All right. Good morning. Welcome to the Canaccord MedTech, Diagnostics and Digital Health & Services Forum. My name is Bill Plovanic. I am Senior Analyst here with Canaccord. With us up first, we have a fireside chat with Artivion, and we have the President and Chief Executive Officer, Pat Mackin, and the C FO, COO, Lance Berry. With that, I am going to just sit down and get going here. All right, we are going to dig right in. You guys just had earnings. I think all of us are just getting to the end of earnings.
So, Q3 was a solid quarter on the headline numbers. Revenue, EBITDA, and EPS were all ahead of expectations, but the loss of PerClot and a slower-than-hoped AMDS starter set ramp kind of reset our expectations. The stock pulled back, and at the same time, you now have the AMDS under PMA and NEXUS launching on January 1st. Before I get into all this, it seems like the setup for 2027 is really good here, but the stock is obviously off the quarter, didn't trade so well. As you talk to investors, what is the biggest thing you hear, the one thing you think they are missing as they are looking at the company today?
Yeah, so I think, one, I think there is just a lot of focus on the very near term. I think people that if they are looking at 2027 and they are really thinking through the things that we have set up for 2027, I don't think the stock would be doing what it is doing right now. I think there are a lot of questions around, what does the guide mean for Q4? So very near-term things. But if you step back, everything that we have been setting up for 2027 is really still intact. AMDS is still a huge opportunity for us. We are going to be launching NEXUS on January 1. Yes, we have this PerClot that is going away, but that is really an inorganic thing.
It is something we sold a long time ago, and if you look at it more on an organic basis, I think the street is at close to 10% top-line growth and high teens EBITDA growth, which is kind of where we are telling people every year at the beginning of the year that we are going to try and accomplish. Really, I think if you look on into 2027, as you pointed out, there are a lot of good things that we have going on, and there is really no change in what we are typically talking about for the next year.
Okay. Then in terms of the 2027 framework and the guidance, you already talked about the tightening and the taking PerClot out. Is there anything in the core portfolio tracking differently than you expected six months ago?
Well, honestly, versus six months ago, that's a good question. Really, if you look at what we did on guidance for 2026, we basically just maintained the midpoint of our guidance for the second half of the year, and we have a little bit of timing difference in our preservation services business between Q3 and Q4. Even if you look at that for the full year, it's going to come in right in line or probably a little better than what we expected at the beginning of the year. So, we would say things are overall very much the same, which I would say would be reflected in what we did with our guidance.
All right. Last on guidance, I promise, and then we'll get into the products. NEXUS is expected to be EBITDA neutral in 2027. You got the R&D clinical spending moving towards 7%-8% of sales. What's the right framework for EBITDA margin expansion beyond 2027?
Yeah, I think we've talked a lot about how we think our company has very durable top-line growth and a really good opportunity for EBITDA leverage. We have the normal G&A leverage that any kind of a sub-$1 billion company would typically have. Our sales force is probably a little more leverageable than most MedTech companies because our reps don't have to stand in every single case. Then the last thing is these new products that we're bringing to the market in the U.S. are all pretty meaningfully higher gross margin than our corporate average, so we have an opportunity for gross margin expansion over time. With all three of those things in place, we talk about trying to be a double-digit growth business with EBITDA leverage that gets us to EBITDA growth twice top-line growth, and to be able to do that for years and years and years.
That's an unchanged. 2027 is just, it would be, but you got to strip out the PerClot.
I think the PerClot thing is, and maybe just for a little bit of background for people, it's a product that we off-strategy product that we sold in 2021, but it's a PMA product, and the buyer had to scale up their own manufacturing, which for a PMA product just takes years, literally. It's been harder for them than they anticipated. It's drug out longer than we expected, and we finally got notice just recently that they have all their approvals, they're ready to go, they're going to take it over, which we are ecstatic about.
We have no desire to be an OEM manufacturer for this product that we sold five years ago. That's coming to an end. So there is a little bit of revenue that's in the model, a little bit of earnings that'll go away, but it's really not indicative of the long-term business. You can almost think about a discontinued operation that just wasn't put in discontinued operations.
Okay. AMDS, I think, has been the challenge this year, definitely from a starter kit standpoint. How do you feel just on AMDS? Has the sell-through, the utilization for the accounts you brought on board, how is that tracking to your original expectations? Are there use cases that you expected, didn't expect, kind of getting in the weeds on AMDS?
Yeah.
Just general thoughts.
Just to remind people, there are two sources of revenue for AMDS. There is the starter set. There are four different part numbers. You have to buy all four. It is $100,000 up front. Then there is the actual implant. You have a case, you use a device, and then you replenish and reorder. If you go back to 2025, we actually did better than we thought on the starter sets. We actually had a great year, and we actually beat our expectations on starter sets. We got into Q1, and that is when we kind of ran up against the wall on the starter sets, which is when we kind of changed our guidance.
The starter sets have been harder because it is really an administrative task. We thought once you get through VAC, the Value Analysis Committee, that you get the PO the next day, and all of a sudden the PO is taking several months to get because somebody has got to sign a PO for $100,000. I think that is a very different thing than we are used to doing. The good news is we are actually seeing the implants accelerate. As we get these starter sets up, the ultimate measure of how well we are doing is how are your implants.
Right.
We did make a comment that once we got the PMA at the end of Q2, we did think implants would actually accelerate because there were some kind of governors on kind of the launch from this HDE. It is kind of a weird regulatory pathway. I think we have definitely seen that. The PMA has not helped the starter sets. These financial people do not have a clue what the PMA is. Again, we are still bullish, and we are actually doing a good job penetrating these accounts, and the implants are growing, which is the ultimate metric.
Would you say that the utilization is tracking, if you go back a year and a half ago on the launch of this, where you expected it in terms of the physicians that have adopted?
Yeah, I think it is similar to any launch. I mean, I have done lots of these launches that we have got some centers that are on the adoption curve exactly like we want. We have got some reps that are on the adoption curve. We have got others that are in the middle and others that are lower. I think one of the things that is important, right, is once you get the starter set on the shelf, you may train one doctor, but there may be four docs who take call.
So even though you open account A, you may only have access to 20% of the acute type As or 25% of the acute type As until you train the rest of them, right? This is a launch that is going to take us some time to get the starter set in, get the doctors trained, and get them up the learning curve. Again, we would like it to be going faster, but I think really the biggest thing when I step back at 100,000 ft is that nothing about this opportunity has changed, right? This is a life-saving technology.
Our clinical data shows a 72% reduction in mortality and a 58% reduction in major adverse events. It is also done at 2:00 A.M. from medevacs, right? These are emergencies. We are trying to change behavior of surgeons at 2:00 A.M. in the morning in an emergency situation without their normal staff, right? So it is not the easiest thing to launch into something like that, but we are very bullish on this opportunity. It has just taken us longer than we would have liked.
Your reps are becoming trauma reps. Just a point of clarity, you mentioned just to differentiate between the VACs and the POs and just the getting the accounts on board. I think some of us, myself, thought that going into getting the HDE would kind of open up the waterfall and you would have all these accounts. It sounds like while maybe the VACs started going through approvals, the POs did not. Is that
Yeah.
I guess, as we sit here, we are like, "Okay, so now you have this backlog of VACs, and you just need to get the POs—
Yeah.
—through the process.
Yeah, I would say there were some centers, just to make a clarification, there were some centers, think about a mid-sized center, like an IRB, when you bring in a HDE to them, you need an IRB. They are like, "What?" Like, "What is an IRB?" Right? So there were some centers that literally were not going to bring the product on the shelf until we got the PMA. And once we got the PMA, we just started those accounts on July 1. So we are still in the VAC process for those. I think the PO is the thing that has been a little surprising for us because we would get through VAC pretty easily. That is the other thing.
We have not had any problems getting through VAC because if you step back again from a financial standpoint, MS-DRG 209, I have never launched a product when you have a DRG that is so advantageous to the product. MS-DRG 209 went in place a year ago, October 1st, and it more than covers the device. The hospital makes more money doing an AMDS plus a hemiarch than they do on a hemiarch from MS-DRG 221. The VACs are not a problem.
The problem is when you get through the VAC, someone has to sign the $100,000 PO. That is not very common in med devices. Most companies can sign stuff. We have no competitor. There are only four devices. It is an emergency. We are saying you have to buy the four devices. This is not a normal thing where you have to sign a check for 100 grand, and it is different at every hospital who you have to go talk to.
I think I was reading transcript from another conference you were just at, and you mentioned that you were considering consignment for this product.
Yeah, I think, look, first of all, we are still early on in this thing as far as penetrating the overall opportunity. We are evaluating everything to what can we do to get this to go faster, whether we are talking about getting it on the shelf or getting better adoption, right? We are early on and still in the learning phase. I think consignment, I do not think we are evaluating like just flipping to straight consignment. I think, we charge you significantly more if we put it on consignment.
Does that get over the hurdle? How can we be creative without just completely letting you off the hook on the being invested in the product without having you actually having to cut a check for $100,000? We are open to any of those ideas. Consignment with a higher ASP would be one of them, and we're looking at that among other things to try and get it on the shelf.
I think the question I get from investors is, okay, so this we're talking about, it's been a challenge. What metric should we look at as investors to know that you've overcome this hurdle and you're kind of back on track? Because it's been this gate for you for this year. It's been a headwind. If we know utilization's building and you've got through VAC and potentially these POs, at some point, it's going to start all coming through and—
I think it's simple, right? I mean, one of the things, we have a lot of products and we sell in a lot of markets. Everybody wants to have like, how many accounts are in you and how many implants do you have? Look at the stent growth rate, right? I mean, the stent growth rate is the ultimate metric. If the stent growth rate is going up faster than the last quarter, then we're being successful.
That was my next question on accounts. You're telling me you're not going to tell us. Shifting to NEXUS, you've had limited U.S. cases and positive surgeon feedback. You're going to launch this at VEITH, and the first surgeon training is December. As you build cases in 2027, how should we look at the cadence of this launch?
Yeah, this is a very different. First of all, if you think about NEXUS is an endovascular operation. So it's a catheter operation, minimally invasive. It's elective or scheduled. None of this stuff's really elective, because if you have an aneurysm that's growing that's about to rupture, it's not like you can decide to do it or not, right? You need to get on the schedule. My point is, we know about these cases three weeks out. Contrasting that with AMDS, it's an emergency medevac 2:00 A.M. in the morning, right? These are very different. I think some of the things we just got done talking about with AMDS, where you have to have a starter set, we're asking people to pay $100,000 to start it up.
There's none of that with NEXUS. NEXUS is, there's no inventory. We actually ship devices in for the procedure. The rep's there. That case will be covered by a rep, kind of a very high-end kind of endovascular rep. They use whatever they use, and we get the PO that day. This whole thing about getting stuff on the shelf and the $100,000 PO is not an issue. I think the other thing that we've been very surprised by with NEXUS is we're doing a bunch of cases and accounts with no VAC approvals. Because these are patients who have no other option, and because it's such a unique technology, these vascular surgeons are able to get it in and do cases with no VAC.
So we've got a bunch of centers that we don't even need a VAC to go through to do cases. We're still going to go through the VAC process, but I think it's going to follow kind of the very similar of a normal launch, because we don't have this barrier from an inventory standpoint, which is how many surgeons have you trained? How many VACs do you have or places that don't need VACs? We're just going to kind of ramp kind of through the year as you build more. Every quarter, you're going to train more surgeons, you'll get more VACs, and you'll be in more accounts.
How much overlap is there between your regular customer base, the NEXUS user—
100%
—and the NEXUS user?
Again, the other thing that's really neat about NEXUS. AMDS, we didn't get to the account thing. There's about 800 centers in the country that do acute Type As. Most of the volume's in 400. The NEXUS volume is in 150 centers. Those 400 and the 150, they're the same places. The 150 is in the 400. Those are also the same places that we use On-X aortic valves, we use BioGlue. Our customers use BioGlue. They do the Ross. Those are customer relationships we already have, and they're the big aortic centers.
Literally, we know the cardiac and vascular surgeons at all those programs already. We've got a separate dedicated endovascular team for NEXUS that we've hired and trained. It's small, but they're hired and trained. We've been taking the second half of 2026 to build inventory, to get through VACs, to train our reps, and we'll be ready to go in January 1 . We're super excited about the NEXUS launch.
You mentioned a different sales channel. Are these like more clinical specialists that you're putting in?
They're—
The case support versus a—
Yeah, I wouldn't call them—
—because apparently you already have the accounts.
Yeah, I wouldn't call them. Again, I ran Medtronic's stent graft business 20 years ago. The endo reps are a unique animal. It's a little bit like the TAVR reps, right? They are in the case and they're an integral part of the case. They're very high-end, sophisticated. They know what they're doing in these cases, right? So they're not clinical specialists. That's a different kind of level. I've had a lot of experience with that as well. But this is a rep with a heavy clinical background. But the great thing about it, these are $50,000 systems. So the scaling of the rep is irrelevant. The math works.
How many of those reps are internal promoted versus external hired in?
We picked up a couple from the acquisition. They had a couple already. We had one of our European reps who has been selling NEXUS for several years is coming over, and we have hired a couple external. There is plenty of them. I mean, we have a long list of people. As this launch scales, we can add resources very quickly.
Got you. I will flip it. If we add reps, what does that do to the P&L? Does that change the EBITDA 2x revenue growth?
No. I mean, I think you just got to understand the magnitude. Pat just walked through our whole five-person sales force for NEXUS, right? It is just, we are not having to scale up 50 or 100 people. This is, in general, super high ASP, not super high volume in the beginning. We can move reps around because these are all scheduled cases weeks in advance. You just do not need a very big sales force, and you can scale it along with the revenue. You do not expect that to be a headwind.
Okay. Then just the last question on NEXUS is how quickly can you penetrate the $100 million NEXUS market? I mean, is this going to be a five-year, 10-year? I mean, how much of that is the true market, and how much do you think you can actually get over time?
Again, I think one of the things unique about this is these are patients who literally the cardiac surgeons don't want to operate on because they're at too high risk of having surgery. So, they literally go to their vascular surgeon and say, "Can you treat this patient?" Because the risk of a stroke or a mortality or whatever is just too high because of the patient's condition. So, there's a lot of these patients out there. I mean, we're pretty bullish on this segment. Now, like anything, it will take time to train surgeons, get them their first cases, get them comfortable with the technology. But this will definitely be, I think, ramping over the years, and I think we can penetrate a good chunk of that, not in five years, in less than five years.
Is there a different dynamic? I think you said there's maybe 150 centers around the country you could sell this into, but it's the same at four or five physicians in each center, or is this a more concentrated physician group?
Typically, at the big centers, you'll have a couple of big I'm talking like here in the city, there's probably four or five massive centers. There'll be a big aortic, two or three big aortic cardiac, and one or two big aortic vascular. So they may have like 15 heart surgeons, but it's a sub-segment of that population. And the vascular guys that are doing this are the catheter. I mean, these guys are super high-end. They're like the Formula 1 drivers. So, bringing this new technology to them, all we got to do is teach them how to use the catheter. They know how to do this kind of stuff. They're very facile, they're very experienced, and it's just more about unique things, attributes of our system.
Okay, we have a couple minutes here. I'm going to switch over to the On-X and preservation services. That was 13%. U.S. was mid to high teens, I think you talked about on the conference call. You've got the manufacturing up and running in Austin. Help us understand when you say that you've been supply constrained in Europe. You've been supply constrained, it's impacted Europe, and now that they can go out there and really kind of sell it more. What do you mean by that?
Yeah, so, I mean, obviously, we've been having international sales. It's not like we haven't been supplying the international business. But they have really not been in a supply position where they can confidently go open new accounts, bid on new tenders, and know that they're going to have supply to meet that increased demand. I mean, therefore, that's not where their time and attention has been, right? I mean, no rep wants to open an account and then disappoint a customer.
Also, pretty much, if you can't get over a certain price point, you know you're wasting your time trying to open a market because we're going to tell you you're not going to get any valves. As we've increased this capacity, we can lower the bar on the type of business you can go after, right? Lower price point, sure, you can go after that now. More importantly, in these direct markets, feel, "Hey, go open that new account. We have consignment for you. You can place in that account, and you can get after it." That really has not been the case, I would say, for several years in international.
Yeah, we would have no valves at the end of the quarter, most quarters. Now, for the first time this quarter, we're going to have valves available.
Yeah. The U.S. always got whatever they wanted.
Right.
Right? It is by far the highest ASP. The U.S. has never been constrained, is not constrained at the moment. And we grow international too. But they have not been able to just go seek new business to the full extent possible.
So you have taken the governor off. How should we think about they can go after this business when you start to see it show up in the numbers? Is this a six or 12-month thing, or is this like next quarter? What is that?
I would say not next quarter. I mean, they have to go. Tenders are a rolling thing. It is not like they all come up at the beginning of the year. You have to bid on them and get them. Opening a new account, that takes time. So, I think it is one of the things we just point to as we look out into 2027, is something that can be a tailwind for On-X that has not been there in the past.
Yeah.
All right. I am going to flip over to Arcevo. ARTIZEN trial has enrolled 56 of 132 patients. You got completion targeted for mid-2027, approval 2029. What milestones should we watch for over the next 12 months, and how do you frame the incremental market opportunity?
Yeah, so I would say, one, we have been super happy with the enrollment. It has been pretty rapid. We have got like 25 centers, the same 25 centers that were in the AMDS trial, in the NEXUS trial, are now in the Arcevo trial, roughly. We have also got some European centers online. I would say the two things, we have got our first presentation next Friday at the big aortic symposium up here. So the Chief of Cardiac and Vascular at Cleveland Clinic, Eric Roselli, is going to be presenting that data, the first 30 patients. I think the next milestone is when we hit enrollment. So the paper is next week, and then we hit enrollment in the first half.
Because then you just basically add two years to that, and that is our next PMA. From an opportunity standpoint, that is probably an $80 million U.S. TAM, but we will also bring that technology off that trial because we have got European centers. We will also bring that to Europe. We will also bring it to Japan. So this is a pretty significant opportunity for the company, and it is disruptive technology. It is the first frozen elephant trunk with a left subclavian branch. It makes the procedure much easier to do. So again, the excitement from the investigators has been quite high.
All right. Then, we have a minute left. I am going to flip to the balance sheet. You ended with $48 million in cash, about $360 million in change in debt. Your free cash flow was negative because you had to pay some milestones and some Endospan costs. What does normalized free cash flow look like in 2027? Like, percentage of revenue, however you want to frame it, percentage of EBITDA, whichever way you want to frame it. Then, you have these big earnout payments. I think as the numbers came down, it looked like you did not need to raise any further capital to pay the milestones, but with the lowered numbers, it makes it much more challenging. So, how should we as investors think about as you go to pay the milestones and the free cash flow? Like, how does this pan out over the next several years?
I think let's talk directionally, going forward on cash. Most recent quarter was very negative, but most of that was an earnout payment, which is not truly free cash flow. It's a one-time thing. Right now, our free cash flow generation is less than typical because we're making these investments in our On-X manufacturing facility. That's an infrequent thing. You won't see anything like that probably for a long time. We'll still be finishing that out in the first half of 2027. As we get to the back half of 2027, I think you'll really start to see the company's true free cash flow generation, and you'll start to see significant cash flow quarter -after -quarter -after -quarter from that point forward.
Right now, we still look out and say, "Hey, we think we can generate free cash flow to cover these earnouts, no problem." That's our position, and we are comfortable with that. Just for people to know, it's probably a $75 million payout in mid-2029 for AMDS, and then in mid-2028 is a payout for NEXUS, which is going to be more variable depending on how we do in the launch of the product. But, we have to fair value that liability and put it on our balance sheet, and the initial fair value is $26 million. That'll give you some ballpark of what we're talking about. There is a little bit bigger number that's due, but it's further out, so giving us more time to earn that, and the nearer term one's likely to be smaller.
I think in the past, we talked about it. You think that, as the leverage ratio comes down, you would always have access to more debt, because your free cash flow is higher, so you could go out and increase.
Yeah, I mean, honestly, I think we would have more access to more debt right now if we wanted it and we needed it, which we don't. I don't think that would be a problem for us if it was required.
Plus, with our EBITDA growing double digits, 20%, our leverage is going to come down just off our EBITDA growth.
Yeah. All right. I think we are out of time. Thank you very much.
Thanks, Bill.
Good to see you.
Yeah.
Pleasure as always.
Thank you.
Good to see you.