AtriCure, Inc. (ATRC) Earnings Call Transcript & Summary

Hi, everyone. Thanks for joining us today. My name is [ Lilli Lazada ]. I'm part of the Medtech equity research team here at JPMorgan. After the presentation, we'll be having a breakout session in the Sussex room. And without further ado, it's my pleasure to introduce AtriCure's CEO, Mike Carrel.

Hello, everyone. I'm Mike Carrel. Thank you, JPMorgan, for having us here and -- on a lovely Thursday morning. So it's been nice all week, for those of you that are online. But today, it's not so nice with the rain. I'm Mike Carrel, President and CEO of AtriCure. I'll kind of talk to you kind of about the exciting things we've got going on in our business. As you can see from just looking at the first slide is really what we've been doing over the last 10-plus years is creating a platform, a world-class platform for atrial fibrillation. That is what we do. That's what we're about. I'll talk a little bit about the disease and kind of how we approach this state. And obviously, we'll be open for questions later on. And what was the room?

Sussex.

In the Sussex room. Excellent. So forward-looking statements. So why is Afib so important. I mean this is what we're focused on. It's an epidemic around the world. Many of you may or may not know this, but I am guessing that if you're talking to your family or friends, your parents, you probably know many people that have Afib because there are over 33 million people around the world that have this, 6 million patients in the United States alone, and the incidence of Afib is only growing. Before I got involved in this field about 7.5 years ago, I knew 1 person that had Afib and it was my mom. And it's actually the reason I joined AtriCure was to really kind of help with this epidemic, especially those that are suffering from that really debilitating late-stage aspects of Afib. Why is Afib bad, though? I mean okay, your heart doesn't work properly. It's not pumping properly. You're not getting enough oxygen, but what is the impact to you? Well, first, I always like to say, Afib is a lot like cancer. In fact, there have been studies and shown that if you get Afib, by the time of your diagnosis, you are actually more likely to die within 5 years of Afib and/or some complication related to it than you are with about 50% of the cancers out there in the world today. So as I said, it is a lot like cancer. It's a progressive disease. And it affects 33 million people around the globe. But what does it do to you? Number one is that you've got about a 5 to 6x more likely chance of having a stroke, and these are debilitating strokes if you have Afib. On top of that, if you know anybody that's got Afib, ask them what their activity level is, their quality of life is awful. And it helps contribute to other heart failure and other disease states that are out there. So Afib is bad. Risk of stroke, bad quality of life and you're likely not to live a very long-life if you've got Afib. It's also a problem on -- in addition to that, on the health care system. Because many of these strokes, when you have a stroke, they're debilitating seriously. These people don't go back to work after that. They go into homes. They need to be cared for. And they've got an even worse quality of life, and they put a lot of cost on to the health care system as well. So it's a bad disease, causes lots of problems, and it's one of the fastest-growing areas in the space. Now the way that we at AtriCure, think about Afib is really there are 2 distinct profiles for the way patients enter into the system. We're a very patient-focused company. You think, okay, how does somebody with Afib get diagnosed and then get treated eventually? And these 2 distinct profiles are incredibly important in analyzing and looking at our company. So the first profile of that is that -- and really the founding and where this business started, is that you've got really sick patients that already have some other cardiovascular disease and are going in for heart surgery. These are patients that need their mitral valve replaced or repaired, their aortic valve or they have coronary bypass disease and they're going to go in for what they call a CABG procedure. In the United States alone, there are 300,000 patients alone that go in for cardiac surgery procedures every year. And there's all sorts of talk you go into different rooms throughout JPMorgan and they'll say, "Well, isn't it going down?" No, in fact, cardiac surgery has been growing about 1% to 2% every year because of the nature of the patient population, everybody is aging. You've got baby boomers that are kind of hitting that age. And it's actually those that are going in for surgery are even sicker patients than they were 10 or 15 years ago because stents have allowed people to do well. But eventually, cardiac surgery is going to be necessary. Now 1/3 of those patients, 1/3, so about 90,000 patients in the United States alone that are going in for cardiac surgery, have Afib. And there are proven treatments at the time of surgery to treat those patients. And in fact, we are the leader in that space. You can do what they call a Cox-Maze, which is you create a lesion sit on that part at the same time that you're treating the rest of the heart, and that patient can get treated, and we're the only PMA-approved product in that space today. We've got about 85% market share in the U.S. and that sounds all really good. But of all those 90,000 patients, only 22,000 are getting treated today. So when you think about the market opportunity in the patients we're not treating, we still have a tremendous amount of growth in this part of our business. You'll hear us talk about this as the open or concomitant, we call it open because they used to do it a lot and a lot of times you did it through the open chest, but a lot of times now you do minimally invasive surgery, and you can use our products during that as well. So your first patient is going in. They have to go in for cardiac surgery, and they also have Afib. It's an underpenetrated market, a very fast-growing market for us to penetrate that market and the guidelines tell you, you should and must treat that patient. That's opportunity #1 for AtriCure. It's an opportunity we've had for a long time. The good news is that we've grown it from 10,000 cases about 10 years ago to 22,000 today. Now the next marker is how do we get to 50,000 and get to all 90,000 over the next decade plus. So opportunity 1, that's kind of one way to think about how a patient gets into the system. Opportunity 2 is that the patient has Afib, but they don't have any other structural heart disease. They don't have any other really major issues that are going on for that patient. They've been diagnosed with Afib. And in this case, the triage is a little bit different. Because it really is important to understand what type of Afib does that patient have? I talked about cancer earlier and Afib being a lot, very similar to cancer. It's really important to kind of think through this because an early-stage Afib patient can go through a different treatment algorithm than a later-stage Afib patient. So if you just start with numbers in the United States alone, you've got 6 million patients in the United States that have Afib that get diagnosed. Of those, about 50% can take drugs really well. So you've got 3 million patients left that the drugs do not work. And when the drugs don't work, you look at what type of Afib do they have. Catheters, you'll see companies like J&J, wonderful companies, Medtronic, Abbott. They've got great technology for that early-stage Afib. That's about 30% of the patients. 70% of the patients fall into a different category called persistent or long-standing persistent Afib, meaning the heart has gotten sicker. You've had it for longer. The heart's gotten larger, using a small catheter by itself does not work. We at AtriCure focused on that patient population. It's over 2 million patients that are drug-refractory in the United States alone, 2 million patients, and that's the patient population that we're going after. And the way that we treat it is that we combine our technology with the catheter-based technology in what's known as a hybrid stand-alone-type solution. Last year, we treated like 3,000 patients. So we've just scratched the surface. Why? Because we're under a 510(k). And the opportunity are the different trials that I'll talk about here in a little bit about how big that market can be for us. So that leads you to -- how big are these markets? So that last market I was just talking about, in the United States alone, realistically, if I just took those 2 million patients and multiply it by the number that you get per procedure, you're talking about a $15 billion, $20 billion market. That doesn't make sense. Obviously, you can't treat 2 million patients every year. So we look at it and say, well, how many catheters are going -- how many catheter ablations are happening in the United States? There's about 150,000 catheter ablations for Afib. Of those, a little bit less than 50% are for this sicker patient population because they're trying to do something for that patient. If we could attach ourself to some aspect of just those, not even the ones that aren't getting treated or diagnosed yet. You're talking about a $1 billion to $1.5 billion real market today that is growing every single year. The market is growing at 10% to 15%. Remember, we're only doing 3,000 of those cases today. Which is why we've invested heavily in clinical data and clinical trials so that we can actually get a label for this very specific market that nobody in the world has a label for today. The concomitant market I talked about earlier is about $700 million to $800 million market in the United States. And then we have a third part of our business. It's incredibly exciting, which is pain management. I'm not going to go into too much detail today about pain management. But pain management is -- we have an opioid epidemic in the United States. We tried many years ago to improve people going in for Afib surgery because it was complicated and painful. We thought that while people are using cryoablation to ablate the nerves and reduce hospital stay. We thought, "oh, that would increase the amount of patients that would get treated." What we learned was, it didn't have any impact on the number of patients that were treated. But it did spawn off a brand-new business for us in the thoracic space because there's 140,000 cases every year and thoracic surgeons that are doing lung resections and rib plating and other areas are using this in order to reduce the pain and reduce the amount of time they've got to spend in the hospital. So we're in big markets that we're going after, multibillion-dollar markets. And what I just showed you was just the United States. Multiply that by at least 2 to get kind of a global perspective. So how well have we been performing as a business? Just to give you some context to that. The way to always think about AtriCure, the way that we approach the market is that we are a consistent double-digit revenue growth business. We've had 29 straight quarters of double-digit revenue growth, very consistent. Our cumulative average growth rate during that period of time is about a 15% CAGR. You can see this past year, we just did about $231 million in revenue. It was about a 15% growth on a constant currency basis on a year-over-year. So you can see that we've had great growth as a business. But as important as just having solid growth has been -- that it's been consistent. And as we look into the future over the next 5 years, you'll anticipate similar, consistent double-digit growth. And as some of these trials, I'm going to talk about, kick in, we will begin to be able to accelerate that growth rate as well, because these trials are going to allow us to go after that multibillion-dollar MIS market that I was referring to before. And on top of that, not only do we have a strong growth profile, we've continued to improve our gross margins as we've leveraged and gotten more scale in the business. You can see back in 2015, we were just under 72% gross margins. We're approaching the 74% gross margin and on our way to getting over 75% over the next several years. So making really good progress on the gross margin line as well. We've got a strong balance sheet, not in need for cash to operate and grow this business. We raised money in October of 2018 to really kind of operate and fund this business as we go forward. This year, we have predicted that we'll do about a $10 million loss. I get asked the question, well, are you going to be profitable? When are you going to be profitable? We did an acquisition, which I'll talk about here in a moment, last year, that business was burning through about $17 million a year. We're going to lose about $10 million. So without this acquisition, we actually would have been profitable and be predicting profitability, really good profitability in 2020. With the acquisition, it pushes us back a little bit. But it's for a multibillion-dollar market that we're going after. And we thought it was a well-worthed investment for us to make. We've got a really -- a strong suite of products. I won't go into every one of our products, you can see these on our website, that actually treat the Afib. It's a combination of ablation. And then we also have tools to treat the left atrial appendage and you -- we do most of ours all concomitant. So you put the appendage product on, whether it's a clip or the product we just bought called LARIAT. You'll actually combine that at the same time that you're doing cardiac surgery or an ablation procedure as well. As I mentioned earlier, we've got many clinical trials. We are a big believer in clinical data. The way we win in the market is that we create and add more innovative products than anybody else that's out there. We're continuing to put new products on to the market. But on top of that, we invest in clinical data to really build significant differentiation for the long term. If you look at most companies our size, they're not investing in 4 IDE trials like we are. I'm going to focus on 2 today. Some of the trials that we do are more sustaining. So we've got several, you can see on here, DEEP and our ICE-AFIB trial are in markets that we're in today. They're really about sustaining the kind of growth rates that we see within that market to get additional labeling that's really important to kind of invest in that space. And then we have market-changing trials which are going after new markets, new market creations, billion-dollar market opportunities and naturally CONVERGE and aMAZE, those top 2 trials, and I'll go into some detail here in a minute. So first, let's talk about CONVERGE. This is the question. I've been meeting with investors in the last 3 days. This is all I'm getting asked on. It's a trial that we basically -- we bought a company back in 2015 called nContact. And when we bought them, well, there were 19 patients that were enrolled. It was a 153-patient trial. It is a superiority trial. That's what we need to look for. It's a randomized controlled trial. The first of its kind. And quite frankly, the only one in the market today. Nobody is even trying to do this trial to go after that most difficult patient population, 70% of the Afib patients have persistent and long-standing persistent Afib. The catheters do not work in most of those procedures. We're comparing our technology, which is a hybrid, combining the catheter with our EPi-Sense technology versus the catheter by itself. We enrolled that trial. Completed enrollment in August of 2018. We submitted everything to the FDA on December 31 of this year. And we anticipate -- and we will be going for a late-breaker to bring out the -- what the results look like at HRS in May of this year. This will be, and we believe is going to be, a market-changing-type trial because it's going after a patient population that is not being served. And there are no other trials that are out there today that are trying to get the same type of label. What you're going to look for and what you're going to want to see is, did we achieve superiority? That's what you're going to want to see when you see the results come out at HRS. And hopefully, we'll get a label by the end of this year. Typically, it takes 12 to 14 months from the time of submission through the FDA process, if you look at kind of their average timing for it. And so we're really excited about this trial to go after that long-standing persistent patient population. And again, we're the only ones in the world that are focused on this space because the next trial is going after the same patient population, which is adding an appendage exclusion tool to it. So we bought a company last year called SentreHEART, had a trial called aMAZE on their product called LARIAT. So when we talk about the aMAZE trial. This was a 600-patient trial, randomized controlled trial. It is also for persistent and long-standing persistent atrial fibrillation patients. Again, these are the only 2 trials that are out there that are going after that very difficult-to-treat patient population. What this trial is trying to show is, again, superiority. These are the most difficult trials to run. Most people will not run trials like this. Superiority in this case is catheter plus the LARIAT technology, which excludes the appendage versus the catheter by itself. And by doing that, can you reduce the Afib because it is known that about 10% to 15% of Afib originates either at the base and around that appendage or within the appendage. So the goal here is to show that this is, again, additive. We're not out competing against the catheter companies. Both of our solutions are complementary and additive and help grow and expand the overall market and patients that can get treated today. This trial, to give some timing on it, is that we bought the company, expect the enrollment to complete in the first quarter of this year. We actually completed enrollment in December upon buying them, accelerated the growth. This company gave us access to its 55 sites that enrolled in the trial. These are EPs, building out our EP sales force, building out an EP contact that we had started with CONVERGE, and this really kind of accelerates some of that. Timing on it is that the final patient came in, in December of this year from an enrollment standpoint. We will have follow-up on those patients in March of 2021. We'll submit to the FDA and anticipate an approval sometime in 2022. So when you think about what this company looks like over the next 5 years, we have consistently, for 7 straight years, delivered strong double-digit revenue growth, and we've got 2 major market-changing catalysts coming down the pipeline in the next 2 to 3 years that really change the trajectory of both the profile and the markets that we can go after. And are we ready for it? So that's the next question is that, are we going to be ready for these market-changing events that are going on. We've built an incredibly strong sales force and infrastructure. We've got over 150 people in the field today. We've actually got a dedicated MIS team when we combine what we had with LARIAT team and also the MIS team we've had in place. I get asked the question, are you going to have to go double, triple the size of your sales force upon getting these approvals? The answer is no. We've been, over the last 3 to 4 years, building these teams out, building their knowledge base, building their capabilities to understand how to operate and talk in the EP lab, understanding how our technology makes a difference. And so we have the field team already in place. And yes, we're going to add some incremental. So we're at about 30-or-so people that are dedicated in this MIS kind of EP space, and we'll be adding likely about 10-or-so people this year that we'll continue to train. So we'll exit this year close to 40 people in this area that are going to be ready for CONVERGE and then ready for LARIAT a couple of years later as those get their approvals and the PMA approvals in the market. So we are absolutely ready on that front and excited to kind of bring this technology into this field force. They are a very clinical field force. They understand these procedures incredibly well and they're getting cross-trained across the 2 different groups. So just to hit on some of the highlights that we had just in 2019. Again, it was about 14.4% on a GAAP basis and 15.2% constant currency growth. 16% just in the fourth quarter alone. Again, 29th straight quarter with double-digit revenue growth. The area that we focus on as a business internally is that we've served about 90,000 patients this year. And we have a product that manages the appendage called the AtriClip. 50,000 patients were treated with an AtriClip in 2019 alone. We've got over 220,000 AtriClips implanted in patients since the inception of that device over the last 8 or 9 years. It's the #1 product for left atrial appendage in the world in terms of units implanted, and that number continues to grow every year. As I mentioned, we acquired SentreHEART in what I believe is a market-changing acquisition as we think about the next 5 years. cryoSPHERE is the product for pain management, another several hundred million dollar new market opportunity for us. We also achieved electrical isolation, which is exactly what LARIAT is going after on -- in -- for the left atrial appendage. And we've done many other things in terms of just investing in the clinical trials, et cetera, in the market. So when I think about AtriCure, we've been working at this for a long time. We've got a solid base of a business today at about $231 million in this year, growing at 10% to 13% is the guidance for next year. And we've got real catalysts that are coming down the pipeline over the next 5 years. So I think it's a pretty exciting time to be part of AtriCure. I can tell you that the team at AtriCure is really excited about what the next 5 to 10 years looks like, given the clinical data coming down, the new products that we've got in development and the pipeline, I think, is as good as any medical device company our size in the marketplace today. It's a really exciting place to be a part of. And these are big, big markets that we're going after. So just in summary, strong double-digit revenue growth company, 2 significant strategic acquisitions that are about to pay significant dividends to shareholders and patients around the world. AtriCure's got about 730-or-so people in the business. That number, obviously, continues to grow. We've got a strong gross margin profile, and the markets we're going after are not small markets. We're talking about $3 billion-plus market opportunity, and I could argue much, much, much larger than that. Thank you for your time today, and I look forward to answering some questions later on.