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

Good morning, everyone. Welcome to the 2023 JPMorgan Conference. I'm Robbie Marcus, the med tech analyst here. I'm very happy to kick off the conference with our first session, AtriCure. And I'll be calling up CEO, Mike Carrel for the presentation. And after about 20 minutes or so, we'll shift over to some Q&A. Mike?

Thanks, Robbie. Thank you, JPMorgan, for having us here today. It's kind of fun to be one of the first people to actually kick off the meeting and then the second year in a row to do it. I think when you're at JPMorgan, you're going to get the sense, and I'm going to go through and come hit on, you're going to see a lot of amazing companies and JPMorgan is basically here to create and show and emphasize all the great technologies that are going on out in the world. What you'll also hear I think a lot of is looking at the markets, one of the biggest markets that everybody is talking about is atrial fibrillation. Atrial fibrillation is a large underpenetrated pandemic that is going on in the world today. We are dealing with 37 million people around the world -- 37 million today. That number is expected to grow to well over 60 million over the next decade that have serious forms of atrial fibrillation. This is all AtriCure does. This is one of the differentiating factors for us is that we are in a market that is growing at about 10%, 15%, 20% per year. And all we do is sit around and talk about and think about how do we actually solve this epidemic that's going on in the United States today. Just in the U.S., it's 8 million patients. It's about 37 million to 50 million or so around the globe, and 1 in 4 people are going to get atrial fibrillation in their lifetime. Think about that. Many of you know your grandparents and others and people, maybe it's your parents, their friends. They're probably calling you and asking wait, you're involved in health care. Do you know anything about atrial fibrillation? I get these calls every single day. And the reason for it is really a big disease, and that's what differentiates AtriCure in the sense that we're 100% focused in this area. But why? Why does it matter? In addition to people feeling terrible when they get atrial fibrillation, you've got a 5x more likely chance of getting a stroke. So you always hear everybody, the first thing that they do is they put you on drugs, which is the right thing to do, is are they going to manage you? Are they going to be able to manage to medically? Allow you to take the anticoagulants or the antiarrhythmics, reduce that stroke risk, but a lot of those drugs, people can't tolerate. And as the disease progresses, it gets worse and gets more difficult to quite frankly, take care of the disease. And at AtriCure, we're really focused on the more complicated forms of those disease. In addition to that, people always often think of atrial fibrillation say, "oh, it's just a stroke risk." So put them on the anticoagulants and that's going to work. But the reality of atrial fibrillation is that you've got about a 46% more chance leading to mortality. You don't live as long. There's a great chart that I've seen recently that shows that if you get atrial fibrillation, you actually will live a shorter lifespan than most people that get cancer, given the investments that have been made in cancer over the last 25 to 30 years. The reason for that is that it's not just the Afib, it's what Afib leads to. Heart failure, dementia and many other diseases. When you're not getting enough oxygen to support the organs of your body, atrial fibrillation has an awful impact on the longevity and the quality of life for those individuals. And that's really what AtriCure is all about. And there's a reason that it is growing so fast. So let me kind of take a little bit of step back and say AtriCure and the foundation that we've built over the last 10-plus years at AtriCure to ensure that we're successful over the next decades, not just over the next year, but over the next decades. We've always had a dedication as a business to really 3 main areas which is that we believe that you have to invest and think forward on innovation. You've got to be thinking creatively about what's coming around the corners over the next several years. What's going to matter in 2030 and 2035, you've got to put those pieces in place. I think what I'm going to show you today is that we've got a history of great innovation over the last 10 years, and we're continuing to put our money where our mouth is in terms of new products that will be coming out over the next several years as well. In addition to that, you've got to invest having great technology, if you don't have great clinical science behind it, doesn't matter. So you have to make the investments to have incredible differentiation to show that what you're doing is actually going to have positive impact on the patient lives, and we make significant investments in the clinical science area. And we've done so over the last several years. We've made great progress in 2022, which I'll talk about in a moment. And then finally, you've actually got to build out a platform. If you get great science that proves out that this works, you've got to have an infrastructure in place to be able to expand and grow not only in the U.S. but globally. And we've built out that expansion mechanism over the last several years as well, and we're really confident that, that really kind of builds a nice foundation for our growth going forward. And finally, you've got to build durable growth. 2022, if you saw our press release today, we had over 20% growth. Prior to COVID, we had 29 straight quarters of double-digit revenue growth, incredibly durable growth. And we committed to the street into everybody that we are going to be north of that 15% growth for a long period to come after we came out of COVID. Last year, we did 33% growth, we're to a solid 20% this year on constant currency growth number that is over 21% growth. A really solid year impacting over 100,000 patients around the globe in 2022 alone. In addition to that, we also had major clinical trials that we got approved that really set us up for the next decade and more. So I'm going to dive into this a little bit more. So let's talk a little bit about the innovation side of our business. You can see on this slide the impact that we've had in the products. If you go -- we've got ablation and left atrial appendage products on here. And we've not stopped innovating. Just on this slide alone, we've got 3 products that drove most of our growth in 2022. On the top line, you'll see the cryoSPHERE. The cryoSPHERE is for pain management -- is to reduce pain management for postoperative surgery. That has been growing, as you saw in the third quarter at about 70-plus percent. It's been a great product for us that we organically developed and built. We invested in the science and now we're actually seeing the fruits of those investments come to fruition. Next to that, you see the EnCompass Clamp, which we rolled out in the middle of last year for open concomitant business. When I presented at JPMorgan 5, 6 years ago, I used to get pressure from people saying, open cardiac surgery is never going to take off. We were at 25% penetration, maybe just over 20% penetration of the patients that have Afib that were undergoing cardiac surgery that we're getting treated. And yet today with the Encompass Clamp, one of the biggest things that was in the way was that we needed technology to make it easier. And what we're seeing with EnCompass, we invested in the technology, we got it onto the market and now we're starting to see great growth and expansion within where we've got relationships today, which is pretty much every cardiac surgery hospital in the United States. And then on top of that, if you look down below on the left atrial appendage, the Flex V, which is all the way over to the right. The Flex V is the open-ended clip. We put that out about 3 years ago and you begin to see that it started to gain traction and then really gained traction over the course of the last several years, and now it represents almost 50% of all of our clip revenue. On the clinical side, you have to continue to differentiate as well. So we're continuing to invest, and we anticipate more such products coming out in 2023, 2024 and 2025. We've got a rich pipeline of products in each one of our portfolio areas. In addition to that, you've got to have great clinical science, the clinical science that we have here, the Isolator Clamp was the first and only approved product for the treatment of atrial fibrillation and cardiac surgery. We then did a FROST study for Cryo Nerve block. We've also done the CONVERGE trial, which I'll get into a little bit more details of the success there. And we're going to continue to invest in expanding new markets by investing in new trials like LeAAPS , which is expanding into the prophylactic use of the clip and the HEAL-IST, which is a new hybrid form to help patients that have appropriate sinus tachycardia, another terrible arrhythmia that patients suffer with. So with that, I'll give you kind of a brief overview of the size of each one of these markets. These are large markets, and they are all expanding. The first market is the cardiac surgery market. This is when you're undergoing cardiac surgery and you're getting treated with atrial fibrillation. The market is only 30% penetrated today. That means 70% of the patients are not getting treated. In addition to that, they put a clip on every 1 of those patients. And we've done the HEAL-IST trial. If you saw this slide a year ago, you saw a slide that has had about $450 million market. Now with the LeAAPS trial, we've been able to expand that because we are going after patients that do not have Afib but have the likely chance of getting Afib in their lifetime. Those patients are really going to be supported by getting a clip. And that LeAAPS trial is the largest cardiac surgery trial ever done at 6,500 patients and is going to be the only trial to show for that concomitant use of the clip for someone to reduce stroke. So a large market opportunity investing. In addition to that, our hybrid business. The hybrid business is when you have an electrophysiologist working in concert with the cardiac surgeon, we talk about CONVERGE. There's been lots of questions about CONVERGE over the last year. Why isn't it taking off faster? Why isn't it growing faster? This market is a massive market opportunity and really underpenetrated. Just to give you a quick view on the numbers. In the United States, there's about 350,000 cardiac procedures -- cardiac catheter procedures for atrial formulation every year. 45% of the patients that have atrial fibrillation have long-standing persistent nature fibrillation. AtriCure is the only company in the world that has a label to treat long-standing persistent atrial fibrillation -- the only company. Yet of those 350,000 patients, we're in less than 3,000, less than 1%. The market opportunity is large, and the data shows that it works. So our CONVERGE trial demonstrated an over 110% improvement that if you added the surgical portion of it with CONVERGE to the catheter portion, you had tremendous impact on that patient population. So the big work we've got to do today is not to convince people that this works or that it's safe, it's about the logistics and getting them to work closely together. And if you think about others, you think about how TAVR developed and other markets developed, getting them together is really the work we've got in front of us right now, it's not about does this work. This is the only product that is not only on the market, but there are no products even being studied for that 45% of the patients that are out there. This is our differentiation. This is why we've got decades worth of growth in front of us. On top of that, we're not just an ablation company for cardiac surgery. It is a huge focus of ours, but we've extended that understanding in the Cryo Nerve Block and Cryo Nerve Block is for reducing pain when you're undergoing any kind of thoracic surgery. This market has been growing very fast. We've got unique product and differentiation here. We're the only product on the market to treat this area and we're over 10% penetrated today. That's from 0 just 3 or so years ago. If you ever hear these patients and patients who undergo thoracotomies, it's incredibly painful. And we believe that we are going to become not only a market leader, but we're going to be able to get over 50%, 60%, 70% penetrated over the years in the thoracic area. And we're not just sticking there. We're going to grow that market by getting into sternotomy which is almost 1.5x the size of the market of the thoracic procedure market that we're already seeing the growth in. So when you add it all up, this is a $5 billion-plus global market opportunity that we are going after. And the areas that we're in, we are #1 in the -- world, #1. There's not one other company. We've got clinical differentiation. We've got innovation, and we've got a team that's going to be able to execute over the next decade to do that. And so when you look at 2023 and you look at the growth that we've seen, we are a durable growth story. We're continuing with our commitment of 15% to 17% growth in 2023. After coming off a year of $330 million, we've estimated $380 million to $387 million this coming year, and we are going to break through and become profitable this year. We get questions from investors. I know that's on top of mind. We've improved $4 million every single year. We anticipate we'll improve another $4 million this year. It could be greater except for the fact that we've made decisions to invest in those items I talked about before. We do believe we've got differentiation for decades to come and that we're going to come through that period of breakeven and then we're going to grow profitably from there on out. On top of that, we're proud to say that we are committed to sustainability in many different ways. Most recently, I had the opportunity to present at the NACD meeting, where we were the one small cap company that won for diversity equity inclusion for all publicly traded companies. Our Board is 60% women with a female chair and we're incredibly diverse across the board. We're committed to that and much more from a sustainability standpoint as well. So we feel really good about the commitments that we've made in those areas, getting out the ESG report, I think, in advance of many companies. We don't view this as an obligation. We view this as important for society, and it's something that we should be doing, and we have no problem making these types of investments. So hopefully, you walk away from today thinking to yourself, AtriCure has huge market opportunity. They're differentiated both on technology and on top of that with the clinical science that they've put behind it, that we've got decades worth of growth in front of us to attack and penetrate and win in those markets. We've got a really strong portfolio and that our future is bright. With that, I'll welcome Robbie up for questions.

Great. Thanks, Mike. There's a lot to talk about here, but I want to start first with the fourth quarter pre-announcement and the 2023 guidance. So fourth quarter beat by a little bit versus the Street. Any color you could give us on what were some of the better product drivers? Anything that underperformed your expectations and had that trend geographically?

Without getting into too much details about each of the different areas, which I know everybody wants to know what was happening within cardiac surgery versus hybrid. We had a strong year. And I believe, overall, our Cryo Nerve Block continues to be a great driver for us and so does the EnCompass Clamp, as I mentioned in the rollout and we're still making progress on hybrid. I think that from a hybrid standpoint, we're going to see a great 2023 and 2024. We feel really good about the future of that business, as I mentioned. And we're getting really good sites up and running and on board.

Any -- CONVERGE, obviously, is one of the big focuses. It's one of the big potential growth drivers, really exciting technology, good data. Anything you could tell us on fourth quarter and what's assumed in guidance for 2023 for CONVERGE?

I won't give too much color on fourth quarter, but what I can tell you is that we still feel really strong about that part of our business. I know there's a lot of questions about -- is it going to actually meet its end goal of being a high growth driver for AtriCure? I can tell you and look at you everybody in the eye and say, "Absolutely, this is going to be a strong growth driver." The data is compelling and people are looking at this business and we're getting net new sites every single quarter, and we're starting to see case volumes go up.

And as we think about just thinking fourth quarter, procedure volume trends is one of the big items that people are looking, not just for AtriCure but across medical devices. How do you think cardiac procedure volumes trended across fourth quarter. Is there any backlog you're seeing and any difference U.S. versus OUS?

We didn't see much change on the volume side of things from an overall standpoint. I'd say that they were -- it was consistent volume throughout the quarter. There wasn't a lot of disruption. There was -- what we saw was the beginning of last year, you got really hit with Omicron that continued a little bit into the second quarter. But then as the year went on, it kind of more normalized, I wouldn't say it got to normal volumes that it was pre-COVID on the cardiac surgery. You're still a little bit light of that overall. But it's kind of normalized in the sense that they're having regular case volume every week. You're not seeing a lot of case cancellations as much anymore in the fourth quarter.

So maybe instead of just thinking of volume perspective more, you're returning to normal market growth trends off of prior quarter rather than necessarily absolute volumes pre-COVID?

I mean -- I think in general, I haven't thought about it from that perspective. But I mean, in general, I think you've got a more normal quarter, there wasn't a lot of disruption on the macro side of it.

And you have a smaller international business, but any difference you're seeing U.S. versus international?

Not as much. I mean I'd say that overall, obviously, with the one exception of China. I mean, China has obviously been impacted the most. But other than China, most of the other markets around the world are pretty consistent at this point.

Remind us how big is your China business as a percentage of overall sales?

It's less than -- it's like 1% or so. It's a very, very small portion of our business.

As we move to 2023, your guidance definitely caught consensus at the low end of it, got me in the middle. Maybe talk to some of the assumptions behind that. How -- are we assuming normal procedure volume growth? Any color you could give us on CONVERGE versus AtriClip, Cryo, [ open ]. I'll leave it there.

Yes. So I mean, what we're seeing -- when we look at the 2023 and you look at the investments, I talked about some of the areas that we've got I'll start with our different franchises. When you look at the open franchise, we anticipate EnCompass to continue to get into more and more sites and get deeper penetration in those sites. We've seen great traction with it. It's been one of the best rollouts of products I've ever been a part of my entire career. It's really been received incredibly, incredibly well, and we've got great deep relationships. We anticipate really strong growth out of our EnCompass business in 2023 and beyond as we improve kind of the penetration in that market. Cryo Nerve continues to be a very strong player for us. and we anticipate that's going to happen, and we're going to open up the sternotomy market at the end of the year. So we anticipate kind of the back half kind of in the fourth quarter or so. We anticipate that sternotomy might be able to have some sort of impact as we roll into 2024. And that's a huge market expansion opportunity for us. On the clip side of things continues to be a -- I mean, it's obviously larger numbers, but it continues to be a very strong growth trial for us overall as a business. I think the LeAAPS trial is going to kind of really create a nice halo effect overall with people talking about kind of managing those patients. And we believe hybrid is going to kind of come back and have a really strong and solid year.

Got it. Top line definitely looked better than consensus today. I would say where there was a bit of came in a little lower, it was on the bottom line. And you committed to getting to breakeven for next year. Typically, we've always seen fourth quarter a lot better than first quarter and second, third kind of in the middle. So maybe talk to some of the investments you're making for 2023, how to think about the cadence of that? And maybe just why the spending is still sort of on the highest side.

I mean the reason for it is we're really -- we think really long term. I mean, we believe that we're going to be profitable. We know that's an important commitment. We needed to kind of get to that breakeven point. We don't need to go out and raise any capital to run our business and to operate. And then we also committed, if you saw in the press release that we're going to not only get the profitability, but we're going to grow profitability from here on out. So I mean, that's a commitment that we're making. But we do believe we've got enough areas to invest that can drive high growth for a really long period of time. It's why we're making investments in that LeAAPS trial is obviously a big clinical trial that costs many millions of dollars a year that adds obviously to the cost structure this year but will, I believe, really expands our market by almost $1 billion expansion when you think about it on a global basis. The trial alone 6,500 and 250 sites around the globe, and that market opportunity is for almost 2 million cardiac surgery procedures around the globe every single year. So we think that, that is an investment we're making and that obviously impacts a little bit on the profitability side. And as we expand into other new areas, HEAL-IST is going after inappropriate sinus tachycardia, which is a terrible disease, typically for women who are ages 20 to 40 who have an elevated heart level. It affects about 1 million people around the globe every single -- every year. I didn't get into much details on that, but the HEAL-IST trial is all about helping those patients out. And you really need a hybrid approach to do that. And HEAL-IST is obviously adding a little bit of cost this year that isn't driving revenue. But we do think when you think about the back half of this decade, we're going to be able to help tens of thousands of patients every single year with HEAL-IST as well.

Are there any time lines you could provide us on those trials maybe when you might complete enrollment and then how long it will take to maybe get through to approval.

The LeAAPS trial, it's a long trial because you have -- these are patients that don't have Afib and you're looking at them over the 5 years. That's really an investment in, call it, the back half of the decade in terms of kind of starting to see some sort of traction relative to that. I'd say HEAL-IST is a little bit earlier, it's going to probably the middle part of the decade that you'll start to see some effect of that. But we're starting to get sites up and running right now. Nobody's doing it, but we're now up to 5 sites that are enrolling in that trial, and we anticipate adding more throughout the year as well.

I want to open it up for questions if anybody has, just raise your hand and we have a mic runner. No. All right. I will keep going then. Cryo Nerve Block, over the past few years, I would say this is probably one of the standout business lines that was least expected and has been one of your biggest product successes. So maybe talk about the trends you're seeing there, the penetration you're seeing there. And then sternotomy, obviously, you talked about in the presentation, can pretty much double the opportunity. Think about the ramp-up there and how we should be thinking about sales building?

We anticipate continued growth in the Cryo Nerve Block area. We're just over 10% penetrated in the United States today. There's about 150,000 or so procedures on the thoracic space in the U.S. that happen every single year, we're at just over 10%. So we anticipate that number growing. Why? It works. It works incredibly well. These patients do not feel much pain after they undergo thoracic surgery. We're up to over 60 people on the sales team today. We're adding clinicals and specialists to basically have coverage throughout the United States. We've now started to expand in Australia and in Europe as well. So we anticipate strong growth for many years to come just on Thoracic. There's no reason they shouldn't be using this device. It's a reasonably cost device, and they get a significant reduction in pain. These patients, they can go home faster, they can recover more quickly. So it's been a great product on that front. And we're continuing to look for other areas to grow. I mean thoracic procedures are not the only procedures that are painful and someone undergoes surgery and so sternotomy is the most natural because I've got a sales force and clinical team of 150 people already in those operating rooms every day today that have deep relationships. We know that it works there, but we're going to do a slow rollout much like what we did with EnCompass where we kind of took our time to just make sure we do it right, that we get the therapy completely right. And so that by the back half of this year, we anticipate really expanding and growing that market. We're already getting people wanting to use it in that front that area, and we're kind of slow playing it a little bit, but we do anticipate the back half of the year beginning to start to see some traction there. So I think this is going to be a strong part of our portfolio for many years to come.

So this isn't a product that has direct reimbursement, right? This is a cost off of the procedure code. So what are the doctors really looking out of this product to justify the added cost?

What they see is how fast these patients recover more quickly. Sometimes, in some cases, we can reduce hospital stay. So we've got a bunch of studies to reduce hospital stay, which definitely shows a reduction in the cost, and you can pay for it that way. But the other one is that it just -- they recover more quickly. Therefore, they can get up, they can start walking around in an intensive care unit. That is something that these patients need, and that helps them recover from whatever surgery that they've just had, that's what they're looking for, first and foremost. Secondly is they want to send them home taking fewer narcotics. Now we don't have a label to reduce narcotics, but you don't need narcotics with our product. And so as a result, they want to basically start to see some of that. And some areas and some centers are beginning to study, can they reduce the narcotics. There's a bunch of studies that are out there that show that you can. We are also looking at possibly doing a study at some point in time to show the narcotic reduction both at the hospital but also kind of post hospital stay as well.