Good morning. Thanks for joining us at the 23rd Annual Needham Healthcare Conference. I'm Mike Matson, and I lead the MedTech and Diagnostics Equity Research Team at Needham & Company. I'm pleased to introduce Artivion. Presenting from the company today, we have CEO Pat Mackin and CFO Lance Berry. Instead of a standard presentation, we are going to do a Q&A session. If you do have any questions that you would like to ask, you could submit them electronically through the Needham Conference website, or feel free to email them to me at mmatson@needhamco.com, and I'll do my best to fit them in. So we, as I mentioned, we are going to go straight into the Q&A. Unless you'd like to make any introductory remarks, Pat, and then we can get started.
Yeah. Thanks for having us, and let's go ahead right into the Q&A.
Okay, great. So you've got a pretty interesting pipeline these days. You've got some interesting, pretty large opportunities there. I wanted to start out getting an update on some of these. So specifically, you have three sort of longer-term opportunities. The first one is AMDS in the US. So can you maybe provide us with a quick overview of the product and the market opportunity there?
Yeah. So let me. I thought what would be helpful is just I'm going to show a few slides just to get people kind of grounded in kind of the technology that we're focused on. So we're going to talk about these three technologies this morning. And if you look at the portfolio, one of the things we did is if you we call this kind of the arch solutions. So this is up in the aortic arch, kind of from just to orient people, this is the aortic valve. These are your major vessels, the great vessels that come off the aorta. So all three of our technologies in our pipeline are in the aortic arch. So we have our AMDS, which is for acute Type A dissections.
We have our frozen elephant trunk product called the NEO and the next generation called Arcivo, which is a surgical kind of stent graft in the arch. And then we have our partnership with Nexus, which is a fully endovascular system to treat the arch. So again, I think it's important to kind of get the context that these all kind of interplay with each other depending on the anatomy, depending on the disease state. So that's kind of the pictorial view of this. This is our pipeline, right? So AMDS, Nexus, and Arcivo in the U.S. and Japan are kind of our six leading candidates in the pipeline, which we're going to kind of dive into. So starting with your first question, so AMDS is a fairly simple system, and I think it's one of the things that makes it unique.
You can see over here on the left, it's a very large stent, the size of your aorta, that's surgically implanted here in this cuff. And then here's the delivery system where the stent is collapsed down onto the delivery system. You've got kind of a ripcord here that you use to pull to deploy it in the aorta. So that's the system. And again, pretty simple, implanted by cardiac surgeons.
Okay, got it. You recently announced the results from the PERSEVERE trial of AMDS. I was wondering if you could maybe just summarize the data and why you think it was so positive?
Yeah. So this data was presented as a late breaker at STS back at the end of January. And just to, again, once again, orient people, kind of we keep talking about the aorta, right? So if you have an acute Type A dissection, which is a tear in the lining of the aorta, it splits into two, as you can see here in the picture on the left. The current standard of care operation is they would just go in and put a surgical graft to repair that tear. They're basically trying to get you out of the hospital alive. And in the reference cohort of that procedure, the standard of care of about 800 patients, you could see the mortality is almost 35%, stroke rates 21%, people requiring kidney dialysis after surgery is 24%, heart attacks is 10%.
So the combined of all those major adverse events is almost 60% of those patients had one of these four things. We then ran a 93-patient U.S. FDA trial. The 30-day data was, again, published or presented back at the end of January. And you could see the I think most surprising is the mortality going from 35% to less than 10%, stroke almost cut in half, dialysis down a little bit, no MIs. And so if you look at the patients that had a major adverse event, went from 58% down to 28%, a significant reduction and well below the safety bar that the FDA set in the trial. So I think this is, I mean, really breakthrough. It's been given breakthrough technology status from the FDA. And I think the results speak for themselves.
Okay, thanks. And just in terms of the timing, I think the chart you put up a moment ago looked like it was kind of late. 25 is what you're expecting for FDA approval?
Yeah, we think probably second half, probably more towards like the Q4 2025.
Okay. And so how will you sell the product in the U.S.? Is it, I think, you just have one sales force that sells kind of all your products here.
Yeah. Yeah. So the great thing about this technology, this is the same technology. Our cardiac surgery team in the US sells the pulmonary valve, which we're going to talk about, to aortic surgeons. They sell On-X. They sell BioGlue. So it's going to go through our existing sales force. We're not going to add any salespeople when we launch this product.
Okay, got it. And then what about pricing on the product and reimbursement?
Yeah. So we're going to pricing is $25,000 per device. And the reimbursement, because of the complexity and severity of these patients, you can obviously see this is life-threatening, life-altering. There's plenty of room in the DRG to cover kind of that kind of pricing point.
Okay, got it. And then there's two other products that were on your slide there, NEXUS and Arcivo. Can you provide an overview of these and kind of the market opportunities there as well?
Yeah. So let me start with kind of NEXUS. You see kind of all the very similar type stuff, right? So these are this one is a pure endovascular treatment for the aortic arch, right? And you'll get a better picture on the next slide. But it's two components. It's a graft that goes into the first vessel, and then you've got an extender graft, which kind of docks in this area. And you can see kind of more in this kind of pictorial of the steps, right? So this is all catheter delivered. You go into the innominate here, and you start deploying a device into the branch and start deploying the stent graft across the kind of aortic arch. Once it's fully deployed off the arch, you then come in and you bring in the second component, the docking component. And then you finish it off.
So you can see you have a kind of a total endovascular repair of the arch via catheter. So the trial in the U.S. is called TRIOMPH. You can see here. And by the way, these slides are right from the STS presentation that was given, again, about at the end of January this year. The trial is 110 patients total. But important to note that the pivotal approval arm is the chronic dissections, which is 60. There's 30 aneurysms and 20 penetrating ulcers. And that's going to be done in 30 centers here in the U.S. and followed for 5 years. As of today, we've enrolled 42 of the 60. So we expect that trial to complete enrollment in the second half of this year, which would put you on an approval time frame of kind of second half of 2026.
Okay, thanks. And I suppose I think there was some interim data from TRIOMPH. Maybe you could talk about that.
Yeah. So this was presented at STS. Again, it's obviously only about a third of the trial. So this was presented by Brad Leshnower from Emory. So in this highlighted blue, it's 13 out of the 60. So it's obviously an early look. There were some aneurysms, which got you up to the 22. But very good early mortality and then no strokes, no renal failure, no paraplegia. So I mean, again, it's too early to tell, right? That's why you do trials. But I mean, this was I think it's promising. And we've seen similar results in the first-in-man trial that was used to get European approval and the data coming out of Europe. So it certainly looks to be very promising technology.
Okay. And then maybe just a similar overview of Arcivo. I know that's probably in a little bit earlier stage here, but.
Yeah. So we've been in the frozen elephant trunk market for a decade and through our acquisition of JOTEC. This will be our third-generation system. So this is a surgically implanted stent graft. And the novelty here is the subclavian branch technology. We'll be the first company that comes with the subclavian branch. And you could see kind of the delivery system here where the main portion goes into the aorta, and then this smaller portion goes into the subclavian branch, which is really kind of the most challenging part of the procedure. And we think this is going to be a major step forward in the field. So that's kind of the system. The clinical trial, you can see again, here's it pictured in the aorta. So this latter portion is the Arcivo device, which is the stent graft with the branch subclavian.
They just attach a standard surgical graft on the other side. We're expecting. We're still in discussions with the FDA on this, but we're expecting this to be kind of in the 65-100 patients in 20-25 centers. We are going to be submitting the IDE this year and hope to get our first patient late this year, early next year. This trial is kind of in the works. We've got a steering committee and protocols being developed, and we'll be submitting that IDE here shortly.
Okay. And then what is the competitive situation like for both of those products in the U.S.? Would NEXUS be the first endovascular arch repair product?
It would. Yeah. NEXUS would be the first. There's nothing else approved. And there's one frozen elephant trunk product approved from Terumo that's in the market right now. They just got approval last year, I think middle of last year.
Okay. What about with the NEXUS? I mean, right now, it's owned by Endospan. So, I think when you signed the partnership originally, you were distributing it in Europe, and then you have an option to acquire the company. So, can you maybe just remind us about the terms of that agreement and when or if you might potentially end up buying the entire company?
Yeah. So basically, the way the agreement was written is that we have European distribution rights, and we also have an option to acquire the company within 90 days of them receiving FDA approval. So as we talked about, our current estimate on the trial is that it finishes enrollment in the second half of this year, which would put them on a path to having approval probably late 2026. And that's about the time we would have to make a decision if we were going to acquire the product or not. So I mean, we haven't seen the data yet. So we have to see the data. They have to get an approval. And then if we want to acquire it, we have an option to do so. And we should be in very good shape to do that from a balance sheet standpoint.
Okay. And then you are selling both AMDS and NEXUS outside the U.S. So I guess it's part of your stent graft business, which has seen really strong growth. But maybe so it's a little hard as an outsider to know how much of that's kind of the other stent grafts versus these products. How have these done, I guess, in Europe and other places?
These are two of our fastest growing stent grafts. So actually, I'd say all three of them that I just talked about. So AMDS, NEXUS, and the current predecessor to this product that's on the screen, NEO, those are three of our fastest growing stent grafts, which is driving the overall performance of the stent graft business. So they're doing quite well.
Okay, got it. Then I think you agreed to sell this PerClot product to Baxter, or I guess you have sold it now to Baxter. I think there was some kind of transition agreement there, and you were still generating some revenue. Can you just remind us of where things stand there with that?
Yeah. I'll let Lance grab that one.
Yeah. So we are supplying Baxter right now, and we do have revenue in the other category in our revenue line items. It's pretty small right now. I mean, obviously, when it goes away, there'll be some headwind. But at this point, at the current run rate, it's not meaningful.
Okay, got it. And then in terms of the NEXUS, what are you assuming there in terms of how much of that market ultimately transitions to endovascular repair?
Yeah. It's a good question. I mean, I'll go back to kind of when we did all these transactions. I mean, I think you know I ran Medtronic stent graft business back in let me see. Can you see those slides back up? Can you see those okay, Mike?
Yeah. Yeah.
Yeah. So I've got a lot of experience in the stent graft business. This field of arch solutions for kind of using stents and stent grafts to repair the aortic arch is really a new frontier, right? There is no product approved for acute type A dissections like AMDS. It'll be the first of its kind. There's no product approved for NEXUS in the US. It'll be the first of its kind in the US. There's one approved in this area. We're bringing in next-generation technology. So without getting too technical from a procedural standpoint, AMDS is really used in acute type As. You can also use a Neo in acute type A. One of the contraindications for an AMDS is that if there's tears up here in these vessels, you can't use an AMDS, but you can use our Arcivo device or the Neo.
When you start talking about NEO or Arcivo compared to NEXUS, one's totally endovascular, one's surgical. But there's different anatomical limitations of what you can do with a NEXUS device. The first trial is a single branch. We're currently selling a dual branch in Europe. We're about to launch a three-branch. So these are early days. We've not even seen the U.S. FDA trial on the single branch, right? So I think you can kind of go back to TAVR when the first TAVRs came out. The other thing that happened was this type of technology opens up the market, actually expands the market to patients who can't get surgery. So these are going to all three of these are going to coexist together. And what we're seeing is it gives great options for clinicians to treat their patients as the best way that they can.
I don't think we're going to know the answer to how these are ultimately going to play, which is going to have what percentage of what until you see the data for the different therapies and technologies over time. They're all going to be, I think, very vibrant technologies in the market.
Okay, got it. I want to move on to some of your existing products that are still seeing pretty solid growth. Just starting with On-X, the On-X valve. The aortic valve in particular, I was wondering if you could give us an update there. I know that there was some data presented last year that showed some lower adverse outcomes and reduction in bleeding. How has that been received, and is that driving increased use of your On-X valve?
Yeah. So this is the data you're referring to. This was presented at the European Society meeting back in Vienna back in October of last year. So just to orient people, this is a post-approval trial, which is an FDA requirement of 510 patients, which is a lot of valves. I mean, 500 valves is a lot of valves. They want to see the real world. They want to see, does the data you have in the PMA, is it replicated in the real world once it gets out into the community? What we found was we saw the data actually improved. We saw an 85% reduction in major bleeding. You can see here, the composite primary endpoint between kind of bleeding and thrombosis was a significant reduction of 0.001 in favor of the low INR. So this is the 3-year data.
We will be presenting the five-year data at AATS in like three weeks. So it's one of these things where all the patients were enrolled, but the data, it kind of moves over time fairly quickly because once you catch them up. So you're going to see the five-year data. And we've done some market research on this, and it's been very well received by clinicians. And to your point, I mean, On-X grew 16% last year, and this data was released in October. So we expect to see nice double-digit growth in the On-X franchise going forward.
Okay, got it. And then what about your share in mechanical aortic valves? I know you've taken a lot of share, but I guess, are you anywhere close to being at a point where we should start to worry that it's going to get tougher to keep doing that?
Yeah. So it's interesting. It's kind of a tale of two cities, right? I mean, one of the things unique about our company is for a company of our size, we do half our business internationally. Our shares are very different in the U.S. versus international. So globally, we're at about a 30% share. So we've got plenty of headroom, particularly with this data. We've got kind of over 50% share in the U.S. And then obviously, you can do the math, and under 50%, it's probably in the 25% range outside the U.S. So we have plenty of room to grow. And in fact, the research we did on this recent data showed that we should be able to continue to take share kind of around the world with the technology.
Just as a follow-up, I mean, mechanical valves, are they just kind of the age range and the population that they're being used in similar outside the U.S. as in the U.S., or is there maybe wider use of these valves outside the U.S.?
Yeah. It's very different. It definitely goes older. I mean, the US, our average age for a mechanical valve in the US is probably 55, 56 years old. And outside the US, that goes way up. The use of TAVR and bioprosthetics is nowhere near what it is in the US. So it definitely skews to the older ages, I'd say under 65, under 70.
So there's a greater percentage of the patients that are getting mechanical as opposed to us?
For sure.
Okay. All right. And then just on the tissue business, I know that that's kind of seen a bit of a resurgence. And we can talk maybe more about the Ross procedure. But just can you give us an update there broadly and then specifically what you're seeing with the Ross procedure and why that's been driving such strong growth?
Yeah. So just to, again, orient people on our Ross, again, you see everything we do is kind of in the aorta. So basically, the Ross procedure is for patients, I would say, under 55. It's very large in the pediatric market. That's a big portion of our business is in kids. But it's really been growing in young adults and then now kind of in the 50-55 range. What they do is they take out your malfunctioning aortic valve. They backfill it with your native pulmonary valve, and then they use one of our replacement valves to backfill your pulmonary valve. So it's a two-valve operation. This is called the Ross procedure. What's been driving the growth of this is it's the only aortic procedure that you can see here restores patient survival for your age, gender-matched populations with data out to 25 years.
So what that means is if you had a Ross and the person, the guy just like you, next to you, didn't, you would actually have the same outcomes that they would have without having had this procedure for 25 years, which is amazing. No blood thinners. It's a great operation. There's going to be some data presented at AATS on the procedural growth of the Ross, and it's exponential. It's really taking off. And we happen to have the only decellularized pulmonary valve on the market, which is extremely meaningful because of the lack of reoperations required with our valve compared to a non-decellularized. And you can see that here. So at a decade, if you got a non-Ross valve, you have about 40% of those valves will come out. And with our valve, we only have about 20% at a decade. So we have proprietary technology.
We actually have very good gross margins on it now with the price increases we've done. So this is a real bellwether for the company and is driving significant growth in the tissue business.
Okay, got it. And then just on BioGlue, I think it's a fairly mature product, but are there any indication, expansions, or anything like that that could drive growth? And I know that in the past, you were trying to get this product approved in China, and I don't remember where. I know there were some delays and whatnot, but maybe you could just give us an update on potential to get that into China.
Yeah. I'll let Lance give an update on that.
Yeah. So I mean, we're still pursuing that. I think at this point, we're not counting on it. And we don't need that to be able to get our total business to the growth rates that we want to get it to. If it were to happen, that would be fantastic. But it is challenging and something we're not counting on at this point. So if it happens, it'd be great. And if not, that'll be fine. BioGlue is a fantastic product. It's been a company for a long time. It's got awesome gross margins. Doesn't have the growth potential that some of our other products does, but it pays a lot of bills. It's really good.
Yeah. Okay, got it. And then I want to move on to your international business. So at the Investor Day that you had a couple of years ago in 2022, you talked about being able to sustain 25%-30% growth in Asia and Latin America. And I think you've largely delivered on that so far. So can you just talk about what's been driving the growth there and how sustainable that is?
Yeah. In fact, I went back and looked. So since we've talked about that kind of directional guidance of 25%-30% in APAC Latin America, the last two years, 2022 and 2023, we grew the combined region 27%. So to your point, it's done quite well. It's been a fairly simple kind of play, which is we have this great portfolio of products. We get regulatory approvals. And when we have kind of a mass of those approvals, we go direct and put some feet on the street. And we've done that in a number of different markets. We've done it in Australia. We've done it in Thailand. We've done it in Singapore. We've done it in Hong Kong. And so that's really what's been driving the success. We're direct in Brazil and Colombia at this point in Latin America.
So it's a very simple kind of NPV calculation, right? It's like, how much can you sell, and how much are the reps going to cost you, and does it make sense? And we have kind of a whole model that we use. So yeah, I mean, 27% growth over the last two years has been pretty strong.
In terms of your NPV model, I mean, what's that telling you about other are there other markets that you're looking at entering in the next few years, other regions or countries?
Lance, go ahead once you take that.
Yeah. We're direct in really probably the vast majority of places that we want to be at the moment, but a lot of them is pretty recent. So there's still a lot of growth opportunity. We're kind of entering in the really good phase. We have infrastructure set up. And so that's built into the cost structure of the business. But we still have opportunities for future product approvals and then sales force expansion. So we've really done a lot of the initial work that's kind of behind us. And now we're really having an opportunity to expand from here without having to make all these big infrastructure investments.
Okay, got it. And then just in terms of the products that you're selling, I know it probably varies by country, but On-X, it gets a lot of attention in the U.S. But can you remind me, are you selling On-X outside the U.S. in a lot of these regions that you're in?
Yeah. I actually checked on that. We're in like 100 countries with On-X, right? I mean, we're everywhere. The difference is, and you'll appreciate this, right? When you have a highly differentiated technology like that with a low INR, it takes a rep on the ground to kind of communicate that to people, right? So I think that's kind of, to Lance's point, it's not just having the product there. You sell through a distributor, and they do a nice job for us, but they just don't spend the time on the product that your direct rep does. And we see it every time when we put direct people on the ground, the business kind of takes off. And that's part of the rationale. When you have very sophisticated technology like AMDS, like NEO, like NEXUS, you need feet on the ground to actually do that.
And so getting them there is one thing, but then getting the relationships and communicating the messages and all that is really where you continue to get revenue growth.
Okay, got it. And then just a few financial questions. I want to start with the financing that you announced in January. Can you provide us with an overview of this and kind of where your balance sheet stands post the financing, including your leverage ratio?
Yeah. Lance, go ahead.
Sure. So in January, we refinanced our term loan with private debt, which was a combination of a term loan, a revolver, and then an option for a delayed draw term loan. And so we were able to completely refinance our existing term loan in January. And then now we have a $100 million delayed term loan available to refinance our $100 million of outstanding convertible debt, which is due in the summer of 2025. So the financing we did was essentially a complete refinance, if you want to think about it like that, because we have the money available to refinance, to convert when we choose to. And so we have about $320 million of debt total post the refi and about roughly $60 million of cash.
Call it $260 million of net debt, which is about looking on a trailing 12-month basis of EBITDA, about a 4.8x net leverage. Then if you look toward the guidance we've provided, that should be closer to 3.5 by the end of 2024.
Okay, got it. That's helpful. And then just in terms of your gross margin, it's been pretty stable in the mid-60s in the past few years. And I mean, that's good. But by med-tech standards, especially in kind of the cardiovascular world, it seems to be a little on the lower side relative to some of the peers. So is there anything you can do to drive this higher over time? And is there any kind of mixed benefit, particularly from some of these newer pipeline products? I got to imagine that AMDS and NEXUS, those must have pretty high gross margins.
Yeah. So first of all, I think honestly, holding gross margins flat over the past couple of years with all the inflation and supply chain issues was actually pretty good just as a starting point. And one thing to keep into consideration with our gross margin, which is a little lower than some portions of med-tech is, as Pat said earlier, we're almost 50% international, which definitely has lower margins. And then the tissue business, most of it has lower margins. Although I will say with the price increases we took on our SynerGraft pulmonary valve, that that's actually accretive to overall gross margin, and that's growing faster than the rest of tissue. So to your point, there are looking forward some really good mixed benefits.
The big thing is those things in the pipeline are coming to the U.S. and Japan, which are really just the two highest gross margin markets in the world. Hopefully, we'll get to see some mixed benefit as those things come to market. We definitely would expect it. We haven't built anything into guidance this year because there's not anything coming to market this year. Looking forward, you would hope there would be upward pressure on gross margin through mix.
Okay, got it. That makes sense. And then just in terms of the guidance, I can't remember off the top of my head exactly where you got in the EBITDA in terms of the dollars this year, but it does imply some pretty strong growth versus last year. So can you just talk about what's driving that? Where in the P&L? Is it primarily SG&A leverage, or is there something else going on?
Yeah. I think that's actually an underappreciated portion of the Artivion story is our opportunity for SG&A leverage. And that's really what's driving it this year. We're taking 10% growth at the midpoint top line and turning it into 30% growth at the midpoint for EBITDA. And really, first of all, the sales forces are pretty leverageable. We talked about we have been expanding in Asia and Latin America, but a lot of that initial infrastructure setup is now done. Hiring the third, fourth, and fifth rep is not nearly as expensive as the first two when you enter a market. So a lot of that is behind us. And then these sales forces are pretty scalable. They're not having to stand in every single case like they are in some areas of med-tech. And our U.S. and Europe sales forces are very seasoned. These are long-tenured, high-performing sales forces.
As we give them new products, that's highly leverageable, which I don't think is maybe appreciated. Then on the G&A side, there's a pretty good bit of it for a company our size because we are so international and we are direct in so many countries. But we're kind of getting toward the tail end of that. We really ought to be highly leverageable from this point forward. If we can continue to grow top line like we are this year, which with the pipeline we have, we feel really good about that, we think we can continue to drive really strong SG&A leverage for a while.
Okay, got it. And then we already talked about the balance sheet, and I know we discussed the potential for you guys to buy Endospan, but just M&A more broadly. I know you've done a number of deals, and they seem to have worked pretty well, brought in a number of new growth drivers to the company. But what's the outlook for M&A? Would you consider additional M&A, particularly as you get past this year and your leverage ratio is kind of back to a more reasonable level?
Yeah. Right now, we're still just on the cusp of getting the payoff from these acquisitions in the past to some degree with AMDS and then Nexus a little further down the line. So right now, the focus is really mainly on driving the products we have and getting our balance sheet in really good shape. And so with the next for sure thing we would be looking at would be Nexus upon FDA approval. And as we discussed earlier, we think if we execute, we'll be in really good shape from a balance sheet perspective when it comes time to consider our option for that asset. And in the meantime, we're really focused on driving what we have.
Okay, got it. All right. That's the end of my questions. I don't see any questions submitted by the viewers. So I think we're going to have to wrap up there. But thanks, guys. Hope you have some good meetings today.
Hey, thanks for your time, Mike.
Thanks, Mike.