Artivion, Inc. (NYSE:AORT) Q3 2023 Earnings Call Transcript

Artivion, Inc. (NYSE:AORT) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Welcome to the Artivion Third Quarter 2023 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to Laine Morgan from Gilmartin Group. Thank you. You may begin.

Laine Morgan: Thanks, operator. Good afternoon and thank you for joining the call today. Joining me today from Artivion’s management team are Pat Mackin, CEO; and Ashley Lee, 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.

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Additional information concerning certain risks and uncertainties 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 detailed highlights on the today’s call on the investor relations section of the Artivion website. Now I’ll turn it over to Artivion’s CEO, Pat Mackin.

Pat Mackin: Thanks, Laine, and good afternoon, everybody. I’m pleased to report we made outstanding progress on our goals this quarter. As you’ll hear today, the team has made substantial progress across the board in the third quarter; commercially, operationally and financially. In addition to delivering top and bottom line growth, we also achieved clinical and development milestones. As of today, we have two patients remaining to complete the enrollment in the PERSEVERE clinical trial in October. Also AMDS On-X clinical study results presented at EACTS, the European Society of Cardiac Surgery, that demonstrated unprecedented clinical outcomes. I’ll detail these positive developments one by one, starting with our financial results.

We delivered constant currency revenue growth of 12% year-over-year in the third quarter, resulting in 87.9 million in revenue. Our strong performance was led by improved revenue growth in and our stent grafts business, which increased 22% followed by On-X 13%, tissue processing 12% when compared to the third quarter 2022 on a constant currency basis. We’re also benefiting from expansion of our commercial footprint through regulatory approvals in new geographies. Our strong top line performance led to $13.9 million in non-GAAP adjusted EBITDA in the third quarter. This is a 34% increase compared to the third quarter of last year. We expect our strong momentum in the first nine months to continue through the fourth quarter and into 2024. We’re very optimistic about our future as we’ve ever been.

At our Investor Day in March of 2022, we committed to delivering compounded annual double-digit costs and currency revenue growth through 2024, also driving further operating leverage and adjusted EBITDA of 75 million in 2024. Again, we are reiterating our expectation to achieve these goals. Our commercial team is also executing extremely well. As I mentioned earlier, stent grafts revenues grew 22% on a constant currency basis in the third quarter, compared to the third quarter of last year, driven by improved supply and strong performance and AMDS and NEXUS. We anticipate demand to remain strong for the balance of 2023 and beyond for our stent grafts products, which to continue to sustain our strong revenue performance. Additionally, On-X revenues increased 13% compared to the third quarter last year on a constant currency basis and we continue to take market share globally with the only mechanical aortic heart valve that can be used with an INR of 1.5 to 2.0 in the aortic position.

We believe our valve is the best aortic valve in the market, and our market share gains each year clearly support this view. And finally, tissue processing revenues increased 12% compared to the third quarter of last year on a constant currency basis primarily due to pricing initiatives. As you may recall, part of our organic growth story has been to expand into new markets. We have done that effectively and are successfully expanding our operations in APAC and Latin America. Through new regulatory approvals and commercial footprint expansion, APAC and Latin America delivered constant currency revenue growth of 21% and 22% respectively, compared to the third quarter of last year. We expect these regions to be important growth drivers over the coming years as we continue to leverage our industry-leading product portfolio further into these regions.

In addition to our strong financial performance, we made significant progress on our clinical programs, and saw extremely impressive data readouts for On-X and AMDS at the recent European Association of Cardiac Surgery in Vienna. First, I’m extremely pleased to report that we’ve nearly completed the enrollment for PERSEVERE, which is our IDE trial for the US PMA, consisting of 93 participants who have experienced an acute Type A aortic dissection. At this point, we only have two patients remaining to complete enrollment in the trial. As a reminder, the combined primary efficacy and safety endpoints of this trial are reduction in all-cause mortality, new disabling stroke, myocardial infarction, and new onset renal failure requiring dialysis as well as the occurrence of DANE tears, which are distal anastomotic new entry tears, which are associated with increased risk for re-intervention and mortality.

DANE can occur in up to 70% of patients falling Hemiarch repair without AMDS and allows continued blood flow into the false lumen created by the dissection. Interim results of the PERSEVERE study, which is our FDA pivotal trial, has shown there had been no DANE tears detected in any patients treated with AMDS, nor were there any DANE tears reported in the DARTS study after three years of follow up. As I will discuss shortly, clinicians have so far seen incredible outcomes with AMDS across these endpoints. Additionally, the FDA has granted us continued access for approval to continue our enrolling of up to 40 additional patients in the PERSEVERE study, so physicians and patients in need can access this life-saving technology while we pursue regulatory approvals.

Following the one-year follow-up period, and assuming the trial meets its endpoints, we continue to believe that we should receive FDA approval for the AMDS device in the second half of 2025. In addition, our partner Endospan is making progress on its US IDE trial called TRIOMPHE for its NEXUS aortic repair stent graft system. As a reminder, the PMA will be based on the results of 60 patients in the chronic dissection arm of the trial. At this point, there are 41 patients enrolled out of 60 in the trial. Based on the current enrollment rate, the pivotal arm of this trial should enroll in the first half of 2024 and after Bureau follow up any year for regulatory review, this would put NEXUS on track for approval sometime in mid to late 2026. To reiterate, if these PMA trials proceed as anticipated, we expect FDA approval on AMDS in 2025 and NEXUS in 2026.

At that time, assuming we exercise our option for Endospan, these two products will significantly increase our addressable market opportunity. At the recent EACTS meeting in Vienna, two of our products were featured in late breaking presentations. First, interim data from the AMDS PERSEVERE clinical trial, which is the 30-day combined primary endpoint for data in the first 52 out of 93 patients that were enrolled showed clinically meaningful reduction of all cause mortality in primary major adverse events. As reminder, the safety endpoint for this IDE trial is based on liver controls for patients with malperfusion. In this reference cohort, 58% of patients had greater than or equal to one major adverse event. The target goal of this trial was a 31% reduction to reach 40% of patients with greater than or equal to one major adverse event.

The data in the 52 out of 93 patients that were presented at EACTS showed that 21% of the patients had greater than or equal to one major adverse event, that’s a 64% reduction. We’re incredibly pleased with the very positive interim results, which have demonstrated the life saving nature of AMDS, including a statistically significant reduction in mortality, renal failure causing dialysis and myocardial infarction. We expect this data will drive AMDS device adoption, enhance revenue growth in markets where AMDS is currently approved. Second, data from our 510 patient On-X heart valve low INR post market study with a follow up — with a mean follow up with 3.4 years showed a statistically lower composite primary endpoint of thromboembolism valve thrombosis in major bleeding.

These results were driven by an 85% reduction in major bleeding and a 73% reduction in all bleeding. This data reflected an improvement in outcomes compared to the original On-X low INR pivotal arm, which showed about a 63% reduction first published in 2014. This is the basis of our current low INR label. With these data, we are increasingly confident in our ability to gain further market share globally with On-X. It is the only mechanical aortic heart valve that can be maintained at an INR of 1.5 to 2.0, which is backed by recommendations from ACC, the American College of Cardiology, and AHA, the American Heart Association, guideline for patients with evaluated disease. Finally, I wanted to let you know that we’re discontinuing our pursuit of the lower INR indication in the US for On-X mitral valve.

As we previously reported to you, while the trial did not show an increase in thromboembolic or valve thrombosis event rates, it missed its primary non-inferiority endpoints. After several discussions with the FDA, in which they informed us that would require additional clinical data to consider the indication for approval, we’ve determined not to invest in the significant time and resources it would take to secure the additional data. We previously stated that securing PMA approval for low INR indication for the On-X mitral valve was not critical for us to achieve our growth objectives that we’ve communicated. Furthermore, I am please report that our On-X mitral valve business has increased 18% year-to-date, compared to the same period in 2022.

We believe this is partially due to the compelling clinical results for patients in the trial who have been treated with the On-X mitral valve and were being maintained at a lower INR. Based on the positive data from this trial, we do plan to seek change in the existing guidelines for use of Warfarin in connection with the On-X mitral valve as we did with the On-X aortic valve. I want to thank our investigators and subjects who participated in the trial. Before I turn the call over to Ashley, I’d like to take a minute to talk to you about the impact of the GLP-1 receptor agonist class on medical device stocks. Right now, investors are trying to determine what the impact these drugs will have on medical procedures. Over the past couple of weeks, myself personally and our team have met with over 25 cardiovascular epidemiologist, preventive medicine cardiologists, cardiac and vascular surgeons regarding the potential impact of this class of drugs on the disease states that we treat, specifically aortic valve disease in patients under 65, and aortic dissections, and aneurysms.

Based on the clinical data published to date as well as extensive research into risk factors of these diseases, our research indicates that GLP-1s will not have any impact on our incidence rates of these diseases we treat and the corresponding addressable market opportunity. We’ve included two slides, slide 11 and 12, in the presentation included in our Investor Relations section of our website that summarize our research. More specifically, regarding aortic valve disease, the patient population we treat are under the age of 65. The primary risk factor basically is linked to a pre-existing condition for those patients that have a congenital valve malformation called a bicuspid aortic valve, which make up about 60% of the patients that we treat.

Further, and there are very large studies with over 100,000 patients that have shown there’s no relationship between obesity and aortic stenosis or valve replacement in ages under the age of 65. Based on our conversations with key opinion leaders, and based on the significant data stemming from the studies on the matter, GLP-1s will have minimal or no impact on the incidence rates of aortic valve replacement surgery in patients under the age of 65. Similarly, for aortic dissections, and aortic aneurysms, the primary risk factors are pre-existing conditions for those patients with this disease are familial or connective tissue disorders such as Marfan, high blood pressure, smoking and high cholesterol. Similarly, these very large studies for aortic aneurysms and dissections have shown no relationship to obesity.

Further, GLP-1s have minimal impact on blood pressure. Based on our conversations with key opinion leaders and based on the significant number of studies on the matter, GLP-1 should have minimal impact on the incident rate for aortic dissection and aneurysms. Furthermore, even if this category did have some minimal impact on our adjustable markets, you must keep in mind that the largest growth opportunities for Artivion over the next several years is the introduction of our novel stent graft technologies in the US and Japan, and other developed markets around the world. And in those markets, we’re starting from zero. So, in conclusion, we do not feel GLP-1s will have a meaningful impact on the incident rates of the disease states that we treat and even if they did have some minor impact, the new addressable markets that we are eventually moving into provide ample opportunity for us continuing delivering double-digit growth on the top line for many years.

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

Ashley Lee: Thanks, Pat, and good afternoon everyone. Revenues were at $87.9 million for the third quarter of 2023, up 14% on a GAAP basis and 12% on a constant currency basis, both compared to Q3 of 2022. Non-GAAP adjusted EBITDA increased 34% from $10.4 million in the third quarter of 2022 to 13.9 million in the third quarter of 2023. After generating $5.1 million of free cash flow in the second quarter of this year, we generated $5.8 million of free cash flow in the third quarter. Importantly, on a trailing 12-month basis, we are free cash flow positive and expect that free cash flow on a trailing 12-month basis will continue to improve from this point going forward. On a year-over-year basis, in the third quarter of 2023, stent graft revenues increased 30%, On-X revenues increased at 14%, tissue processing revenues increased at 12%, and BioGlue decreased 7%.

On a constant currency basis, compared to that third quarter of 2022, stent graft revenues grew 22%, On-X revenues grew 13%, tissue processing revenues increased 12%, and BioGlue revenues decreased 8%. To add some color on the decline in BioGlue revenue this quarter, in Q3 2022, we did not have CE mark and we’re using derogations to sell in Europe. At the end of Q3 2022, our derogations for the UK and France were set to expire, so our customers ordered an additional $1.5 million of BioGlue so that they would not run out of this important product. As a result we had lower sales in Q4 of 2022 and expect BioGlue to return to growth in Q4 of 2023. On a regional basis, third quarter 2023 revenues in Asia Pacific increased 21%, Latin America increased 29%, and North America and Europe both increased 13%, all compared to the third quarter of 2022.

On a constant currency basis, revenues in Asia Pacific increased 21%, Latin America increased 22%, North America increased 13% and Europe increased 7%, all compared to the third quarter of 2022. Gross margins improved to 64% in Q3 compared to 63.4% in the third quarter of 2022. This increase was driven by price increases and product mix, partially offset by inflationary impacts on materials and labor. G&A expenses in the third quarter were 51.1 million, compared to $41.1 million in the third quarter of 2022. Excluding charges, which primarily consists of adjustments to the fair value of contingent consideration related to the Ascyrus acquisition, G&A expenses were 44.7 million for the third quarter of 2023 compared to 39.9 million in the third quarter of 2022.

R&D expenses for the third quarter were $6.4 million, compared to 11.8 million in the third quarter of 2022. The decrease in R&D spending resulted primarily from the cessation of the PROACT 10A trial last September. Other income and expenses of $8.2 million includes $6.3 million in net interest expense, and foreign currency translation losses of approximately $1.9 million. On the bottom line, we reported GAAP net loss of approximately $9.8 million or $0.24 per fully diluted share in the third quarter. Net loss for the third quarter of 2023 includes pre-tax charges of $6.2 million related to contingent consideration for the acquisition of AMDS and the impact of valuation allowances on deferred tax assets. Non-GAAP net income was $749,000 or $0.02 per share in the third quarter.

Non-GAAP net income includes foreign currency losses and excludes business development and other non-recurring charges. As of September 30, 2023, we had approximately $53 million in cash, $313 million in debt, and the full $30 million available to us under our revolving credit facility. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results. And now for our updated outlook for 2023. Given our performance through the third quarter, our pricing initiatives, improvement and supply of stent grafts, and FDA approval for PerClot, we are raising our revenue guidance and now expect constant currency revenue growth of between 11% and 12% for the full year, compared to the previous range of 10% to 12%.

We expect revenues to be in a range of $349 million to $351 million compared to our previous range of $342 million to $350 million. With our strong third quarter performance, continued top line revenue growth, general expense management and a decrease in R&D spending, we have increasing confidence that we will meet or exceed our adjusted EBITDA guidance of a minimum of $52 million plus for 2023. These factors also allow us to remain on track to meet our $75 million 2024 adjusted EBITDA commitment we made in March of last year at our investor base. In regards to our capital structure, we continue to monitor market conditions and evaluate options to address the majority of our convertible debt in July 2025. As we continue to execute on our strategy, and drive EBITDA and free cash flow higher, we believe our options to address our capital structure will continue to improve.

And finally, our Term Loan B contains no financial covenants to maintain unless we were to have more than $7.5 million drawn on our revolving credit facility at the end of any calendar quarter, which we do not. As of now, we have the full $30 million available under our credit facility and do not foresee the need to draw on it. As a reminder, our convertible notes do not contain any financial covenants. Overall, our strong financial performance and the expectation it will continue through 2024, affords us greater flexibility as we consider our future obligations and ways to increase shareholder value. With that, I’ll turn the call back over to Pat for his closing comments.

Pat Mackin: Hey, thanks, Ashley. So as you just heard, our business is performing extremely well. We exceeded our revenue goals, increased guidance, continue to expand our markets and advance our clinical pipeline, which will meaningfully expand our addressable market if approvals are gained. These combined factors make us highly confident that our growth prospects to 2023 and beyond. We expect future growth to be driven by the following. First, our continued strong growth in our stent graft business primarily due to our improved supply and product adoption. Second, our accelerating AMDS growth driven by the 30-day PERSEVERE study data that was presented at EACTS showing a 64% reduction in major adverse events compared to literature control.

Third, continued market share gains for On-X, driven by the recent 510 patient data that was presented at EACTS showing an 85% reduction in major bleeding. Fourth, growth in our proprietary SGPV SynerGraft valve, which is driven by price increases, the growth of the Ross procedure, and our increased ability to deliver from a supply standpoint. Fifth, the continued growth that we’ve seen in Asia Pacific and Latin America from our channel investments and our new regulatory approvals. Sixth, our continued growth in PerClot due to the PMA approval in May of 2023. And finally, in the mid-term, a robust clinical pipeline, more specifically, the completion of patient enrollment in the AMDS PERSEVERE trial, continued enrollment in the Endospan NEXUS TRIOMPHE trial.

Combined, we expect these two opportunities to significantly expand our total addressable market in 2025 and 2026. We’ve delivered on consistent double-digit revenue growth this year. And as you just heard, we have great momentum as we finished 2023 and head into 2024. I will wrap up my comments with some thoughts as we head into 2024. First, as we commented our March 2022 Investor Day, we are committed to delivering double-digit revenue growth. Second, we have made the necessary investments in our channels, our factories and our pipeline, and you will see the continued benefit of those investments in 2024. As such, our plan is to deliver $75 million in adjusted EBITDA, which will reduce our net leverage to less than three times despite the headwinds we faced and inflation and its impact on gross margins.

In addition, on a trailing 12-month basis, we are cash flow positive and expect that free cash flow will continue to improve going forward. Finally, I want to thank our employees around the globe for delivering an exceptional third quarter. With that operator, please open the lines for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And we’ll take our first question from Rick Wise from Stifel. Please go ahead.

John McAulay: Hey, Pat. Hey, Ashley. This is John on for Rick today. I just wanted to start off with the two kind of really encouraging datasets we saw at EACTS 2023 and maybe how we could think about those and the impact that could have potentially on financial performance as we look into 2024. Just specifically, I want to kind of hear, are you hearing anything from the field? Just what your reps are saying, what they’re hearing from doctors? Could these datasets both potentially be growth accelerants as we look to next year and you could grow even faster and expand margins greater than expected?

Pat Mackin: So maybe I’ll take them one at a time. So that the two datasets that I referenced in my comments were the AMDS PERSEVERE. That was the first 52 patients out of 93. I think the overwhelming feedback from clinicians is this is kind of game changing data, right. So we’re not — we’re about to finish the trial, we’ll get the full dataset and hopefully have that presented in January. But you’re seeing a 64% reduction in major adverse events versus the literature control that we’re using with the FDA. So, as a reminder, the patients that have acute Type A dissections with malperfusion, right, so blood going in the wrong false lumen. In the literature control, if you look at the average of those results, at least one of those patients had 58% — or 58% of patients had at least one major adverse event.

The bar that the FDA set was around a 30% reduction to get to 40%. We delivered, at least in the interim analysis, a 64% reduction, which is a 20% of the patients had an MAE, that is a huge change, statistically significant difference in mortality, patients requiring dialysis and MI. So we expect and — I mentioned, as we expect, that data, as it gets around, will continue to drive the growth of AMDS, which is already growing very rapidly but I think it portends for a very big opportunity in the US once we launched that. I think the second one on the On-X post-approval data, that’s a 510 valve study, that’s a very large study. And as a reminder, the original On-X, low INR study, which we’re the only company that has it, we showed about a 63% reduction in bleeding and that’s what the PMA and the expanded label was based on.

This was a post-approval trial required by the FDA in kind of real-world patients. We’re about 3.5 — we have 3.4 years of follow ups in those patients. There’ll be more data presented at AATS in May but you’re basically seeing an 85% reduction in major bleeding and a 73% reduction in all bleeding. So it just further contributes to the body of evidence around the On-X aortic valve and nobody else has, and we’re just going to continue to go after market share with the market leading technology.

John McAulay: Thanks, that’s helpful. And then as a follow up here, you talked a bit about ramping adjusted EBITDA to 75 million next year, and you’re growing strong so far this year, 30% this quarter. My question is, I just want to better understand the inputs for getting there, I get that the double-digit top line growth is critical. But we’re also going to have to see some leverage on the G&A in the R&D line. So just be really helpful if you could kind of talk through how you’re going to generate that leverage, how quickly it’s going to be more visible and just kind of the ramp throughout the year?

Pat Mackin: Yeah, so there’re multiple factors and I mentioned some of them in kind of my closing, right. So we have a lot of things going in our favor, right. We just talked about the AMDS data. We talked about the On-X data. The other big thing is our SynerGraft pulmonary valve is growing very rapidly, the Ross procedure — the data on the Ross procedure that’s come out is phenomenal. That procedure is going extremely rapidly. We’re the market leader by far in that. We’ve taken some price increases there but we’ve also done a lot to improve our supply, so that’s going to be a real growth driver for next year. So this year, a lot of it was pricing; next year, you’re going to see a lot from a unit standpoint. So we expect that pulmonary valve business to continue to grow.

That’s one of the big contributors. I think the other piece is, I mentioned in my comments, I mean, we’re building a company here. So we’ve invested heavily, right — we’ve invested heavily in Latin America and Asia Pacific. We’ve invested heavily in the pipelines, our factories, clinical trials, all these things that we’re talking about. And for 2024, we’ve made the investments. We were delivering double-digit growth and you’re going to see us drive rapid EBITDA acceleration by the top line comments that I made, as well as managing the middle of the income statement, because we’ve basically made the investments we’ve needed to make, and you’re going to see a significant drop through on the P&L next year.

John McAulay: Right, that’s helpful. And just if I could sneak one more, and I just wanted to better understand the price versus volume contribution to third quarter growth and how we should be thinking about that for 2024. Is there a potential with these two datasets to potentially increase prices again or are there any other areas you might be targeting for a price increase? Thanks.

Pat Mackin: Yeah, I mean, we look at pricing every year and we’ve taken some pretty significant price increases where we have highly differentiated product, which again is the majority of our portfolio. So we will look at that on a case-by-case basis but clearly that is going to be another focus for us in 2024 where appropriate to take additional price increases.

John McAulay: Thanks.

Operator: Thank you. And we’ll take our next question from Suraj Kalia from Oppenheimer. Please go ahead.

Shaymus Contorno: Hey, this Shaymus on for Suraj. Congrats on the quarter and thank you for taking the questions. Just kind of looking On-X, how should we start thinking — how should — you have thought about same store — new store and same store sales in 3Q and kind of 4Q and thoughts on 2024 for that as well, if you can.

Pat Mackin: Yeah, so I mean, we’ve delivered 13% growth in On-X, for the last five years. And it’s been a combination of — it’s not just — when you think about a hospital sometimes we’ll get into a new hospital with one surgeon and other surgeons may use another valve. So it’s, to your analogy, same store, but then expanding in that store with other surgeons. So we’ve had very good penetration into accounts, we still have more to go. This expansion in Asia and Latin America, we’ve seen very nice growth in those markets. So I think that this data is just out. I mean, literally, this date is not even a month old, so our commercial teams are just getting out there and making their rounds with the clinicians, but we’re going to be very aggressive.

And we think this is the best valve on the market and there’s no reason people should be using another one because they don’t have the data. So we see this as a big opportunity for us and, like I said, we’ve guided a year and a half ago, we told people we could grow On-X 10 to 15. We’ve been growing at the higher end of that range and I think we’re looking at more of the same going forward.

Shaymus Contorno: Got it. Thank you for that. One quick one for Ashley, how should we start thinking about FX exposure as we move into 2024?

Ashley Lee: Well, as we round out the end of 2023, we certainly have a little bit of a tailwind. Again with the majority of our US business being in Europe the relationship that we pay the most attention to is the Euro USD and, again, we should have a little bit of a tailwind in the fourth quarter of this year. If you look at the forecast for 2024 and again, we just look at the consensus, we’re not FX experts, but we look at the consensus, and the consensus right now indicates that the dollar should start weakening from these levels going into 2024, which again, should create another tailwind for us if that in fact happens.

Shaymus Contorno: Got it. Thank you. Just one kind of last one, if I can sneak in. What are your kind of thoughts on these low risks TAVR signals that were presented at TCT for partners [Indiscernible] Evolut and how it relates to you guys? Thank you.

Pat Mackin: Yeah, I think, I mean, we saw a joint press release that came out from both the STS and the European Association of Cardiac Surgeons, we can make that available to you. It was pretty direct, basically saying — I can read you the comments from — this is from the press release, from the two biggest cardiac surgery societies. Given that the fastest growing operation in the STS national database over the last five years is TAVR. X plan. We advise that more follow up in time to get into the existing low risk trial, before advising this in this patient population. They also make a bunch of comments about — that they’re comparing apples and oranges, about 26% of the patients in these trials, the SAVR group, the surgical group, had a concomitant procedure done with it, whether it was a CABG or whatever, which comes with a higher risk order.

So this is again, a direct quote, we’re calling investigators for both PARTNER 3 and Evolut low risk trials to publish the results for isolated SAVR versus isolated TAVR and see what the real data is. An the final comment was, we recommend caution prior to adopting TAVR for strategy in low risk patients, particularly those patients with characteristics not specifically studied in these trials. So tell me what you think about that.

Operator: Shaymus, does that complete your question?

Shaymus Contorno: Yes, sorry. Thank you.

Operator: Okay. No worries.

Pat Mackin: Yeah, no, I would encourage you guys, look, this is from the search. These aren’t my words. This is the two most powerful cardiac surgery societies in the world that issued a joint press release after those two trials were presented.

Shaymus Contorno: Appreciate it. Thank you.

Operator: Thank you. And we’ll take our next question from Mike Matson from Needham. Please go ahead, Mike.

Joseph Stringer: Hi, this is Joseph on for Mike. Congrats on the quarter. And we do appreciate the commentary on the GLP-1 impact or I guess lack thereof. Looking at stent graph, we’ve seen like four quarters from straight acceleration, at least on a reported basis. Just kind of curious where is all the strength coming from? What’s going on with that? Do you expect — I guess, based off of the guide, it looks like they’re going to be continued acceleration into the fourth quarter, maybe not. But maybe if you could just frame 2024, especially in that segment for us, that would be helpful.

Pat Mackin: Yeah, so we talked about it in the first quarter, right. If you go back a year, we were having challenges hiring people in Germany, and we end up having to raise labor rates and we hired like 100 people in the last six months of Q4 and Q1. So we are fully staffed. We got a brand new facility; it’s operating on all cylinders. We delivered 100 — our operations team delivered 100% of what we asked them to. We have full consignment, we have full inventory, and that was, frankly, the rate limiting factor for us. We only grew 8% or 9% in the first quarter. And I told you back then, watch what happens when the supply kicks in. And we grew 19% in the second quarter and 22% in the third quarter. So we’re well-positioned and what’s driving the revenue is the products, right.

We’ve got some great new products and a great sales team and we expect to keep doing more of the same. It’s a very proprietary portfolio in the fastest growing segments of the stent graft market. So again, we’re very, very bullish on that technology continuing to grow.

Joseph Stringer: Okay, yeah. Great. That’s helpful and makes a lot of sense. And then I guess, just one more thing. You guys laid out the expectations for this year in 2024 talking a lot about operating leverage, but I was wondering if you could maybe get into any potential gross margin expansion. I’ve seen in the slide deck. I guess the question essentially is, how much gross margin expansion is, and more, just back to some of the historic levels, you guys think you can go beyond that into even the higher 60s; 68, 69?

Pat Mackin: So, we are given — I mean, we keep coming back to this investor presentation that we did almost — it was March of 2022, so 18, 19 months ago, where we talked about — we’re going to — we committed at that point to double-digit top line growth and to $75 million EBITDA in 2024. We’re not giving — I’m not giving revenue guidance for 2024, I mean, the 75 is pretty much where we’re at on the EBITDA, but as far as gross margin, I mean we’ve had to swallow a lot on the inflation side between materials going up, between labor rates going up. So it’s really not going to be driven by margin increases next year. Now we’re going to be working to get them up but it’s not really a margin driven thing. It’s really a top line revenue, as well as some really nice performance in some of our product lines above what we originally thought they were going to do, where we have very strong positions.

And also, I think there are some pricing opportunities, but I’m just not — I’m not giving gross margin details yet. We’re not that far along in our planning process to get 2024 gross margin.

Joseph Stringer: Sure, okay. That’s fair enough. Well, congratulations on the quarter and continued progress to you guys.

Pat Mackin: Thank you.

Operator: Thank you. And we’ll take our next question from Frank Takkinen from Lake Street Capital. Please go ahead.

Frank Takkinen: Great. Thanks for taking the questions. I wanted to follow up on the double-digit growth guidance you put out there, Pat. I think it’s been talked about in a couple of different frameworks today. I wanted to ask a little bit more specifically on growth by product line. I know throughout the Investor Day it’s stents leading the way, then On-X and, then preservation and BioGlue in the single digits or lower single digit range. It feels like you add all that up and we can make 10% relatively easily achievable. If I can say that maybe it’s downplaying it too much, but just was hoping you could kind of walk through that thought process and how you think about growth from each line in 2024.

Pat Mackin: Yeah, no, it’s a good question, Frank. So I think the difference is, Frank, if you go back to that Investor Day, we basically said, we thought we could grow stent grafts 15 to 20. I think that holds. We’ve been at the upper end of that range of weight. We said On-X to growth 10 to 15, we’ve been at the upper end of that range of weight. BioGlue, we said it was kind of a low-single digit item, it was a little off this quarter, because of what Ashley commented on, it wasn’t anything material, it was because of the derogation last year, but I think that still holds. I think the big difference is we said kind of like 5% to 7% on tissue, I think that’s where there’s upside. Because of some of the things this Ross procedure, which is a great operation in patients under 60, for their aortic valve, the data that’s come out on that is phenomenal.

And there’s just a huge growth in that operation in all the major aortic cardiac centers. And we’ve — this year has been more — we’ve benefited more on the pricing side, but we’ve put things in place to significantly enhance our production, and to meet to meet the demands of that growth, so we expect that to be a major contributor. I think that’s the one segment that’s going to go up from what you have from the Industry Day last year, or 18 months ago.

Frank Takkinen: Yeah, that’s helpful color. And then maybe on On-X, more specifically, we’ve talked about this market in the past, but I think it’s been at least a couple quarters since we’ve talked about the entire mechanical aortic valve market clearly or do you continue to take share outpacing market growth? Can you maybe just talk a little bit where the market stands today, and kind of how much more market you think is available to take and how that’s going to compare to market growth or pricing increases over time?

Pat Mackin: Yeah, so the worldwide mechanical valve market is around 250 million, it’s not perfect data because it gets loose when you get to outside the US and Europe. It’s about a 250 million market for aortic and mitral. And depending on where you are in the world like, so far, for example, our market share in the USA is probably over 60 at this point. So we still got 40 more to go. It’s lower in Europe and it’s way lower as you get outside the US. So we’ve got lots of room to grow, internationally, as well as in Europe. And the data that we’ve got out right now clearly is a catalyst for continued On-X growth going forward.

Frank Takkinen: Perfect. And then maybe for the last one, just for Ashley, if you could talk about free cash flow, you guys have put a couple quarters together in a row now with the good cash generation, balance sheet looks better each quarter. So maybe talk about anything you’re comfortable sharing about free cash flow expectations on a go-forward basis.

Ashley Lee: Yeah, Pat has mentioned this couple of times. We are going to give out our formal 2024 guidance in February of next year. We did have a second quarter of really strong free cash flow generation. And we’ve done a lot of things internally to focus on that whether it’s expense control or better working capital management, it’s something that we’re laser focused on. I made the comment in the call that we are now free cash flow positive on a trailing 12-month basis and we expect that we will be free cash flow positive on a trailing 12-month basis going forward and we expect that to improve each quarter as we move forward.

Frank Takkinen: Perfect. I’ll stop there appreciate taking the questions and congrats on solid quarter.

Pat Mackin: Thanks, Frank.

Operator: [Operator Instructions] We’ll take our next question from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen: Hi, Pat and Ashley. How are you?

Pat Mackin: Hey, Jeff.

Ashley Lee: Hey, Jeff.

Jeffrey Cohen: Just a couple short ones from — sorry if you’ve addressed many of the issues. So was there an update — I heard a quick mention about PerClot. Was there an update as far as manufacturing over the past quarter and what that looks like on your end from manufacturing and transferring that at some point?

Pat Mackin: Yeah, so we basically — this is as a refresher, so we’re currently producing PerClot for Baxter. They’ve done a very nice job with the product and kind of meeting exactly where we thought they would be. We basically — we don’t have perfect information, Jeff, on this, but it looks like we will be producing PerClot for them all of 2024 and maybe into the first half of 2025 and, again, it’ll depend on how their transfer goes. And we’ll have — I think, as we get closer, we’ll have better data, but I think for — we’re expecting to have it in all of 2024 and then we’ll know more kind of mid-to-late 2024, how their transfer is looking. So that’s about as good as I can do for right now.

Jeffrey Cohen: Excellent, so far. And then secondly, could you talk a little bit about your commercial channels, at least ex-US, as far as some of the territories that went from direct to distributors? And will any of those be moving in the near future? Is it something on your to-do-list as far as some of the territories moving either direction?

Pat Mackin: Yeah, so we’ve had — as you know, we’ve had a pretty deliberate strategy over the last five years to build out our channels in Asia Pacific and Latin America. I mean, when I joined the company nine years ago, we had one person in Asia and nobody in Latin America. Now we’ve got probably a team of 25 in Asia and half a dozen people in Latin America. We’re going to, basically — for 2024, we’re going to slow down the investment there. I think we’ve got good infrastructure. There’s more to do, but we’re not doing in 2024. I think we’ve invested what we need to invest for where we are as a company. We did — for example, we went to direct in Greece this past year, kind of in our European region. And we’ll look to do those things from time to time, but not in 2024.

So we’re kind of — our channel, we’ve got about 185 direct reps right now around the world and we’re kind of fixed there for next year and that’s part of the way you’re going to see the EBITDA drop through, because we’re not going to be investing in further channel expansion next year.

Jeffrey Cohen: Okay, perfect. That does it for us. Thanks for taking the questions.

Pat Mackin: Thanks, Jeff.

Operator: Thank you and that was our last question. I’d like to turn the floor back to Pat Mackin, President and CEO for closing remarks.

Pat Mackin: Well, thanks for joining the call. And as you can tell, we’re extremely positive about how things are going at the company. We’ve been raised every quarter. We had a great Q3. We kind of were hitting on all cylinders. We’ve got great new data. Our factories are firing on all cylinders. We’re delivering the numbers we told you we would deliver. And we feel very confident about our ability to deliver double-digit growth next year with 75 million of EBITDA. So look forward to next quarter and we’ll be giving out our 2024 guidance. So thanks for joining us.

Operator: Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.