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

All right. Good afternoon, everyone, and thank you for joining us on day 1 of the Morgan Stanley Healthcare Conference. My name is Calvin Chu, and I'm part of the Morgan Stanley medtech equity research team. It's my pleasure to have with us today Mike Carrel, President and CEO of AtriCure. Before we begin, here is our disclaimer for the event. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, Mike, thanks so much for being here with us today.

Great to be here.

So perhaps for -- if we just want to kick off for investors that aren't as familiar with AtriCure, can you maybe spend a minute just walking through the story, the business and perhaps where AtriCure fits within the broader Afib space?

Sure, yes. I mean AtriCure is a business that is focused and has always been focused on eradicating Afib as a disease. That's really kind of been our focus. We've historically been around doing ablation devices. We started out doing them during cardiac surgery, so a lot of our tools were made in our cardiac surgery. And we're the #1 player in the world in treating Afib during a concomitant surgery, meaning when you're also undergoing some other form of surgery like a coronary bypass or a valvular disease, whether it's repair or replacement. We've also extended that into hybrid therapies where we're kind of working in conjunction with many of the large catheter companies. And our products actually work in concert with them to treat the most difficult-to-treat patients, in particular, these patients that have had Afib for over a year. And we are focused on that with other ablation devices and tools. You hear about things like Convergent, which is really like converging the 2 technologies together to treat that patient even better. And then on top of that, we've actually extended our reach and gotten into the pain management space. There's an opioid crisis in our country, actually in the world in many different areas. And pain is a big part of coming out of any kind of surgery, in particular, a thoracic surgery. And so we kind of got into that because the cryoablation tools that we made for Afib worked incredibly well at treating pain after those surgeries, and they really helped alleviate some of that pain. So we've established a new business. There's really upside for many investors in that cryoablation and nerve block space. So that's kind of in a nutshell in terms of who AtriCure is. We're about 750 people globally. We have offices in the United States, in Hong Kong, in the Netherlands. And we cover places all over the world. About 80% of our business is in the United States. And we are really committed to doing clinical trials to achieve a lot of success we've had.

Awesome. That's a very helpful overview. So if I may just dive into obviously the top of mind for everyone, which is sort of near-term COVID-19 trends in recovery, I think on your latest earnings call, you have commented that July trended slightly worse sequentially from June driven by sort of impact from research and hotspots in Florida, Texas, Southern California. Just as you stand today, have things improved sequentially in the month of August and perhaps even September to date based on what you've seen since the earnings call?

Yes, I mean I'm not going to give specific comments about AtriCure in the sense that, not to update my guidance, I feel really comfortable with the guidance that we gave back then in terms of how the back half of the year might unfold. But I will give maybe some context to some of that, really, if you think about the 3 macro markets that we're after and that we serve. So first is the electrophysiology space electrophysiology space in our conversations and what we're seeing in activity is that, that space is pretty much back to COVID levels -- pre-COVID level, I should say. They're very, very busy. They're not taking up ICU beds, so it really enables them to be in a good spot to get those patients in and get them through pretty quickly and not have to worry about taking up resources in the hospital. On the cardiac surgery side, they're really -- depending on who you talk to, they are anywhere between about 75% and 90% of pre-COVID levels, and they're marching their way back. Obviously, there was some impact, as you mentioned earlier, with the fires a little bit but also the COVID kind of uptakes in the July, August time frame in Texas and Florida and California. We've seen those places come back as we had expected after kind of a 2- to 4-week hiatus in some of those hospitals. But pretty much everybody is back up and running now. And I would argue that you're basically sitting at about 75% to 90% overall.

Got it. That makes sense.

And then our third market really is Cryo Nerve Block, which is a brand new market. It's small, but it's really going after the thoracic space. In particular, it's going after patients that are undergoing long resection surgery for cancer patients. That has not changed. And that business is continuing to stay because they're not taking up the ICU beds, much like cardiac surgery, where they do take up ICU beds and they want to make sure they're keeping a certain number of those kind of to decide as COVID kind of comes in.

Got it. That makes perfect sense. And I do want to dive into the Cryo Nerve Block product in a little bit but just wrap up on this topic. Obviously, so it remains hard to predict, but if absent sort of another resurgence this fall or in 4Q, you think 4Q can return to normal like you previously expected?

I mean I don't know at this point. I mean I think that obviously -- I think that, as I mentioned, the cardiac surgery is at about 75% to 90% overall from where they were before. They're starting to get their volumes to be more consistent. So sure, if everything comes back to being consistent, we could absolutely be in a good place on that front.

Awesome. All right. I just want to quickly touch on your thoughts on maybe post COVID-19 and 2021 before we dive into some of the business items. So I know you guys are obviously not providing guidance here, but just any thoughts on how we should think about perhaps 2021 revenue using 2019 as a baseline, sort of what percent of 2019 revenue could that be. Could it be materially above 100%? Or how are you thinking about that?

I just think it's too early to tell. I think people that are -- I mean for us right now, we're not giving guidance for 2021. And matter of fact, we wouldn't be giving guidance here. Our perspective is that I think we're in a really good position that as things return, we're going to be able to return along with them. And we've got our team in place. We're supporting cases. And things have returned in most places, as I mentioned, close to 90% in many places around the country. But as we look at 2021, we've got a lot of major catalysts coming out in the business that are really accelerators for us for the next 5, 10 years, things like the CONVERGE approval that will be coming down fairly shortly, hopefully. You've got on top of that the aMAZE trial that will be reading out sometime late next year. We've got a new clamp that we have for our Open business and then the Cryo Nerve Block that we talked about before. These are major catalysts that are going to -- we will be able to have growth about this year, obviously into next year, and then continuing to accelerate through '22, '23 and '24 with all the major catalysts we have with our business. But to give a specificity around 2021, I think it's just too early.

Yes, that makes sense. So that's actually a wonderful segue into the next topic, which is the CONVERGE trial. Obviously, it's a key focus for you as well as for investors. You have said you're operating under the assumption that there will be an FDA panel. But given COVID and everything, it may be unlikely the panel gets sort of scheduled for this year. So as I understand, your -- the HRS data came out there strong across sort of efficacy and safety endpoints. So do you think it's likely at all that FDA may just decide to skip the panel all together given COVID and everything and then the fact that the data are very strong thus far?

Yes, I mean you're right, the data is very, very strong and compelling on multiple different fronts every way that you look at it. But I do -- I've always said, even before I knew the data, I've always thought that we would go to panel. The reason for that is because we're really setting a bar for the long-standing persistent patient population. There are no trials ongoing that really represent and are looking at that greater than 12-month basis. There are catheter trials going after kind of that earlier persistent stage less than 12 months. But that really big patient population, that is the long-standing persistent, there's nothing there. And we're moving from a 510(k) to a PMA. And I believe that if history is anything, if you look back, products that have moved from that typically go to panel. And I'm not aware of any that have not. So from our standpoint, we believe that it's going to go to panel for that reason. We know the data is great. So we're doing everything we can right now to answer all the questions so that when we go to panel, it's actually a pretty smooth panel and really easy, and there aren't really any major questions to ask. It's really as much of a belt and suspenders because this is going to be the standard of care, everybody is going to have to mark themselves up against when they look at this really difficult-to-treat patient population that is a really large patient population out there.

Yes. All right. That's very helpful. So that makes sense. So I understand things obviously remain a little bit fluid, but have you committed to sort of a commercialization time line yet?

Yes, we're ready today. We sell the product under the 510(k) today. And then we have got a team in place that is well trained on all fronts. So first and foremost, as we've got about 35-plus people kind of in our MIS group that is very focused and they're trained on not only the procedure, but they're also trained on electrophysiology and helping bridge that electrophysiology to surgical gap. On top of that, we've got another 20-plus people in our education and training group. That group is focused on making sure they can get the procedure down well, they can train the surgeon to do it really well, and that team is ready to go also with setting up mobile cadaver labs and ways to get that training up and running. All that's kind of been done. On top of that, one of the things we bring to the table is that you have surgeons -- or I'm sorry, our sales force that focuses on surgeons. We've got 55 people that are direct in that area plus another 70-or-so clinical folks. Their whole job is to have relationships and help support the surgical community -- the cardiac surgery community. And that's going to really help because this is a hybrid solution. So we've got -- we're marrying this MIS plus our kind of more focused cardiac surgery group, and they're going to kind of be working together in tandem to go after the space. So the moment we get the approval, that will allow us to kind of be a lot more aggressive in the market once we get that.

Understood. Very clear. I think just maybe moving on a little bit to the market for sort of this opportunity, could you just maybe help us define the persistent AF market and just maybe help us understand the TAM opportunity and the sizing of the market a little bit?

And the market is so big. It's -- when you look at it, there are over 3 million-or-so patients that have long-standing persistent today. So if you think about that -- and that's the primary market for -- that's going to be used as, hopefully, kind of a first-line therapy would be the goal, where those patients are not getting treated today. They have no options to go after, and it's over 3 million patients. Now today, just to give you some context, there's only 150,000, 160,000 catheter ablations that happen every year. So I mean that's the whole catheter market, it's a $5 billion to $6 billion market when you add it all together. So if we just get a fraction or a portion of that 3 million in any given year -- and that number, by the way, is set to double over the next decade. And so when you think about that, that's just such a large group, that the TAM is many billions of dollars when you begin to think out over the next 5 to 10 years in the number of patients that need to get treated, and they don't have treatment options today. On top of that, there are a lot of patients that have persistent Afib that will likely have catheter ablation first. And then once they have no other options, they're eventually going to move into this space where we're going to be able to kind of be that second-line therapy for a lot of them to kind of add to the catheter. And remember, our procedures, they're all about adding value to the catheter. The catheter is a part of our procedure. It's a hybrid solution. And so again, it's a multibillion-dollar market opportunity just for the ablation side. Then add on top of that, the pull-through, which is that you can put a clip-on concomitant to that. And that market, if you add the clip on top of it, you get about a 50% more sizing of the market by bringing that AtriClip on the minimally invasive side on top of the ablation tools that we've got with Convergent.

Got you. All right. That's very helpful. So I think I'm going to move on a little bit to sort of your next opportunity, which is the aMAZE/LARIAT opportunity. So I think it sounds like the trial enrollment was completed by late last year, I think, in December. And the follow-up period probably will take you to early to mid-2021. So just on data timing, do you think we can see data as early as back half of 2021 perhaps on TCT or AHA 2021?

That is the goal. I mean the goal is to get the data out by then and we should because as we'll get the data finished up in kind of April time frame with the last patient will come in, we'll finalize it, probably take us a couple of months to kind of pull that data together, submit it to the FDA. And then we need a scientific session that it could come out at. And like you said, TCT and AHA are the most logical ones in the fall time frame. And obviously, there's probably a question on which one is the better market or the better one to kind of get it out at. We haven't made that decision yet, and we'll kind of likely make that sometime next year.

Very clear. Okay. So I guess in addition to that, what's your latest sense in terms of commercialization of that product? Do you think this could contribute to 2022 revenue?

I don't see it much on the 2022 revenue. We'd really look at it as kind of '23, really more '24. We anticipate approval probably sometime at the end of '22, maybe having a small effect on 2023 but really begin to have a bigger effect in '24 and beyond. Anything that would be kind of beyond -- before '24 would really be a nice upside kick to the business, quite frankly. The fortunate part about CONVERGE is that there's very good reimbursement in place. On the LARIAT side, there's some work to be done just to make sure that we can kind of solidify that. And so that might take a little bit of time, which is why we kind of say '24 is when you'll begin to see some acceleration on that front.

Great. So I was just going to ask about reimbursement as well. Are you sort of looking to or working on pursuing NTAP and sort of breakthrough designation for LARIAT? And if so, what's kind of the time line on that if you have a sense?

Not necessarily breakthrough designation on it. I think the market is -- so it will be interesting to see because it's already a 510(k) product today, so I don't imagine that being the case. But I do anticipate kind of pursuing the right level of reimbursement for it. There are codes that are already out there that could be leveraged, and we'll be looking at leveraging those codes and seeing how we can kind of get LARIAT underneath them.

Got it. Makes sense. Now could you maybe help us just size the LARIAT opportunity a little bit? Obviously, to your point, I assume CONVERGE is probably still going to be meaningfully larger than LARIAT in sort of 3 to 4 years, 3 to 5 years' time frame. So what time frame would you assign to LARIAT becoming sizable and maybe help us size that opportunity a little bit?