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

Good morning, and thank you for joining us for the fourth day of the 2021 Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst and a member of the healthcare research team here at Morgan Stanley. It's my pleasure to have AtriCure President and CEO, Mike Carrel with us today. And before we begin, I'll run through our disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representative. And with that, Mike, thank you for joining us today.

Great to be here. Nice to see you Cecilia.

You as well.

And I wanted to start off, COVID, 2021 guidance. On your last call, you highlighted seasonality driving a sequential step down versus 2Q results. But from U.S. as well as OUS standpoint, has anything, really either from a seasonality standpoint, played out materially in a different fashion versus historic trends? And really curious, U.S. specifically, have you seen heightened seasonality versus traditional levels?

Yes. We ended last quarter in a really strong manner. So it was like every month got better throughout the quarter in Q2. We talked about it on our call, we had a really strong July, but we are cautious as we kind of looked at the rest of the year, which is why we kind of talked about that step down. We thought normal seasonality would come back in. And then on top of that, obviously, there were some -- the Delta variant was kind of going around and so we want to make sure that we kind of gave guidance to kind of put all that into it. And I feel like our guidance has kind of done that. We did see normal seasonality that you would expect in August, lots of vacations also impacted the Delta variant to some degree. But again, I think we are thoughtful enough to kind of have that within the guidance range that we talked about.

Okay. That was a helpful framework. And I wanted to switch to really your core business trends, Convergent being a key focus for a while approval, but just can you walk through a bit just from a physician training piece or cadence and really your outlook around the ability to ramp the opportunity. Just can you frame your ET base prior to approval? And how you're really leveraging that base today to drive expansion?

Yes. And we've got over -- we've got 3 different sales forces. One is our cardiac surgery team that has great relationships on the cardiac surgery side. We've got our hybrid team, the hybrid team is over 40 people today. That number is growing. We're adding resources into that area. And then we've got our Cryo Nerve Block team, specifically to the hybrid side, which is where the EP focus is. We built that team over the last 5 years, so they can be confident and ready. And as we're going to add more headcount as well kind of in the next year to 2 years, we're going to be adding quite dramatically there. We feel like we've got great coverage in the U.S. We have historically done about 80 to 100 or so customers per quarter with Convergent in 2019. So if you kind of go back to kind of a more normalized year on that front. Now we did about 200 or so customers in total. Since then, we've added a bunch of net new customers have really come on board since the approval. We're having great conversations. We're getting deeper into those accounts. Obviously, one of the things we always talked about was, the back half of this year is about doing that training and getting those sites up and running. And we're well ahead of plan and well ahead of the progress that we thought we would be on that front. It doesn't impact revenue much this year, but it sets us up for a really good 2022 and 2023 because we are getting net new sites with new surgeons and EPs really starting to build out programs and think through what does their program look like.

Can I ask just what you've seen from a clip attachment and your Convergent procedures. You talked about 60% to 70% recently, but where do you think this trends over time? And really, what are the drivers if you can see clip attachment grow versus where it is today?

We're at 67%, and that's actually consistent. That's continued to kind of be that way. We anticipate it will stay there. Part of that is because when we set up a new site, while we're going to be adding a lot of new sites over the coming 18, 24, 36 months, we first have them do their first 5 to 10 cases ideally without a clip. Even if they want to do put a clip or manage the appendage, we normally -- we say to them, wait, we want to get CONVERGE right. We want you to understand patient flow, how to manage that patient through your hospital, do those learnings, how well does the ablation work and then add the clip at a later time because it's another skill set they've got to learn. And so we wanted them to get really good at doing the Convergent ablation first and foremost, and then they can add appendage management afterwards. So we think that 60% to 70% overall attachment will stay consistent for the foreseeable future. And then obviously, over time, if you look out 3 to 4 years, we do anticipate that by then I think we can start to get some incremental increases in the attachment rates overall. But 60% to 70% is obviously pretty dramatic overall relative to more than we ever had expected originally when we bought the company.

Can I ask, just in -- what you've seen commercially to date, stage procedures versus single session, how that's trended versus preapproval? And then this EP lab throughput, how does that, on the EP side specifically, how does that enhance procedure, timing predictability, really further augmented adoption?

It is a great question. So we're -- about 60% of the sites stage and 40% do it same day. We haven't seen a material difference since the approval. The trial itself was a same-day trial. So it was all done within the same day. But we do have centers for a variety of clinical reasons. They make the decision to stage it, which is why 60% of them do do it that way. And there's lots of reasons we could go into, but they make that call. But I don't foresee any change. We're agnostic to that. We let them make the decision based on whatever is happening clinically at their hospital and their best workflow they can kind of go after. But your next question brings up a really interesting point, which is what are the time savings that the EPs get? In the trial itself, we saw about a 40-minute time savings for the EP in what they need to do after they do the conversion procedure. So that 40 minutes is quite dramatic when you think about an overall ablation. If you add that to and they actually want to do even more aggressive ablation, we're talking to people who are getting 2 to 3-hour savings per case on these complicated long-standing persistent cases. And so we think that's going to help EP efficiency and really get more and more EPs to want to do this procedure.

I wanted to ask Persistent Afib Catheter approvals. You saw J&J, Medtronic Cryo. As you think about it from a market standpoint, though, I wanted to ask what you've seen in the market overall in terms of just evolving outlook around intervening on more challenging patients? And can Converge focus on treating long-standing Persistent patients specifically, potentially benefit from shifting perspective on patient management?

Absolutely. In fact, actually, I think that was one of the big pieces that happened with the FDA and the conversation and the aha moments, which is the delta in that long-standing persistent was so great. You saw 110% improvement at 18 months in the catheter arm versus the Converge arm. And by giving us a label that is very specific on that front, which represents 45% of all patients, it does make the EPs think to themselves, wait a second. I can save time and do better for the patient, why not go there as a first-line therapy for those long-standing Persistent patients? And that's really driving great differentiation for us, but also I think it's going to benefit the patient as well. They're not going to have to undergo multiple different procedures like that. I think that we're going to get the benefit right upfront. So yes, we do see that paradigm shifting. Those are the kinds of conversations that we're having. And it's pretty exciting to kind of watch that -- that conversation happen out in the field.

Okay. Mike, I wanted to switch to aMAZE trial, Lariat. As you think about, one, if you could just kind of walk through where you are today? You talked about on the 2Q call, but as you think about kind of going forward, are there other paths you look to pursue from a data standpoint, potential to look at serve endpoints, other areas as you think about it today that you think might be areas of consideration going forward?

It's a good question. So we announced the data because we -- it was great safety data. And so really good safety, we had benefit. We just didn't have enough benefit to prove out the primary endpoints in a kind of superiority standpoint. That being said, we are absolutely pulling all the data. We've looked at it from a lot of different angles. And there's a lot of good in the data. There's no question about it. We're going to have that presented at AHA. We've submitted for a late breaker there, so that all the data gets out and we can have a more robust conversation. And so that should happen in kind of the early or mid-November time frame. Meanwhile, we are having conversations or we'll start to have conversations with the FDA about, hey, let's look at all the data and what kind of pathway can we take to go forward? What are some the next steps? Are there pathways to things. Now that being said, because we do believe it's a great device. That being said, I don't want investors to get confused. Yes, we're going to go down that path. Yes, we're going to go there, but don't put that into any of our numbers. It's going to be all upside at this point. We wanted to get the information out there to say, we didn't meet the primary end point, make sure like it's going to be upside. We still got a lot from it, and we still think it's a good device, but there's still -- there's some work to do with the data to have conversations with the FDA over the course of the next several months, if not more.

In SentreHEART to just beyond Lariat specifically, can you talk through other aspects of the acquisition, you'll be able to leverage going forward, either just from an IP standpoint, your EP relationships, addition of their commercial team at AtriCure, how that's really enhanced your messaging and positioning within the EP community?

I mean you actually said it really well. I mean first, yes, we got over 100 patents with the acquisition. So that definitely came along very strong patent portfolio. On top of that, we got -- you mentioned it, the relationship with EPs. We kept a lot of the sales team that was out there. They're now -- some of them are still supporting cases on the convert, convert but on the Lariat side. Others are continuing and part of our overall hybrid team. And so we're definitely going to leverage that and those relationships that we've kind of garnered and built through that, whether it's on Converge or other things that we work on with the EP community, it's really been a big boost for us. The other thing that you probably don't talk about enough though, as part of this, we've also brought the manufacturing in-house. We've got a lot of learnings that we've had from a technology and from a manufacturing standpoint about EP products, catheter-based products, et cetera. And so that's actually been a great learning over the last 18 months for our teams on that side of it. So that as we think about new products and bringing new products in eventually, we've already got some expertise in that area.

And if you were to remove, at least for now Lariat from the long-term picture, can you walk through puts and takes as you think about appendage management penetration? How much upside do you lose without an EP auction? And really how much, on the flip side, additional penetration do you see now driven by clip?

I mean the clip has been a great product, and it obviously sells both in an open setting and in the MIS setting as well. And so we do anticipate, obviously, that there will probably be higher taxmen rate for clip than Lariat relative to with Converge. And so we think that will continue and there strong way to happen, and you're not going to have obviously Lariat take over as much on that side. There is still are many that are using it along with Converge on that side. There's lots of upside when you look at it from an open side of our business as well. You've got our existing franchise that is on most patients that are getting their appendage managed have Afib. We are going to be pursuing a trial for the prophylactic treatment of the appendage. And we will be going to the FDA in the coming months and hope to start a trial sometime mid next year that would go after that really large market expanding patient population that you have cardiac surgery and you're likely to get Afib. Therefore, over time, therefore, we're going to basically try to see, does the clip help reduce stroke. It's going to be a huge multicenter trial. You're talking about over 6,000 patients that will likely be randomized in this trial, and we're pretty excited about kind of the prospects of moving forward with that next year. As it relates to kind of the market opportunity to Lariat, yes, I mean, obviously, it hurts some of the upside that was there. I mean that was -- and I think -- we've got a lot of things on go. We've got to take chances like that. There's not -- there wasn't a lot of downside in the transaction we did. It was definitely some upside that we will not get because of that right now. And that's something that you've got to take those kinds of risks to get other benefits, whether some of the risk we took like on Cryo Nerve Block or the clip has benefited us. And in order to -- you've got to take shots on goal to score. So we took the shot, and we think we got a lot from it, but unfortunately, probably not some of the high-end upside. On that one product, obviously.

How do you think about now just your appetite for continuing to look for something, LAA management device to put into EPs hands?

Right now -- I mean, we still see think Lariat products is a great product. We know that it was incredibly safe and performed very well on multiple different fronts. And so I'm not sure that we've got any kind of desire right now to do anything different from that. I'm not going to say we wouldn't be opportunistic at the right time. But right now, that's not a priority for us. We want to see -- we want to figure out what can we get from the data that we've got in existence today, how do we continue to leverage the clip and the work that we're doing there. And then maybe we'll look at that in the coming years.

Okay. Mike, I wanted to turn to your pain management business, which has had a very strong first half of the year. You talked about 7% of your first half sales. But can you just walk through your plans for further data generation, specifically and your ability to leverage further data that really drive broader adoption versus where it is today?

Yes. I'm going to start with the biggest piece for adoption right now is we've got to build out the sales team. So we're at almost 30 people today. If you look on our website and you look at our open jobs, you'll see we are hiring aggressively in this area. We anticipate continuing to add to that team because people that use it, they see the benefit right away. So we're -- that is our #1 growth driver as you look at '22 and '23 for sure. Now the data we need to look at is there's already good data, people have to publish it. So there are people that we've been working with for the last several years, have to get some of that data that they've already shown, whether it's length of stay reduction, improved kind of care and the care pathway that they go through so that they basically have lower kind of pain scores after they leave or when they're in the hospital. Eventually, I'd say we've got to do some economic analysis to basically show that, yes, you can prove the savings in some way, shape or form. And that's what we're trying to kind of define specifically. It's nothing in the short term though, it's something more that if you look out 2 to 3 years from now, we might be needing to pursue something along those lines.

When you talked about your sales force and not being a focus. And can you just kind of walk through where you are as you think about kind of a center penetration standpoint today, talked about 30 on your sales force. What's an optimal size as you think about and have a scaled sales force given the opportunity in the field?

Yes, I think we're trying to figure that out right now. I mean we're -- there's 150,000 cases, thoracic cases in the United States, and we're in less than 10,000 today. So with our 30 salespeople, we're basically in -- we're just scratching the surface in what the potential opportunity is for this treatment option. And so we anticipate we'll continue to expand quite aggressively on that number. I don't want to give a specific number because we're kind of learning every day about what kind of support, when can we wean off that support so they can kind of operate on their own. I think there's some learnings that have to do over the next couple of years to figure that out. But right now, we want to get as many people trained and in the field as possible to be able to really expand to that opportunity.

As you think too, about future investment across your entire business, how do you think about prioritizing further investments in pain management franchise versus investments in your core AF franchise?

We look at each one of our return. I mean the nice thing about the pain management is it was a low-cost investment upfront, in terms of kind of getting into the space. We just made some modifications to our existing technology. And then from that, we've got an incredible return on it. Right now, the big return is just getting people out in the field, and it's almost -- it's a click ROI on every person we put out there does generate revenue fairly quickly. It takes them about 3 to 6 months to get up to speed, to understand the therapy, to understand how to sell it and to be able to get access. And so it's kind of independent. If we think that, that can actually continue to outsize the growth rate of the company, we'll continue to make investments in that particular area. While also I wouldn't say it's binary, it's that or something else because if we find other opportunities that can grow that fast, we'll make those investments as well, like in Converge and adding the flip to that with EnCompass Clamp coming down the -- on the open side of our business, we anticipate continued investments in some of that area as well. But there's different types of investments because that's in the new stage, whereas on the cardiac surgery side, I don't have to add a lot of reps today. So I don't have to add people to have coverage on the cardiac surgery side. And so we have to do other things to grow into that area, and we already made some of those investments. So it's not an either/or equation.

As you think of few years down the road with a broader sales force. So just curious, as you look at your business today, any tangential areas right now as you look at the field that might make sense for you to step into and really leverage that sales force that you're creating today?

I don't know about -- inorganically, like through acquisitions, there might be things if we can get into the EP space a little bit more aggressively. I think if we had product and things like that, that would be something that might be of interest. From an organic standpoint, it's -- we also have development and things we're working on. So for example, and I think I've talked about it on some of our conference calls in the past, inappropriate sinus tachycardia is a disease that affects mostly women kind of in their 20s and 30s. It's when you've got a rapid heart rate that you can't control, and you can't get down. And so as a result of that, there has been some recent research using our products that can show significant reduction in improvement for that patient population. And so we are in the process of kind of -- we've seen the data. It's been published. It shows dramatically good results. It's a large patient population. It would be in our hybrid group as an example. That would be a way that we might do it. It's not just leveraging our sales team, it's leveraging our ablation know-how to treat a disease state that today has 0% success for most of those patients. That's how we think about it. How do we expand things, much like what we did on the cryo nerve block side as we saw something where there just wasn't a solution and our know-how in that ablation space enabled us to kind of get in there and then we figure out how to leverage things from there.

Looking at your core legacy open business, excluding cryo for now, but as a high single-digit growth profile over the next several years, a reasonable outlook? And how much of your outlook today as you think about growth stems from Encompass putting greater penetration in CABG versus kind of the impact of either guidelines, awareness could have on growing open?

It's a really good question. I've been just on the record saying it's kind of that mid-single to high single-digit growth rate that we expect out of the open ablation franchise. Now it's tough to -- we look at it a little differently internally because we also look at the clip growth. They're sold by the same sales force. There's a tremendous amount of leverage within that space, and that's growing -- been growing it north of 20% for many years. And so I'd say that when we look at -- we kind of blend the 2 overall because it's -- that's critical to basically the patient at the end of the day and also our overall growth rate. That being said, Encompass we do think is going to help us and enable us at bigger numbers to continue to grow at those types of paces. Now what's been exciting, but I don't want to get too far ahead of ourselves and kind of give guidance yet because we're not ready to do it, but we just saw from CMS, there was a new CMS code for CABG plus ablation that was an $8,000 to $12,000 increase when they add the ablation to that CABG. And that is something that we think, combined with the Encompass could drive some more adoption for us. And we also think gets telling. The fact that they've done that and that CMS is willing to pay for it tells you they've done a lot of work. It came a couple of years before we expected it to happen. And it's too early to tell what that impact is going to be, but I think that long term, that's going to have a dramatic impact on the number of patients that are treated.

Okay. Catalysts, your pipeline, talking about EnCompass Clamp, but I want to stick on that and can you just talk about early feedback in the field to date around the Clamp? I also wanted to ask just as you think about relative penetration in CABG today versus AVR, MBR, where you think you are? And again, speaking to the last question, how much further you can drive this with reimbursement, proposed reimbursement now augmenting that opportunity?

The overall penetration rate is still only at 25% to 30%. The good news that's up from 12 years ago when it was 10%. But now it's kind of -- I don't want to say stalled, but it hasn't been growing much since, and COVID kind of obviously put a little bit of crimp to look at some of those numbers. I think that number can go much higher with the combination of reimbursement and the Encompass plan. You're right, CABG is where the lowest penetration is. So while it's 25% to 30% overall, it's like less than 10% in CABG patients today that have Afib. We think that both that reimbursement with the Clamp should have a dramatic impact on the surgeons treating and then the patients eventually getting treated in that area. When you look at mitral valve, you're at 60% to 70% penetrated. When you look at aortic valve, you're closer to 30% penetrated. So it's going to have the most dramatic impact on the population that's not getting treated. That's why we targeted the Clamp the way we did. And then we were fortunate enough that the CMS recognize that this is a patient population that needs to be treated, and therefore, they basically gave additional reimbursement for it.

Can you walk through just the proposed CPT codes, just the society push for these codes? And also how current awareness around managing appendage has increased past several years and data's impact on driving increased awareness?

Yes. That's another bit of exciting kind of reimbursement news was that the Clip got some reimbursement. And so as you walk through that -- open concomitant side, the societies basically went and said, "hey, there is benefit to manage the appendage in these patients". And CMS came back and agreed with that and gave $128, and I know it doesn't sound like a lot per case, it was [ $128 ] per case were on the open side of it and that's for CMS. Obviously, private pay is going to be a higher pay rate and it doesn't take them a ton of time to do it. So we think that's a great payment start. And then on the MIS side of things, it's close to $1,000 for them to do it. So we think those rates are really going to help us and quite frankly help improve adoption of the clip.

Other areas deep. That was -- it's been a pipeline focus for a while pre-Converge. But can you provide an update about where you are right now on the clinical side and really how you think about the longer-term opportunity alongside Converge?

Yes. We look at it as that we want to provide options. I think we've been talking about this for the last 4 years since we bought Converge. Converge is really going to be the horse to ride relative to that is going to be for the masses. That's going to be the one where it's the easiest to train, it's easiest for surgeons to do it. And we are definitely riding that horse overall. That being said, there are some physicians that would rather do a more robust profile for that patient, which is really where DEEP comes into play. And so we've got a really good, nice sound business on that DEEP side. We are continuing to enroll in that trial. We don't see a lot of growth out of that, but we do see most importantly, we want to make sure that we're supporting those customers that we have finishing out that trial, showing that the data is very compelling, which we believe that it's going to be to maintain that business. And then you'll get some centers that will add it on over time, but mostly our biggest focus is going to be on Converge.

The other clinical update. I was hoping you provide ICE-AFIB, just any updates on kind of where you are and really your strategy with that trial as well?

Yes. I think AFIB came about because we wanted to be able to do more aggressive training on cryo. When you do a cryo-only may sort of the open side of our business, people were doing it wrong. And they just weren't doing a good job with that. And we couldn't train them that well with it. So we wanted to get in and really train those people to do it properly. And ICE-AFIB is all about getting that label so that we can train more physicians to do that. It's not about massively growing that market like Encompass and like the reimbursement that I just talked about is going to have to change to. But it does enable us to really make sure people are doing really good mazes when they're using cryo. We've made great progress on that. We've got lots of sites enrolling in it. We anticipate we'll be almost at 100 or so patients enrolled by the end of this year, and that number will continue to grow into next year. Hopefully, we'll complete it by the end of next year, early part of the year after that in terms of enrollment.

Okay. And I wanted to ask to just how you think about investment, removing for the moment, Lariat, from the long-term outlook, how do you either balance or how do you balance either reinvesting planned investment that you would have put into Lariat back into your business or else driving towards EBITDA profitability at a faster rate. And I realize there are a whole lot many more dynamics than that, but just simplifying it down to that. I'm just curious kind of how you're thinking about opportunity for reinvestment versus driving towards profitability?

Yes. We're really close to profitability right now. I mean you saw last year in to get profitable in a couple of different quarters. Our focus is growth. I mean we are going to go after that, but we'll stay close to profitability. We do think naturally with an increased focus on growth and that growth rate, as we've talked about before, going up from its historical numbers that eventually you're going to start to see how obviously, that drop to the bottom line naturally just because we're so close to profitability there. I'm not going to give a specific date, but our thoughts are, first and foremost -- we are a growth story. We need to expand that growth rate. We believe that with the catalyst that we've just talked about and hit upon, we are going to do that. And we're going to basically make sure that we execute on that front. Obviously, we're going to balance that profitability front, but it's not -- we're not trying to say, hey, by x quarter, we're going to be profitable. It's more about that will naturally happen as the growth continues over the coming years.

And gross margins, too, I wanted to ask, we've seen them very strong. Part of that's been geographic mix. But I'm curious kind of as you think about OUS products mix drivers as you look out through the balance of this year, but beyond, is this a sustainable level? And as you think about kind of long term, where can gross margin trend over time?

We've always tried to say, 75% is our target. Let us get to consistent 75%. I know we hit it last quarter. We've had good gross margins. There was a lot of good geographic -- as you mentioned. I would suggest that -- and we've done a lot of efforts behind the scenes to make sure that we're managing things and kind of getting our supply chain in a really good place from that standpoint also and looking at the product in terms to make sure that we're kind of taking some costs out. That's why we're at 75%. Now let us just stay there. That's world-class. We think we want to make sure we're maintaining 75%. I don't want to get too far ahead of ourselves and start kind of committing to numbers above that. We just want to make sure we can maintain 75% for a long time.

Understood. I know we're almost out of time, Mike. But I wanted to thank you for the time today, but also turn it back to you for any last closing remarks as well.

Appreciate that. Well, thank you for having us. We really appreciate the support of Morgan Stanley and for everybody on the call. Hopefully, you're as excited as I am about our future. I know there's a lot going on with COVID and a lot of questions that you guys are hearing about. But if you look at our long-term playbook and you look at what's going to happen over the next decade for AtriCure, I look at us as being something that's going to have multiple catalysts for many years to come at very high growth rates. So hopefully, you guys will get involved, and thank you again for having us.

Thanks, Mike.