot revenue in 2024 versus '23. And then as I indicated, we've got these two late-breaking publications coming out in Vienna later this week. And on top of that, it's just really a very good tight spending control. And again, I think that a combination of all those should allow us to reach the targets that we've set out.

And on your leverage target about roughly 3x if you meet all these goals, I think that where we are today implies that you would need to also generate some cash in between now and then. And you've given us -- in Q2, you were slightly cash flow positive. Could you maybe walk us to like maybe the cadence of what you expect cash generation to be from the back end of this year to next year and how you see that for now?

Yes. So we haven't given any formal guidance and are planning on doing that until the end of 2024. But I can make some general comments. We generated $5 million in free cash flow in the second quarter of this year. And I stated this and again, in our previous conference call, we're not yet at the point where we are going to commit to delivering positive free cash flow on an individual quarter basis going forward or on a trailing 12-month basis, although we are very close to being able to do that. Could that happen towards the end of this year, it very well could, but we're not committing to that at this point. But based on everything that I've spoken about, the spending, both from a CapEx side, from the investment in our channels, coupled with the increased revenue growth that we're expecting to see, I think that all kind of bodes well for improving free cash flow. And I do think that we are getting very close to being able to commit to delivering that on a consistent basis going forward.