Q3 2022 AxoGen Inc Earnings call
[music].
Welcome to the oxygen third quarter 2022 conference call.
At this time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference today. Please press star zero from your telephone keypad.
A reminder, this conference is being recorded.
I'd now like to turn the conference over to your host a choice accidents director of Investor Relations excuse me get Mr twice.
Thank you Rob and good morning, everyone. Joining me on todays call are Karen that Ray <unk>, Chairman and Chief Executive Officer, and President and Pete Mariani, Executive Vice President and Chief Financial Officer.
Karen will discuss the quarter and our outlook for the year and people who provide an analysis of our financial performance followed by a question and answer session.
Today's call is being broadcast live via webcast, which is available on the investors section of the website.
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 <unk> Dot com.
Before we get started I'd like to remind you that during this conference call. The company will make projections and forward looking statements regarding future events.
Forward looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including without limitation, the risks and uncertainties reflected in the company's annual and periodic reports actual results or events could differ materially from those described in any forward looking statement as a result of various factors.
Including without limitation the impact of COVID-19 on our business global supply chain issues record inflation hospital staffing issues product development product potential expected clinical enrollment timing and outcome of regulatory process and approvals APC renovation timing and expense financial performance sales growth.
Product adoption market awareness of our products data validation, our visibility app and sponsorship of constant conferences and educational events global business disruptions caused by Russia's invasion of Ukraine and related sanction and other factors, including legislative regulatory political and economic development not within our control.
The forward looking statements are representative only as of the date, they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward looking statements, whether as a result of new information future events changed circumstances or otherwise.
With that I'd like to turn the call over to Karen Karen.
Thank you Ed.
And thanks to everyone joining us this morning.
We're pleased to report revenue of $37 million.
Representing 18% growth over last year's third quarter.
Driven by strong commercial execution with increases in each of our products and across our applications.
As expected we continued to see sequential improvement in surgical procedure volumes during the quarter as hospitals address staffing and other challenges, resulting in improved consistency and emergency department staffing.
And then increased surgical capacity.
We're pleased with the sequential improvement.
Although we note that hospitals continue to report some residual impact from these challenges and accordingly, we remain measured in our outlook regarding the pace of continued improvements over the near term.
Our strategy remains anchored with continued focus and execution in our core and active accounts.
As a reminder, active accounts are those that 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 had greater than $100000 in revenue and the trailing 12 months.
The number of our core accounts increased to 331 in the quarter representing growth of 11% sequentially and 17% over prior year adjusted level of 283.
Excluding the impact of the five purchases in 2021.
This growth represents the impact of our strategy to die to drive deeper penetration into accounts as they continue to open surgical capacity across nerve repair applications.
Core accounts continue to represent about 60% of our revenue and typically contain at least one surgeon who has adopted the accident nerve repair algorithm for a significant portion of his or her nerve injury patients.
Leveraging this search and success with our products, we focus on gaining more cases with that first early adopter surgeon and gaining used by additional surgeons, including middle adopters in that account.
We continue to see that our best opportunity for growth resides with our core counts by driving more and more deeply penetrating the treatment of traumatic injuries and continuing to expand into other nerve repair applications, including breath.
And that and the surgical treatment of pain.
The number of our active accounts increased to 952 in the quarter representing growth of 1% sequentially and 2% over an adjusted prior year of 930.
Active accounts continue to represent about 85% of our total revenue with the top 10% contributing about 35% of our revenue.
We ended the quarter with 111 direct sales representatives.
Downside from the end of second quarter and up from 109, a year ago.
Our commercial execution in the quarter was strong and we're continuously evaluating the productivity of our sales representatives and making adjustments as necessary.
We believe our revenue growth can be primarily driven by sales rep productivity gains and we will continue to add additional sales reps as their territory approach targeted levels.
Our direct sales force continues to be supplemented by independent sales agencies that represent approximately 10% of our total revenue.
In September we participated at the American Society for surgery of the hand meeting in Boston.
This annual conference is a valuable event for driving innovation and an important forum for oxygen is expanding portfolio of clinical data.
We were pleased to see the continued discussion of the importance of our recently reported Recon study results at the conference.
As a quick reminder, our recon study, it's the culmination of years of work with the FDA and <unk>.
Sure, it's primarily as the pivotal study for a biologics license application or BLA towards transitioning advance from a 361 tissue product to a $3 51 biological product, we expect to submit the BLA in the second half of 2023.
S C. A S. H conference. The Recon study data was the focus of a surgeon panel symposium titled State of the art nerve reconstruction data, the how and why of implementing this new data into your clinical practice.
We believe recon is a landmark edition to our growing body of clinical evidence used to drive surgeon engagement and adoption.
As a reminder, this study achieved its primary endpoint.
The study also observe that as nerve gap lengths increased advanced demonstrated statistical superiority over conduits and the return of sensibility as measured by static two point discrimination and gaps greater than 12 millimeters.
Also for gap lengths greater than 10 millimeters advanced had statistically superior time to recovery with patients achieving normal two point discrimination after three months earlier than in the conduit group.
The study also demonstrated lower incidences of persistent and unresolved pain for advanced subjects.
Yeah.
C. A S. H symposium also included a presentation by the surgeon authors titled a systematic review and meta analysis of nerve gap repair.
This comprehensive clinical review and analysis compared the meaningful recovery rates between allograft autograft and conduit.
For this meta analysis several hundred peer reviewed studies were screened for nerve injury type and similar outcome measurements with over 1500 nerve repair is included in this analysis.
This is the largest peripheral nerve repair meta analysis today and the study concluded that meaningful recovery rates for allograft and autograft repairs were comparable across all gap links and up to 70 millimeters.
And if there were no statistical differences between allografts and autograph outcomes and both sensory and motor repairs.
Additionally, allograph, an autograft repairs delivered significantly better rates of meaningful recovery in short caps as compared to conduit repairs.
Lastly, an additional part of this meta analysis, what's an examination of the acute procedure related costs, comparing autograft procedures to allograft and this study found the costs were comparable.
Overall, we were excited with the high level of interest and engagement at the assets age conference. This year the strong surgeon participation highlights the importance of clinical data to a personal nerve surgeons.
We continue to build market awareness of nerve repair with both health care providers and to our direct to patient initiatives, particularly for breast and pain applications.
We utilize our marketing initiatives to drive patient engagement to our recent station and rethink pain website.
These sites are aimed at increasing patient awareness and education for the potential of nerve repair procedures to improve outcomes for those undergoing the sector me in reconstruction and those suffering from chronic neuropathic pain.
October with breast cancer awareness month, and this annual campaign raises awareness about the impact of breast cancer.
Our breast team has been highly involved in the monthly awareness events.
For us quality of life for patients undergoing mastectomy and reconstruction is a year round focus.
And we're pleased to see that throughout the quarter. There were eight presentations at clinical conferences on restoring sensation and incorporating new organization into these patients reconstructions.
We believe the increased awareness and enthusiasm from the thought leaders in this space will continue to elevate both the importance of incorporating nerve reconstruction into these surgeries and the role that recent session technique plays in providing the opportunity for return of sensation. Following the SEC to me.
Our surgeon education programs remain a top priority for oxygen and continue to generate interest in the surgical community.
We have achieved our annual goal of training more than 75% of the most recent class of hand, and microsurgery Fellows and as I mentioned, we had great interactions and engagement during all of our educational events at the HSH Conference.
Moving on to uptake and a growing body of clinical evidence.
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 oxygen algorithm across our full portfolio of nerve repair products.
We added 11, new peer reviewed publications this quarter now with a total of 207 across the extremity trauma breast O M F and paint.
As I mentioned, our Recon study was discussed during acetate. We believe that the addition of the recon studies level. One evidence will provide compelling incremental data to support further expansion into the middle adopters and our core accounts.
We believe that our growing portfolio of high quality clinical evidence is the most comprehensive in the area of nerve repair and the key data driven part of gaining surgeon adoption.
Our Ranger and mass registries continue to enroll now with over 2007 hundred advanced nerve graft repairs enrolled in Ranger.
Data from these two clinical registries continue to play an important role in informing surgeons and their clinical decision making.
Repose is a study of Axa Gardner cash compared to standard treatment for the reducing for reducing symptomatic neuroma.
Earlier this year, we announced strong topline data results from the pilot phase of this study.
And we've achieved full enrollment with 86 subjects in our comparative phase of this study.
We expect topline data readout from the comparative phase in Q4 of 2023.
We remain on track towards.
We remain on track working towards all the requirements necessary for our BLA submission for <unk> for advanced nerve graft in the second half of 2023.
Our new tissue processing facility in Dayton, Ohio also remains on track and we anticipate beginning transitioning production in the first quarter of 2023.
Turning now to our outlook today, we narrowed the range of our full year guidance and expect 2022 revenue to be in the range of 137, and a half to $140 million compared to our prior guidance range of $135 million to $142 million.
Full year gross margin is expected to be above 80%.
Now I'll turn the call over to Pete for a review of financial highlights Pete.
Thank you Karen revenue this quarter was $37 million.
An 18% increase over the third quarter was 2021.
Both was driven with increases in unit volume of 12% as well as 3% increases in both price and changes in product mix.
As a reminder, there was no revenue in either the third quarter of 2022 or 2021.
Gross profit for the quarter was 30.8 million as compared to 26 million in the third quarter of 2021 gross margin was 83.3% for the third quarter compared to compared to 83, 2% in last year's third quarter.
Total operating expense in the third quarter increased 9% to 35.6 million compared to $32 7 million in the prior year. The increase in total operating expenses is primarily the result of compensation costs of $2 6 million in occupancy related expenses a five.
$100000.
Sales and marketing expenses in the third quarter increased 8% to $19.8 million compared to $18 4 million in the prior year.
The increase was primarily due to compensation costs offset by a decrease in marketing program expense as a percentage of total revenue sales and marketing expense was 54% compared to 59% the third quarter of 2021.
Research and development expenses increased 10% to $7 $1 million compared to $6 4 million in the prior year.
Product development expenses represented approximately 50% of total R&D in both the current and prior year and included spending in a number of specific programs, including the BLA for advanced nerve graft and in next generation advanced product.
Clinical expenses represented approximately 50% of total R&D in both the current and prior year and included spending in support of our various clinical programs as a percent of total revenues research and development expense was 19% in Q3 compared to 21% in the prior year.
General and administrative expenses increased 12% to $8 8 million in the third quarter as compared to seven 9 million in the prior year. The increase was primarily due to higher net compensation expenses, partially offset by decreases in professional service fees G&A as a percent of revenue was 24.
4% in the quarter compared to 25% in the prior year.
Net loss for the quarter was $4 $3 million or 10 cents per share compared to net loss of $7 1 million or 17 cents per share in the third quarter of 2021 adjusted.
Adjusted adjusted net loss was $368000 or approximately one cents per share in the third quarter compared to a loss of $3 6 million or eight cents per share in the prior year.
Adjusted EBITDA in the quarter was $368000 compared to an adjusted EBITDA loss of 2.5 million in the prior year. The reconciliation of these non-GAAP financial measures to GAAP can be found in today's earnings release and in our website.
The balance of all cash cash equivalents and investments on September 30 of 2022 was $59 $4 million compared to a balance of $64 3 million at the end of Q2.
The net change includes capital expenditures of $3 9 million related to the construction of our new processing facility in Dayton, Ohio, and $1 million of net operating cash burn in the quarter.
The construction and validation of the new a P. C facility is on schedule and we expect to begin transitioning nerve tissue processing into this new facility in the first quarter of next year and as a reminder, we expect to have dual facility and other startup expenses during the transition and expect our gross.
To be temporarily below 80% during the transition and will provide additional guidance for 2023 gross margins at our Q4 Q4 and full year call in March of next year.
We expect our operating cash to continue trending towards cash flow breakeven driven by revenue leverage on our fixed cost infrastructure, along with our continued focus on thoughtful operating expense management.
We believe this trend can block combined with a return to more normalized capital expenditures will allow us to maintain our strong balance sheet position, providing ample support as we continue our path to profitability.
Lastly, today, we narrowed our full year revenue guidance and now expect 2022 revenue to be in the range of $137.5 million to $140 million compared to our prior revenue range of 135 to 142 million.
We're pleased with our strong commercial execution, particularly our staffing issues continued to stabilize in the second half of the year and the new guidance implies a midpoint Q4 revenue growth of approximately 17%.
Excluding the impact of a valve revenue in 2021.
Additionally, our full year 2022 gross margin is expected to be above 80%.
We're pleased with the strength of our execution and performance in the quarter, including strong top line growth and solid gross margins, while also providing a line of sight towards cash flow breakeven overtime and longer term profitability.
We have achieved several important clinical and operating milestones and look forward to transitioning our new APC processing facility and filing our BLA in 2023, we believe we built a solid foundation to support our next phase of company growth anchored in clinical science and proved out.
It comes for patients and we continue to be confident in our ability to deliver sustainable long term growth.
At this point, we'd like to open up the line for questions Rob.
Thank you.
Well now be conducting a question and answer session.
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One moment, please pull for questions. Thank you.
Our first question is coming from the line of Mike Sarcone with Jefferies. Please proceed with your questions.
Hey, good morning, and thanks for taking the questions.
Hey, good morning so.
The first question just on the E.
Our revised 2022 guide seems to imply for for Q, If I'm doing my math correctly about a mid teens year over year growth rate for for Q, and that's kind of down off the 18%.
Posted and three Q I know Karen mentioned, you're being somewhat conservative, but you have seen some improvements in the in the hospital setting with kind of staffing shortages and constraints around there I was wondering if you can just talk about what you've got baked in into the <unk> Guide and you know are there any other factors outside of.
You know being measured in your outlook that would explain the deceleration in growth at the midpoint.
Yeah, No I'm happy to answer a word like you said, we're very pleased with our performance in the third quarter and expectations going forward and you're right. We the midpoint would imply about a 17% Q4 number we typically see Q4 being sequentially.
Flat to down and so we're thinking through that piece, but we also recognize that the top end of the range would allow us to see continued improvement in staffing and in our continued performance through the fourth quarter, but we just also want to continue I can't it's that'd be measure.
<unk> and the pace of continued improvements of staffing issues.
In the hospitals.
Understood. That's that's really helpful. And then just one more question I think Karen also mentioned that you know that the best opportunity for growth resides within core accounts and increasing utilization I was wondering you know with that in mind can you speak to.
You know what the environment looks like for new account additions and our.
Our staffing constraints impacting your ability to get into new accounts, but would just love to hear your thoughts there.
Sure. So we continue to see some growth in our active accounts and then active accounts become core accounts. So this quarter, we had growth in both the number of core accounts, but also the size of the average size of our core accounts. So we think the lowest hanging fruit is to go to continue to move deeper in those.
Core accounts, but it's not exclusively that we're only going to do that we'll continue to to grow active accounts to be core accounts and developed some new accounts. It's just it's an emphasis of where we're spending our time I don't see staffing as an impediment to getting into new active accounts, we haven't we haven't seen that be a particular.
Barrier since very early on in the pandemic. So that's not a that's not driving this it's really a decision about strategy and how we approach commercial or commercial execution.
Okay, great. Thank you.
Our next question comes from the line of Christmas Squali with Nephron. Please proceed with your questions.
Thanks, and congrats on a nice quarter wanted to ask a couple of questions about the Salesforce. Karen you made some operating changes back in the summer are more of a direct reporting coming to you you're talking about the impetus for that and what you're hoping to achieve.
Yeah. So we ended up splitting so that a we have a marketing team and a sales team and just splitting those functions. So that they both report that the chief marketing role reports to me as well as the sales team reports to me and this is really just recognizing that.
Those are really different functions and we wanted to make sure that we have a focus on both commercial execution as well as from the marketing standpoint real emphasis on building awareness of this great body of clinical evidence that we have that we think ultimately will be a real driver for middle adopters and that's.
And that's a stage that we're at we're starting to move into the middle adopters and we want to make sure that we have the right emphasis on that.
And I think it's paying off as I look at our commercial execution as well as what the marketing team is working on I think we have some good wanted interruption.
I'm sorry.
I was just saying it looks like you're now going to end the year with fewer reps than you originally planned but better productivity. How are you thinking about the pace of rep adds from here and heading into 'twenty three.
Yeah, we will.
Bring in a few more reps are yet here in the fourth quarter and then next year well, we haven't given a guidance number yet I think you can think about the pace as being similar to this year that as territories reach a certain threshold level, we will still add capacity and but it'll be really focused on.
Growth through productivity.
Great. Thank you.
Our next question is from the line of Ryan Zimmerman with B T. O G. Please proceed with your questions.
Good morning, Karen.
It works for taking my questions.
I know youre not going to guide to 'twenty three at this point, but when you look at the street.
Looking for about mid teens growth.
Maybe you guys can just kind of help.
Of all the puts and takes you're thinking about as we move into 2023, just qualitative land.
And you know you've.
You've had so many kind of macro dynamics that have impacted your ability to grow you know does it feel like we're starting to come out the other end of that and.
Maybe it will allow you to be a little more unconstrained in terms of your ability.
And that mid teens rate.
Okay.
Yeah I think.
We're really pleased with where things are right now and the execution that we've seen and that we're executing to the plan that we laid out and that is yielding the results we expect.
So if you use where we are today do you think about the future I think you know we are fairly optimistic about our about the future, but we want them to remain measured in our guidance just because there are still macro effects out there that we can't control.
And so so you kind of hear that in the guidance that we provided is while we're optimistic about our about the growth that we see and excited to return to you know sort of high teens growth, we don't want to get out over our skis and getting too aggressive and guidance and you'll see that as we you know round out.
Our guidance for 2023.
Okay.
And if I can squeeze two more a housekeeping question number one.
Repos I think shifted back maybe a corner from third.
The fourth quarter.
Elaborate on that and then you know Peter as we think about the gross margin impact.
To give more commentary on the next call, but you know how long does the transition of this magnitude take just as we kind of contemplate margins for next year. Thanks for taking the questions guys.
Sure on Repos, you're right in the last few subjects ended up taking a little longer to get into this into the study than we had originally forecasted so it's pushed it.
We're at the end of third quarter, we're now in the in the beginning of fourth quarter and fourth quarter that will have the results but.
Now fully enrolled and are looking forward to getting that top line readout from the comparative phase, especially with the encouraging pilot data that we have.
Yeah and on the margin side first of all the two things our team on the production side is doing a fantastic job on yields and managing the production in our current facility are the other team is working great on getting that facility up and running and we're excited to be able to start transitioning that that facilities.
Give us.
Significant capacity well into the future on the transition I think about a negative impact in.
In the first couple of quarters next year, and then think of it as sort of ramping into ramping to some improvement across Q3 and Q4, what that means specifically for numbers we'll.
Give more guidance later, but like I said in my remarks, we do we would expect.
Pressure below 80% in the first couple of quarters as we have dual facilities charges and other startup.
But then.
Moving back towards normalized margins over time.
Thank you guys nice quarter.
Thanks.
Our next question is from the line of Kyle Rose with Canaccord Genuity. Please proceed with your questions.
Great. Thank you very much for squeezing me in so a lot's been asked so I'll just ask one I appreciate the previous commentary on the sales force, but maybe just help US understand you know youre down five reps quarter over quarter obviously.
I'm still a little bit year over year, but just help us understand are those transitions out and just your confidence that we won't see any disruption when we think about moving forward. Thank you.
Yeah, I think one of the really great things as we've moved into kind of a new stage in our accounts is that as we have a core count we find that they remain pretty sticky as we have transitions and so we don't see a as much turbulence when you when you performance manager.
Territory in and and make transitions of reps doesn't mean, we when you know what I do too much of that we want to make sure that we continue to train people up as much as we can.
But but we're not anticipating a lot of disruption in the short term from these transitions.
Yeah.
Thank you.
Our next question is from the line of for US Osborne with Cantor Fitzgerald. Please proceed with your question.
Hi, Congrats on the quarter I guess, so just one for me it sounds like the operating environment did improve sequentially.
I would be curious to hear how the more elective procedures such as breast recon performed during the quarter and your outlook for the rest of the year, maybe 'twenty 'twenty three if possible.
Yes, we've talked about before breast reconstruction and oral maxillofacial procedures do tend to be our earliest warning signs that hospitals are having challenges for staffing because they're both very resource intensive long in the O R inpatient stay.
We saw those rebound in Q3 and back to being up and running now the one thing that I would say is that hospitals are still constrained on overtime. So while there is a backlog of procedures were not making headway on the backlog, they're really trying to meet or those and but it's just that.
Again, their resource intensive and they're just not getting enough capacity to do much on the backlog, so they're scheduling pretty far out.
But but we're up to steady operating those procedures, which is a good thing.
Got it thank you.
Thank you.
Next question is from the line of Steve Turk late with JMP. Please proceed with your questions.
Hey, good morning, maybe one for Karen and one for Pete.
Now you mentioned again that Nextgen advanced product and I was just wondering how.
How we should think about that whether it's gonna be process differently or function differently or I guess any sort of.
Details that you could share would be much appreciated and I'll just ask the one for Pete here as well can you just remind us what's been spent on the Ohio facility and what's left in terms of the Capex as we look ahead. Thank you.
Ah well mildly short because I don't have a whole lot I can tell you. We haven't really provided any details on that on the second generation events and and we have mentioned that we also have a third generation events. That's that's in our pipeline. We think it's important to continue to be the innovator and Lee.
<unk> and nerve repair and that's what those products represent as a biologic the cycle time can be a little bit longer. So we just recognized we need to make sure. We continuously have improvements in our pipeline, but as far as with the features of our we're not quite ready to talk about those just yet.
Yes.
Yeah and on the building we've got about a week, we'll have about 8 million left to go between now and the end of the first quarter I think we spent right around 57.
So it will be all in about 65 million by the time we're done.
Thank you.
Yeah.
Thank you.
Question is from the line of frying Zimmerman with BTG. Please proceed with your question.
Apologies I have a follow up and just can't get enough here, but.
Hum.
The operating expense profile was a little bit better than I think we expected this quarter and you're running you know kind.
Kind of flattish relative to.
Second quarter, and so Pete I just would appreciate your commentary as we think about kind of opex in the next year and and given you know given the slower pace pace of ads on head count in our sales force I mean, do you guys feel like you might be able to see a little more leverage in 'twenty three.
No absolutely I think what you saw in the third quarter was some evidence of our ability to drive leverage off this model, we've been talking about the opportunity to drive increased rep productivity and drive leverage off our fixed cost base, which has been you know.
Fairly flattish over the last few quarters are we think there's more leverage that we can gain yeah certainly through the next quarter.
And as we think about 2023 without specifically get a getting guy giving guidance. We would expect to see continued leverage as we see you know rep productivity continues to improve we will have some additional spend in additional cost, especially early in the year as we.
We continue.
Continue to get ready to file the BLA.
You'll see some moderate increase in spend.
In the first part of next year, but.
Again similar to the messages, we've been saying for a while we really do not feel we need to spend significantly more sequentially in order to drive the revenue growth that we've been targeting.
Thanks Pete.
Thank you at this time I'll switch into a question and answer session and I'll turn the call over to Karen centers for closing remarks.
Thank you.
I'd like to thank the accident team, who remain committed to our mission of improving nerve function and quality of life for patients with peripheral nerve injuries.
We're happy with the progress we've made towards our goals this year and we remain focused on ensuring our long term success.
I want to thank everyone for joining us this morning, and we look forward to meeting with you at several upcoming investor conferences, including Jefferies in London, Canaccord, Genuity and Piper Sandler in New York and the Cantor Fitzgerald Conference in Miami, Thank you and have a great day.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.
Yeah.