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

Perfect. Great. Thanks, everyone, for being with us. Before we start, just the 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, we are here with Pat Mackin; and Lance Berry, CEO and CFO of Artivion. Thank you very much for being here with us.

Thanks for having us.

Yes, absolutely. Maybe before we take a deep dive into your recent performance, it would be great if you can speak a little bit to those unfamiliar with the audience, what Artivion is about? And if you could provide a brief overview.

Sure. I'll do a quick intro. So we're an aorta-focused company. Specifically, we have heart valves for patients under the age of 65. We have a number of products to treat aortic aneurysms and dissections. We're a little over $400 million. I think midpoint of our guidance is $440 million for this year and about a 20% EBITDA margin company. We have a portfolio of really highly differentiated PMA-protected products, and we have a pipeline of a series of additional PMA products. And then from kind of a financial objective standpoint, what we tell people is our goal is to grow the business double digits for the foreseeable future and to grow EBITDA at twice the rate of sales. We have really good leverage opportunity. We have -- like most companies our size, we have a good opportunity to leverage G&A. We also have a leverageable sales force because our reps don't have to stand in all the cases. And then our pipeline of products really are for the U.S., and those will carry higher gross margins than our current gross margin average. And so we should have a gross margin expansion opportunity as well. So that's real high level on Artivion.

Awesome. I guess maybe diving a bit into your guidance. We -- obviously, you have your 2025 guidance out there. There's an implied acceleration in the second half of '25. Could you talk about what's driving your confidence that you're going to be able to accelerate in the second half of '25?

Yes. So there's a few things. Number one, and we said when we gave our guidance back in February, we launched AMDS under this HDE format. And getting through value analysis committees was going to take some time and that we expected each quarter to be better sequentially. So that would imply that you're going to have a better second half than first half. So clearly, the AMDS launch is one of them. We've also got -- the fourth quarter comp is quite [ easy ], because that was our cyberattack last year. We've also got the On-X performance that you've seen post this new data, we expect to continue as well. I don't know if there's anything else you would add there?

Yes. I mean I think those are the big drivers.

Yes. Understood. And then you mentioned this at the beginning, but on top of the exciting growth, you're also saying that your EBITDA is going to grow at twice the rate. Maybe could you talk about what gives you confidence that you'll be able to meet that?

Yes. I think well, first of all, if you go back and look over the past couple of years, we pretty consistently had EBITDA margin expansion of 200 to 300 basis points each year, and that's really been with no gross margin expansion. And so we still feel like we have plenty of leverage opportunity in our sales and marketing and our G&A. And then with AMDS, first of these pipeline products coming to the U.S. is significantly higher gross margin than our current average. Right now, a total company, we're about 65%. It's a 90-plus percent gross margin product. So now we're going to add gross margin expansion kind of into the formula, which is just going to make it easier for us to hit that 2x EBITDA growth target.

Understood. Maybe shifting a bit into your portfolio. So your mechanical valve business has seen some pretty durable growth. And I think most recently in the last quarter, you mentioned that a lot of the growth was driven by cross-selling opportunities from the initial AMDS launch. Could you maybe help us understand what exactly that means? And how should we look -- as we look forward, if we should continue expecting this?

Yes. So On-X has been a great story for the company and for patients. So I think there's probably 3 or 4 things that are driving the On-X. You mentioned one of them. So before the beginning of the year, we had -- so I think it was about a year ago, we presented the post-approval data in 500 patients, which showed an 87% reduction in major bleeding for the valve. We've done some research on that and showed that we continue to take market share. So we kind of already had that in our favor. And then in January, we were surprised by a big paper, 109,000 patients that was presented back in January at STS. There was a paper that was published in JACC, the Journal of American College of Cardiology that basically showed that if you get a mechanical valve versus a tissue SAVR valve under the age of 60, the benefit from a mortality standpoint was towards mechanical valves. We were not involved in the paper. It was presented and published out of UCLA. That was an extremely positive piece of information. And we saw the market -- our business kind of take off right after that. And then the third thing you mentioned is also the cross-selling. We're training all these surgeons on AMDS in 1,000 centers over the next several years. And when we get in front of them, we can present the data. So it's kind of the combination of the post-approval data, the JACC data, the cross-selling. And when you put that all together, it's -- we've been growing that business 13% a year for the last 10 years. And it just, I think, is going to allow us to continue to do that.

So do you think that, that sort of double-digit growth going forward is what people can expect?

Yes. We haven't given long-term guidance. But I mean, in February, we'll -- it's pretty new. I'd say the other piece of information on that is we didn't do anything in the second quarter from a marketing standpoint because we're obviously focused on the AMDS launch, and On-X grew 22% worldwide. We have a big marketing campaign we're about to kick off to focus on getting that information out to cardiologists, which takes time. So it's -- we're 1 quarter in, but we'll be able to give further updates as we go through the upcoming quarters. But yes, it's certainly very positive and a real tailwind.

Perfect. Maybe you touched on AMDS. Can you maybe talk about what acute Type A aortic dissection is and how AMDS is going to fundamentally change the treatment paradigm?

Yes. So acute Type A dissection is -- it's a very -- it's acute. So it's a very emergency procedure a tear in the ascending part of the aorta. What happens is you get basically a false aorta and you have blood going down basically the wrong pathway and it's not getting to your brain, your kidneys, your spine and it is a very serious situation, roughly 1/3 of the people die and then almost 2/3 of the people either have some major issue, a heart attack, a stroke, paralysis or death. And so that's the procedure. It's basically the same procedure that's been done for 50 years to remove the disease or the torn part of the aorta and replace it with a simple surgical graft. The problem is you still have blood going down the wrong areas of the aorta. And so AMDS is a really straightforward device. It's open surgery and under direct line of sight, you put AMDS into the aorta and then deploy the stent, and it pushes the wall of the true aorta back to where it needs to be and gets all the blood flowing into all the right places. So we had pretty amazing results in the clinical study. And I think we've continued to see that early on in the launch in real-life application and I'm really excited about what the product can do longer term.

Could you maybe double-click on the clinical trial results? I know you mentioned they're positive, but maybe give us a little bit more context of what you saw in some of the data.

Yes, I can jump in. I mean the big takeaway, right, so in the trial was specifically done, it was the U.S. FDA trial. It was 93 patients against kind of the body of evidence that's been out there to date. mortality in a mouth perfusion, this is what Lance described is when blood is not going where it's supposed to go, mortality is about 35%. We showed a 9.7% mortality rate in the trial. So just on that, the stroke patients requiring dialysis, paralysis, all significantly lower. So really kind of across the board on all those endpoints, it's a life-saving, life-changing device.

Yes. Fair enough. And I guess now that with the launch ongoing, anything that you can tell us about how it's going so far? Any green shoots that we can look for to measure success?

Yes. So we gave a little bit of information on our first quarter call around the significant number of accounts that we had in the process of seeking IRB approval, which is a requirement of the HDE and getting through value analysis committee, which honestly is the longer lead time item most of the time. So we have a large number of accounts that are in the process. I think you can tell looking at our numbers, our growth rate accelerated from Q1 to Q2. So I think there's some indication in the stent graft line in particular, where probably a larger contribution from AMDS. We didn't break it out specifically. We've also given, I think, most importantly, some qualitative comments around how the first implantations have gone. So we're getting [ patent ] feedback every time one of these things is being implanted in a patient. And so far, really, all the results have been outstanding. We're really batten 1,000 right now. That won't always be the case. All med devices have some level of less than desired outcome. But right now, it's off to a great start clinically, which I think is probably the most important thing for long-term success.

Great. And as we think about the future regulatory pathway there, is there anything else that as we think about timing for the PMA, et cetera, are you...

No, we're basically -- we've got one module left, which we've communicated publicly that we expect it in Q2 of next year. So that would basically get the PMA. So the HDE would go away, which the only real change is we no longer have to have an IRB to get into a center.

So it's -- and you said middle of next year is when you expect it.

Yes.

Great. So maybe pivoting to another product that you just got FDA approval as well or you got approval to initiate the ARTIZEN trial, right? Can you maybe tell us about that and how you're thinking about the trial and timing, et cetera?

Yes. So the trial is called ARTIZEN and the product is called Arcevo. This is our third-generation frozen elephant trunk, which is basically a device that's used to replace the entire aortic arch. So it's for -- it can be for acute type A dissections, chronic dissections or aneurysms, anything that involves kind of the arch off the heart and the head vessels. We've been a leader in that field internationally for a decade. We sell that product kind of around the world, not in the U.S. or Japan. And that's really what this trial is going to seek to get approval for. So it's about 125-patient trial centers in the U.S., Europe. We've got an approval to start the trial. The unique technology in this device is it's the very first device of its kind that actually has a branch that goes into one of the head vessels, which is called the subclavian. We think that will actually make the procedure faster. And because these patients are on the heart-lung machine, it will basically reduce morbidity and mortality by speeding up the operation. So we hope to have our first implant in the second half of this year, before the year-end. And our clinicians are super excited about the technology. It's really a cutting edge -- another cutting-edge breakthrough aortic technology.

Great. And does it open any more TAM for any patient population?

Well, it will open TAM, obviously, in the U.S. and Japan, assuming we can get the -- we typically are able to use the U.S. trial to get into Japan, but we always have to have those conversations. But it clearly opens up those 2. And the other thing it does is it gets you FDA clinical data. We'll be able to take that trial and get that product approved in Europe. The predecessor product is already in Europe and in many other countries around the world, but we can take that FDA trial and get our Arcevo approved in many markets and market that data. So I think the trial, it's being done in the top centers in the country and in the top, I think, top 5 centers in Europe. So with that kind of clinician involved with the technology, it will really get the word around kind of the world about this technology when it comes out.

And any way that you could sort of quantify a bit more of what the TAM could be?

Yes, I think we have the TAMs are out there on our slides.

Yes. It's in our slide.

I think it's 75 in the U.S. and another 70 or 50 to 70 in Japan.

Great. Maybe moving to one of your other products, NEXUS. Can you maybe talk about overview of NEXUS and your relationship with Endospan and sort of some of the data releases that they've had recently.

Yes. I'll comment on the data, and I'll let Lance talk about the relationship. So NEXUS is interesting, all the technologies we're talking about from AMDS to Arcevo to NEXUS. These are all used in the arch. It's a cutting-edge area, if you will. It's really nascent. And we've really, as a company, that's been our focus is really the cutting-edge technology into the aortic arch, and we're a leader in that space. So NEXUS is a catheter delivery. So both AMDS and Arcevo are done in open surgery under direct vision where you're putting a stent into the aorta. NEXUS is a catheter, fully catheter delivered from the [ growing ]. The current generation that we're bringing to the U.S. or the first generation is it's a branch and the first branch, which is the nominant. That trial has completed. The 30-day data was presented in May. We expect to have the 1-year data at the STS in January in New Orleans. I think it's the last week in New Orleans. And that will really be the last piece of information before the FDA approval or not. So I think people will have all the information they need to see about how NEXUS is performing in that space. We think this is a platform technology. This is the first step. We've got many things coming behind it. I think there's 2 or 3 more PMAs right behind it with various kind of configurations of that platform. So we're very excited about it. The 30-day data was excellent. We'll wait to see the 1-year data, and we'll comment when that becomes public in January. But we're very excited. And I'll let Lance explain kind of the relationship.

Yes. We've had a partnership with Endospan for a number of years where, a, we distribute the product in Europe, and which has been great because we see the product in use every day and getting to really understand the technology. And then also, we have an option to purchase Endospan. We have 90 days post approval, we can exercise that option. Purchase price of $135 million upfront, and then there is an earn-out at 2.5x year 2 revenue. So that's kind of the basic parameters of our relationship with Endospan.

Understood. And I guess now that we've seen the data, how does that change your thinking in terms of exercising the option for Endospan?

I mean there's always -- I mean, the first point is that to acquire them, they have to get FDA approval. So kind of the onus is on them to get the approval. What we've seen in the 30-day data was excellent. There's one product approved in the U.S. right now, and our 30-day data was very strong compared to that. So if that's the proxy, I mean, it looks pretty good, and we're very excited about the technology, but they've got to get the approval and once they do that, then we'll decide what happens next.

Yes. No, fair enough. And then maybe in that same vein, obviously, a lot of exciting organic growth internally. But as you think about maybe longer term, how are you thinking about your capital allocation?

Yes. I think hopefully, we use some capital to acquire Endospan. That would be step one. I'd say that's really from an M&A standpoint, that's the one piece of M&A that's definitely on our radar screen. We don't feel like we need M&A to hit those financial objectives that I laid out at the kickoff to this fireside chat. And so -- but we do want to stay the leader in these differentiated technologies for the aorta, particularly the arch. And so right now, those differentiated things are all in our pipeline with the exception of the NEXUS device. So main purpose of capital allocation other than hopefully funding the Endospan deal is probably pay down debt. And then we get a little further out and we can reassess that. That's where we are right now.

Fair enough. Any thoughts of any share repurchases or anything along those lines?

Well, I would say we're probably not quite flush enough with cash to be thinking about share repurchase, but that's aspirational, I love it. So hopefully, we get there soon.

Fair enough. I guess maybe as you think about your investment thesis, you talked about continuing being a leader in aorta. What do you think makes you all so unique? Or what's the most underappreciated part of your thesis that you would like people to know about?

Yes. I think it's the focus on the aorta. I mean it's -- I think as a smaller size company, as I said, we're in the $440 million range this year, the midpoint of our guidance, very profitable. We're growing double digits, top and bottom line, cash flow positive. We basically have 7 PMAs. If we acquire Endospan. We've got 3 or 4 in our in our kind of current company. And if we acquire them, it will add another 3. So 7 PMAs, I don't need to buy anything. And I can spend around 7% to 8% on R&D and have a PMA come every 2 years. And then the odd year gets into Japan. So this is like a decade-long kind of opportunity. So I think the unique thing about the company is the focus on the aorta. These are largely the same customers, the same hospitals and the same diseases with a multitude of technologies just using in different ways in different places depending on what the patient needs. And I think the combination of that makes a very unique company. And I don't think there's a lot of companies, I think if folks do their screens on growing double-digit top and bottom or profits twice as fast and all the things already rattled off. I mean it's a pretty unique company.

Yes. Fair enough. And I guess maybe in terms of as you look at it in the competitive landscape, anything that either any competitors that you look -- see out there that you're concerned about or anything in the landscape that people should be looking out for?

I mean it's one of our kind of mantras is when we get involved in a technology, we have to have competitive advantage. We don't like playing in markets where we don't have competitive advantage. Now you don't always know it when you have -- when you do a trial because you got to wait for the data to come out. But if you look at the On-X valve, I mean, we absolutely have competitive advantage. We have a much bigger competitor, and we take share from them. If you look at our pulmonary valve, we're the only ones with the decellularized valve with outstanding data. Nobody else has it. It's kind of the same thing when you go through like very few competitors. And if we do have a competitor, we have better technology. So yes, I mean we're always paying attention to what competition is up to. But so far, I feel pretty good about what we've got in our bag.

The other thing that's great, too, these are all PMA products, right? Yes. So it's a pretty high barrier for competitive entry. And I think because of that, in general, we have few competitors in each of our segments. And we also get a very long lead time heads up, there's one coming.

Yes. Fair enough. And do you think that there's any products in the portfolio that the Street is underappreciating, as you look out at the projections out there or when you speak to analysts, is there anything that in the portfolio that's not getting enough attention?

Yes. I think it's a good question. I mean, I think one of the -- I understand it, but it's like when something is too far away, the Street doesn't really value it much, which I get. But obviously, AMDS is here and people are valuing it. I mean we could launch NEXUS a year from now. And then we have Arcevo 2 years after that, right? So I think it's the combination of the every 12 to 18 months, you've got another PMA hit, I think is underappreciated, but you typically don't get the value.

I'll throw another one on there. I think people that have spent time trying to understand our company a little bit, I think, get this. But if you haven't, you don't appreciate how sustainable the growth is in our existing portfolio. And some of it doesn't grow super fast, but it has been growing at the pace it's been growing for a very long time. There's really no reason for that dynamic to change. And it's because these are highly differentiated products. Again, they're PMA protected and in market sizes that are such that they're unlikely to ever see additional competition. And so I think sometimes people don't appreciate on the surface like how can we have these legacy products where we're so confident in our ability to continue to grow them, but it's the kind of the nature of the market dynamic that allows us to do that. So if people spend time on it, I think they get it, but I think a lot of people haven't spent the time.

Yes. Fair enough. Can you -- maybe double-clicking on that, can you give an example of one of those products that you would say this product, even if it's not growing as fast, will have durable growth for the foreseeable future?

Yes. I mean my favorite one is BioGlue. It's a 20-year-old product. There's 3 other competitors in the market for surgical sealant. So we each kind of have our own niche within the niche, if you will. Ours is we're the only ones that have an indication for acute Type A dissection, which obviously fits perfectly with our call point and our portfolio. That product has grown consistently for 2 decades. It's super high gross margin. We don't consign it. We sell it the minute we ship it out wherever it goes, we sell over 100 countries all over the world. And there's really no reason why it can't continue to grow at kind of procedure rates plus a little bit of price for I don't want to give, say, 20 years, that's a long time, but for the foreseeable future. So I mean that's an example. And it's because it's probably never going to have additional competition. There'll be another -- never be another -- or hopefully never be another surgical sealant with an acute Type A dissection indication.

Right. Fair enough. I guess maybe moving out a little bit. I know you mentioned Japan on coming. How should we think about internationally? I know you are already in many geographies, but do you have a strategy sort of for further diversification internationally? Or how should we think about your split?

Yes. I mean we're 50-50 international U.S. right now, which is pretty rare for a company of our size. So we actually were way more international than most companies. We sell On-X and BioGlue in 100 countries. right? So we're -- we've expanded pretty significantly. If you go back and watch our evolution over the last 5 years, we started with like 1 person in Asia, now we have 50. So we've put a lot into Asia. We've also built out in Latin America. So I think those are kind of slowing down. Those investments are slowing down. But I don't know, Lance, if you have any other.

Yes. I mean I think actually there's a nice cadence to it. I think while we were working on getting these products, these new PMA products on the U.S. market, we had this opportunity to build out our international footprint, which we did, and that helped drive growth. And the margin profile for a lot of these products is really good outside the U.S. as well, but it's not as good as it is in the U.S. And I think now that was a great thing we could do while we were working on these PMAs. Now we have AMDS is kind of the first one of the domino's to fall in the U.S., I think you'll see a little bit more of the investment now is to how do we maximize that U.S. growth for AMDS, for On-X, hopefully, fingers crossed for NEXUS. One, that's the bigger opportunity now as opposed to what it was, say, 3 to 5 years ago, but that's also just way more profitable. These are super high gross margin products. And so I think as Pat said, you'll see a little bit more of a shift. But I think we think we can continue to grow our international business really well, probably accretive to our overall company gross margins for, again, for a while.

Right. And -- but as we look forward, I know you mentioned it's sort of half and half right now, 3 to 5 years from now, should we should expect the U.S. to be the preponderance of revenue?

I think you'll start to see a shift. But again, I still expect the international business to grow. I would expect it to grow certainly double digits. So I think it's not going to be like a light switch. I think it will progress over time. You'll be able to see that mix shift and you'll be able to see it in the gross margin.

Yes. Fair enough. I think we have a few minutes left. I want to see if there is any sort of final remarks or anything that you think I missed in the conversation that you'd want to highlight for potential investors.

No, I think it's just some of the stuff we talked about, right, an aorta-focused company that literally has an R&D pipeline of 5 PMAs in the works now with a couple more coming if we do the Endospan acquisition. We have a 200-person channel already. We've barely brought the first product to the U.S. We're working on getting in Japan and the ability to grow this business double-digit top line, twice as fast bottom line, cash flow positive, expanding gross margins, expanding EBITDA margins. It's a pretty unique company.

Yes. No, the same thing we talked about. It's a really clean story if people will take a little bit of time to go research it. We're very financially healthy right now and have really good EBITDA margins right now. But with this pipeline opportunity we have, we can continue this growth for a long time and take EBITDA margins. Even though they're great right now, we can take them meaningfully higher than where they are at the moment. And again, companies this size typically don't have that level of profitability to begin with. But if they do, they certainly don't have an opportunity to take it considerably higher. So I think it's a really great clean story. And if anybody hasn't been paying attention, I encourage them to check us out.

Yes. I agree. Well, thank you very much for being at our conference. And hopefully, this is helpful.

Thank you.

Thanks.