Artivion, Inc.

Greetings and welcome to CryoLife's third 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 the 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. I will now turn this call over to Ms. Lynn Lewis. From the Glenn Martin 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 in the press releases issued earlier today. With that, I'll turn the call over to Cryolife CEO, Pat Mackin.

Thanks, Lynn, and good afternoon, everyone. Thanks for joining us. I'm pleased to report that we had a solid third quarter. As trends continue to improve from the first day of the COVID crisis, we attribute our recovery to the critical indications that many of our partners addressed. Our team's efforts have been extraordinary over these past two quarters. They have proven they can supply devices and support procedures, both in person and virtually. They can also employ creative solutions to ensure continued customer service and patient care. I have no doubt that their incredible dedication and resolve have helped save many patients' lives throughout this pandemic. I want to sincerely thank our entire organization for their outstanding performance during these challenging times. Today, I'll provide some color on our Q3 performance, as well as our expectations for the remainder of 2020. Then Ashley Lee, our CFO, will review the third quarter financial results and liquidity in greater detail. I will then make closing remarks and open up the call to your questions. As I will explain later in more detail, through the third quarter, we advanced on a number of our key initiatives and delivered solid results. Our third quarter revenue performance was driven by the fact that the vast majority of our products are using procedures that cannot be postponed at all, or they cannot be delayed for very long. In Q3, we achieved revenues of $65.1 million, which reflects a decrease of 4% versus third quarter 2019. both a GAAP and constant currency basis. If you exclude TMR revenues for the third quarters of 2019 and 2020, total revenues decreased 2% on a constant currency basis. As we saw in the second quarter of this year, throughout the third quarter, we saw improving procedure volume. In fact, revenues in September increased over September 2020 increased over September 2019. These trends corroborate our belief that hospitals and providers have become increasingly adept at managing procedural continuity during the COVID-19 pandemic. As we look to Q4 revenue performance, we were optimistic that we could return to growth versus 2019. In fact, our October 2020 revenue performance was a strong 99% of October 2019. Unfortunately, this pandemic is a fluid situation, and in the past two weeks, we've seen spikes in infection rates in both the U.S. and Europe. and more recently have seen lockdowns in Ireland and the UK as well as other countries in Europe. As a result, we are less optimistic that we'll see the return to growth in Q4. But we do anticipate that we will begin to benefit from recently launched or soon to be launched next-generation duct tape products, AMDS and Nexus, in our continued expansion into Asia Pacific and Latin America, as well as positive news on the regulatory front that should benefit us beginning in 2021. We are particularly optimistic on the outlook for AMDS. This is the world's first ARCH modeling hybrid device used for the treatment of acute type A aortic dissections, which we now own as a result of our acquisition of Osiris Medical back in September. The acquisition of AMDS aligned exceptionally well with our vision to provide the most technologically advanced, simple, and elegant solutions for patients with aortic disease. As we discussed on our call immediately following the Osiris acquisition, AMDS has the potential to reduce complications as well as re-operations associated with acute type A aortic dissections, which should improve patient care and reduce hospital costs. We believe the hemi-arch repair with the AMDS technology added has the potential to become a new standard of care for the treatment of acute type A aortic dissections. So far, we're off to a great start. We posted revenues of approximately $465,000 for the month of October, which was a 295% increase over October of 2019. Regarding our operations, fortunately, nothing has changed since our last update, as we've continued to run at our near capacity across our three manufacturing facilities with few, if any, disruptions, and have continued to avoid any significant supply chain disruptions. At each of our sites, the work from home and safety protocols we implemented earlier this year remain in place, and we believe they've been very effective in minimizing the impact of COVID-19 on our workforce. As mentioned previously, the slowdown in procedures in the past few months has allowed us to continue to improve our YOTIC inventory position. We also remain on track to have a second source sewing supplier by the end of the year, assuming, considering the worsening pandemic conditions in Europe, don't allow or preclude our notified botting for coming in and conducting their inspection. As we look ahead, we remain in a position of strength by continuing to mitigate operational risk, diligently managing our expenses, and strategically investing for growth now and when the pandemic subsides. In fact, we've been able to make significant progress on several strategic initiatives and R&D projects. First, we've made continued progress on our Yotech product launches. Our limited market release for the Avita Open Neo and Enside are progressing very well, and to date we've received very positive customer feedback on those technologies. We also remain on track to initiate a limited market release for Enya this quarter and have already resumed the limited launch of Nexus. We continue to anticipate full market release for all three new Yotech products in early 2021. As mentioned on our last earnings call, our teams are continuing to gear up to train physicians as well as build supply to support the full market launches of these three new Yotech products. Second, with the improvement seen in Q2 and Q3, We've ramped up our enrollment efforts in the PROACT-10A trial, which is a prospective randomized clinical trial to determine if patients with the onyx aortic valve can be maintained safely and effectively on Eliquis versus Warfarin. We currently have 34 sites fully qualified to begin enrollment and 54 patients already participating in the study, and feedback from surgeons and patients has been very enthusiastic. Enrollment to date represents solid progress towards our approximately 1,000 patient enrollment target, across 60 North American sites that we expect to enroll over the next year. As a result of our progress, despite pandemic headwinds and assuming the trial meets its endpoints, we believe we can still achieve FDA approval for the use of Eliquis with the Onyx Aortic Valve in 2024, which we believe will contribute to the Onyx Aortic Valve becoming the market share leader in the mechanical valve segment, as well as taking share from existing bioprosthetic aortic valves. On the regulatory front, we remain on track to file our PMA for per-clot in the U.S. and also a response to the Chinese FDA for BioGlu before year-end. And finally, Endospan received FDA approval to begin their U.S. clinical trial for Nexus and anticipates enrolling their first patient later this quarter. With that, I will now turn the call over to Ashley for a detailed review of our financials in the quarter. Ashley.

Thanks, Pat, and good afternoon, everyone. Total company revenues were $65.1 million for the third quarter, down 4% compared to the third quarter of 2019, due primarily to the impact on our business from COVID-19 and the absence of TMR revenues. Excluding TMR revenues, third quarter revenues were down only 2% compared to the third quarter of 2019. In the third quarter of 2020 versus the third quarter of 2019, BioGlue revenues increased 1%, Tissue processing revenues decreased 2%. Onyx revenues decreased 4%. And Yotech revenues, including Nexus and AMDS, decreased 3%. Performance in each of these products lines was adversely affected, primarily due to the COVID-19 pandemic. But as expected, we saw improved sequential revenue performance for each product line in the third quarter compared to the second quarter. On a regional basis, third quarter 2020 revenues in EMEA decreased 1%, North America decreased 4%, Asia Pacific was flat, and Latin America decreased 36%, all compared to the third quarter of 2019. Our performance in Latin America during the quarter primarily reflects the state of the pandemic in Latin America during Q3, and especially in Brazil, where the majority of our revenues in Latin America are generated. Our gross margins were 66% for the third quarter compared to 67% for the third quarter of 2019, reflecting an actual decrease of approximately 50 basis points year over year. The slight decrease in gross margins is primarily due to revenue mix. Interest expense of $4.9 million includes approximately $2.3 million of expense related to our term loan fee, $1.1 million related to our convertible debt, and approximately $1.4 million in non-cash interest expense and amortization of debt origination cost. Other expense includes $4.9 million related to milestone payments made to IndusPan for their recent IDE approval, partially offset by $2.1 million in realized and unrealized foreign currency translation gains. The impact of the milestone payment to Indospan is included in our business development expenses for the quarter for non-GAAP calculations. On the bottom line, we reported a net loss of approximately $2.9 million, or $0.08 per fully diluted share, in the third quarter of 2020, excluding business development expenses of $6 million, amortization of $3.4 million, and non-cash interest expense of $1.4 million, non-GAAP net income was $4.9 million, or 13 cents per share. Note that we have excluded non-cash interest expense of $1.4 million in the determination of the third quarter of 2020's non-GAAP income calculations. With the completion of our convertible debt financing in late Q2, We are now including non-cash interest expense as an add-back in the determination of non-GAAP earnings for all periods presented, including prior years. As of September 30, 2020, we had approximately $300 million in debt. Adjusted EBITDA for the third quarter of 2020 was $12.2 million, compared to $13 million for the third quarter of 2019. As of October 31, 2020, we had approximately $61 million in cash and cash equivalents, as well as the full $30 million available 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. So in summary, the third quarter demonstrated the effectiveness of our strategy Sorry, pardon me there. Due to the continued uncertainties resulting from the impact of COVID-19, we will not be reinstating 2020 financial guidance at this time. However, with the recovery we have seen in the business and prudent expense management, 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. I will now turn the call back over to Pat for his closing comments.

Thanks, Ashley. So in closing, as you've heard this afternoon, despite having to manage through a global pandemic, our business is performing well. I look forward to the days when we can operate in a more normalized environment and the true potential of the company can be realized. CryoLife is primed for growth over the next few years like never before. Our adjustable market opportunity in 2015 was approximately $600 million. In just five years and four transformative transactions later, we've increased our total addressable market tenfold to over $6 billion. Our product lineup is now filled with innovative, highly differentiated products that are either in development or, in many cases, just starting to realize their potential. As a result of these opportunities, we have growth for years to come, and these are truly exciting times at Cryolife. We couldn't be more pleased with Onyx, Yotech, Nexus, and now AMDS. We are fortunate to have these four outstanding products, which when combined with our legacy products, form a highly competitive lineup, particularly given our highly experienced and talented sales and service organization and our ability to go direct in key markets around the world. And as Ashley said, Cryolife rests on a sound financial structure, which allows us to continue to execute on our goals and objectives. So in summary, the third quarter demonstrated that the effectiveness of our strategy to focus on air to air and the emergent nature of our product portfolio. Barring any adverse impacts from the resurgence of COVID-19 in our key markets, we are confident about our prospects for success through the remainder of the year and beyond. With that, we'd like to open up the call to questions. Operator, please proceed.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation cell 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 for you to pick up your handset before pressing the start key. One moment while we poll for questions. Our first question comes from the line of Suraj Kalia with Oppenheimer. You may proceed with your question.

Hey, Pat, Ashley, congrats on a great quarter. Thank you. Thanks, Suraj. So, Pat, forgive me, just hopping in between calls, so you might have mentioned this. Will the supply issues at EOTech resolve in the quarter? The numbers look pretty good, but I just want to make sure I didn't miss that.

Yeah, so two things. The kind of silver lining in a difficult time with this pandemic is as the supply or the demand for the products kind of waned for all products in Q2, and we've come back very strong going into Q3, we took the opportunity to run our factories at full tilt. So we've increased our Yotech supply significantly. And we didn't really stop there. We've got our second source supplier, as I mentioned in the comments, that we should be getting our inspection from our notified body this quarter. And again, COVID could kind of slow that down if they can't get an inspector into that country. But between the inventory build we made in the Yotech product line during the pandemic when the demand was, you know, slowed down. We are in a very strong inventory position. And with the second source sewing supplier coming online, I think we're going to be very well poised for 2021 from an inventory standpoint.

Got it. Pat, specifically in terms of Onyx in the U.S., walk us through center utilization metrics as you see them progressing. And in Europe specifically, can you walk us through the cross-selling that you have witnessed, you know, if you normalize for COVID between Onyx and Eotech?

Yeah, so the first question, you know, if I look on a global basis, you know, basically the Onyx portfolio was what's forwarded to the prior year. And we've got, you know, when you look at the details, that showed growth in some areas and slowdowns in other areas, just mostly pandemic driven. So, you know, Onyx has been very resilient in that it's basically performing where it was last year. So, you know, the other comment I made is that we are starting to ramp up Proact 10A. And there's a lot of excitement. We've now got, you know, 30 plus centers towards the goal of getting to 60 centers. And we've got like 54 patients already enrolled in the trial. So, we think it's actually doable to enroll that trial in 2021. And I think that added excitement is going to show up in just the customer's interest in that product from a future standpoint. As far as the cross-selling, I mean, it's one of the things I've been reiterating from the very beginning when we started this journey of acquiring these four companies over the last five years. You know, Yotech has got an aortic stent graft portfolio that goes from basically the aortic valve all the way down to the iliac. Onyx has an aortic valve, mitral valve, as well as a device that treats the ascending arch. Nexus treats the aortic arch with a catheter. Osiris treats the aortic arch for an acute type A section. So, you know, literally, we're going to have three US IDE trials in the next 12 to 18 months We're going to be running Endospan just started. They should enroll their first patient this quarter. Proact 10A is already enrolling. This time next year, we should be able to start the AMDS OSIRIS-US trial for acute type A dissections. And then we'll follow closely behind that with our Avita OpenNeo frozen elephant trunk device. So, you know, our customers are, you know, very interested in these cutting-edge technologies. And as a result, we're in front of them a lot more. And, you know, Europe has the great thing about Europe is they've got that entire portfolio available to their customers today. So the cross selling opportunities between Onyx and AMDS and Avita Open Neo. And then if you flip to the vascular side, the endospan and the inside, it's just we've got cutting edge technologies that are for once. And it does nothing but provide, you know, tremendous cross selling opportunities for the company.

Got it. And Pat, in terms of PROAC mitral, remind me when we could see some data, and at the same time, would there be any subgroup analysis based on risk stratification? Thank you for taking my questions, and congrats on a great quarter.

Yeah, so PROAC mitral, we talked about this last year. So we finished enrollment that trial last year. So, you know, it's about a 400-patient clinical trial. That's going to be, it's the kind of you know, sister trial to proact aortic, where we reduced the amount of blood thinner for the mitral position. We've been in follow-up all year with the one-year follow-up for the FDA trial. So, once we hit the follow-up, which should be, I think, early in Q1 of 2021, we will, you know, pull the data together, and we should be submitting that PMA in the second quarter to the FDA. Okay. As far as the subset, your question about subset analysis, that trial is powered to just, you know, can you reduce the INR from, you know, 2.5 to 3.5, which is the standard of care for nitrile, to 2.0 to 2.5. And you're not going to be able to, I don't believe you're going to be able to do any subsets with any statistical powering. So it's a kind of non-inferiority complex design or trial design like we had with the PROACT-A ORIC. So we should be submitting that. The next thing you'll hear from us is, you know, the submission of that PMA. And I think we're still looking at when we want to have that data presented. We obviously would like to have, you know, a conference with people in the room versus a WebEx. So, you know, we'll see what the timing of that looks like and how that lines up with when the data will be ready. But we should have that data ready to submit to the FDA by the second quarter of 2021. Thank you.

Our next question comes from the line of Jeffrey Cohen with Lattenberg. Salman, you may proceed with your question.

Hi, Pat and Ashley. How are you? Good. Yeah. Congrats, Pat, on the EY award. I did notice. Thank you. No problem. Ashley, first for you, can you just run through the international segments again? I missed those specific numbers from the quarter.

Yeah, let me get my notes back out here. Just be happy to do that. Yeah, so on a regional basis, EMEA decreased 1% year-over-year. North America decreased 4% year-over-year. Asia Pacific was flat. And Latin America decreased 36% year-over-year.

Okay, got it. Thanks for that, Collar. And sorry to jump around here. A little bit further color pad on the PROC 10A trial. As far as the implants to date, are most of them recent surgical implants or implants over the past weeks, months, quarters?

Yeah, Jeff, I don't have the breakdown on, I don't obviously see the day-to-day data on that, so I'm not exactly sure. I would say that the trial design, as we talked about, is very unique in that. You have to be 90 days out of surgery, which is consistent with what we did in the original PROACT aortic trial, because you want to be on your full dose of Coumadin while the valve gets set in. So the patient has to be 90 days out of surgery, and they can go out to, I think, three or four years post-surgery. So I don't have any visibility to how long. I mean, there's only 54 patients in the trial right now, so I don't really have any visibility into, you know, are these like early post-surgery? Are these people have the valve for three years? I don't have that data. Okay, got it.

We had a small amount of revenue for MDS for third quarter. I think about $100,000 was a zero for the quarter and the commercialization started. You made a reference to some October numbers.

Yeah, so that was actually a real highlight of the quarter. So we acquired the company in the middle of September. We started shipping devices kind of the next day. our October revenue for this year was up, um, 295% over last year. So we did almost a half a million dollars, $465,000 in the court, uh, in the month of October.

Okay. Got it. That's a, uh, it's a strong start and anything to call it on, on the, uh, the Yotech, uh, portfolio as far as strength with any, uh, specific devices and could you talk specifically about any territories that stood out either stronger or weaker in Europe, please?

Yeah, so we've talked all year about these new devices and we've conducted the, you know, we always start with a kind of a limited market release where we get, you know, a number of centers to trial the device and get the training protocol worked out, et cetera. And, you know, we were very, very strong feedback overall. Avito Open Neo, which is the frozen elephant trunk device, which, you know, we actually created that market. Yotech created that market, you know, 10 years ago. And one of the competitors in the field had come out with a newer device, so we lost a little bit of share there. You know, we're actually doing extremely well. I've talked to a number of KOLs in Europe who've used the device, and we're getting, you know, kind of rave reviews. It's got a new delivery system. It's got a bunch of new features. So I think that device is going to do extremely well. We've also started doing cases in Asia, and we're actually having, we actually had a proctor from Germany on a WebEx, you know, teaching the surgeon, or, you know, not teaching, but assisting the surgeon remotely, which is something you have to do in these kind of COVID times. And I think, you know, the same on the inside, which is our off-the-shelf branch, the local abdominal device, we've gotten, you know, fabulous feedback in Europe from the centers that have used this. The challenge is, you know, with these intermittent lockdowns, it's, you know, people aren't letting you travel from country to country. In some cases, you can't go from one town to another town. You know, they're not letting reps into the hospital. So it's just, you know, it's just kind of putting a governor on the ability to launch with all these kind of flare-ups here and there. So we're very excited about what we've seen from the initial, you know, and I'm not talking one or two cases, I'm talking like 50 cases. The customer feedback has been, you know, kind of off the charts from a positive standpoint. So, you know, we've got the supply, we've got the channel, and we're looking forward to kind of when things kind of ease up a little bit. And, you know, the business is actually performing well. As I said in the script, you know, October was 100% of last year. So we're basically back to where we were last year.

Got it. That's great. And along those lines, I know it's hard to look into the crystal ball for the balance of the year, but what have you been seeing the last handful of weeks or so in North America? Are you seeing flare-ups? And if so, specific to geography? And how is that affecting the businesses you're heading to and through the historic stronghold? Yeah.

So one of the things that everybody's experiencing, right, is this is a very dynamic, fluid situation. In fact, you know, coming into the fourth quarter, I mean, we had a super strong September. We actually grew in September. We were flat to last year in October. And we, with the product lineup that we have between, you know, what we've already talked about, we've got Neo, we've got Insight, we've got Nexus, we've got AMDS, we've got Onyx. And we expected to actually return to growth in the fourth quarter. And literally, it's like the, you know, the tectonic plates are moving under your feet. We had these forecasts of return to growth in the fourth quarter. And then all of a sudden, two weeks ago, you start, Ireland shuts down. Five days ago, the UK locks down. Then we start hearing noise about, it's more in Europe, Jeff. I would say, and that's the other thing about our company versus a lot of companies our size, we've got a big business in Europe. And a lot of our growth has come out of Europe. And they tend to be more stringent in their lockdowns. I think the US has actually done a great job. And, you know, the hospital administrators that I've talked to, you know, hospital CEOs, they've figured out how to manage, you know, COVID and elective cases. So I think I have not seen as big an impact in the U.S. We've seen a bigger impact in Europe. But I think the one thing I can reassure our investors about is we know how to manage a business during a pandemic. You know, in the worst month of this thing, you know, back in April, You know, we did, you know, 62% of the prior year, and we cut our expenses, and we were able to put up a very strong quarter. You know, if this thing rages again, we will adapt our expenses to line up with the revenues. So I have no challenges running this thing during a pandemic. We know how to do it. I will tell you that we're seeing, you know, a lot of positive feedback. I can't, as you guys all know, control the virus, so If this thing flares up in Europe, then we'll have to manage it as best we can under the circumstances.

Got it. And then lastly for me, just a question on bio-glucana. You said you're expecting a response by the end of this year. I imagine it's the calendar end of year. And what would you expect? What are the permutations as far as what the response will be? Will we be looking for more information or... any further data that the authority will be seeking, or would that be some finality in terms of approval there?

Yeah, it's, you know, so first of all, this pandemic has not helped at all with BioGru China. I mean, a lot of these meetings are supposed to be face-to-face. None of them have been face-to-face all the way back to our panel back in March. So this thing is clearly dragged on longer than it would have normally if we could have met face-to-face. We are going through kind of a you know, a real time review process, if you will. We've got submissions going in, I think, this week to answer some of their questions. So it's kind of a back and forth, right? You submit, they give you feedback, you submit, they give you feedback. Our assumption is that we should have an approval in the second half of 2021. That's our current assumption right now. It could be earlier than that. It could be, you know, Q2. It could be Q3. It could be Q4. I just, it's very hard to predict in a pandemic working with a regulatory body, how long this is really going to take. So again, we're working hard and we'll give updates as we get more information.

Got it. Okay, great quarter. Thanks for the questions.

Mr. Mackin, there are no further questions at this time. I would like to turn the call back over to the management for closing remarks.

Yeah, and I'll be brief. So thank you for joining the call. And obviously, we're actually excited about how we performed in the quarter, and we're watching this kind of resurgence. But I will say that as we're getting ready to go into 21, we couldn't be more excited about the opportunities in front of us. We've got kind of four buckets of opportunities in 2021. And I'm skipping 2020 as a comp year. I'm using 2019 as the comp year. You know, we've got new products we've launched. We've talked about Avita Open Neo. We've talked about N-Side. We're going to start our limited market release for any of this quarter. So those are three new products. We just talked about BioGlue China. We'll be launching BioGlue China in the second half of next year. On the N-Side, you know, we had the acquisition of Osiris. We have Nexus. We've also got our distribution agreement with Misonics on our Neo patch device. And we've also got the continued... kind of growth we're expecting from Asia Pacific and Latin America. So we've got like nine different vectors in 21 that we didn't have in 2019. So we are expecting to, you know, accelerate our growth profile and, you know, look forward, you know, we'll manage through the pandemic, but I think as we come out the other side of this, we're going to be very well positioned for accelerating our top line growth. So thanks again for participating in the call and good night.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.