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

Good morning, everyone. Happy to introduce our next session to kick off day 3 of the JPMorgan Healthcare Conference. I'm Robbie Marcus. Pleasure to introduce Mike Carrel, CEO of AtriCure. Mike will do a little bit of a presentation, then we'll do some Q&A on stage. Mike?

Thanks, Robbie, and thank you, JPMorgan for having us at the conference this year. We -- it's always a great time of year to kind of kick off and explain kind of what we're doing as a business and kind of where we are in the progression of the company. So I'll kind of just kick it off, go through our forward-looking statements here for a moment. But I'd like to start on this slide because I think it's really important. What does AtriCure do? AtriCure is really focused -- passionately focused if you just meet any of our 1,200 people in our business on healing the lives of people that have atrial fibrillation and postoperative pain. Now how big are those markets? I'm going to go into some more detail in just a little bit but these are over $5 billion worth of market opportunities sitting in front of us today. And actually, our TAM continues to expand. What's incredibly unique about AtriCure is the way that we focused on our markets because in every one of the markets that we're in today, we are #1 in the world. Let me repeat that, we are #1 in the world in every one of the markets that we are in today and every one of them are underpenetrated. We select markets where they are underserved patients, patients who have the most advanced Afib, the most risk of heart failure, the most risk of stroke. And we focus on can we provide solutions that other people are not providing today. These are the kind of markets that we go after and that we continue to grow. So these are large underserved markets that are there. But we support that with an incredibly strong portfolio of products. But it's not just products, we also have clinical science to back it as well. So we make major investments. When you think about AtriCure, you're going to think about us really, we make investments in 3 major areas that we believe create long-term sustainability for a company like ours. So first, if you've got the large market, that's great. You have to create innovative products, and you have to keep creating and investing in R&D and innovative products. Two is you've got to do the clinical work behind those products. We do lots of PMAs on purpose because we believe it is a disease-centric area, and we need to make sure that if we are going to use our products that you can actually treat and effectively affect lives of the people that have that. And then finally, you've got to build a great training organization for people to be able to utilize those products safely and effectively. So why is Afib a big deal? So just -- if you don't know what Afib is, it's kind of a heart arrhythmia where your heart basically fibrillates. So instead of beating normally like you learn in your biology class, boom, boom, boom, it's not doing that. It's fibrillating. So therefore, your body is not getting enough oxygen throughout. Therefore, it can lead to a lot of things such as dementia, heart failure and other really bad health problems because you're not getting enough oxygen to major organs and major parts of your body in the efficient manner that you should be getting it. And it happens over a long period of time. In addition to that, when your heart is fibrillating, the other thing that happens is the blood pools. The blood pools because it gets stasis. When that pooling effect happens and it normally happens in something called the left atrial appendage on the side of your heart, you have a higher risk of stroke for that to become a clot to go up to your brain, which leads to a 5x greater risk of having a stroke, having heart failure and a greater risk of mortality if you've got Afib. This is not a benign disease. It's also one of the reasons why in MedTech today, this is one of the hottest growing areas across all aspects of MedTech. And there's a lot of people that have it. It is not only not benign, but we're talking about 37 million people worldwide. And we've got the number on the 37 million. I think that number may actually be an old number because nobody has actually published recently, but I've seen numbers now, 55 million, 60 million patients around the globe that have this, and this number is growing. And there's a lot of talk back last summer about GLP-1s and the effect on really cardiovascular disease as people lose weight. Interesting enough, it has no effect on our ability for the number of patients that have atrial fibrillation, has very limited effect. In fact, we believe that the GLP-1s might actually help because as people lose weight, we've done research with cardiologists to show that they actually may refer more patients if they lose the weight, who had Afib that they otherwise would not have gone through. It was too risky to do to treatment for those patients. So in the work that we've done, we've actually seen that this patient population could actually grow as a result of that. To break that down, though, in the United States alone, there's 8 million patients that have atrial fibrillation today. That number is to grow to 12 million patients by the end of the decade. And what we're focused on is the really complicated and difficult to treat patients. I talked about the underserved market before. The 4.5 million are the easier to treat patients that catheters work really well with, but when you have to add something to the catheter, patients that are in atrial fibrillation for more than 12 months, the sickest of the sick, the most fibrotic hearts that you have out there, that's almost 45% of all the atrial fibrillation patients that are out there and they don't have a solution today. There is no solution on the market for them, and I'll walk you through that here in a moment. So I'm going to walk you through the patient flow because I think it's incredibly important to understand our business. And I'm going to break out the Afib part first, and then I'll get into pain management in a second. So the referral pattern for patients, they're talking to their general cardiologists. They're talking to their GP. Our first business is somebody has major structural heart disease. That means they have to undergo valve procedure or coronary bypass procedure. So you have to open up the chest, do a sternotomy and treat that patient. Now about 1/3 of those patients globally have atrial fibrillation at the time that they're undergoing that surgery. We are the #1 player in the world in this area, continue to innovate in this area to actually treat that 1/3 of the patient population. Today, that number is 30% of that 1/3 gets treated. So 70% still do not get treated, yet the guidelines in 2017 changed. Now the good news is that over the last 10 years, we've moved it from 10% to 30%. The next move is to go from 30% to 100%. Every one of these patients should be treated when they are in the operating room table. There's absolutely no doubt about it. The guidelines say it and all the data that has been published using our technology has also demonstrated and changed the guidelines overall in this -- not only guidelines, but reimbursement. So if you're now undergoing a coronary bypass procedure, you get $10,000 additional to do an ablation on that patient. Why is that? Because they know that if you treat, CMS knows that's going to help the health care system long term as well, obviously help the patient also. So this is a big market for us. In that market, we have both ablation tools and we also have -- and I'm going to talk in detail about those in a moment, but we also have left atrial appendage tools as well, and we have large clinical trials going on in that area. The second part of our population and flow is that you're a patient and you have atrial fibrillation, but you don't have any other structural heart disease. So for that particular patient, drugs work really well. They work really well at first. However, they do break down, and they only work in about 50% of the patients. So the other 50%, they're going to try something. And you have to look at the continuum of care. If you think about cancer in stages 1, 2, 3 and 4 and you look at the continuum of care, somebody might have in cancer, Afib is a progressive disease just like that. What I mean by that is that the earlier stage Afib, the catheter base companies, massive market, $6 billion market today. They've got mapping systems and catheters that work really well at treating that early stage atrial fibrillation. I talked about that earlier. That's that 4.5 million patients in the United States. It's a massive market opportunity and guess what the catheters work incredibly well in that area and there's more and more technology coming out to make it even faster and more efficient for the catheters to work in that area. But what they don't work well on is the long-standing persistent patients. The patients that have been in Afib for over a year because their heart has completely remodeled. They're incredibly fibrotic and they need an approach in which you're coming from both the outside and the inside to effectively help that patient. We are the outside portion of that part. Focused on that part of the patient population, and we call that the hybrid solution because you're combining the technologies that these great companies, the J&Js, the Medtronics, the Bostons do with ours to actually treat that very difficult-to-treat patient population. No differently than in cancer, you're not just going to have one drug, you're going to go immunotherapy and chemotherapy and surgery to possibly treat and make sure you've covered that very sick patient population. So think about that, that's our patient flow in terms of how that works. So now let's talk about the markets. It's an over $5 billion overall market. So when you look at this slide, and look at the kind of orange box that you see there. I've just touched upon a couple of these different areas. The first one is I'm going to go to the bottom left, cardiac surgery, open ablation and left atrial appendage management. This is the part of the market and you see the darker gray down the bottom, darker blue gray, that says that's what the penetration is. That's that 30% that we know is going to continue to grow with a combination of the R&D that we've done, we came out with a new product last year called the EnCompass Clamp that reduces the time from 40 minutes down to less than 10 minutes for them to do an ablation, so that a coronary bypass surgeon can do an ablation in a very quick and time-effective manner. On top of that, we've got our AtriClip product that is in this area for these patients that you put on while you're doing that procedure as well. And we've made great progress in that and has continued to grow our business. In the United States alone, there are 300,000 people that undergo cardiac surgery. Of those, about 1/3 have atrial fibrillation. Now if you look over to the left of that, though, we've also started a trial because I mentioned there are 300,000 patients in the United States, but there's 1.5 million patients, let me repeat that, 1.5 million patients every year around the globe that undergo cardiac surgery. Every single one of them have a risk of getting a stroke because a patient, whether you have Afib going into surgery or not, you've got a 50% chance of getting Afib in your lifetime. And there have been multiple studies done over the last 8 years that demonstrate that if you manage the left atrial appendage, even in the patients that don't have atrial fibrillation, you are going to significantly reduce their stroke rate. So we have embarked on a trial called the LeAAPS trial, which is the largest cardiac surgery randomized trial in the world ever done 6,500 patients, half the patients will get a AtriClip, half the patients will get nothing. And there's excitement behind the trial. It's a 250-site trial, 6,500 patients. We've already enrolled 1,400 patients in the first 9 months of the trial. 1,400 patients in the first 9 months of the trial, over 60 sites have already signed up on it in the United States. We've got 25 sites lined up, and we've got about 150 sites ready to go in the United States as well. We will likely enroll this trial over the course of the next 1.5 years. So we will -- should be enrolled fully sometime in 2025. This trial will demonstrate stroke reduction for all patients that undergo cardiac surgery. I'm telling you this because it absolutely expands the size of the market opportunity. It means that 1.5 million patients should have their left atrial appendage managed while they're undergoing cardiac surgery. But there's another benefit to a trial like that. The level and amount of data that we're going to grab on 6,500 patients is unheard of in the medical device world. We are also going to show things such as hypertension. We are also going to demonstrate the economic value for these patients so that we can go back to the reimbursement agencies across the world as a global trial to get additional reimbursement, specifically for the AtriClip product in this area. So we're making a major investment in R&D to expand that market quite a bit. On the pain management side, this is where you're undergoing a thoracotomy. When you undergo a thoracotomy, you've got lots of pain because you're going in through your ribs where you have intercostal nerves, incredibly painful. Just think about it if you ever got punched or fell on your ribs, you feel the pain. If you stick a [ fork ] in there or you move it open, what happens? It disrupts and you get really angry nerves at that point in time. We have ablation products, cryoablation very specifically and it's nitrous oxide that's incredibly important is at the exact right temperature between negative 60 and 70 that kills the inside, all the axons but does not hurt the sheath. Why that's important is it allows it to regenerate and grow back. So what you've done is you block the pain signals to the brain for about 4 to 8 weeks after surgery which significantly reduces the pain, improves recovery. We started this process about 5 years ago, and we've basically stood up this business from nothing to something to almost $50 million in revenue this year and in almost -- it's been growing over 20% for the last several years. A very good business for us, and we are still less than 20% penetrated in the thoracic market. And there's 150,000 patients in the United States who undergo thoracotomies. Of those 150,000 patients were less than 20% penetrated. The next piece is we're actually beginning to expand and you're hopefully getting a little bit of thought here. Wait, AtriCure likes to expand these markets, leverage the existing technology and the existing channels they have. In sternotomy, you have the same level of pain when you're opening up the chest as well. There's 255,000 sternotomies around the globe, and we're now beginning to roll out and actually talk to surgeons about opening up that market and expanding it. And those are just the U.S. numbers that I just quoted. And I talked briefly about the size of the hybrid market, which is that 3.5 million patients that we have in our business or in the United States alone that are going after that. You can see that, that is a very, very small box at the bottom there. Just to give some context to it, of the 3.5 million or so patients, we treated 3,000 last year. Yet we're the only company in the world and just got our approval with randomized controlled data to show incredible efficacy with this. And right now, we're doing what you do, which is you go build programs. We go build those programs out and we started to see great results, and we saw great results in this quarter. This is a market that is a multi, multibillion-dollar market to add on to the other ones that I just talked about. So I'll go a little bit deeper into each one of these here momentarily. On the cardiac surgery side of our business, the part that I mentioned before, we've continued, I mentioned innovation, clinical science and awareness and education. On the innovation side, over the last 2 years, we've been rolling out the EnCompass product. You can see it there on the slide. What that enables you to do is that enables you to go around to the different transversion oblique sinus of the heart so you don't have to get behind the heart. Getting behind the heart is the most difficult part of this procedure, which is why many cardiac surgeons have not done it. So we developed this innovative technology over the last couple of years, and that has actually had a significant effect on our growth rate in this area and also on treatment. Most importantly, where we've seen more and more patients getting treated. We think this, combined with what we're doing on the reimbursement side that you've seen recently is going to improve that penetration rate over the next 5 years quite dramatically by the end of the decade. In addition to that, we continue to innovate on the AtriClip side of our business. We've got a new product coming out actually at the end of this year. The feedback we get from our customers is we want a smaller and smaller product. There's been a lot of conversations from investors over the last 2 months because a competitor came into the space and is coming into this area. We view that as a very positive thing. When competitors come into your space, that's a validation of your market. It means your market is big enough that it's worthwhile for large companies to make those investments to help you grow and expand that market. I talked about the size of the left atrial appendage market from before, how it's 1.5 million patient total. We are less than 10% of that penetrated today. There is a huge market opportunity there, and we continue to innovate in this area, and we'll have another new product called the Flex Mini coming out later on this year that is an even smaller profile product that will be about 1/3 the size of our existing product, which is already the smallest profile product on the market today. As I mentioned, we're investing in clinical evidence and clinical science. The guidelines have changed. And I just think these numbers are really fun to look at and an impressive, which is that we hit our 500,000 AtriClip implanted in 2023. And we have done over 400,000 ablations. We know this market. What's as good is that the efficacy rates are exceptional with these products and the safety rates are -- basically, we don't have any safety events, basically utilizing our products in this area. Very, very few. As low as any medical device that is out there in the market today. So we're very proud of what we've done in this area. On the hybrid side of our business is the large opportunity for those long-standing persistent patients that nobody is serving today. We've invested a lot in clinical evidence in this area. It's incredibly important. The EPs who are the referring physicians in this area would say, you need clinical evidence to demonstrate if I'm going to refer my patient, I need to see it. So there have been 3 randomized controlled trials over the -- that have read out over the last 2 years. Every single one of them have demonstrated at least 100% improvement between the catheter-only arm and the catheter arm plus doing an epicardial ablation on the outside -- were the epicardial ablation on the outside. It's a minimally invasive procedure that you add on to the internal procedure that the catheter ablation does. We've seen amazing results, but don't just trust our data. There's actually data out there. You see CAPLA study on there where the catheters tried to do that themselves, and they showed, guess what, the same efficacy that we saw in all of our randomized trials for just the catheters. So very consistent data. We get lots of good feedback on. Now the biggest thing for us is to go build out those programs to focus on how do you actually create that referral pattern to be appropriate, and that's what we're building out now and we've made major investments in this. And this is going to be a major growth driver for us over the course of the rest of the decade. And to give you some context, I think it's important to understand, so we talk about -- I talk about these different areas, the early stage or paroxysmal patients, the persistent patients and then these long-standing persistent patients. You can see where the major device players are playing. They're playing in the early stage. Every single trial that's been done or started is in that area on the catheter-based side of it. Why? Because you do need the combination for these long-standing persistent patients, there is benefit regardless of the energy source you use. You could use Cryo, PFA or RF. They do great work on those early-stage patients. But on the later-stage patients, the combination is actually super effective. We're the only one that have done trials. We've invested in these trials, and we've seen great results with it. And then finally, is the pain management business, which I talked about earlier, we've got great evidence in this area. We've seen great growth since we've launched this in 2019. We have a new product coming out this coming year that is going to actually hopefully reduce the time that they're going to have to actually spend doing this. That's the biggest pushback that we get, and we see this as a continued growth driver not only in thoracotomy but in sternotomy and then in other extremities over time. So let me just give you a brief highlight on 2023. I think one of the most important ones I'd like to look at on this slide is that the one right in the middle. We've served over 1 million patients to date in the lifetime of AtriCure. It's something that everybody at our company is incredibly proud of. We crossed that barrier this year. And we anticipate that obviously number is going to grow quite dramatically. We've done 500,000 AtriClips, as I mentioned, and we had 21% growth. 21% growth, and I'm going to hit on this in a slide or 2, is our 3 straight years in a row where we've been north of 20% growth. So as the business has grown, the revenues have grown, they've gotten larger, we have organically driven that type of acceleration for our business. And as I mentioned, the other number on there is the LeAAPS trial, that 1,396, we had anticipated that in the first year, just getting sites up and running, we might be able to do 650 patients. But the excitement in the market for this trial for the treatment of these patients was so great. We got more sites signed up faster, and they're treating almost every patient that they see. It's just fantastic. And then just one of the other things that we're proud of for the year is that we had adjusted EBITDA positive for the first time, and we'll do about $18 million to $20 million for the year. At the beginning of the year, we expected to do about 0% or basically $0. So we were saying, "Hey, we're going to cross through." Now we're doing $18 million to $20 million. As we look into 2024, you can see, as I mentioned, over the last 3 years, we've had great top line revenue growth, over 20% for each of the last 3 years. We actually accelerated from 2022 to 2023 in the overall growth rate because of these innovations. We've got 6 new products coming out in -- over the next 18 months that we think are going to continue to advance and innovate in this market. We've got more clinical evidence in clinical science and we're obviously becoming profitable. So we feel really good about kind of the foundation of the business. And with that, I'm going to turn it over to Robbie to come on up and ask me some questions.

Great. Thanks, Mike. Maybe we could start with the quarter. You grew 20% constant currency. Any details you want to provide of where the sources of growth came in U.S. versus OUS?

Yes, sure. It's a great question. Thanks. I'm sure you saw the press release, Robbie. So our growth this quarter, the #1 growing piece of our business was actually Convergent, the minimally invasive part that I talked about that hybrid that I just mentioned. That was the fastest growing part of it. You started to see some of the traction that we've been talking about, building out those programs and really kind of doing that market development work that we're doing. That was by far the largest growing part of our business. Number two is the AtriClip and then it was the other ones were kind of around kind of I'll call it, that corporate average that we kind of did overall. So we feel really good about the progress that we've made on CONVERGE. Last year at this time, everybody was nervous about CONVERGE in general. And we had reset expectations at the beginning of the year. We feel like we beat -- we have beat expectations throughout the year, and we've seen that accelerate now. We're cautious. One quarter doesn't make the entire next year, but we definitely saw more cases and more patients being treated. So we feel really good about the quarter from that standpoint.

So if we take that excitement, we move into 2024, 15% to 17% constant currency growth. I guess same question, in those ranges, what do you see at the low end? What do you see at the high end? And any comment on Convergent as a component of that?

Yes. What's -- and we kid about this. But basically, if you look at all of our franchises and the areas of our business, they're all kind of converging upon a similar growth rate. We anticipate similar growth rates across all the franchises this year in that 15% to 17% range. So I would say that Convergent is going to be within that range and kind of approaching and kind of around there, as is Cryo Nerve Block, the Clip and then also the open part of our business as well, EnCompass. So we feel like it's all kind of converging around that same number. I mean, give or take a percentage or 2 here or there, you might see Convergent maybe at the lower end of it. And then maybe -- but we'll see. I mean, obviously, as the year goes on, we're going to kind of progress from that.

What's really impressive is the open business, which historically was a good but not double-digit grower. Last year, you launched a new product there, this last year. It got a nice mix benefit yet we're seeing that double-digit growth continue this year. So maybe spend a minute, talk about what you're seeing in the open business. How much is volume? How much is mix? And how long this double-digit growth can be sustained here?

We think we're -- we've moved it from a single digit to a double-digit growing business. I mean I think that, that -- with the guideline, not only guideline, but the reimbursement combined with the EnCompass technology, the EnCompass technology has really been a hit out in the market. It's been a great launch. We're in almost 600 sites now in the United States in just almost -- we're not even at a 2-year mark within basically 60% of all the sites in United States with that product. We feel like there's a lot of room for growth, both getting deeper in there and also expanding it. The price, though difference -- at this point, we've lapped any kind of, kind of price benefit. Everything that we're getting now is volume benefit, but the volume we're doing is at a higher ASP. So it's not like you're lapping it against something else and stealing from anything else you're at, but it is all at a higher ASP than we used to get before.

You're in 60% of the centers. And I know you have some slides on this, but where do you see yourself in terms of penetration? And two, where you could be in terms of open procedures with patients that have atrial fibrillation?

Yes. So we're in 60% of the centers for EnCompass specifically. But we're in 100% of the centers or like 98% or 99% of the centers for all of our open procedures. We think that there is -- we're still only at 30% or maybe a little bit north of 30% penetration at this point in time. We think with the EnCompass Clamp, we should be able to get to 70%, 80% or 90% by the end of the decade. .

I imagine that number is very different in the U.S. versus outside the U.S.

In terms of penetration?

Yes.

Yes. So yes, that is a U.S. number. OUS, it's really sitting around 20%. And we -- our EnCompass Clamp actually is not in Europe yet, and we anticipate rolling that out sometime in year by the later this year into 2025.

AtriClip, that's been a really good multiyear growth story for you. And I feel like as of late with the competitor entry here, it's become the focus. It's hit the stock price a bit. I want to spend a few minutes here because I think it's really important. So you and I were talking before the session about how you can break down AtriClip into different components. So maybe just for investors talk about where is AtriClip used today and what are the different clip sizes and how that's relevant?

So great question. So yes, I mean, a competitor did come into place. I like to state this, we believe -- we've been the only one in the space for 10 years. We've established the footprint. We've got over 500,000 implants. And we know our products work incredibly well and incredibly safe. So -- and we believe -- we've been waiting for competition for a long time to kind of enter into the space because it's a great space. And we think people have found out, call it, that it's a good space. That's fine. We think that will help grow the space and help us everybody, ourselves and others, obviously get into it because they wouldn't be doing it unless they -- we feel like we could have a much larger market opportunity. But if you actually just look at our business, more specifically, Robert, to your question, which is if you take 100% of our revenue and you say 100% of your revenue is AtriClip. Of that, 30% is minimally invasive. The new competition that just came into the market does not have a minimally invasive product. So that is typically done along with our hybrid solution. When you're doing Convergent. You actually have AtriClip added on to that. That's 30% of the overall 100% that you've got there. So now you're at 70% of your revenue. Of the 70% of revenue there, we have really 2 primary products today. You've got our V product, which is our more expensive product. That's the one that competitor came after. And then we've got our lower-priced product, which is the original product that's out there, the original product is significantly lower on the price standpoint and represents 30% of our overall revenue. So you're now talking about 70% of the 70%. So 50% of the overall revenue is the market that effectively the competition has come out with a new product in that area. They've come out with a competitive product, but they're also coming in at a higher ASP price than what we've actually had in the market as well. So we feel like we've got a really good footprint in that area. In addition to that, if you look at that patient population, you don't typically -- some people do, but you don't always just do just the AtriClip. You're doing an AtriClip with an ablation. And in the U.S. market, we tend to -- we have about 85% market share relative to the competition in that area today. And as we were just talking about, that number is growing in terms of -- and we're the ones growing the ablation market. So our share is actually continuing to grow on that side as well, and you're going to get an AtriClip along with our technology.

Yes, that's great. Of the 50%, right, the 70% of the 70%, what percentage is concomitant AtriClip plus surgical ablation versus just AtriClip alone?

I don't -- I can't give an exact number on that front because -- but it's probably around 80-20 or so, I mean -- but that's a very -- that's a guess to some degree. But we do have also, remember, the LeAAPS trial is going on. And a lot of people have already made the conclusion that they want to treat the appendage prophylactically in non-Afib patients. So we do have a portion of that, that is non-Afib patients that are actually getting treated as well. But a large portion of that is combination within ablation.