Artivion, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Greetings, and welcome to the CryoLife’s Fourth Quarter Year End 2020 Financial Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. I will now turn the call over to Lynn Lewis from Gilmartin Group. Thank you. Ms. Lewis, you may begin.

[Lynn Lewis:]

Thank you. 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 requirement of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from 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 release that was issued earlier today.

[Pat Mackin:]

Thanks, Lynn, and good afternoon, everyone. Thanks for joining. So despite the continued impact of COVID-19, our business was very resilient given the nature of our products. We continue to launch innovative products and invest in our business, including R&D, clinical trials and manufacturing site expansions. As we look to 2021, we expect the full commercial potential of our products will start to become more fully realized, especially in the second half of 2021. We hope to see a return to normalcy first in the U.S. and then followed by Europe later in the year. Today, we’ll touch upon the highlights of our Q4 2020 performance and our initial expectations for 2021, as well as provide updates on several strategic initiatives before Ashley reviews the fourth quarter and full year financial results, as well as providing further details on our 2021 outlook. I will then make closing remarks and open the call to your questions. As we discussed on our last call, we ended the fourth quarter of 2020 with optimisms as we generated year-over-year revenue growth in September and October as COVID-19 related headwinds appeared to have lessened. However, since November, the pandemic worsened across geographies around the world, lowering procedural volumes again and slowing our return to growth. Fortunately, the impact of this resurgence on our business was lessen because most of our products are used in critical procedures that cannot be postponed for long or at all, as well as hospitals and providers have become increasingly adept at managing procedural continuity throughout the pandemic. So despite these returning headwinds, we had solid performance in the fourth quarter. It now appears that infection rates are once again declining from the 2020 year-end spike. This coupled with the acceleration in vaccination caused us to believe that we should see procedure volumes normalize mid-year and return to growth in the second half of 2021, both relative to 2019 and 2020. CryoLife like many other companies was put to the test last year. But as I said before, we continue to advance our R&D initiatives and investments and maintain production at or near capacity. In addition, our field teams supported procedures, both in-person and virtually. Our team was particularly adept at deploying creative solutions to ensure continued customer service and patient care. And we thank our entire organization for their outstanding performance during these challenging times.

[Ashley Lee:]

Thanks, Pat and good afternoon, everyone. Total company revenues were $67.9 million for the fourth quarter, down 3% compared to Q4 2019 due primarily to the impact on our business from COVID-19, the absence of TMR revenues, as well as the temporary shortage of certain tissues that I will discuss in more detail shortly. For the full year, revenues were $253.2 million, down 8% compared to the full year of 2019 due primarily to the impact on our business from COVID-19. On a year-over-year basis, in the fourth quarter of 2020, JOTEC revenues increased 3%, On-X revenues increased 2%, BioGlue revenues decreased 4%, and tissue processing revenues decreased to 11%. For the full year compared to 2019, JOTEC revenues decreased 9%, On-X revenues decreased 4%, BioGlue revenues decreased 10%, and tissue processing revenues decreased 6%. Performance in each of these product lines was adversely affected primarily by the COVID-19 pandemic. On a regional basis, fourth quarter revenues in 2020 in EMEA increased 2%, North America decreased 4%, Asia Pacific decreased 7%, and Latin America decreased 10%, all compared to the fourth quarter of 2019. Compared to full year 2019 revenues, full year 2020 revenues in EMEA decreased 9%, North America decreased 8%, Asia Pacific decreased 2%, and Latin America decreased 23%. Our gross margins were 66% for the fourth quarter compared to 67% for the fourth quarter of 2019. For the full years of 2020 and 2019, gross margins were 66%. Fourth quarter and full year gross margins include a charge of approximately $800,000 related to certain inventory – tissue inventory that I’ll provide more detail later in my remarks. G&A expenses in the fourth quarter were $36.1 million, compared to $37.6 million in the fourth quarter of 2019. G&A expenses for the full year of 2020 were $141.1 million, compared to $143 million in 2019. The fourth quarter and full year of 2020 includes business development charges of $4.8 million, primarily related to a fair value adjustment to contingent consideration for the acquisition of Ascyrus, partially offset by a pretax benefit of $1.2 million due to a change in our corporate PTO policy, and a pretext benefit of $3 million resulting from the reversal of performance-based stock compensation, because the financial targets were not met during 2020.

[Pat Mackin:]

Thanks, Ashley. So in closing, as you’ve heard this afternoon, despite the global pandemic, our business continues to perform very well. We hopeful that the rollout of the various vaccines around the world will improve market conditions by the middle of 2021. as market conditions improve and procedure volumes return to previous levels, we believe we will be in a position to realize the full potential of all the work we’ve done over the past five years and see our revenue growth begin to accelerate. even though we are not providing formal full-year 2021 guidance, we do believe that when the pandemic subsides and vaccines are more widely available, we will be in a position to deliver double-digit growth year-over-year. we have several catalysts in 2021 that we did not have in 2019. first in 2021, we should fully launch three new JOTEC products; E-vita OPEN NEO, E-nside and E-nya, as well as their benefit from our improved supply chain. Second, in 2021, the addition of AMDS and NEXUS are already in full launch, and we should see nice growth in both product lines, absent unanticipated COVID-19 impact. Third in 2021, we are filing our PMAs for both PerClot and our On-X mitral valve, and we hope to have good news for our BioGlue China submission. Finally, in 2021, we anticipate seeing further upside from our investments in our channels in Asia Pacific and Latin America. All of these catalysts give us heightened optimism in our ability to drive increased financial performance. So in summary, the fourth quarter, once again, demonstrated the resilience of our product portfolio and the effectiveness of our strategy to focus on aortic repair. We look forward to the day when COVID-19 is behind us, and we remain confident about the growth potential of our innovative products. Lastly, expect us to continue on the operation goals I outlined earlier funded by our solid financial position. with that, I’d like now to open up the line to questions. operator, please proceed.

[Operator:]

Thank you. The first question is from Suraj Kalia, Oppenheimer and company. Please go ahead, sir.

[Suraj Kalia:]

Good afternoon, everyone. Pat, can you hear me all right.

[Pat Mackin:]

Yes, we’re hearing fine.

[Suraj Kalia:]

Perfect. So Pat, Ashley, congrats on ending what was otherwise a tough year? And if you just have a look at the numbers, you guys did reasonably well. So, congrats on that. Pat, let me start out with, or maybe Ashley maybe, start out with the Q1 guidance, is 5% to 8% year-over-year downtick broad-based or is it a specific category whether it’s JOTEC or On-X or the services that is causing some level of the grief from the 5% to 8%.

[Pat Mackin:]

Yes. So, I’ll take this and Ashley can chime in if he wants to add anything. So the first thing is, as you know, Q1 of last year was really a non-COVID quarter. So, it’s a real – it’s a normal comp. number two, we still – we’re still seeing the pandemic from the post 2020, early 2021 spike is still hanging around. the biggest issue for us, so it’s COVID and then the other one is we commented on this tissue issue that we ran into, where we had a supplier quality issue that we caught. Thank goodness. And that’s going to impact really only our first quarter, because the tissues that you process in Q4 are the ones you sell in Q1. So that that’s frankly, the biggest reason. Now, I must say that I’m encouraged. We’re halfway through the quarter and pro forma constant currency we’re down like 1%. So, we actually feel like we’re doing better than what we’re being kind of cautious, just because of this, COVID as well as this short-term tissue impact. but so far halfway through the quarter, we’re in better shape than we thought.

[Suraj Kalia:]

Got it. pat, on On-X mitral, if you’re going to file for regulatory approval with low INR midyear, should we expect the data presentation maybe at ACC?

[Pat Mackin:]

Yes. we’re actually – in fact, I was in a meeting on this yesterday. We’re actually talking about, where we want to get this published and where we want to have it presented. So, that’s obviously a process that we go through. So, we don’t have anything to update you on, but as we get closer to the PMA filing, we should have more color in the next quarter or two, because – this will go in – the PMA will go in probably in like August. So, I would think maybe, on our Q2 call, we should be able to give you an update on where we expect that to be published.

[Suraj Kalia:]

Perfect. PROACT Xa, Pat, N is equal to 81 on December 7th presentation date to now, N is equal to what?

[Pat Mackin:]

150.

[Suraj Kalia:]

Oh, so you guys have doubled. Oh, nice. Okay. okay. Pat and Ashley specifically, maybe I missed this. I heard On-X was up 32% year-over-year. Maybe, it was a geographic split. Forgive me, I was frantically making notes. What was that number specifically in terms of a U.S. and OUS?

[Pat Mackin:]

Yes. So that maybe, actually you can look at the total number for the quarter. So, I highlighted that number as well in my presentation – in my comments was On-X was up 32% in the U.S. Q4 2020 over Q4 2019, even in the face of a pandemic, we’re growing that business 32%. So...

[Ashley Lee:]

yes. And that was the aortic valves.

[Pat Mackin:]

Yes.

[Ashley Lee:]

Yes.

[Suraj Kalia:]

All right.

[Ashley Lee:]

And so for the quarter, On-X was up 2% worldwide.

[Pat Mackin:]

So, the full worldwide On-X was plus 2%, but that’s got aortic and mitral. When you look at the U.S., which is our biggest market, the U.S. was up 32% in aortic.

[Suraj Kalia:]

Yes. Got it. That was it from my side, gentlemen. Excellent quarter. Congrats.

[Pat Mackin:]

Thanks, Suraj.

[Operator:]

The next question is from Mike Matson, Needham and Company. Please go ahead, sir.

[Mike Matson:]

Yes. Thanks. I just want to go back to your guidance for the first quarter that downed 5% to 8%. I guess, after the prior commentary in response to Suraj’s question, I’m a little confused now because you’re saying down 5% to 8%, and then it sounds like you said you’re really only down 1% so far. So is that because the tissue hit really hasn’t been in that down 1% and that’s going to kind of hit later in the quarter or something, or…?

[Pat Mackin:]

Yes. So two things, Mike, I noticed a little bit – there’s a little bit of disconnect there. So we look at – as you all know, the pandemic has been unpredictable throughout the year. And while we were super encouraged going into Q4, we then got hit by this second wave. Q4, as you just heard, was down 5% pro forma constant currency. We have an added – so we still have the pandemic hanging around in Q1 and we’ve got this added short-term tissue supply issue, which is frankly hard to predict. And I made the comment to Suraj that all the tissue that we process in a quarter shows up the next quarter. So trying to figure out exactly how much of that tissue is going to be impacted, it’s hard to figure out. So December – the Q4 number was down 5% due to COVID. COVID hadn’t left us, so we were thinking down 5%, and then we put in a few points for the tissue issue. I’m very pleasantly surprised that halfway through the quarter we’re down 1%. So, yes, I think it’s obviously – we’re being cautious because it’s hard to predict exactly what happens with tissue in the next six weeks, but so far it looks good.

[Mike Matson:]

Okay. Thanks. And then I wanted to ask about just the backlog of potential procedures. Given that you made the comments and the nature of your products and the type of surgeries that they’re used in are typically things that really can’t be deferred that long. Would that then sort of imply that you probably don’t have as big of a backlog as maybe companies that did provide more elective type products?

[Pat Mackin:]

You know what? It’s hard to say, Mike. I’ve been out with a bunch of customers in the last month and I think there’s a big difference between what I’m hearing in the U.S. and what I’m hearing in Europe. And remember, we’ve got a big business in Europe, and a lot of our growth is coming from Europe. The travel restrictions and the curfews and the kind of the lockdowns in Europe are way more pronounced than they are in the U.S. We’ve had lots of cases canceled move because of COVID. So it’s just an ongoing kind of a drag on our ability to launch products to get into cases. So I think it’s more of that. I mean, I was at a major center last week, I think two weeks ago. And they said, here in the U.S., and they said administration called them and said, on Wednesday, you guys can’t operate, our ICUs just spiked up. I was in another big hospital the next day, and there are no issues. So clearly the hospitals have learned to manage their stuff better. I also had a heart surgeon at another major center telling me, hey, we know for a fact, if you need an urgent aortic valve or an urgent – if you have an acute type A dissection, you can’t delay that. He said, but I’ll guarantee you, there are people who have kind of whether it’s a mitral valve repair, where you kind of don’t feel great, they may be pushing that down the road a little bit. So it’s hard to say exactly, but I’m giving – I’ve given you a bunch of data points that we are clearly not running with all pistons from a procedure standpoint because of the pandemic.

[Mike Matson:]

Okay. Thanks. That’s helpful. And then I wanted to ask one on PerClot. So just this delay that you’re waiting on this laparoscopic indication, I guess, so what do you have to do if anything to get that other type of labeling? And then I guess I didn’t understand the comments around the manufacturing part of that.

[Pat Mackin:]

Yes. So let me see because this will be easy to understand. Our original plan to file PerClot was under the assumption that CryoLife would be distributing the product to our channel in the U.S. And all we needed for that was we were going to file with open surgery and what I call small scale manufacturing, which is not huge volume. And that would have been fine for CryoLife’s launch. In discussions with potential partners, they want a lot more product and they want laparoscopic, which is where a big chunk of this is. So, instead of kind of filing for a smaller indication or a lesser indication with not enough product, we said, why don’t we just wait a couple of quarters, go to a larger – it’s basically technical stuff, I mean, we’ve got to do some testing and validations to get up to the larger scale capabilities so we can make more product and a simple way to say it. And then the laparoscopic is just we have to do an animal study. So that’ll all be done by this summer and we’ll submit the PMA in Q3, which will give us access to a bigger market with the ability to produce a lot more.

[Mike Matson:]

Okay. And just given your comment there, it sounds like there’s a decent amount of interest from potential partners when distributing this product. Would it likely be a single partner or multiple partners or…?

[Pat Mackin:]

Yes, I’m not going to get into that. I’m not going to get into that level of detail. I just – again, as we checked – as we got feedback from potential partners, they wanted access to a bigger market and have the ability for us to supply more products. So, I’ll just leave it at that.

[Mike Matson:]

Okay, understand. Thanks.

[Operator:]

The next question is from Jeffrey Cohen, Ladenburg Thalmann.

[Jeffrey Cohen:]

Hey, Pat and Ashley, how are you?

[Pat Mackin:]

Hey, good. Hey, Jeff.

[Jeffrey Cohen:]

So, just a few questions from me, I think Suraj and Mike caught a bunch of them. So, as far as the tissue issue, was that specific to a cardiac or vascular? Because it doesn’t look like you specify with the other.

[Pat Mackin:]

It was both.

[Jeffrey Cohen:]

It was both. Okay, got it. And are there any ramifications from your supplier as far as some of your insurance and your – what you’re carrying there as far as the potential $5 million charge going forward?

[Pat Mackin:]

Yes. I’m not going to get into that level of detail, Jeff.

[Jeffrey Cohen:]

Got it, okay. So, can you give us an indication where AMDS fell out for Q4? I know you’ve bundled it all in now under one path forward?

[Pat Mackin:]

Yes. we called it out AMDS did $1.1 million in Q4 versus Q4 of 2019, which is a 91% increase.

[Jeffrey Cohen:]

That’s fantastic.

[Pat Mackin:]

And just we aren’t even in the first lap of the race over the first inning of the baseball game, because it was late in Q4. We didn’t have – we had to do some kind of paperwork to get the regulatory. We had the CE mark, but we need to do some special paperwork to get access to Spain, to Italy, to Poland that came late in the fourth quarter. So that isn’t even really in our numbers yet. We also are starting to get approvals and in some countries in Asia and Latin America. So, throughout this year with access to all of the markets in Europe, all the market, all of Canada and then more markets in Latin American and Asia, we’re expecting nice growth in that area.

[Jeffrey Cohen:]

Got it. So, you had talked previously about a slightly smaller size for On-X in the aortic setting. Was there any update there that you called out for the quarter?

[Pat Mackin:]

No. We’ve got a 17 millimeter valve that’s been in clinical trials for awhile. It’s just hard to enroll because it’s such a – it’s either pediatrics or just a rare patient here and there, just from a trial standpoint, there’s a good chunk of patients, but we’re pretty close to finishing that. I don’t have the, I can get back to you offline with the data on that. We’re pretty close to finishing that.

[Jeffrey Cohen:]

Okay. And any commentary further, I know you called out Texas on the second source on the some of the JOTEC product line. Is there any update there, is it full-blown now; you’ve got both sources up and running and no issues any longer, as far as demand goes, is it a safe guest for that currently?

[Pat Mackin:]

So I think, as you guys all know, I mean, 2019 was – the JOTEC supply was a challenge and we still grew double digits. but it was coming off a year. We grew 25%. So, the JOTEC supply really was a big headwind for us in 2019. We’ve done three things. Number one is with the pandemic causing the procedure slowdown. We took the opportunity to run our factory at 100%. So, we built inventory during the pandemic. So that’s helped. Number two, we did get our second source, sewing supplier up and running. They’re already supplying us product. And number three, Ashley talked about the big increase in capital expense. We’ve built a new building in our facility in Hechingen, which is going to increase our capacity by 50%. So, the combination of those three things with these new products, we’re not product – supply is not going to be a constraint.

[Jeffrey Cohen:]

Okay, perfect. I think that those are from me. Thanks for taking the questions.

[Pat Mackin:]

Thanks, Jeff.

[Jeffrey Cohen:]

Yes.

[Operator:]

Mr. Mackin, there are no further questions at this time. I’d like to turn the floor back over to management for closing comments.

[Pat Mackin:]

Yes. Well, thanks for joining and appreciate the attention to the company. I mean, we’re – obviously, the pandemic everybody’s aware of what’s going on with the pandemic. We think with the vaccine rollout plan. We think the U.S. is going to return to normalcy in Q3 and in Europe, who’s a little bit behind on the vaccines comes in Q4. The reason we’re so excited is we’ve got like 10 things in 2021 that we didn’t have in 2019. We’ve got the NEO launch, the E-nside launch, the E-nya launch, AMDS and NEXUS, our investment in Asia Pacific and Latin America, a potential for a BioGlue China approval. We’ve got the PROACT Xa enrolling and we’ve got two PMAs we’re filing this year for PerClot and for PROACT Mitral. So obviously, the company’s got a lot going on, but as this pandemic lifts, we feel like we’re well positioned to start delivering a double-digit growth. So, appreciate your attention on the call and look forward to the next quarter update.

[Operator:]

This concludes today’s conference call. You may disconnect your lines at this time and thank you for your participation.