Artivion, Inc. ($AORT)

Good afternoon, and welcome to Artivion's Fourth Quarter and Year-End 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Brian Johnston from the Gilmartin Group. Thank you. You may begin.

Thank you. Good afternoon, and thank you for joining the call today. Joining me from Artivion's management team are Pat Mackin, CEO; and Lance Berry, COO and CFO. Before we begin, I'd like to make the following statements to comply with the safe harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. You can also find a brief presentation with details highlighted on today's call on the Investor Relations section of the Artivion website. Lastly, I would like to remind you to please refer to our press release published earlier today for information regarding our non-GAAP results, including a reconciliation of these results to our GAAP results. Unless otherwise stated, all comments today will be using our non-GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis. Revenue growth rates will be the adjusted constant currency rates and expenses as a percentage of sales will be based on adjusted revenues. With that, I'll turn the call to Arctivan's CEO, Pat Mackin.

Thanks, Brian, and good afternoon, everybody. Through the first quarter of 2026, we continue to execute our strategy designed to drive long-term profitable growth through an expanding and clinically differentiated product portfolio. In the quarter, we delivered constant currency revenue growth of 12% and adjusted EBITDA growth of 26% year-over-year. Revenue growth was driven primarily by On-X and stent grafts, including AMDS. We also benefited from growth within preservation services as tissue processing volumes normalized following the 2024 cybersecurity event. Before expanding further on product line performance, I'd like to take a moment to address today's exciting news regarding the exercise of our option to acquire Endospan. This is following the PMA approval of its NEXUS Aortic Arch Stent Grafts system for chronic aortic dissections, which they achieved in early April. The NEXUS system is a branched endovascular stent graft system that is purpose-built for minimally invasive treatment of Aortic Arch disease where patients often have no choice other than open heart surgery. The clinical data is compelling. Data from the chronic Aortic Arch dissection cohort of the TRIOMPHE trial demonstrated 93% of patients survived from lesion-related death, 90% freedom from disabling stroke and at 1 year post treatment. Also, 95% were free from intervention due to endoleaks, excluding type 2 endoleaks at 1 year, which is a very high-risk population. As a reminder, the total annual U.S. addressable market opportunity associated with both cohorts is estimated to be around $150 million, with dissections representing about $100 million of that. We plan to pursue supplementing the label to include aortic aneurysms through formal regulatory processes expeditiously post acquisition. Importantly, our anticipated acquisition of Endospan and its NEXUS system will complete our market-leading three-pronged Aortic Arch portfolio. This technology, if acquired alongside AMDS and our Arcevo LSA will position us at the forefront of this segment as the only company globally with a complete portfolio of Aortic Arch solutions. And importantly, NEXUS is the platform technology, not just a single product. It's supported by additional three PMA programs in development that we expect to further expand and solidify our leadership in the Aortic Arch market over time. We are pleased to have had the financing already in place for this acquisition and subject to satisfactory and customary closing conditions, we expect to close in the second quarter of 2026. As Lance will discuss in greater detail, we expect a full U.S. commercial launch of NEXUS in January 2027, following efforts to scale inventory production, complete value announced committee processes and augment our U.S. sales team. With that, let me turn back to our Q1 '26 results. From a product category perspective, stent graft revenues grew 10% on a constant currency basis in the first quarter compared to the same period last year. Year-over-year constant currency growth fell below our expectations due to lower-than-expected AMDS set sales in the U.S. as well as softer-than-expected performance internationally, particularly in the Middle East. Year-over-year growth also reflects a tougher comp in Europe following a strong Q1 2025 performance as we recovered from the 2024 cybersecurity event. While U.S. AMDS sales associated with initial stocking fell short of our expectations in Q1, we've been very encouraged by implanting reorder patterns within the accounts already using AMDS. We view this as a much more critical item than the immediate impact of sales from starter sets as strong reordering patterns reflect positive user experience and ultimately, our long-term adoption of these in our growth thesis. Looking ahead, we expect U.S. AMDS set sales to accelerate as more accounts are already through the VAC process, they finalize the procurement as we benefit from steps being taken, not to ease the initial upfront $100,000 cost burden associated with stocking. We also anticipate PMA approval of AMDS in the coming months, which will obviate the need for entirely new accounts, which won't have to go through the IRB process, some of which have deferred the PMA approval because of this increasingly imminent date. Ultimately, we see our comprehensive stent graft portfolio as a foundational component to our growth strategy. We are encouraged by our enduring fundamental strength and increasingly strong competitive advantage within the segment. Looking ahead, we intend to replicate our proven strategy by bringing additional stent graft products that are already generating revenue in Europe to the U.S. and Japan, which we believe will unlock further meaningful expansion of our stent graft total addressable market. Meanwhile, our Q1 On-X revenue was 17% year-over-year growth on a constant currency basis. This growth was driven by further global market share gains and continued early traction in our new $100 million U.S. market opportunity unlocked by recently published data, which demonstrate improved outcomes with mechanical valves versus bioprosthetic valves for younger patients. We maintain our conviction that On-X is the best aortic valve in the market for patients under the age of 65, and we will continue to take market share worldwide in that product line. Tissue processing revenues increased 23% year-over-year on a constant currency basis in the first quarter as demand for our products remained strong and tissue volumes normalized year-over-year following the cybersecurity incident in late '24. Q1 results were slightly ahead of our expectations of roughly $24 million per quarter for that business. Lastly, BioGlue was relatively flat on a constant currency basis compared to the same period last year. While this performance was slightly lower than our mid-single-digit growth expectation contemplated in our previously communicated full year revenue guidance, it falls within the range of normal quarter-to-quarter growth variability due to significant amount of stocking distributor business in that product line. Lastly, on our pipeline, we continue to make great progress on the ARTIZEN clinical trial for our Arcevo LSA product. We now have 26 patients enrolled in the trial, which is a nonrandomized clinical trial consisting of 132 patients in the U.S. and Europe and up to 30 centers for treatment for aortic dissection and aneurysm in the arch. We anticipate completing full enrollment in mid-'27. We are optimistic that the trial will be successful, supported by our clinical results from our current generation Frozen Elephant Trunk, E-vita OPEN NEO, which is available outside the U.S. following our 1-year follow-up period and assuming the trial meets its endpoints, we anticipate FDA approval for our Arcevo LSA in 2029, unlocking an incremental $80 million annual U.S. market opportunity. In conclusion, while Q1 results fell short of our constant currency expectation and reflected some moving pieces that Lance will walk you through in detail, it was a quarter of meaningful progress against our long-term strategy. The fundamentals that underpin our growth strategy remain intact, a comprehensive clinically differentiated portfolio, a focused commercial organization and a pipeline that stands to exceed the total addressable market, expand our total addressable market continuously over time. The reordering behavior we are seeing within AMDS accounts reinforces our conviction in the long-term adoption story, and we have a clear line of sight in the near-term drivers that will accelerate new account conversion. On-X continues to take share from both mechanical and bioprosthetic valves as the leading Aortic Valve in the market for patients under the age of 65. And with the addition of NEXUS, we now have what we believe is the most comprehensive Aortic Arch portfolio in the world, a position we have built deliberately and intend to extend. With that, I'll now turn the call over to Lance.

Thanks, Pat, and good afternoon, everyone. Before I begin, I would like to remind you that please refer to our press release published earlier today for information regarding our non-GAAP results, including a reconciliation of these results to our GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted. Total revenues were $116.3 million for the first quarter of 2026, up 12% compared to Q1 of 2025. Meanwhile, adjusted EBITDA increased approximately 26% from $17.5 million to $22.1 million in the first quarter of 2026. Adjusted EBITDA margin was 19% in the first quarter of 2026, an approximate 130 basis point improvement over the prior year, driven by leverage in SG&A and gross margin improvement. From a product line perspective, stent graft revenues increased 10%, On-X grew 17%, tissue processing revenues grew 23% and BioGlue revenues were relatively flat in the first quarter of 2026. On a regional basis, revenues in Asia Pacific increased 6%, North America 23%, EMEA increased 5% and Latin America decreased 23%, all compared to the first quarter of 2025. International growth was below what we typically see from that part of the business. EMEA underperformance was driven by the stent graft-related factors that Pat discussed earlier, while underperformance across APAC and LatAm was driven primarily due to quarterly fluctuations in distributor ordering patterns, which we expect to normalize over the course of the year. Q1 gross margins were 64.9% in Q1, an increase from 64.2% in the first quarter of 2025, primarily due to favorable product and geographic mix. General and administrative and marketing expenses in the first quarter were $60.8 million compared to $54.7 million in the first quarter of 2025. Non-GAAP general and administrative and marketing expenses were $59.3 million or 51% of sales in the first quarter compared to $53 million or 53.6% of sales in the first quarter of 2025, reflecting a 260 basis point improvement. Approximately 170 basis points were driven through leveraging existing infrastructure and annualizing our year one AMDS launch costs and approximately 90 basis points were from stock-based compensation. Our as-reported expenses included a gain of approximately $1.5 million in Q1 associated with insurance reimbursement for cybersecurity costs we incurred in previous periods and approximately $1 million of diligence and integration planning costs associated with the planned acquisition of Endospan, both of which are excluded from adjusted EBITDA. R&D expenses for the first quarter were $8.8 million or 7.6% of sales compared to $6.7 million or 6.8% of sales in the first quarter of 2025. Interest expense net of interest income was $5.2 million as compared to $7.5 million in the prior year. Other income and expense this quarter included foreign currency translation losses of approximately $800,000. Free cash flow was negative $6.8 million in the first quarter of 2026 as compared to negative $20.6 million in the first quarter of 2025. As a reminder, the first quarter is typically our seasonally lowest free cash flow quarter. And although negative, this quarter's free cash flow results were actually slightly better than anticipated. As of March 31, 2026, we had approximately $55.8 million in cash and $215.4 million in debt, net of $4.6 million of unamortized loan origination costs. At the end of the first quarter, our net leverage ratio was 1.8, down from 4.0 in the prior year. And now for our outlook for 2026. As Pat stated, our Q1 stent graft results did not meet our expectations due to factors that could continue to impact our revenue in the near term, primarily softness in our international markets, particularly in the Middle East and timing of AMDS set sales in the U.S. It is early in the year, and we are working to mitigate or offset these issues. However, given the uncertainty around the timing and impact of those actions, we believe it is prudent to adjust our guidance. We now expect adjusted constant currency growth between 7% to 11% for the full year 2026, representing a reported revenue range of $480 million to $496 million. This guidance contemplates FX to have an approximate 1 percentage point tailwind on as-reported revenue for the full year. From a product line perspective, the reduction relates primarily to stent grafts due to the factors we've discussed. This guidance assumes inconsequential revenue from the U.S. NEXUS sales in 2026 as we seek value analysis committee approvals and build supply for an anticipated January 1, 2027 U.S. launch. As a reminder, growth in the first quarter of 2026 was anticipated to be higher than the remaining quarters, driven by the easier comps for the preservation services business from the prior year cybersecurity event. These flipped to difficult comps for the preservation services business in Q2 and Q3 before normalizing in Q4. We currently anticipate our Q2 year-over-year growth rate will be the lowest in 2026, followed by more consistent sequential improvement as our U.S. AMDS and U.S. On-X sales accelerate during the year and we return to normal comps for the Preservation services business in Q4. With these updated revenue expectations and excluding the impact of the planned Endospan acquisition, we now expect full year 2026 adjusted EBITDA to be in the range of $100 million to $107 million, representing a range of 12% to 20% growth over 2025 and approximately 100 basis points of adjusted EBITDA margin expansion at the midpoint of our ranges. Please note that this full year adjusted EBITDA guidance excludes any potential impact from the anticipated completion of the Endospan acquisition. Assuming the acquisition closes later in the quarter as anticipated, we would expect to incur approximately $8 million of incremental expense through 2026. This would include investments in launch costs and commercial infrastructure while also accounting for the absorption of Endospan operating costs, including ongoing R&D and clinical expenses. Given our expectation for immaterial revenue contribution from U.S. NEXUS sales in 2026, this incremental $8 million would be expected to reduce our full year 2026 adjusted EBITDA to $92 million to $99 million. Looking forward, we would expect the first meaningful revenue contribution to begin in January 2027 and we anticipate our combined results to be EBITDA neutral for the full year 2027 as U.S. NEXUS revenue ramps over the course of the year and as we get combined R&D and clinical spending into our targeted range of 7% to 8% of sales. Relative to the pending acquisition, we also announced today that we drew $150 million under our existing term loan facility. The proceeds will be used to fund the $135 million upfront purchase price for the anticipated Endospan acquisition. Assuming the acquisition closes as anticipated, quarterly interest expense would increase to approximately $8 million starting in Q3 2026 with Q2 2026 interest expense expected to be slightly lower than that. As a reminder, we also continue to anticipate paying a $25 million earn-out in the second half of 2026 following the anticipated mid-2026 AMDS PMA approval. With that, I'll turn the call back to Pat for his closing comments.

Thanks, Lance. Overall, we have near-term work to do, and we exited Q1 with greater conviction than even in our foundational growth strategy. We're excited to move forward with our pending acquisition of Endospan as the NEXUS platform stands to complete our market-leading Aortic Arch portfolio. We see PMA approval of AMDS as it's on track for midyear. Implant adoption for AMDS continues to build and our broader market expansion pipeline is accelerating to plan, particularly with ARTIZEN enrolling as expected, and our long-range growth thesis remains intact. More specifically, we expect future growth to be driven by the following four key growth drivers: Number one, the AMDS PMA. We're commercializing the AMDS in the U.S. under the HDE, increasing penetration of the annual U.S. market opportunity, with new clinical data, reimbursement dynamics and the PMA approval are likely to further be tailwinds for this growth. Number two, the On-X heart valve data. We're continuing to educate providers on the clinical data showing mortality and reoperation benefits in patients under 65 years of age compared to bioprosthetic valves and continue to expect this to translate into greater market share globally. Number three, we're pleased to announce that NEXUS is moving forward with our strategy and to acquire our partner, Endospan, following the FDA approval of NEXUS. This acquisition, if closed, will provide an additional near-term growth driver, position us at the forefront of this segment and significantly expand our pipeline with three additional PMA programs in development, extending our runway well beyond the initial approval. And finally, number four, the ARTIZEN IDE trial. We continue to make progress in our third-generation Frozen Elephant Trunk trial called our Arcevo LSA. This clinical trial represents an incremental $80 million annual opportunity. Finally, I want to thank our employees around the globe for the continued dedication to our mission of being a leading partner to surgeons focused on aortic disease. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from John McAulay with Stifel.

Just want to understand, I think, better on this guidance reset, what's exactly contemplated in it now? Because I think there's a few key assumptions in here. And the key one is exactly when AMDS receives PMA and then sort of more broadly, what kind of opportunity the PMA unlocks? And I guess the question of, is this truly conservative, adequate? Or how would you frame it in terms of, one, the expectations for when you get this AMDS approval? And then two, how should we think about the opportunity that, that approval unlocks in the context of the revenue ramp throughout the year?

Yes. Thanks, John. Yes. So, I would say a couple of things. One, there were two things that didn't go as planned in the first quarter, right? Number one was international stents were off, and that was mostly due to unplanned things. One was the Middle East and two was some supply chain challenges. Those are temporary, and we're working to fix those. And the second, as we pointed out, was the AMDS set sales. Those are the starter sets where the hospital has to buy four. We do think that the PMA will help. We've been saying all along that we didn't think the PMA was going to be that much of a difference. But the closer we get to getting the PMA approval, there's some bureaucracy and work that the hospitals have to do to get these IRBs in place. And with the PMA so close, I think that they're just going to wait. So we do think that will be helpful. So again, we're also working to knock down some of the barriers that we're seeing on getting these starter sets. The encouraging thing is that we saw, we were ahead of plan on the actual implants. So I think that's what we're working on right now is to make sure we can get access to these starter sets and working through that process. Lance, would you add anything there?

Yes. And then I would say we've been saying we expect PMA approval midyear. We still expect that. And then as far as what the guidance contemplates, I mean, it basically contemplates the trends we're seeing right now. I mean we're working to improve those, but that is probably going to take a little bit of time. And I think this is a prudent guidance given the trends we have right now.

Got it. That's helpful. And then I also wanted to hit on NEXUS here. So, you talked about working towards closing the acquisition. Just wanted to understand from this point forward, what you're doing as you work up to Jan 1, 2027 in terms of building out the commercial infrastructure from here, whether it be hiring and whatever else is required. So if you could just talk through sort of key next steps as you build to NEXUS, that would be great.

Yes. So, we're very excited about this NEXUS platform. As I mentioned in my comments, it's the third piece of the puzzle, right? It's AMDS, Arcevo, and NEXUS, and that really gives us a kind of a comprehensive portfolio for the Arch, we're basically going to have to do a few things to get ready. Number one, we've got to go with through value analysis committees. So, as you've experienced with us with AMDS, it can take 4 to 6 months. So, we're going to use that time while we're doing that to do two things. One is building inventory and two is to hire dedicated clinical specialists for that. The good news about this is it's a very different market than AMDS in that there's only probably 100 accounts that are on our list to begin with. These are very high-end, high-volume accounts. We know who they are, and we can cover that call point with not a lot of reps. So, we're going to start hiring reps. We've already got a couple, and we're going to start hiring more as we go through the value analysis committee. So that's really going to be the two main focuses once we close this transaction, getting ready for a January one launch.

Our next question comes from Frank Takkinen with Lake Street Capital Markets.

I was just hoping to get maybe a little bit more color on some of the reordering and versus maybe a plateauing of new accounts. Just trying to kind of really understand the concept there of is it a factor of really new accounts are starting to slow down or the reordering isn't yet occurring? Because it feels like we've had a really steep trajectory with some of the initial ordering patterns and then we're just waiting for the reordering? Or is it the new ordering starting to plateau?

Yes. Let me clarify. So we've started using this term starter sets, right, which is basically account that doesn't have AMDS. To get AMDS, they need to purchase four devices for $100,000, right? That is not kind of a normal practice. A lot of business will consign units or sell them lot of trunk stock. We are having hospitals they have to acquire four units. The other piece of the equation is the actual implants of the existing accounts. So those actually went quite well, and we're ahead of our plan. So, we're very encouraged and pleased by the adoption of the technology of the accounts have purchased. What we're working on now is we've got a lot of accounts out there that have AMD kind of in the queue, and we're working through trying to get the units on the shelf. There could be a number of different barriers, whether it's the IRB or just the 100,000 upfront purchase getting someone. So, we're working on programs to kind of minimize and need that anything.

No, I think that's, yes. So, I mean, in summary, there's the upfront $100,000 investment. And then every time that device gets used, they need to reorder a device. So, we call that the initial 1000 is a set sale and everything after that is implant sales. So, implant sales went great. They were actually ahead of our expectations and all the feedback we're getting on those is fantastic. What we're running into is some barriers into getting this upfront $100,000 investment for a number of different reasons. We talked about the PMA and the IRB. There's also financial considerations. So, we're putting things in place now to try and help overcome those barriers, and we think we'll see a reacceleration of that set sales.

I think the other point on that, the $100,000 upfront lands on a financial person's desk and can get stuck there for a while. I think the thing that's very interesting about this is with the DRG-209 for complex arch work, there's very strong reimbursement for AMDS. But as you know, it takes a while to get that information disseminated out to the account. So, we're also working on making sure they have good visibility to the publicly available information on DRG-209 and what that means to their procedural billing.

Got it. That's very helpful. And then maybe as a second one also on NEXUS. How should we think about kind of growth trajectory of this product? I know we've spoke about in the past that there's potentially a little bit more training upfront, but obviously, very novel, expect a strong growth trajectory coming out of that. So maybe how should we kind of think about that as we're looking at 2027? And then is there a point in time that you can see that $8 million incremental cost be kind of offset by revenue that you're thinking about as you're thinking about the ramp?

Yes. So, I think one of the things that's clear about this technology is that the vascular surgeons, they've got a lot of patients that aren't being treated right now because there's no option, right? These are patients that are too sick for cardiac surgery, and we now have a solution in the arch to treat those patients. They also adopt technology very rapidly because they really have had no, they've got a significant need. So, I think really, it's just the building blocks, right? It's like we've got to get through value analysis committees, which you're experienced with. We've got to train the surgeons. We've got to hire the team, and we've got to get the inventory in place. So, our goal is to really be ready to go by January one. And I think this technology has some real opportunity to drive growth for the company and also help a lot of patients along the way. So obviously, I want to get some cases under our belt. We know that the technology is very well appreciated. But we think it's going to do quite well. We'll obviously give you more information as we go into 2027.

Yes. Maybe a little information on the $8 million.

Just one other thing on NEXUS is different than AMDS, there won't be any set sales. So our revenue will come from implants only. And then on the $8 million, just a little more color on that. It kind of is broken up into, I would say, 3three pieces. One is some additional costs related to getting ready to launch the product that won't carry forward into next year. There is R&D and clinical-related expenses that are just going to be incremental this year. But as we roll into '27, we will make that fit into our normal 7% to 8% of sales. So it's not really incremental if you think about it from a '27 standpoint. And then there are some expenses, just run rate expenses of the sales force and some G&A that will carry forward. And we think that will be covered by the actual NEXUS revenue that we have in the U.S. in 2027 and make it EBITDA neutral overall. So hopefully that makes sense.

Yes. I think one other point, Lance, on the supply chain for this product, it's very different than AMDS. We're not making people buy it upfront. These are, AMDS cases are acute Type A, which is an emergency. So you have to have the stock on the shelf. Chronic dissections are elective. So we have plenty of time beforehand to know exactly which size devices, and we'll ship them into the cases that will get paid at the case. So there's really going to be no stocking of the shelves and have that be a limiter. We're going to basically be able to support cases one by one as they need them.

Our next question is from Bill Plovanic with Canaccord Genuity.

I just wanted to unpack the AMDS a little more in some of the commentary. So one of the challenges that's been brought up multiple times is starter set, and you mentioned strategies to get around this. Are you going to ship the product to consignment? Or is the strategy, you believe the PMA is really going to open up that? And is there a backlog? And I guess what I'm kind of really trying to think back to, are we through the early adopter phase and now we're getting into a broader customer base, and it's just going to be a slower ramp for new accounts? And then lastly, on that list is what was the growth of the core stent business if you back out the AMDS, like it used to be about mid-teens. Kind of obviously, the growth came off a lot this quarter. Kind of what was that kind of core growth?

A lot there. Yes. Yes. So I would say we have plenty of hospitals. If you step back when we set the plan internal, our expectations for the year, we had plenty of accounts on our target list to hit the numbers that we set out. And like I said, we were pleased with the implants, the ongoing implants were ahead of what we expected. So again, I think the challenges of getting into these hospitals this kind of upfront 100,000 purchase, we're not going to consignment. We could always have that be our last stop on the train, but that's not where we're going. We've come up with some programs to kind of address ways to address the barriers of this 100,000 upfront. We've got some programs for that. We also mentioned the PMA that once the PMA is out, there's no longer an IRB, and we think that's going to be very helpful. So I think it's just really getting these accounts to kind of through these processes is what we're working on. And that's harder to control that timing than it is the actual implant timing. Do you want to.

Yes. And then on the, we don't break out the details on U.S. AMDS revenue as compared to all the international stent grafts. But I think you can tell just by looking at the geographic growth rates, the international growth was much lower than we typically expect this quarter for the reasons we've discussed. And you can also look at the North America growth rate, which you have to normalize a little bit for the comps in easy comps in Q4 and Q1. But if you do that, the North America growth rate is pretty similar in Q4 to Q1. So I think that would all point you to the slowdown was driven significantly by international, but AMDS U.S. starter set sales were definitely below our expectations for the quarter.

Yes. And then kind of on that same topic is I think when we started out in the launch in the first quarter last year, talked about 140 targeted accounts. And I think it was like 600 full potential, and that was opening up over time. Can you give us anything on kind of what you feel the targeted number of accounts will be in total or where you are targeting today, kind of how far you've penetrated that? Just so we get an understanding of if there's 600 hospitals, are you in 150 or are you in 600 and then it's all resale from reuse from here versus starter kits?

Yes. that's a good question, Bill. I mean we haven't broken that out. I mean, I think I would just say at this point, we still have plenty of opportunity to sell starter sets. I think as we move along, we'll consider giving a little more detail on that because at some point, that the starter set is a onetime revenue thing that won't repeat, and it's the implants that matter the most long term. So we'll consider giving you a little more information on that later down the line, but not breaking that out at the moment.

Okay. And just on NEXUS, you're pushing it to a '27 launch. Is manufacturing scaled and ready to go? Or is that something you need to really invest a lot in as companies transition from PMA approvals to commercial, sometimes that can be a challenge, but I believe this is being sold in Europe. So I assume that commercial is scaled, the manufacturing, but I want to ask the question.

Yes. So I mean, yes, they're manufacturing today. So it's not like they're going from no manufacturing to having to start because they've been manufacturing, we've been selling the product in Europe for over five years. But we do need to expand that and then we actually need to build the inventory. I mean, as you can imagine, this company, they had an agreement with us essentially for us to acquire them upon PMA approval. They really had no intention of ever commercializing the product. They did not spend any money to build product for a U.S. launch like we would have if we had owned the business. So now there's a little bit of scale up, but mainly it's just, we just got to, these guys build the product.

Our next question is from Suraj Kalia with Oppenheimer

This is Shaymus on for Suraj. Just to start, I know we've kind of been hammering on AMDS, and apologies is going to keep in on that a little bit. But I guess, can you quantify kind of how many accounts are kind of deferring AMDS for this PMA approval? I mean, is this the first time you kind of called it out? Has this been kind of an ongoing trend you've seen and now it's kind of just coming more to ahead? Or anything on that? And just with that, should we expect kind of a bolus once you kind of get this PMA approval in this? Is it kind of been once they kind of get that $100,000 bill of the starter set that they say, 'hold on, we want to wait until maybe PMA?' Or just any color there you can give?

Yes. No. So let me take that. Like I said, we've been saying for, I think, pretty much every quarter that we didn't really see the PMA as a big catalyst for good growth. I think what's happened is what we've seen is, I'll give you a great example. We have to go to an IRB in a hospital and the surgeon has to take four hours of training. And surges like when are you going to get the PMA, it's like sometime in the second quarter. So they guys like, well, I'll just wait. I'm not going to do four hours of training for this IRB, right? It's just a practical thing. We do have a number of accounts. We're not going to get specifics on how many accounts are this, how many accounts are that. But we do see the PMA two quarters ago, it really didn't matter. But now as it gets closer, I think people are not wanting to do the work for the IRB, and we see that as an opportunity when it comes out, and that's contemplated in our guidance.

Got it. I appreciate that. And then kind of just on the cross-selling opportunities you guys have had with On-X via, it's been about a year. Obviously, you've kind of seen that. Any difference you've been seeing kind of in physician utilization for those? Are they kind of ramping up on a similar curve that you've seen for those that you've taken on? Or is it kind of just been something that kind of added to our portfolio, but it's been, I'd say, minimal at best?

Yes, it's a great question. I think it really speaks to our strategy. We are a valve company that treats patients under 65 with Ross and with On-X, and we're an Aortic Arch company. And if you think about our interactions, I just came from ATS. I met with 20 top aortic surgeons. They were involved in the PERSEVERE trial. They're involved in ARTIZEN. They were involved in the TRIOMPHE trial. So if you think about it, we're going to be, if you fast forward kind of go through even the next three quarters, we're training AMDS centers and we have these kind of AMDS trainings. We're going to have NEXUS trainings, and we bring the heart surgeon and the vascular surgeon. All of those events, we have ARTIZEN investigator meetings. All of those events are ways for us to continue to build our relationship with the aortic surgeons, both on the cardiac and vascular side and deliver our messages across all of our products, whether it's On-X for bioprosthetic, whether it's AMDS in acute Type A or whether it's NEXUS in the arch, it's very kind of complementary, right? It's all about the aorta. And I think the more we do, just the more powerful that we become. So, we're already seeing the cross-selling, but it's just going to get better because we're going to do, our first NEXUS training will have 25 centers with 25 vascular surgeons and 25 cardiac surgeons. I always go to present and we'll talk about AMDS, we'll talk about On-X. So again, I think it's just, we're surrounding the cardiac and vascular surgeon for the arch.

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Two from us. I guess you did touch upon it with NEXUS, but I wanted to know any updates as far as the commercial organization, both U.S., EU and perhaps Japan, W2s and 1099s as far as trends, puts and takes for, say, the balance of this year that we should anticipate.

And this is for NEXUS Jeff?

Well, you addressed NEXUS. I was thinking of everything else.

Yes. I mean I think, Jeff, same thing said that Pat talked about we're going to have to hire some specialists for NEXUS. But other than that, I mean, sales force adds would be, I mean, fairly limited across the globe and still highly leverageable with our focused sales force.

Yes. And just a couple of points on NEXUS, right? I think I mentioned earlier, our initial target is like 100 accounts. We can cover that with a pretty small team, a dedicated team because they are elective cases, and we can cover those out of kind of central locations. We do have, as part of this acquisition, we do have a relationship with a distributor in Japan, who's got a dedicated team on the ground and is very good. So, we've already got the commercial infrastructure in Japan. We just have to work through that approval process. And again, like I said, we haven't owned the company. So, we really are just starting those conversations now, but that's pretty well developed.

Got it. Okay. And as a follow-up, can we touch upon the tissue business. It was a strong quarter. I know it was extensively comp last year. But could you talk about that a little bit as far as any puts and takes or trends on the balance of the year? And maybe any commentary on cardiac versus vascular, loss procedures, et cetera?

Yes. Maybe I'll take that one on the preservation. I think we told people to kind of think about that as a $24 million a quarter business. We obviously did a little bit better than that this quarter. I think that's great. I would put that within the realm of normal quarterly fluctuations. So if it's a little bit less in the future quarter, I wouldn't read anything into that. As long as it's kind of in the ZIP code of that $24 million and averaging out to that to the year, that would be in line with what we expect. So this quarter was good. It would be great if we can keep that going, but don't be surprised if it dips down a little bit in future quarters.

Our next question comes from Mike Matson with Needham & Company.

I guess just starting with AMDS, I mean, I understand the commentary around consignment and these $100,000 sets. But I guess, why not put it on consignment? I didn't really hear you address that. Is it just tying up too much of your company's capital and the inventory that will be sitting on hospital shelves? Or is there some other reason that you're requiring the hospitals to have this big expense to get started?

Yes. I mean I think, look, you can always flip the consignment, you can never flip back, right? It's an emergency case. They need it on the shelf. It needs to be there. It's a differentiated product, has incredible reimbursement. And we think it's something that they should stock. And that's how we launched the product. We have a lot of accounts that have made the purchase. I think we just kind of hit a point where we're starting to see as we get further down the list, some resistance to that, that we had not seen in the past. And now it's just our job to overcome that barrier, right? I mean it's been great if we've seen it earlier. But now we see it. We have multiple levers that we're pulling to try and get over those barriers. And I'm sure we'll run into additional ones as we move along, and we'll come up with solutions for those as well. But we're not going to throw in at the first time of resistance. We need to work to overcome the barrier.

No, I was just going to say, I mean, to Lance's point, it's extremely compelling data. We have a device that can turn a non-malperfusion patient or malperfusion patient into a non-malperfusion patient, both in terms of mortality and restore blood flow. We have a device that eliminates in which carries a 20% difference in reoperation or 30% difference in reoperation at 10 years and a 20% difference in mortality at 50 years. I mean it's like super compelling data. It's an emergency. There hasn't been an innovation in the space in 50 years, and it's got the best DRG in the market. Like you should buy those, and we're working on it. So again, it's a fair point, but I think the most important one is like once you do it, like we ever started doing that in whatever field, like they never stop.

Yes, I understand. Okay. And then on the international issues in stent grafts, you called out the Middle East as well as distributor destocking in some of the other regions. So, can you, I know you're probably not going to quantify them in terms of dollars, but which of the two is bigger? Is it Middle East the bigger problem? Are they similar in terms of the impact?

Yes. It was about half and half. I mean, clearly, we didn't, we have a pretty significant business in the Middle East, and we obviously didn't contemplate what's going on there to have an impact and it did. We also had some supply chain things in the quarter that we weren't anticipating. So I think the combination of those two things was not something we had planned on.

Yes. Okay. And then the revenue guidance, the 7% to 11% organic, or sorry, constant currency, does that, what are your assumptions there about the AMDS sets and then the international stent graft sales? Is it, are you assuming any improvement? Or is it maybe like no improvement at the low end and some improvement at the high end of the range or something like that?

There's definitely some improvement expected for AMDS set sales. It's just at a rate that was lower than it was originally anticipated. And so I think rough numbers, if you want to think about the guidance reduction, think about half of that is kind of AMDS set sales and half of that is international stent grafts. And the international stent grafts is kind of split roughly evenly between the Middle East situation and the supply chain situation that we're working through.

Our next question comes from Danny Stauder with Citizens.

Just for my first one on AMDS, just on the reordering behavior. Good to see that, that was strong. But could you expand on any trends here? Why has usage been more than you expected? Are multiple surgeons utilizing at some of your larger accounts? Or just anything more here about what's going on or some dynamics would be great.

No, it's actually, it's a good question because I mean, one of the things that's really interesting, we knew it, but it's something that we're working on as well, which is typically, what happens is you have a surgeon come from an account who goes to the training program and he goes back and starts to implant. But then he starts to train his partners or his partner goes to a training program. So in a lot of these bigger centers, there's two or three or four guys that do these acute type A dissections in the middle of the night. And we trained in hospital, but there's four people that take calls. So we're also having to train more and more surgeons. So again, it takes time, but that's what I think we're seeing is that it's spreading in the accounts. So when we open account, if you have one guy using and all use, you get more usage. So we were pleased with the reorder pattern in the quarter was ahead of our expectations.

Great. And just following up on that, could you remind us if there's any different margin contribution from reordering sales compared to initial orders because gross margins were still pretty strong during the quarter despite some of the AMD starter softness. So just trying to get a hold of the dynamics here. And any more color would be awesome.

Yes, there's no meaningful difference in gross margin in both are also.

Our next question comes from Keith Hinton with Freedom Capital Markets.

Great. I just have one on On-X and then one on NEXUS. So for On-X, can you talk a little bit about the current usage, how that splits between younger patients and older kind of before this data came out and then where it is today? Yes. And then I'll follow up.

Yes. So we, unfortunately, we don't get like real-time data on like where the surgeon puts a valve and sends us a postcard and tells us how old the patient was, right? We just, we've got historical data of roughly kind of where our patient populations are. So real time, that's not something we have access to. I can tell you, just based on, like I said, I just came from ATS, there's lots of conversation about these papers that have been published showing a mortality benefit to mechanical valves in patients under 60 and almost a 20% reoperation benefit at 10 years in mechanical valves versus tissue valves under 65. So we're in the process of getting that data out, and we are definitely growing our share in the bioprosthetic space, which previously we had not. So I think that the fact that a lot of our growth is coming from kind of, when you say older, it's like 50- to 65-year olds because our focus is under 65, and that's really the segment we're going after.

Great. And then just on the go-forward plan for NEXUS, can you talk a little bit about whether there are plans to bring the Duo and Tre into the U.S.? And if so, what are kind of the regulatory steps required there? And then logistically, do you see it as an issue to have a custom-made product coming from Israel into the U.S. just in terms of lead times?

Yes. So a couple of things. It's obviously still early. We don't own the company yet. We're in the, we triggered our option. So we just have to do the kind of customary paperwork to close the transaction. But we've already been working with their team. We've got great collaboration across the two companies. So we are planning on bringing the Duo tray to the U.S. It will require, we have not met with the FDA on it yet. So this is just kind of my kind of spitballing, but it will require a clinical trial. It's a, we will have an off-the-shelf version. I think what's new is that we will have an off-the-shelf version, not a custom-made version. So that's, I think, some of the innovation there. So we're in the process of working on the timing of that, what that looks like, and we'll give an update on our pipeline once we've acquired them and digested it and are able to kind of come back to you guys with an updated pipeline.

We have an additional question from Bill Plovanic with Canaccord.

Just there's been some discussion on supply chain challenges, and it sounds like that is going to continue to impact going forward for the comments. So I was just wondering if you could unpack that and help us understand more of what exactly it is? What's the, have you ring-fenced the issue? What's the solution? And what's the timing?

Yes. So we're not get into a ton of detail, but I'd say we have ring-fenced the issue. It has somewhat to do with our supplier network, but we've got our arms around that. We feel confident about solving it, but it will take a little bit of time. And the time to solve it is what is contemplated in our guidance. But it's not, I'd say it's, we've moved on into execution of the solution stage, if that makes sense.

And how much of your portfolio does it impact?

It's not broadly across the graft portfolio. It's specific to a small number of products.

Mr. Mackin, we have reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.

Yes. Well, thank you for joining the call, and we're super excited about the Endospan transaction, and we'll be working to close that. And I think this is an exciting day for the company because it's kind of the final piece to the puzzle of our Aortic Arch solutions. We have AMDS approved with an HDE in the U.S. right now. We're hoping to get PMA in midyear. We've got NEXUS just got FDA approval, and you heard about our plans to launch that. And we've got ARTIZEN that's enrolling ahead of schedule, which is our next. We've got three PMAs in the arch, one approved, one about to be approved and then one on its way. So very excited in what that means for the company and appreciate your support as we continue to build this aorta company.

Thank you. This concludes today's call. You may disconnect your lines at this time. And we thank you for your participation, and have a wonderful evening.