Q2 2021 AxoGen Inc Earnings Call
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Greetings and welcome to the acts of Ginnie reported second quarter 2021 financial results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
The pad as a reminder, this conference is being recorded I would now like to turn the conference over to your host Pete Mariani Executive Vice President and Chief Financial Officer go ahead Sir.
Thank you Maria and good afternoon, everyone. Joining me on today's call is Karen battery acts as the Chairman Chief Executive Officer, and President Karen will begin today's call with an overview of our second quarter performance and update on our operational highlights and a review of our financial guidance I will then provide an analysis of <unk>.
Our financial performance, followed by closing remarks from Karen and the question and answer session.
Today's call is being broadcast live via webcast, which is available on the investors section of the oxygen website.
Within an hour following the end of the live call a replay will be available in the investors section of the company website at Www dot accident ex Dot com.
Before we get started I'd like to remind you. The during this conference call of 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 SEC, including without limitation, the company's forms 10-K, and 10-Q, which identify the specific factors.
That may cause the actual results or events to differ materially from those described in the east forward looking statements.
These factors may include without limitation statements related to the expected impact of COVID-19, all of our business statements regarding our growth, our 2020, 1 financial guidance product development product potential regulatory processes and approvals a P C renovation timing and expense.
Financial performance sales growth product adoption market awareness of our products data validation of our assessment of internal controls over financial reporting.
And with that I'd like to turn the call over to Karen.
Thank you Pete and good afternoon, everyone.
Total revenue for the second quarter was $33.6 million representing growth of 52 per cent compared to the friend of here.
I'm pleased with the Q2 results as our team continued to execute well and the dynamic health care market.
And the second quarter, we achieved growth across the business led by our overall growth of the repair of traumatic nerve injuries.
And they used to advance nerve graft across the application.
With more than 50000 advanced implants since launch and how does the 45 peer reviewed clinical publications featuring of an adoption of our flagship product continued to grow as surgeons adopt the accident algorithm across our full portfolio of nerve repair products.
Our commercial team remains focused on the strategy of driving deeper penetration of our customer accounts we.
We believe the these efforts have positioned the business for improving growth and the incidence of trauma and the volume of elective procedures return to normal levels.
We're pleased with the continued growth in our second quarter of our application for the surgical treatment of pain.
The removal of painful neuroma and the use of advanced or kind of the resulting GAAP is an elective procedure often perform about the same surgeons, who repair nerve injuries and our core extremity trauma fitness.
Providing an opportunity for these surgeons to expand their nerve repair practice.
Okay.
Our breadth of organization business continued to demonstrate growth at the awareness of the problem of non breast following a mastectomy.
The increase among the patients and health care providers.
Using the recent station Putney surgeons can use advanced to reconnect the nerves with the goal of restoring ceiling to the risk reconstructed breasts.
During the quarter hospitals continue to open surgical schedule for this elective procedures.
And our own of maxillofacial nerve repair business remained steady during the quarter.
The success and benefits of IMAX nerve repair are well documented and clinical studies in textbooks and we expect improved growth for these elective procedures in the second half of the year.
Turning now to commercial execution of our sales team.
We ended the quarter with 109 direct sales representatives in the U S compared to 100 of ships at the end of the first quarter and 112, 1 year ago.
We expect the end of year was 115 to 120 direct sales representatives and we plan to strategically expand our sales team during the second half of the year to support growth in 2022 and beyond.
Our direct sales channel continues to be supplemented by independent sales agencies, who represented approximately 12% of our total revenue in the second quarter compared to approximately 15% 1 year ago.
In the second quarter, our sales rep productivity continued to improve and continues to be the primary driver of our revenue growth and we both drive deeper penetration of our existing accounts and add new accounts.
Last quarter, we introduced the new account metrics that we believe demonstrates the strength of adoption and potential revenue growth in accounts that are developed and more consistent use of accident, you promise and the nerve repair algorithm.
We refer to these as core accounts.
Kind of accounts that have purchased at least $100000 in the last 12 months.
Our core accounts typically have at least 1 surgeon who has adopted the oxygen nerve repair algorithm for the majority of his or her nerve repair nerve injury patients and have other surgeons for at earlier stages of accident product adoption.
In the second quarter, we had 306 core accounts.
An increase of 34% from 228, 1 year ago.
Core accounts represented approximately 60% of our revenue in the quarter.
We see significant opportunity to drive increased revenue as more accounts reached this level of adoption and the surgeons within these accounts increase the adoption across our nerve repair applications, including extremities trauma pain for us and all of that.
We've also historically reported in a number of active accounts among the estimated 5100 health care facilities that treat nerve injuries in the U S.
These accounts have of lower adoption threshold of at least 6 orders in the past 12 months.
And the second quarter, our active accounts increased to 959, representing a 22 per cent increase compared to 789, 1 year ago.
The active accounts have consistently represented approximately 85 per cent of our total revenue for them with the top 10% of our active accounts, representing approximately 35 per cent of our revenue each quarter.
Turning now for our continued focus on building market awareness.
In the second quarter, we continued to utilize digital marketing to supplement the efforts of our sales team to deliver important and timely nerve repair of news and content to targeted surgeons.
We were pleased with the continued high level of surgeon engagement with our email campaigns during the quarter and our surgeon customers continue to participate in our nerve matters online searching community discussing their use of peripheral nerve injury solutions. The community has grown to over 3400 surgeons as we exited the first half of the year.
We also continued to increase awareness of nerve repair with patients through our direct to patient marketing campaigns, which were successfully which successfully increased visits to our recent patient dotcom and rethink pain Dot com website during the first half of 2021.
As the leader in nerve repair, we continue to invest in surgeon education and advocate development, we kicked off our second annual masterminds program in April of providing a series of virtual education events for emerging leaders in nerve repair.
We remain committed to providing education and training for each class of fellows.
And as in prior years, we've trained more than 3 quarters of the hand, and microsurgery Fellows and the class of 2021 through a combination of local in person hands on labs and virtual programs.
We're planning a safe return to in person programs with 5 Fellows education events currently scheduled for the second half of 2021.
Beyond the surge of fellowship, we provide support for the transition to practice and I'm pleased for the majority of the new hand surgery of attending from the 2020 class have for.
So for cases, using our nerve repair products following the completion of their fellowship trained.
As we carefully returned the live programs, we will be offering of a surge of educational event at the upcoming 76th annual meeting of the American Society for surgery of the hand conference in September in San Francisco, our lateral explore practical solutions for upper extremity trauma through lecture enhance on the category.
Along with case review and discussion.
We continue to expand our body of clinical evidence in support of our product portfolio and increasing surgeon adoption.
Our Ranger and match registry has continued to enroll with over 2400 nerve repair and now enrolled in Ranger.
In 2020 analysis of the match registry.
Which is the comparative population of conduit and autograph of subjects for Ranger demonstrated that advanced nerve graft outcomes were statistically better than conduit and where silver similar to those for autograft.
Data from these 2 clinical programs continues to play an important role in informing surgeons clinical decision making.
Our recon study remains on schedule after completing enrollment of 220 subjects in July of 2020 as.
As a reminder, <unk> is our phase III pivotal study supporting our biologics license application or BLA, which will transition of our advanced nerve graft from the section 361 tissue product to of section $3.51 biological product. The study is progressing well and we now anticipate the final follow up visit to occur in the coming <unk>.
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The topline study data readout is expected in the second quarter of 2022 and will be followed by filing of our BLA in 2023.
Okay.
Enrolment in the comparative phase of Repos are study of Mastercard nurse cash compared to standard of treatment for sense of symptomatic neurons neuroma is well underway and we expect enrollment to be completed in Q1.2022.
And the study data readout in Q2 of 2023.
2 recent publication, resulting from a collaboration between Washington Nerve Institute, and Washington University bring to life, the significant negative impact of chronic nerve pain on patient quality of life and the economic burden associated with managing these injuries.
Both of these manuscripts address the role of peripheral nerve surgery in the treatment of chronic nerve pain.
Finding the surgical intervention can significantly improve patient quality of life and the timely surgical referrals are associated with the reduction in the overall economic burden, especially compared to conventional non surgical management of the pain.
This data helps to inform surgeons and referring clinicians on the growing role of the surgical treatment for chronic nerve pain.
Uh huh.
As we advance the science of nerve repair, we remain committed to investing the time and resources necessary to provide meaningful and impactful clinical evidence on the utility of our nerve repair portfolio.
Nerve regenerates slowly, which often necessitates long follow up times to assess treatment effects and gather the meaningful clinical data that surgeons payers and regulators have come to expect when making critical care decisions.
Our retail the Ranger studies highlight the significant amount of time effort and expertise required to conduct the clinical research and peripheral nerve for me.
The kind of study began enrollment of approximately 6 years ago and the Ranger registry began enrollment more than 10 years ago.
And Ranger many of the nerve injuries have follow up assessment periods of up to 36 months to fully appreciate the impact of the repair.
We're fortunate to have an established body of clinical evidence supporting advanced nerve graft and.
And we remain committed to obtaining the clinical evidence to demonstrate the safety performance and utility of our nerve repair solutions.
I'd like to take a moment to comment on the proposed changes in CMS reimbursement rates for nerve repair in the outpatient setting for 2022.
Well the proposed increases for 2022 are modest at approximately 3% across most nerve repair procedures.
We continue to be pleased with the significant increase over the last 3 years for repairs utilizing an implant.
The Medicare patients represent a relatively small percentage of trauma cases commercial payers often follow the lead of CMS.
These reimbursement changes make simple nerve repairs economically feasible in the ambulatory surgery center setting and we believe we are well positioned with our full portfolio of products to support nerve repair and all of surgical sites of care.
Before I turn the call over to Pete I'd like to spend a moment discussing our outlook for 2021, including our updated financial guidance.
We're confident that our commercial execution combined with our substantial investments in clinical data over the past decade, we will continue to support surgeon adoption and our long term growth as we continue our mission to revolutionize the science of nerve repair.
On the strength of our first half results were.
We're increasing our financial guidance for the year.
We now expect that full year 2021 revenue will be in the range of $134.5 million to 137, and a half million dollars versus the prior range of $133 million to $136 million.
And we continue to expect full year gross margin to remain above 80%.
This guidance reflects our optimism in the business as we continue to monitor the impact of Covid variance on procedure volume and surgical capacity.
As we look forward for 2022 and beyond we continue to view ask Jen as of long term growth company delivering sustainable annual revenue growth in the high teens to low 20%.
I'll now turn the call over to Pete for a few for a review of the financial highlights.
Thank you Karen first quarter revenue increased 52% to $33.6 million, our revenue increase for the quarter was the result of of 40% increase in unit volume.
80 per cent benefit from changes in product mix kind of 4% increase in price the growth in unit volume and mix is primarily attributed to growth in our core and active accounts and reflects the initial impact of Covid, 19, pandemic, which negatively impacted procedure volumes and revenue.
The second quarter of 2020.
On may 17th we announced that we will suspend the market availability of our volume soft tissue membrane effective June 1.2021 pending the ongoing discussions with the FDA regarding the regulatory classification of the Baas and the.
Second quarter of volume revenue was approximately $1.8 million, representing 5 per cent of total revenue.
Gross profit from the second quarter increased 60% to $25 million compared to $16.5 million in Q2 of 2020.
Gross margin was $78.9 per cent for Q2 compared to 74, 7% in the prior year gross margin would've been approximately 83, 1% excluding the impact of a 1 time charge of $1.4 million free.
Reflecting the write down of the inventory and production costs related to the previously disclosed suspension of market availability of wallboard.
Prior year gross margin was negatively impacted by lower revenue and a $1.6 million charge for increased inventory reserves and suspension of production in response to the market impact of COVID-19.
Total operating expense from the second quarter increased 36% from $33.6 million compared to $24.8 million in the prior year.
Operating expenses in the second quarter included $3.8 million of noncash stock compensation compared to $2.2 million in the prior year.
The increase in total operating expenses, including stock compensation reflects the return to more normalized spending levels over the past few quarters. Following the steep reduction in spend in Q2 of 2020 as a result of the company's cost mitigation initiatives.
At the beginning of the pandemic.
Sales and marketing expense in the second quarter increased 35% to $19.3 million compared.
Compared to $14.3 million in the prior year.
As a percent of total revenue sales and marketing expenses decreased to 57% for the 3 months ended June 30 of 2021 compared to 65% in the prior year.
Research and development spending in the second quarter increased 41% to $5.7 million.
Compared to $4.1 million in the prior year research and development cost include product development, including the non clinical expenses in support of our BLA for advanced nerve graft.
And expenses for all clinical research.
Product development expenses represented approximately 64% of the total R&D in the first quarter compared to 50 per cent of the prior year, while clinical expenses represented the remaining 30%, 36% in Q2 of 'twenty, 1 compared to 50% of the prior year.
The increase in product development expenses reflect the increased spending in specific programs, including the BLA for advanced nerve graft and the next generation of Vance products. Additionally.
Additionally, pandemic related restrictions lowered spending on certain clinical study programs beginning of March of 2020.
As a percentage of total revenue research and development of expenses were 17% in Q2 compared to 18% in the prior year.
General and administrative expenses in the first quarter increased 35% to $8.7 million for 26% of revenue compared to $6.4 million or 29% of revenue in the prior year.
Adjusted net loss and net loss per share in Q2 of 2021 was $3.7 million and 9 cents per share compared to adjusted net loss and loss per share in the prior year of $5.9 million and 15 cents per share.
Adjusted EBITDA loss from the quarter was $2.4 million.
Compared to an adjusted EBITDA loss of $5.7 million in the prior year reconciliation of these non-GAAP financial measures to GAAP can be found in today's earnings release and on our website.
The balance of cash cash equivalents of investments on June 30 of for 2021 was $106.2 million compared.
Compared to a balance of $97.2 million at the end of Q1.
The $9.7 million increase includes $15 million of additional debt proceeds drawn from the company's debt facility with Oberland capital on June 30.
Net operating cash flow in the quarter of $1.2 million, partially offset by facilities capital expenditures of $7.2 million, primarily for our new biologics processing center in Dayton, Ohio.
And we continue to expect completion of the Dayton facility. Later this year, followed by a 1 year validation process and expect to begin production in the New center in late 2022.
Year to date, we've spent approximately $9.1 million on this facility and continue to anticipate total capital expenditures of approximately $26 million for this facility in 2021.
Additionally, we expect to continue ramping investment in clinical trials product development programs marketing and administrative initiatives all of which are key to driving our long term growth as a result, we anticipate the operating expenses will increase sequentially in the we will continue to see moderate operating cash.
Cash burn in 2021.
Turning to guidance as Karen noted earlier, we are increasing our revenue guidance and now expect full year 2021 revenue to be in the range of $134.5 million to $137.5 million, an increase from our previous range of 133 million to 136 million.
Additionally, we continue to expect full year gross margin to remain above 80%.
This guidance reflects our optimism in the business as we continue to monitor the impact of COVID-19 variance on procedure volumes and surgical capacity. This guidance also assumes that avaya is non commercially available for the remainder of the year.
As we look toward 2022 and beyond we believe the strength of our strategic plans the execution in this underserved healthcare market will allow us to continue to be of long term growth company delivering sustainable annualized revenue growth in the high teens to low 20%.
And with that I'd like to hand, the call back over to Karen.
Thanks Pete.
I'm proud of the achievements of the entire oxygen team in the second quarter and first half of the year.
We remain committed to delivering our innovative nerve repair solutions to patients surgeons and hospitals and I believe we are well positioned for success in 2021 and beyond.
At this point I'd like to open up the line for questions Maria.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad. The confirmation tone will indicate the your line is in the question of Kipp you.
You May press star 2 if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
1 moment, please while we poll for questions.
Our first question is from Brandon Folkes with Cantor Fitzgerald. Please proceed with your question.
Hi, Thanks for taking my questions and congratulations on the very good quarter.
First of all.
On the full year guidance range, just any pushes and pulls in terms of the assumptions in that full year range.
And then secondly, I'm of course of the cadence in the back half of the year for the group.
In the form of being a little bit less elective and.
You haven't relied historically on the heavy for Q is that the same thinking for 2021 I'm just any color just given the uniqueness of the times and then.
Yeah, because the 3.2 summer activity that you saw in July because that's in line with prior years and given that is it fair to think that's true.
Maybe the best quarter, just true to that increased activity. Thank you.
Thanks, Brian and thanks for the question, Yes look first of all we're just.
We're pleased with the overall execution of the business.
We're continuing to make very good progress.
This market within our accounts and we're happy with the growth we had here through the first half and we believe we will continue to see growth.
The nice growth in the second half of the year as well as far as puts and takes goes I mean I think.
Highlighted in my prepared remarks.
That we had $1.8 million of alive.
Revenue in the second quarter, and we've always expected the debt that we would not have the wide revenue in the back half that's always been part of our assumption so as youre thinking about your model.
There is that put and take to think about but overall in the market.
I think we saw good progress through the second quarter I think our experience in the second quarter is very much like everyone else the scene and we do think that the recovery is continuing.
It's not as if and this is consistent with what Youre hearing from everybody else, it's not as if the.
There was the full recovery in Q2, it's still happening and we'll see that extend.
In the Q3 and likely into Q4 as well.
Alright, Thank you very much.
Okay.
Our next question is from Anthony Petrone with Jefferies. Please proceed with your question.
Thank you and congratulations.
Maybe just Pete on the follow up to the to the initial question just when you look of trauma cases.
Obviously, that's being tracked and it looks like it was sort of mixed in the quarter from <unk>.
From competitive calls we've been on in the past week or so the way.
Where do you think U S trauma cases are versus pre pandemic levels of OE, even yet overall the trauma cases or do you think we're still at some discount.
When do you think we will get to even so just the clean that up a bit and then on on the core accounts.
Sort of update when we think about those accounts now doing 100000 in trailing 12 month revenue just curious as to where do you think.
The average overall core accounts.
Contribution can go as this new strategy of going deeper into place. Thanks.
Great well.
Actually the trauma is not back to pre pandemic levels.
The people's activity, well, improving and increasing.
And then there's the resultant level of trauma associated with that.
It has been getting better.
Terms of activity. So therefore, the trauma cases have increased.
The increase some of them, they're not back to what we would consider normal for this time period.
The difference that we see compared to obviously early last year is debt well some elective procedures and the hotspots are being delayed what we arent seeing in trauma cases being delayed.
Hospitals are looking to continue to prioritize those as long as they have really any kind of surgical capacity. So we have.
<unk> been less effective than elective procedures in our trauma business.
In terms of the question about the core accounts just to reminder of car count as a minimum of $100000 in the trailing 12 months, but if you just do.
Do some math to think of it as 60% of our business you can see that the average is obviously higher than that.
Our highest accounts for over $1 million in that in that category and we see that we have room, even to grow the highest accounts. So we look to continue to drive penetration Thats, where we think we get the biggest dollar impact.
And then continue to add more core accounts as we take if you think about our progression of taking active accounts. The core accounts. So they move up into that higher region, and we continue to develop new accounts to move them into active we see this as the total expansion as we drive penetration.
Okay.
Alright, our next our next question is the J P. Morgan with SBB Leerink. Please proceed with your question.
Hey, guys, Thanks for taking hi, Jamie.
So you guys just touch on the trauma market I'm curious just how the.
The progression of the other markets is going in the second quarter and kind of how to think about the outlook between the surgical treatment of pain brass and all of that that in the back half of the year and you know if those markets arent back the normal either yet, which you know are I'm, assuming they are not.
You know when can we expect that the more normal levels in those market.
Sure.
If we look at each of the segments.
Breast reconstruction nerve station we.
We have had what I would call on the air pocket of the patient flow that.
That occurred because women didn't have mammogram and have preventive care because they didn't have diagnoses of.
Of tumor and they didn't have an effect of me and those things were delayed so there with this air pocket of of patient flow.
We believe we're through that.
And and see breast reconstruction ramping back up.
That is of course of tempered as the is an elective procedure that takes quite a bit of all of our time. So in areas that are of hotspot.
And Thats, a very regional regional determination, but areas that are of hotspots for COVID-19, we see the cases in those areas going down for a period of time, there delays, they're not lost for those cases of delayed until they have more capacity in the surgical capacity of the hospital.
So what do we think will happen for the rest of the year of overall, we think we're going to be going through these these rolling pockets of the impact from Covid.
That it will be manageable in the same way that we've managed over the last 12 months that the overall surgical impact will be less than what we saw over the last year and in general all of these will all of the electric procedures will be increasing through the year.
So we think the breadth of organization, we'll be continuing to ramp through the back half of the year.
Oral maxillofacial, we've seen has been very flat of ethics, we've mentioned before it's been our slowest market to recover with a significant patient reluctance to come in and have surgery.
And the sort of invasive surgery of the mouth.
Of that we do expect it to start to ramp back up in the back half of the year, but it's been relatively flat through the first half of the year and the surgical treatment of pain are sort of hard to say, what's normal because that was a new introduction for us really focusing on it last year. It has continued to grow but of course off of.
Really small base and that we really launched accident tariff cap and a focus on neuroma management only of the beginning of last year.
So while at the small segment, we continue to be pleased with the adoption and interest from surgeons and expanding into the surgical treatment of pain.
Got it that's helpful. And then I think you're referring to allude to that before with your commentary just on the courthouse, Karen but you know is bringing on the new incremental surgeon or new accounts versus just getting an existing active user to do more cases more needle moving in terms of driving the growth.
And kind of.
Delivering as you talked about the sustainable high teens, the low twenty's annualized growth. Thanks.
Yeah the the.
The best opportunity for us.
Is is to continue to drive penetration within existing user out of an existing accounts.
Adjusted from them.
Continuing to move the needle that's the thing that is the biggest impact, but obviously, we're not only doing that we continue to focus on the strategy of this dose we need to continue to expand out our footprint. So that our users can use our products in all sites of care.
The nerve repair is done predominantly in the hospital based centers, but it's moving to ambulatory surgery centers, and we need to be positioned to be able to support that and we believe with the product portfolio that we have we are well positioned to be their choice there.
Partner of choice in all of their nerve repair regardless of the site of care. So we continue to work in all of those areas of expanding and adding new accounts.
At the same time that we're driving penetration with existing users and existing accounts.
Thank you.
As a reminder, if you would like to ask the question. Please press star 1 on your telephone keypad.
The moment, please as we pull again for questions.
Okay.
Yeah.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to call turn the call back over to Karen Saturday for closing remarks. Thank.
Thank you Maria.
Thanks, everyone for joining us on today's call. We look forward to speaking with many of you virtually at the Guggenheim Med Tech Disruptor summit on August 9.
Canaccord Genuity annual growth conference on August 11, and the Morgan Stanley Global Healthcare Conference on September 9 of the Cantor Fitzgerald Global Healthcare Conference on September 27, and the Jefferies London Healthcare Conference in November Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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