Q3 2019 Earnings Call
Greetings and welcome to the oxygen Inc.'s third quarter 29 change their school results conference call. At this time, all participants are in listen only mode.
Question and answer session will follow the formal presentation should anyone require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host Pete Mariani, Chief Financial Officer. Please go ahead.
Thank you Saatchi and good afternoon, everyone. Welcome to actually turns third quarter 2019 financial results Conference call. We appreciate you joining.
Joining me today on the call is karen's add Ray our chairman Chief Executive Officer impressed.
Format for todays call will be as follows Karen will discuss the 2019 third quarter financial and operating highlights and then I will provide details on the financial result outlined in today's press release, we we'll then open the call for your questions.
Today's call is being broadcast via webcast, which is available on the oxygen website within an hour. Following the end of the live call a replay will be available in the investor section of the company's website at www dot oxygen <unk> dot com.
Before we get started I'd like to remind you that during this conference call. The company will make projections and forward looking statements regarding future events.
We encourage you to review the company's past and future filings with the FCC, including without limitation. The company's forms 10-K, and 10-Q, which identified the specific factors that may cause actual results or events to differ materially from those described in these forward looking statements. These factors may.
Include without limitation statements regarding product acquisition and or development product potential the regulatory environment sales and marketing strategies capital resources or operating performance and with that I'd like turn call over to Karen.
Thanks.
And good afternoon, everyone.
I'm pleased with the company solid growth and financial performance and the third quarter.
Total revenue grew 26% to 28.6 million driven by our strength in our core trauma business and growth in our number of active account, which increased 16% year over year to 791.
We ended the quarter with 105 direct sales representative and 19 independent sales agencies.
By studying sales territory and strategically converting agency territories to direct rep. During the year, we've expanded our commercial footprint, providing our direct rep with smaller geographic territory, allowing them to spend more time developing surgeon and account.
However, as we've discussed in prior quarter, the rapid growth of our commercial organization over the past two years, including our pursuit of new nerve repair market opportunity has created challenges. It it's been an ongoing priority of ours to address these challenges and improve our commercial execution.
I'm encouraged with the progress we've made identifying and implementing improvement unlike to spend a few minutes reviewing them.
First we are rebalancing our commercial efforts had sales resources back toward extremity trauma as this remains our largest market opportunity and the most efficient and effective path to sustainable growth.
At the same time, we will continue to invest and grow and the breast reconstruction artist nation, and oral and maxillofacial market as these nascent markets develop.
Second.
We've been slowing the rate of our salesforce expansion to allow for the development of efficiencies across our commercial footprint.
Although early.
These two changes are already providing sequential improvements and we plan to continue building upon these and other initiatives during the remainder of the year and into 2020.
Let me provide some additional contact for these changes.
Nerve repair for extremity injuries, including trauma and compression is our largest addressable market estimated a total of $2.2 billion as compared to an OEM aftermarket a $309.
The breast reconstruction artist nation market of 25 250 million.
Our position on the trauma market as result of more than 10 years of development initiatives, including building market awareness.
Educating surgeon growing the body of clinical evidence and focused commercial execution.
The breath to know enough markets continue to be significant opportunities for growth, but remain early in their development.
In the RMS segment, we've developed a solid initial footing with oral and maxillofacial surgeons, who are focused on mandible reconstruction and allergenic nerve injury.
Through careful analysis, we determined that the successful adoption of these targeted procedures with concentrated with a specific profile of surgeons in major academic institution, which overlaps significantly worse promise business is the most developed.
Additionally, we were often supporting these surgeons and procedures with both our all enough clinical specialists and our full line sales rep.
Which created unnecessary redundancy.
This demonstrated to US we had an opportunity to gain efficiencies through a more effective allocation of resources as such we're converting our eight oral and maxillofacial clinical specialists position to full line sales world.
This reallocation of sales head count will increase our sales efforts focused on the development of targets surgeons and procedures and extremity trauma.
At the same time, given the alignment of our RMS business will that be trauma count. Our full line sales representatives are well position to efficiently support the all enough opportunity and we'll do so in partnership with other market development resources.
Simplified structure will allow us to support our mask growth with an allocation allocation of resources that is better matched to the relative opportunity of this important application.
This change will not impact to our approach and breast reconstruction artist nation, well, we will continue to use of clinical sales specialists and this highly targeted market.
We have established a solid foundation in the breath market at 30 centers for re sensation and using sales specialist for this both it focused ballpoint.
That's allowed us to efficiently educate and support surgeons as they integrate the recent station technique into their current breast reconstruction procedures.
We're very encouraged by the increasing awareness of patients uncertain to the improved reconstruction options available for women, including reconstruction with the recent station technique.
[noise]. Additionally, we slowed the rate of adding new sales reps to allow for stabilization and productivity growth within our current salesforce and territory structure.
Aggressively splitting territories has been the right long term decision for the company, but it has inevitably cause short term disruption.
We will continue to split territories and add new sales rep, although at a more measured pace as we look to drive further efficiency and productivity gain with an expanded commercial footprint.
We previously stated that we plan to end the year with 115 direct sales rep.
However, with the reallocation of the eight Oh, that's positions to full line sales reps in Q4, and this long of our hiring of new sales reps, we now anticipate exiting the year with between one of five and 110 sales rep.
Our efforts to rebalance our commercial focus toward our core trauma market contributed to a modest sequential improvement in rep productivity in the third quarter.
Well, we're encouraged by these early resolved.
It's important to remember that these changes are not a magic bullet, but our step into right direction, and we will continue to pursue improvements to our commercial execution.
Before providing updates on our clinical progress I want to comment on a very recent and encouraging ruling from CMS.
On November 1st CMS released the outpatient prospective payment system final rule, which determines how much hospitals in surgery centers will be paid for outpatient care provided to Medicare patients. The new rates will be effective January onest 2020.
And this update CMS has separated direct suture nerve repairs from repairs with conduit and Allograph.
And updated the rates to reflect the diversity of cost of these procedures.
The rate for direct repair, where we do and conduit and allograph payment rates were increased compared to the 2019 rate.
CMS also recognized allografts repair as device intensive leading to a more significant increase in payment to surgery Center.
Although see I'm afraid only applied to Medicare cases, which represent a small percentage of traumatic injuries. The changes. The Pos is positive as it reflects the evolution of nerve repair adoption and private payers are often influenced by the analysis and decisions made by CMS.
Turning now to our clinical progress.
As of the third quarter, our Ranger registry has now been rolled over 1900 advanced nerve graft repair and continues to provide significant new evidence in the management of nerve injuries.
Data from the registry continues to demonstrate meaningful recovery treating a variety of nerve injuries and gap link.
The data on advanced nerve graft demonstrates the ability to restore sensory and motor function and shows positive outcome, while eliminating the doner, thank morbidity associated with autograft.
Surgeons are using this clinical data to better understand nerve repair outcomes and to expand their treatment algorithm.
In September we attended the 2019 meeting of the American Society for surgery. The hand, the meeting included several events and presentations regarding improved nerve repair technique using the oxygen portfolio.
These presentations included a range or data update a 511 upper extremity nerve repair.
Findings demonstrated a consistent meaningful recovery rate of 84% for advanced nerve graft across the study.
Findings from the match study were presented at a SSH as well.
As a reminder of the match arm of Ranger serves as a contemporary cohort control.
Dividing conduit, an autograph data from participating center.
Finding from the match studies show a statistically significant improvement for advanced nerve graft as compare to synthetic conduit in three essential areas the rate of recovery. The overall degree of recovery.
And in the average recovery a static two point discrimination acai sensory measure in the hands.
The study found that in digital nerve gaps less than or equal to 14 millimeter advanced demonstrated meaningful recovery rate of 92% as compared to 67% for conduits.
And gaps between 15 and 25 millimeters, that's demonstrated a meaningful recovery rate of 85% what conduits were found to be 45%.
These outcomes are consistent with published literature for synthetic conduit and advance.
In addition to the match conduit study preliminary analysis of advanced nerve graft and the matched nerve autograft repairs.
On the outcomes and recovery rates were comparable between the group.
The mats Autograft arm continues to enroll and we anticipate enrollment to be completed in late 2020.
Our recon study continues to enroll and we remain on target to complete enrollment of a total of 220 subjects by the end of summer in 2020.
We continue to be the leading companies solely dedicated to restoring quality of life for patients suffering from peripheral nerve damage.
We are advancing this mission through pursuit of our strategic initiative, which we refer to as our five pillars of growth.
We have already provided updates to three of these pillar and I'd like to briefly touch on the remaining two.
Just as a reminder, our five pillars are building market awareness.
Educating surgeons in developing advocate.
Growing the body of clinical evidence executing on our sales plan and introducing new products and expanded applications in nerve repair.
Our commitment to educate surgeons and develop advocates continued in the third quarter as we conducted for national education programs, including one Oh I'm a specialty program.
These surgeon led event focused on advances and best practices in nerve repair with participating surgeons, gaining additional confidence and nerve repair technique.
On average, we see accident product utilization from a surgeon into from surgeon attendee more than double in the six month after they attend the program.
We plan to conduct a total of 25 national education programs, including six Fellas program by the end of 2019.
We remain committed to educating the next generation of nerve surgeon and expect to train three quarters of all hand, and micro surgery Fellows this year.
We previously announced several foundational initiatives to introduce new products and expand the application of our portfolio into the surgical treatment of pain.
Symptomatic and aromas, our common source of chronic pain following traumatic injuries orthopedic surgery.
Surgeons can surgically removed been aroma and repair the resulting nerve injury using our products.
We see significant interest among surgeons and treating this underserved patient population.
We recently initiated Mark in development efforts with a limited number of surgeons to increase the identification and referral of number neuroma patients for their evaluation and treatment.
We expect to expand these efforts with a broader launch into pain with our current hand, and plastic surgeon customers in the first quarter of 2020.
Additionally, we have completed enrollment of the pilot phase of repos, and we have initiated enrollment of the pivotal phase of the study.
Poses a prospective randomized controlled study evaluating the use of axoguard nerve cap and the management of painful in the Roma as compared to a standard directed me procedure.
Before I hand, the call over to Pete.
I want to reiterate that I'm pleased with the progress we've made as we continue to execute against our strategic initiatives in this large and developing market.
Our rebalanced effort in our core trauma market has started to show improvement and we expect to see this continue over the next several quarters.
I am confident that we're building strong capabilities to drive long term sustainable growth across our nerve repair application.
Now I'll turn the call over to peak for a review of financial highlight Pete.
Thanks, Karen third quarter revenue grew 26% to $28.6 million revenue growth was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix.
As in prior quarters, our revenue growth was largely driven by increased revenue in active accounts and the addition of new active accounts, we had a net sequential increase of 29 active accounts than in Q3 and now have 791.
An increase of 60% over the prior year. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products can begin to incorporate them into their treatment algorithm.
Gross profit for the third quarter was $24 million at 25% increase compared to Q3 of 2080.
Gross margin was 84.2% for Q3 compared 84.7% in the prior year.
Total operating expense in the third quarter was $30.2 million up 26% over the prior year.
Increase includes and investments in our expanded commercial capabilities as well as increased investments in clinical R&D general corporate expenses associated with our growth.
Operating expenses also include non cash stock compensation expense of $2.4 million in the third quarter compared to $2.2 million in the prior year.
Sales and marketing expense in the second quarter was $18.2 billion up 25% over the prior year as a percentage revenue sales and marketing expense in the quarter decreased to 64% compared to 65% in the prior year.
Research and development spending in the second quarter was $4.2 million compared to $3.3 million in the prior years third quarter.
Our increased investment in R&D includes additional clinical in product development programs as well as expenditures supporting RBL a for our advanced nerve graft.
As a percentage of revenue R&D expense for Q3 was 15% consistent with the prior year.
General and administrative expense in the third quarter was $7.7 million up 28% over the prior year. The increase includes higher compensation expenses, including higher noncash stock compensation and litigation and related costs.
The percentage of revenue Gina expense in Q3 was 27% consistent with the prior year.
Net loss in the third quarter was $5.6 million or 14 cents per share compared to 4.1 million or 11 cents per share in the prior year.
Excluding the impact of noncash stock compensation as well as litigation and related charges adjusted net loss and loss per share in Q3 of 29 team was $2.6 million.07 per share compared to $1.9 million.05 per share in the prior year.
Adjusted EBITDA loss in the quarter, which also excludes the impact of stock compensation litigation and related charges was $3 million compared to an adjusted EBITDA loss of $2.4 million in the prior year.
On our balance sheet and I'll get back as soon as I can.
On our balance sheet, we ended the quarter with $106.1 million in cash cash equivalents and investment compared to $109.1 billion at the end of Q2.
Turning to our guidance as Karen mentioned, we are reiterating our 2019 revenue guidance of between 106, and a $110 million and we continue to expect gross margins will exceed 80%. Additionally, we now expect to have between 105 and 110 direct sales reps by by year.
When compared to our previous expectation of at least a 115 direct sales reps by the end of year.
In the third quarter, we continue to make investments across the organization to build a foundation for long term sustainable growth.
We're also pleased with the moderation of spending growth over the last two quarters. Following a year of significant investments, we will continue to invest in our commercial team and broader capabilities to drive topline growth. However, we also expect these investments to deliver near term results and ultimately drive leverage in the.
<unk> business model.
And with that I'd like to hand, the call back over to Karen Thanks Pete.
Acted in remains the leading companies solely dedicated to improving the quality of life for patients suffering from peripheral nerve damage.
We believe that we're building a foundation based in science and clinical outcome that will allow us to address these important unmet clinical challenges.
We're confident that the underlying fundamentals driving our business are strong and we believe that the continued execution of our strategic initiatives will deliver long term sustainable growth.
I want to thank our investors their ongoing support.
And the accident team for their commitment to our values and mission to revolutionize the science of Nervy car repair.
Before taking questions I'd like to end our prepared marks remarks by featuring a patient Jessica please quality of life was improved by nerve repair using the accident algorithm.
After receiving a breast cancer diagnosis in June 2017.
Jessica underwent a grueling five months of chemotherapy, followed by a double mastectomy the day after Christmas.
Well, she brave through treatment to save for life.
She worried about what life would be like after cancer.
During effect to me when the breast tissue is removed the nerves that provide feeling to the breadth skin and nipple are also suffered.
Winners are severed nerve signals are disrupted the typically results in numbness and lost a feeling in the breast area.
I'll Jessica was planning to have a breast reconstructed she was concerned about how she would ever feel connected to a check that would be permanently now.
Thanks to advanced nerve graft and the recent station technique, Jessica Jessica surgeon was able to reconnect the nerve center chest with nerves and earn newly reconstructed breath.
Procedure ultimately allow the nurse to regenerate restoring sensation.
Jessica is now back to work as a nurse and patient advocate and can once again feel the hogs sold for two children and these were the thing she holds most precious.
As we exit October breast cancer awareness month.
We're encouraged by the response of patients and surgeon to a growing awareness of the importance of sensory restoration in breast reconstruction.
No worries about re sensation from patients like Jessica appeared in 30 media news stories nationwide last month, helping to educate women on their reconstruction option.
At this point I'd like to open up the line for questions Safi.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation John will indicate your line is in the question can you make press star too if you would like to remove your question from the Q.
For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Q.
One moment, please while we pull for questions.
The first question is from Richard Newitter of Sdd Leerink. Please go ahead.
Hi, Pete Hi, Karen this is Jamie on for rich.
No.
Just wanted to start on.
Potentially how we should be thinking about 2020.
Gross for the business.
Considering it in the context of a fast growing company like yourselves just wondering.
If you could maybe provide some color levels that on expectations on how we should be thinking about the business is at the right way to be thinking about it potentially as an at least 20% growth business or perhaps something more than 20 or 25% range just looking to get your thoughts based on some of the rebalancing that you're doing within the sales organization.
As as.
You might remember, we mentioned that we'd be giving our guidance for 2020 in Q1 and a and the early part of the Q1 time period. So we haven't given guidance for next year, but I can tell you that we look confidently that we continue to see accident as a high growth company that we've been building this found.
Nation reps, who will continue to expand in their experiences wells the efficiency measures that were putting in place to allow productivity to continue to improve and we think those will continue to help play out next year, allowing us to continue to show strong growth.
Okay, great and if I could just follow up on the rebalancing sales efforts.
With a lowering anticipated wrapped how in 2019 here I was just curious how we should be thinking about.
Rep productivity ramp into 2020 and potentially on new account openings in that should people be thinking about dialing back sort of their expectation to into 2020, considering how you kind of change course, a little bit within 2019 with a rebalancing efforts.
So our growth historically has been in two dimensions, it's been both in adding new active accounts and driving penetration within our existing active accounts and through this year, we've really been.
Addressing and focusing how do we drive more penetration within the active accounts. That's a part of what our rebalancing effort is focused on is is seeing that we have tremendous opportunity in the accounts that are already active.
And we will continue to have that as a focus through next year. So we will still add new active accounts that that will be an important part of our overall growth we will still add some new reps next year as well, but we will see an increasing focus on driving penetration within the.
Listing active accounts and that's where we expect to see some of the productivity gains.
Got it thanks for taking my questions. Thank you.
The next question is from Raj Denhoy of Jefferies. Please go ahead.
Hi, good afternoon.
Maybe I could a fall delivered on that last question just in terms of the idea of rep productivity, increasing perhaps you could maybe kind of ground us in terms of you know there in Europe . The reps for you have currently and when you look at the you are the ones that had been with you for longer you know how does the productivity actually look you know in those more experienced most folks relative to some.
It might be newer to the organization.
So if you look at our sales organization, we still have a little over half of the sales organization to spend with us for less than a year.
Slowing rep hiring will help to shift a bit of that balance, but we also expect to see efficiencies occur through many of the other initiatives that we've done part of this is the rebalancing of the sales team with effort.
That redundant efforts between the on the specialty team as well as the full line Rep and other things that we've talked about like the geographic review of the territory. So that we reduced the amount of inefficient travel time that the reps have where they can spend more time in their active accounts and again our goal is to drive that penetration.
Then as active accounts and that combined with some of the coaching and training that we've put in place. This year I think gives us the a framework to be able to drive that efficiency.
Yes, so I guess I I get that you've added a lot of folks right to less than half or or or.
More than a year I suppose but when you think about somebody has been there for more than year versus someone who is just starting out just as we try and look at what a maturing salesforce could due to the revenue over the next year or to what kind of productivity increases do you typically see when someone has been there for more than a year.
So historically, we've seen it if I look back historically, we saw a substantial ramp up and productivity and growth and to grow.
For a rep, who had been with us for more than a year and was in a territory that remain.
Consistent.
And one of the things that we're doing.
As we continue to evaluate our data is we started to look and recognize that and this is where some of the redundancy came in that in this year in that group of people, who are sort of one to two years, we felt that we had redundancy with the LMS specialty team.
And that was what was reducing the productivity of that we believe that by eliminating that redundancy will restore the productivity that we saw in that group as well as the the the people with more tenure.
Okay, maybe it could well.
Well I'll ask maybe different that line of questioning, but we think about the pace of new sales reps you know it's been 2025 per year for the last couple of years.
We think about slowing the pace of new hires when you look out into 2020 do you have any.
Sort of rough.
Framework around what kind of new hires should we should look for over the next 12 months.
We'll continue to higher it will be at a slower rate than what were than what we've done over the last year. We've doubled over the last two years more than double now over the last few years and 40% plus.
Over the last few years or a couple of years and so we'll be moderating that back we'll continue to add.
But it will be it and we haven't completely settled in on what that number will be for next year.
But we'll we'll dial it in based on.
The growth metrics unforeseen on the improvements in productivity that we continue to monitor and driving the organization.
Right right I guess, that's kind of what I'm trying to get out but it didn't sound like you guys are going to give us much on that front, but the when the salesforce starts to mature over the next yeah, you're right, it's hundred and plus reps you have I mean.
I guess right now the average rep is doing kind of well less than a million dollars right around that number. It we don't have exact numbers, but something like that right does that number go to million in half does it go to you know to like what's what's the kind of sweet spot that you think these folks can get too on an average basis over the next couple of years.
Well it.
When we model that we see the opportunity per rep to come in around the 2 million dollar Mark now that we're not there yet so it will take us well to ramp so that but that's what we think it's very possible was certainly demonstrated that in a as territories have matured now as we've talked before we still.
Split territories when they become.
Very large so somewhere typically between a million and a half and two and a half million, we would split a territory.
But we believe that is the level that we think reps can get to and continue to show growth at that level.
Okay. That's helpful. Maybe just one.
All up as well so you mentioned.
Pain, you're still moving forward with with neuropathic pain.
Next year, but you said first quarter 20.
Yeah, I realize it's gonna take awhile for that to ramp and to build.
The data needed and everything that goes along with that but do you have some thoughts around what that could start to contribute just given the size of that market opportunity.
I think it's too early to give you direction on that it's an area that we think has a tremendous amount of clinical need but the roof. There rate limiting factor of the referral pathway is something I think we need to get more data on before I can give you some guidance on what they actually.
Growth rate will be.
So again clinically I think theres, a tremendous opportunity, but we're factoring in its a modest contributor for next year.
Okay fair enough. Thank you.
Thanks, Rob.
The next question is from David Turkaly of JMP Securities. Please go ahead.
Yeah, Hi, it's actually 10 on for Dave Thanks for taking the question.
First off Hey, just on the contribution to sales growth.
Second quarter, you mentioned mid single digit net price increase can you just give us an idea of what this effect was this quarter or rather how to growth compared directionally into Twoq you. Thanks.
It's about the same so still med mid single digit.
Okay, Great and then just one quick follow up as far as Salesforce attrition.
I mentioned last quarter that you expected to be in typical 10% to 15% annual rate has this changed at all and then any color on at what point you see the most attrition in terms of number of months onboard for up thanks.
Ah So no we haven't seen any change in attrition would expect this year to continue to be in that same same sort of range.
Second question month of its person.
I don't know that we see any particular pattern on that.
So I don't have any color on that.
Okay, alright, thanks, a lot.
[noise], we have reached the end of the question answer session and I will now turn the call back over to care in January Chairman CEO and President.
Thank you Safi, well I want to thank everyone for joining us on today's call and we look forward to seeing many of you at the Jefferies London Health Care Conference later this month and at the 31st annual Piper Jaffrey Health Care Conference on December 5th in New York City. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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