Artivion, Inc. (NYSE:AORT) Q4 2023 Earnings Call Transcript
Artivion, Inc. (NYSE:AORT) Q4 2023 Earnings Call Transcript February 15, 2024
Artivion, Inc. beats earnings expectations. Reported EPS is $-0.1, expectations were $-0.13. Artivion, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Artivion Fourth Quarter and Year-End 2023 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I will now turn the call over to Laine Morgan from the Gilmartin Group. Thank you. You may begin.
Laine Morgan: Good afternoon and thank you for joining the call today. Joining me today from Artivion's management team are Pat Mackin, CEO; and Lance Berry, CFO. Before we begin, I'd like to make the following statements to comply with the Safe Harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements.
Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company's SEC filings and in the press release that was issued earlier today. You can also find a brief presentation with detailed highlighted on today's call on the Investor Relations section of the Artivion website. Now, I'll turn it over to Artivion's CEO, Pat Mackin.
Pat Mackin: Thanks, Laine, and good afternoon, everybody. I want to start off our call today by welcoming Lance Berry, our new Executive Vice President and Chief Financial Officer. Lance most recently served as Executive Vice President, Chief Financial Officer and Operations Officer at Wright Medical until acquisitioned by Stryker in November of 2020. We are thrilled to have Lance join our team during this exciting time. I am confident his broad expertise and proven leadership in med-tech will add significant value to Artivion as we enter the next phase of profitable growth. I'd also like to thank Ashley Lee for his many years of dedicated service to Artivion. His contributions no doubt help make Artivion the outstanding company we are today.
Now, on to our fourth quarter, and full year 2023 results. 2023 was an outstanding year for our Artivion and I'm pleased to report that we achieved total company constant currency revenue growth just over 12% for the full year of 2023 compared to the full year of 2022. In addition to exceeding our top-line growth revenue target, we achieved adjusted EBITDA growth of nearly 30% year-over-year, enabling us to deliver positive free cash flow, while making strides in advancing our clinical programs and further expanding our global footprint. Our achievements throughout 2023 culminated in a particularly strong Q4 as we delivered constant currency revenue growth of 15% year-over-year, resulting in $93.7 million in revenue. Our performance was driven by improved revenue growth in our On-X business, which increased 19%, followed by tissue processing at 18%, BioGlue at 11%, and stent grafts at 8% growth.
Each when compared to the fourth quarter of 2022, all on a constant currency basis. We've also benefited from the expansion of our commercial footprint through regulatory approvals across new geographies, especially in Latin America and Asia-Pacific. Our strong top-line performance led to $15.3 million in non-GAAP adjusted EBITDA in the fourth quarter, which is a 40% increase compared to the fourth quarter of last year. We expect our strong momentum in the fourth quarter to continue into 2024. From a product perspective, as I mentioned earlier, On-X revenues increased 19% compared to the fourth quarter of last year on a constant currency basis, as we continue to take market share globally and have the only mechanical aortic heart valve that can be maintained at an INR of 1.5 to 2.0. We believe our valve is the best aortic valve on the market.
Our market share gains each year and the recently presented results of the On-X post-approval data, which showed an 85% reduction in major bleeding, clearly support our view. Tissue processing revenues increased 18% compared to the fourth quarter of last year on a constant currency basis, due primarily to pricing initiatives and the increase in volume of the Ross procedure. We expect continued double-digit growth in our tissue business in 2024, driven primarily by our significantly improved supply of our proprietary SynerGraft pulmonary valve. And lastly, stent graft revenues grew 8% on a constant currency basis in the fourth quarter compared to the fourth quarter of last year, driven by improved supply and strong performance in AMDS outside the U.S. We anticipate demand to remain strong through 2024 and beyond for our stent graft products, which should sustain and continue our strong revenue performance.
Our results were also driven by the continued progress we are making expanding into new markets, through new regulatory approvals and commercial footprint expansion in Asia-Pacific and Latin America both delivered constant currency revenue growth of 19% compared to the fourth quarter of last year. We expect these regions to be important growth drivers over the coming years as we continue to leverage our industry-leading product portfolio further into these regions. In addition to our strong financial performance, we continue to advance our clinical programs and show leadership in the aortic field with two late breaking science presentations at the STS Annual Meeting in San Antonio. First, the full data set from the AMDS PERSEVERE clinical trial and second, the interim data from the NEXUS TRIOMPHE clinical trial.
First, in November of last year, we completed the trial enrollment of PERSEVERE, our IV clinical trial for PMA approval, which consists of 93 patients who've experienced an acute Type A dissection. I'm pleased to report that the trial methods combined primary efficacy and safety endpoints demonstrating a statistically significant reduction in all-cause mortality in the primary endpoint of major adverse events, as well as no occurrence of DANE, which are associated with increased risk for reintervention and mortality. As a reminder, the adverse events called MAEs, which is the MAE endpoint for the IV trial is based on historical control of patients with malperfusion. In this reference cohort, 58.2% of patients had greater than or equal to one major adverse event.
The target goal in the trial from the FDA was a reduction in this endpoint to 40% of patients with greater than or equal to one MAE. The recently presented 30-day data at STS showed only 28% of the patients had greater than or equal to one major adverse event, representing a 52% reduction compared to the standard of care hemiarch procedure. As it relates to DANE tears for context DANE occurs up to 70% of patients following hemiarch repair without AMDS. Results from the full IDE data set have shown there have been no DANEs at all detected in any patients treated with AMDS, nor were there any DANE cares reported in DART study after three years of follow-up. Critically, the data up to 30 days also demonstrated a statistically significant 72% reduction of all-cause mortality, a truly revolutionary result.
Second, the interim data from the NEXUS TRIOMPHE U.S. IDE trial included 22 patient study participants demonstrated a 9% mortality, no detected strokes, paraplegia or renal failure in any patients treated with NEXUS aortic arch stent graft system. As of today, there have been 42 of 60 patients enrolled in the primary endpoint of the NEXUS trial and it remains on track for approval in 2026. In summary, we are very excited about these two native print -- these two new data prints, which assuming we exercise our option to acquire Endospan, should accelerate stent graft growth in markets where the products are currently approved. If these PMA processes proceed as we anticipate, we would expect PMA approval for AMDS in 2025 and NEXUS in 2026. At that time again, assuming we exercise the option for Endospan, these two products would significantly increase our adjustable market opportunity.
Lastly, on our R&D pipeline, our third-generation Frozen Elephant Trunk used to replace the entire aortic arch called Arecibo LSA is in the final testing stages and we currently expect to start the U.S. IDE trial later this year. I look forward to providing additional updates on our proprietary on our progress in future calls. With that, I'll now turn the call over to Lance.
Lance Berry: Thanks, Pat, and good afternoon, everyone. Before I begin, I'd like to remind you to please refer to our press release published earlier today for information regarding our non-GAAP results, including a reconciliation of these results to our GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis and revenue growth rates will be in constant currency unless otherwise noted. Revenues were $93.7 million for the fourth quarter of 2023, up 15% compared to Q4 of 2022. Non-GAAP adjusted EBITDA increased approximately 40% from $11 million to $15.3 million in the fourth quarter of 2023. And after generating $5.8 million of free cash flow in the third quarter of 2023, we generated $7.4 million of free cash flow in the fourth quarter.
Importantly, we were free cash flow positive for the full year 2023, representing a critical milestone achievement for Artivion. As importantly, we expect that free cash flow will continue to be positive in 2024. From a product line perspective, On-X revenues grew 19%, tissue processing revenues increased 18%, BioGlue revenues increased 11%, and stent graft revenues grew 8% in the fourth quarter of 2023. On a regional basis, revenues in both Asia-Pacific and Latin America increased 19% while North America increased 17% and EMEA increased 10%, all compared to the fourth quarter of 2022. Gross margins improved to 65% in Q4, compared to 64% in the fourth quarter of 2022. This increase was driven by price increases in product mix partially offset by inflationary impact on materials and labor.
General administrative and marketing expenses in the fourth quarter were $50.3 million, compared to $38.5 million in the fourth quarter of 2022. Non-GAAP general administrative and marketing expenses were $47.7 million, compared to $41.9 million in the fourth quarter of 2022. R&D expenses for the fourth quarter were $7.6 million, compared to $8.3 million in the fourth quarter of 2022. Other income and expenses include $5.8 million in net interest expense and foreign currency translation gains of approximately $2.2 million. On the bottom line, we reported GAAP net loss of approximately $4 million or $0.10 per fully diluted share in the fourth quarter of 2023. Non-GAAP net income was $4.6 million or $0.11 per share in the fourth quarter. As of December 31, 2023, we had approximately $58.9 million in cash and $312 million in debt.
It is important to note that this does not contemplate the impact of our recently closed comprehensive credit agreement, which I will speak to shortly. And now for our initial outlook for 2024, we expect to continue building on our momentum, enabling us to achieve, as reported revenues in the range of $382 million to $396 million. At current FX rates, the year-over-year impact on revenue is expected to be negligible. Therefore, this range represents revenue growth of 8% to 12%, both as reported and on a constant currency basis. With our continued top-line revenue growth and general expense management, we expect adjusted EBITDA to be in the range of $68 million to $72 million for the full year 2024, representing 26% to 34% growth over 2023 and 280 basis points of adjusted EBITDA margin expansion at the mid-point of our ranges.
We expect gross margins to remain at levels similar to 2023. We expect to continue to drive significant leverage from our global sales force and G&A infrastructure. Additionally, R&D expense is expected to remain relatively flat as a percentage of sales. I would like to proactively note that our guidance range is below the $75 million that we originally targeted for 2024 at our March 2022 Investor Day. There has been no change to our commitment to drive significant adjusted EBITDA growth in 2024, as evidenced by our expectation for 30% year-over-year growth at the mid-point of our range, which is 3x our mid-point top line growth rate. We are driving this level of improvement while maintaining our investment levels in R&D as a percentage of sales.
Driving strong adjusted EBITDA growth is a top priority, but not at the expense of the investments we need to make for the future. We feel that the strength of our underlying business, our longer-term growth outlook and our balance sheet today validate this approach. In regard to our capital structure, we are very pleased to have recently closed a comprehensive non-dilutive financing for $350 million of senior secured, interest-only credit facilities with six-year maturities. The facilities include an initial $190 million term loan, a $60 million revolving credit facility, and an additional $100 million in unfunded delayed draw term loan that may be drawn to refinance our convertible bonds at any time prior to their maturity in July 2025. As a reminder, our convertible notes do not contain any financial covenants.
The initial $190 million term loan and $30 million from the revolving credit facility were drawn at close, along with the use of some cash on our balance sheet to retire the existing senior secured credit facilities and pay related transaction expenses. Overall, this credit agreement coupled, with our strong financial performance, gives us flexibility with no near-term debt maturity overhang as we continue to evaluate the best options to address our convertible debt. We also intend to file a shelf registration statement on Form 3 with the SEC following the filing of our 10-K. We view this strictly as a matter of good corporate housekeeping and prudent considering the reestablishment of our WKSI status. As it relates to free cash flow, we are not giving formal guidance.
However, we are confident in our ability to be free cash flow positive in 2024. The $16 million of incremental adjusted EBITDA at the mid-point more than covers the $5.7 million of additional interest from the new credit facility, which provides us room for working capital expansion to support the growth of the business while still being free cash flow positive. Finally, I want to make a few comments on quarterly cadence to assist you with your modeling. As it relates to revenue seasonality, the third quarter is typically our lowest growth quarter, particularly due to the impact of the European vacation season. Q1 is our most cash intensive quarter due to the payment of annual bonuses and due to normal activities such as sales meetings and industry conferences, which are heavier in the first quarter.
Despite our expectations for free cash flow to be negative in Q1 because of these items, we still expect cash flow to be free cash flow positive for the full year of 2024. In summary, we are thrilled with our 2023 performance and are excited about the prospects of the business in 2024 and beyond. With that, I will turn the call back to Pat for his closing comments.
Pat Mackin: Hey, thanks, Lance. As you heard from Lance, we're extremely pleased with our 2023 performance and continue to deliver on our mission to build a world class aortic company. We finished strong with 50% revenue growth and 40% adjusted EBITDA growth in the fourth quarter. We continue to expand our markets and meaningfully advance our clinical pipeline, positioning us well for long-term growth. We also executed a non-dilutive capital structure, giving us a six-year runway with no financing overhang. Our strategy to deliver sustained, profitable growth is working and we look forward to continued momentum we built in 2023 through 2024 and beyond. More specifically, our growth this year will be driven by the following: number one, our continued growth in our stent graft business driven by the recent 30-day PERSEVERE data presented at STS showing a 72% reduction in mortality and a 52% reduction in major adverse events compared to the standard of care literature control.
Number two, continued market share gains for On-X, driven by data recently presented in Europe of 510 patients in our aortic valve showing an 85% reduction in major bleeding. Number three, continued growth of our proprietary SynerGraft pulmonary valve driven by price increases, growth of the Ross procedure as well as our ability to capture that growth from our efforts to improve supply. And fourth, our continued growth in Asia-Pacific and Latin America from our channel investments and new regulatory approvals. So, in conclusion, we are more confident than ever in our near and long-term prospects for our business. Finally, I want to thank all of our employees around the globe for delivering an exceptional year. So with that operator, please open the line for questions.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Rick Wise with Stifel. Please proceed with your question.
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