Q4 2021 AxoGen Inc Earnings Call
[music].
Greetings and welcome to the oxygen incorporated fourth quarter 2021 conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the final presentation. As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Ed Joyce accidents director of Investor Relations. Please begin Mr. Joyce.
Thank you Hillary and good afternoon, everyone. Joining me on today's call is Karen data Ray <unk>, Chairman, Chief Executive Officer, and President and Pete Mariani, Executive Vice President and Chief Financial Officer.
Karen will begin today's call with an overview of our fourth quarter and update on our operational highlights and our guidance for the year. Pete will then provide an analysis of our financial performance followed by clothing marks from Karen in a question and answer session.
Today's call is being broadcast live.
Live via webcast, which is available on the investors section of <unk> website within an hour of the end of this call a replay will be available on the investors section of the company's website at Www Dot Acrogen, Inc. Dot com before we get started I would like to remind you that during this conference call. The company will be making 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 Companys forms 10-K, and 10-Q, which identify the specific factors, which may cause actual results or events to differ materially from those described in the forward looking statements.
These factors may include without limitation statements related to the expected impact of COVID-19, and hospital staffing on our business statements regarding our growth our financial guidance product development product potential expected clinical enrollment timing and outcome.
Regulatory process and approvals.
Renovation timing and expense financial performance sales growth product adoption market awareness and our products.
Data validation, our assessment of our internal controls over financial reporting or visibility AD and sponsorship of conferences and educational events and other matters not within our control.
And with that I'd like to turn the call over to Karen Karen. Thank.
Thank you Ed.
And good afternoon, everyone.
Our total revenues for the fourth quarter was 31, and a half million dollars, representing a 3% decline versus the prior year period.
Excluding the impact of revenues from advanced soft tissue membrane and both years revenue for the quarter was approximately flat year over year.
Although we saw sequential improvement in revenue in November .
Variant negatively impacted procedure volumes and hospital staffing in December which negatively impacted our revenues for the quarter.
For the year, we achieved revenue of $127 4 million and.
An increase of 13% over the last year.
Losing the impact of the five revenue increased 15% year over year.
I'm proud of the growth we were able to achieve despite the ongoing challenges of Covid and hospital staffing shortages and.
And we believe more surgeons and accounts recognize the value actually can provide.
We had an excellent year engaging and educating surgeons using a combination of in person and virtual programs and.
And we again met our annual goal of training more than 75% of hand, and microsurgery Fellows.
We're confident that we've built the right organization and a solid foundation of clinical evidence that will allow us to deliver sustainable long term growth as the impact of Covid Wanes and hospital operating environment improve.
Yeah, almost non related challenges we faced late in the fourth quarter continued through the early part of Q1.
Like all of you. We're encouraged by reports of declining Covid rates in recent weeks. However, we believe it will take longer for hospital staffing challenges to improve and for surgical schedules to normalized.
As a result, we are measured in our outlook of the pace of procedure volume improvement in the first half of the year compared to 2021 and anticipate a return to more normalized growth rates in the second half.
Commercially we remain focused on driving deeper penetration into customer accounts, while also continuing to add new accounts.
We've achieved success with this strategy as demonstrated by the growth in our active and core accounts.
It helps us frame and monitor our growth as it were.
A reminder, active accounts have ordered at least six times in the last 12 months and may still be in the early stages of adoption.
Core accounts represent more penetrated account defined as those that have greater than $100000 in revenue in the trailing 12 months.
We ended the year with 951 active accounts up 6% over the last year and 294 core accounts up 9% over the last year.
Active accounts typically represent about 85% of our total revenue with the top 10% contributing about 35% of revenue.
Our core accounts continue to represent about 60% of our revenue.
And typically contain at least one surgeon who has adopted the oxygen nerve repair algorithm for a significant portion of his or her nerve injury patients.
Leveraging this search and success with our product we focus on going deeper with that first surgeon and gaining adoption by additional surgeons.
We have significant opportunity for growth within our core accounts by more deeply penetrating the treatment of traumatic injuries and continuing to expand into other nerve repair applications, including breast Oh, a mess and the surgical treatment of pain.
We ended the year with 115 direct sales representatives, an increase of six during the quarter and up from 111 a year ago.
We believe we have an established and well trained sales footprint and expect that our growth can be delivered primarily by improving sales rep productivity.
At the same time, we will continue to monitor and evaluate our sales territories for capacity and growth opportunities and anticipate increasing our sales team by five to 10 sales reps this year.
Our direct sales force continues to be supplemented by independent sales agencies that represented approximately 10% of our total revenue in the fourth quarter.
We continue to build market awareness through numerous initiatives across our applications.
For example, we're employing direct to patient educational campaigns to increase awareness of the potential for nerve repair procedures to improve outcomes for patients with breast cancer and those suffering from chronic neuropathic pain.
Over the last few years, we've been very successful growing the number of patients visiting our recent station website to learn more about the problem of breath numbness post mastectomy and the potential for nerve repair to restore sensation.
In the fourth quarter, we launched an educational animation to help illustrate the problem with post mastectomy numbness and its impact on quality of life as well as how recent session maybe a potential solution.
Through these awareness efforts searches report that an increasing number of their patients are expressing interest in returning sensation for a more complete breast reconstruction.
Leveraging our success with direct to patient educational campaigns for recent session. We're following a similar strategy to increase visitors to our rethink pain website to raise awareness of the surgical treatment of pain as a potential solution for patients suffering from chronic neuropathic pain and.
In 2020 , one we initiated a partnership with the U S paint Foundation.
Each November the foundation runs a campaign called November to explore and educate on a unique area of pain management through Webinars and social media content and more.
In November of 2021, the foundation focus its campaign to raise awareness of neuropathic pain and its treatment options, resulting in a significant community response.
Direct to patient educational campaigns will continue to be an important important in our market development efforts for the breath and paint application.
Okay.
In terms of our progress with our clinical endeavors. We continue to expect top line results of our Recon study in the second quarter <unk>.
<unk> is our phase III pivotal studies supporting our biologics license application or BLA, which will transition our advanced nerve graft from a section 361 tissue product to a section 351 biological product.
We look forward to the readout of our recon topline results. The study was designed to test for non inferiority of the primary end point static two point discrimination as compared to conduit nerve repairs.
In addition to the recap data our teams are continuing to work on other BLA CMC and documentation requirements for our facilities operations quality systems and validation as a part of our preparations for a successful application.
Do you expect to submit our BLA to the FDA in 2023.
Our Ranger and match registry continue to enroll now with over 2600 nerve repairs enrolled in Ranger.
Matches, a subset of the Ranger registry, which is a comparative population of conduit and autographs subjects for Ranger.
Readouts from this data have demonstrated that advanced nerve graft outcomes were statistically significantly better than conduit and were similar to those for autograft.
Data from these two clinical registry continues to play an important role informing surgeons and their clinical decision process.
Enrollment in the comparative phase I propose our study of <unk> nerve cap compared to standard treatment for symptomatic neuroma is ongoing.
Surgery delays have led to slower than expected enrollment and we're now anticipating completing enrollment in Q2 of this year with a topline data readout from the comparative phase in Q3 of 2023.
We've always made clinical evidence generation, an important priority and believes that our collection of meaningful data publications is the most comprehensive in the area of peripheral nerve repairs.
Unparalleled amount of evidence in nerve repair is expected by our surgeons and pairs, when making clinical care decisions and.
As of the end of the year, we have 181 peer reviewed papers, including growing numbers.
Among all of our nerve repair application, namely trauma breast, Oh, and math and the surgical treatment of pain.
We remain committed to developing the clinical evidence to demonstrate the safety performance and utility of our nerve repair solutions to support the continued adoption of the accident algorithm across our full portfolio of nerve repair products.
I'd now like to spend a moment discussing our outlook for this year.
We expect that full year revenue in 2022 will be in the range of $135 million to $142 million.
This revenue guidance represents about 10% to 15% growth over 2021, excluding the $4 1 million of Vive revenue from last year.
Full year gross margin is expected to be above 80%.
As I noted earlier, we're being measured in our outlook for procedure volume improvement and revenue growth in the first half of the year compared to 2021, but.
But we anticipate a return to more normalized growth rates in the second half of the year.
We're confident that we've built the right organization with a solid foundation of clinical evidence that will allow us to deliver sustainable long term growth as the impact of the Covid pandemic Wayne and hospital operating environments improve.
We continue to view accident as a long term growth company delivering sustainable annual revenue growth in the high teens to low 20% range.
Now I'll turn the call over to Pete for a review of financial highlights Pete.
Thank you Darren fourth quarter revenue was $31 $5 million, a 3% decrease compared to Q4 of 2021 .
Fourth quarter revenue was negatively impacted by Covid and related hospital staffing challenges, particularly in the final weeks of the quarter.
Fourth quarter revenue includes $500000 from the reversal of a sales return reserve recorded in the second quarter of 2021 for <unk> soft tissue membrane for which we voluntarily suspended for market availability on June <unk> of 2021.
<unk> revenue in the fourth quarter of 2020 was $1 $6 million.
Gross profit for the fourth quarter was $26 $1 million compared to 27 million in Q4 of 2020.
Gross margin was 82, 8% for Q4 compared to 83, 2% in the prior year fourth quarter.
Total operating expense in the fourth quarter decreased 3% to $31 $5 million compared to $32 4 million in the prior year. The decrease was primarily due to a reduction in employee compensation were decreases in incentive and stock compensation bonus and commissions.
Were partially offset by increases in salaries.
That decrease in operating expense was partially offset by increases in professional and consulting fees marketing programs and travel and research and development projects.
Sales and marketing expense in the fourth quarter decreased 11% to $17 7 million compared to $19 $8 million in the prior year. The decrease was primarily related to lower employee compensation, partially offset by an increase in marketing programs and travel as a percent of total revenue.
Sales and marketing expenses decreased to 56% for the three months ended December 31, compared to 61% in the prior year.
Research and development expenses increased 28% to $6 3 million compared to $4 9 million in the prior year product development expenses represented approximately 73% of total research and development expenses for the current quarter as compared to 55% in the prior year.
The increase in product development expense reflects increased spending and specific programs, including our efforts related to the BLA for advanced nerve graft and the next generation of advanced products clinical trial expenses represented approximately 27% of research and development expenses in the fourth quarter.
Compared to 45% in the prior year.
As a percentage of total revenue.
Research and development expenses were 20% in Q4 compared to 15% in the prior year.
General and administrative expense in the fourth quarter decreased 3% to seven $4 million compared to $7 7 million in the prior year.
G&A as a percent of revenue was 24% in both periods.
That decrease is due primarily to decreases in employee compensation, partially offset by increased professional and consulting fees adjusted.
Adjusted net loss and net loss per share was $3 $3 million.08 per share in both fourth quarters of 2021 and 2020.
Adjusted net loss in the quarter was $1 $7 million compared to an adjusted EBITDA loss.
Of $1 3 million in the prior year. The company has updated its definition of EBITDA and adjusted EBITDA to now include amortization of the right of use assets and debt discount.
Deferred financing fees. 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 all cash cash equivalents and investments on December 31, 2021 was $93 million compared to a balance of $98 1 million on September 30th with 21.
The net change includes capital expenditures of $5 8 million related to the construction of our new processing facility in Dayton, Ohio, and $1 9 million of operating cash burn in the quarter.
And we typically see elevated operating cash burn in the first half of the year and we expect this to be the case again in 2022, we expect this to improve in the second half of the year.
Additionally, we anticipate capital expense to be up to $14 million over the course of the year for the physical completion equipment and validation of the Dayton facility, along with up to $6 million in capitalized interest through the end of the year and we expect to convert production to the new facility.
In early 2023.
With $90 million in cash our balance sheet is strong and we expect to end the year well positioned to continue funding our growth, while maintaining an appropriate level of cash.
As Karen mentioned, our guidance for full year 2022 will be in the range of $135 million to $142 million and this represents about 10% growth year over year, excluding the impact of $4 1 million of Avaya revenue.
From 2021.
We're being measured in our outlook for procedure volume improvement in revenue growth in the first half of the year compared to 2021, but we anticipate a return to more normalized growth rates in the second half of the year.
And as a matter of corporate housekeeping, we will be providing an update to our expiring shelf registration along with the filing of our 10-K in the coming days and with that I'd like to hand, the call back over to Karen. Thank you Pete.
I'm proud of our achievements this year and of the entire accident team in the face of pandemic headwinds.
We remain committed to delivering our innovative nerve repair solutions to patients surgeons and hospitals and I believe we are well positioned for long term success.
At this point I'd like to open up the line for questions Hillary.
Thank you at this time, we'll 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 tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star two.
One moment, please while we poll for questions.
Our first question is from David her colleague of JMP Securities.
Please proceed with your question.
Great. Thanks.
Pete maybe just following up on the <unk>.
Commentary on the spend.
Do you expect in 'twenty, one 'twenty two.
Adjusted EBITDA loss was close to $7 million. This year. It sounds like you still have.
Some initiatives that you're anticipating spending on Directionally I mean, you almost breakeven and you have plenty of cash but that EBITDA losses. If you were.
Just commenting up or down or.
Up a little bit this year and then when the new facilities on in 'twenty. Three would you expect it to be a would you expect to breakeven.
When do I expect to be breakeven.
Sure.
Oh.
Look were.
We're headed in the right direction I mean, I think your point is right.
As we get the building up and running and as we continue to drive revenue growth I think we're certainly on the path towards a breakeven across the line but.
I'm not going to call that in in 2022 we're not going to give that type of outlook, but certainly.
You know we're in a good position from a spend perspective, we can.
We've got some initiatives and we're continuing to invest in around the BLA product development and other items.
And we think we're in a good position to manage spend well through next year and then into 'twenty three.
Yeah, and I don't think anyone would be super surprised about the measured sales outlook is a lot of companies are kind of.
Our forecast and that at least in the first half of the year.
Could you just remind us of the recon readout like what are we anticipating there I know you say in the second quarter.
Is it just it will just be a pea or are you going to do a call or like what are the plans right now.
Yeah, well, we'll do we're going to do a press release, and we will schedule a call.
As soon as we have the information available we'll be excited to talk about that.
Yeah.
Thank you very much.
Yes.
Our next question is from Daniela on policy of SP SBB Leerink. Please proceed with your question.
Hey, guys. This is Aaron on for Danielle. Thanks, So much for taking our question and I was just hoping you guys could talk about some of the trends that you saw in the fourth quarter were related to Oh, Mackay and <unk>.
Hospital staffing shortages.
And maybe how that's trended starting.
Starting heading into the first corner.
Sure.
I think we're on a pretty good trend what we measure it daily sales in November and then certainly in December started to see some substantial drop off of that especially towards the backend. This Amazon started to ramp up hospitals had the double whammy of both.
Lots of capacity constraints because of patients in the hospital because of Covid patients testing positive when they were showing that they're asymptomatic and showing up for procedures, but not able to have procedures because they were positive with veteran being sent home and then constraints in terms of staffing and that continued into January .
As Covid has the incentive rate has come down and to some extent has come down of hospital beds as well, we start to see things loosening up and getting a trending much better and we hope to see that continue to trend.
Okay great.
And then if you could just you know regarding the 2020 guidance just if you could walk us through kind of some of the assumption.
Baked in regarding you know COVID-19 .
Hospital staffing sorted out and then you know kind of what we would expect to see maybe at the upper end or lower end of the range.
I think our observation is that.
Even though COVID-19 is certainly coming down answer the scope of it is coming down hospitals are still dealing with a census that includes a lot of COVID-19 patients and we expect that to improve.
But what we also are recognizing is that the hospitals still have challenges with hospital.
Staffing.
And we think that will take some additional time for them to work through.
Look we see hospitals has been very resilient they will figure this out.
Think that in time this will move back towards what we all hope to be a more normalized situation, where surgical schedules are keeping up with the current pace.
But I think at our outlook, we wanted to just be fairly measured and assuming when that's going to happen and not get out in front of it.
We'll see how things go over the rest of this quarter and we certainly think.
Debt.
Back half of the year. This was back to more normalized growth rates for us.
Okay, great. Thank you so much for taking the questions.
Our next question is from Frank panel of Jefferies. Please proceed with your question.
Hi, guys hope everyone's doing well thanks for taking the questions here a bit of a follow up to the last question I was hoping you can maybe provide some color on rep access sort of actually exiting last year and so far what youre seeing this year and I have a follow up to that thank you sure.
Hmm.
Well through the year, we've seen rep access actually get better.
You know obviously when things were shut down completely it went down completely as as we've seen.
Hospitals become more comfortable with a with operating in a COVID-19 environment, they've allowed rep access to to occur. It does go up and down depending on what's happening with the hospital in terms of their COVID-19 constraints at the moment, if they move into crisis management than a weather extreme capacity they don't want reps.
And there.
But they're also limited in the number of procedures that they can do them, having said that I think that some of the tools that we learned in remote case coverage. During the Covid pandemic will continue to be important to us at both helps their productivity. As these are unscheduled cases, and many hospitals have put in place restrictions that I.
We're gonna be durable post all of this and that they don't want they will ask reps in for a specific case, but not allow reps to just visit deal or on a daily basis and check out the board and I think those changes are going to be more durable for the long term. So we've been very successful with the resources that we provide.
Surgeons to be able to have the access that we need in most cases.
And where we can't do that we can do them remote case coverage.
Great. Thank you for that quicker.
Quick a I guess a follow up to a prior question as well on <unk>.
E Con.
What sort of significance.
In your view how are you thinking about the significance of our positive topline read out I'm sure you're expecting at this point, but I guess really on growth.
Penetration and will the BLA BLA.
L. A approval in 2023 allow you to to charge a premium for advanced I guess in addition to what seemed like already favorable.
Reimbursement trends for Sean.
At least on the J P M presentation.
Sure well I'll start with the the pricing piece I'm being a BLA actually we don't believe we'll adjust the reimbursement of Uh huh of events. So we don't see that is impacting our pricing strategy.
We think that we've done a good job of looking at this in pricing this to be comparable to autograft. So that from an economic standpoint to hospitals. So that's a good choice for their patients to.
To switch from Autographing to two events in terms of the data read out where we're getting very excited about that I think that there's an opportunity.
Theres an opportunity for us to.
Hum too in fact showcase this with a lot of surgeons are P. I's are pretty enthusiastic about getting a chance to announce this information.
We will.
We are looking to present it later and some conferences, obviously, we'll do the short term presentation here when we when we have the data in second quarter, but we're looking for a more extended review with surgeons and some presentations at scientific conferences later this year and I think that it's going to create some buzz among our surgeon friends as they continue to think about changing.
Their treatment algorithms.
This is important really for middle adopters are early adopters and innovators.
They were willing to try advance and actually help us build this data, but middle adopters are looking for this type of level, one evidence to be confident and changing their treatment algorithms and we think it'll be helpful. As we continue to drive penetration.
And some of our core accounts to help convert those middle adopter I do want to go back real quick one thing I thought I heard you say what BLA approval in 2023, we actually plan to do the submission in 2023 and while we have an expedited review with the FDA I think we should assume right now that it'll be a year.
Year approval, just they're running a little slower and steeper given some of the other things going on.
So where we're assuming a 2020 for approval.
Great. Thank you I appreciate it.
Sure.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please I'll we poll for additional questions.
Our next question is from Djabran Ahmed of Canaccord. Please proceed with your question.
Great. Thanks for taking the question. This is Joe Brown on for Kyle I guess, one question from US in terms of backlog sort of a follow up to some of the overall dynamics seen at the end of the Q4.
Did the backlog grow this quarter, maybe has there been any sort of shift in terms of how the 2022 guide is assuming working through that backlog, obviously less of a factor on the.
On the trauma side of the business, but curious if any sort of dynamics have shifted on that front.
Yeah. Thank you for the question, we do believe that there are some deferred cases, and certainly all of our segments, but in trauma, we no longer have visibility to what those are and it really has to do with the staffing issues that they have in in the first round. If you go back to 2021 hospitals.
It turned back on they were able to run with significant overtime and pulled back these nerve repair patients very quickly and we could see a very clear spike in their business as they.
Worked off all of their deferred Ah patients in about a two to four week period.
No longer have that flexibility if they can't work them off that quickly.
Do think that there'll be bringing patients back in it and as a reminder, you can do nerve repair it's always better when it's done sooner in terms of the outcomes expected, but you can still get good meaningful recovery up to a year post the entry. So it isn't something that has to be done in days or weeks.
Better if it's sooner, but but we think it's going to be a little bit longer tail for any deferred patients.
In our and are more elective procedures like in particular breast nerdy version.
And we do have a fair number of patients who are have been deferred on their breast reconstructions D. C plant procedures are pretty resource intensive and the hospital, they're a long surgical procedure in their inpatient today and so from a resource standpoint in a hospital, they're actually some of the first ones. We see deferred every time that there.
It's been a hospital constraint and so at this point, we're having surgeons tell us that they have substantial deferred waiting lists and deferred patients, but they don't have enough block time and they are to work them off quickly. So they are telling us that it may take them as much as a year or more to work through their deferred patients.
So while we thought about that in our in our guidance am I. You know, it's also something that's going to trickle in it's not going to be a big spike.
That's helpful. Appreciate the color there Karen and then maybe if I could just squeeze a second one and the active accounts core account numbers have held relatively sort of steady now for a couple of quarters in terms of percentages of revenue I guess.
What do you need to see to start maybe getting more pull through from those active accounts into core accounts just that direct to patient marketing efforts that you alluded to does that help sort of drive that or maybe what are some other factors to consider there.
Yeah. So first of all we expect the percent of our revenue to remain approximately the same now we expect our revenue to grow up but to go up.
But the but for example, approximately 60% of our revenue coming from these core accounts as our revenue goes up its going to be primarily driven by increased penetration in core accounts and so we think that 60% number will hold approximately the same and the drivers of that are really increasingly usage.
Each of them surgeons within the accounts so.
It is.
Really that first surgeon I've described this as almost a stair step of adoption that first surgeon, who is kind of our anchor surgeon in the core count.
Some some significant adoption, but its not fully adopted we want to continue to drive full adoption with that surgeons. So that they become a champion across the full algorithm that we teach and start to move to the second and third surgeon at those accounts and in addition at our biggest accounts that can be bringing in the breast business and the surgical treatment of.
Pain those are the segments that are driven more on the patient education segments to help patients start to show up and ask the right questions to say I I think sensation is important to me in my breast reconstruction and they want to understand where I can get that done and we're more and more seeing patients showing up understanding that that is a problem and looking to have their repair done enough.
That will do the recent station technique.
Thanks for taking the questions.
Okay.
Yeah.
We have reached the end of the question and answer session I will now turn the call back over to Karen Saturday for closing remarks.
Thank you Hillary I just want to thank everyone for joining us on today's call and we look forward to speaking with you in the near future.
Okay.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
[music].
Hum.
[music].