Q3 2021 AxoGen Inc Earnings Call
Greetings welcome to accident reports third quarter 2021 financial results call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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This conference is being recorded.
At this time I will now turn the call over to Peter Mariani Executive Vice President and CFO.
Mr. Mariani, you may now begin.
Thank you Rob Good afternoon, everyone. Joining me on todays call are Karen battery accidents, Chairman and Chief Executive Officer and President.
Kevin will begin today's call with an overview of our third quarter performance and update on our on our operational highlights and a review of our revised financial guidance. I will then provide an analysis of our financial performance followed by closing remarks from Karen and a 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's website at Www Dot accident, Inc. 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 SEC, including without limitation, the company's forms 10-K, and 10-Q, which identify the specific factors that may.
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 related to the expected impact of COVID-19 on our business statements regarding our growth our 2021 financial guidance Prada.
Development product potential regulatory process and approvals APC renovation timing and expense financial performance sales growth and product adoption.
And with that I'd like to turn the call over to Karen Karen.
Thank you Pete and good afternoon, everyone.
Total revenue for the third quarter was $31 2 million, representing a 7% decline versus the prior year period.
Excluding the impact of revenues from our <unk> soft tissue membrane and deferred procedures in the prior year period revenue growth for the quarter was approximately 9% year over year.
Okay.
We're encouraged by the underlying growth in our business in light of the difficult operating environment across our industry during the third quarter.
Although we believe the incidence of trauma increased during the third quarter compared to both the prior year and prior quarter surgical schedules and procedure volumes were negatively impacted by the surge in COVID-19 cases and hospital staffing shortages.
These challenges caused some procedures to be deferred most significantly in the month of August.
We saw volumes begin to improve in September and remain consistent in October as hospitals continue to adapt to these challenges.
We view the negative impact to our procedure volumes as transitory in nature, although the timing of recovery is difficult to predict in light of the ongoing staffing shortages being experienced by many of our customers.
The continued uncertainty of Covid, 19, and ongoing product shipping and transportation challenges.
Nevertheless, we remain highly confident in our commercial execution.
Your line demand for our products and the ability of our customers to overcome the present challenges to deliver important health care to patients, including the search for a pair of nerve injuries.
We expect to see improvement in our procedure volumes as pressure on hospital operating schedules continues to abate.
The impact of the Delta variant and staffing shortages on the quarter varied across nerve repair applications.
Similar to our experience during previous searches in COVID-19 cases in hospitalizations.
Our breath on that and surgical treatment of pain applications were impacted more significantly.
The elective nature of these procedures.
Well, we believe the incidence of trauma increased in the quarter.
Our trauma business was impacted by E R and surgical capacity constraints, resulting in deferrals of nerve repair for traumatic injuries.
As we experienced last year, we would expect many of the deferred nerve repair procedures will ultimately be completed at surgical schedules improve.
However, unfortunately for patients there will be also a portion of injuries that are ultimately not repaired.
As a reminder, while optimal outcomes are achieved by repairing the nerve in a very timely manner nerve repair can result in positive outcomes months. After the injury. After the nerve is injured.
Turning now to commercial execution.
We ended the quarter with 109 direct sales representatives in the U S compared to 110, one year ago.
We expect to end the year with approximately 115 direct sales representatives as we strategically expand our sales team to support growth in 2022 and beyond.
Our direct sales channel continues to be supplemented by independent sales agencies that represented approximately 10% of our total revenue for the third quarter.
Our commercial team remains focused on our strategy of driving deeper penetration within customer accounts is a key driver of revenue growth and we are well positioned to continue to drive growth as procedure volumes recover.
Another aspect of our strategy is to increase the number of accounts performing nerve procedures using the accident algorithm.
Earlier this year, we introduced a new account metric that we believe demonstrates the strength of this strategy, which tracks those accounts that have developed more consistent use of accident products and their nerve repair algorithm.
We refer to these as core accounts.
Defined as accounts that have purchased at least $100000 in the last 12 months.
Our core accounts typically contain at least one surgeon who has adopted who has adopted the accident nerve repair algorithm for the majority of his or her nerve injury patients.
And other surgeons, who are at earlier stages of accident product adoption.
In the third quarter, we had 292 core accounts, an increase of 18% from 248, one year ago.
And down from three O six in the previous quarter.
Poor accounts continue to represent approximately 60% of our revenue.
We continue to see significant opportunity to drive increased revenue as more accounts reached this level of adoption and as surgeons within these accounts increase their adoption across their nerve repair applications, including extremities trauma pain breast and O M S.
The year over year growth of core accounts reflects our strategy to develop long term users of the accident portfolio. While the sequential decrease is consistent with the procedural impact in the third quarter.
We have also historically reported our number of active accounts among the estimated 5100 health care facilities that treat nerve injuries in the U S.
These accounts have a lower adoption threshold of at least six orders in the past 12 months.
In the third quarter, our active accounts increased to 954 reps.
Representing a 9% increase compared to 873, one year ago.
Active accounts have consistently represented approximately 85% of our total revenue with the top 10% of our active accounts, representing approximately 35% of our revenue each quarter.
Turning now to our continued focus on building market awareness.
During the third quarter, we participated in two clinical conferences the.
The 76th annual American Society for surgery of the hand, and 103rd annual American Association of oral and Maxillofacial surgeons.
We were pleased with the opportunity to engage with customers in person at these conferences and with the numerous sessions on nerve injury nerve repair and neuroma pain.
Accidents nerve repair portfolio was featured in clinical and scientific sessions at each conference and we hosted an educational symposium at the hand Society conference titled innovations in nerve surgery that transformed my practice.
We also continue to build awareness among patients of the important benefits of nerve repair and October we supported breast cancer awareness month with several activities highlighting recent station a surgical technique designed to restore sensation to the reconstructed breast post mastectomy.
To raise awareness of the surgical treatment of pain, we are partnering with the U S paint Foundation.
Each November the foundation runs a campaign called no Denver.
Were they explore and educate on a unique area of pain management, driven social media content and more this year. The foundation is focusing its campaign to raise awareness of peripheral nerve pain and its treatment options.
As the leader in nerve repair.
We continue to invest in surgeon education, and advocate development and are excited to have returned to hosting in person national search and education programs in the second half of 2020 one.
We remain committed to providing education and training for each class of fellows.
And as in prior years, we trained more than three quarters of the hand, and microsurgery Fellows and the recently graduated class of 2021.
For the current class of 2022 we held three in person national programs in the last two months and are holding to more programs in November.
This fall we are similarly return to in person national programs resurgence of all experience levels to learn best practices in nerve repair from our expert faculty.
We continue to expand our body of clinical evidence in support of our product portfolio and increasing surgeon adoption.
Our Ranger and match registry is continue to enroll with over 2500 nerve repairs now enrolled in Ranger.
In 2020 and analysis of the match registry data, which is a comparative population of conduit and autograph subjects for Ranger.
Demonstrated that advanced nerve graft outcomes were statistically better than conduit and were similar for those two those for autograft.
Data from these two clinical programs continues to play an important role in informing surgeons clinical decision making.
Okay.
Our recon study remains on schedule.
After completing enrollment of 220 subjects in July of 2020.
As a reminder, recon is our phase III pivotal study supporting our biologics license application or BLA.
Which upon approval will transition our advanced nerve graft from a section 361 tissue product to a section 351 biological product.
We have completed final subject follow up.
And we anticipate a top line study data readout in the second quarter of 2022.
Followed by filing of our BLA in 2023.
Enrolment in the comparative phase of reposed, our study of <unk> nerve cap compared to standard treatment for symptomatic neuroma is well underway and we expect enrollment to be completed in Q1 of 2022.
With a preliminary study data readout in Q2 of 2023.
I'd like to share a few highlights from our recent Ranger publication and some data presentations from this year is a S. S H conference.
We are excited to see a new publication from the Ranger investigators on the role of advanced nerve graft and nerve reconstruction following in the resection of painful neuroma.
The study evaluated twenty-five subjects with painful neuroma, who elected to undergo surgery for their neuroma pain.
The study found that 80% of subjects, who had their neuroma resected and had the resulting gap reconstructed with advance reported an improvement in their pain.
Furthermore, 88% of the subjects reported meaningful return of sensory function.
Reconstruction with advance enabled the return of function following a removal of the painful neuroma an outcome that is typically not achievable with standard neuroma resection and termination techniques.
Additionally.
A group of investigators presented on the patient's perspective of nerve autograft harvest the traditional nerve repair technique.
The study surveyed a group of patients who had undergone nerve repair with autograft and assessed multiple factors related to the donor site function and pain.
[noise] critical findings from this study included 88% of patients reported pain at the Autograft harvest site.
75% reported persistent and bothersome loss of sensation distal to the harvest site.
And 50% of the subjects reported cold and tolerance and thermal sensitivity in the harvest site land.
The findings highlight the compromise that patients and surgeons, commonly face when choosing to repair nerve injuries with autograft.
We believe that with the growing body of clinical evidence on the performance of advanced nerve graft, the increasing understanding of the true morbidity and functional lots of nerve autograft harvest.
And the benefits of early referral for nerve surgery.
Surgeons will continue to adopt advanced nerve graft as their standard of care for managing nerve gap repairs.
Collecting clinical data in peripheral nerve repair it takes a significant amount of time effort and expertise.
Actually Jim has made it a priority to build and develop the knowledge systems capabilities and capacity to deliver high quality impactful and relevant clinical evidence in peripheral nerve repair.
Nurse regenerates slowly.
Which often necessitates long follow up times to assess treatment effect and gather the meaningful clinical data that surgeons payers and regulators have come to expect when making clinical care decisions.
We're fortunate to have an established body of clinical evidence supporting advanced nerve graft.
Including 145 peer reviewed clinical publications, along with more than 50000 advance of implants since launch.
We remain committed to obtaining the clinical evidence to demonstrate the safety performance and utility of our nerve repair solutions to support the continued adoption of the accident and algorithm.
Across our full portfolio of nerve repair products.
Okay.
Before I turn the call over to Pete I'd like to spend a moment discussing our outlook for the remainder of 2021, including our revised financial guidance.
We now expect the full year 2021 revenue will be in the range of 127 million to 129 million.
First is the rent the prior range of 134, and a half million to a 137 and a half million dollars.
And we continue to expect full year gross margins to remain above 80%.
Our revised guidance reflects the extended period of impact from the Delta variant and the ongoing hospital staffing challenges, which continued to pressure nerve repair procedure volumes.
We are remaining measured in our expectations for the fourth quarter as hospitals address these challenges.
To help provide further context around our updated guidance.
We believe that the low end of our range represents a continuation of our current run rate through the end of the quarter.
Well the upper end represents a modest steady improvement as our customers continue to adapt to the challenges they've been facing.
We believe that our revised guidance for 2021 has no impact on the longer term growth outlook for our business.
Though we currently anticipate that there will be a more gradual ramp in procedural volumes, we remain confident in the growth prospects for our business.
As we look forward to 2020, two and beyond we continue to view accident as a long term growth company delivering sustainable annual revenue growth in the high teens to low 20%.
We're confident that our commercial execution.
Combined with our substantial investments in clinical data over the past decade will continue to support surgeon adoption and our long term growth as we continue our mission to revolutionize the science of nerve repair.
Now I'll turn the call over to Pete for a review of financial highlights.
Thank you Karen our third quarter revenue of $31 2 million represents a decrease of 7% versus the prior year are lower than expected revenue was the result of a 10% decrease in unit volume and a net 3% increase in changes in prices and product mix.
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Prior year revenue included approximately $3 $3 million from procedures deferred from the first half of 2020 as a result of the initial impact of the COVID-19 pandemic.
And approximately $1 5 million from <unk> soft tissue membrane for which.
For which we voluntarily suspended market availability.
As of June <unk> of 2021.
Excluding the impact of both of these items revenue growth for the third quarter would've been approximately 9%.
Gross profit for the third quarter decreased 6%.
$226 million compared to $27.7 million in Q3 of 2020 as a result of lower sales.
Gross margin was 83, 2% for Q3 compared to 83% in the prior year.
Total operating expense in the third quarter increased 13% to $32 7 million.
Compared to $28 8 million in the prior year.
Total operating expenses in the third quarter included $2 $9 million of noncash stock compensation consistent with the prior year.
The increase in total operating expenses reflects higher facilities costs as well as increased compensation travel and project costs. As we have returned 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 COO.
Cost mitigation initiatives enacted at the beginning of the pandemic.
These increases were partially offset by lower bonus commission and stock compensation charges in the third quarter, primarily due to lower revenue expectations for 2021.
Sales and marketing expense in the third quarter increased 4% to $18 $4 million compared to $17 $7 million in the prior year as a percent of total revenue sales and marketing expenses increased to 59% for the three months ended September 30, compared to 53 <unk>.
<unk> in the prior year.
Research and development spending in the third quarter increased 51% to $6 4 million compared to $4 $2 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 expense.
As for all clinical research the increase in R&D expenses reflected increased spending and specific programs.
<unk> the BLA for advanced nerve graft and a next generation of enhanced product as a percentage as a percentage of total revenue research and development expenses were 21% in Q3 compared to 13% in the prior year.
General and administrative expenses in the third quarter increased 16% to $7 $9 million or 25% of revenue compared to $6 $8 million or 20% of revenue in the prior year.
Adjusted net loss and net loss per share in Q3 of 2021 was $3 $6 million.09 per share compared to adjusted net income and net income per share in the prior year of $1 $5 million and <unk> <unk> per share adjusted.
Adjusted EBITDA loss in the quarter was $2 $5 million compared to an adjusted EBITDA of $2 $3 million in the prior year.
The 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 and investments on September 30 was $98 $1 million compared to a balance of $106 $2 million at the end of Q2. The decrease includes facilities capital expenditures of $8 million, including one.
Point 2 million of capitalized interest primarily on our new Biologics processing center in Dayton, Ohio, and net operating cash burn in the quarter of $200000.
We expect completion of the Dayton facility early next year, followed by a one year validation process and expect to begin production in the New center in early 2023.
Turning to guidance as Karen noted earlier, we are revising our revenue guidance and now expect full year 2021 revenue will be in the range of 127 million to $129 million compared to our previous range of $134 five to $137 5 million.
Additionally, we continue to expect full year gross margins to remain above 80%.
Although we remain measured in our expectations for the fourth quarter as hospitals address capacity constraints from surgical schedules, we are confident that our commercial execution and the underlying demand for our products position us to see improvement as hospitals continue to adapt to these challenges as we look toward 2020.
Two and beyond we believe the strength of our strategy and the execution in this underserved health care market will allow us to continue to be a long term growth company delivering sustainable annualized revenue growth in the high teens to low 20%.
With that I'd like to hand, the call back over to Karen.
Thank you Pete.
I'm proud of the achievements of the entire accident team in the face of the headwinds during the quarter.
We remain committed to delivering our innovative nerve repair solutions to patients surgeons and hospitals and I believe we are well positioned for success as we move through the final months of 2021 and beyond.
At this point I'd like to open up the line for questions from.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
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One moment, please pull for questions.
Thank you and our first question comes from the line of Danielle <unk> with SVP Leerink. Please proceed with your questions.
Hello. This is Aaron on for Danielle Thanks for taking our questions.
That's that's one or just a couple from me.
I was just hoping you could maybe talk about the impact of hospitals staffing shortages.
And you know if there's any thoughts that you could possibly take to mitigate these impacts.
And then also just as it relates to the mix of prestige or by setting you know was there and you know was there a certain putting even like the ASC that that was less impacted by these shortages versus the hospital.
And just you know do you expect to see a shut the procedures to the ASC.
Going forward. Thanks.
Sure.
Got that.
Great question definitely we saw impact of actually the combination of the COVID-19.
Delta variant a rise in certain parts of the country and and then complicated by the fact that the hospitals have staffing shortages and so the first thing that we saw impacted where are more elective procedures. So breast reconstruction is a great example, and that is always an inpatient procedure. It takes a lot of our time and it is.
Is deferrable.
Without significant complication to it to the patient and so that's usually for us the very first sign the hospitals or are starting to push it procedures out.
But we also saw that in the surgical treatment of pain and oral maxillofacial surgery, all of those being very elective procedures and all of them impacted and delayed as hospitals are trying to manage their our their flow.
And in the.
Trump traumatic injuries, it's actually not quite as clear.
Because it really depends on the circumstances of the hospital.
And and what they're trying to do on these more emergent procedures and so the first thing that we see and similar to what we saw last year is that these procedures were moved to alternate sites of care. So in the early days are in and some of the areas where he saw delta variant in particular are starting to creep up we saw.
An increase in move to either outpatient surgery centers or ambulatory surgery centers.
Which were less affected both by the staffing shortages.
At that stage and Delta variant, but as and Delta variant became pretty strong.
All of those staffing shortages kind of came to a head and we saw our procedures delayed and deferred even more.
So this is going on in the <unk>.
And in an ongoing basis, and we hear from company, a well Ceos of a hospital systems.
But they certainly have today's staffing problems, but there could potentially be another wave of staffing issues says.
As Delta variant wanes, but theres more resignations that may come and so we're just.
Trying to be cognizant of that and try and support the hospitals as they go through this recognizing that our elective procedures will continue to be more will continue to be deferred.
Help hospitals get through these procedures.
But they are challenged with how they are going to schedule. These procedures and so where we saw an uptick in September.
That September run right sort of ran consistent for us through October we didn't see the additional.
Pick up as in the month of October that we would have liked to have seen to have provided a little stronger outlet for the fourth quarter. So we're trying to.
That puts and takes we're looking at our current run rate and if we maintain that through the end of the year that that's pretty much defines the bottom end of our guidance and if as we expect hospitals are able to.
Get these procedures done and work through some of these challenges that they have with staffing that we'll see a moderate improvement and that kind of moves us through the top end of the range. So we're we're not trying to make in.
Any exceptional growth in Q4, and if if we see.
More procedures coming in and more quickly than that's that's going to move us up in the range.
But we wanted to sort of set the bottom end of this at a current state business.
And specifically two year deferred procedure.
We think those procedures are going to come in it's just trying to figure out what is the pace of of getting those scheduling give those procedures done last year, we saw experiences where those deferred procedures came in very very quickly, but it's Karen pointed out. These staffing shortages are causing us to be a little more measured and.
The pace at which those procedures might come back.
Great. Thanks, so much.
Our next question is from the line of Anthony Patrol and was Jeffries. Please proceed with your questions.
Great. Thank you.
First question on our end wood.
Relates first the recon study just to.
An update on next steps.
Two year and.
And just whether or not you're seeing any notable impact from COVID-19 just in terms of timelines there in in in terms of.
Just sort of FDA <unk>.
Developments during the quarter Integra had a palomino on surge mend a cellular thermal matrix products for breast reconstruction, obviously, a mixed vote from the panel.
When you look at the breast nerve physician opportunity for acts adjourn anything from that panel meeting that.
Potentially maybe a tailwind for the events business or otherwise thanks.
Okay. Thank you.
So on the recount steady again, we completed enrollment and follow up of all the subjects and so at this point, there's not an impact in hospital staffing.
Associated with this study as we have this with the Sierra to complete the data tables. So no we don't see any impact on recon.
Despite the staffing challenges at hospitals, and we still look forward to having the top line data readout and second quarter of next year.
In terms of the.
Looking at this recent panel that happened.
I think we've read through it and looked at what was going on there.
I think it is important to make sure that in communicating with these panel that it is not just a statistically significant difference, but also a clinically relevant.
And cleaning clinically meaningful and point is an important measure to put in place.
And I think in this particular case.
At least as I read the panel I think there was very thought.
Thought processes among the panel members around the presentation on clinically meaningful endpoints and so I think it's a very good reminder, to all of US that one we're doing these trials, we want to make sure that we're showing both of those points.
Fortunately for us if we've designed recon those are both baked into recon.
It's also information that we have and we are would pull data from Ranger and sensation now just support our broader label claim.
And all of that was kept in mind when we when we set those studies so.
Anticipating that we have those that information.
In a form that the panel if there is a panel that the that the panel would be able to understand it.
And if I can if I could sneak one follow up in there, which would be on the core business and kind of shifting into the core accounts that new category announced last quarter. When you think about some of the headwinds you saw in three Q Delta and staffing shortages, how did that play in those core accounts and are they.
Is there a portion of those accounts that are more insulated or was it evenly dispersed across.
The entirety of the accounts in the quarter again, the pressure's on Delta and staffing. Thanks again.
Well Delta definitely had regional differences across the country So Florida.
Tennessee that Tennessee Valley area, all of those had greater.
Impact overall on.
On volume.
And on those core accounts in those regions, but the staffing is much more broadly impacted.
If you look at it we still did show an 18% overall growth year over year in this core accounts. So we see that it's still continuing funnel and fuel for our overall growth.
On both increasing the number but also increasing the penetration or volume when that I can't remember the $100000 is a floor. It's not feeling that's just getting into that category in our largest accounts are over a million dollars.
And and so well.
While we saw staffing affecting accounts.
Across the board, we still see that distribution of driving penetration and that's as their staffing resolved. So we see that we we believe will come back up to continuing.
To drive on those two dimensions, both continuing to increase the number of core accounts taken for our active accounts and moving and decor.
And increasing the revenue per account.
Thank you.
The line of Kyle roofs was Canaccord. Please proceed with your question.
Great. Thank you for taking the question.
If we could just get a little more commentary on what you're seeing.
With respect to staffing shortages I mean, some of the students were done is the is suggesting that yes. There are stubborn shortages, but that's more related to the inability to flex for like overtime or additional operating hours, but that just the queue was full so it's hard to flex higher as reduced from Q4 is that what you're seeing or you seen.
Actual decreases in procedure volumes in.
In the market you serve.
Yeah, I'll have to give a different answer for different segments. So for those elective procedures that require a hospital stay.
Seeing that the staffing shortages are causing us to be pushed out and either not scheduled at all are scheduled way out into the future.
Because I would say more acutely the staffing shortages are in the hospital floor not necessarily of our hospitals are trying to keep dlr's moving at much capacity as they can.
Now I've talked to some hospital Ceos that have in their system, hundreds or thousands of backlog procedures that they need to get through.
So there are there are some sizable amount of backlog and what.
With the shortages are causing in the O R. As you said the inability to two flat.
Flex and create more capacity so that they can both deal with the current procedure volume and the backlog at the same time doesn't mean, they won't get to it. It's just going to be working it off will take a little bit more time.
Okay. That's helpful and then with respect to guidance I, just Wanna make sure I understand it appropriately.
If you see.
Kind of status quo, the exit rate of October for the rest of the quarter that brings you to the low end and if you see you may be some gradual improvement that takes you to the high end, but maybe just talk to us about how October trended on a month over month basis relative to September.
Yeah, we saw.
So that we saw things get better in September, but then going into October it remained relatively consistent slightly better, but still I would say relatively consistent.
So we think that and that's why we set the low end of the guidance. There is to say, let's just assume that because of these headwinds we remained flat through the quarter.
And then of course, if we can start to get the volume back up to what I would consider normal through.
Hello.
And and or start to tackle some of the deferred procedures, we would see some increasing through the quarter, which would be the higher end.
Okay very helpful. That's all for us thank you.
Thank you.
We've reached into the question and answer session I will now turn the call over to Karen February for closing remarks.
Thank you Ron.
I want to thank everyone for joining us on today's call. We look forward to speaking with many of you at the Jeffries, London Healthcare conference and at the Canaccord Med Tech Diagnostics Forum later this month. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.