Elutia Q2 2023 Earnings Call Transcript

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August 14, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Azeo Biologics Second Quarter 2023 Financial Results Conference Call. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Matt Steinberg with Fin Partners.

Speaker 1

Thank you, operator. Thank you all for participating in today's call. Earlier today, Azeo released financial results for the quarter ended June 30, 2023. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make Statements during this call that include forward looking statements within the meaning of the federal securities laws, which are pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act 1995.

Speaker 1

Any statements contained in this call that do not relate to matters of historical facts All relate to expectations or predictions of future events, results or performance are forward looking statements. All forward looking statements, including without limitation, those relating to our operating trends, future financial performance and expectations for our product development and sales are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, Including Azeo's Annual Report on Form 10 Q for the quarter ended June 30, 2023, to be filed with the SEC, accessible on the SEC's website at www.sec.gov.

Speaker 1

Such factors may be updated from time to time in Azio's other filings the SEC. The conference call contains time sensitive information and is accurate only as of the live broadcast today, August 14, 2023. Azeo disclaims any intention or obligation, except as required by law, to update or revise Any financial projections are forward looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Azeo's CEO, Randy Mills.

Speaker 2

Thank you, Matt. Today, I will discuss our 2nd quarter results And the progress we continue to make on our strategy to transform Azeo into a drug eluting biometrics company. Matt Ferguson, our CFO will then discuss our financial results in more detail. After that, we'll open the line up for your questions. 1st and foremost, I would like to address the recent events surrounding our viable bone matrix products within our orthopedics business.

Speaker 2

Patient safety is and always will be our priority. Patients are at the heart of our organization's mission And motivate us each and every day. Last month, we were contacted by the Center For Disease Control regarding a patient Who had developed symptoms consistent with mycobacterium tuberculosis or MTB infection, Following the implantation of 1 of our viable bone matrix, we immediately initiated a voluntary withdrawal of these products and open an investigation in cooperation with health and regulatory authorities. A review of the production records indicated that samples from the This pre release test is part of our standard operating procedures and exceeds guidelines set by both the AATB And FDA. It was also conducted by an independent laboratory using a nucleic acid assay So far, additional testing of this same lot, both by independent laboratories As well as the CDC have not detected the presence of MTB via either nucleic acid testing or culture methods optimized for TB.

Speaker 2

We continue to work closely with the FDA and the CDC to further the circumstances surrounding this event. Now let me turn to our progress of transforming Azeo into a high growth Drug eluting biometrics company. As previously communicated, we are focusing the company on what we believe to be our highest value creating Namely, Kangaroo and simpliderm. Here's what we are doing to make this vision a reality. First, we signed an exclusive distribution partnership with LeMaitre Vascular for our cardiovascular product lines.

Speaker 2

Now as you can see from our Q2 results, the partnership is off to a strong start. 2nd, we engaged an investment bank to help divest Our orthopedics business, we have received strong interest and are negotiating multiple LOIs at this time. We are working through the process to find the best home for this business, one where the acquiring entity appreciates the value of our stellar ortho Our goal is to get this divestiture wrapped up as quickly as possible. These moves enable us to focus on what we think will drive both short and long term value for the company, Our drug eluting biometrics technology. This is our unique and proprietary platform that combines the benefits A biological matrices for soft tissue repair with powerful drug eluting activity designed to target specific surgical needs.

Speaker 2

We are building this platform on 2 established biologic product lines, Kangaroo, our extracellular matrix product line For CIED placement and Simploderm, our acellular dermis product line used in breast reconstruction. Both are safe, Sterile and ready to use implants with years of clinical data to support their use. Our most advanced drug eluting biometrics product is Kangaroo RM, for which we hope to have cleared in the Q1 of 2024. Kangaroo RM should be the 2nd entrant into the drug eluting pouch market for pacemakers and implantable defibrillators. Currently, the only antibiotic luting pouch on the market is TYRX, a synthetic product marketed exclusively by Medtronic.

Speaker 2

Medtronic acquired the product line for approximately $200,000,000 back when TYRX was early in its launch. Since the acquisition, Medtronic has done a nice job developing the market and it's now estimated that worldwide, Pyrex Does between $200,000,000 $300,000,000 in revenue and currently addresses about 1 third of the U. S. Market. Because of these dynamics, we think that Kangaroo RM will become a highly valuable asset that can help capture not just pouch, but CIED market share for a strategic partner.

Speaker 2

We also think that it is a product that physicians will prefer given the benefits of a biologic envelope that turns into a patient's own healthy tissue instead of one made from a synthetic polymer. Therefore, we believe that the approval of Kangaroo RM should represent The creation of several $100,000,000 of value for Azeo, making it our greatest near term opportunity. And behind Kangaroo RM, we see a similar opportunity for our simploderm product in breast reconstruction. Given that background, let me provide a more detailed update on our progress towards obtaining FDA clearance for Kangaroo RM. We had previously submitted a 510 for Kangaroo RM that resulted in the issuance of a not substantially equivalent or NSE letter.

Speaker 2

The silver lining of that letter is that we were given the explicit list of outstanding items needed for us to demonstrate substantial equivalents and to gain market clearance. In total, there were 4 items listed. 2 were administrative in nature. The FDA requested that we provide them with information on a test method and requested a few specific document numbers. The other two items that were more substantive in nature related to our in vitro elution method performed as a quality control step in the device manufacturing process.

Speaker 2

This test is used to show a consistent rate of drug release from batch to batch. FDA requested that we, 1, Develop an accelerated IDE method that can be completed within 48 hours or less and 2, Established lot release criteria of greater than 80% Ellucian within that timeframe. Now this is challenging for an extended release product such as Tangru RM since the product is designed to elute the drug Over days weeks, not hours. So to better understand this request, we met with the FDA soon after receipt of the NSC letter. And FDA provided helpful clarification in their request and expressed to us That their interest was in a tool to assess lot to lot variability that ensured the label claim was represented accurately.

Speaker 2

Importantly, they did not have concerns about the actual in vivo performance of the product. FDA also clarified that certain conditions could be adjusted to facilitate the acceleration of the test and With this information, the team work can generate Elution profiles under these accelerated conditions. For the sake of time and because they represent new intellectual property, I will spare you the details, but here's what matters. This graph represents a curve that we had under the original conditions. Notice that the curve put plateaus in the 70% range with 48 hour results of only 75% drug release.

Speaker 2

Now here's a curve that we were able to create under the accelerated conditions. As you can see, Drug release exceeds 80% exceeds the 80% threshold by 24 hours and reaches 93% at 48 hours. We believe this new method to be fully responsive to FDA's request and are now in the process of completing the work necessary We expect to have all of this work completed, compiled and submitted for review by the end of the year. Since the review clock for the 510 is 90 days and we are only updating the specific items in the MSC letter, We hope to gain clearance sometime in the Q1 of next year. We will of course provide you with updates along the way.

Speaker 2

And with that, I'll turn the call over to Matt Ferguson, our CFO, for the financial update.

Speaker 3

Okay. Thanks, Randy. For the Q2, we generated net sales of $10,300,000 as compared to $12,600,000 in the corresponding prior year period. The Q2 2023 result included a revenue reversal of $3,000,000 in our orthopedics business related to the viable bone matrix recall and market withdrawal. In our other three segments, growth was led by our simploderm product line with a 32% increase compared to Q2 2022.

Speaker 3

Sales of our kangaroo product line in our device protection segment were relatively consistent versus the prior year quarter, Despite the significant reduction in sales headcount that we implemented earlier this year. Lastly, we completed the hand off of our cardiovascular products LeMaitre Vascular during the quarter. This resulted in a significant increase in volume, but largely at distributor transfer pricing rather than the previous end user pricing. We're really pleased that the LeMaitre partnership is off to a good start. It's allowing us to focus on the higher growth parts of our business Gross profit for the Q2 of 2023 was $1,000,000 and gross margin was 9.5%.

Speaker 3

The substantial decline in gross profit and gross margin was directly attributable to the Viable Bone Matrix recall and market withdrawal, which decreased gross profit by $5,000,000 and gross margin by 35 percentage points. Total operating expenses were $10,100,000 for Q2 of 2023 compared to $13,100,000 in the corresponding prior year period. We realized nearly $4,000,000 of expense reductions across sales and marketing, R and D and G and A, primarily as a result of organizational streamlining enabled by strategic partnerships with LeMaitre and Sientra as well as reduced spending on Kangaroo RM development as that project approaches completion. The decreases were offset by approximately $900,000 in increased Fibrocell litigation expense, which to date has been covered by insurance and therefore has not resulted in cash outlays by the company. Factoring in all of the above, our net loss in the Q2 of 2023 $10,600,000 as compared to $9,400,000 in the corresponding prior year period.

Speaker 3

As of June 30, 2023, our cash position was $9,300,000 This reflects cash usage of $2,500,000 for Q2, Down significantly from $5,200,000 for the Q1 of 2023. With the loss of revenue from our viable bone matrix products, we do expect Cash burn to increase somewhat in the current quarter, but we expect to moderate that impact through ongoing optimization efforts across the business and continued growth in our simploderm and kangaroo product lines. We look forward to sharing these results as we continue to execute on our growth strategy in coming quarters. And that concludes our prepared remarks. Operator, you may open the line for questions.

Operator

Thank Thank you. We have a question coming from the line of Ross Osborne with Cantor Fitzgerald. Please proceed with your questions.

Speaker 4

Hi guys. Thanks for taking our questions and congrats on the progress on the RM resubmission. So starting off on the product recall and regarding the $3,000,000 in reversal of revenue related to BBM during the 2Q. Does this reflect an entire quarter's worth of revenue and a good way to about the lost revenue for the 3Q and 4Q assuming the business is not divested?

Speaker 3

Hi, Ross. That's exactly right. The recall reflected the outstanding viable bone matrix product for the quarter and sales associated with that, and that is just about the amount for the entire quarter. So in terms of Ongoing reduction in that segment of the business, that is about the right assumption going forward.

Speaker 4

Okay, got it. And then turning to your partnerships, where do you believe LeMaitre and Sientra sales teams are in terms of productivity levels and selling your products?

Speaker 2

Hey, Ross. This is Randy. So, LeMaitre is Further ahead, obviously, because they've started the transition process and are further along into it. And they're doing I think they're doing a beautiful job and either at or beyond where we had expected and hoped They would be. So we're really excited about the LeMaitre partnership.

Speaker 2

We're also super excited about the Fientra partnership too. It's just much, much earlier That is a partnership that as we said on previous calls would really start launching the product In the second half of this year and with that said, even more so in the Q4 Then in the Q3, we do love their coverage. And so they do represent a very significant increase In surgical coverage for us, actually about 5 fold increase in surgical Coverage for us as they get up and running. But I would be remiss if I didn't congratulate the existing team on what again was another blowout quarter, Another 32% increase and that was done by the existing team. So we're super excited about both

Speaker 1

of those

Speaker 2

partnerships. Lemaitre is well underway and Sientra is getting up and running and our existing commercial team, both for Simploderm as well as our team for Kangaroo are doing beautiful jobs as well.

Speaker 4

Got it. And then last one for us. One of your goals for 2023 Strengthen your relationship with Boston Scientific regarding the synergies between their CRM products and your current Kangaroo offering. Do you have any update there on how that's going?

Speaker 2

Yes. So we had a great meeting at the Heart Rhythm Society meeting in New Orleans, Where we were at, there was a lot of data that was presented around Kangaroo and the clinical benefits Of Kangaroo in CIED Placement, I think it got the attention of a number of clinicians, but it also got, I think the attention of representatives at Boston Scientific and I think there was a Sort of a light went off and said, hey, this actually could be a pretty strong offensive tool. And so With that said, I mean, again, as we think about the use of Kangaroo, Kangaroo is a great product in and of its own right, but Its tremendous value comes from its ability to help drive CIED Business. And so we really like the leverage that it's able to bring. And we think there was sort of a light went off We can actually use Kangaroo and then to a much greater extent Kangaroo RM to really help guide cardiologist Preference around the actual placement of the pacemaker or defibrillator.

Speaker 2

So with that said, coming out of that meeting, It actually led to it actually led to additional interaction between the leadership of Azeo and Boston Scientific and our Head of our Kangaroo business regularly participates With the commercial organization at Boston Scientific on their different strategy and tactic Meeting. So very good partnership, very good relationship on our current Tanger business and really we look forward to the work To getting the work our R and D teams have now done to get the rest of the questions buttoned up on RM, so we get that product in front of FDA and get a really, really great drug eluting biologic on the market. If I

Speaker 3

could just add one thing to that, Ross. I think it kind of combines your previous question about LeMaitre And Boston Scientific, the fact that this is now the Q1, Q3 that is, it's the Q1 where the Focus of our sales force is really 100% on Kangaroo as opposed to selling the cardiovascular patch products. We're already starting to see the benefit of that. So while we're really pleased with what LeMaitre is doing with the cardiovascular business, It's also having associated positive effects on the Kangaroo business as a result of the additional focus there.

Speaker 4

Got it. Makes sense. Thank you again.

Speaker 1

Thanks, Ross.

Operator

Thank you. This will conclude our question and answer session and this will also conclude our call. Thank you for dialing in today and joining us. Thank you for your participation and have a wonderful

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Key Takeaways

  • Voluntary recall of viable bone matrix due to a potential tuberculosis infection led to a $3M revenue reversal and a joint investigation with the CDC and FDA, although no TB has been detected in independent tests.
  • Q2 net sales fell to $10.3M from $12.6M year-over-year with a net loss of $10.6M, as gross margin dropped 35 points primarily from the recall impact, though Simploderm grew 32%.
  • Exclusive distribution with LeMaitre Vascular is off to a strong start and the upcoming Sientra partnership will quintuple surgical coverage for Simploderm, boosting future revenue potential.
  • Azeo has engaged an investment bank to divest its orthopedics business and refocus resources on its high-growth drug-eluting biomatrix platforms, Kangaroo and Simploderm.
  • Kangaroo RM, the company's antibiotic-eluting biologic pouch for pacemakers and defibrillators, is on track for FDA clearance in Q1 2024 and could tap into a $200M-$300M market, driving significant near-term value.
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Earnings Conference Call
Elutia Q2 2023
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