AtriCure, Inc.
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Good afternoon and welcome to AtriCure's Fourth Quarter and Full Year 2020 Earnings Conference Call. My name is Kevin and I'll be your coordinator for the call today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lynn Lewis from the Gilmartin Group for a few introductory comments.

[Lynn Lewis:]

Thank you. By now you should have received a copy of the earnings press release. If you have not received a copy, please call 513-755-4136 to have one emailed to you.

[Mike Carrel:]

Thanks, Lynn. Good afternoon, everyone and thank you for joining us. We hope that you are remaining safe and healthy. As you look back on 2020, I want to begin by recognizing the dedication of our team at AtriCure and the resilience and durability of our business. In spite of the dynamic and challenging nature of the past year, we made meaningful progress in all areas of our business. In 2021, we will continue building for the future with many key catalysts on the horizon. Total revenues for the fourth quarter were $58 million, representing a 5% sequential revenue growth over the third quarter. Following solid growth in the early part of the quarter as COVID cases and hospitalizations increased after the holidays, we experienced volatility both in the U.S. and in Europe. This led to reduced cardiac procedure volumes at the end of 2020 and put pressure on our volumes as a result. These trends continued into January, and some areas began to worsen driven by return to quarantines and diversion of medical resources to COVID patients. With that said, we are starting to see some strong positive trends and experience an uptick in volumes as hospital constraints subside. While we expect this upward trend to continue, we believe that cardiac surgery volumes will remain slightly below full capacity, and that we will experience some variability for the first half of the year.

[Angie Wirick:]

Thanks, Mike. Our fourth quarter 2020 worldwide revenue of $57.7 million declined 6% on a GAAP basis, and 7% on a constant currency basis when compared to the fourth quarter of 2019. U.S. revenue was $47.4 million, a 4% decrease from the fourth quarter of 2019 reflecting the deferral of procedures using our minimally invasive ablation products. International revenue was $10.3 million, down 12% on a GAAP basis, and down 16% on a constant currency basis, as compared to the fourth quarter of 2019. We experienced more pressure in our international revenue with conditions in Europe stalling and a tough comp to the fourth quarter of 2019. On a sequential basis, we experienced growth of approximately 5% in our worldwide revenue from the third to fourth quarter. As Mike mentioned earlier, the sequential increase results from procedure volumes stabilizing at the onset of the quarter followed by increased variability in December in the U.S. and in Europe based on the resurgence of COVID-19 cases. Touching briefly on a few key metrics for the fourth quarter; gross margin was 73.5%, up 50 basis points from the fourth quarter of 2019, largely driven by geographic revenue mix. We had positive adjusted EBITDA of $1.7 million compared to an adjusted EBITDA loss of $5.4 million for the fourth quarter of 2019; this improvement to the bottom line reflects -- results reflect lower variable compensation, travel and training costs, all which were impacted by COVID, and we experienced a decrease in clinical trial spend related to aMAZE activity each year. Our loss per share was $0.42 for both fourth quarter 2020 and 2019, while the adjusted loss per share each period was $0.18 and $0.37 respectively. Fourth quarter 2020 net loss and the resulting loss per share includes a one-time charge of approximately $6 million related to a legal settlement. Given the extraordinary nature of this expense, it is excluded from both, our adjusted EBITDA and adjusted loss per share metrics.

[Mike Carrel:]

Thank you, Angie. While this past year was undoubtedly a challenge for everyone, we are optimistic and confident about our road ahead and the pathway to accelerating revenue growth. To that end, we are fueling our investments for our future and our focus on executing the many catalysts for growth that we discussed today. Thank you for joining us today. And with that, we'll turn it over to the operator for questions.

[Operator:]

Our first question comes from Robby Marcus with JPMorgan.

[Unidentified Analyst:]

Hi, this is actually Lilly on for Robbie. Thanks for taking the question. So to start, could you just share a little bit more details on how your conversations with the FDA regarding CONVERGE have been progressing? I think we were expecting to hear something with regards to timing of a panel, or whether a panel would even be needed by now; so is it still realistic to expect a panel or approval without one in the first half of the year? So, any color you could add on timing would be really helpful. And this guidance assumed any benefit from CONVERGE? Thanks.

[Mike Carrel:]

Sure. I mean it's a fair question and we do understand the interest in the timing everything. As we've talked about before with many of you and a little bit on this call, there really are those two decision points; the panel or no panel. We're not in a position give any more details on what we gave on the call today. We do know that it's a catalyst, we're excited about the conversations that we're having; they've been very productive with the FDA. And as I've said, we view these as very positive and collaborative discussions, and we'll look forward -- looking forward to updating everybody in the very near future. As we look at our guidance for the year, our guidance really is much more impacted by COVID. COVID is really the big one because elective procedures are having to have to come back, and so we did start to see some strong growth or coming back in the February timeframe after a very weak January that I believe most companies we're experiencing; as things are beginning to come, we do anticipate that that is going to continue. And so hopefully, we'll continue to see kind of COVID subside and we'll be able to kind of move forward from that standpoint. That has a much greater impact than timing or anything associated with CONVERGE at this time of the revenue for 2021.

[Unidentified Analyst:]

Great, thank you. And just a quick follow-up, can you talk us through what this guidance outlook assumes in terms of the cadence of the recovery, both throughout -- both on the top line and down the P&L? Are you assuming any sort of material impact beyond first quarter? Is it through the first half of the year? Any color you could give there would be helpful. Thank you.

[Mike Carrel:]

Yes. We believe that the pandemic will continue to be with us through the first quarter and into the second quarter, even with the back half of the year to some degree; but we think that the back half of the year will be much stronger, we're already starting to see signs of light today, but it's not going to be a bounce back all of a sudden overnight, it's going to be an incremental growth, kind of, as the year progresses. Therefore the back half of the year we're anticipate much stronger than the first half of the year, given what we're seeing today, and as we're starting to see things open up.

[Operator:]

Thank you. Our next question comes from Mike Matson with Needham & Company.

[Mike Matson:]

Yes, thanks for taking my questions. I guess I'll start with convergent. So, you mentioned that you have -- so I think you said 35 hybrid reps now focused on that -- those products or that procedure. So, how many of those were hired in 2020-2021? So how many of those are recent hires? And then, how should we think about the launch of convergent? How quickly the sales can ramp? Is it something that could be material this year or is it really going to be more in 2022?

[Mike Carrel:]

Yes. So that -- the -- it was about 10 people or so that were hired over the course of -- say, over the last 12 months, give or take; maybe a little bit less than that. We're going to continue to add to that team. Some of that team came over from the LARIAT team as well, where they were already very familiar with EP world, and kind of gave us a great insight into the relationships there. So, and then we've kind of cross-trained everybody from that standpoint. So we're in a really good and solid position, we'll continue to grow the number of reps for the year for sure. The biggest impact on issue is really about COVID. I mean COVID's really going to be the bigger one, not relative to CONVERGE. CONVERGE, we do anticipate that we -- once we get that approval, it's going to take time to begin to kind of build that market; we're ready, we've got everything prepared for it but we also need to go to build out the market. And so we've got to get the new sites up and running, we've got to create the awareness that's there, train the surgeons; it will have a great impact on 2022. As I mentioned in my comments, we do anticipate you'll be seeing accelerated revenue growth over our historical -- our historic double-digit revenue growth that you've seen in the past.

[Mike Matson:]

Okay, thanks. And then, just the guidance on EBITDA is a little more negative than I would have expected. Are you -- it's your investments or something that you are making to prepare for Convergent or LARIAT launch or are there other things happening that are causing that to -- to be a little more negative this year, just given that kind of path you're on, at least prior to COVID?

[Mike Carrel:]

Yes. I mean, last year -- if you look at our last year number; at the beginning of last year when we gave our numbers, we said we'd lose about $10 million on about $260 million of revenue. Obviously COVID hit us, we're now saying it's about the same loss that we had anticipated from last year; so the investments are actually very similar that we thought of last year as we are going to begin to accelerate into this new market. The investments that we've got to make to rollout on CONVERGE and getting ready for aMAZE; we've got a very strong balance sheet to be able to handle it, and really there is just kind of money around the edges from that standpoint. Obviously, this year we're going to have the full year of commissions and the full year of bonus but we anticipate that we're going to be doing much better from that standpoint; that was a lot of savings from last year that we had. And so obviously, as we kind of get ourselves back on to that growth trajectory and we will get ourselves ready to accelerate in 2022, there is some level of investment. But again, it's around the edges; we've got an incredibly strong balance sheet of $258 million in cash, and so we feel like this is a loss that we can obviously handle while we're making those major investments in our team, and to be ready for the catalyst coming on the pipeline over the next several years.

[Mike Matson:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Matthew O'Brien with Piper Sandler.

[Matthew O'Brien:]

Good afternoon, thanks for taking the questions. Mike, just to be clear, the guidance that you have laid out today doesn't include any kind of incremental benefit from the convergent approval this year. I know you're already selling into that channel but there is no incremental revenue this year. And then, along those lines; can you just give a little bit more color as far as the discussions with the FDA, is it the move to long-standing persistent that they're asking more questions about? Is there anything that they really pulled forward that they are incrementally more concerned about; anything along those lines? Thanks.

[Mike Carrel:]

Matt, our overall guidance -- I didn't say this, it didn't include any incremental. What I said was that our numbers include what we believe to get to be the impact for the year. I mean, so -- and COVID's getting much stronger impact then incremental revenue growth associated with an approval. COVID's what's going to happen, it's all baked into the number right now. And what we anticipate to happen with CONVERGE is all sitting in the number that you see today at -- around $250 million. So that's kind of within what we've got today. We feel, again, like that's a very good solid strong number for the year, coming off of last year; and that we're in a great position. Overall, you're seeing it's 21% growth on the year-over-year basis. And in terms of the conversations with the FDA, I mean -- as I mentioned, it's really kind of going out with one of two paths . The two paths are obviously panel no panel; we are having very positive and collaborative discussions with the FDA, and hopefully, we will be able to update everybody very soon.

[Matthew O'Brien:]

Okay. I won't push any further then. And then Mike, as far as the volumes that you're assuming; again, coming back this year, I know last quarter you had talked about -- I think it was 70% to 80%. Looking in that range, are you expecting a little bit better than that this year as far as the volumes go for the rest of the business? And we'll just love to hear any kind of underlying commentary on the clips and what you're seeing as far as new account adds etcetera?

[Mike Carrel:]

Yes, so -- we anticipate -- what we're seeing is about 80% to 90% of cardiac surgery volumes that are kind of happening. It obviously got hit a little bit when there was a resurgence that came back, that you're at the lower end of that range; we're now getting back up and we're working through the 80s. From our standpoint, I don't think we'll get to 100% by the end of the year, but I do think we'll make incremental improvement as the year goes on. Things are opening up for sure, we're starting to see that; I don't see it being a hockey stick, but it will impact all aspects of our business, that's the biggest impact on this year is to continue to see incremental improvement in the hospitals to treat these cardiac surgery patients.

[Matthew O'Brien:]

Okay. I'm sorry, just to be clear on that and so essentially, and I'm just using averages here. You're saying that 250 is and basically at about 90% of what you typically saw over the course of the year. So -- so to adjust for that in a normalized time it would be meaningfully higher than that; is that fair?

[Mike Carrel:]

I'm -- what I'm saying is, I'm not equating it to the 250 , I think you're doing math it -- you're probably going to put yourself into a quandary around that. What I'm saying is that -- that cardiac surgery -- and cardiac surgery volumes at the hospitals today are between 80% and 90%, and they are incrementally improving, they were probably closer to that kind of 80% or so during -- when the surge came back and they're beginning to kind of come back a little bit for sure, and you're moving throughout that, that's the end cardiac surgery volume that is there. And so if you try to do that math on what is all that -- kind of back into and equate; and remember, we've got multiple types of businesses, it gives you a sense for beginning to kind of move in and the hospital is getting more busy. And so, I -- hopefully that gives you some context. Obviously, if things get back to normal, they get back to 100%, but -- that would be upside to our revenue, that would be upside growth for us as a business for sure.

[Matthew O'Brien:]

Okay, thank you.

[Operator:]

Our next question comes from Rick Wise with Stifel.

[Unidentified Analyst:]

Yes, this is actually Don on for Rick. Thanks for taking the question. Just one kind of follow-up on the COVID trends you're seeing in the quarter so far. If you could give any more color just on five business, what you're seeing; just for modeling kind of 1Q? And then also any geographical differences that you're seeing between the OUS and OUS impact into a recovery?

[Mike Carrel:]

Yes, I mean we're -- in general, what you see is that the cardiac surgery part, the actual open chest valve CABG , that portion of our business -- that portion kind of has the least volatility, but it also has the least kind of upside for growth as we kind of rebound out of things. And so I'd say that's kind of giving you one context to that. Elective procedures are coming back, they were the ones that got hit the hardest back during the initial COVID, they slowly but surely come back a little bit, but they also got the hardest during this period of time as well because of the elected portion of it, and that will be kind of MIS portion of our business. Clips and cryo nerve block continue to be very strong players for us and we anticipate that to be the case as we move throughout the year.

[Unidentified Analyst:]

Got it. Thank you. And then, just one on the EnCompass clamp. Just trying to get a sense once approved, how quickly we may see a positive impact in growth in the open business? I think in prior quarters you've said that you already have relationships with a lot of these higher volume CABG accounts and sales teams have been in place. So if it's the case that they're kind of looking for an easier to use faster tool like this, it seems to me like it could be pretty quick uptake. So, just kind of any color around that?

[Mike Carrel:]

Yes. I mean the way we're describing the EnCompass clamp is, it's really more about once we get to a normalized volume and that's critical because obviously got to get you a more normalized volume of COVID. Once you get to that, we do anticipate that the EnCompass clamp enable us to continue to grow at the solid growth rates that we've achieved before; kind of in that mid to high single digits have been kind of our core open business. And we've got quarters that we've been in the low double digits, but in general, it allows us to continue that growth rate and penetrate into the market because those are -- these were the surgeons that we're not doing any cases before. So we're basically opening up that market, and we think that's what that will do for us, is that it will enable us to continue that growth. The growth accelerators force are going to be -- I mean, that -- the EnCompass is foundational to us as a business for sure but that's not the faster growth aspect of our business, the faster growth aspects are going to be the clip, the cryo nerve block, and then the minimally invasive therapies that we have, and then eventually, obviously when LARIAT gets approved many years from now, but that will also be another accelerant to the growth rate as well.

[Unidentified Analyst:]

Got it, makes sense. Thank you.

[Operator:]

Our next question comes from Marie Thibault with BTIG.

[Marie Thibault:]

Hi, thank you for taking the questions this evening. I had one, possibly for Angie on the sales build and some of the SG&A; it certainly seem to step up a bit in Q4 and I'm guessing that had to do with some of the preparations for CONVERGE. But just wanted to get some thoughts on perhaps the cadence of how to think about the SG&A line as some of those bonuses and commissions and things get built in throughout the year? And whether you would look to expand further at the end of the year in preparation for LARIAT as well?

[Angie Wirick:]

Sure. Thanks, Marie. I think the way to think about SG&A costs looking into 2021, we typically see an uptick at the beginning of the year, that's when we reset plans and you're marching to new orders. There are other kinds of timing items such as tradeshows where they are heavier in the first half of the year, and a little bit in the second half of the year. In terms of investments, we expect to continue to make investments throughout the year in preparation for the CONVERGE launch, the EnCompass launch, and some of the other catalyst longer term. So, I'd say kind of declining over the course of the year but look to historical levels when you're thinking about spend overall.

[Marie Thibault:]

Okay, that's really helpful, Angie. I appreciate it. And then just one on CONVERGE; I'm certainly not going to try to ask more on FDA but I did want to ask, what you're seeing from current users in terms of the impact of that as symposium data? I'm sure some of them more aware of some of that large benefit to 35, absolute benefit there. If you're seeing that show up in procedures at this point, that benefits. And then, maybe more importantly, you mentioned new sites that would be targeted; do you -- can you give us an idea of how many new sites we might see with the rollout of CONVERGE?

[Mike Carrel:]

Yes., I mean the is relatively new, it's the first time that was presented and kind of peer-reviewed at a scientific session with -- so that was -- it just happened several weeks ago where I wouldn't say it's affecting our volumes yet but there is definitely a lot of chatter and discussion amongst -- within the EP community about the significant benefits for the long-standing persistent patient. Dr. Delurge was the one who presented the data; it's obviously compelling and you're getting a lot more conversations for sure that didn't happen before, both with surgeons and with the electrophysiology community. So, I'd say it kind of generated some discussion along that group but that's really about it at this point in time, not necessarily procedural volumes. And remind me, can you ask the second question, Marie?

[Marie Thibault:]

New sites, beyond kind of the current users what you hope to target, no more less ?

[Mike Carrel:]

Yes. So what we did -- so every one of our reps have targeted new sites within that area. We've also targeted those that are existing sites that they know that they can expand; so once we get the approval, we'll be able to kind of go after the market from that standpoint, we'll be able to add them on in a very kind of methodical way as we kind of get them trained and up and running. So you can imagine that they've prioritized sites within each one of their different territories, so that they can get them right, they can kind of build best-in-class, we can learn from those, we get up at running first, and then we can kind of accelerate from there. That's what we keep talking about that we believe that 2022 we looked at -- that's when we started -- we will enable and start to see some accelerated growth for sure, and then that will continue for many years. The great thing about this is that we've got lots of sites to go after, we're going to prioritize and get them right, get them doing the procedure right, make sure that they're safe and effective with their patients, seeing good results, and then kind of begin to move on to other and additional sites at that time.

[Marie Thibault:]

All right, thank you so much.

[Operator:]

Our next question comes from Suraj Kalia with Oppenheimer.

[Suraj Kalia:]

Good afternoon, everyone. Mike, can you hear me all right?

[Mike Carrel:]

Yes.

[Suraj Kalia:]

Thanks. That's perfect. Hey, Mike. So, I know a lot of questions have been asked; I just want to go on to CONVERGE. Mike, forgive me, did I hear you wrong when you said there was a 35% absolute delta between the two arms at 18 months?

[Mike Carrel:]

That is correct. It was basically approximately in the convergent arm, it was approximately 61% success at 18 months. And in the catheter-only arm, it was around 26%.

[Suraj Kalia:]

So the convergent arm, and forgive me for belaboring this, and the reason I ask Mike is, I've never seen a 40% delta; that's a big deal, at least clinically. So help me understand the treatment arm went from, let's say, 68% to 61% within a span of six months, right, from 12 months to 18 months. And what you are saying is the ENDO-arm went from, let's say around 50% to 27% something?

[Mike Carrel:]

.

[Suraj Kalia:]

Wow, that's interesting. And Mike…

[Mike Carrel:]

And that's why we talk about the durability of the procedure, and that's what we've seen; that's one of the compelling pieces to it. As that -- and it's -- remember the catheter is -- the catheter and the conversion are complementary, we really kind of play to each other's strength when they work together, it's about the two procedures or the two devices really working well together to get a better result.

[Suraj Kalia:]

Right. Mike, I'll be in a position to make any assessments about long-standing persistent AF, and more recent, persistent AF within the context of this 35% absolute delta?

[Mike Carrel:]

I'm not sure I understand the question when you say...

[Suraj Kalia:]

So…

[Mike Carrel:]

I guess the data that we presented to the FDA and obviously, that was discussed at the Afib Symposium; so that's -- that is for long-standing persistent.

[Suraj Kalia:]

Got it. Okay. And Mike, in terms of the initial centers and maybe I'm just asking the same question in a different flavor and I'll hop back in queue. For CONVERGE I know you talked about the reps, but how many of your existing centers would you consider as low-hanging fruit? Whatever metric you want to use; centers, cases, whatever -- just trying to understand. I know you're putting feet on the ground, but what do you think is the low hanging fruit in your existing client base? Thank you for taking my questions.

[Mike Carrel:]

On the long-term this harvest is huge. And then, because in most of our existing client base you only have one EP or maybe a small group of cardiologists to referring; and so it's -- because they believed in this, they started going down that path. Now that we've got very compelling data, once we get that approval and we're able to kind of actually market to that which we cannot do today, it allows us to expand the expand it -- expand to the referral network, expand to the EPs within that community; and so we do feel like there is -- I don't -- I know low-hanging fruit is the wrong word per se, but what do think that there is a significant expansion opportunity within the existing base, it already has a trained surgeon. And for sure we've prioritized those sites that we already know are good sites, and already have at least one few EP champions in that group. So we're definitely going after that; we will go after that for sure.

[Operator:]

Thank you. Your next question comes from Rebecca Wang with SVB Leerink.

[Rebecca Wang:]

Hi, this is actually Rebecca for Danielle Antalffy. I just want to shift gears a little bit to value-add because I think that is an important data catalyst coming up later this year. To begin with, how should we think about LARIAT into business, especially is this complementary or competitive with minimally invasive business? Will that be cannibalized ? And more importantly, what we should -- we look for from the aMAZE trial data as it relates to efficacy and safety that will be mainly for two FDA approval or adoption? Thank you.

[Mike Carrel:]

Yes. So, thanks for the questions, Rebecca. So as it relates to clip , the way we approach the market is; we believe it's complementary because it allows us to talk to a physician community, the EPs, and give their options for their patients. And whatever it is, in the best interest for their patients, we let them assess it. Now we're giving them -- we will be able to give the LARIAT, which is a less invasive percutaneous approach or you've got the clip; they both worked exceptionally well at closing off the appendage. They both are epicardial, and have the advantage of both, mechanical and electrical isolation. And so those are benefits of both of the devices. It really comes down to how do they want to use it; and it allows us to have that conversation. The pricing is different, LARIAT gets more money per procedure; so we would benefit from that, but that's not how we're going to sell it. We are going to sell it as an option and give them the choice based on what's going to be best for their institution and for their patients. As it relates to data for LARIAT; also I know a question that's on top of mind for many people. The data that we're looking for -- the trial was designed to be a superiority trial, we're not giving exact numbers because it obviously fluctuates but that benefit would be provided to that particular trial. So we're looking at it as a superiority trial, that's what we're looking for, we believe that will go both clinically and relevant for kind of our FDA submission. And so that's going to be the -- I think you're going to want to look for much like what we do with CONVERGE where we talk about superiority was critical, we did achieved it with CONVERGE, that's what we're hoping to achieve with this as well. It's a 600-patients trial, and -- so you can kind of get a sense in a randomized 2.1 .

[Rebecca Wang:]

Thank you.

[Operator:]

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mike Carrel.

[Mike Carrel:]

Great. Well, again, everyone thank you for joining us tonight, and your interest in AtriCure. As I mentioned before, we're really excited about the progress that we've made with the FDA, and where we're going right now in the future and the catalyst in front of us, both with CONVERGE, aMAZE, EnCompass and cryo nerve block, and the many clips that we've got in the market. We've got an exciting future, not just for this year but for the next decade. Thank you, again for your interest, and we look forward to talking to you soon.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.