AxoGen, Inc. (AXGN) Q1 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the AxoGen First Quarter 2013 Earnings Conference Call. At this time all of the participants are in a listen-only mode, a brief question-and-answer session will follow the formal presentation (Operator instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host Carol Ruth, President of The Ruth Group. Thank you, Ms. Ruth. You may now begin.

Okay, thank you and good morning. Thanks for joining us today for AxoGen’s first quarter 2013 financial results conference call. On the call with me today are Karen Zaderej, AxoGen’s Chief Executive Officer, and Greg Freitag, Chief Financial Officer. Last night, AxoGen issued a press release announcing its first quarter 2013 financial results, If you have not received a copy of the release please feel free to contact our offices at 646-536-7000 or e-mail investorrelations@axogeninc.com and we will have one forwarded to you. Today’s call is being made available to a broader audience via the Investor Relations section of the company’s website at www.axogeninc.com. Following remarks by management we will open the call to your questions. We anticipate the duration of the call to be approximately one hour. In addition, replays of this call will be made available on the Investor Relation page of the AxoGen’s website probably after conclusion of the live call. During the course of this call, management may make certain forward-looking statements regarding future evens and the company’s future performance. These forward-looking statements reflects AxoGen’s current perspective on existing trends and information which can be identified by such words as expects, plans, will, may, anticipate, believes, should, intent and other words of similar meanings. Any such forward-looking statements are not guaranteed of the company’s future performance and involve risks and uncertainties including those noted in our filings with the SEC on Form 10-Q, 10-K and 8-K. Actual results may differ materially from those projected in these forward-looking statements. For the benefit of those of you who may be listening to the replay this call was held and recorded on May 1 at approximately 10:00 AM Eastern Time. Since then the company may have made additional announcements related to the topics discussed. Please reference the company’s most recent press releases and current filings with the SEC. AxoGen declines any attempt to obligation to update these forward-looking statements. With that let me turn the call over to Karen.

Thank you, [Carroll]. Good morning everybody and thank you for joining our call. This has been an exciting quarter in AxoGen. I’ll get to the details on our first quarter in a moment, but first I’d like to share my personal enthusiasm on the momentum that AxoGen has gained during the quarter. I’m very pleased with the growing interest in AxoGen which has been reflected in our financial market activity. I’d like to welcome our shareholders to this call and thank them for their ongoing support. Second, I’m very pleased with the positive recognition from the surgical community for AxoGen as a leader in peripheral nerve repair. There is positive buzz about the company our products and our educational approach to the market. Finally and perhaps most importantly, I hear more and more stories about the significant impact to patients who suffered from peripheral nerve injuries, and I’m honor that our product have a role in restoring quality of life for these patients. I believe the recent media interest in telling these impact with stories, demonstrates the broad appeal of AxoGen and our impact. I’d also like to highlight two very recent developments that I believe we’ll continue to lay the groundwork for our future development and growth. First we were pleased to announce this morning that our AxoGuard products, AxoGuard Nerve Protector, and AxoGuard Nerve Connector have been granted CE Mark approval in Europe. We’ve also completed registration of Avance Nerve Graft in the UK and Netherland both of these developments will broaden our footprint in Europe. Second, while we remain focused on our current call pattern of hand and plastic reconstructive surgeons repairing traumatic injuries. We’ve now added our first expansion market in oral maxillofacial surgery. Oral nerve injuries result from a complication of third molar extraction through…

Thanks, Karen. I’d like to remind everyone on the following through for the first quarter of 2013 financial results, press release and Form 10-Q for the current quarter that was issued yesterday. The press release with financial details can be found in our website at www.axogeninc.com. As Karen mentioned, we reported record quarterly revenue of $2.14 million in the first quarter 2013, up approximately 30% year-over-year from $1.65 million in the first quarter 2012. Gross profit for the first quarter of 2013, also grow approximately 30% and was $1.58 million, up from $1.21 million in the first quarter 2012. Gross profit margin for the first quarter was 73.9%, up 50 basis points compared to 73.4% in the first quarter 2012. This is in line with our expectation for gross margins in the low 70% range. The increase in gross profit and gross margin was primarily attributable to the year-over-year revenue growth, manufacturing efficiencies and a price increase instituted in March 2013, partially offset by an increase in our inventory reserve. Sales and marketing expense was $1.89 million in the first quarter 2013, up 16% compared to $1.63 million in the first quarter of 2012. The increase was primarily due to increased sales and marketing activity. Research and development expense was $410,000 in the first quarter 2013, up 38% compared to $300,000 in the first quarter of 2012. The increase was primarily due to investments in clinical studies that support the use and the use in regulatory status of our products. General and administrative expense was $1.61 million in the first quarter 2013 up 31% compared to $1.23 million in the first quarter 2012. The increase was primarily due to increased salaries and benefits, public company expenses and travel and other expenses. Total operating expenses for the first quarter 2013 were…

Thank you. (Operator Instructions) Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Go ahead with your question please. Jeffrey Cohen – Ladenburg Thalmann: Hi, thank you for taking my questions.

Good morning, Jeff, how are you? Jeffrey Cohen – Ladenburg Thalmann: Just fine, so just a few here. So, firstly, should we think of gross margins more toward the 70%, 71% as opposed to the mid 70s going forward, how do you think that comes out for the balance of the year?

Yeah, so Jeff, well, we continue to say, so we model at 73% and we’ve been doing better than that, we’re not providing any further guidance, but we certainly are comfortable at 73% in the fact that we’ve been able to consistently exceed that by a little bit. Jeffrey Cohen – Ladenburg Thalmann: Okay. And no device tax payments, correct?

That is correct. Jeffrey Cohen – Ladenburg Thalmann: Okay. And along those lines, can you update us on the BLA for the FDA for Avance and the expected timeline or how that’s going?

Yeah, we are moving forward with that as part of our transition of the Avance Nerve Graft from 361 tissue to a license biologic, the next step for us will be beginning the clinical study which is we call it the Recon study which is a randomized perspective pivotal study compared to hollow-tube conduit. We would expect enrollment of that to begin sometime this year. Jeffrey Cohen – Ladenburg Thalmann: Okay. And can you talk about the size of sales force currently and as of the end of the Q1?

So, we’re at 18 sales associates today, and we will continue to meet [therein] few additional people each quarter. Jeffrey Cohen – Ladenburg Thalmann: ?:

Yes. Jeffrey Cohen – Ladenburg Thalmann: Okay. Okay, and lastly one more, so could you talk about Europe congratulations you’ve got an approval for the Connector and the two products, can you talk about Avance and where that might stand for Europe and for sales?

Jeffrey Cohen – Ladenburg Thalmann: Okay, so you said Italy, Austria, Switzerland, United Kingdom and the Netherlands?

Yes. Jeffrey Cohen – Ladenburg Thalmann: Those five countries currently, and could you give me like estimate as far as what percent of your revenue composition from the past quarter that’s accounted for thus far?

That’s very small Jeffrey Cohen – Ladenburg Thalmann: Very small, okay, perfect, that’s it from me, thank you very much.

Thank you, Jeff.

Thank you, Jeff.

Our next question comes from the line of Dave Turkaly with JMP Securities. Go ahead with your question please. David Turkaly – JMP Securities: Talk about the 18 reps can you remind us sort of the tenure of those folks today, and how long you think the development process is, given the uniqueness of your product line before was that higher so they are actually producing in the field?

Sure. Good morning, Dave, actually, I did want to say thank you for the coverage initiation that you started just recently I appreciate you initiating coverage on it. So it’s very nice. In terms of the 18 reps, so first they are in a wide range of tenure, anything from a month to three years, so we have a wide array, but half have less than a years seniority with us, in terms of the learning curve, we actually see impact in two ways, certainly there is a reps learning curve coming in, we need to train reps pretty extensively on peripheral nerve repair, because obviously, I can’t hire people with peripheral nerve repair experience, you know, I think that is probably a six to 12 months full learning curve. In addition to that, when they step into a brand new territory, where we have not had a rep before, they also at the same time are starting in the process of the committee process and just getting into account, and so impacts the ramp up that we see. So all-in-all we see a ramp up of 12 months and some territories more in those territories with the committee process just a little bit more argues and Boston is notable that’s an example of that. David Turkaly – JMP Securities: And just to focus on that committee process, because I just want to make sure, they were clear on this so when you go to a new account or a hospital and they never use your product before, what do you say on average the length of time is, from the first surgeon implant before can be widespread use in a hospital, how long did that process take generally?

It is so variable, it’s actually not as predictable it has a lot less to do with us than it has to do with the hospital and I think what’s going on there, it is honestly taking anywhere from a couple of days to 12 months in a given account, generally we can count on it being few months the few days is a nice event but not most common.

Yeah, one of the things with the committee process also a lot of the times we have to get approval on each one of the brands, so depending on where we’re penetrating with one of the products we may have to go back for then AxoGuard that we started with advance. And so, and many of the accounts, most of the accounts right now, we’re not fully penetrated across the product line which is one of the things that we’re focused on is to start being able to push the total portfolio within the different brands. So as Karen said it is interesting, because sometimes you can go into the hospital and there is not committee approval and then there is some regions again, Boston, we always use as a highlight more of those committee processes can be a little bit longer.

And just one more thing on those, I think the most argues thing for us is honestly getting on the agenda for the committee, because that’s the challenging thing, once we’re into the committee process we’re, we rarely end up having obstacles there, again where a unique set of products with solving a need that they have in the hospitals, but that is part of the committee process is to really evaluate from a safety standpoint and efficacy standpoint and a health economic standpoint, that introducing a new technology is the right thing for the account and they take a slow process in doing that. David Turkaly – JMP Securities: Okay, and then I know you mentioned in your commentary, some of the focus on the guys, particularly with the fellowship or specialist in microsurgery, do you have kind of estimate of how many folks like that there are and I am just curious, are these people easy to find for your 18 reps are they, can you locate target these people specifically, or is that a bit of process to acquiring the people, that would specifically benefit from all your products?

Yeah, so today we focus only on surgeons who have microsurgical training, so all hand fellowship include in microsurgical training, plastic surgeons who focused in reconstructive surgery would have had microsurgical training, some of the plastic surgeons then go on and do a fellowship in microsurgery, yes all of that is part of their background, so you can certainly identify them in both the societies that we mentioned, as well as from a hospital standpoint would be in their CD that’s posted, so, yes we can certainly target those surgeons. In addition, I mentioned the Oral Maxillofacial market that we are moving into and in that space we are only focusing again on microvascular trained fellows in Oral Maxillofacial surgery, so this is not the average oral surgeons, it’s the one who have already gone through that specialty training, and again they are already identified in their [referred] centers.

One of the interesting things to and we’re keep fighting this issue as because we’re now the Nerve Company, but Nerve is somewhat of a niche within everything else, you don’t always have certain data available so what we’ve done is, we start to creating out own database because there wasn’t one out there that was very good for what we’re focused on, and currently we have over 3000 names of extremity surgeons and continue to build our database again promoting our course, and our expertise within this particular area of peripheral nerve, and so part of the all of the work that Karen’s talked about that was building on and continued to give us a advantages for us to leverage in the future. David Turkaly – JMP Securities: And then a last one from me would be, obviously 30% growth is impressive it’s of a small base in the product based on our ability and it seems to save money and time I guess, but what is the biggest push back you guys see is there anything that you hear from your guys are preventing let’s say further adoption in your current accounts and new accounts from use of the device?

I think the biggest push back that we hear is that it’s new, so surgeons are trained in a particular method in terms of never repair most contently autograft and what they like to see is a results in their own hands before they close adopt and even expand their usage, so what we see typically that a surgeon will try a product and whatever their initial applications is and then they wait to see results and in nerve repair the nerve heal slowly, so while we provide opportunity for good outcomes for the patient we don’t feed that up, and so we’re in a waiting game our surgeons watch their patients, follow them for a while, look to them expand, as they see their own positive results that they see positive results from a peer that they respect, and I think I think that is the biggest push back that we see is they certainly see the data that’s out there, but data is somewhat two dimensional, they like to the three dimensional component of actual patient recovery in their own hands.

And that will fits into accounted that before with regards to a particular the points is maybe patient stories, don’t sound exactly as the how that translates into sales, but even physicians see that and see that as working in other outcomes the work with that allows the Ranger data, all of that starts creating critical mass to allow surgeons to feel better about the product and potentially starting to change your habit, so that’s why it’s a multifaceted approach that you have to take in order to drive that they feel comfort in use of new products. David Turkaly – JMP Securities: Thank you.

(Operator Instructions) Our next question comes from the line of Nathan Cali from Noble Financial Group. Go ahead with your question please. Nathan Cali – Noble Financial Group: Hey guys, good morning. Thanks for taking the question this morning.

Good morning Nathan, thank you.

Good morning, Nathan. Nathan Cali – Noble Financial Group: Congrats on the CE Mark approval for you guys for the AxoGuard franchise. Karen Zaderej – Chief Executive Officer: Thank you. Nathan Cali – Noble Financial Group: Just, any expectations now that you got these approvals for 2013 and then going in 2014, maybe 2015 now that you have these approvals on the ex-U.S. market and those are going to be two independent reps, if I’m correct, is there any stocking order there or how would you handle that process?

Yeah, my expectation for 2013 is that this will still remain very small, so our focus at this point is doing the right building blocks to build in the European market and so that will be a combination of certainly the regulatory release, but also and getting into the hands of the early adopters and the key opinion leaders. So that we have a strong base to build from (inaudible)(0:00:12), so I would just say from a 2013 standpoint, I am very pleased that we’ve gotten a step forward, in terms of giving that first building blocks but on a revenue standpoint, we would consider it very small allowing us to step off into growth in that area in 2014, 2015. Nathan Cali – Noble Financial Group: Okay, you guys sort of touched on this from previous questions, but what you are guys hearing from your existing accounts? I know you had some price increases congratulations on that. Can you give us some color on customer retention and then any potential for additional price increases on the horizons over the next couple of years?

So we did implement a price increase in March, obviously, in to-date healthcare environment and constraint cost environment hospital custom a good decisions when that happens, in our case I think we successfully implemented that price increase because the hospitals still see an economic value in the products that we provide, and so I think that went through very smoothly with hospitals understanding that cost will go up and that there will be periodic price increases. Our model is really going to be driven not so much on price increases obviously, yes, it is adoption, so while I expect that we’ll see some cost of living increases in the next year and that will be reflected in some price increases I don’t expect that to be a big revenue driver for us over all. Nathan Cali – Noble Financial Group: Okay

Yeah, one of the issues with the price increase that’s also comfortable, we’ve been able to execute that to our knowledge we’ve not lost any customers as a result of price increases, but our longer Graft in Avance and those price increases have really shown the capability of that being a premium product and part of our positioning as we go into the year and as we went into that price increase it’s really reflecting not only in our marketing materials, but quite frankly our pricing that is a product that is not available and a lot of ways in any other way including that as an autograft which goes back to our story of Edward The Soldier and that replacement where our capabilities was the only thing that helping that situation. So, we’re trying to also look at our pricing across the product line to also take advantage of those areas where we are the only game in town. Nathan Cali – Noble Financial Group: This maybe a tough question to answer at this point, but have you seen any sort of taking market share from an [integrer] or from the conduit players from your customer base?

On an account-by-account basis, yeah, we do see some of that it really is where we are targeting certainly in working with key surgeons that we see them decide to standardize and ultimately our goal is to get all of our continuum of products available in an account and standardize on the products that we provide that also that benefits. And so, when that happens then we see that they don’t want to carry additional inventory and so we can standardize that way. Nathan Cali – Noble Financial Group: Okay, and then just one additional question, you talked about this a little bit, do you have a percentage of revenue on product breakdown for…?

No, we have not provided guidance by product. Nathan Cali – Noble Financial Group: Okay.

I think we have said Avance is the lead and provides a larger majority, but that was certainly not an insignificant amount with AxoGuard as well.

Right, I mean revenue, for revenue certainly more than 50% of the revenue comes from the Avance product and more than 50% in the units of the AxoGuard just because of the pricing differential between those products, but we haven’t given an specific breakdown. I will tell you though what’s nice is we keep seeing and our push towards a full portfolio of products, it has remained relatively consistent in our growth as to the relationship between that which we view as being very important as the value comes from the portfolio and not from the individual products. Nathan Cali – Noble Financial Group: Okay. And then finally on you hiring projections that you should end the year with about 24, 25 reps?

Well, we haven’t given a number, but it will be more than we have, 18 and we’ll add a few each quarter. Again, I’m putting strong emphasis on making sure that we hire of course really strong people, but that we also do it in a, an amount that doesn’t distracted from the growth that we’re focusing on. And so we wanted to add a few people each quarter, but not be, so busy that myself and management is spending lots of time doing that instead managing the day-to-day business. Nathan Cali – Noble Financial Group: Sure. You guys saw some efficiencies in the first quarter sequentially on sales and marketing expense is that, are you guys realizing some efficiency there and how to do things to get the revenues going well, not increasing expenses?

Yeah. So, from the standpoint of what have increase expenses in terms of both commission and when you bring on new sales people they don’t come up and immediately become profitable to you. So, what you are doing, as you are fighting a little bit of that as you go, but as long as we don’t bring in the (inaudible) of sales people that we did in 2012 the maturity level of our current sales force should out strip the extra expense that you are brining on until you mature up in new people that come on. So part of that is the juggling aspect we go through as to how we kind of put it, that filtered in to the mix, we want to keep monitoring, how we bring new people in to what the build-up is of the current group we have so that we keep becoming more efficient as we go forward. So, obviously driving our revenue is key to us, but also not limiting new mistakes by not just ruling all sorts of people at a problem grabbing that expense and not being able to handle it. Nathan Cali – Noble Financial Group: Congrats, again on the continued success. And thanks for taking the questions today.

Thank you.

Our next question comes from the line of Tao Levy with Wedbush. Go ahead with your question please. Tao Levy – Wedbush: Hi, good morning.

Good morning, Tao, how are you?

Good morning, Tao. Tao Levy – Wedbush: Good, thanks. Just couple quick questions can you maybe talk about the sequential trends that you saw in the quarter from Q1 versus Q4 sort of how things progressed between January and March because obviously you had some conference activity in the January timeframe and then in March and I just want to get a sense of, was there any, do you have a greater interest of, as your exiting in the quarter, it’s like a challenge going forward is at some point during a anniversary some of the good growth that you had, and the growth rates could potentially slowdown, unless you start growing nicely on a sequential basis?

Yeah, (inaudible), I think as we exhibit the quarter and obviously through the beginning of this quarter, we’ve seen a very strong foundation that we built with that, with some, I guess I just keep calling it buzz or enthusiasm in the marketplace, really on the pillars of growth that we focused on. So, we focused on building out an experienced sales team, so that we have the sales leadership for execution. Really focused on jewelling those key opinion leaders and the early adopters so that we can start to expand from the early adopter base into their peers, using clinical data and peer-to-peer surgeon education as a key driver with a strong surgeon education focus. And then lastly, like as I mentioned before, I think that the patient stories had makes us a three dimensional real solution for surgeons. And so, we’ve continued to see very positive uptick from the media on these patients stories and they’ve, we’ve gotten some both national placement and key market placement of stories that really raise awareness with our primary interest in doing that and showing at the surgeons to see that this can have an impact on patient life. And so, I think that’s the buzz that I see that will be the foundation for us to drive growth going forward. Tao Levy – Wedbush: Okay. And do you have a sense of the European conduit market, what sales are right there?

Yeah, I actually don’t have good data source on the European hollow-tube conduit market market, I know that it’s a much lower emphasis for Integra. So I would suspect it smaller than the U.S. but I don’t have a good levels of number to give you. Tao Levy – Wedbush: Okay. And then just lastly, the new countries we’ve registered Avan, so they are ready to go down like UK, Netherlands you can go ahead and sell or there still it will take more administrative process that needs to take place?

So, we have not sold yet into them, but yes we are now ready to go. So we have the registrations complete from a regulatory standpoint and a distributor who is registered. Tao Levy – Wedbush: Okay, great. Thanks a lot.

Thanks. Joe.

There are no further questions at this time. I would now like to turn the floor over to Karen Zaderej for closing comments.

Thank you. Well I’d like to thank everybody for joining us today. And I look forward to proving an update on our second quarter conference call. Thank you.

Thank you. This will conclude today’s teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.