Good morning again. I'm Rick Wise. I'm welcoming management of Artivion, Pat Mackin, President and Chief Executive Officer, Ashley Lee, to my left, EVP and Chief Financial Officer. Welcome to you both. Thank you for being here. I've known Pat for, gosh, you know, 15-20 years. I don't even know. Pat, for years was the outstanding president and leader of Medtronic's Heart Rhythm Division, which was basically half the company in its prime, at the great era of adoption for the electrophysiology field. Did a great job, and Pat and team are building an exciting, really, a company with compelling technology. Once again, thank you for being here, Pat, and look forward to the update today.
Thanks for having us, Rick. So I'm just gonna start off with just a handful of slides to give some backdrop on the company. This is on the web, so you can look at our forward-looking statement there. So to Rick's point, I joined from Medtronic around 2015, and the company's roots, at the time the company was called CryoLife, had two product lines: tissue for cardiac valves and vascular tissue, as well as BioGlue for basically, think of it as the superglue for the aorta, anytime you put two tissues together. And basically, I went out and recruited a team, a lot of them former Medtronic folks, but folks around the industry. We just brought our new Head of R&D, who's here with us today, are from Gore.
So we've got a really good leadership team. We put together a strategy. The company's roots were in aortic surgery, which is basically both cardiac and vascular surgeons. Our goal was to really assemble a portfolio that allowed you to treat the aorta from the aortic valve all the way to the iliac artery. We had some good starting pieces with our tissue and our BioGlue. We went on this journey, and this is kind of in the 2016, 2017 timeframe, and we've invested about $700 million in the franchise. As you can see, everything from the majority was M&A, but our pipeline, our channels, our manufacturing facilities, and we're building a real company here.
And so the M&A kind of strategy started with 2016. We acquired the On-X mechanical valve portfolio. Then in 2017, we acquired a German company called JOTEC, which got us basically a full stent graft portfolio. 2019, we did a deal with an Israeli company called Endospan, which got us a technology up in the arch. And then in 2020, we acquired a company called Ascyrus, which got us a stent for acute Type A dissections. So really, this, we did you know, four deals in five years, and really built out a portfolio, as you can see here, which took the TAM of the company from about $500 million to about $5 billion.
Interestingly, half the stuff on the right half of the page, nothing's approved in the U.S., so we have five or six PMAs kind of in the works, either enrolling in trials or about to start enrolling or are gonna enroll in the future. So we really have a lot of runway here. We've got a great sales team. We've got about 185 direct reps. You can see kind of where they are. We've invested a lot in Asia and Latin America, and those regions are growing rather rapidly. We've also invested a lot of CapEx in our manufacturing facilities. We've doubled the production capability in our stent manufacturing facility in Germany.
We've doubled our valve manufacturing capacity in our valve facility in Austin, and then the remainder of the products are, are produced in, in Atlanta. We've got a pipeline, like I said earlier, about the portfolio. Between the, the U.S. PMA and the Japanese approvals that will come off those same trials, you can see the pipeline. That's about $1 billion of revenue opportunity. Most of these markets either have no competitors or maybe one competitor. Every one of those technologies is $30,000, 90% gross margin. So we're very excited, and you can see how they kind of layer in 2025, 2026, 2027, 2028. They just kind of flow one or two a year, going forward.
We rebranded the company about a year ago to Artivion from CryoLife, really to focus, you know, show the change from a company that was just tissue and BioGlue to all the new technologies that I've just shown you. Then the final slide, and then I'll let Rick start asking me some questions, is really the narrative here is we've... When I started with the company, it was growing 5%-7%, a couple of products, small TAM. In that middle kind of today column, we've taken our growth rate up into the, we're growing about 11% through the third quarter. But we've been doing a lot, right? We've been investing in our factories, we've been investing in our facilities, our channels, our pipeline.
We've kind of done all that, and now we're gonna start to reap the benefits of those things, right? So we're expecting, and you'll hear this from Rick, I mean, you know, rapid EBITDA expansion, as we go into 2024, continuing double-digit revenue growth. But as soon as you go back to that pipeline and start to have products roll off that have $100 million opportunities at 90% gross margin with very little competition, without the need to add more reps, the drop-through is pretty profound. So with that, I will come sit down and let Rick ask me some questions.
That's great. Thank you. It's great overview to get us, get us going, Pat. I've been to... As I got ready for this conversation, I was reflecting on your Analyst Day comments and targets in the March 2022 Analyst Day, and thinking about how you've performed so far, and you've double-digit sales growth was an important goal, and you've achieved it. My question is, with a lot of that growth share price-driven as opposed to market growth necessarily, talk to us about how durable that double-digit growth is going forward.
Yeah, I threw a couple of slides in here just because I think it's relevant, right? We basically—this is from our Analyst Day back in March 2022. We said that we would grow double digits on the top line, call it roughly 10%, which we're at 11% so far this year. As you know, 'cause we've been on the call with you every quarter, we started the year at 8%-12%, then went 9%-12%, then 10%-12%, then 11%-12%. So we beat and raised every single quarter. One correction there, it's not just pricing and, you know, small market growth, right? A lot of the markets that we're in on the stent graft side, so AMDS, we're creating that market.
There is no existing market.
Of course.
It's, it's all growth. Some of the advanced technologies are where we use our device in the arch, the, for the frozen elephant trunk, the thoracoabdominal, those markets are growing way faster than the big kind of AAA thoracic, right? So the, the AAA markets are growing 2% or 3%. That's a small portion of our, of our business. We're, we're actually taking share there and growing faster, but there is an underlying market growth in a lot of our technologies that we're in because we're either new or it's, it's kind of the cutting-edge part of, of the field.
Yeah. I'm thinking about another target, expanding gross margins. Help us think through your gross margin goals from here, and there's obviously, it's been a complicated environment for a variety of reasons over the last year. So talk to us about that and where we're heading now.
Yeah. So you know, it's interesting, whenever we talk with our, you know, our analyst investment advisors, they're like: You know, you guys have got to be careful about - one of our guys is here - like, putting out three-year numbers, 'cause you never know what's gonna happen. So we, we put out three-year gross margin numbers, and we had very confident we could kind of add a point of gross margin every year.
Right
Right up until the worst inflation in the last 40 years, right? So we got, we got whacked on labor, we got whacked on suppliers jacking up our prices. So that was a change from when we put our numbers out.
Mm-hmm.
Our gross margins are fairly stable now. And the underlying, you know, pipeline of 90% gross margin things as they come out, all of our new products are 80%+ gross margin. So as that mix changes, we have an underlying, you know, kind of margin expansion opportunity and a pretty significant margin.
Just a natural one.
Pretty significant as we get, for example, AMDS into the U.S., which you actually have a good-size revenue number on a 90% gross margin, and then you get into Japan, and then you launch your next product. So I think you're gonna see, you know, a steady increase up. In 2024, it's not gonna be huge 'cause we're still kind of, you know, absorbing all of the kind of the blows from, you know, the high inflation rates.
How much operating leverage, as we approach, thinking about adjusted EBITDA targets, but-
Yeah
... you're clearly making progress, but how much operating leverage is there to be had on the SG&A line, the R&D lines? How are you thinking about the OpEx side of things?
Yeah. So this is another Investor Day slide we showed, right? Which was, we expected to get to, like, $75 million of EBITDA, which is a number you hear a lot from us in 2024. So if you throw on, you know, double-digit, however we finish the year, you know, you throw on double-digit revenue growth for that, we've got... You know, and if you get to the middle of the income statement, we've made a lot of our investments in the channels, in the factories, in the pipeline. So we can control some of those things, right? So 2024, we see as a significant.
If you think about our guidance right now for EBITDA is at $52 million-$75 million, you're talking about a very rapid EBITDA expansion because we've built the chassis, and now we just basically leverage kind of what we've got from an infrastructure standpoint.
OpEx is just not gonna grow as fast as this.
No, we can do it. I mean, it's a- I think we feel pretty confident we can actually do that. And it sets ourselves up very well for the next launch because then, that drop-through, this will drive this even higher.
Yeah. No question about it. And you highlighted inflation, and you know, what do I know about the economy? I'm a med tech analyst. But, it seems like we're seeing some signs of some of the inflationary pressures easing. Are you all seeing that?
I think-
In any way, shape, or form, Ashley?
Yeah, you know, certainly we're starting to see it start to moderate. But if you go back to the Analyst Day, you know, we had anticipated being at about 68% gross margin in 2024. We're currently between 64 and 65 right now. That is almost solely due to inflation. I mean, if you look at that, you know, 300 basis points on, let's call it, you know, $400 million in revenue next year, it's $12 million. And so it had a big impact, not only on gross margin, but where we are on adjusted EBITDA. Despite that, we still think that we have a pathway to get to $75 million in adjusted EBITDA next year, and if we didn't think so, then we wouldn't be saying it.
You know, the other thing that I'll mention is, again, going back to our Analyst Day, we told people, you know, the 400 was based on a presumed FX rate of EUR/USD 1.13. We're a little bit below that right now. But, you know, we told people 10% compounded annual growth on the top line. You know, Pat just mentioned earlier, so far through the end of the third quarter, we're above 11%. You know, we'll see where we end up.
For this year, and we'll give out guidance for 2024, in February. So, you know, we'll see, you know, where that comes out. The other thing I'll say is, you know, one of the advantages of being a small, nimble company, you know, we can make decisions very quickly on tightening up on spending if we need to do that. So one of the great advantages of being small is, you know, the people that need to decide on, you know, tamping down on spending are, like, sitting right here.
Right.
You know, and we can do that pretty quickly.
Yeah, that's great. Going back to thinking about 2023, how much is price? Well, let's say it more positive. Price has contributed positively, obviously to performance this year. So a couple of questions: Will you need that level of price again in, you know, 2024 to maintain that double-digit top line growth? And is there the opportunity to keep raising prices?
So, you know, it depends on the product line, right? We have a lot of different products and a lot of different geographies, and it's. If you know one product, you know one product, right? I mean, they're all different depending on the kind of competitive situation in those areas. We had one product line in particular that had some very nice price increases because of its proprietary nature in a growing market. You know, we will not go after those prices again this year, in 2024, but we're gonna see large volume increases through work we've done in yield performance. So the kind of the amount of price we got in 2023 for what that product, we will get actually as much or more in volume in market growth.
The rest of the products have been, you know, the stuff we go after, you know, a couple percent a year type stuff, which we will continue to do.
One underappreciated growth driver at Artivion, I think is your Asia, Latin America,
Mm-hmm
... business. They've grown, I think in 2023, like 21%-26%-
Yeah
... if I remember the numbers. How sustainable is that kind of growth? And talk about the drivers that might drive that kind of stronger double-digit growth.
Yeah, it's pretty simple, actually. It's like blocking and tackling, right? So when I started, we had one person in Asia and nobody in Latin America. Now, I showed you earlier, we've got, you know, probably about 40 people in those regions.
Right.
We had a ton of products that weren't approved. So all we've had to do is, you know, get the products approved, and then once you have kind of a critical mass of products approved, you put some feet on the street. So, for example, we have direct reps in Thailand now, and we have a very nice business there. It's growing very rapidly. We're direct in Australia. We just went direct in Greece. So as we get critical mass of approvals, and it makes, you know, financial, we just run the NPVs, and then you put a couple feet on the street, and then your business kind of explodes.
Right.
So it's really just the same, same play. Get approvals, put some people on the street, and then, you know, drive the growth. But we're seeing 20%-25% growth in both those regions consistently.
Right. Another topic I wanted to make sure I touch on is, and thinking back to the Analyst Day, are your net leverage expectations?
Yeah.
You're clearly making progress, but net debt, I think, the latest, actually, like $252 million, something like that, a little less than 5x your projected 2023 adjusted EBITDA. At the end of 2024, we're saying $237 million net debt, $75 million adjusted EBITDA, more like 3x leverage. Are you on track? And again, what are the puts and takes there as we look ahead?
Well, there's the slide from Analyst Day, and we said, you know, two years ago that we'd be at less than 3 net leverage in 2024. Do the math that you just did. If you hit $75 million in EBITDA, and you have $230 million of debt, it's around three. So I think we're, you know-
You feel good?
Yeah, I think we, we feel very good about kind of where we are on the leverage side.
Yeah. You recently sold one of your small businesses. When you think about the portfolio, you sold PerClot, as folks know. Are there other opportunities to reshape the portfolio and think about debt, or give yourself maybe, said another way, more of an opportunity to go out and add other innovative technologies to the portfolio?
So, you know, so, you know, we sold PerClot to Baxter. It was a non-strategic asset. We've actually, over time, you know, over the last five or six years, while we were acquiring, we actually divested a couple other assets as well that were not strategic. You know, I think, I think we're, we're not gonna do anything in the near term until some of the... For example, when if AMDS- when AMDS comes online in the U.S., and we can get to, you know, $50 million-$60 million of, of revenue with 90% gross margin, we, we could then talk about maybe divesting something. I don't want to get into the specifics of that because it, you know, competitors love to hear that kind of stuff. So I'll just keep my comments to myself on that one.
Okay. But, options exist?
They do.
Oh, okay, gotcha. Let's turn to the product overview, and I apologize to folks listening. It is technical and clinical and about a lot of datasets, but you really have a lot going on. Most recently, just a couple of days after you reported, I think it was November ninth, you announced that you had completed enrollment in your AMDS PERSEVERE trial. For folks listening, what is AMDS?
Yeah.
What's the trial? Why is this so significant? It's an important milestone.
Yeah, so this, this is a really unique technology. So here it is up on the screen. So the disease condition is called an acute type A dissection. You basically get a tear in your aortic, in your aorta, basically above the aortic valve, and blood starts to go down kind of the wrong way. It creates a new aorta, and the blood goes the wrong way. This was a U.S. trial in the 20 biggest cardiac centers, 93 patients. We presented the interim data of 52 patients at EACTS, which we did a press release on. We're seeing dramatic. I mean, I've been in cardiac technologies for 32 years. We showed mortalities going from 35 to 13, statistically significant.
We're seeing people who require kidney dialysis going from in the 20s down to, you know, single digits. We're seeing stroke improve, we're seeing MI improve. So this is basically all you do is you add that big stent on the standard of care operation, which is putting that white graft in, which is called a hemiarch. So we're very excited about this. This is our next big launch, which we finished a trial. We have to do a year of follow-up and then a FDA approval. So, you know, you're talking probably second half of 2025 for this launch.
Okay. But thinking through all that math about submission and publication-
Yeah
... et cetera, I mean, it sounds like in terms of meaningful U.S. launch and meaningful revenue, 2026.
Yeah.
I mean, this is gonna be a big product for 2026.
Yeah.
Talk about the opportunity a little bit, in various ways. Reimbursement, I'm guessing the price tag is in the $20,000-$30,000-
Yeah, around $25,000.
Okay. Have you worked with CMS to establish codes? And, I mean, how do we think about-
Yeah, so the DRGs... I mean, all of our technology falls under the DRG, but we don't have separate reimbursement. These are all kind of-
Okay
... covered under DRG. So,
Existing DRG.
Existing DRGs. The DRG for an acute Type A dissection is quite substantial because I mean, the mortality of this condition is 2% per hour. It's an emergency surgery in the middle of the night. So there is ample room in the DRG to cover this device.
Mm-hmm.
Now, once we you know, we're not gonna stop there. Once we get the final dataset, we will go to CMS for a new tech add-on, because just the math off of what this can do to the healthcare system and for patients and the like, I think, is, you know, it should get an additional favorable kicker for the institution, to help them absorb some of the cost. But that'll can only happen after you get the data.
You called out the mortality of the stroke rate and how superb it was. Is that enough to feel... you know, I don't wanna jinx you by saying this is what the FDA is gonna do, but it seems like a no-brainer. I mean-
Well, I think... For me, you know, I was a high jumper in high school, right? 58% of people who have an acute Type A dissection either die, have a stroke, have to go on kidney dialysis, or have a heart attack, like, real stuff. The FDA said you have to take that down to 20%—excuse me, 40%. We're at 20%.
You're feeling good?
Yeah, I mean, this is not—I mean, I've been involved in heart failure trials where somebody walks 12 more feet.
Right.
Right. This is, this is death, stroke, dialysis, and heart attacks.
In terms of commercialization, actually, before I even ask that, does this—I don't wanna say—you've talked about the TAM a little bit, but could this expand the opportunity, having an off-the-shelf, minimally invasive... And every doctor that we've talked to, it always, the doctor always says: "Yeah, this always happens at 1:00 A.M., Saturday night." I don't know what that's about, but several doctors have said that.
Yeah.
Does this expand the market because they're able to take people who otherwise would have died and?
Absolutely. In fact, there's, you know... Because there's a 2% mortality per hour, and if you have... This, again, I don't wanna get too technical, but when the blood's flowing to the wrong places, it's called malperfusion. It's about half the cases. Those are the sickest of the sick. In a local, if you're in Wichita, Kansas, they can't do the surgery that they need to do for that patient. They need to transfer them, and a lot of them die in transport, you know. This technology will allow them to do the procedure there. I mean, every cardiac surgeon can do this, and there's 700 hospitals in the country that do these. Right.
So that, that's it's a really good point because, you know, Cleveland Clinic, Mayo Clinic, these places where you've got these expert aortic centers, getting them there is gonna cost you mortality. So if you can actually, you know, distribute this technology and democratize-
Right
... acute Type A’s, it can make a huge impact on patients.
The FDA is letting you treat another 40 patients.
Yes
... with AMDS, post the 93 patients enrolled.
Yeah.
It seems to me, it says a lot about the quality of the technology and the data, but I was reflecting on the incremental revenue at $1 million, you know, at, at, maybe at a full $25,000 ASP. Anyway, what would the implications be of treating the additional 40 patients, and is that in guidance? Is that cushion? Is that upside?
No, we have it, I mean, so typically, this is... I've been involved with a lot of PMA trials. This is very, very common, where you finish enrollment, and the clinicians want access to the technology. I mean, I had a number of these big investigators say: "You know, we've enrolled. We can still get it, right?" And so, well, there's a process called the continued access with the FDA.
Right.
They gave us 40, so we're in the process of doing that. They have to go back through their IRBs, potentially change their contract-
Mm-hmm
... administrative stuff. And if we use those 40, then we go back to the FDA, and maybe we get more. So it's-
Yes
... the idea is to provide access to the technology while it's under, you know, follow-up and FDA review. So this continued access can go on for the next couple of years, and they will, you know, feather us out patients based on, you know, they don't give you 500 in, in-
But again, this is real revenue.
Oh, yeah.
This is not-
Yeah.
Internationally, I know reimbursement is not as ideal internationally. What's the story there?
Yeah, I mean, it's, you know, different in every country once again. But, you know, this technology is growing. I mean, we haven't broken out the revenue. This technology is growing 100%, 100% year-over-year.
That sounds good. Looking at some other products, and we're not gonna have time to go through every one, but the recent positive On-X aortic mechanical valve data, how are you thinking about using-
Yeah
... that data set to drive additional share gain and price increases or not? You know-
Yeah
... what have you seen and heard?
Well-
What are the reactions been post the data readout?
Yeah. So it's a pretty simple story, right? So we, The chart I'm showing here is from the original On-X, Low INR trial, right? We, we had this concept where if you could, if you could cut the blood thinners in half, still protect the valves from a stroke, and reduce bleeding by 60%, that would be meaningful to patients. So we, we did that trial, as you well know, and we launched it in 2015, and our market share went from 25% to 60%, right? And we've, we've taken share from some of the biggest players and put some of them out of business. That product's grown, grown 13.5% for the last, you know, six, seven years. This is the data you refer to.
So the FDA, as part of that PMA, made us do a 510-patient valve trial in the real world. We showed an 85% reduction in major bleeding. So this is just out. We're doing some market research right now, but our goal right now is to basically... We don't think people should be putting any other valves in except for this valve, because of the data. No one else has the data, no one else has the indication, and they're not gonna. Why would anybody use another valve if you can use this one?
Exactly.
So we again, it's still early days. I'll have some more information on the market research, and maybe in our next call, I can, you know, tell you. You can ask me again, and I can tell you what we're gonna do with it. But, I mean, we expect this to be a driver of continued growth for the On-X valve.
Again, highlighting the richness of your-
Yeah
... portfolio here. To move on to another compelling story. Your-- you have a full aortic arch replacement device.
Yeah.
The E-vita Open NEO. Talk about the, the accelerating U.S. launch.
Yeah.
We've done a bunch of due diligence on E-vita Open NEO, and our physician checks all say it truly is a better device-
Yeah
... than the U.S.-approved competitor. I won't name names. But they have... The competitor has CMS DRG and an NTAP payment. You know, is there an incentive to accelerate the approval process here and-
Yes
... or do you want AMDS, and you can't mix them up? It's hard to judge that.
Yeah, I mean, back to the pipeline, right? It's actually, you can see it here, right? So we have AMDS first, and then the product you were talking about is called, we've branded recently as Arcevo LSA. So we should be in the clinic. Our head of R&D is here right now. We have to test 700 of these devices this year, and we will be in the clinic next year.
I see.
So we're going as fast as we can, but we've licensed in some technology that allow us to actually treat if it's the middle product there. That's our current product we sell internationally, but we've licensed in some technology. It'll be the first device with a branched subclavian. And I can just tell you, when you put that device in front of surgeons, I mean, we will, you know, do extremely well with that technology.
The $250 million TAM, does that include this incremental technology, or?
It doesn't.
Yeah.
And that TAM's probably gonna double.
As a result?
Yeah. That's a, that's a $35,000 system at 90% gross margin, and I think we will, like I said, do extremely well.
We only have a minute left, Pat, and I just touched on some of the compelling aspects of the story, but I mean, to me, I know this is my opinion, it's obvious that you have a truly compelling, very broad, unique portfolio in the aortic space. Do you have enough now? I mean, obviously, you told me the numbers is very exciting, but are there more technology opportunities-
Yeah
... to build this out over time?
So if you look at this slide, right, I mean, there's $1 billion... Like I said, it's not a billion dollars where I'm going in to compete against eight other people. These are all... No one has AMDS. There's no approval for a branched arch device, NEXUS. There's one competitor for Arcevo, and we think we will do extremely well there. So we've got, you know, five years of... And this is all funded. We don't have to raise more money. It's all funded, and $1 billion, and we're guiding to $400 million maybe next year.
Right.
And then there's more, there's more behind it. There's more people. There's another one, our bridging stent, our branched thoracoabdominal. You know, I think the ultimate is when I talk to customers, and I show them our portfolio, say: What else do I need? And they're like: You kind of have everything. Now, there's always some one-off technologies here and there, but for the next three years, we are going to delever, we're going to get these products approved, we're gonna accelerate revenue, expand gross margin, and expand EBITDA.
Sounds like a plan. Thank you for being here today. It's really exciting.
Great to see you, Rick.
Thank you.