Great. Good morning, everyone. Thanks for joining us. This is our second annual Truist MedTech Conference in Boston. I'm Rich Newitter. I cover medical devices at Truist Securities. To kick off our fireside chat track, we have Artivion. Very fortunate to have Artivion CEO Pat Mackin and CFO Lance Berry. Thanks to both of you for joining us.
Nice to be here.
Maybe just to kick it off, a good place to start. I'm newer to the story. But one of the things that, from following you guys in the periphery, that struck me, you guys just have a very unique set of multiple TAMs that are—I don't want to say bite-sized, but maybe smaller than what we're accustomed to from some of the larger medtech players that are out there. Collectively, they offer quite durable growth runway, it seems like, and at least for the foreseeable future. I'd love to maybe just hear an overview of those. It seems like you guys have new indications and geographic expansion potential in each one of those. You've also committed to, I think, EBITDA growth twice the level of your price and currency top-line growth.
We'd just love to hear kind of how you maintain that, maybe some of the pillars there, and we'll dive deeper.
Yeah. I think it all goes back to the strategy that we set several years ago. We're an aortic-focused company, which allows us to have a very tight and focused organization, channel, pipeline. As you mentioned, individually, these TAMs aren't billion-dollar TAMs. When you string them together, it's quite a nice offering. The beauty of it, it's the same call point, the same sales force. If you look at our—the biggest part of our kind of unrealized TAM at this point is in the kind of stents and stent grafts for the aorta. The global market for stents and stent grafts is about $4 billion. About half of that is the more commoditized—they've been around for a while, so AAAs and Thoracics. I actually ran Medtronic's business that has those products 20-plus years ago.
The area where we're focused—now, we have some products in that area, but that's not really where our focus is. We're focused on the advanced stent graft segment, which is also about $2 billion. In many cases, those products haven't even reached—no products have reached the U.S. yet. We're kind of a leader in that space. If you kind of just look at our pipeline and just walk down the aorta and kind of chronologically what's coming, our first kind of shot on goal is AMDS. We got an HDE back in January. That TAM is about $500 million-plus. We're already starting to—we've got it in Europe and other parts of the world. We're now launching in the U.S. The next PMA in the pipeline is Nexus from our investment in Endospan. Their data just read out in May at AATS.
We would expect to see that PMA in the U.S. in the next 18 months. The third is our what's called the Frozen Elephant Trunk segment, which is basically a total replacement of the aortic arch with a stent and a graft. We have a product called Arcevo. We expect that trial to start later this year. Next on the list is a branch thoraco-abdominal, which is also about $500 million. If you go from the top, AMDS is $500 million. If you go to NEXUS, $600 million. If you go to Frozen Elephant Trunk, probably $250 million. If you go to the branch thoraco-abdominal, another $500 million. You have about $2 billion. The beauty of all these trials is we run a U.S. trial. We may have some European centers. A year later, we submit to Japan, right?
Then we use that data in other parts of the world. Yeah, I think, as you mentioned, I mean, we've got a business that every 18 months, there's another PMA coming. We have products in different phases. We're just launching AMDS. We finished the trial on NEXUS. We're starting the trial on Arcevo, and we're getting ready to start the trial on our next device. It's just kind of a flywheel of things that just keep coming out in a very—which allows us to keep our R&D constant in the 7-8% range so we can manage it and not have to raise any money.
That's great. Maybe just sticking with—and we'll go in the order there—AMDS, what are the next steps for the PMA and the timing there?
Yeah. The PMA, it's a modular PMA. We've submitted three to four modules at this point. We're just working through the process. We have one more that has testing that's going to take a little bit longer for us to finish and then submit. We're looking at approval sometime mid-2026. I think the good thing is the HDE really gives us, I guess, a year, year and a half jumpstart on the launch. The product will be on the shelf in the hospital. We really ought to be able to drive a significant amount of the benefits of the launch from the HDE. For those not familiar with the HDE, the one big limiting factor versus a PMA is there is a cap on the number of procedures you can do in a given year.
For this particular indication, the cap is larger than the whole market. So it is not really a cap for us. It is a little bit—this HDE is much closer to a PMA than a normal HDE.
Got it. Maybe just talk a little bit about what aortic dissection is like today and how does AMDS fundamentally change that.
Yeah. It's really a devastating—it's probably the worst disease in the cardiac space. I mean, in simple terms, you get a tear in your aorta, in this case, kind of in the ascending part right above the valve. And blood starts flowing down kind of a wrong new tube, which means blood's not going to your brain. It's not going to your kidneys. It's not going to your legs, your gut. It's really—the mortality is like 1-2% per hour. These are patients that are medevaced in from kind of tertiary centers. The standard of care right now is just to fix the tear with a surgical graft. It's called a hemi-arch. It's been around for 50 years. There's really been no innovation. In cases where there's what we call malperfusion, where the bleeding, your blood's going the wrong way, the mortality is like 35%.
All we're saying is do the standard of care, put this big stent on, add the big stent, and cut your mortality by 70%. I mean, it really is—it's a life-changing device. We're the only ones that have it. It's patented. We have a long runway with this technology.
Maybe there's been some studies recently published. Can you just maybe walk through some of the highlights from those?
Yeah. So we ran an FDA trial called PERSEVERE. It was in 25 centers in the U.S., the big aortic centers. Mass General here in town was in it. It was in acute type A dissections with patients with malperfusion. That means, again, they have blood that's not going to all the end organs. The endpoints on these trials are extremely rigid, right? It's mortality, stroke, do they require kidney dialysis, or do they have an infarct? These are not soft endpoints, right? As I just mentioned, in the reference cohort, we saw the primary endpoint was greater than one major adverse event. The reference cohort, 58% of patients had one of those things happen to them. They either died, had a stroke, needed dialysis, or had a heart attack. In the treated group in 1993, it was 27%.
Like a 50% reduction in major adverse events, hard endpoints. The more impressive was the mortality. If you ask any cardiac surgeon, if you have an acute type A with malperfusion, the mortality rate's about 35%. We were 9.7%, 72% reduction. It really is a life-saving technology. It is really the first innovation in the aortic arch for acute type As in 50 years.
Just going commercial here, do you need to do anything to the sales force? Can you just drop this in, or do you need to kind of build that out?
This is one of the great things about the business model is these products are all focused on the same call point. No, we do not really need to build out the sales force. The other thing is most of our products do not have case coverage. The reps are not standing in these cases. Once they get a surgeon up and going, they are just not needed for the surgery. Our current sales force should be completely adequate for launching this product. We have no sales force expansion plans this year. I think further down the line, I think there is an opportunity maybe for some small incremental increase in the sales force, just as it gives us an opportunity not only to sell AMDS and other accounts, but also it is the same surgeons that are using our mechanical valves, using our surgical sealant.
I think there's a really good cross-sale opportunity, but that's really more of an upside opportunity than a required investment.
Got it. Have you given any color on kind of how you think that ramp will progress and go?
Yeah. The ramp is tough because really the barriers to the ramp are your normal value analysis committee, which I think most people in medtech understand how bureaucratic and challenging that can be in certain centers. It's not really, in the end, not a barrier to actually getting in, but it can significantly draw out the time that it takes you to get into the hospital. With the HDE, each hospital has to have an IRB. It's just for the site. It's not for every patient. That's another administrative thing they have to go through. You're really trying to predict is how long does it take me to get through these two levels of hospital bureaucracy? It's all over the board. There are some that can happen pretty quickly, some that takes months. That's the big limiter on the ramp.
So far, we've been working through the process. We've gotten—we sat on a Q3 call. We had over 150 accounts that we're actively working on value analysis committees and IRBs, which we felt like that's a great start out of the gate. We'll see how long it takes us to get through them. We've also learned some things, particularly as it relates to the IRB. These hospitals are very familiar with IRBs, but not really for HDEs. Normally, they're doing them for a clinical trial, for example. This is a little bit different. This is probably or possibly the first time they've ever done one for an HDE. We've kind of learned how to package that a little bit better for them so they understand.
Is it more cumbersome?
It's not more cumbersome. It's just—in some ways, it's less cumbersome. You're not going to have to consent to every patient. You're not going to have—but it's more just—it's not what they're used to.
It's different.
It's different. In some ways, easier once they understand. I think that was a learning we've had in the first few months. We've kind of repackaged our materials to help people understand. That's going better now.
Got it. 2026 is not really the year that we should expect major inflection or contribution here. It's tough to say, but.
Yeah. I mean, I think we should just directionally, we should think sequential growth quarter to quarter for a while.
Yeah. Maybe just kind of moving down. So we started with AMDS, $500 million TAM. And then I think you said NEXUS is potentially 600. Let's talk a little bit more about NEXUS now. I think you also had some data there at AATS that you referenced when we—
Yeah. The U.S. pivotal trial, much like AMDS, was like 93 patients. The pivotal trial for NEXUS in the U.S. was about 60 patients in chronic dissections. What's interesting is that these patients that have an acute type dissection today will have a chronic dissection in 10 years. These pieces go together. We ran a trial. Our partner, Endospan, ran a 60-patient trial, very similar type endpoints, right? Mortality, stroke, do they require kidney dialysis, were they paralyzed? Very hard endpoints. These are patients that are at very high risk of surgery. When you—and we've talked to a bunch of clinicians from the trial. Mortality was similar, kind of in the sub 10% range between the surgical reference cohort, which you would expect given the sickness of these patients.
Stroke rate was less than six , which is on par with surgery, but phenomenal for a catheter-based technology. It's one of the lowest that's ever been printed. What's super impressive is no patients were paralyzed. About 2% on surgical arm. Because if you cover certain branches of the spinal cord, the patient actually comes out of the operation paralyzed. So it was about 2%. We had none. Then about 5-6% of patients have to have lifelong dialysis after this because of the hit from the heart-lung machine. None. It's all catheter. It's really the future. The clinicians are very excited about it. It fits perfectly within our aortic strategy. It's the same hospitals. It's the same part of the anatomy. This is a pure catheter. We've seen—we already commercialized this product in Europe.
We've seen patients who are out of the ICU in a day versus 8-10. I think the resource utilization on this is going to be a big win for the healthcare system and for the patients.
Just remind me what geographies this is in.
We currently sell it in Europe. We have been in Europe for the last five years. This configuration is a single branch device. We are already selling a two and a three branch system in Europe today. There is a pipeline coming with that as well.
Just for this one and AMDS, just the $500-$600 million TAMs, can you just—OUS, U.S.? Is that what was the word?
Those are global.
Global, yeah.
Yeah. For example, the TAM for AMDS, you are probably like $150 Europe, $150 U.S., another $100 Japan. We get approvals kind of in all these other places off of the US trial. The only part that is not in that big number would probably be China because we are not doing a lot of work in China for various reasons. Pretty much we probably get access to—with the U.S. clinical trial, we get access to probably 75% of the TAMs for all of those.
Okay. So right now you have 25% addressable, and that'll open up the remaining.
Correct.
Same.
Kind of split to think on Nexus and.
Yeah. Similar. Yeah.
Excuse me. You mentioned Endospan. I guess you have an option to purchase there. What does this—I mean, it was positive data, but very positive. I guess how does that mean there's a higher likelihood that you're going to exercise?
Yeah. First of all, just for everyone that's listening, we have an option to purchase Endospan. We have 90 days post-FDA approval. Text files are options. So we don't have to make a decision until we know for sure the product is going to get onto the U.S. market. And it's $135 million upfront when we exercise our option. Then there's an earn-out on incremental revenue in year two, two and a half times that. That's the basic deal. As Pat said, we've been distributing the product in Europe for a while. We're big fans. We think it's a great technology. Obviously, the data readout was great. Hopefully, we get through the regulatory process and it goes well. I think a reasonable assumption is if it gets approved, I think we should assume that we'll exercise our option.
However, in the meantime, now that we have this data, we're going to be doing our research and understand our original beliefs about the size of the market, rate of adoption, those types of things. Do we still think those hold true now that we have hard data, now that we've had surgeons in the U.S. that have used this? We'll do our further diligence on that. No guarantees. If you think about capital allocation, I think it's a reasonable assumption that if it gets approved, we would spend that $135.
Since you brought it up, just maybe we'll pivot there for a minute on capital allocation. Obviously, that's one important key kind of item that we need to be considering over the near to intermediate term. Anything else you want to say on capital allocation strategy and how that fits into a broader?
Yeah. So anyone that's followed us has known that we've been pretty levered in the past. The company had EBITDA and cash flow, and Pat levered up and did these acquisitions that have really transformed the company and are really right now about to get the payoff. We've done a really good job of getting that leverage down quite a bit. We also just recently had $100 million convertible debt that we converted into shares. They got it down further. We're in a really good spot right now. I think that the main thing is to stay there. Let's keep our leverage at a reasonable level while if we get the opportunity to purchase Endospan and fund our pipeline, which we feel really good about. We feel like we can do both of those with where we are now without having to lever up.
We expect to be significantly increasing our free cash flow from here. We're free cash flow positive. The big thing that kind of eats up our EBITDA to free cash flow is interest expense. We took that down a little bit when we converted into shares. As we can generate more, we can pay down debt and be able to even produce more free cash flow. Right now, it's kind of like be able to fund Endospan if we're able to do that as efficiently as possible and drive our leverage down as much as we can.
Yep. Sorry. Just taking out the convert, specifically what for the balance sheet currently?
Took $100 million of debt off the balance sheet and put $4.3 million additional shares out.
Okay. Got it. The NEXUS results that were recently presented, what was the doctor feedback?
Yeah. It was presented in early May out at a big cardiac meeting, AATS in Seattle. I had a chance to—I think I met with 20. What's unique about this is it's cardiac and vascular surgeons, which we actually work with both. I would say that to a person, the comments were like, "This is great data." They would jump to the stroke data and say, "No one's put up numbers like that." If you look deeper, if people are interested, if you look deeper into this category, it's really all about the stroke rate, right? The patient's level of how sick they are coming in is probably going to drive the mortality of the data. When you put a catheter up into the aortic arch and start manipulating it, that's what's driving stroke.
This system was specific—the Nexus system was specifically designed for the aortic arch. It has step-by-step procedures. The way it is deployed, it is the lowest stroke rate, to my knowledge, that has been published in this field. I think that was super exciting. The fact we already mentioned, the fact that there was no hit, no dialysis requirements, and no one was paralyzed was a pretty huge outcome.
Just going down the three main drivers, you talked about the aortic arch opportunity being $250 million, I think, right?
It gets confusing. When you're in the arch, there's multiple diseases that can happen. If you start up kind of with acute type A's above the aortic valve, that's one condition. That's AMDS. We also have the Frozen Elephant Trunk called Arcevo. That can also be used in acute type As. It gets really technical, but trust me. Then you progress to a chronic dissection or an aneurysm. You can't use AMDS there, but you can use NEXUS or Arcevo, right? It just depends on what's the disease, what's the patient's conditions, all these things, like which device they're going to use. Frankly, that was the whole part of the strategy. We have all of them.
Right. Portfolio.
We're somewhat agnostic. I mean, these are $30,000+ devices at 90% gross margin. I want what's best for the surgeon and the patient.
Just On-X, your On-X mechanical valve. That's been a durable growth driver for you the last few years. Just how stable is that?
Yeah. I mean, On-X is—we acquired On-X probably eight years ago, I think. We've grown that business 13-14% CAGR over that time frame. People kept asking, "When's that going to run out? When's that going to run out?" The TAM on that is about $250 million worldwide. That's mechanical, aortic, and mitral valves. There were three clinical trials that got us to where we are today. The first one, which was back eight years ago, we were the first company to do a trial where we could actually prove you could take half the blood thinners. When you did that, you had a 60% reduction in bleeding. The big knock on a mechanical valve versus a bioprosthetic is the mechanicals last forever, but you got to take a blood thinner.
Tissue valves, no blood thinner, but they don't last very long, particularly in young patients. We got an FDA approval for a low INR. You can almost cut your blood thinners in half, and you reduce bleeding by 60%. That's why we took all the share and grew almost 15%. The FDA required us to do a PMA or a post-market approval trial like they always do in 500 valves in the real market, 60 centers in the U.S. We did that trial. We reported those data about a year ago. 87% reduction in major bleeding. That's also driving growth. The real gift was in January, there was a big trial presented that we weren't even in—I didn't even know it was coming. 109,000 patients in the SDS database. They showed a mortality difference.
When you hit 60, if you get a tissue valve under 60, you have a higher likelihood of dying versus if you get a mechanical valve. So we've done our market research. We think now the door has opened for us to go after a bioprosthetic market in patients under 60, which is about a $100 million TAM increase from the $250 million. So that's going to provide another wave of growth for the On-X valve. And by the way, when we train surgeons on AMDS or NEXUS or Arcevo, they all can use the On-X valve. They can all use our BioGlue. So it's just a very kind of synergistic cross-selling opportunity.
Sorry if this is a naive question. How do you translate that data from January, SDS dataset? How do you translate that to a guideline update or?
Yeah. The guidelines take some time. So interesting, when we did the original low INR, On-X is the only valve mentioned by name in the guidelines. It's never been done before. It'll be curious to see what happens with the guidelines off this new paper. It takes time, right? These don't happen like the next day. It takes time to go through the guidelines committees and things like that. We're already in the guidelines for low INR.
I mean, if I'm hearing you correctly, between the expanding TAM as a result of this positive data or mortality benefit and you still had runway previously, is there any reason why this shouldn't be a steady double-digit growth asset for you?
Yeah. We think this is going to be a continued growth. We're doing some market research right now off that new data. I don't want to get over my skis, but I think we can come back probably in the fall with more definitive what it would be. I mean, On-X has been growing double digits for almost a decade, and we don't see it slowing down.
Yeah. Maybe just going to your outlook for the year. I think you bumped it slightly on 1Q. There's an implied growth acceleration in the back half, and you kind of gave us some of the reasons why that should happen. Maybe what's driving your confidence in that, if you could just summarize that for us?
Yeah. I think there's two main things. I mean, the biggest thing is we expect sequential growth in AMDS throughout the year, each quarter. That's the biggest thing driving the growth acceleration. Also, we did have late last year, we had a cyber attack that had some impact on the business, mainly from a timing standpoint. It kind of disrupted some supply, in particular in our tissue business, that we will catch up, but resulted in a little bit lower growth, certainly in Q1, that will be caught up through the remainder of the year. Those two things combined are what's really going to create the acceleration throughout the year, quarter to quarter.
You have pretty good visibility to that latter piece.
Yeah. That's all from an operational standpoint. The impacts of cyber attack are all behind us in the rearview mirror. It's really more about just catching up with the processing we have to do in the tissue business. It is something we have pretty good visibility to. Heading into Q1, we had given guidance kind of where we thought it was going to be and ended up doing quite a bit better than that, cleared more than we expected. We also had said we thought it would take us through the end of the year to get it all cleared up. On the Q1 call, we brought that in and said, "No, we think we can get it done by the end of Q3." That's all moving in a positive direction.
I feel like we do have our arms around it pretty good.
If there were to be something that is the biggest risk factor on that back half acceleration, what would it be? What would you point to?
The biggest swing factor in guidance is just AMDS timing, right? Again, we're trying to predict timing of hospital bureaucracy. That's more challenging. Try to contemplate that in our range, however. We did tighten the range a little bit coming out of Q1. I think that's an indication that we're feeling good about how we are doing out of the gates.
Great. Maybe just to close it off, and maybe it's a little more for you, Lance, but the growing EBITDA twice as fast as the top line, it seems like a very, very big mix shift impact that's there. Can you just break down the components of what's driving that?
Sure. If you look at the past several years, we've been doing a really good job of EBITDA margin expansion. That's really two things. One, most companies our size have a G&A leverage opportunity, and we do as well. I think one of the things a little bit unique about our business model, though, is our sales force is leverageable, which frequently in med tech, it's not. It gets back to not all of our products require case coverage, right? We have very tenured, stable sales force, and we can actually leverage that cost some. Those have been the two main drivers over the past several years. As we start to bring these new products to the U.S., AMDS being the first one, we're going to get to add to that mix gross margin expansion just through mix.
AMDS is a 90%+ gross margin product. Our total gross margin currently is 65%. Significantly accretive to our current overall average. We have multiple products coming behind that over the next several years. We think that EBITDA margin expansion really is very durable, and we should be able to do for a really long time.
Isn't just U.S. margin gross margin higher generally than it was?
In general, U.S. is always higher. I'd say the tissue business is lower. If you look at the devices in the U.S., so BioGlue and On-X, I mean, they're very high gross margins. Also, to the extent we can accelerate On-X growth in the U.S. with some of this new data, that would be gross margin accretive as well.
Great. We are at time. Thank you so much to both of you. Really appreciate it.
Thanks for having us, Rich.