Q3 2020 AtriCure Inc Earnings Call

Welcome to eat the carry trade.

20, 2020 and conference calls.

At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of todays call.

I remind you this call is being recorded for replay purposes.

I would now like to trying to cultivate told me Lewis from the Gilmartin group for a few introductory comments.

Thank you I know you should have received a copy of the earnings press release. If you have not received a copy. Please call 5137554 went three six to have one E mail to you before we begin today, let me remind you that the company's remarks include forward looking statements.

Looking statements are subject to numerous risks and uncertainties many of which are beyond ATRA cruise control, including risks and uncertainties described from time to time and age or SEC filings. These statements include but are not limited to expectations regarding the timing of ft. A review expectations regarding the FDA response, and whether all approved converge the but.

Central converged launch timing and potential market opportunity for converge and the adoption of the converge procedure Atricures results may differ materially from those projected eight or undertakes no obligation to publicly update any forward looking statement.

Additionally, we refer to non-GAAP financial measures, specifically revenue reported on a constant currency basis, adjusted EBITDA and adjusted loss per share a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures is included in our press release, which is available on our website with that I would like to turn the call over to Mike Carroll, President and Chief Executive Officer.

Hi, Mike.

Thanks Len good.

Good afternoon, everyone and thank you for joining us.

We know that it's been a challenging time, all hope youre, many safe and healthy during this time.

Gotcha with surgeons Electrophysiologist hospital administrators across the United States, we see a clear desire to treat eighth and patience.

Procedures in which our products are used are generally economically favorable and the clinical results are effective.

However, these procedures consume hospital resources spin.

Specifically I C U beds, which must be kept available to respond to the pandemic.

Because of this dynamic we believe cardiac surgery volumes four main slightly below full capacity and will experience ongoing variability through the end of the year and the end of 2021.

That said, we do expect to see continued incremental sequential improvement in our topline results as we navigated returned to normalcy.

Now turning to several strategic initiatives and highlights I will begin with converge well, we're closer to completing the regulatory process to allow us to market. The hybrid conversion therapy for treatment of advanced forms of a fifth.

As a quick reminder of the activity. This year data from the Converse trial was released as part of the late breaking clinical trials during the virtual Heart Rhythm Society Conference. This past me.

The data demonstrated superiority against the primary and secondary endpoints, namely freedom for me to have another arrhythmia, and a 90% or greater reduction and a fifth burden.

Since then we have engaged in active dialogue with the F D. A to answer questions about the data.

Provide additional analyses and dive deeper into the real world evidence in support of this therapy.

In particular, we've examined data for the longstanding persistent patients in the trial, which demonstrates compelling efficacy and durability.

While the trial minutes efficacy endpoint for the entire population of both early and longstanding persistent patience.

The clinical benefit among the longstanding population was significantly greater at 12 months, then the blunden trial results.

The improvement over the control arm of the catheter ablation only actually increased with time for the longstanding persistent patients in the trial with results almost double that of the overall trial at 18 months.

Unlike patience with loan persistent a fifth those with longstanding persistent <unk> currently have no standalone FDA approved treatment options.

Additionally, there have been published articles abstracts physician experience treating longstanding persistent eighth of patients using the same reason set that was used in a convert style.

The publishers off from those articles are consistent with the results for the patients with longstanding persist and a fifth and the converge trial further strengthening our confidence in the data for this cohort of patients.

As such we recently completed our final submission to the F. D. A seeking the label for the treatment of patients with longstanding persistent eight fifth and now wait a response from the F D, a indicating whether or not an advisory panel will be required something we expect to note in the coming months.

The collaborative manner in which our team has engaged in with the F. D. A has been immensely valuable and a regulatory approval process if.

If approved we believe the hybrid convergent therapy will provide a compelling treatment option for the unmet need for standalone therapies for long standing persistent eight fifth patients.

I know I want to take some time to cover a couple of important points inner converge update.

The data for longstanding persistent patience and the corresponding market opportunity.

First so the data.

As I discussed previously the deeper that we looked into the data the more convincing and differentiated the procedure look for patients with the most advanced form of Afib.

The analysis of longstanding persistent patients and the convert trial demonstrated clear superiority and hybrid can Bergen arm compared to the endocardial catheter <unk> within approximately an approximate 29% absolute difference in effectiveness at the 12 month end point.

This is a significant improvement over catheter alone.

As mentioned earlier, we recently completed the analysis of 18 months follow up and the overall trial results for long standing persistent patients actually improves significantly over the 12 month data essentially doubling the blended results and demonstrating the durability of the procedure.

Looking beyond the converged trial throw a journal articles reporting outcomes for long standing persistent eighth of patients that were consistent with this analysis.

Further there is evidence in both the literature and HRS guidelines that the ablation targets that are sufficient for paroxysmal early persistent patients may not be enough to control longstanding persistent eighth it.

The inflation targets to contribute to the <unk> to the perpetuation and sustenance of longstanding persistent a fifth are difficult to address with just a catheter alone.

This is the premise for why we believe the hybrid convergent procedure to be effective.

Thus, we believe the totality of the evidence from the convert trial and real World practice practice is compelling demonstrating the hybrid convergent procedure has a larger more consistent and durable effect for longstanding persistent aphid patients than any other clinically available standalone treatment alternatives to that.

Once the regulatory process is complete we expect the strength of our data to change standard of care for millions of patients and the most expensive market opportunity.

Which would be just to a discussion on the total addressable market.

The longstanding persistent aphid population represents well over 3 million patients in the United States alone.

Or nearly half of all diagnosed eighth of patients.

This population is expected to grow to more than 4.4 million patients by 2025.

These patients have no other F D. A standalone treatment options and represent a total market opportunity that is multiple billions of dollars today and expected to grow.

Let's dig deeper into these numbers and how we expect this market opportunity to unfold.

Looking at the 3 million long standing persistent aphid patients in the United States, roughly 25000 are being treated annually with catheter ablation alone today.

Based on expected growth and catheter oblations procedure those procedures will increase to approximately 45000 by 2025.

This is a clear opportunity in front of us since the hybrid convergent procedure is attitude not competitive to the catheter oblations.

Yeah. Today, there are only 1800 hybrid conversion procedures done in the U S and we believe the trial results and related evidence shows that all longstanding persistent eighth of patients will benefit by having episodes added to catheter ablation procedures.

This alone is a 500 million dollar addressable market and our opportunity increases by 50% with the inclusion of left atrial appendage management. So hybrid convergence procedure a trend that we have seen emerged and strengthen over the last few years.

But this is merely the starting point in our addressable markets are far more expensive when considering both the strength of our clinical data and inefficiency. This procedure brings to a patient treatment.

Another data point, we observed in the clinical <unk> and the converse trial is it the hybrid convergent procedure significantly improves electrophysiology lab efficiency by reducing procedure times by approximately 35 minutes.

Considering patients with advanced eighth at also require more extensive oblations when performing catheter ablation alone.

This shouldn't flu improve throughput N E P lab capacity, enabling more patients to be treated.

Applying this logic to the market. We believe this will result in a higher penetration of longstanding persistent eighth of patients being treated.

Therefore, if we assume an improvement in treatment to just 5% of total longstanding persistent eighth at patients who go untreated today or approximately 150000 incremental patients per year in the U S.

Our opportunity increases to more than $2 billion.

Additionally.

As I mentioned earlier, the inclusion of a white neutral appendage management to this procedure will further expand the opportunity within our reach.

Our full PMA submission.

Switching gears now to the cryo seer probe, our innovative and dedicated device for managing post operative pain in cardio thoracic patients.

We continue to see positive upward trends in sales carrying momentum built momentum in sequential quarter growth since the launch of the cryo sphere probe in the first half of 2019.

Our growth has been coming from a variety of procedural applications, including general thoracic surgery trauma cases in fact this repair.

Although still in the early innings, we are investing in our sales teams and clinical resources to build on this momentum and to support this long term growth opportunity.

Continuing with our open ablation platform and our focus on innovation, we're progressing towards five 10-K clearance of our new encompass clamps and are preparing for market launch in early 2021.

Encompass clamp provides a simpler and faster approach to bleeding heart.

The heart in open procedures.

We expect this plant to appeal to high volume Cabot Surgeons, where we have minimal adoption today.

As a result, we expect this new calamp to be accretive to our open ablation revenue.

Okay.

As you can probably tell we are truly excited about the strength of our fundamental business end market expansion opportunities driven by converge amaze cryo sphere, and encompass which paved the way to drive accelerated growth over the long term.

With that I will now turn the call over to Angie why Rick our Chief Financial Officer, and will return with closing comments.

I'm turning to operating expenses, excluding one time acquisition costs incurred in 2019 and.

And the recurring effective non-cash adjustments to the contingent consideration liability or total operating costs decreased $6.5 million.

From $56 million for the third quarter of 2019 $244.1 million for the third quarter of 2020.

This decrease was primarily driven by Laura variable compensation expense as well as decreases and travel training and meeting costs due to continued limitations on in person group events at trade shows that were cancelled delayed or transition to virtual platforms.

Offsetting this temporary decline and operating expenses sure based compensation expense increased $1.1 million from the third quarter of 2019.

Additionally, this quarter marks the anniversary of our Amish 2019 acquisition of center heart incremental costs from center heart, which are primarily the amaze clinical trial PMA readiness efforts.

Drive the slight increase in research and development expenses in the third quarter of 2020 compared to 2019.

The resulting operating loss for the quarter was $4 million compared to an operating loss of $8.6 million for the third quarter of 2019.

In the third quarter of 2020, you had positive adjusted EBITDA, a $4.2 million compared to an adjusted EBITDA loss of $2.2 million for the third quarter of 2019.

The majority of this improvement is driven by lower variable compensation travel and training another commercial costs, which we expect to be restored historical levels as our top line improves.

Our last for sure was 11 cents for the third quarter of 2020 compared to a 25 cent loss for sure for the third quarter of 2019.

While the adjusted last per share each period was 11 cents and 33 cents respectively.

We ended the third quarter with $250 million in cash and investments.

Finally, we would like to provide an update through outlook by providing guidance for the fourth quarter 2020.

As Mike mentioned earlier, we are pleased with our third quarter results will reflect the recovery across major geographies and products on a sequential basis.

While cardiac surgery surgery volumes improve significantly in the corner and have held through October most of our customers are not yet operating at full capacity and we have seen variability as COVID-19 cases spike.

We thank thee, an ongoing impact of the pandemic in the United States in other parts of the world could cause periodic disruption in our revenue until the pandemic is contained.

Therefore, we are assuming a continue to attack from the pandemic in the fourth quarter.

With worldwide revenue, improving on a sequential basis $256 million to $60 million.

In 2021, we believe there will still be uncertainty as a result of the pandemic, yet or sequential growth trends will continue.

Additionally, we expect to achieve our original guidance for 2020, EBITDA loss of approximately $10 million at certain variable operating costs remain temporarily low.

His from JP Morgan Your line is now open.

Hi, This is actually Lilly on for Robby Thanks for taking the question.

So what assumptions are baked into this guidance range.

Are you guys, assuming current trends hold steady or is there the potential for a material disruption in volumes with cases on the rise and how much visibility do you feel that you have into this range at this point. Thanks.

Well, we got pretty good visibility into the ranch after the quarter, we feel very confident in the numbers that we put out there.

Your line is now open.

Hi, good afternoon to you, both and great to see the excellent quarter.

Just wanted to make sure I understood the comments I understand the fourth quarter guidance that AG or Mike.

He said 21 did I hear you correctly, you expect sequential improvement.

Told me year over year or each quarter sequentially better in the quarter I just want to make sure I understood. So you're thinking there.

Yes.

Year over year, but sequentially. So we anticipate you know we're not giving specific guidance for next year, but as we look into next year.

And as we begin to kind of see the trends that are happening and anticipating that co bid is going to be around with us for a while we do anticipate that we're going to continue to see sequential growth.

From Q4, and then into <unk> and into next year.

Right and each quarter as we as we think about modeling it Mike.

There's a little bit of a I mean, obviously, you've got the third quarter is a little weird because of obviously, we all know the summer months can be changed on that front, a little bit, but I mean in general yes, the sequential growth.

Okay and just to take.

A couple of points you made me again, maybe you could just expand a little bit.

Cardiac surgery volumes.

Who knows back at that you know something approaching 90%, maybe 75 to 90.

But it.

It's like.

In your view, how long to get back to normal from my perspective.

And maybe.

Just one other laggard obviously into.

International.

Some parts did better than others, how are you thinking and modeling and factoring that into your thinking for the fourth quarter and for 21.

Yes, I think that as we.

I wish I could be the one to tell you that when exactly it's going to come back to normal recommend that in some lessons depend upon everything that's happening within the pandemic and.

When do we get treatment options that are going to work in the vaccines et cetera, and the timing of that when does it get mass distributors and I don't think any of us really have a complete clear picture to that we do know there's going to be spikes and as we look at this quarter and then even into next year. So.

We believe that cardiac surgery, obviously is something that people have to have at some point and so you will probably be in that kind of 80% to 90% range for a bit.

And we kind of anticipate that but hopefully will again see some sequential growth.

Positive interactive conversation with.

And working collaboratively on that front.

From a panel standpoint.

We submitted and now we're kind of awaiting feedback so as I mentioned hopefully within the next couple of months, we will have some feedback from them, but I can't choose the FDA timeframe at this time, but it should be in reasonably short order.

Great. Thank you so much.

And there are so many patients and the unmet need is biggest sir.

Okay. Thank you so much.

[music].

Your next question comes from the line of Matthew O'brien from Piper Sandler your.

Your line is now open.

Procedures in terms of kind of where they are on capacity standpoint, and how they're basically getting those patients back to the hospitals.

And then so you're right I mean, if we are obviously, that's down 10% to 20% and if we're closer to we're not going to be down that much as a result of that.

We're obviously growing within there its actually across all of our franchise as you see it we're getting more penetration in the open in the procedures that are occurring you are getting clips and you're beginning to see some procedures come back on the minimally invasive side of our franchise as well so it kind of it crosses all barriers that we feel really good about how we're able to manage through this and understand what's happening in cardiac.

Surgery.

And Thats kind of how we are going into the market and I feel really good kind of up where we are right now.

And you had a second question and I apologize if I would again like to make driven.

That was a super long question. So just just the international I mean, your toughest comp of year end so.

Artists and I may ask it did have a faster recovery, but obviously, it's coming from a lower point back in the April may timeframe and it is still the most elective portion.

Of our procedure base, but obviously once things kind of get back to more normal that should kind of come back nicely. It is economically viable for it there are a lot of patients that need it and obviously.

We're going to build off of when we get the approval from.

Amongst our three trials run by a strict here. The first trial is converge, which is a one obviously were part of our now that we've already got the data we've seen as I mentioned earlier, how compelling that data is.

For that patient population and there are no other treatment options for those patients. The second trial is the amazed drop as they May show was also for patients that are out to three years in a fed so it kind of covers two of those years as well and that will be additive to what we're talking about with converge and then our deep trial is the other one as well.

<unk>.

Okay, and we think what we think our trial shows that data and that's what we will be talking about from that standpoint, okay.

Okay, and then on the amazed trial.

Is there any possibility we could see the results of that in 2021, if its going to the fall is going to be done I think you said mid 2021 or is it really going to be more more realistic to assume 2022.

We anticipate data coming out at the end of 2021.

Okay.

Yeah.

Absolutely.

Okay. Thanks.

Yes.

Your next question comes from the line of service Kalia from open Jaime Your line is now open.

Point in time.

Okay. So no change there great. Okay, and then I wanted to ask one on encompass you mentioned that you know that.

That's a a clearance would get you into.

Submitted for that we've had lots of conversations with them.

Okay cause <unk> some of that depends on kind of the timing of what happens and the approval et cetera, but I mean, we're in a really good spot right now because we spent a lot of time and energy building up a big portion of that team over the last three years.

Great. Okay. That's all I had thanks for taking my questions.

Yep.

I don't see any question at this time I will say anything Victor Matfield closing remarks.