Cabot Small-Cap Confidential Issue: June 6, 2024

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The Big Idea

The MedTech market is full of small companies with innovative devices that are better than the current standard of care.

At a high level, that’s the pitch for today’s company, which is 100% focused on breakthrough technologies that help surgeons treat a variety of aortic diseases.

Whether a patient is getting a new heart valve or being treated for an aortic aneurysm, this small player has it covered.

Currently approved solutions are exciting enough, but add in the pipeline products and it’s clear there’s ample potential for this $1 billion market cap company to break into the big league and attract much more attention from Wall Street.

Perhaps more importantly, surgeons are increasingly relying on its technologies to not only help a person live through whatever aortic disease they have but do so with relatively limited side effects and future surgeries.

The Company

Artivion (AORT) is a pure-play aortic disease MedTech company. It sells medical devices, implantable human tissue and preservation services to cardiac and vascular surgeons treating patients with heart valve disease, aortic aneurysms and dissections.

In terms of the growth strategy, the company’s playbook is exactly what we’re looking for from an emerging MedTech player. Artivion is growing through new product introductions, new indications, global expansion and M&A.

Several products are approved outside of the U.S. and are on track to gain eventual approval in the U.S. In the meantime, about half of revenue comes from Europe, Asia and Latin America.

Revenue isn’t at the top of the MedTech group but should be steady in the 10% to 13% range now and accelerating to over 15% as new solutions gain approval in the U.S. Contrary to some other smaller players, Artivion is on the cusp of profitability this year – despite ongoing R&D spending – and should be firmly in the black in 2025.

The company does not have a ton of analysts from the big investment banks following it. They will begin to over time if management executes. The most recent earnings call had analysts from Needham, Stifel, Lake Street, Ladenburg and Oppenheimer, all of which currently have buy ratings.

Artivion has a market cap just north of $1 billion. Its roots date back to the founding of CryoLife in Florida in 1984. Over the years, there were a number of FDA approvals and acquisitions, and the company changed its name to Artivion in January 2022.

Artivion’s Product Lineup

Artivion reports revenue in two segments: Medical Devices (74% of revenue, gross margin 68%) and Preservation Services (26% of revenue, gross margin 57%).

PRESERVATION SERVICES

This segment includes revenue from the preservation, processing, storage and distribution of cardiac and vascular implantable human tissues for valve replacement surgeries (CryoValve and CryoValve SG) and cardiac repair procedures (CryoPatch and CryoPatch SG). This segment generated $92.8 million in revenue in 2023 and grew by 11%.

MEDICAL DEVICES

The Medical Devices segment includes four main product categories: surgical sealants, On-X mechanical heart valves, aortic stent grafts and aorta arches, and other (implantable cardiac and vascular human tissues). The segment generated revenue of $261.2 million in 2023 and grew by 13%.

The image below from Artivion’s investor slide deck shows the market size of the bigger categories (aortic stent grafts and aorta arches are broken into two categories and represent the biggest markets).

Each of these products addresses a different disease state. Let’s take a quick look at them in that context.

Surgical Sealants: BioGlue Surgical Adhesive

Surgical sealants are used with sutures and staples to help wound healing and eliminate air and fluid leakage. Artivion’s proprietary BioGlue is a polymer mix of bovine blood protein and an agent for cross-linking proteins. It’s stronger than most other cardiovascular sealants and reaches bonding strength within two minutes. It’s dispensed from pre-filled syringes.

The product generated $68 million in sales in 2023 (19% of company total) and grew by 4%.

Aortic Valve Disease: On-X Aortic and Mitral Mechanical Heart Valves

Depending on the situation, patients with heart disease and/or congenital cardiac defects typically need a heart valve repair, valve replacement surgery, and/or cardiac reconstructive surgery.

The list of available implant options includes human tissue (allografts), animal tissues (xenografts), synthetic (i.e., mechanical) or some combination of synthetic and tissue components.

There are pros and cons to each option.

The first option is mechanical heart valves. They are very durable, readily available and less expensive than other options. But they require lifelong use of blood thinning or anticoagulation drugs (warfarin).

Artivion sells the On-X aortic and mitral mechanical heart valves, which can be paired with a synthetic vascular graft when a patient needs to replace part of the ascending aorta. On-X is made of a graphite substrate coated with a silicon-free pyrolytic carbon coating, which makes it extremely smooth.

On-X has very good flow dynamics, which translates to lower doses of anticoagulation drugs (warfarin). It is the only FDA-approved valve of its kind allowing such a low warfarin dose. It has been crushing the competition in the U.S., rising from 25% of market share in 2015 to north of 60% now. Global market share is around 30%.

A second option is a bioprosthetic heart valve. These are also readily available and relatively inexpensive, but usually need to be replaced after seven to fifteen years. Multiple open-heart surgeries aren’t a great option for aging individuals.

A third option is human heart valves. These tend to be the preferred choice since they reduce complications. In a Ross Procedure, a diseased aortic valve is replaced with a patient’s own pulmonary valve, which is then replaced with a donated human pulmonary valve.

Artivion’s CryoValve SynerGraft (SG) Pulmonary Valve is increasingly used in Ross procedures. It’s the first and only decellularized, pulmonary valve allograft cleared by the FDA in North America, and data shows that patients’ survival rates match that of the general public. It’s a very fast-growing product.

Heart valves generated $74.5 million in sales last year (21% of total revenue) and grew by 17%.

Aortic Aneurysms & Dissections: Aortic Stent Grafts & Aortic Arches

The aorta is the body’s main artery, carrying blood out of the heart through the aortic valve, up through the aortic arch then down through the chest, into the abdomen then to both legs.

Sometimes, the aorta wall weakens and balloons out. This is called an aneurysm and if left untreated it can rupture, often leading to death. Aneurysms can be repaired either through open surgery, with a vascular graft covering the aneurysm, or via endovascular repair, with a stent graft inserted inside the aorta via the femoral artery.

Artivion has a portfolio of stent graft products for endovascular repair, ranging from tailor-made solutions (like E-liac) to more basic versions (including E-vita and E-tegra).

The company also has a portfolio of solutions for treating aortic dissections. This condition occurs when the innermost layer of the aorta tears and blood surges through, separating the inner layer from the outer layer, often leading to a ruptured aorta. Arch solutions include AMDS, E-Vita Open NEO and NEXUS (distributed in EMEA for Endospan).

Aortic stent graft and aortic arch revenue grew by 16% to $107.5 million in 2023 (41% of company total).

Other Products

The bucket of other products includes a bovine patch (PhotoFix) for cardiac and vascular repair. Last year an absorbable gel adhesive product called PerClot, used to stop internal bleeding, was sold to Baxter.

Growth Initiatives

M&A and NEXUS Option to Acquire: Artivion’s M&A activity is the reason the company is where it is today. On-X Life Technologies (mechanical heart product line) was acquired in 2016, JOTEC in 2017 and Ascyrus (AMDS product) in 2020. We’re not expecting any sizeable acquisitions soon given management’s focus on NEXUS (for aneurysms and aortic dissections), which is a product owned by the Israeli company Endospan. Artivion distributes NEXUS in Europe and invested $20 million in Endospan in 2020. It has an option to acquire NEXUS pending FDA approval, which is hoped for in 2026 pending data from the TRIOMPHE study.

Pipeline & AMDS U.S. Pivotal Trial: Artivion’s AMDS (for aortic dissections) is approved in Europe, Canada, Asia and Latin America, but not in the U.S. The ongoing PERSEVERE trial is expected to gain FDA approval for AMDS in 2025. The trial is fully enrolled. The latest data shows rates of mortality of under 10%, compared to 35% for other solutions. The following image shows the company’s extended pipeline approval plan.

International Growth: Ongoing investments in sales as well as regulatory approvals are driving higher than company-average growth in APAC and Latin America.

The Business Model

Artivian has a sales force of around 50 focused on the U.S. and another 100 working out of its Germany headquarters focused on Europe. Independent distributors are used in APAC and Latin America. Manufacturing happens at three locations: Atlanta, GA, Austin, TX, and Hechingen, Germany. At a high level, the growth plan here is pretty straightforward – grow the product lines through FDA approvals and M&A and show clinical superiority so surgeons will go with Artivion versus all the various competitor products. Company-wide gross margin is 65%, which is a little lower than some other MedTech companies but reflects the international exposure.

The Bottom Line

In 2023 total revenue growth was 12.8% to $354 million. The Medical Device segment grew by 13.4% to $261 million while the Preservation Services segment grew by 11.2% to $93 million.

In Q1 2024, revenue grew by 17.1% to $97.4 million, beating by almost 6%. Adjusted EPS of $0.18 was a $0.30 beat.

On the call, management updated full-year 2024 guidance, calling for revenue growth of 9% to 12%, led by On-X and aortic stents and growth in Asia and Latin America. EBITDA is seen growing around 30%, driving positive free cash flow, especially in the second half of the year. Consensus estimates point toward EPS of $0.01 this year.

Risk

• FDA product approval risk
• Fierce competition in the MedTech space
• International exposure a plus, until it’s not
• Small company, not well known

Competition

LifeNet Health, LeMaitre Vascular (LMAT), Baxter (BAX), Bard, Ethicon, Gore, Cook, Terumo, Edwards Lifesciences (EW), Medtronic (MDT), Abbot (ABT) and Corcym.

The Stock

Trading Volume: AORT trades an average of 183,000 shares daily, or $4.3 million worth. We may have a modest impact on share volume.

Historical Price: AORT started trading in early 2022 after CryoLife changed its name to Artivion. Over the last 12 months, the stock is up about 57%, though a pullback from 15 to about 12.5 from September until November of last year likely shook out a lot of investors. That downtrend turned north after the November 3, 2023, earnings report. Since then there have been a couple consolidation phases followed by modest pullbacks to, or just a hair below, the 200-day moving average line. Still, the trend is clearly up and to the right over the last year. A high-volume rally after the Q1 2024 earnings report on May 6 sent the stock up 13% and into the 23 to 24 range and it’s hung out there for the last month.

Valuation: AORT trades with an EV/Revenue multiple of 3.4 using current-year expected revenue of $391.3 million. For a company with this growth profile, that’s entirely reasonable.

Short-Term Buy Range: Expect to buy in the 22.5 to 24.5 range in the next week or two.

The Next Event: Expected Q2 2024 earnings date around August 1.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for

July 3, 2024.

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