Artivion, Inc. (NYSE:AORT) Q1 2024 Earnings Call Transcript

Artivion, Inc. (NYSE:AORT) Q1 2024 Earnings Call Transcript May 6, 2024

Artivion, Inc. beats earnings expectations. Reported EPS is $0.1573, expectations were $0.02. AORT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Artivion First Quarter 2024 Financial Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Eileen Martin [ph] of the Gilmartin Group. Thank you. You may begin.

Eileen Martin: Thanks, operator. Good afternoon and thank you for joining the call today. Joining me today from our Artivion’s management team are Pat Mackin, CEO and Lance Berry, CFO. Before we begin, I’d like to make the following statements to comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements.

Additional information concerning certain risks and uncertainties and that may impact these forward-looking statements is contained from time to time in the company’s SEC filings and in the press release that was issued earlier today. You can also find a brief presentation with the details highlighted on today’s call on the Investor Relations section of the Artivion website. Now I’ll turn it over to our Artivion CEO, Pat Mackin.

Pat Mackin: Thanks, Lynn, and good afternoon, everyone. Q1 was a strong quarter for Artivion as we maintained top line growth momentum and executed on key operational priorities. I’m pleased to report that in the first quarter of 2024 and we achieved constant currency revenue growth of 16% year-over-year, representing $97.4 million in revenue and adjusted EBITDA growth of 60% year-over-year compared to the first quarter of 2023. More recently, in April, new clinical data from our On-X low INR post-market study and AMDS per severe trial were presented at the AATS Annual Meeting in Toronto. The 5-year results from our On-X aortic heart valve low INR post-approval study show that the On-X aortic valve has an even more durable safety and efficacy profile for patients receiving low-dose warfarin than predicted by the results of the original PMA trial.

Meanwhile, the late-breaking 30-day data from persevere demonstrates positive or remodeling in over 80% of patients after treatment with AMDS. These 2 milestones demonstrate the continued success in our clinical and regulatory programs as well as the continued expansion of our market-leading aortic portfolio. Our investment in these 2 products and related clinical trials reinforce that we are committed to remaining the leader in aortic health. From a financial perspective, as anticipated, our strong Q1 performance was led by tissue processing, which grew 26%, followed by stent grafts at 19% and On-X at 11% and BioGlue at 1% growth, each when compared to the first quarter of 2023 and all on a constant currency basis. In the first quarter, we also continued to benefit from our footprint expansion through regulatory approvals in key international markets.

As a whole, our first quarter results and recent regulatory and clinical achievements further validate our growth strategy. From a product category perspective, as I just mentioned, tissue processing grew 26% year-over-year on a constant currency basis in Q1. We expect our tissue business will continue to grow double digits throughout the balance of 2024, as we further leverage our increased supply of our proprietary SynerGraft pulmonary valve and continue to benefit from higher Ross procedure volumes. Benefits from last year’s tissue pricing initiatives positively impacted Q1 but will begin to annualize in the second quarter of this year. As I also indicated earlier, our Stent Graft revenues grew 19% on a constant currency basis in the first quarter compared to the first quarter of last year.

Our stent graft supply is now healthy and stable, which is producing strong growth across the stent-graft portfolio. Lastly, I also previously mentioned, On-X revenues increased 11% year-over-year on a constant currency basis as we continue to take market share globally with the only mechanical aortic valve that can be maintained in an INR of 1.5 to 2.0. Based on feedback from the field, these market share gains and proven clinical outcomes that were reinforced by the results of the post-market study recently presented at ATS. We will maintain our strong conviction that the On-X is the best aortic mechanical valve in the market and will continue to take market share worldwide. Revenues in the first quarter were also driven by continued progress in growth initiatives in APAC and Latin America, primarily through new regulatory approvals and commercial footprint expansion.

Latin America delivered constant currency revenue growth of 22%, while APAC saw a 3% decline compared to the first quarter of last year. The decline in APAC this quarter was primarily driven by timing of distributor orders, which adversely impacted BioGlue revenue growth. Fluctuations in growth rates in APAC and Latin America are to be expected as those regions have the highest percentage of stocking distributor sales. We still anticipate strong revenue growth for both regions for the full year and over the coming years as we expect to leverage our industry-leading product portfolio in those regions. Let me turn now to the clinical data presented at ATS in April that I mentioned previously. We are very pleased to see positive results from the On-X aortic heart valve, low INR real-world post-market study presented at AATS in Toronto.

The abstract reported long-term clinical outcomes of 229 study participants with a target INR of 1.8 out to 5 years. The results show a significantly lower composite primary endpoint for thromboembolism, valcrombosis and major bleeding combined at 1.83% and compared to the predefined historic control of 5.39%. This was driven by an 87% reduction in major bleeding and no increase in thromboembolism. Notably, the data compares favorably to the results of the On-X aortic heart valve low 1 trial, the 1-year post-market study results presented last year, as well as the On-X aortic low INR ID study that was first published in 2014. The fact that device performed as well or better in the real word setting than it did in the original clinical trial provide strong additional validation that the On-X aortic valve is the best aortic mechanical heart valve market in the market for patients, thus increasing our confidence in our ability to obtain even greater On-X valve market share globally.

We believe the longevity of the On-X [indiscernible] valve combined with a significantly lower risk of bleeding over the other mechanical heart valves, make the On-X [indiscernible] valve a compelling option for patients under the age of 65. Also at ATS, late-breaking 30 data from our AMDS persevere trial, demonstrated positive aortic remodeling over 80% of patients as well as no occurrence of [indiscernible] tears. These positive results follow a 30-day IDE data from the same trial that was presented at STS in January of 2024, which demonstrated a statistically significant 72% reduction of all-cause mortality and a 52% reduction in primary major adverse events when compared to the current standard of care hemiarch procedure. We’re excited to see the continued positive results of the persevere study, further reinforcing an unrivaled clinical benefit in the life-saving nature of AMDS.

We continue to anticipate PMA approval for AMDS in 2025 and which would open the U.S. addressable market opportunity of about $150 million with no competitive alternatives. In addition, our partner, Endospan is continuing to make progress on its U.S. IDE trial called [indiscernible] for its Nexus aortic arch stent system. As of today, there have been 44 of the 60 primary endpoint patients enrolled. Assuming the trial endpoints are met, NEXUS remains on track for approval in the back half of 2026. In summary, we’re excited about our great progress early in 2024 and look forward to sustaining momentum throughout 2024 and beyond by driving continued growth of our On-X portfolio, stent graft SynerGraft pulmonary valve and further expanding our footprint in APAC and Latin America.

With that, I’ll now turn the call over to Lance.

Lance Berry: Thanks, Pat, and good afternoon, everyone. Before I begin, I’d like to remind you to please refer to our press release published earlier today for information regarding our non-GAAP results, including a reconciliation of these results to our GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted. Total revenues were $97.4 million for the first quarter up 16% compared to Q1 of 2023. Non-GAAP adjusted EBITDA increased approximately 60% from $10.8 million to $17.3 million in the first quarter of 2024. The combination of strong top line constant currency growth and significant marketing and G&A expense leverage resulted in an adjusted EBITDA margin of 17.8%, a 480 basis point improvement over the prior year.

From a product line perspective, tissue processing revenues increased 26%. Stent Graft revenues grew 19%, On-X revenues grew 11% and BioGlue revenues grew 1% in the first quarter of 2024. As anticipated, growth in our tissue business was very strong in this quarter as we benefited from both the substantial price increase we implemented in Q2 of last year, and improved supply from our yield improvement initiative. We expect the growth rate to come down in future quarters as we annualize the price increase, but we still anticipate double-digit growth for the full year. On a regional basis, revenues in Latin America increased 22%. North America increased 18%, EMEA increased 17% and Asia decreased 3%, all compared to the first quarter of 2023. The decrease in Asia Pacific region was expected and driven primarily by timing of distributor orders, which also impacted BioGlue sales.

As Pat discussed, you should expect to see some fluctuation in quarterly growth rates in the more distributor-based regions, and we still anticipate strong growth in Asia Pacific for the full year. As anticipated, gross margins were 64.6% in Q1, flat to the first quarter of 2023. General, administrative and marketing expenses in the first quarter were $30.7 million compared to $50.4 million in the first quarter of 2023. Non-GAAP general and administrative and marketing expenses were $48.1 million in the first quarter compared to $45.2 million in the first quarter of 2023, representing 500 basis points of leverage. R&D expenses for the first quarter were $6.9 million compared to $7.2 million in the first quarter of 2023. We underspent in R&D in Q1, and we expect to catch up over the remainder of the year.

We still anticipate full year R&D spend as a percentage of sales to be relatively flat to prior year. Interest expense net of interest income was $7.5 million as compared to $6 million in the prior year. Other income and expenses totaled $7.5 million and net interest expense, $3.7 million for a loss on extinguishment of debt and foreign currency translation gains of approximately $1.4 million. On the bottom line, we reported GAAP net income of approximately $7.5 million or $0.18 per diluted share in the first quarter of 2024. Non-GAAP net income was $2.6 million or $0.06 per share for the first quarter. As expected, free cash flow was negative $9.1 million in the first quarter of 2024. As a reminder, Q1 is our most cash-intensive quarter due to the payment of annual bonuses and due to normal activities such as sales meetings and industry conferences, which are heavier in the first quarter.

Importantly, we continue to expect free cash flow to be positive for the full year 2024. As of March 31, we had approximately $51.1 million in cash and $313.3 million in debt, net of $7.1 million of unamortized loan origination costs. Importantly, this is inclusive of the impact of our recently closed comprehensive credit agreement in January. As a reminder, the initial $190 million term loan and $30 million from the revolving credit facility were drawn at close, along with the use of some cash on our balance sheet to retire the existing senior credit facilities and pay related transaction expenses in the first quarter. Overall, this credit agreement, coupled with strong financial performance gives us flexibility with no near-term debt maturity overhang as we continue to evaluate the best options to address our convertible debt.

Further, we do not anticipate the need to raise additional capital to fund our debt obligations, our investments in our channels or our pipeline in the foreseeable future. Our net leverage at the end of Q1 was 4.5%, down from 6.8% in prior year. At the midpoint of our EBITDA guidance, we expect net leverage to be closer to 3.5% by the end of the year and to continue to decrease in 2025. And now for our outlook for the remainder of 2024. Given our momentum in the first quarter of 2024, positive data from the recent AATS presentation, supporting the long-term clinical benefits of On-X, improved stent graft supply and robust demand for our SynerGraft pulmonary valves, we are raising the midpoint of our fiscal year ‘24 revenue guidance and now expect constant currency revenue growth between 9% and 12% compared to the previous range of 8% to 12%.

We expect reported revenues to be in the range of $386 million to $396 million compared to our previous range of $382 million to $396 million. At current rates, we expect FX to have a negligible impact on full year revenue growth rates. With our continued top line revenue growth and general expense management through Q1, we continue to expect adjusted EBITDA to be in the range of $68 million to $72 million for the full year of 2024 representing a 26% to 34% growth over 2023 and 280 basis points of adjusted EBITDA margin expansion at the midpoint of our ranges. The strong start to the year puts us on a good trajectory for achievement of this guidance. As a reminder, we expect gross margins to remain at levels similar to 2023 and continue to expect to drive significant leverage from our global sales force and G&A infrastructure.

Additionally, R&D expense is expected to remain relatively flat as a percentage of sales. In summary, we feel great about the strong start to the year, and we are excited about the prospects of the business in 2024 and beyond. With that, I will turn the call back to Pat for his closing comments.

Pat Mackin: Thanks, Lance. So as you’ve heard, we’re very pleased with our first quarter performance kicking off 2024 with a very strong start. We continue to deliver strong top and bottom line growth, expand our markets and advance our clinical pipeline. We expect future growth to be driven by: first, the continued strong growth in our stent graft business driven by improved supply in our innovative portfolio. Second, continued market share gains of On-X, driven by the recent 5-year data from our real-world post-market trial, reinforcing the safety and efficacy of our On-X aortic low-dose warfarin. Third, growth from our proprietary SynerGraft pulmonary valve, driven by growth of the Ross procedure and our operational improvements.

Fourth, continued growth in Asia Pacific and Latin America from our channel investments and new regulatory approvals. In conclusion, we remain confident in the near and long-term prospects of our business. We believe our first quarter results validate our expectation for a strong year ahead as we focus on continued revenue growth and free cash flow generation. I want to thank all of our employees around the globe for delivering a strong first quarter and their continued dedication to our mission of building a world-class aortic company. With that, operator, please open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Mike Matson with Needham & Company. Please proceed.

Mike Matson: Yes. Thanks. So I wanted to start with the tissue business. So I know you talked a little bit about what drove the growth there, but maybe you could just elaborate on the supply and how you’re able to increase that. And then the outlook, I know you’re not giving guidance for ‘25 yet, but I mean, is this business in a position now where you could sustain double digits longer than this year? Or is this more just kind of a unique year for tissue?

Pat Mackin: Yes. So I would say there’s a couple of things. Number one, I’ve talked previously about the growth of the Ross procedure. There’s been a tremendous amount of new data that’s been released on the Ross that shows at 25 years that you can actually have an aortic valve replacement with your own native pulmonary valve, and backfill you’re missing pulmonary valve with our valve. And your survival and morbidity matches that of the general population. So it’s a great operation, and it’s growing extremely fast. So that’s the first – there was some data published – presented at AATS in Toronto last week about this procedure is growing extremely fast. Number two, you heard Lance talk about we had a big price increase last year that’s kind of annualized at the end of the first quarter.

But then we also talked previously about some of our operational improvements that we’ve undertaken here at the company and see a very nice increase in our yields. So I think the combination of those kind of three things, Hobbies had a huge first quarter with the pricing kind of annualizing itself this year. It will be basically supply benefiting the rest of the year. And then I think going forward, this procedure is not slowing down anytime soon. So I think there’s a lot of opportunity for that. But as you know, the – ultimately, there’s a constraint on how many tissue valves you can get. So we’re not going to give ‘25 guidance at this point, but we feel very strong about double-digit growth this year.

Mike Matson: Okay. I understand. And then if I take the EBITDA that you did this quarter and just multiply by 4, it gets you into the guidance range. it seems like the last few years, we’ve seen EBITDA kind of ramp throughout the year as your revenue ramps. So just wondering why you’re maintaining the guidance here. Is there maybe it’s the R&D spending and timing or something laying?

Lance Berry: Yes, I think there’s a couple of things. First of all, it’s just early in the year. That’s one. Two, we did have a good start to the year, but part of that was definitely due to timing on the R&D spend, and we absolutely intend to spend that money this year. So – those are the two big things, just a little bit early to be – to raise that number, which was pretty strong growth, and we’ll see how it goes throughout the rest of the year.

Mike Matson: Okay. Great, thanks.

Operator: Our next question is from Suraj Kalia with Oppenheimer & Company. Please proceed.

Suraj Kalia: Good afternoon, Pat, Lance, can you hear me all right?

Pat Mackin: Hey, good afternoon, Suraj.

Suraj Kalia: So Pat, congrats again. You guys are unrolled. Pat, the obvious question, I know you’ve been talking about this for some time. But it seems like in the last two quarters, you guys seem to be just shifting gears in terms of CAGR, now the leverageability this quarter also surprised everyone. So Pat just talk to us, I understand the supply issues and some of the other constraints that you were talking about. But is this something more fundamental we should be cognizant about? A more tenured sales force, rev commission changes, different marketing method – just there seems to be a distinct shift in everything. Maybe if you could give us some additional color there.

Pat Mackin: Yes, sure. No, I think it’s – one of the nice things about the company is we’ve got a portfolio of products, right? So we also have a portfolio of regions. And as you heard, we had strong double-digit growth across our entire portfolio, except for BioGlue, which we expect to grow kind of low single digits and across all of our regions, except for APAC because we had a timing thing. So – it’s kind of a combination of – we got highly differentiated products with really strong channels around the world, and you’re seeing kind of them firing on all cylinders. And again, I just would remind you if you look at SynerGraft, nobody – no other company has SynerGraft. The Ross procedure is growing very rapidly, and we are the market share leader, and we’re taking advantage of that.

The On-X valve is the market-leading mechanical valve in the world, and we’ve just shown data that shows almost an 80% reduction, I mean an 87% reduction in major bleeding. So we feel very strong that, that is the only mechanical valve that should be used, and we’re not going to stop until we take it all. Number three, our stentgraph portfolio. We have full supply. We have had no supply problems probably for like 1.5 years, very highly differentiated products. our NEO device is growing rapidly. Our thoracal abdominal devices are growing rapid. Nobody has an AMDS. Nobody has some of the technologies we have. So I think it’s just a combination of all these portfolios under this aortic umbrella with – powered by channels around the world, when you combine it all together, it’s driving nice results.

I think it’s nothing more complicated than that.

Suraj Kalia: So Pat, would it be fair to summarize this as more of product attributes yielding a pull-through demand rather than any fundamental shift in your sales and marketing structure and messaging? Is that fair to put it that way?