Aziyo Biologics Inc. Q1 2023 Earnings Call

Speaker 1: I.

Speaker 2: Good day ladies and gentlemen. Welcome to the Zio Biologics first quarter 2023 financial results conference call. If you know you would like to ask a question, please press star one on your telephone keypad to join the queue. Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to Matt Steinberg, FinPartners.

Speaker 3: Thank you, operator, and thank you all for participating in today's call. Earlier today, Azio released financial results for the quarter ended March 31, 2023. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward looking statements, and

Speaker 3: within the meaning of the federal securities laws which are pursuant to the same former provision of the private securities litigation reform act of 1995.

Speaker 3: Any statements contained in this call that do not relate to matters of historical facts or relate to expectations or predictions of future events, results or performance or psychological catching statements.

Speaker 3: All four looking statements including without indentation, those relating to our operating trends and future financial performance are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause ash or results or events to materially differ from those anticipated or implied.

Speaker 3: by these four looking statements.

Speaker 3: Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factor section, public filings with the FCC, including EZO's annual report on Form 10Q for the quarter ended March 31, 2023, to be filed with the FCC.

Speaker 3: accessible on the SEC's website at www.scc.gov. Touch factors may be updated from time to time and use other fileings with the SEC.

Speaker 3: The conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 10, 2023. The Zio Biologics disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise.

Speaker 3: Also during this presentation, we refer to Gross Margin, excluding Intangible Affent Amortization, which is a non- GAAP financial Measure. A reconciliation of this non- GAAP financial Measure, the most directly comparable GAAP financial Measure, is available in the company's financial results release for the first quarter ended March 31, 2023.

Speaker 3: which is successful on the SEC's website and posted on the investor page of the AZO website at www.AZO.com. And with that, I will turn the call over to AZO's CEO Randy Mills.

Speaker 3: on the SCC's website and posted on the investor page of the AZO website at www.AZO.com. And with that, I will turn the call over to AZO's CEO Randy Mills. Thank you, Matt.

Speaker 3: Welcome to our first quarter 2023 earnings call. Today I'll start with an overview of recent highlights.

Speaker 3: I will then describe how our efforts fit into the overall strategy for Ezeo. Matt Ferguson, our ACFO, will provide details and context for our financial results, and lastly, I'll wrap up with the priorities for the company moving forward. After that, we'll open the line for your questions.

Speaker 3: We have a lot of ground to cover so let's jump in.

Speaker 3: First, it would be hard to miss the exceptional financial performance delivered by our businesses.

Speaker 3: Sales were up 14% to a record $13.1 million for the quarter. And this top line growth was seen across all of our four businesses.

Speaker 3: Furthermore, we saw substantial improvement in gross margin, up 11 points year over year to 49%.

Speaker 3: The improvement in gross margin is largely attributed to process improvements made by our operations team led by Erica Elgin.

Speaker 3: Recall, Erica was one of the leadership changes that we made in the second half of last year. And the efforts of her and her team are starting to produce some really impressive results.

Speaker 3: Erica was one of the leadership changes that we made in the second half of last year, and the efforts of her and her team are starting to produce some really impressive results. Next up...

Speaker 3: We made great progress on the business development front, which included creating a partnership with Lemate Vascular to distribute our Cardiovascular portfolio. With this deal, we gain access to Lemates Expert 58-person sales team dedicated to the needs of the Cardiovascular Surgeon, increasing coverage approximately 5 fold.

Speaker 3: Similarly, we are now operationalizing our not exclusive distribution partnership with Ciantra, a leader and breast reconstruction surgery for our best in class product, SimpleDerm.

Speaker 3: Like with Lamate, this partnership greatly expands sales coverage for Simple Durham with the addition of Cientra's 55 sales professionals. Again, approximately a five-fold increase over our current coverage.

Speaker 3: These transactions enable us to improve patient access and outcome and at the same time, the increase our commercial footprint in a capital efficient manner.

Speaker 3: Lastly, we've made progress with FDA. Following the receipt of our NSC letter for Kangaroo RM, we were granted a meeting with the review teams from both the Center for Devices and the Center for Drugs as Kangaroo RM is regulated as a combination product at FDA.

Speaker 3: The meeting was productive with the results being a clear understanding of the additional information requested by the agency for the resubmission of Kangaroo RM 510K.

Speaker 3: The request is limited to in vitro quality control testing and importantly does not require the generation of any animal or human data. Our R&D teams are laser focused on generating this information and are confident we will be able to provide the agency with the required information.

Speaker 4: overall strategy for a ZEO.

Speaker 4: regenerative medicine is improving the interface between the medically essential device and the patient that it's intended to treat.

Speaker 4: Complications that arise at the device patient interface, whether it be from movement or erosion or fibrosis or infection, is an enormous problem and also represents a massive opportunity.

Speaker 4: When you just look at the surgical procedures that kangaroo in simple derma dress...

Speaker 4: Each year there are over 90,000 complications so severe that they require surgical reintervention. And at a cost of the healthcare system of $7.5 billion. That's not to mention the very real morbidity and mortality that the patient and their family experience. Now here's what we think is really exciting.

Speaker 4: We're developing technology that combines the proven benefits of a biologically based material with therapeutic delivery to create the drug-eluting biologic. The combination of these two can produce synergistic effects and that's because there are so many therapeutically relevant drugs that are also highly protein-bound.

Speaker 4: keeping them at the site inactive much longer than you would get with simple drug illusion. We saw this effect rather dramatically in our pre-clinical studies for Kangaroo RM weeks after the drug illusion was complete. The biologic pouch still had the ability to kill a six-long challenge of pathogenic bacteria.

Speaker 4: So we're starting with relatively simple therapeutics here like antibiotics with Kangaroo RM, but we really think that's just the tip of the iceberg. So now let's look at how we're putting this technology to work across our different businesses.

Speaker 4: which is an envelope technology used primarily with pacemaker implantation today, but it also has indications in neurosimulation and the like. Simpliderm, or acellular dermis technology, which is used in breast reconstruction. Cardiovascular, which leverages porcine-derived extracellular matrix for cardiac and vascular surgery.

Speaker 4: that best leverage are drug-looting technology moving forward.

Speaker 4: focusing on kangaroo for a minute we saw very healthy top line and gross margin improvements this is a product that we distribute through two channels one is through a proprietary sales force and the other is through our distribution partner Boston scientific

Speaker 4: Kangaroo has tremendous value, both with and without antibiotic supplementation. There has been some great clinical work published that shows the benefit of Kangaroo, particularly in the subcutaneous defibrillator placement, where migration and fibrosis are a real threat to efficacy.

Speaker 4: There's a new paper out in Jack is the Journal of the American College of Cardiology demonstrating this effect. Look for it. We also have some exciting data being presented at the upcoming annual Heart Rhythm Society meeting in New Orleans. We will be there from May 19th of the 21st at Booth 319. If you're there, stop by. We would love to see you.

Speaker 4: And again, all of this great activity is on our currently marketed version of kangaroo without antibiotics. But as mentioned in the opening, we are preparing for the recent mission of kangaroo RM, our pouch product that elutes antibiotics by fanpid and minocyclin. I know the question that everyone wants to know.

Speaker 4: when will we be ready to resubmit to FDA? What I can tell you now is that we are confident we can produce a high quality submission and, too, it will be filed within the calendar year.

Speaker 4: We will provide further updates as we gain more specificity.

Speaker 4: Now moving to SimpleDerm. Here we saw a top line growth of 40%. Surgeons love this product. We sell SimpleDerm through our own distributor network and as recently announced, we have added breast implant manufacturer Cientra as a partner. This makes a lot of sense for both organizations.

Speaker 4: reduction on simple dermis, an important goal for us, and we believe these improvements along with volume increases we expect to see with the CNTRA partnership will increase the profitability of this line substantially.

Speaker 4: On the other side of the house, we have our more mature businesses in terms of revenue growth potential, but which are still great cash producers for the organization.

Speaker 4: These are our cardiovascular and orthobiologic businesses. And yet, even here, we saw solid growth this quarter. Our cardiovascular business was up 12%.

Speaker 4: And our new partnership with Lemate will open up our product representation significantly, adding 58 direct sales reps to our current coverage. In this new model, we sell product to Lemate in bulk at a transfer price that is approximately about half of what we're recognizing in the end market. Now the spot.

Speaker 4: partnership will improve our profitability and our cash flow.

Speaker 4: Our final business unit is worth the biologics.

Speaker 4: It is our largest in terms of revenue, and here we've made remarkable progress under new leadership. For the period, sales grew 7% to $6.7 million and gross margin improved 14 points. Deves improvements are driven by strong demand for the product, and by process improvements the team has implemented along the way, both of which we...

Speaker 5: We achieved 14% growth for the first quarter of 2023. Net sales of $13.1 million.

Speaker 5: The increase was driven by growth across all four business segments led by our Simploderm and Kangaroo product lines.

Speaker 5: Growth profit for the first quarter of 2023 was $6.3 million, resulting in a gross margin of 49 percent, up 11 percentage points compared to the prior year period.

Speaker 5: On a non-gap basis, excluding the amortization of intangibles, which may be viewed as more indicative of our operating performance, growth margin grew to 55%.

Speaker 5: up from 45% in the first quarter of 2022.

Speaker 5: biologics and women's health business unit.

Speaker 5: The increase was primarily due to increased non-cash accruals related to the 2021 recall of our fibercell product.

Speaker 5: With the gains in gross profit and the somewhat higher operating expenses in the quarter, our Q1 net loss was only slightly changed from the prior year period coming in at $8.0 million for Q1 of this year compared to $8.1 million in the year ago quarter.

Speaker 5: As of March 31, 2023, our cash position was $11.8 million. This reflects cash usage of $5.2 million for the quarter. Based on a variety of factors, the partnerships we've implemented continued organic growth and a variety of other efficiency measures we've implemented. We expect this burn rate to come down significantly during the remainder of the year.

Speaker 5: We'll see some effect in Q2 and by the second half of the year we expect cash burn to be at roughly half of recent levels. In other words in the range of two to three million dollars per quarter for Q3 and Q4 of this year.

Speaker 5: I'd also like to remind everyone that we're fortunate to have a committed base of shareholders, Chief Among Them, High Cape Partners, who is one of the founders of the company and continues to be our largest shareholder. We very much appreciate that High Cape remains actively involved in the company and committed to our long-term success and increasing shareholder value.

Speaker 5: And with that, I'll hand it back to Randy before we take questions.

Speaker 5: And with that, I'll hand it back to Randy before we take questions. Thank you, Matt.

Speaker 4: I'd like to finish up with a summary of our priorities moving ahead. First, we are continuing to drive top line growth, particularly in our kangaroo and simple Durham lines. To this end, we are strengthening our partnership with Boston Scientific by Building Awareness.

Speaker 4: around the unique synergies Kangaroo offers Boston CRM products, specifically their subcutaneous defibrillator. With Simploderm, we are continuing to drive sales through our own distribution network and are working aggressively with Cientra to get their sales team up and running.

Speaker 4: We are also doing the same with Lamate looking to set a strong trajectory out of the gate for our cardio vascular products

Speaker 4: We have made to stick and to serve as a base for even better margins going forward. As Matt pointed out, we are doing a nice job reducing operating expense and are targeting to have our cash burn rate cut in half in the second part of the year.

Speaker 4: And we're still not done with business development activities. We've had some solid wins already this year, but we look forward to capitalizing on additional opportunities specifically around our orthobiologics and kangaroo businesses, which could further improve our cash position.

Speaker 4: And our third point of focus is the recent mission of Kangaroo RM. Our regulatory and R&D teams, led by Dr. Michelle Williams, are hard at work generating the data that agency needs for recent mission. And we look forward to providing you with updates as our progress unfolds. So we kicked off 2023 in a really positive note by generating record revenue.

Speaker 4: and open the line up for questions.

Speaker 2: Okay, again if you'd like to ask question press star one and it looks like we have a question from Ross Osberg from Counter, your line is open.

Speaker 6: Hi guys, congrats on the strong first quarter. I'm taking your questions. Thanks, Rob. So maybe starting off, just would be curious to hear the rationale for not providing revenue when you got it at this point.

Speaker 5: Well Ross, you know, we're very pleased with the growth that we saw in Q1 and we feel like we're on a good trajectory in really all parts of our business. But the fact that we've recently implemented the couple of partnerships that we talked about, the deal with the Antra and the deal with Lemate.

Speaker 5: Make it a little bit harder to just predict within a reasonable range, reasonably tight range. Exactly what the future revenues will be. We feel like they're headed in the right direction and importantly in both cases we feel like both of those deals will really contribute more beneficially to the bottom line than if we were trying to do all the sales ourselves.

Speaker 5: But we'll continue to evaluate that over the next quarter or two. And as we get a little bit of trajectory going with both those partners, as well as our own organization and its new form, we'll reconsider whether it makes sense to.

Speaker 5: But we'll continue to evaluate that over the next quarter too. And as we get a little bit of trajectory going with both those partners as well as our own organization and its new form, we'll reconsider whether it makes sense to do that in future quarters. And so we'll continue to evaluate that over the next quarter.

Speaker 6: Okay, fair enough. And then I guess I realize that it's only been 20 days or so since your partnership announcement with LeMade. But have you seen an increase in productivity or sales horse with respect to kangaroo given it's their focus now? And do you plan to add to your direct team there? Yeah.

Speaker 4: Yeah, Ross. So right now, our direct team there and our sales and commercial leadership

Speaker 4: is really focused on training and training their sales team and on account conversion where it makes sense for LeMate to have complete access to the account. So we're looking...

Speaker 4: Right now to make sure that all of the customer and all of the revenue base we have transfers over completely and then have them build on that moving forward. So 20 days in, yeah, you get way too early for us, you know, to...

Speaker 4: to see anything directly out of the gate. I will say this though, this is a really solid partner and this is a partner that we communicate with on a daily basis, both at the team member level and at the leadership level. And...

Speaker 4: I think both of us, and I think the same thing with Sandra, by the way, both organizations and these partnerships are really important to both of us, and their success is really important to both of us. So we really couldn't be more pleased with how either one of these has started out so far. Okay, great. And then lastly, maybe on...

Speaker 5: Yeah, so actually, this is a good question, Ross. In the first quarter, the changes that we made really were enacted very close to the end of the quarter. And so...

Speaker 5: We talked about them then on our call for Q4, which is not until late in the quarter during Q1. So some of the cost of those changes will actually add to some of the expense in Q2. Other changes that we may be able to see a more immediate effect.

Speaker 5: So I would say the overall effect in Q2 will be a little bit more muted but we do expect cash burn to come down in Q2. So, you know, rather than the five million dollars that we saw in the last quarter and pretty consistently in the few quarters before that, you know, it's probably more like in the three to four million dollar range in the second quarter. And then as we get into Q3 and Q4, we should see the full benefit of the changes and we'll also start to see some of the changes in Q3.

Speaker 5: $3 million per quarter, per quarter range.

Speaker 6: Okay, great. Thanks for taking my questions and congrats to get on the strong quarter. Thanks, Ross.