TRUMF - Artivion's Ongoing Clinical Studies Could Drive Significant Growth Starting In 2025

2023-10-13 14:37:09 ET

Summary

• Artivion has used M&A to reposition itself towards growth opportunities in aortic disease care and heart valves.
• The company's legacy operations contribute positively to revenue and margins but have limited growth prospects.
• The success of Artivion's stent-graft business and ongoing clinical trials will determine its future growth potential, as those trials are the gating factor to over $1.2B in potential revenue.
• There are ample risks, including inadequate clinical efficacy, execution on the commercial launch, and future competition, but the stock looks interesting at this level.

With med-tech investors prizing revenue growth (and generally rewarding companies for it), it’s not that uncommon now to see med-techs spending aggressively on M&A in an attempt to boost their growth rates. Artivion ( AORT ) was ahead of the curve in this respect, as it used M&A several years ago (2016 to 2020) to reposition the company toward differentiated growth opportunities in aortic disease care and heart valves.

The full benefits of this shift have yet to be seen, but could propel a company that has grown revenue at 11% over the last five years (including M&A) towards mid-teens growth and EBITDA margins in the 20%’s over the next five years. Much of this growth is gated by clinical trial success, FDA approvals, and successful commercial launches (including products that will change standard of care), and plenty of risk goes along with that. Still, relative to the opportunity, today’s valuation looks pretty reasonable and this is a name worth further exploration.

Building Off A Solid Core

My personal history with Artivion goes back a long way – it was called CryoLife then, and it was among the companies my team covered when I was just starting as a junior sell-side analyst (something like 25 years ago now). The core of what CryoLife was then remains – the company’s industry-leading cryopreserved heart valves and venous grafts, as well as the BioGlue surgical sealant – but management has pivoted the company toward a more compelling growth opportunity in differentiated mechanical heart valves and stent grafts designed to treat a range of aortic/thoracic-aortic conditions.

Those legacy operations, tissue processing and BioGlue, still chip in close to half of revenue, and while neither are scintillating growth prospects from here (likely low-to-mid single-digit growth), they have helped build a commercial and R&D operation that can propel the company to a higher-growth future.

The On-X heart valve portfolio, which the company acquired in 2016, now generates about 20% of quarterly revenue and while the On-X atrial valve enjoys strong share (around 59%), there’s still ongoing growth opportunities in the U.S. and particularly in markets in Asia and Latin America. This growth is underpinned by unique product attributes that allow people with the On-X valve to use considerably lower doses of anticoagulants, an important safety and quality-of-life edge. Management should get FDA approval for its On-X mitral valve later this year, and while the opportunity there is probably about 20% that of the atrial valve, it will still be an incremental contributor to growth.

Combined, I think these products can generate around 5% growth over the next five years and contribute around $270-$275M to FY’27 revenue, about 55% of what I expect for that year (versus 68% today), and at worthwhile gross margin.

The Exciting Opportunities Are In The Clinic

What will make or break Artivion as a successful stock pick will be the fate and future of its stent-graft business, and particularly multiple products in clinical trials in the U.S. This business has been built through the acquisitions of Jotec and Ascyrus and a partnership with Endospan that could become an acquisition if the ongoing TRIOMPHE study ultimately leads to FDA approval. In the meantime, the company sells these products in markets outside the U.S. (Europe, Latin America, Canada, and Asia) and I would argue that the early results in these markets (revenue up 19% in Q2’23) is encouraging.

The AMDS hybrid prosthesis is the world’s first aortic arch remodeling device for treating acute Type A (or DeBakey Type 1) aortic dissections. This device is meant to be used in conjunction with surgery and it addressees an issue called residual false lumen – a consequence of current standard of care that can lead to future aneurysms, reintervention, and negative outcomes (including strokes, renal failure, and death).

Artivion is running the PERSEVERE pivotal study in the U.S. to gain FDA approval and as of the last report had enrolled 75 of 100 targeted patients, keeping the company on track for data late in 2024 and approval in 2025. An interim look at the data (at the October 5 EACTS meeting) showed meaningful reductions in stroke, renal failure, and heart attacks versus historical experience. While the 30-day all-cause mortality (13.5%) was below the stated historical norms (29%-44%), I’ve seen more recent studies suggesting 30-day all-cause mortality rates of 16%-30%, so there could be some concerns here over this endpoint, though stroke, renal failure, and MI are all in the clear even against the most competitive recent data.

Artivion has partnered with Endospan on the NEXUS stent graft, with Artivion currently marketing the device in Europe and holding an option to acquire the company at a specified price if the FDA approves the device. NEXUS targets the repair of both aneurysms and dissections in the aortic arch, and the ongoing TRIOMPHE study is likewise expected to finish enrollment in 2023, with data late in 2024 or early 2025 and approval in 2025. The main appeal of NEXUS is that it’s an off-the-shelf solution for endovascular repair of the aortic arch, with a target market opportunity of elderly or frail patients (who can’t tolerate open surgical repair) and/or those who’ve previously undergone open surgery for Type A dissection repair.

Last and not least is the E-vita OPEN NEO 2.0, another stent-graft product addressing aneurysms or dissections of the aortic arch and descending thoracic aorta. This product is further back in the queue, with the trial yet to launch and likely trial completion in 2025 (with approval in 2027).

All told, these aortic arch products target a market that could be worth over $1.2 billion in annual sales and where competition is in some cases rather limited – Terumo ( TRUMF ) ( TRUMY ) competes in these markets as well, but has had some sales execution issues and I believe can be vulnerable if Artivion can come to market with compelling clinical data.

There are other products beyond what I’ve mentioned, including opportunities in thoracoabdominal and endovascular markets like a stent-graft product for thoracoabdominal aortic aneurysm (or TAAA), but the biggest near-term opportunities for the company are with AMDS, NEXUS, and OPEN NEO 2.0.

The Outlook

I am bullish on Artivion’s clinical pipeline, but I have seen many times how difficult it is to actually launch and ramp practice-changing products, particularly for smaller companies. Many investors want to believe that data alone is what drives physician/surgeon behavior, but that’s just not the reality, and it will take time to build these businesses.

To that end, while I do agree with management that there is mid-teens growth potential here, I’m more comfortable with estimates that see the company growing around 9% over the next five years and over 8% over the next decade. I do think that revenue growth can take EBITDA margins into the low- to possibly mid-20%’s and there’s certainly upside if there’s a faster uptake (more revenue growth) than I’m modeling. Looking at free cash flow, I believe the company can be free cash flow positive next year and generate mid-teens FCF margins on around $500M in revenue in 2027. Longer term, I see FCF margins in the high teens, and 20% would not be impossible if revenue exceeds my expectations.

Discounted cash flow actually drives a promising fair value for Artivion which is unusual and suggests that the shares are overlooked right now (and/or that I’m simply too bullish on the long-term revenue and profit potential). Likewise, if I use my 2026/2027 margin/return estimates (margins, ROCE, et al), apply that to revenue (a 3.25x multiple) and discount it back, I get a fair value in the low-to-mid-$20s. I get a similar result using the growth side of that model and a 9% revenue growth target from 2022 through to 2026; a 4x multiple on my 12-month revenue estimate drives a high-$20’s fair value.

The Bottom Line

There are numerous risk to this story. The company took on quite a bit of debt to fund its M&A program, and there are no guarantees that the final read-outs of the key clinical trials will be successful or successful enough to drive robust commercial launches in the U.S. Likewise, future margin estimates could prove aggressive, as smaller med-techs almost always end up spending more than they project to support commercial launches. Even so, investors who approach this name with eyes open to the risk may yet find it a worthwhile high-risk growth opportunity in a space that has taken a beating here of late and where many are decrying a lack of innovation to drive future growth.

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