AxoGen Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

There are 8 speakers on the call.

Operator

Greetings. Welcome to AxoGen Reports Third Quarter 2023 Financial Results. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to Adana Alexander, Investor Relations Consultant. Adana, you may now begin.

Speaker 1

Thanks, Rob. Good morning, everyone. Joining me on today's call is Karen Zadere, AxoGen's Chairman, Chief Executive Officer and President and Pete Mariani, Executive Vice President and Chief Financial Officer. Karen will discuss the quarter and our outlook for the year, and Pete will provide an analysis of our Today's call is being broadcast live via webcast, which is available on the Investors of AxoGen's website. Following the end of the live call, a replay will be available in the Investors section of the company's website at www.axogeninc.com.

Speaker 1

Before we get started, I'd like to remind you that during this conference call, the The company will make projections and forward looking statements, including our expectations regarding our ability to expand our footprint and expand core accounts, Anticipated growth for revenue categories, penetration of core accounts, marketing opportunities with nerve applications associated with emergent Trauma, breath, OMF and surgical treatment of pain and new products, our expectations regarding the timing of a launch for Avai plus Our expectations regarding our ability to make a rolling biologics license application submission for Avance Nerve Graft and the timing of the BLA submission for approval Our belief that our balance sheet will continue to be sufficient to bridge through to cash flow breakeven and longer term profitability our expectation that we will continue trending towards Cash flow breakeven and our belief that trends towards operating leverage will allow us to maintain a strong balance sheet position and provide ample support as we work towards profitability. Our 2023 financial guidance, including revenue range and gross margin associated with the adoption of our new products, key strategic pillars and our balance sheet. Forward looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risk And uncertainties reflected in the company's annual and periodic reports such as hospital staffing issues, regulatory process and approvals, Certain product adoption and market awareness of our products, the forward looking statements are representative only as of the date they are made and except as In addition, for a reconciliation of non GAAP measures, please reference today's press release Our corporate presentation on the Investors section of the company's website.

Speaker 1

Now, I would like to turn the call over to Karen. Karen?

Speaker 2

Thank you, Donna, And thank you all for joining us today as we discuss our Q3 2023 financial results. We're pleased with the quarter, Led by revenue of $41,300,000 representing 12% growth year over year. Our performance reflects improvement in emergent trauma as well as continued strength in scheduled procedures. This improvement was the result of stabilization in the hospital operating environment and improved commercial As you may recall, last quarter, we began reporting estimated revenue and growth across 2 primary These estimates are based on available data received from hospitals and sales reps and assumptions regarding specific surgeon practice and account information, and as such, are subject to the limitations of the data received and our assumptions. During the quarter, we estimate that emergent trauma procedures represented approximately 50% of revenue and grew in the mid single digit As a reminder, emergent trauma generally results from injuries that initially present in an ER.

Speaker 2

These procedures are typically referred to and are completed by a specialist either immediately or within a few days following the initial injury. During the quarter, we began to see stabilization of staffing and procedure scheduling in hospital compared to the first half of twenty twenty three. Although we continue to see growth of certain routine procedures in lower cost settings, such as ASCs, access to these procedures within Also improved in the 3rd quarter compared to the first half of the year. Scheduled procedures also represent Half of total revenue. During the quarter, we estimate that this category grew approximately 20% versus the prior year.

Speaker 2

As a reminder, scheduled procedures are generally characterized as procedures where a patient is seeking relief of a nerve condition Caused by a nerve defect or surgical procedure. These include breast reconstruction following a mastectomy, Nerve reconstruction following the surgical removal of a painful neuroma and oral and maxillofacial procedures such as a mandible reconstruction And nerve decompression. The growth in this category is reflective of the opportunity to provide improved quality of life outcomes for patients. We have built the success with compelling solutions backed by clinical data and supported by surgeon education and effective patient activation programs That educate patients and connect them with trained surgeons. Our growth strategy continues to be focused on going deeper into core accounts, Where we believe there's tremendous opportunity to expand our footprint.

Speaker 2

Core accounts are defined as those with greater than 100 dollars in revenue in the trailing 12 months. During the quarter, core accounts totaled 372, An increase of 12% over the prior year of 331 and an increase of 7% sequentially. Revenues from core accounts now represent approximately 65% of total revenues, up from 60% in prior quarters, demonstrating the strength of our commercial execution and ability to gain deeper surgeon adoption and expanded use cases of our products. We ended the Q3 with 116 direct sales representatives, up 1 from the end of the second quarter and 5 from a year ago. We believe our revenue growth can continue to be driven primarily by increased productivity of our sales force, and we will evaluate and add additional Sales reps as their territories approach targeted levels.

Speaker 2

Our direct sales force is supplemented by independent sales agencies that represent approximately 10% of our total revenue. Earlier in the year, we were pleased to provide an update on our key strategic Product and procedure innovation, and we expect this will continue to be a driver of long term growth. As a summary, we announced 3 specific innovations across our offering, including an expansion of our resensation technique for women who choose an implant based Which we believe could apply to an additional 10% to 15% of all breast reconstruction patients. We had initially set a goal of training 20 additional surgical teams by year end, but now expect to have more than 30 new teams Trained and performing procedures, and we will continue to train additional teams in early 2024. We also announced innovation in our nerve protection portfolio.

Speaker 2

The category of nerve protection represents approximately $800,000,000 of the overall nerve repair market and covers a wide range of injuries and defects, including carpal and cubital tunnel syndromes, crush injuries and other non transected traumatic nerve injuries. We believe that the diversity of these injury types Their anatomical locations present some unique challenges. Optimizing outcomes for these patients requires a targeted portfolio of solutions to adequately address the specific aspects of both the injury and healing process. Following a successful pilot release, We're happy to announce that in August, we had a national launch for the first of these new products, AxoGuard plus nerve protector. We're very pleased with the initial surgeon engagement and feedback as they began to integrate AxoGuard plus into their nerve protection algorithm.

Speaker 2

We're confident that AxoGuard plus will expand the adoption of nerve protection products and will help more patients with nerve injuries. Additionally, we're continuing the development of a resorbable nerve protection product that functions as a barrier, providing temporary Protection and tissue separation during the critical phase of healing for nerve injuries. This new product will be branded Avive Plus Soft Tissue Matrix and will be regulated as the Section 361 tissue product. We expect the VIVE Plus will further strengthen our position in nerve protection, Supporting emergent trauma and the surgical treatment of pain. We remain on track to launch this product in Q1 2024.

Speaker 2

Moving on to updates and our growing body of clinical evidence. Over the years, we've made significant investments Our active clinical programs are progressing as expected. As of the end of the quarter, we have over 200 peer reviewed publications across Trauma, breast, OMF and pain. In the quarter, the RECON study was published online in the Journal of Hand Surgery And was recently presented in the 78th Annual American Society For Surgery at the Hand Conference. Both events included the author's analysis of the results, Which found that Avance returned a greater degree of functional recovery than conduits and superiority was demonstrated as GAAP links increased.

Speaker 2

We are excited to see the addition of this Level 1 evidence supporting the efficacy of Avance Nerve Graft in published literature and being discussed by surgeons. This data was supplemented by the findings in the meta analysis and Premier All Payer publications. These publications demonstrated that allograft and autograft sensory and motor outcomes as well as procedure costs were comparable. Notably, the Allograft group reduced OR time and reduced patient morbidity as compared to Autograft. We believe that these publications will continue to play an important role in surgeon clinical decision making, especially with middle and doctor surgeons.

Speaker 2

Turning to our new production facility and our BLA for Avance Nerve Grafts. During the Q3, we began processing tissue in the new State of the art APC facility, which provides for up to 3 times our current capacity and was designed for long term growth and expansion. This represents a key milestone in preparation for our BLA submission. We continue to anticipate a pre BLA meeting with the FDA in early Q1 2024, where we will request utilization of a rolling submission process. We plan to begin filing the modules in the Q1 and complete the We believe this process will support BLA approval in the first half of twenty twenty five.

Speaker 2

As a reminder, a BLA approval will complete the regulatory transition of Avance Nerve Graft from a 361 tissue based product to a 3 biological products. And importantly, we believe Avance would be designated as the reference product for potential biosimilars, providing 12 years Looking ahead, we remain focused on executing our strategic initiatives anchored in the strength of our clinical data, Innovation, market development and commercial execution to continue to drive surgeon adoption and growth. Importantly, we're also delivering operating leverage across the business and believe our balance sheet will continue to be sufficient as we bridge through to cash flow breakeven and longer term profitability. Now, I will turn the call over Pete to provide a review of our financial highlights and guidance. Pete?

Speaker 3

Thank you, Karen. Revenue for the quarter was $41,300,000 Representing a 12% increase compared to the Q3 of 2022. Growth was primarily Driven by an increase in unit volume of 8% and a 3.5% increase in price. The estimate We estimate that revenue from Emergent Trauma represented about half our total revenue and grew in the mid single digit range versus last year. Scheduled procedures also represented about half of total revenue and grew approximately 20% year over year.

Speaker 3

Gross profit for the quarter was approximately $33,200,000 compared to gross profit of approximately $30,800,000 For the Q3 of 'twenty two, gross margin for the quarter was 80.5%, down from 83.3% year over year, The initiation of tissue processing in our newly opened AxoGen Processing Center in the quarter. Total operating expenses for the quarter increased 5 percent to $37,300,000 compared to $35,600,000 in Q3 of 2022. The net increase was primarily the result of increased marketing programs, compensation and professional services. Sales and marketing expense in the 3rd quarter increased 8% to $21,400,000 compared to $19,800,000 in the prior year. The increase was primarily due to compensation, marketing programs and travel.

Speaker 3

As a percentage of total revenue, sales and marketing Expense decreased to 52% compared to 54% in the Q3 of 2022. Research and development expenses of $7,000,000 remained flat year over year. Product development This represented approximately 62% of total R and D compared to 50% in the prior year and included costs for a number of specific development programs along with the non clinical spend on the BLA for Avance Nerve Graft. Clinical expenses represented approximately 38 of total R and D compared to 50% in the prior year. And as a percentage of total revenues, research and development expense Decreased to 17% compared to 19% in the Q3 of last year.

Speaker 3

General and administrative expense was $8,800,000 in the 3rd quarter remaining flat as compared to the prior year. Our net loss in the quarter was $4,100,000 or $0.10 per share compared to a net loss of $4,300,000 or $0.10 per share in the Q3 of 2022. We recorded adjusted net income in the quarter of $700,000 or approximately $0.01 per share Compared to an adjusted net loss of $400,000 or $0.01 per share last year. We also recorded positive adjusted EBITDA In the quarter of $2,400,000 compared to positive adjusted EBITDA of $400,000 in the prior year. The balance of all cash, cash equivalents and investments on September 30 was $38,600,000 compared to into the company's new processing facility in Dayton, Ohio, which was placed into service during the quarter It provides for up to 3 times our current capacity and is designed for long term growth and expansion.

Speaker 3

Capitalization of interest interest expense and other income and loss on our P and L. We are pleased with the operating leverage demonstrated through 2023, We expect to continue trending towards cash flow breakeven driven by leverage over our fixed cost infrastructure And our focus on thoughtful operating expense management. Additionally, the license fees that we pay on Advanced revenue will come to an end in the Q4 of this combined with normalized capital expenditures will allow us to maintain our strong balance sheet position And providing ample support as we continue our path to profitability. Now turning to guidance. In today's press release, we are maintaining our full year guidance with 2023 revenue In the range of $154,000,000 to $159,000,000 which represents annual growth of 11% to 15%.

Speaker 3

Additionally, we anticipate the gross margins will be reduced with the continued transition to the new processing facility in the 4th quarter And continue to expect that gross margin for the full year of 2023 will be approximately 80%. And in summary, we're pleased with our Q3 performance. We will continue to execute our strategies, invest in innovation and drive toward cash

Operator

Thank And our first question is from the line of Mike Sarcone with Jefferies. Please proceed with your question.

Speaker 4

Good morning, Karen and Pete. Thanks for taking the questions.

Speaker 3

Good morning. Good morning.

Speaker 4

So just the first one, on the guidance, if I look what's Slide for 4Q, that's kind of $38,000,000 to $43,000,000 which is 5% to 19% Year over year growth at the low and high end of the range, I was wondering if you could just talk about what are your assumptions that are baked in To both ends of the range and just any more color there would be great to start.

Speaker 3

Yes, Mike. I think for our guidance, Yes, we're trending in the middle of the range. We just didn't feel like in this current environment trying to mess with the range At the end of the year would be appropriate. We're comfortable with the range that this is implying and think that this makes sense for the company.

Speaker 4

Okay, got it. And then do you think you can just give us some more color on the ASC Dynamic and hospitals moving some of those simple procedures to the ASC. In 2Q, you called out an economic impact. We'd just love to get some more granularity on how that situation is playing out.

Speaker 2

Sure. Yes, we saw Actually, two things happen. We started to see good execution in ASCs as we see some Simple procedures transitioning to ASCs, but we also saw stabilization in the hospital environment, Hospitals were able in some cases to restabilize their staffing and allow procedures to be there. And in other cases, they've made their changes. Procedures have moved ASCs, but as I said, we're starting to be able to move into those.

Speaker 2

So all the way around, we saw an increase in what we would call simple trauma. So these are durations that can be repaired with a connector or could be repaired with a short advance and we saw those stabilize and start to grow again.

Speaker 4

Okay. Thank

Operator

you. The next question comes from the line of Mike Krachke with Leerink Partners.

Speaker 5

I guess just in first of The upcoming DLA approval, I mean, is your expectation that that is going to help drive meaningfully higher utilization from surgeons? What have you heard from your industry And then just as a follow-up, has that pre BLA meeting been scheduled for 1Q already? Or is there any other

Speaker 2

Pre BLA meeting, it's not scheduled, but we are on track to have it scheduled to be in the early part of Q1. And in terms of gating factors, yes, there's certain documents that you provide to the FDA. They go through some logistics internally to then come up schedule. So those initiatives have to happen yet, but again, we're on schedule to do what we expect to get it scheduled in the early part of Q1. 1.

Speaker 2

In terms of the impact of the BLA, we think the BLA will be helpful for middle adopters to be comfortable in The data that Avance Nerve Graft has that shows that it is a certainly a superior option to conduits And that combined with the meta analysis is going to provide a better opportunity for their patients without the morbidity of an autograft. And then as I mentioned in the script, it's also faster for those hospitals that are trying to get their ORs turned over more quickly. So we think that we've got a good opportunity to continue to build this business as we transition into a BLA with The stamp of being a biological product.

Speaker 5

Super helpful. Thanks very much.

Operator

Our next question is from the line of Caitlin Cronin with Canaccord Genuity. Please proceed with your question.

Speaker 6

Hi, everyone. Good morning and congrats on a great quarter. Just maybe to start touching on core accounts that became a larger Your business this quarter historically has only been 60%, now 65%. Do you really expect this to keep growing? And has this really been the result of Middle adopter growth or more penetration of different types of surgeons within an account?

Speaker 6

Thank you.

Speaker 2

Yes. Thank you. We're very excited that we're seeing faster growth in both emergent and scheduled procedures in our Core accounts and that's been our strategy is we think there's a significant opportunity to grow that business in this core accounts. That's Where we've got a lot of upside potential and it is all of those. Now the majority of our the vast majority of our core accounts Have both some business in trauma and some business in scheduled cases, but we see opportunity to continue to expand both of those And continue to drive that deeper adoption.

Speaker 2

And that deeper adoption really by definition means we're moving into those middle adopters and becoming The standard of care in those accounts, that's what our goal is and then continue to grow the number of core accounts where we become the standard of care. We think that strategy has been effective and we're happy to see that percentage increase.

Speaker 6

Awesome. And then just a quick one on breast. You noted a higher number of surgeons you expect to train this year. Are you starting to See revenue contribution from this new opening of procedures in that segment?

Speaker 2

Yes. It's been exciting to see the expansion into the implant based procedures. This is The opportunity for Sensation as we're ending Breast Cancer Awareness Month has been a meaningful topic of conversation among women who have breast cancer. And I think the realization that this is an important outcome for women, has continued to spur significant interest in the procedure. We've had Standing room only interest in our training programs for the implant based procedures, and we think this will continue to be An impactful part of our overall growth in the scheduled procedures.

Speaker 6

Thank you.

Operator

Our next question comes from the line of Dave Turkaly with JMP Securities. Please proceed with your questions.

Speaker 7

Hi, good morning. Karen, maybe the on the AVAIRE plus Reservable, does anybody else have resorbable product? I'm just curious and were surgeons asking for this? I'm kind of wondering exactly what Where it will be used specifically?

Speaker 2

Yes. Actually, if you remember, we had an absorbable product prior That was very well received by the market, and we voluntarily withdrew that as some FDA changes in classification of products. I can tell you that I regularly receive phone calls from surgeons who are saying that they would like a replacement back for that product, that it was An important part of the overall treatment algorithm, it's not going to be used. It's a very niche product. It's not going to be used in all procedures.

Speaker 2

But in those Seizures where there is a trauma that can cause damage to the surrounding tissue of a nerve as well as the nerve, It can be important to have a temporary or resorbable soft tissue matrix that provides protection during the critical healing phase. And surgeons are very interested in having this as a part of their algorithm in addition to the offerings we have with AxoGuard. And so we are looking forward to getting this launched in the Q1.

Speaker 7

Great. Maybe one follow-up for Pete. Pete, can you give us from a modeling standpoint sort of you think interest expense is going to look like maybe just on a quarterly basis moving ahead given that that capitalization is now rolling off?

Speaker 3

Yes, I think with the structure of our debt, you'll see anywhere from $1,700,000 to maybe 1,900,000 Actually, yes. That's interest expense and then we'll see interest income as well off the cash that we have Of a few 100,000.

Speaker 7

Thank you.

Speaker 2

Thanks, Dave.

Speaker 3

Thanks, Dave.

Operator

Thank you. At this time, we've reached the end of our question and answer session. I'll now turn the call over to Karen Sattery for closing remarks.

Speaker 2

Thank you, Rob. I'd like to thank the AxoGen team who remain committed to our mission of improving nerve function and quality of life for patients with We're happy with our current progress and we remain focused on ensuring our long term success. I want to thank everyone for joining us this morning and have a great day.

Operator

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

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Key Takeaways

  • Q3 revenue of $41.3 M represented 12% year-over-year growth, driven evenly by emergent trauma procedures (mid-single digit growth) and scheduled procedures (≈20% growth) as hospital staffing stabilized and ASC access improved.
  • Core accounts (>$100 K revenue) increased to 372 (+12% YoY) and now contribute ~65% of total revenues, supported by a 116-member direct sales force and supplemented by independent agencies.
  • Key product innovations include the national launch of AxoGuard+ Nerve Protector in August and the upcoming Q1 2024 launch of Avive Plus Soft Tissue Matrix, plus expansion of the implant-based breast reconstruction sensation technique to over 30 surgical teams.
  • Clinical evidence continues to build with over 200 peer-reviewed publications, including the RECON study demonstrating Avance Nerve Graft superiority over conduits and meta-analyses showing allograft cost and outcome advantages versus autograft.
  • AxoGen’s new state-of-the-art processing facility triples capacity ahead of a planned rolling BLA submission in Q1 2024, targeting FDA approval in H1 2025; full-year guidance remains $154–159 M revenue with ~80% gross margin and positive adjusted EBITDA of $2.4 M in Q3.
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Earnings Conference Call
AxoGen Q3 2023
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