Artivion Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Artivion Second Quarter 2023 Financial Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to Lane Morgan is from Kew Martin Group.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good afternoon and thank you for joining the call today. Joining me today from our Tivityon management team are Pat Matkin, CEO and Ashley Li, CFO. Before we begin, I'd like to make the following statements to comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involves risks and uncertainties and are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

The forward looking statements include statements made as to the company's or management intentions, hopes, beliefs, expectations or predictions of the future. These forward looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from those forward looking statements. Additional information concerning certain risks and uncertainties that may impact these forward looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. Now I'll turn it over to Artivion's CEO, Pat Machen.

Speaker 2

Thanks, Lane, and good afternoon, everybody. The Q2 of 2023 was an outstanding quarter for Artivion, both commercially and operationally. I'm pleased to report we delivered constant currency revenue growth of 11% year over year, resulting in a record $89,300,000 in quarterly revenue, our strong performance was led by improved revenue growth in our stent graft business, which increased 19%, Followed by On X at 11%, tissue processing at 9% and BioGlue was up 4%. These were all compared to We continue to execute on our strategy to drive increased revenue with existing markets as well as new geographies through expansion of our commercial footprint with new regulatory approvals and by expanding our adjustable markets through our clinical pipeline. Our strong top line performance led to $13,800,000 in non GAAP adjusted EBITDA in the Q2.

Speaker 2

This is a 35% increase compared to the Q2 of last year. We expect our strong momentum in the first half of the year to continue into the remainder of the year and through 2024. We were confident coming into 2023 that our business was well positioned for success and the years unfolding largely as expected. At our Investor Day in March of 202022, we committed to delivering compounded annual growth of double digit constant currency revenue growth through 2024 and through driving further operating leverage, adjusted EBITDA $75,000,000 in 2024. We believe we remain on track to achieve both of these goals.

Speaker 2

Our commercial team is also executing extremely well. As I mentioned earlier, stent graft revenues were up 19% constant currency Versus the Q2 of last year, we saw double digit constant currency year over year growth in stent grafts across all geographies, fueled in part by increased stent graft production as a result of recent production hires in Germany and strong performance in AMDS and Nexus. We anticipate demand to remain strong in 2023 and beyond for our stent graft products and should see continued sustained revenue performance. Additionally, On X increased revenue 11%. We continue to take market share globally as we're the only mechanical aortic heart valve can be maintained at an INR of 1.5 to 2.0.

Speaker 2

We believe our valve is the best aortic valve in the market, leading market share gains each year. We are also executing well on our initiative to grow product sales in APAC and Latin America through our new regulatory approvals and commercial footprint expansion. In APAC and Latin America, we delivered 2nd quarter constant currency revenue growth of 23% 24%, respectively, compared to the prior year period. We continue to expect these regions to be important growth drivers over the coming years as we continue to leverage our industry leading portfolio of these regions and going forward. On the regulatory front, as I mentioned earlier, in May, we received FDA approval for PerClot and began shipping PerClot is Baxter.

Speaker 2

As for ProAg Mitral, we are in continued discussions with the FDA. We've not factored any potential In addition to our progress on each of these three initiatives, we continue to make good progress on the AMDS We've enrolled 75 patients in the PERSEVERE trial. This is our ID clinical trial for US PMA approval in up to 30 centers in approximately 100 patients who have experienced acute Type A aortic dissection. The combined primary efficacy and safety endpoints of the trial are a reduction in all cause mortality, stroke, Heart attack and new onset of renal failure requiring dialysis. The efficacy endpoint is the expansion of the true lumen of the aorta.

Speaker 2

We anticipate completing full enrollment in PERSEVERE in the coming months likely before the end of Q3. Following a 1 year follow-up period, assuming the trial meets its endpoints, we anticipate we should receive FDA approval for AMDS in 2025. In addition, our partner EndoSpan is making progress on the U. S. ID Triumf for its Nexus aortic arch stent graft system.

Speaker 2

In that trial, there were approximately 34 patients enrolled and treated out of a total of 60 patients enrolled and approved for treatment. Endosband estimates enrollment completion later in 2023 and a PMA approval in 2025, Again, assuming trial endpoints are met and no FDA panel is required. To reiterate, if these PMA trials are perceived as anticipated, we expect FDA approval for AMDS and Nexus in 2025, at that time, assuming we exercise the option for EndoSpan, These two products would significantly increase our adjustable market opportunity. With that, I'll now turn the call over to Ashley.

Speaker 3

Thanks, Pat, and good afternoon, everyone. Total revenues were $89,300,000 for the Q2 of 2023, Up 11% on both a GAAP basis and constant currency basis, both compared to Q2 of 2022. Non GAAP adjusted EBITDA increased 35 percent from $10,300,000 in the Q2 of 2022 to $13,800,000 in the Q2 of 2023. On a year over year basis, in the Q2 of 2023, Stent graft revenues increased 19%, On X revenues increased 10%, tissue processing revenues increased 9% and BioGlue increased 4%. On a constant currency basis compared to the Q2 of 2022, StenGraft revenues grew 19%, On X revenues grew 11%, tissue processing revenues increased 9% and BioGlue revenues increased 4%.

Speaker 3

On a regional basis, Q2 2023 revenues And Asia Pacific increased 23%, Latin America increased 21%, North America increased 8% And EMEA increased 12%, all compared to the Q2 of 2022. On a constant currency basis, Revenues in Asia Pacific increased 23%, Latin America increased 24%, North America increased 8% and EMEA increased 11%, all compared to the Q2 of 2022. Gross margins improved The increase was driven by price increases and product mix, partially offset by inflationary impacts on materials and labor. G and A expenses in the 2nd quarter were $57,200,000 compared to $39,000,000 in the Q2 of 2022. Excluding non recurring acquisition related business development expenses and benefits and other non recurring charges, G and A expenses were $45,900,000 for the Q2 of 2023 compared to $41,800,000 in the Q2 of 2022.

Speaker 3

R and D expenses for the Q2 were $7,400,000 compared to $8,600,000 in the Q2 of 2022. The decrease in R and D spending resulted primarily from the cessation of the PROACT 10A trial last September. Other income and expenses of $10,300,000 includes $6,100,000 in net interest expense, A $5,000,000 charge related to the final payment to EndoSpan pursuant to our loan agreement with them and foreign currency translation gains of approximately $800,000 On the bottom line, we reported GAAP net loss time, approximately $3,400,000 or $0.08 per fully diluted share in the Q2 of 2023. Net loss for the Q2 of 2023 includes pretax charges of $10,900,000 related to contingent consideration for the acquisition of AMDS and $5,000,000 related to the final payment to EndoSpan, Partially offset by a net pre tax gain of $14,300,000 related to our receipt of the per clock PMA approval or $0.06 per share in the 2nd quarter. Non GAAP income includes foreign currency gains and excludes business development and other non recurring charges.

Speaker 3

As of June 30, 2023, we had approximately $49,000,000 in cash, $313,000,000 in debt and the full $30,000,000 available to us under our revolving credit facility. Please refer to our press release For additional information about our non GAAP results, including a reconciliation of these results to our GAAP results. And now for our updated outlook for 2023. Given our momentum in the first half of twenty twenty three, our pricing initiatives, anticipated improvement in supply of StenGraft's and FDA approval for PerClot, we are raising our revenue guidance And now expect constant currency revenue growth of between 10% 12% for the full year of 2023 Compared to the previous range of 9% to 12%, we expect revenues to be in a range of $342,000,000 to $350,000,000 compared to our previous range of $337,000,000 to $348,000,000 We continue to expect revenue growth will as we continue to pursue price increases for products where we have clear clinical differentiation and with the approval of PerClot. With our strong second quarter performance, continued top line revenue growth, general expense management and a decrease in R and D spending, We have increasing confidence that we will meet or exceed our adjusted EBITDA guidance of a minimum of $52 plus 1,000,000 for 2023.

Speaker 3

These factors will allow us to remain on track to meet our $75,000,000 2024 adjusted EBITDA commitment we made in March of last year at our Investor Day. In regards to our capital structure, we continue to monitor market conditions and evaluate And with an apparent near term end to the Fed's interest rate increases, we believe our options to address our capital structure will continue to improve as we move throughout the year. And finally, our Term Loan B contains no financial covenants that would place us in default unless we were to have more than $7,500,000 We have the full $30,000,000 available under our credit facility and do not foresee the need to draw on it. As a reminder, our convertible notes do not contain any financial Overall, our strong financial performance and the expectation it will continue through 2024 affords us greater flexibility as we consider our future obligations and ways to increase shareholder value. With that, I'll turn the call back over to Pat for his closing comments.

Speaker 2

Hey, thanks, Ashley. So as you just heard, the momentum that began in the Q1 continued into the Q2, Capping off a very successful first half of the year. Our strategy is working and generally what we expected to be meaningful EBITDA growth this year. We also took guidance up for the 2nd straight quarter and we're confident our strong growth in 2023 will continue for the following reasons. 1st, continued strong performance in our StentCraft business due principally to recent staffing improvements at our German manufacturing facility and other supply chain initiatives 2, continued strong Onex performance driving further market share gains 3, continued strong performance in Asia Latin America as a result of our investments and new regulatory approvals in those regions.

Speaker 2

4th, growth in BioGlue and PerClot due to our recent regulatory approvals. 5th, we have 2 U. S. Clinical trials, AMDS PERSEVERE and EndoSpan's Nexus Triumf that are currently enrolling. Combined, we expect to significantly expand our total addressable market in 2025, assuming we execute on the end of spend option.

Speaker 2

We continue to expect revenue to grow double digits as compared on an annual basis and to generate greater than $75,000,000 of adjusted EBITDA in 2024, which will reduce our net leverage to less than 3 times despite the headwinds we face from inflation and its impact on gross margins. In conclusion, we continue to advance our goal of being a market leader in aortic repair and expect 2023 to be a standout year for the company. I want to thank all of our employees around the globe for delivering on an exceptional second quarter. With that, operator, we'd like to open the line for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Rick Wise with Stifel. Please go ahead.

Speaker 4

Hey, Pat. Hey, Ashley. This is actually John on for Rick today. I wanted to start off on price. Last quarter, you spoke about implementing price increases in certain product areas.

Speaker 4

I was just curious how successful that implementation has been so far? Any kind of benefit it might have contributed in the second quarter? And What your expectations are in the second half of the year?

Speaker 2

Yes. So we talked about looking at some of our products that were is highly proprietary with patented technology that really nobody else has that also provides significant benefit to patients. And Given the demand on some of these products chose to raise prices there, it's been very successful. And I think as I mentioned in my comments, We expect to see more of that as we go throughout the year. A lot of those prices were rolling through the 2nd quarter And a lot of those will be in place fully for the 3rd Q4.

Speaker 2

So it's been kind of as we thought and been very well executed.

Speaker 4

Great, great. And then to follow-up on that, I'd like to look at it through the lens of revenue guidance for the year. If I just take the balance of the first and the second half, it implies almost a fifty-fifty split, a little more in the second half than the first. I'm just curious with the price increases built in. Could there be potential upside to that midpoint?

Speaker 4

Like what's getting you to the higher end of the range? Is it price? Can you just talk us through the

Speaker 2

Yes. I mean, I think there's always we have a lot of levers we can pull. We've got The price increases we just talked about, we've got the supply for our stent grafts that I mentioned in my comments that we've done a great job in building up our inventory, which If you look back in the Q1, our stent grafts grew in kind of 8% or 9% range and they're growing 19% now. So we expect the stent graft business to continue to grow faster. We also have some new product launches in there That are going to kick in.

Speaker 2

We've got some stuff coming out of regulatory that will kick in. So a lot of it like any quarter, I mean, we've got projections for when we think stuff is going to get approved, when we think launches are going to roll out, and that's really the difference. So I mean, we're confident we can grow double digits. The question is, if we grow 11, 12 in the range is going to depend on how those things come together.

Speaker 4

Got it. Thank you. That's very helpful.

Operator

Our next question comes from Suraj Kalia with Oppenheimer. Please go ahead.

Speaker 5

Hi, Pat. Hi, Ashley. This is Seamus actually on for Suraj today. Congrats on the great quarter. Just kind of to start on our end, looking at SG and A, it kind of jumped, I'd say, a decent amount, about 64%, if my math is right.

Speaker 5

Just looking for Any particular reason for that, if that's a continuation that we might see going forward? Can you just break it down a little, please?

Speaker 2

Yes, I'll let Ashlee take that one. It's not a real G and A go.

Speaker 3

Yes, the biggest contributor was the big spike that we had in contingent consideration for the AMBS acquisition. So that was a non cash charge of about $11,000,000 And I had made some comments In our prepared remarks that excluding the amounts that I just described that adjusted SG and A came in at around $45,000,000 roughly compared to The previous year.

Speaker 2

Yes. I mean, the way I look at this, I mean, that's an accounting gyration of an acquisition that we did. If I look at the pure operations of the company, we grew the top line 11% and our operating expenses grew 5%.

Speaker 3

Time, got it. Yes. So the true comparison is around a little over 45 to around 42 from the previous year.

Speaker 5

Perfect. Thank you for that. Just kind of thinking as well, how should we kind of think of current On X U. S. Sites, average utilization rate, kind of what's the room for growth there?

Speaker 2

Yes. So I mean, On X is a plays in we have obviously An aortic valve and a mitral valve, that's about a $250,000,000 global market that we've been growing double digits Since we acquired the company, I'm not going to get into specifics. You can do the math on our numbers, but we still have plenty of room for growth. We've had we've seen some competitors exit, because we've taken so much share in some geographies that they've decided to exit kind of in other places. So we see upside really around the world for Onex.

Speaker 2

And we continue to put up double digit growth. And We've also had the Mitral publication that's people are very interested in that's even a better valve than the aortic. So I think with our global channel and our focus on the aorta, our relationships with customers and the strength of that product, We feel it's going to continue to kind of grow at the double digit range going forward.

Speaker 5

Perfect, perfect. Thanks for taking our questions.

Operator

Our next question comes from Frank Taycan with Lake Street Capital Markets. Please go ahead.

Speaker 6

Great. Thanks for taking the questions. Congrats on the quarter. I wanted to start with 1 on stents. Pat, you alluded to it in your prepared remarks, but manufacturing has been a challenge.

Speaker 6

Clearly that came back really solidly this quarter. I was hoping you could take us a little bit deeper into the status of that. Is there still work to be done. Are you feeling pretty confident with your current capacity? And how should we be thinking about that line item through the back half of the year?

Speaker 2

Yes. If you go back over the last couple of quarters, right, this is one that we highlighted that Q1, our really our only kind of like light Kind of in this inflationary period last year, we are having a hard time hiring people in our big facility in Germany, which is where we produce all of our stent grafts. We put a big initiative in place in the Q4 of last year, hired like 60, 70 people. They were all hired in the Q4 and then we told you last quarter that they had to get trained in the Q1, which they've done. And we basically hit our production plant for the first half of the year, the team did a great job.

Speaker 2

We're very well positioned. We've got the people in place. They're producing And we're set up well for the second half and going into 'twenty four with the team that we've got there. So I think that is largely behind us. And You said the teams executed extremely well.

Speaker 6

Okay, that's helpful. And maybe one on Onex. I heard the comments on taking share. I was hoping you can maybe bring us a little bit deeper on if that if there's another factor in there of the market just returning to normal And there's more market growth in that as well, but I was hoping you could kind of parse out the growth there between share taking as well as any market dynamics that are occurring?

Speaker 2

Yes. So I think one thing that I mean, if you saw one of the TAVR companies reported that their surgical business grew faster than their TAVR business, Which is interesting. So I do think that there is a kind of a growth overall in the market and we don't have great market data on that. I do know that we continue to perform well in all of our regions. All of our regions have been growing double digits.

Speaker 2

I think the other thing is whether or not that market grows, we've got more data coming out on our On X valve. We've got A 500 patient post approval trial that will be presented here shortly with excellent data. So It's just a continuation of just pounding the drum on it's the best aortic valve in the world and we just keep taking share and we got a great sales team and they keep doing their job and as we expand internationally, we're getting that message out as well. So again, I think there's lots of room for us to continue to grow that business.

Speaker 6

Great. And then maybe the last one for Ashley. Just was hoping you could kind of parse through cash generation in the quarter. Clearly, a couple of factors that are non operational or not within the regular P and L related to the cash infusion as well as the cash outflow to EndoSpan and some cash generation in the business, but was hoping you can kind of bridge us from the $31,000,000 last quarter to the $49,000,000 this quarter And then help us think about cash generation through the end of the year.

Speaker 3

Yes. So you're right, Frank. There was a lot of noise In the Q2, we had the payment to EndoSpan. We received the PMA milestone payment from Baxter. So there was a fair amount of noise in there.

Speaker 3

And we've when you back all of that out, we actually generated Free cash flow of $5,000,000 in the Q2 of this year. So we've been talking a lot about our focus on Not only driving adjusted EBITDA higher, but a focus on generating cash as well. So we're really pleased with where we ended up in the second quarter. I don't think that we're quite at the point yet where we're ready to commit to being able to generate positive free cash flow On an individual quarter basis and a trailing 12 month basis, but with the trends that we've been seeing Over the last couple of quarters, we're very encouraged about where we are, and we think that we're getting Very close to the point where we will be generating free cash flow both on a quarterly basis And a trailing 12 month basis going forward.

Speaker 6

Perfect. I'll stop there. Thanks for taking the questions.

Operator

There are no new questions at this time. So that concludes our question and answer session. I would now like to turn the floor over to Pat Mackin, President and CEO, for closing remarks.

Speaker 2

Well, listen, thanks for joining the call this afternoon. And We had a great quarter. We have a lot of confidence in our second half and think we're very well positioned going into 24 Our double digit growth in the top line and $75,000,000 of adjusted EBITDA. So stay tuned and we'll be back next quarter. Thanks for joining.

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