Artivion, Inc.

Greetings and welcome to CryoLife's second quarter 2020 financial conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Lewis from the Gilmartin Group. Thank you. You may begin.

Good afternoon, and thank you for joining the call today. Joining me today from Cryolife'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 in our 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 those forward-looking statements. 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 the press release that was issued earlier today. With that, I'll turn the call over to Cryolife CEO, Pat Mackin.

Hey, thanks, Lynn, and good afternoon, everyone. Thanks for joining. The second quarter of 2020 was filled with a number of challenges as COVID-19 disrupted many facets of our lives. I'm very pleased to report our team responded to these unprecedented challenges with incredible dedication and resolve. I want to thank our entire organization for their outstanding performance, and we have a lot to be proud of. As I will explain later in more detail, we were able to deliver a number of key objectives and initiatives and also deliver solid results. In Q2, we achieved total revenues of $53.8 million, which reflects a decrease of 24% versus the second quarter of 2019 and a decrease of 23% on a constant currency basis. Our revenue decline this quarter was largely driven by the results of the delay, in some cases cancellation, of procedures in April and early May in the various markets that we serve. As hospitals in these regions began resuming procedures starting in May, our revenue likewise began to increase. In April, our revenue was down 39% compared to April of 2019. Our May revenue was down 22% compared to May of 2019. And our June revenue was down 15% compared to June of 2019. While it is impossible to forecast with certainty how COVID-19 will impact our business in the second half of the year, We are cautiously optimistic that we will see continued improvement in our revenue performance for Q3 and Q4 compared to the comparable prior year period. We also anticipate that we will begin to see the benefit from recently launched or soon to be launched next generation Yotech products, as well as positive news on the regulatory approval front that should benefit us in 2021. Based on what we now know today, we expect 2021 to be a very strong year for car lines. Once I've provided some color on our performance for Q2, as well as our expectations for the remainder of 2020, Ashley Lee, our CFO, will review our second quarter financial results and liquidity in greater detail. I will then make some closing comments and open up the line for questions. First, I will update you on the status of key aspects of our business, starting with operations. Since our last update, fortunately, little has changed as our operations have continued to run at or near capacity with few, if any, disruptions. We've been able to further our growth initiatives, fund key R&D projects, execute on $100 million convertible senior note offering, which allowed us to repay our $30 million revolving credit facility and have more cash available for general corporate purposes. Moving on to revenue performance for Q2. All in all, Cryolite has weathered the COVID-19 storm well, due to in large part the fact the vast majority of our products are used in procedures that cannot be postponed at all, or that cannot be delayed for very long. As I indicated previously, revenue dipped sharply in April 2020, but then improved thereafter as Europe, Asia, and certain U.S. geographies resumed more procedures, including those in which our products are used. As hospitals and providers have learned more in their ability to deliver healthcare, even in the face of, and in some cases, a resurgence of the COVID-19 pandemic, We are optimistic that given the nature of our products, we can deliver solid revenue performance for the back half of 2020 and enter 2021 on very solid footing. Our commercial team has shown that they can continue to supply devices and support procedures, both in person and virtually, and employ creative solutions to ensure continued customer service and patient care. We expect their know-how and expertise will further solidify our excellent reputation with customers and strengthen our leadership position in aortic repair. We will also continue to diligently manage our expenses while strategically investing for growth now and when the pandemic subsides. On the manufacturing front, we've continued to avoid any significant supply chain disruption. And each of our three manufacturing sites are functioning at or near capacity. At each of these sites, we have safety protocols that we've implemented earlier this year remain in place. The slowdown in procedure also has allowed us to improve our Yotech inventory position, and we remain on track to have our second SOAR sewing supplier by the end of the year. As Ashley will further detail in his remarks, we remain in a position of financial strength. In June, we completed a $100 million convertible debt offering using some of the proceeds to repay our $30 million revolver. In addition to our encouraging revenue performance in the quarter, good expense management, and enhanced financial position, we made meaningful progress on several other initiatives. First, we made continued progress with our Yotech product launches. As of the end of the second quarter, we initiated the limited market release for Avito Open Neo and Ensign, and anticipate a limited market release for Enya in October. We also resumed the limited market release for Nexus. We anticipate full market releases for all three new Yotech products later in 2020 and as we move into 2021. As we mentioned on our last call, our teams are continuing to gear up to train physicians. We're building supply to support the full market launches of the three Yotech products, and we currently have sufficient Nexus inventory for the remainder of the year. Second, in May, we announced the initial enrollments of the ProLac 10A trial. which is our prospective randomized clinical trial to determine if patients with the onyx aortic valve can be maintained safely and effectively on Eliquis versus Warfarin. The trial is expected to enroll approximately 1,000 patients across 60 sites in North America. Enrollments occurred in the second quarter, notwithstanding the pandemic, as some institutions continue to enroll patients in important clinical trials, and patients did not need to have implant procedures to participate in the trial. As a result, if the trial meets its endpoints, we believe we can still achieve FDA approval for the use of a Pixaband with the Onyx Aortic Valve in 2024, and that the Onyx Aortic Valve will become the market share leader in the mechanical valve market, as well as take share from the existing bioprosthetic aortic valve market. And lastly, on the regulatory front, we remain on track before year-end to file our PMA for Perclod in the U.S. and our response to the Chinese FDA for Bioglue. With that, I will now turn the call over to Ashley for a detailed financial review of the quarter.

Ashley. Thanks, Pat, and good afternoon, everyone. Total company revenues were $53.8 million for the second quarter, down 24% compared to the second quarter of 2019, due primarily to the impact on our business from COVID-19 and the absence of TMR revenues. As Pat mentioned, we saw monthly sequential improvement for procedure volumes and revenues this past quarter. In the second quarter of 2020 versus the second quarter of 2019, tissue processing revenues decreased 17%, onyx revenues decreased 18%, BioGlue revenues decreased 31%, and Yotech revenues decreased 23%. Performance in each of these product lines was adversely affected by primarily the COVID-19 pandemic. Our gross margins were 67% for the second quarter compared to 66% for the second quarter of 2019. The improvement in gross margins primarily reflects a reduction in unit cost of products and tissues shipped during the second quarter of 2020 as compared to the second quarter of 2019. On the bottom line, we reported a net loss of approximately $3.7 million or 10 cents per fully diluted share in the second quarter of 2020. Non-GAAP net loss was $835,000 or two cents per share. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results. As of July 24th, 2020, we had approximately $127 million in cash and cash equivalents. Cash reflects the $100 million convertible debt financing we completed during the quarter, less expenses for a net of $96.5 million received, as well as the repayment of the full $30 million drawn under our revolving credit facility. Even though we are very encouraged by what we are seeing regarding the recovery of our business, uncertainty remains regarding the impact that COVID-19 may have on our business over the balance of this year and thereafter. To be prudent, we will continue to monitor our expenses very carefully during Q3 and Q4. We shared our cost reduction initiatives with you on our previous call. Those include hiring freezes, reductions in discretionary spending, restrictions on non-essential business travel, deferment of merit increases for top members of management, reductions to cash compensation for our board members for a six-month period, and a temporary slowdown of most clinical and R&D programs that are not directly connected to anticipated revenue generation for 2023. However, we are continuing to invest in clinical and R&D programs related to products that we expect to deliver revenue in 21 and 22, including our U.S. per-clock PMA, BioGlutina, and Proact Mitral regulatory approvals. With the recovery we are experiencing in the business and the cost initiatives that we have implemented, we remain confident that we not only have adequate liquidity to run the business, but also have sufficient capital to support our growth initiatives and comfortably service our debt. Due to the potential for continued uncertainties from the impact of COVID-19, we will not be issuing 2020 financial guidance at this time. I will turn the call back over to Pat for his closing comments.

Thanks, Ashley. So in summary, as you've heard today, our growth has been somewhat delayed but far from derailed. There's little question at this point how important our products are to customers and patients alike. We continue to estimate that our business is mostly comprised of products and procedures that cannot be postponed, or if they are postponed, only for a limited amount of time. Our next generation Yotech offerings are very exciting products, and we're very optimistic about their prospects. With that, I'd like to turn it over back to the operator to open the line for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Cecilia Furlong with Canaccord Genuity. Please proceed with your question.

Hi, Pat and Ashley. Thanks for taking our questions. I guess I'd like to start with PROACT. and the trial and really just what you've seen in terms of interest levels to potentially pull patients into just being implanted ahead of a potential indication. It's just any interest that you've seen broadly from the trial starting.

Yeah, so I think one of the great things about this trial is that you don't, as I mentioned in my comments, you actually don't need to go have a heart valve put in. This trial is very unique in that these are patients who already have onyx aortic valves. There's about 10,000 of them in the U.S., kind of in the time period that we're enrolling in the trial, or available to enroll in the trial. So the very first patient that was enrolled during the pandemic actually was enrolled during a telehealth appointment. See, they didn't have to go to the hospital, they didn't have to go to the doctor, they did all their informed consent and all the paperwork over a telehealth appointment on video, and then had their drug shipped directly to their house. This trial, if there was any trial that was designed to be implemented in a pandemic, is one of them. So I think there's a couple points to think about with this trial. One, we have tremendous patient interest in this trial for obvious reasons. If you've ever talked to anybody who's on Eloquus or who has been on Warfarin, it's like night and day. And patients are very excited about the opportunity to be, you know, this study presents to be able to potentially use Eloquus in the future. So one, there's a lot of excitement. Two, There was a natural slowdown in some centers that were hit very hard by the pandemic in April and May. So, for example, big centers in New York City that were kind of being overwhelmed with COVID patients, you know, they were not bringing in any new clinical trials. So it had nothing to do with the interest or excitement about the trial. It was more just they obviously had other priorities going on. I think the second thing is, you know, we made a conscious decision, as Ashley made in his remarks, that we obviously tightened our belt on expenses in the second quarter because no one really knew what the revenue picture was going to look like. The PRO Act 10A is our largest spend in the company. It's about $6 million. So we kind of ratcheted back the spending from about $6 to $3 million. So we cut it in half. So we actually had a natural governor that we put on the trial. We're exploring now as things start to loosen up with clinical centers as well as our confidence around the revenue performance we're going to look to accelerate the enrollment in the trial. So again, there was a lot of things going on, but I think we're as excited as ever about the overall interest and opportunity for that trial.

Great. Thank you. And I guess if I could just ask as well about Nexus, just if you could provide some commentary on what you're really seeing in Europe in the early days. And then just as you think about the U.S. opportunity, your updated thoughts around the trial, trial timing, and then just Priority within the rest of your pipeline, longer-term pipeline, is you reevaluate everything just in this COVID period. Thank you.

Yeah, so just as a refresher, Nexus is a very sophisticated endovascular device that's produced by a company called Endospan. It's an Israeli startup company that we entered into a transaction with, you know, several months ago. And that's all, you know, in press releases and presentations. It's the first device ever that allows a patient to be treated with a catheter to fix the aortic arch in a branch vessel. So it's a very sophisticated technology. Because it's so sophisticated, when we rolled out the product, it required, for good reason, that you have a physician proctor trainer fly in to support the new physician who's in training. And of all of our products, this is probably the one that got hit the hardest during the pandemic. So I'll just give you an example. We were building a great case pipeline of patients and surgeons who were getting trained, and we were bringing patients on back in January and February. And when the pandemic started kind of hitting hard, particularly in Italy and Spain, as you recall, back in March, nobody was flying. No surgeons. In some places, the elective cases were canceled. But, you know, the idea of a proctor flying from Milan to Madrid just wasn't going to happen. So, you know, Nexus has clearly, you know, had taken a setback because of the pandemic and because of the requirement of our physician proctors to travel and the lack of travel where physicians just aren't traveling. So, you know, that's a short-term thing. We're starting to see cases pick back up in certain parts of Europe. But we're extremely bullish on that technology. And as far as the U.S. IDE trial goes, Just to remind you of the relationship we have with Endospan. So we paid $10 million for the European rights for five years. We also funded them with milestones to fund the U.S. trial up to $15 million. So the company, Endospan, is responsible for the U.S. IDE trial, and they've been in discussions with the FDA about their IDE protocol. I'm not exactly sure what the timing is, but again, obviously COVID has somewhat slowed down the FDA in some regard. But we feel like that trial should start probably at the beginning of 2021. And, you know, it's one of the first of its type device ever, so we think there will be a lot of excitement for the enrollment in that trial as well.

Great. Thank you.

Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Good afternoon, Pat. Good afternoon, Ashley. Can you hear me all right?

Hey, Suraj. Hey, you're fine. Good morning. Afternoon.

Perfect. I hope everyone is safe and healthy. So, Pat, just hopping in between calls, forgive me if I missed some numbers. Did you provide an update on Onyx Mitral?

I did not. So, Onyx Mitral, just to give you a quick update, Onyx Mitral completed its enrollment. It's a 400-patient trial that completed its enrollment at the end of last year and basically completed we were using all of 2020 as the one-year follow-up period. So we should complete, the last patient should hit one year, probably I think in the December timeframe. And then we will basically take a quarter, crunch the data, and then we'll be submitting the PMA probably in Q2 for that approval. Got it.

And, Pat, this might be in the weeds, but did you provide the number of patients enrolled so far in PROACT-10A? We did not.

Yeah, we haven't given that update. I think part of it, too, is, you know, I don't know if you heard my comments from the previous question, but, you know, there was a couple things that were, you know, kind of slowing down the trial. One, as you well know, a lot of these big centers are for example, in New York City, and many of the big centers in New York are in this trial. I mean, they literally were not even opening up new trials because of what was going on in the second quarter. Right. You know, second, in fact, I said that the first patient that was enrolled was done via telehealth. So this is a perfect trial for a pandemic. But we're also trying to be financially prudent, right? So we, you know, we weren't sure what Q2 was going to look like. So we really tightened up our belt on the expenses. So we We kind of pulled back probably about half the funding for the trial, so we actually had a natural slowdown on the number of centers we were turning on. And it's not due to a lack of interest. It was more just making sure that we conserve cash. And based on our performance and our discipline around spending, we actually performed extremely well in the quarter and believe our financials will look even better as we go into the second half. So I think we will look to open up the funding for that trial going forward. Got it.

And Pat, in terms of U.S., OUS dynamics, would love to get to your perspective, specifically OUS. I'm curious what the status is for the Yotech supply disruption. And in the U.S. specifically, any color you can provide, and forgive me if you've mentioned this, about resurgence in Florida, Texas, and Arizona, our field checks are telling us things are pretty dicey in a lot of the hospitals. I'd love to have you provide some color on what you're seeing in the U S as a whole, and maybe in some pockets also. Thank you very much for taking my question.

Yeah. Thanks. No, and it's, you know, I think one thing I can say, and I'm probably sure most companies would say the same thing. I mean, you know, if you've seen one geography, you've seen one geography, right? So for example, Asia was probably our best performing versus, versus last year in the second quarter, because the, you know, China went through a, you know, we also don't have a huge business in Asia, but we actually saw Asia return to normal kind of first. You know, our worst performer was Latin America because, you know, Brazil got hit hard and hit late. And we have a big, you know, a fairly good size operation in Brazil. You know, the U.S. actually recovered, I would say, very strongly. We've seen in really across the board, we've seen very strong kind of return to, you know, getting back to normal in the U.S. In fact, I I actually looked at, you know, the month of July, right, with this resurgence going on. I looked at the month of July. I looked at Florida. I looked at Texas. I looked at Arizona. You know, we're actually doing better than last year in Florida. So go figure. I mean, I can't explain it. You know, Texas is actually doing worse than last year. So, again, part of it depends. So, for example, think about Houston as a huge cardiac hub. So the fact that Houston got hit hard, and that's a big cardiac hub that does, it makes a lot of sense that your, your numbers would be off the last year. Um, you know, parts of Florida, we, you know, could be stronger where they're not having as big outbreak. So, um, we, we are, we are not, I mean, I think one of the things I can say for cryo life products, this resurgence, we are not seeing, um, a return to the April, early May type stuff. Um, and I think one of the things that hospitals have figured out is kind of how to manage, I think this idea of shutting everything down and not letting all your elective procedures go away, I just don't think that's something they're going to return to, particularly on the cardiac side. Whereas I commented, half of our portfolio you can't delay, and the other half you can't delay very long. So we're actually not seeing a big negative impact from the resurgence. I would say on the European side, again, the U.K. obviously got hit later and harder. You know, they've been slower to return. Germany did a very good job managing the pandemic, and they're kind of returning very quickly. So it's really kind of region dependent. But overall, I mean, we've seen, if you weren't on, I mean, we saw April, you know, the April numbers were down 39%. May was down 22%. June was down 15, you know, and, you know, we're seeing better numbers now. So we certainly seem to be doing quite well as the time goes by.

And Pat, the Eotech supply issue resolved?

Yeah, I would say, I mean, one of the, unfortunately, this pandemic obviously has been, you know, terrible for lots of people around the world. One of the silver linings has been with the, you know, the numbers I just read to you. So having, you know, the quarter off by 24%, and we kept the factories running hot, our Yotech inventory is up 32% now. So we have taken the opportunity with this pandemic to keep our supply chain and our head of operations has done a fantastic job. And we didn't have a COVID positive case in one of our factories for almost 100 days. And talking with other people in industry, that was kind of unheard of. And we've been very disciplined about our safety protocols for our employees. So our Yotech Supply is – we aren't seeing the supply issues, number one. Number two, we're continuing to build and run the factories hot. And number three, our second source supplier should be online by the fourth quarter. So we think the Yotech supply will be a thing of the past.

Got it. Gentlemen, congrats on managing the quarter well.

Thank you for taking my questions. Thanks. Our next question comes from the line of Mike Matson with Needham & Company. Please proceed with your question.

Yeah, thank you. This is David Saxon. I'm for Mike. Thanks for taking the questions. Yeah. Hey guys, I appreciate the details you gave on the monthly revenue growth trends during the quarter. Would you mind sharing what you saw in July and then also what you're seeing in regions like the Northeast that were picked earlier on and what you're seeing on the pace of recovery in those regions?

Yeah, I mean, we're not going to give specific July numbers. Again, I commented on Q2 that I'll make a general comment and you can kind of go from there. And we know how you guys love to kind of pin us down with this stuff. But we went from negative 39 April, negative 22 May, negative 15 June, and we're doing better than that in July. So that's as far as I'm going to go with that.

Okay, that's great. And then just in terms of the pace of recovery in regions like the northeast?

Yeah, Ashley, I looked at a bunch of the different numbers. Ashley, if you have anything at your fingertips with the northeast in July versus last year.

No, I don't have that right at my fingertips, but the Northeast is doing extremely well. You know, I don't recall off the top of my head whether it is, I would say, back to level par with last year, but the recovery has been really strong in the Northeast.

Okay, I appreciate the color. And then on the Misonics distribution agreement, I know it's early days, but what's the feedback been on the NEO patch? And how should we think about that contribution during the balance of the year?

Yeah, we've actually, there's been great, I mean, we've had really good customer feedback. I mean, Misonics has got an excellent sales force in the channel in which these products are served in the wound care segment. So, you know, we're very excited about the relationship with them. Obviously, like everybody else, we all got, you know, hit in the second quarter, which, you know, slowed down and was right when we're doing our launch. So, You know, I think that they're, you know, in our recent discussions with them, they're ramping up for, you know, kind of a relaunch as things kind of get back to normal. And we'll give more color on that for 2021 when they've had a chance to kind of roll out their launch and things can, you know, as we see things progress. But we haven't given specific numbers out on that, but we do expect to do that for 2021.

Okay, thanks so much. Our next question comes from the line of Jeffrey Cohen with Lattenberg Thelman. Please proceed with your question.

Oh, hi, Pat and Ashley. How are you? Hey, Jeffrey. So one follow-up to as far as Neopatch goes, any kind of further data that we can garner from the company as far as what areas of therapeutic areas that they've been implanting in, wound, hand, ankle, ortho, neuro?

Yeah, so their major focus is on the wound care, which is where the publication was used. Also, they have a good surgical sales force and a hospital-based surgical team. So I do believe there's going to be some foot and ankle usage in that regard as well. So again, we can give them more of an update. We're waiting to let them go through their kind of limited market release and then talk about what they're looking for in 2021.

Okay, got it. On the G&A, as you said earlier, that you're running hot, so that's going to continue through Q3, and I guess a question related to that on the inventory. Ashley, any ramifications or any commentary from Q2 inventory as far as the manufacturing side? And then you read into Q3. Okay.

No, you know, first of all, on the GNA and just OpEx in general, I think as Pat mentioned earlier in the call, you know, we are very optimistic about the second half of the year to see, you know, continued recovery in the business. And, you know, I'm not giving out any financial guidance, but I think clearly, you know, we're managing our expenses throughout 2020 to, you know, in response to how we're seeing the business recover. Pat mentioned one thing in regards to spending on projects. We're looking at starting to accelerate spending on, among other things, the PROACT-NA trial. On the G&A side, we delayed a lot of G&A spending throughout the year. Well, certainly in the second quarter. And again, the level of spending in the third and fourth quarters are really going to be tied to what we see in the recovery on the top line. So no specific guidance, but more general, but it's going to be tied to the recovery. In regards to inventory, Pat mentioned that we've been running hot in all areas of manufacturing all throughout the second quarter, and it's starting to manifest itself and improve inventory levels with Yotech. We're seeing some increases in some of our other product lines as well. But it's something that, you know, we're going to manage, you know, as we go throughout the balance of the year. You know, we're going to continue to run our factories at or near capacity. And, you know, if the business hopefully, you know, recovers throughout the year, we'll likely continue to do that. If it does not, then, you know, we will, you know, likely curtail some of our manufacturing if need be. But again, everything's going to be tied to, you know, how well the business recovers during the third and fourth quarter.

Okay, got it. That does it for me. Thank you. Nice readout. Appreciate it.

Thanks, Jeff.

Thank you.

There are no further questions in the queue. I'd like to hand the call back to Mr. Mackin for closing remarks.

Yeah, so again, thanks for joining the call today. And as you can hear from, you know, the numbers, things progressed, you know, continually got better from April to May to June, and we're seeing even better in July. Our clinical projects are on track. Our R&D projects are on track. We've got our limited market releases for the three Yotech products. We've got Nexus coming back online. We've got the Neopatch, which is brought up. We've got Proact 10A. We've got the Proact Mitral. And frankly, when you look at our financial performance and the discipline we've had around spending, we are not really anticipating needing to burn much cash at all in the second half. So we're in a very strong liquidity position. And You know, we'll just continue to, you know, none of us can predict what's going to happen with the virus, but we know that our portfolio is resilient and we will be financially disciplined when we need to be. And we will accelerate opportunities when we see that the business is returning. So we appreciate your interest in the company and look forward to catching up with you on the next call. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.