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

Hi, everyone. Good afternoon, this is Travis Steed at Bank of America. And up next, we have AtriCure, Mike Carrel, President and CEO; and Andy Wade, Chief Financial Officer. Thanks for joining us here today for our virtual health care conference. And with that, I'll turn it over, and I think they're going to go through some slide decks. If anyone has any questions, you can ping me through the webcast, and we can go over those at the end.

Great. Well, Travis, thank you for having us here today, really appreciate it, I think all of those at Bank of America as well for inviting AtriCure to this conference. What I thought I'd do today is start -- my name is Mike Carrel, I'm President and CEO of AtriCure, and I'll walk through our deck, and as Travis mentioned, open it up. I'm starting on Page 3. They wanted me to make sure that I talked about the slides here. And so I'm on Slide 3. Before we kind of dive into the business, just wanted to briefly update everybody that knows us and our COVID response. We're very focused and feel like AtriCure, is both operationally, financially and strategically positioned for the long term. I think you'll hear a lot of that today, many of you may have seen that yesterday, we announced a financing, and we raised $175 million that really shored up our balance sheet and put us in a very strong position to be able to go after this market, both operationally and strategically over the next decade. That really did set us up. In terms of our COVID response and our response to, obviously, events that have transpired, we did talk on our most recent earnings call about the specifics of how we thought things coming back, but I thought it might be important before diving into our business. But I just kind of -- we bucketed things into 3 main areas. First was how do we take care and make sure the health and safety of both our employees, but also making sure that we're taking care on the customer side as well. We've taken all those precautions at our sites. People are working from home, like most others around the globe. And we are taking very good care to make sure that there are no issues in creating a safe work environment there. Number two is as we looked at our operations, we're continuing to do manufacturing. We have enough product to continue to deliver. We've got no issues in our supply chain. And we're providing case coverage and also online and interactive training for our customers, but also interactive case coverage and also in-person case coverage. We are beginning to see on the demand side, things begin to come back a little bit better. We much like most other companies saw a bad end of March and into April, like we talked about in our conference call. And we're starting to see every day and every week, this begin to come back and cases are beginning to book and patients are beginning to get the treatments that they need. On the expense management side, we have -- we executed cost-cutting measures where we are -- have looked at that. We cut out about $25 million or so without sacrificing anything on our strategic initiatives. And things such as delaying capital investments, hiring, reducing executive board compensation and limiting other nonessential and operating expenses have saved us upwards to $25 million, which really puts us in a position from a cash loss or from a loss standpoint, excuse me, an EBITDA loss, we had anticipated $10 million EBITDA loss, will be slightly higher than that for the year. But with these measures and with our anticipated kind of move, obviously, it's a little fluid on the revenue side, we anticipate we'll be close to that, maybe a little bit worse for the year. Moving on to Slide 4, which after we get through the COVID response, maybe a little bit about AtriCure. AtriCure is a company that is focused on atrial fibrillation. We are the only company in the world that is dedicated exclusively to this. And to give you a context of the size of the market, there are over 33 million patients globally that have Afib, and we are really focused on those that have the most debilitating forms of the disease. I'll talk about that here in a moment, but it's a multibillion-dollar market opportunity for us. These patients don't get the right care today. And we believe with data that we just presented last week or it was presented at HRS last week, that we have a differentiated technology and approach to anything else on the market, and I'll talk about that here in a moment. In addition to being going after a large market, so you've got -- you have to have a large market, lots of patients to treat and help out. We have a strong portfolio to bring to that market, a combination of great products, products such as our ablation tools but also clipping devices for the left atrial appendage, and we are the #1 player in that space worldwide with over 235,000 left atrial appendage devices implanted. In addition to that, we're the only PMA product that has been approved for the concomitant surgical treatment of Afib. There's nobody else in the market. We have a dominant share in that of 85%. And then in addition to that, we've also invested heavily in clinical trials. And I'm going to talk about 2 of those today that are really kind of game-changing and company-changing trials that we believe are going to move the needle for helping patients worldwide treat these most debilitating portion of Afib. Moving on to the next slide, 5, which is why does it matter? I mean, you've got 33 million people around the globe that have Afib, it's about 1.2 million every year that come into the system with Afib just in the U.S. alone. So this is a big patient population. And why do we care? Because Afib is a deadly disease. You've got a 5x more likely chance of getting a stroke, a 5x more likely chance of having heart failure if you have Afib, and you've got a much higher 46% greater risk of all-cause mortality. So it's a deadly disease. You progress faster in pretty much every other heart disease when you have this. And not only that, it's not easy to live with. So I'm going to move on to the next slide, Slide 6, to kind of talk to you about why -- how is AtriCure uniquely positioned. There are really 2 ways patients enter into the system with Afib and get treated. The first one is the one that is the core business that AtriCure was founded and started on, which is the surgical ablation. And that is concomitant with other cardiac surgeries, such as valve procedures or coronary bypass, also known as CABG procedures. In the United States alone, there are 300,000 patients that have cardiac surgery, of those 1/3 have Afib. Today, only 25% of those are getting treated. Now that is a vast improvement, though, over 10 years ago when 10%. And the reason for that is that we got our device approved through the FDA and a PMA, the guidelines changed, and we have moved that needle where we're now treating 20,000 to 25,000 patients per year. Now it also shows you that there's a big market opportunity on top of that. The products that get sold and worked in that area are our ablation tools and also our left atrial appendage tool that are all part of what is known as the Cox Maze procedure to treat these patients very effectively. That market in and of itself is a large market. I'll talk about the size here in a minute, but you get the sense that it's under-penetrated, and we've got many years of growth even with the guidelines there, and we are going to bring out new technology to improve the adoption of that from 25% to hopefully getting to 50% and 75% over the coming decade. The second way a patient enters into the system is that they don't have any structural heart disease. They don't need to go in for cardiac surgery, but they have Afib. And when a patient enters in with this, what they're typically put on as a medication platform first. If that does not work, which it doesn't work a large majority of the time, what they do is they wind up having to look at what kind of intervention could they do. How do we want to treat this patient? Well, that patient that comes into the system you have it on occasional Afib, which people call paroxysmal or you've got Afib called nonparoxysmal, which is you're in permanent or persistent, like this long-standing persistent Afib. You have it for a long time. We are not focused on the occasional Afib. There are catheter companies that do an exceptional job of managing that by isolating pulmonary veins and hinting on other triggers. They do a great job endocardially. It is a noninvasive procedure, and they do a wonderful, wonderful job of managing that patient population. On the nonparoxysmal side, they do attempt to treat it with the catheter today. But what we just did was a trial called the CONVERGE trial, which showed that if you use the catheter by itself and you compare that to our product plus the catheter, you get a better result. That's called the hybrid procedure. And we are -- it's the first-of-its-kind type product that is out there in the market today, and I'll talk in a little bit more detail about why that's exciting. This part of the market is about 70% of the patients. And the market is a multibillion dollar, very large market opportunity. Turning on to Slide 7, is to kind of show you how big that market opportunity is. To give you some context, I'll start with that last item, the stand-alone business, which is in the United States alone, there are about 150,000 or so Afib patients with catheter ablation. Some will say it's a larger number. It is a vastly underpenetrated market. And when you look at the 150,000 patients, around 60,000 of those patients or so are persistent or long-standing persistent Afib. Within that category, only about 1,800 or so are hybrid procedures. We believe that -- and we've shown it with our clinical data, that, that market just by itself, just existing catheters, if we can basically improve those -- the additional 60,000 less 1,800, so 58,000 or so procedures, that is a large multibillion-dollar market. And you would do an ablation and possibly even add an appendage management to that as well. That is called the Convergent procedure plus the AtriClip, could be added. We also have several other products that fit within this category as well. They can also expand the market and -- but again, it's a very large multibillion-dollar market. The U.S. concomitant market I talked about earlier, steady growth in this business for us. I talked about the sizing of the market before. When you do the math on it, it's well over $700 million to $800 million when you combine the ablation with the appendage management tools in that area. And then finally, a very unique area of our business that is upside, quite frankly, from my standpoint for our growth rate long-term is pain management. We got into this business by accident because we thought about people who were using cryo to ablate the nerves, the intercostal nerves to get people home faster and to reduce the pain they were having when they were undergoing Afib surgery. What we found was, so we got a label for reduction in pain, which that has worked, but it did not necessarily increase the amount of procedures on the Afib surgery side. But what it did do is it opened up a brand-new market for us relative to pain management in the thoracic space, which we believe is about a $350 million market. So in summary, it's about $2 billion in the U.S. over $3 billion market around the globe, and I think these are very conservative numbers. To give you some perspective on Slide 8 about kind of our history of strong performance as a company. Up until COVID, we had about 29 -- we had 29 straight quarters of double-digit revenue growth, consistent performer in that particular area with a 15% cumulative average growth rate over the last 5 years. We're proud of the track record of execution that we've had up until right now, it says $68.5 million of cash up until today, when we just finished the financing, we had $68.5 million, we just added $175 million to that. So we've got a very strong balance sheet to move forward with, and we feel very good on that front. In addition to that, we got steady gross margins. And as I mentioned before, we were planning on losing about $10 million. We'll lose a little bit more this year and then we'll progressively get closer to profitability and go through profitability over the course of the next 3 to 4 years. So we feel like we are in a very, very good position as a company. Given the uncertainty for the guidance, we, like most other med tech companies, have pulled our guidance for right now. But we've given kind of high-level macro guidance about how Q2 will not be very good. Q3 will be better, but not back to normal, and Q4 will likely be closer to normal as we enter into 2021. Now turning on to Slide 9 to kind of just give you a glimpse of the product portfolio we have. It's a robust portfolio of ablation tools. And the one that we're highlighting here, if you look at the EPI-SENSE device on the top, is the middle one that is part of the CONVERGE procedure. The cryoSPHERE to the right of that is the cryoablation probe for nerve blocks. And on the bottom, you've got all of the appendage management tools. And you can see the progression of less and less invasive over time till you get to over on the right-hand side, the percutaneous device called the LARIAT device of a company we just bought recently that opens up another big market opportunity for us. Turning on to Slide 10 is the CONVERGE overview, which is the big trial that we just finished and completed and was -- the data was announced in a scientific session at HRS on Friday of last week. It is a very unique trial in the sense that it is the only superiority trial designed to support the FDA approval for the treatment of persistent and long-standing persistent patients. There is one other trial, I should say, that is coming out in a year or so, which is our own aMAZE trial that I'll talk about. But this is the only one that has completely finished and the data has come out at this time. The way that it was set up was a multicenter prospective open-label trial, 2 to 1 randomization, 153 subjects. Duration of follow-up was 12 months and also 18 months are the 2 primary components of the endpoints. The endpoint was freedom from Afib, A-tachycardia and A-flutter, and there was a 3-month blanking period. Safety was to be less than 12%. So to give you some numbers before I kind of get into the data of how successful or not the actual trial was, I think it's important to understand just Convergent is not a new procedure. It's been under 510(k) and we are allowed to sell it as a cardiac tissue ablation tool. There have been over 10,000 Convergent procedures done to date. It is a safe procedure. And the Convergent trial was meant to show the efficacy of that and safety profile. We do about 1,800 or so of these procedures per year in about 100 sites today. But when you look at the penetration and growth opportunity, which I referred to a little before, you can begin to see that there are over 60,000 persistent and long-standing persistent patients just in the U.S. alone, we're in less than 3% of those cases today. On top of that, we are in less than 10% of the overall number of sites also. So the hybrid approach, this slide is meant to tell you, it's not new, but there is a huge penetration and market opportunity in front of us. Turning on to why do we run CONVERGE and why do we run this trial when we've got the 510(k). What we believe in order to really expand this market, we needed a label to go after this large untreated population. And we needed to have the data to prove it. And that is what this trial did. It is the highest level evidence with the only randomized controlled trial studying these patients, and it was no limit to duration. There are other trials that were single-arm trials that were showing even limitations on it. We had no limitations, and it was randomized, and the results of it were impressive. We achieved both statistical superiority and clinical relevancy in the primary endpoints. We completed the enrollment in August 2018. The final module was submitted to the FDA in end of 2019 and we just released the data, and we're working collaboratively with the FDA right now on moving towards an approval. So what did the data show us? These slides came directly from the HRS presentation, we met and we exceeded the primary endpoint here, CONVERGE effectiveness was 18% differential in success rate, which is both statistically and clinically relevant. In addition to that, it was a 35% improvement over the control arm. So you can see great improvement over here on the primary effectiveness. This is freedom from Afib, atrial tachycardia and atrial flutter. Now there are also some secondary endpoints. Turning on to Slide 14, converts primary and secondary effectiveness. I already discussed the one over to the left on freedom from Afib, atrial flutter and atrial tachycardia. Two other ones were freedom from Afib alone, which is the one on the right-hand side, which is almost a 20% differential or 38.5% improvement in a p-value of 0.017, significant improvement in that patient population on the CONVERGE arm versus the control arm. And then on the burden reduction, which is the one of the hot topics within EP, which is, how much burden do you reduce, the burden they are in Afib, and over 90%, meaning that they're in Afib or not in Afib for more than 90% of the time when they got that Holter monitor on, you can see another apples-to-apples comparison it is a pure comparison of the randomized trial between the control arm and our arm, and there was a 23.2% differential, which was almost 41% improvement, and the p-value was 0.007. So significant impact. We think that this is -- obviously, the superiority was achieved, and we're pleased with the results from the trial. Moving on to Slide 15 to discuss briefly the safety profile, the endpoint was to be at 12%. We were at 7.8%. We did meet the primary endpoint on that as well. And of note, there were no deaths, no cardiac perforations and no atrial-esophageal fistula reported in the trial this demonstrating that the trial is acceptable and good safety profile. So conclusions on the overall trial was it is the only multicenter randomized controlled trial for all-comers of patients. It demonstrated that the hybrid procedure is compelling on both safety and superior on effectiveness. The quality of evidence is higher than any other trial that is out there today. And it emphasizes something very important, which is the benefits of collaborating between surgeons and EPs which AtriCure has a unique position in the sense that we have relationships with both parties and once getting approval, we'll be able to kind of build out programs. Now the other superiority trial in the market, we happen to have as well that is called aMAZE. It is also a superiority trial. In the similar patient population. It is limited up to 3 years. It is for persistent and long-standing persistent patients. This is a larger trial, 600 patients, 65 sites, but it does measure the same thing, freedom for Afib at 1 year and that the arm is control arm as PVI alone with a catheter versus PVI plus the LARIAT to demonstrate what is the benefit of adding the LARIAT technology to the Afib, and we did finish enrollment in that trial at the end of last year after acquiring SentreHEART in August of last year. And then the final patient we anticipate seeing in March or April of 2021, and submitting to the FDA kind of in the beginning part of the second half of 2021 as well, expecting a PMA sometime in 2022. What's exciting about this is you can begin to start to see catalysts in our business, starting with CONVERGE, moving to aMAZE on top of a core good business that we have. Moving on to the next catalyst in the business longer-term is our cryo nerve block for pain management. I described this previously as a $350 million market opportunity. We launched this probe in the beginning of 2019. It is for pain management during thoracic cases think lung resections and other areas like that. It works incredibly well. Data was presented at the STS this year, showing that these patients can recover more quickly, and they can reduce the number of narcotics to take when they do this. And it is something that we believe has the potential to really change the way treatment is happening and patients benefit tremendously from this as well. So big market opportunity and patients benefit a great deal. Finally, on Page 19, kind of pulling it all together, you get the sense that we've got a lot of good catalyst building on a foundational business. Our foundation business is a business over the last 29 quarters, is a double-digit revenue growth prior to COVID. We are able to execute. We've invested heavily in bringing new technologies with a robust clinical engine as well behind it with 2 randomized controlled trials for data for the most complicated to treat and largest patient population. On top of that, we've built an education platform that is second to none, and we have a commercial team that can support people in the field with over 200 people around the globe supporting these cases and making sure that they are doing the effective and right treatment. With that, what I'd like to do is turn it over to Travis, if there are any questions.

Sure. Just kind of asking around the recovery of procedures, kind of more -- both near-term and what you're seeing in different geographies? How quickly you think some of these procedures are going to come back? And what you think is going to be different at the hospital? Any kind of any thoughts on different scenarios of how you're going to think this year could play out?

Yes. And we anticipate -- what we talked about on our conference call was that we anticipate that April was a bad month. We told everybody that was going to be the case that we then thought May would be better. We're starting to see that where we're getting more case volume. Things are beginning to recover specifically in cardiac surgery where patients can only be pushed out so far. They're not going back to normal yet. They're adding more cases, opening up an OR this week and then in the next we'll open up a second OR. So you're beginning to kind of see the pragmatic slow-growing back. We anticipate Q2 to be progressively better through the quarter, but overall, a very light quarter. Moving into Q3, where it will continue to get progressively better as they're learning, how they're managing the hospital and making sure they've got enough beds available for COVID patients if they ever going to research on it in some way. And then we do believe that by sometime in Q4, we'll be able to kind of be back to normal as we exit and go into 2021. Now obviously, if a research comes back, we'll have to address it at that time. But everybody that we're working with is really kind of building towards that but also taking the precaution with, we know, it's a fluid situation.

Right. And then kind of more longer term, just kind of curious how you think this is going to impact the health care system in hospitals overall over the next several years structurally?

I mean, I think that -- I mean, it's obviously putting financial pressure on a lot of the different hospitals. Each hospital has got a different -- I don't have a macro stance on that per se. Most of the hospitals we're working with are doing a great job of treating their patients like many that are out there saying thank you to them. We say thank you to the health care providers on that front. I do think that they will come back and survive. And -- but I don't know that I know specifically how it's going to structurally change things. I don't have a good perspective on that.

No. That's fair. You did just raise, I think you said $175 million. It sounds like you've got your balance sheet kind of where you want it to be, even if some negative scenarios play out. Just curious to talk about maybe some of the expense management that you have opportunity for fixed versus variable cost and potential does to think about the cost structure if things turn out a little more negative?

We've already made considerable cost moves in the business, taking out over $25 million in the business to make sure that our loss wasn't much worse than we had already anticipated. And we've already achieved that through everything from travel to pushing out projects, but we have not sacrificed any of the major strategic initiatives that I talked about, such as the CONVERGE launch or the aMAZE or a new product called EnCompass. So we're in a very good position. We're still investing in those areas but we have taken out a lot of other nonessential costs. And we're managing it every day. I mean, obviously, depending upon where revenue comes in, that's going to play out when we begin to open up hiring again. But right now we are not hiring.

Yes. And then just going to the data that you released last week at HRS, any feedback that you've heard so far from the field? Or how you think that's going to change the progression of the business?

Yes. I mean, so far, we've heard -- I mean, what we've been seeing out on in the Twitter world and et cetera, as the EPs are out there talking about it and giving Dr. DeLurgio feedback. It's all been positive. Everybody looks at the data and says, that makes a lot of sense. That managing the back wall with an ablation, can improve it quite a bit. I think everybody is impressed by it. And it's definitely doing exactly what we might thought it would do, which is generate conversation amongst physicians at that point. We're not actively engaged in those conversations until we get the FDA approval. And so our team is more watching from the sidelines as the conversations are about the data. And then once that data -- once we get the approval, we can kind of get more actively engaged in that.

All right. Great. Unless there is anything else that you want to leave us with, I think we'll end it there.

No. Just thank you for inviting us, and appreciate everybody's interest. Have a wonderful day.

Great. Thanks a lot for joining us, and have a great and safe day.

You too.