Greetings and welcome to the CryoLife's Second Quarter 2021 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 Brian Johnston from the Gilmartin Group. Thank you and you may begin.

Thanks, Operator. 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 requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties that 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 for the future. These forward-looking statements are subject to a number of risks and 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. Now, I'll turn the call over to CryoLife's CEO, Pat Mackin.

Thanks, Brian, and good afternoon and thanks for joining. I'm pleased to report we had a solid quarter as our recently acquired and newly introduced products performed quite well even in the face of the pandemic. In evaluating the performance and progress of our business, we believe it is more meaningful to compare Q2 '21 results against Q2 2019 results, because Q2 of 2020 performance was substantially impacted by COVID-19. So, when comparing Q2 of 2021 against Q2 of 2019 performance, our pro forma constant currency revenue growth was 6.6%. This excludes TMR in both periods as we sold TMR in Q2 of '19 but not Q2 of 2021. This revenue growth shows that our business momentum has returned and we are returning to growth. Our Q2 '21 performance is even more impressive when you consider that cardiac tissue declined 7% in the quarter due to the inadequate supply of cardiac tissue valves that were affected by the previously mentioned Tris issue, which has now been resolved. In the last few weeks, we confirmed with the FDA that the quarantine tissue our safe to distribute, and as a result, we will not write-off any of the $5 million of tissue that was quarantined as a result of the Tris issue. As a result of this positive news, we now have an extra quarter of tissue and we've begun working through our release process, which should have positive impact on tissue revenue going into the second half of 2021. Given our confidence in our business, notwithstanding the continued impact from COVID-19 on our business, particularly outside of the US, we are issuing guidance for the second half of 2021. We are forecasting second half revenues will increase approximately 7% to 10% on a pro forma constant currency basis versus 2019. This…

Thanks, Pat and good afternoon, everyone. Total company revenues were $76.1 million for the second quarter, up 42% on a GAAP basis compared to Q2 of 2020 and up 35% on a pro forma constant currency basis compared to Q2 of 2020. Revenues came in ahead of our quarterly guidance due to improving procedure volumes in the US, in Europe as vaccination rates increased and lockdowns eased during the second quarter. On a year-over-year basis in the second quarter of 2021, aortic stent and stent graft revenues increased 60%, reflecting increased procedure volumes and improved JOTEC inventory position, the addition of the AMDS in September of 2020, and improved adoption of NEXUS in the EU. On-X revenues increased 46%, BioGlue revenues increased 44% and tissue processing revenues increased 22% reflecting improving procedure volumes relative to the second quarter of 2020. On a pro forma constant currency basis, aortic stent and stent graft revenues increased 39%, On-X revenues increased 43% and BioGlue revenues increased 40%. On a pro forma constant currency basis compared to the second quarter of 2019, On-X revenues increased 17%, aortic stent and stent graft revenues increased 11%, tissue processing revenues increased less than 1% and BioGlue revenues decreased 1%. On a regional basis, second quarter 2021 revenues in EMEA increased 65%, North America increased 30%, Asia-Pacific increased 13% and Latin America increased 132%, all compared to the second quarter of 2020. On a pro forma constant currency basis, revenues in EMEA increased 47%, North America increased 29% Asia-Pacific increased 13% and Latin America increased 130%, all compared to the second quarter of 2020. Our gross margins were 66% for the second quarter of 2021 and 67% for the second quarter of 2020. G&A expenses in the second quarter were $40.8 million compared to $32.3 million in the…

Yes, thanks, Ashley. So in closing, as you've heard this afternoon, despite the global pandemic, our business performed quite well during the second quarter. I once again give the credit to the outstanding efforts of our employees around the world. Going forward, uncertainty regarding the impact of the Delta variant and uncertainty about continued vaccine adoption make it difficult to predict the impact on our business over at least the next couple of quarters. But what I can say with confidence is that our product offering is second to none in the treatment of aortic disease. When the pandemic largely subsides and procedure volumes return to normalized levels, we expect exceptional products to deliver double-digit growth on a year-over-year basis. We have several catalysts in 2021 that we did not have in 2020. As I explained earlier, we have three initiatives that will drive growth between '21 and '24. First, in '21, we should see continued growth in our five new aortic stents and stent grafts; AMDS, NEXUS, E-nside, NEO, and E-nya. Second, we also anticipate further upside from our investments in our channels and new regulatory approvals in Asia and Latin America. And third, we'll be filing our PMAs for both PerClot and the On-X mitral valve. All of these catalysts in our expectation to continue to deliver on these goals as outlined previously, supported by our strong financial position, leave us optimistic and confident as ever about the future of our prospects. With that said, I'd like to open the line for questions and turn it back over to the operator.

Thank you. [Operator Instructions] Our first question is from Mike Matson with Needham & Company. Please proceed with your question.

Yes, Hi Pat and Ashley, this is David Saxon on for Mike. Thanks for taking the questions. My first one is just on the PerClot sale for Baxter. As I understand it, it's going to be about $19 million upfront to you. So just wondering how you're thinking about prioritizing that, is that going to be mostly for paying down some of your debt, maybe doing it some smaller M&A or kind of reserve for any potential milestones you might have come out like some of these deals like Ascyrus.

Yes, so I mean, regardless of where we put the cash, I mean we do, I think the last comments you made. We've got two milestones coming up, one for Ascyrus, which was $10 million once we get the IDE approved and we just talked about, we are submitting that IDE actually this weekend. So we're anticipating that IDE will be approved in the second half of this year. So that's obviously $10 million of it and then we've got a $5 million milestone for NEXUS once they enroll 50% of their trial. We don't anticipate that happening public for another until outside of 2021, but that would be a chunk of the first upfront.

Okay got it. And then, I mean you've talked about the lower I&R label for On-X mitral. I was just wondering if you can help us think about the size of that opportunity, and I know the On-X Aortic Valve has a pretty high gross margin within the US, so should we expect something similar to the gross margin profile of the aortic On-X.

Yes, so the mitral valve has a similar profile to the aortic from a gross margin standpoint. In the US, it's around 90%. The second part is that the mitral kind of the overall market opportunity and this is I think being conservative when we are just talking about mechanical valves, that it's probably about a $40 million opportunity at 90% gross margin for us. There is also an opportunity, and as we've seen with the On-X aortic where we actually cannibalized tissue surgical valves, so we haven't even used those numbers in the math to come up with the $40 million. That's just kind of the mechanical mitral opportunity we have to go after once we get this product approved and out in all markets.

Okay, that's helpful. And then I guess last for me, I mean it sounds like the tissue issues are resolved. So how should we think about preservation services in the back half? Thanks so much.

Yes, so it was actually very positive, because if you think back to the beginning of the year. We call it the good news - we caught this quality issue and we worked through all the testing and the submissions and the tissues at the highest level of quality we expect. So, in the beginning of the year we said we were really going to write off $5 million by this summer or we are going to have a bunch of extra tissue in the freezer. It turns out it is very positive, and like I said, we're not writing off any of that tissue and we have an extra quarter of tissue, kind of, in quarantine in the freezer right now. So now it actually shifts to a kind of processing and getting the tissue out going through our quality process and procedures. So we've got a lot of tissue, we just got to get it out the door. So I can't tell you exactly how it's going to flow, but we feel pretty bullish over the next 12 months that tissue will have a kind of a tailwind to it compared to what you saw in the first half.

Great. Thank you and congrats on the quarter.

Thanks.

Our next question comes from Cecilia Furlong with Morgan Stanley. Please proceed with your question.

Great. Good afternoon and thanks for taking the questions. Pat, I wanted to just start on On-X strength in the US recently over the past few quarters. Could you talk about what you're seeing on an underlying basis is this more on the mechanical heart valve market, On-X specifically, if you could just provide more color in terms of really what's driving that growth that you've seen over the past few quarters.

Yes, hey Cecilia. Thanks for the question. You know, I've had an opportunity and I think when we last spoke, I was out in 30 of the top cardiac centers in the last six months. And I can tell you, to a person at every institution and I probably talked to more than a hundred surgeons, to a person they all believe in the On-X, kind of, it's the anticoagulation, lower coagulation story. We're the only valve that can have less Coumadin today and we're the only valve that is looking at and studying the use of Eliquis. So it's just kind of a ground swell around it and literally every center I go to were either bringing on new users in those centers or actually bringing on brand new accounts. So it's just a continued kind of momentum and I think it's the combination of the story. It's in the guidelines, having the only ones with the low INR and I think a lot of people are paying attention to this trial, which we've now enrolled 360 patients in. So, I think it's hard to pin down exactly what it is but it's obviously been very strong growth over the last several quarters.

Okay, got it. And just in terms of 3Q guidance as well, I recognize there are lot of moving parts, but could you provide a bit more color, in terms of what you contemplated just from a geographic standpoint, Americas versus other geographies that are still undergoing COVID issues. Thank you.

Yes, I mean one of the things I think we've all learned in the last 18 months is this is clearly a moving target and it's a very kind of dynamic world. We obviously had a nice Q2. We've got a lot of momentum. We talked about - we put up 6.7% growth even without a quarter's worth of tissue. Particularly, it impacted our cardiac tissue, so we feel that's positive. Obviously, this Delta variant has started heating up even in the last week. So, we put these forecasts together with kind of what we knew at the time and we wanted to come out and give guidance for the full year with the second half being - you already know the first half. So that being said, we tried to take into account everything we knew knowing that the things we started learning in the last few days, obviously starting out a little more negative. So, I think we've got a pretty good shot at having a good second half. Now, if things go crazy - I don't have a crystal ball like anybody else, I'm not sure what comes next, what's the fall going to look like with this Delta variant. So, I mean, I think we feel pretty confident with the forecast we put out there, given what we know today.

Hey Cecilia, this is Ashley. The only other thing that I would add to that too is that, I mean if you look back at our business historically, the third quarter has always been down sequentially compared to the second quarter and a lot of that is due to the heavy holiday season that we experience in Europe and there is no reason to think that that we won't see something similar to that this year. And as you've seen in the last few years, we always follow that sequentially with a very strong fourth quarter. So that was another consideration that we factored into our guidance.

Great. Thank you for the color.

Our next question is from Suraj Kalia from Oppenheimer & Company. Please proceed with your question.

Good afternoon. Pat, Ashley, can you hear me all right?

Hey, Suraj. Yeah, we hear you fine.

Yes.

So let me start out, Pat, Ashley, congrats once again; great quarter. Pat, I know you talked about the Delta variant and maybe I could be a little more specific geographically, are you seeing any initial signs of the Delta variant impacting any of your proctoring sessions or US?

Yes, it's, and this is a part I mentioned Suraj that it's literally like a day-to-day situation. I will give an example, I got an email from our country manager in Spain where they started locking down, they started pushing off elective cases. We had a NEXUS case that was scheduled with a proctor that had to get canceled. So it absolutely is affecting the proctoring. Two days ago, I got a message from somebody about a hospital in Florida that has more patients in their hospital than they had in January, right. So, it's just like every day there is new news that comes in. Now, I will say that, particularly in the US, the hospitals have done a great job managing COVID and I think they will continue to do so even. There will be some hotspots and you know where they are. Missouri has been a hot spot, Florida has been a hotspot. We're also seeing - we've had a lot of growth expectations in Asia-Pacific and Latin America and those places are still getting hit pretty hard. Australia is locked down. Malaysia is locked down. Brazil has had a tough go. But particularly in Europe, we saw issues in the UK in the quarter, we saw issues in Spain in the quarter and I can't predict what the Delta variant is going to do. But we're obviously still putting up numbers, it's just not - I guess the way to think about it, it is like we're running with a weight on our back. We're not fully untethered at this point where we can do all of our cases and nothing gets canceled. There had been tons of cases moved or canceled for COVID impact type things.

Got it. And let me move on to my favorite topic, which PROACT Xa, so 125 patients enrolled in Q2. More specifically, Pat, is this any center concentration in terms of enrollment.

Yes, we've had - that's a good question. We've had - I'm not going to name the center, just because it's not appropriate, but we've had one center in particular, which is one of the highest-profile in the country, if not the globe, has been a massive enroller. They have done extremely well and a lot of this gets to kind of the logistics of the trial. This is different than most trials, as we've talked about. This is not a trial where you actually enroll patients in the surgery and then they do the case. This is going back and we have 30,000 patients that are available to be in this trials who've got an On-X valve. So a lot of this is going and finding those patients, getting them consented, bringing them in and we've had a handful of centers that have done an excellent job. We just sent out 31,000 letters to existing On-X patients to see if they're interested in participating in the trial. So we're learning as we go. We're having lots of investigator meetings, but we're expecting the momentum for this trial I think even to pick up from here.

Pat, if you don't mind my asking, if you're at liberty to talk, what is the average age of an On-X patient enrolled in either arm in PROACT Xa?

Yes, I'd have to get pull that back for you. I actually pulled the data on. Yeah.

By age, I mean on On-X.

Oh, yes. Yes, I actually pulled that for you because I knew you were going to ask. About 45% of the patients have had the valve in less than a year.

Got it.

55% have had it more than a year.

Got it. One question. Final question for you, Pat, and one for Ashley, and I'll plug both of them together. So Pat, your comments about On-X being the market leader for patients less than 70 years of age that caught my attention because that means you're looking at more than tripling your heart valve market. More specifically, Pat, can you square your comments with the push by TAVR companies into moderate AS and asymptomatic AS. That's for you, Pat. Ashley, gross margins were a bit shy of our estimates and even though PerClot was included, just kind of help us flesh out, as we look forward to Q3, Q4 and once PerClot is completely out, how should we think about gross margins. Gentlemen, congrats once again, and thank you for taking my questions.

Yes, I'll go. I'll take your question first, Suraj. So we've done a bunch of market research on - and my comment was around assuming the PROACT Xa trial gets approved as we enroll the trial. We do the two year follow-up and it gets approved. So that's obviously if that happens. The market research that we have done shows that there is a big group of patients between the kind of 60 to 70 that currently there is a kind of - in the guidelines even there is kind of it is you have to make a decision between a bioprosthetic valve or a mechanical valve. And our market research shows that as you get closer to 60, a much higher percentage of patients would opt for On-X valve with Eliquis and as you move up to 70 that number would come down but we still would be taking share from tissue valves up to the age of 70. So it's not saying that everyone under the age of 70 is going to get an On-X with Eliquis. It is saying, if you look at all the patients under 70, if this trial gets approved, we would be the market leader in that segment. And then Ashley, you want to take his gross margin question.

Yes. Suraj, yes, to your point, the margins for the quarter were a little bit lighter than we even anticipated, but what was driving that is, we routinely evaluate our inventory and our obsolescence quarter was a little bit higher than it normally is. The other thing is, we had some manufacturing inefficiencies that hit the P&L in the second quarter of this year, not indicative of any recurring issues, but we decided few manufacturing inefficiencies that made their way in the COGS in the second quarter. If you look at the second half of the year, we think our gross margins are going to be in the 67% to 67.5% range, give or take a few basis points on either and depending a lot on like geographic and product mix.

Yes, I think the other thing I would add to that, just from a commercial standpoint is, we have - we've built up some inventory for kind of waiting for regulatory approvals, and then the pandemic hit. So when your volumes drop off by 30%, 40% for a quarter, you have stuff that will expire. So, I think we are seeing a little bit of a ripple effect of kind of the pandemic and some of the write-off, some stuff expiring just from a - the demand went down when we had a normal supply plan out. So I think that will reverse going forward. Okay. Operator, any other questions?

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

Well, first of all, thanks again for joining the call and as you heard from the call, we had, I think, a really strong quarter, both in the top and bottom line. Our new products are delivering. The Tris issue has been resolved. We're submitting two PMAs, both PROACT Mitral as well as the PerClot this quarter. We're submitting the IDE for AMDS this quarter. PROACT Xa is enrolling. NEXUS is enrolling. So the pipeline is really starting to take stride here and we've got the Tris issue resolved. We're not going to write off $5 million. We now have an extra quarter worth the tissue to get out the door. So I think all-in-all we are feeling pretty confident about the second half and notwithstanding this Delta variant which none of us know how that's going to play out. So, we're charging forward and look forward to keeping you updated on our progress. Thanks again for joining.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.