Q2 2022 Paragon 28 Inc Earnings Call
One 8 million.
Representing growth of 19% compared to the second quarter of 2021.
U S growth was the result of increased revenue contribution from new product launches and benefits from recent medical education and training, resulting in strong sales force productivity gains offset partially by modest COVID-19 disruptions.
Later in my prepared remarks, I will provide more detail on the quarter's revenue growth drivers.
Second quarter International revenue was a record $5 $7 million representing.
Representing growth of 20% compared to the second quarter of 2021.
Strengthening of the U S dollar reduced our second quarter International net revenue by 10 percentage points as compared to the prior year period.
Growth in the quarter was once again, driven primarily by our three largest international markets of Australia, South Africa, and the United Kingdom.
Moving to our foot and ankle sub segment revenue trends during the second quarter of Paragon 28 experienced double digit revenue growth in each of the sub segments, including fracture ankle flatfoot, hallux, valgus, including hammertoe and charcoal anchor.
Henkel and fracture product lines, which both benefited from recent new product launches led our growth in the second quarter.
Paragons comprehensive product portfolio, which addresses each of the foot and ankle sub segments continues to be a key driver of our success.
I will now provide an update on U S revenue growth drivers, including sales force expansion Salesforce productivity, new product contributions and medical education.
Starting with the sales force we ended the second quarter of 2022 with 198, producing sales reps compared to 197% in the first quarter of 2022.
The number of producing reps can fluctuate quarter to quarter due to various factors, including among other things the seasonality of the foot and ankle market and the timing of hiring and Onboarding new sales reps.
<unk> continues to be the destination of choice for sales reps, who our foot and ankle specialists as well as reps new to the industry.
I'm excited about both the quantity and quality of reps that have joined <unk> 28 in the last year.
We expect the number of producing reps to increase over time and in the second half of 2022.
Moving to Salesforce productivity, which we define as average revenue per producing sales rep increased by an impressive 17% as compared to the prior year period.
Fueling this growth with new product launches, including nine new products. So far this year and 19, new product launches since 2020.
New product launches complemented by our medical education and sales force expansion initiatives have increased our revenue existing and new surgeon customers.
Specifically during the second quarter, we did business with 1829 U S surgeon customers, including 582 U S. Producing surgeons both records for <unk> 28, and an increase compared to the prior year period of 11% and 18% respectively.
With approximately 15000 surgeons that treat foot and ankle in the United States, we have only scratched the surface and have a long runway of growth in front of us.
Our broad and innovative product portfolio in the hands of our best in class and growing sales force combined with leading medical education and training is driving sustainable high quality revenue growth.
Speaking of medical education and surgeon training.
Most 700 surgeons attended in person F&I medical education events in the second quarter of 2022.
Bringing the total number of surgeons trained in person at F&I medical education events to almost 2200 in the last 12 months. We are very pleased with our ability to meet the very strong surge in demand for these training events leveraging our best in class surgeon training facility at our headquarters in Denver, Colorado.
Thank you to all our medical education team for their commitment and passion to improve patient outcomes, including many many weekends worked over the last year.
Building on this momentum in July we announced the launch of our new mobile surgeon training lab housing a 43 by 30 foot tractor trailer, which includes the state of the art six station Cadbury training facility. The mobile App is currently on the road and we'll be hosting over 50 training sessions and approximately 50.
<unk> during the second half of 2022.
The mobile App will highlight our broad and innovative product portfolio, including the nine new products and surgical systems launched so far this year.
Speaking of new product launches.
In mid May we expanded our soft tissue portfolio with the launch of our grappler suture anchor system.
The grappler suture anchor system has offered and peek titanium and an all suture option and a variety of sizes and configurations to address soft tissue repair and all of the foot and ankle sub segments.
In May we also launched keynote <unk> 2.0 for minimally invasive soft tissue repair for hammertoe and other complicated deformities redo.
Redesigned within angulated washer to allow for greater capture of soft tissue genotype two pointed out streamlines tension ing and improved set to the bony surface.
The addition of the grappler and keynote <unk> two point of bolsters, Pete 20, eights soft tissue product offering which includes the recently launched paratrooper planner plate system and react stabilization system grappler interference screw system and release stabilization system.
With this comprehensive portfolio Paragon 28 provides its customers a broad array of innovative solutions for soft tissue stabilization and repair.
Lastly in June we launched our monkey rings circular external fixation system for trauma deformity correction and limb salvage.
Monkey rings is an external fixation device designed to maintain anatomic position, while providing stability preservation of soft tissue and allow for adjustability and functionality the mud.
Key ring system allows hospitals and surgeons to collaborate with a single vendor for internal fixation external fixation wound care and biologics.
Combined with the launch of Monkey bars pin to bar external fixation system earlier. This year, we are building out a strong external fixation portfolio and complementing our wide ranging internal fixation biologics and soft tissue options.
As we head into the back half of 2022, our product pipeline remains strong and is expected to continue to drive future growth.
In summary, we continue to have success on all key strategic initiatives and we will continue to invest in the business to drive sustainable and profitable revenue growth.
We are grateful for the trust, our physicians and patients have for Paragon 2008.
I would also like to thank our sales representatives and employees around the world for their diligent efforts and dedication to fulfilling our mission to continuously improve outcomes and experiences of patients suffering from foot and ankle conditions.
I will now turn it over to Steve Steve.
Thank you Albert moving to our second quarter 2022 financial results.
<unk> revenue for the second quarter of 2022 was $42 $5 million, representing 19% growth compared to the second quarter of 2021.
Strengthening of the U S dollar reduced our second quarter net revenue growth by 140 basis points as compared to the prior year period.
Second quarter revenue increased by $1 1 million or two 7% compared to the first quarter of 2022.
Gross profit margin for the second quarter of 2022.
It was 82% compared to 81, 3% in the second quarter of 2021.
The improvement was primarily due to lower excess and obsolete inventory expense in the second quarter of 2022 as compared to the prior year period.
Total operating expenses during the second quarter were $43 9 million compared to $43 million in the first quarter of 2020 to the.
The sequential increase in operating expenses in the second quarter was the result of $1 $2 million of one time costs related to the successful second quarter launch of our new SAP system.
Opportunistic investments to drive long term durable growth were enabled by and began after our October 2021, IPO, resulting in a 45% increase in second quarter operating expenses compared to the pre IPO prior year period.
The return on these investments has been significant.
Revenue growth for the first half of 2022 was 22% and was fueled by a 13% expansion of our U S surgeon customer base, an 18% increase in U S sales force productivity and record international revenue.
This growth was driven largely by incremental investments in R&D to bolster our product offering and incremental investments in sales and marketing to expand our global medical education programs and sales force.
Paragon 28 exclusive focus on foot and ankle.
Passion for improving patient outcomes strongly resonates with foot and ankle surgeons and sales reps.
During the second quarter, the opportunistic investments, we made in medical education and sales force expansion initiatives exceeded our expectations further validating that our strategy is working and has momentum.
Several factors drove these opportunistic investments and included but were not limited to.
Increased visibility of Paragon 28, after our IPO last year.
The resurgence of in person medical education activities in the last 12 months and.
And continued foot and ankle market consolidation.
As we head into the back half of 2022, we expect to continue making opportunistic investments and we also expect second half 2022 operating expenses to be consistent with the first half of the year.
Moving to further details on the P&L.
Research and development expense was $6 million or 14% of revenue for the second quarter of 2022 compared to $3 6 million or 10% of revenue in the second quarter of 2021.
And $5 $8 million or 14% of revenue in the first quarter of 2022.
The increase in research and development as compared to the prior year was primarily due to further investments in product development clinical studies quality and the acquisitions of additive orthopedics in May 2021, and <unk> in January 2022.
Selling general and administrative expense was $38 million for the second quarter of 2022 compared to $26 $6 million in the second quarter of 2021 and $37 $2 million in the first quarter of 2022.
The increase in SG&A expense as compared to the prior year was driven primarily by investments in sales and marketing, including in person U S marketing and medical education events.
Commercial team expansion, both in the U S and in our international markets.
Increased variable sales representative commission expense related to revenue growth.
Increased G&A expenses due to the cost of becoming a publicly traded company in the fourth quarter of 2021 and onetime SAP implementation costs.
The $800000 increase in second quarter, SG&A expense as compared to the first quarter of 2022.
It was primarily due to the $1 $2 million of one time costs related to our successful second quarter SAP launch.
Second quarter, adjusted EBITDA was $3 $2 million loss compared to the $3 $3 million loss in the first quarter of 2022.
When excluding the second quarter onetime SAP expenses of $1 $2 million.
<unk> EBITDA improved nicely as compared to the first quarter. Despite continued strong investments in key growth drivers during the quarter.
Turning to liquidity.
Liquidity was $113 million at June 32022.
Including $73 million of cash and $40 million of cash available via our senior credit facility.
Additionally, in the second half of 2022.
We expect to recoup $5 million of cash flow from accounts receivable balances, which increased temporarily in the second quarter during the launch of SAP.
Our strong liquidity position combined with our increased operating leverage moving into the second half of 2022 and beyond is expected to enable <unk> to operate without future financings to fund operations.
Before turning to our updated 2022 revenue guidance, a few comments on macroeconomic and other external factors and their impact on <unk> 28.
Notwithstanding the strong momentum in our business.
We remain cognizant of the current macroeconomic environment, including the potential for reduced elective foot and ankle procedures.
Our company and team are resilient and have delivered strong results in past difficult business environments.
Our comprehensive product suite addresses both the elective and non elective foot and ankle market sub segments of fracture in charcoal, which together account for over one third of the global foot and ankle market.
With respect to inflation, we are not currently experiencing a material impact on our business.
The global supply chain remains challenging, but we are confident that our team and vendors will continue to effectively manage these risks.
Consistent with remarks from our past earnings calls, we have and May continue to Opportunistically increased inventory and instrument purchases to ensure that we have product on hand to meet demand.
And finally, Covid and hospital staffing shortage headwinds on elective procedures remain but currently are not significant now turning to our increased 2022 revenue guidance.
Our 2022 revenue guidance assumes currency translation rates for our international business remain consistent with current translation rates.
We have increased our 2022 annual net revenue guidance to $176 million.
Representing growth compared to the prior year of 19%.
Strength in the U S dollar as compared to the prior year is expected to reduce our 2022 net revenue growth by approximately 100 basis points.
We expect our third and fourth quarter net revenue to be $42 5 million and $49 6 million, respectively, representing growth compared to the prior year periods of approximately 19% and 16% respectively.
The strengthened U S dollar as compared to the prior year periods is expected to reduce both third and fourth quarter net revenue growth by approximately 100 basis points.
While we will not be providing specific adjusted EBITDA or cash flow guidance for 2022, we expect to continue to see sequential improvement and increased operating leverage moving into the third and fourth quarters of this year.
That is the end of our prepared remarks, operator, please open up the lines for questions and answers.
Thank you.
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The first question today comes from the line of Craig Bijou from Bank of America. Please go ahead. Your line is now open.
Good afternoon, guys. Thanks, Thanks for taking the questions.
Maybe maybe just to start I wanted to touch on guidance.
And I think you had 20 plus percent growth in the first half.
Youre looking for 20% growth for constant currency for the entire year, suggesting a little bit of a.
Pull back.
From a growth perspective in the second half so would love to just hear kind of how you guys are thinking about the quarters.
What's assumed.
In that guidance.
It seems conservative to us but.
Would just love to hear some of the assumptions that you're baking in.
Hey, Greg it's Steve. Thank you for the question and maybe to start with just with respect to assumptions in the guidance. We've assumed operating conditions similar to where we're at today related to Covid supply chain elective procedure levels et cetera, and when we look at the third quarter typically.
The third quarter is pretty consistent with the second quarter in terms of procedure levels.
And for Us anyway.
And our our numbers are driven by growth consistent growth quarter to quarter, but we start seeing vacations in the second quarter.
Particularly in our European markets.
And then when we look out to the fourth quarter as you know our fourth quarter is traditionally the strongest quarter of the year preparing on 28.
Really driven by the elective procedure bolus that starts coming through late in the year.
Last year, we grew 25%.
In the fourth quarter, and we expect to have another strong and and finish to this year and that as you noted would put us at 20% on an operational basis for the full year and we feel really good about that particularly where we're at in operating in a somewhat uncertain macroeconomic environment.
Great. Thanks, Steve and then.
Maybe for Albert or for Steve.
I appreciate the color on the product growth by category and what the key drivers were.
Wanted to see if you might provide a little bit more color on how we should think about the product category growth.
Foot and ankle category growth in the second half.
And what if.
If anything maybe different than what we've seen in the first half.
Yeah.
Yeah, Hey, How're you doing Craig this is Albert I'll take a stab at this one.
You know I think from discussions, where we really try to balance our portfolio.
And and we feel like in <unk>.
Times like today that balance of our portfolio has really benefited us.
We've seen some of our more recent product launches that have impacted growth slightly disproportionate to other areas, but we were happy to report that all of the sub segments grew grew nicely.
In Q2.
Second half of this year.
I would see maybe some impact from recent product launches like our soft tissue portfolio also the external fixator. We recently launched the monkey rings circular for et cetera.
Can be used in multiple segments of foot and ankle but.
Primarily.
The <unk> segment could see a really nice pop from a product like that so second half I'd expect to see some of the usual suspects like our ankle franchise, which includes fusion total ankle replacement of Taylor spacer.
From additive orthopedics I'd.
I would also expect to continue to see nice movement on the fracture fixation line.
But then I see the newcomer I'd see shark are really seeing a nice pop with the influence of some of these new products.
Great. Thanks for taking the questions guys.
Thanks, Greg.
Thank you.
The next question today comes from the line of Kyle Rose from Canaccord. Please go ahead. Your line is now open.
Great. Good afternoon, gentlemen, thank you for taking the questions.
So you talked a lot about all of the soft tissue products that have launched in the I guess the quarter or year to date.
Our diligence that was one of the most commonly cited product gaps.
Maybe it's the overall interest.
And our sales force and maybe at some of your medical education around these new products launching when we should expect those to really pick up and then.
The secondary question, there is where the existing product gaps now that you have filled soft tissue. Thank you.
Okay.
I'll take that how youre doing Kyle and thanks for the question.
Youre exactly right I would say two areas that we had gaps.
Where the soft tissue portfolio.
Even though we had a few products in the soft tissue space, we were still mostly missing in that area and if you remember soft tissue really touches all of the sub segments. As we've mentioned before so that was an important piece for us.
We've recently launched things like the react stabilization system Frankel fracture, we launched the grappler soft tissue anchor devices. We also have the grappler interference grew devices those are going to be really helpful. Not only in getting us into the soft tissue, but the complementary effect. It has on all of the existing.
Allergy that we have so areas like flat foot really see an influence there.
The other area that you might remember we were we were missing was external fixation and in January we launched the pin to bar monkey bars pin to bar stabilization system for primarily trauma or fracture fixation, and we saw really nice pop from that.
And then again like I mentioned, the monkey range is going to be a really nice complement for the ankle segment as well as short codes. So we're really excited about starting to have the ability to participate more and more of the foot and ankle ailments and I'll tell you. Our mission has always been if theres a condition below the knee anything related.
Foot and ankle we want to be a participant there we wanted to improve the technology and offer meaningful options to our surgeon customers. So we feel like the soft tissue and the ex fix really gave us that.
Great and then just I don't know if I missed it.
Yes, sorry go ahead.
The second part.
You had mentioned.
Areas that we still might be missing.
I would tell you that I still continue to expect to see some soft tissue products introducing into the market I would also expect to see some external fixation products.
And.
Those would probably be some areas that we're still missing and then if you remember the smart 28 is something we've got some real ambition for.
Moving forward, so I'd say those might be some of the gas.
Great and then just the last question for me is.
Overall I understand you have one net add from a from a.
Productive sales reps perspective here and I know that there is some rounding errors there as far as when our people roll on and roll off but overall expectations with respect to hiring I mean should we expect that sales force on a rolling 12 month basis to increase in line with the top line.
Obviously, you're launching new products or so im just trying to understand what expectations should be for just new feet on the street as it stands.
You got it.
Just to remind you we.
Report, producing reps, which if you remember as a salesperson thats.
Selling a product in every month of the quarter.
Our sales force actually did grow.
And you can see due to seasonal changes and some other factors that can influence the producing rep count.
It looks like it was it was steady.
We do expect that to increase and we really like that measure moving forward as a target for us we feel like adding producing sales reps is a good target and we'll continue to be a focus for us moving forward.
Thanks for taking the questions.
Of course, thank you.
Thank you.
Next question today comes from the line of Mike Matson from Needham. Please go ahead. Your line is now open.
Yes, Thanks for taking my questions can you guys hear me okay.
Hi, Mike.
Hi.
And these are some hedge funds from his time here.
So I guess first on the international business.
30% almost kind of a constant currency basis based on some of the peers companies. It does look like there.
International markets were particularly strong this quarter do you think that it was kind of.
They're just they were just more procedures kind of a catch up going on there or do you think it was really just your own products and execution in those markets.
Combination of both.
Yeah, Hey, Mike, It's Steve I think it's it's actually both and as we noted in our prepared remarks and in the earnings release, our three largest markets again, we're really driving our growth and we're just really really pleased with the progress that we continue to make in those markets in <unk>.
And expanding relationships with surgeons growing with existing surgeons and just really excellent in territory management, navigating a tough environment and continuing to be resilient and so.
We have continued to see some pockets of COVID-19 challenges and even some if you can believe this some rolling brownouts in South Africa from time to time, but our teams are pretty pretty resilient as we've talked about.
And they find a way to make the number and exceed the number and so we're really happy with what we continue to see in those markets.
Okay got it and then it looks like given your cash balance is down about $36 million year to date.
I know you did some M&A is I can't remember how.
How much of that went toward M&A versus operations, but maybe just comment on that and then talk about your how much cash you think you'll use for the rest of the year, if youre willing to do that.
Yes, yes, that's right and that's a good question Mike So for the first part of the year, we had cash used in operations of about $24 million.
And $11 million of that was driven by inventory investments most of it related to these new product launches that we brought to market, but also related to some opportunistic builds of legacy products.
If we could find a slot on a machine that was extra somewhere we would take it and.
And we built some inventory to be able to enable our growth as we move into the seasonally stronger second part of the year.
We also increased our accounts receivable balance on it not intentionally unintentionally related to our SAP launch.
But we will recoup that that was about a $5 million impact for the quarter. So so that will be recouped and then when we look to the balance of the cash used for the year, it's about $24 million net and that was really driven by instruments of about $6 million.
On a year to date basis.
And.
Of about $3 million and then other capex of about $3 million principally to building.
Okay. Thanks, and then with this mobile training lab that Youre, introducing is that training done and that.
I guess.
B.
Incremental to the existing training courses you're already doing either.
<unk>.
Headquarters will be kind of replacing some of the kind of regional local training courses you would offer.
Okay.
Yes, that's a great question I'll tell you we're excited to expand our medical training capabilities right. So the demand has been pretty high, especially with some of these new product launches.
For in person medical education really for surgeons to get their hands on some of these new products, primarily some of the ankle products.
Internal fixation fracture fixation products.
What we've always tried to do is find the most effective avenue to bring surgeons to our headquarters when possible but.
Some situations, it's more appropriate to bring the medical education to them. So this gives us the flexibility really to.
To move that medical education hub around and we expect it to be complementary to our in house facility.
And we just expect to capture more surgeons, who might not have the flexibility of leaving their territories to come here for some medical education and still get their hands on product.
We're pretty excited about that mobile app.
Yeah, Okay, great. Thank you.
Of course, thank you thanks, Mike.
Thank you as.
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The next question today comes from the line of David <unk> from JMP Securities. Please go ahead. Your line is now open.
Great. Thank you.
Sure.
Albert maybe.
You've talked about some.
I mean, I guess pretty impressive productivity numbers on your sales force.
Let's call it high teens, 20% ish.
Last couple of quarters I guess.
Just remind us where these guys stand today in terms of.
Potential.
I can't imagine that you can keep seeing increases like that but maybe with the new products. You can I guess help us think about.
Those trends versus actual new ads.
Yeah.
Thanks for the questions they have great to talk to you.
I'll tell you there's a few things there one is the history of Paragon 28, we've always had such an exciting cadence of new product introductions.
And we're definitely a clinically oriented organization, which means we appeal more to that clinically minded salesperson right.
And medical education for Us, it's two facets it has the surgeon trainings.
But it also has sales rep education, and and so as we increase these medical education opportunities for surgeons.
So a really nice way for our sales reps to continue to get educated on our products why we designed the instrument.
Plants and the options the way we have.
So I think there is really a twofold benefit there.
We launched a lot of great product and we have a history of doing that and we continue to do that today.
Slowing down moving forward.
In addition to that we have.
<unk> tons of medical education opportunities to continue to improve.
Improve our sales force's ability to represent these products and just really be of service in the operating room for those surgeons. So we attribute a lot of that productivity increase there's things there.
Got it and then.
I guess, if you'd be willing to give us sort of an update on.
Patient specific options I know you mentioned talent as cement.
Disney or the <unk> planning I guess I'd love to hear sort of an update of.
Where you stand on.
Smart 28 platform as well thank you.
Absolutely.
Got it thanks for the question.
Look we continue to be really excited about what smart 28 could mean to the future of foot and ankle surgery.
Impacting patients' impacting surgeons impacting basically our knowledge of these deformities and.
Ways to treat these.
So in and of itself Smart 28, really is driven towards more patient specific.
Identification and solutions.
I will tell you that the recent acquisitions both of additive orthopedics and busy are moving well.
The additive orthopedics line in particular, the Taylor spacer.
Just showed us how powerful some of these options can be to surgeons.
These were patients in some cases very young patients that suffer with a vascular necrosis.
And.
Options just werent great for these patients in some cases facing amputation. So there's just such an amazing feeling when we can provide an option of meaningful option like that.
It gives our surgeons those options and also benefits patients. So we're excited about that it's doing well for us.
And then the does your side of it which we commented before we still think is the software really can be the foundation of this smart 28 are enabling technologies.
Right now the phases of Dizzy or are being used primarily internally for some of our research and development work.
As we do two things one we prepare for more of a public launch next year.
But also in combining additive orthopedics and does your platform to create a really powerful solution. There. So that that was sort of an answer that gives you an update on those acquisitions, but also let you know where we are with the smart 28.
That's a chance for us to really change the game here and improve options for patients.
I appreciate it thank you.
Of course, thanks, Joe.
Thank you.
There are no further questions registered at this time, so I'd like to pass the call back over to Albert to Costa for closing remarks. Please go ahead.
Got it. Thank you again for your time today, Steven I look forward to seeing many of you at future investor and industry conferences as well as individual meetings have a wonderful day.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Yeah.