AxoGen, Inc. (AXGN) Q1 2015 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the AxoGen First Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Michael Polyviou. Thank you. Sir, you may begin.

Thank you, Gen, and good afternoon, everyone. Thank you for joining us today on the AxoGen earnings conference call to discuss financial results for the first quarter ended March 31, 2015. Today’s call is being broadcast live via webcast, which is available on the AxoGen website. Within an hour following the end of this live call, a replay will be available on the company’s website at www.axogeninc.com, under Investors. Before we get started, I would like to remind you that during the course of this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company’s past and future filings with the SEC, including, without limitation on company’s Forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance. And with that, I would like to turn the call over to Karen Zaderej, President and Chief Executive Officer of AxoGen. Karen?

Thank you, Michael, and good morning, everyone. And welcome to AxoGen’s first quarter 2015 conference call. Joining me on the call today is Bob Johnston, our Chief Financial Officer, to discuss our operating performance and financial highlights of the quarter. AxoGen’s performance in the 2015 first quarter continues with strong pattern of growth and momentum that we delivered in 2013 and 2014. We have continued to execute a strategy to drive increased awareness and usage of our portfolio of nerve repair products and create a shift in clinical algorithms for nerve repair through education and clinical data all while strengthening our top line growth and financial position. The AxoGen strategic approach continues to deliver strong results. We reported record quarterly revenue of $4.95 million, which represents a 58% increase over last year’s first quarter. In addition to reporting record revenue in the first quarter, our gross margin was 80% as we continue to deliver improved performance across our key metrics. We are proud that we delivered the strong results despite well-documented weather-related issues that we and many other businesses faced in January and February. In fact, once weather-related issues subsided, the sales momentum returned and we had a record sales month in March, which was promptly surpassed another record month in April. The market for peripheral nerve repair is large and in the clinical areas in which we are currently focusing is estimated to be a $1.6 billion market in the U.S. Let me outline how we intend to grow in this market and take advantage of this large opportunity. Our greatest strength is AxoGen’s comprehensive product portfolio. The portfolio addresses the key issues facing nerve surgeons today, how to provide off-the-shelf treatment options for patients in a safe and cost effective manner and avoid the potential complications and costs associated with an additional surgery to harvest autograft nerve tissue. Our three brands address the full spectrum of surgical repair needs for the typical nerve repair surgeon. The first of these products is Avance Nerve Graft. It is donated human nerve tissue processed through our proprietary cleansing and de-sterilization method and intended for the surgical repair of peripheral nerve gaps. Next is AxoGuard Nerve Connector, the only extracellular matrix coaptation aid for tensionless repair of severed peripheral nerves. And finally, AxoGuard Nerve Protector is the only extracellular matrix implant used to protect injured nerves and to reinforce the nerve reconstruction while preventing soft tissue attachments. Our products eliminate the need for an additional surgery associated with the harvest of nerve autograft tissue and offer new options to treat the more than 900,000 nerve injuries that will be surgically repaired this year in the United States alone. Autograft nerve harvest is a surgical procedure in which a healthy nerve is removed from somewhere in the patient’s body and used to repair the injured nerve. Autograft nerve harvest may cause a loss of function to the patient and can add risk and expense to the hospital. In today’s healthcare environment, hospital administrators are seeking medical products that improve the quality of care while at the same time providing an economic value by reducing risk and cost. I believe AxoGen’s nerve repair products address each of these concerns. First, the harvest of the autograft is not separately reimbursed and there is no financial driver for a hospital to perform this procedure. In addition, elimination of the procedure to harvest the patient’s own nerve will save 30 minutes to 90 minutes in total procedure time. That in turn reduces the cost of both OR time and anaesthesia. Using a national average for OR cost, this time savings equals between $4,000 and $12,000 in cost savings for the hospital. In fact, not only does the reduction in time save cost, it presents the hospital with the opportunity to perform more surgical procedures. A typical large hospital could gain the equivalent of 6 days to 9 days of additional available OR time in a year. In addition, eliminating the need to harvest the patient’s own tissue by use of an off-the-shelf AxoGen nerve repair products may allow the use of local or regional anaesthesia instead of general anaesthesia, which further reduces cost. AxoGen’s off-the-shelf nerve repair product may also prevent complications associated with nerve autograft harvest procedures. Surgical site infection is one of the most common complications of any surgical procedure and the cost to a facility to treat a surgical site infection averages $20,000 and can exceed $100,000. Hospitals are increasingly aware of this cost as they are being held more financially accountable for readmission, avoidable complications, and serious reportable events that occur during a patient’s time in a hospital environment. The only way a hospital can completely eliminate the chance of a hospital acquired infection at the additional surgical site is to use an off-the-shelf AxoGen product and avoid the harvest procedure entirely. AxoGen off-the-shelf nerve repair products offer compelling value message to surgeons, healthcare facilities and patients alike. And we believe our value proposition is driving steady surgeon migration to our product portfolio. Let’s now turn to our execution strategy. Since adopting a focused marketing and sales approach in early 2013, we feel we’ve had a consistent pattern of stellar results. Let me highlight how the team is exceptionally executing our plan, what I like to refer to is our four pillars of growth. First, we are building a higher level of market awareness. To introduce more surgeons to the benefits of new treatment options, we engage with them at hospitals, clinical conferences, promotional events and surgeon education courses. As I mentioned on the fourth quarter conference call in January, we attended the joint annual meetings of the American Association for Hand Surgery, American Society for Peripheral Nerve and the American Society for Reconstructive Microsurgery where we sponsored a surgeon panel, titled, "The Value of Nerve Repair Technologies in Your Practice". We have over a 100 surgeons attendant the event. More importantly, the tone of the conversation in these meetings has shifted over the last year. The questions asked by the surgeons in the past were on the basic science of our products and the questions asked today are related to the practical aspects of using our products, things such as what sizes to order, and when to use one product versus another. Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. In late 2013, we initiated a surgeon education platform focused on best practices in nerve repair to help drive awareness of surgical techniques that lead to positive outcome. To date, we’ve seen an increasing revenue of greater than 60% from surgeons who have attended our two day courses. We have plans for nine of these events in 2015 and we have already conducted three so far this year, that’s compared to four in all of 2014. The third pillar of our growth strategy is to grow the body of clinical data to support the use of our product. We continue to make excellent progress building data to assist surgeons in the decision making process. At the end of March, the RANGER Study, an ongoing multi-centered study focused on the repair gaps and peripheral nerves included over 650 nerve repairs with Avance Nerve Graft. Results from this study have already been published in three peer reviewed journals having it sided and other publications more than 130 times and have been presented more than 35 times at clinical conferences in the U.S. and in Europe. Further, data from this study has already been accepted for presentation six more times at clinical conferences scheduled through 2015. RANGER become the largest clinical study in the treatment of severed peripheral nerves, and its increasing size and diversification allows for analysis of the many different factors that impact outcome. Our final growth pillar is sales execution. We simultaneously worked to increase usage in existing accounts and expand our sales footprint by adding new accounts. We see adoption as a process that occurs overtime. In most cases, a surgeon begins with one product incorporating that product into his or her treatment algorithm before moving on to another AxoGen brand and expanding their treatment algorithm. These keep our reps focused on driving adoption of the individual brands and of the entire portfolio. In Q1 an account that ordered all three of our brands generated at least five times more revenue than an account ordering just one brand. So we continue to drive usage of the full portfolio to realize these revenue benefits. We have continued to expand our sales force and at the end of the first quarter, we had 32 direct reps compared to 24 in the year ago first quarter. We’ve planned to continue to grow our sales force with a target of up to a total of 39 sales professionals in the near term to increase our presence in key growth markets. In addition to having a broader sales force, our current team is far more knowledgeable on the best practices of nerve repair. At the end of March, more than half of our direct reps in the U.S. have been with us for more than 12 months and are showing good growth in their respective territories. And in addition to our direct sales team, we had an additional 24 territories managed by independent distributors. With that Bob, will provide you with some additional details on our financial results.

Thanks, Karen. I’ll focus my comments on the financial highlights during our first quarter. Our revenue increased 58% to $4.95 million, compared to last year's first quarter of $3.14 million. This growth was primarily due to increased product usage by existing accounts and the addition of new customers. Additionally, we recorded a $142,000 in grant revenue, which provides additional funding for some of our product development and pipeline work. Gross profit for the quarter increased 62.7% to $3.97 million, compared to $2.44 million for the prior year's first quarter. Gross margin was 80.1%, compared to 77.7% in the year ago first quarter and similar to the 2014 fourth quarter. The year-over-your expansion reflects manufacturing efficiencies, a favorable product mix, and a product price increase we implemented on much first. Now, let me turn to expenses. As we discussed on prior calls, we continue to invest in sales and marketing to raise our awareness and to expand our sales footprint. Sales of marketing expenses increased approximately 44.4% to $3.9 million, compared to last year's first quarter of $2.7 million, due to the expansion of direct sales force, increase support for both the direct sales force and the independent distributors, and surgeon education. We ended the quarter with 32 direct sales reps, up from 24 at the end of 2014 first quarter. We also helped two surgeon education forms in this year's first quarter, compared to just one in last year's comparable period. However, with the 58% quarterly revenue increase, sales and marketing expenses as a percentage of revenue declined to 79.4% for 2015, compared to approximately 86.7% for the first quarter 2014. For the first quarter 2015, general and administrative expenses were flat, compared to the first quarter of 2014. As a percentage of revenue, general and administrative expenses continue to decrease due to the revenue growth and consistent with our prior comments, we do not expect significant increases in general and administrative expenses, which should continue to decline as a percentage of revenues as sales increased. R&D spending decreased 17.5% to roughly $671,000, compared to the year ago first quarter. R&D expenditures vary from quarter-to-quarter. We expect to start the BLA study this year, as well as other ongoing clinical activities, which will moderately increase R&D expenditures this year. As a percentage of sales, R&D expenses continue to decline as we continue to show top line growth. The first quarter interest expense was approximately $995,000, compared to approximately $1.2 million in the first quarter of 2014. The decrease was due to the difference in the interest expense related to the revenue interest agreement of three peaks, compared to the interest expense related to the former PDL royalty contract. For those that are new to the AxoGen story, under the new Three Peak financing, we expect to save $3.2 million in total debt payments in 2015, $5.6 million in 2016 and $5.4 million in 2017, and for each year beyond, compared to the prior PDL financing, by lowering the annual debt payments refinancing a substantially freed up cash flow to support our growth strategies. We ended the first quarter with $19.3 million in cash, which included the $13.6 million of net proceeds related to the common stock offering in February. Our monthly cash burn for the first quarter was approximately $1.1 million, which is consistent with our plan to invest and expanding the direct sales force from professional education events to grow the top line. To echo what Karen said earlier, the impact of the refinancing in and the capital rates have considerably strengthened our balance sheet providing us with sufficient resources to grow the business. The issuance of 5.4 million shares in connection with the equity offering increased our outstanding common stock to approximately 24.9 million shares as of May 4. We recently announced two developments related to our manufacturing and distribution facilities. As part of our long-range planning, we are transitioning out of the Virginia Beach facility where we process our advanced now nerve allograft by early next year to new processing space to accommodate our continued growth. We've also expanded our space at the Burleson, Texas distribution centre to further meet our growth needs. With that I will hand the call back over to Karen for closing remarks. Karen.

I want to take a few minutes to talk about some other recent news. First, the FDA has given us clearance to proceed with the Recon study to support our investigational new drug application for Avance Nerve Graft. This multicenter study will compare Avance Nerve Graft to hollow tubes for bridging gaps in peripheral nerve tissues and will support our biologic license applications. Pursuant to an enforcement discretion granted by the FDA, AxoGen continues to market Avance Nerve Graft while it is transitioned to a biologic product. We will be moving forward promptly with the study and we expect to enroll the first subject in the second half of 2015. We are also exploring opportunities for our products to repair nerves and other applications such as nerve separate during prostate cancer surgery. The cavernous nerves that control erectile function and continence line on either side of the prostate capsule, and are sometimes removed when cancer has spread beyond the prostate. In this situation, high rates of impotence and incontinence are reported, and there's a need to evaluate options to repair the nerve at the time of the surgery. As I’ve mentioned previously, a study of the use of Avance Nerve Graft for this type of repair was initiated several years ago. We are now through enrolment and 24 month follow-up on this subject and we anticipate that we will be able to share results from this study later this quarter. In summary, we are off to a strong start to the year with a record first quarter and our momentum has continued into the second quarter with a record month in April. I am confident that our focus on the execution of our growth strategies and our strengthened financial position will drive the continued adoption of our products. We are reaffirming that our full year 2015 revenue guidance will exceed $24 million and that we’ll maintain annual gross margin in the mid to high 70% range. As always, I would like to thank our investors for their continued support and all of the members of the AxoGen team for their commitment to helping patients with nerve entries and for delivering another strong quarter of business results. Gen, we are now ready to take some questions.

[Operator Instructions] Our first question is coming from the line of Tao Levy from Wedbush. Please proceed with your question.

Yes. Hi, good afternoon.

Hey, Tao, how are you?

Good, thanks. So maybe just a couple of quick questions. In terms of the percent of revenues coming from events versus the AxoGuard products similar to some product orders.

Yes, it’s 55% events and 45% AxoGuard on a revenue basis.

Perfect, okay. And then I’d love to maybe if you can provide a little bit more detail around carrying your comment that you made regarding April being record month after March. Maybe the price increases seemed to have stuck given the strength in April and may be if you could talk about who are the surgeons that are ordering now? Any change in terms of the ones that may have attended education sessions from I don’t know six months or nine months ago. Anything like that would be really helpful.

So lots of questions there, Tao, all combined. So a little more color on April, so April is a combination that predominantly driven by just growth [ph]. So we did take price increase in March 01, that of course took place all through March, we will see a full quarter impact in second quarter. But we really are focused on the growth and momentum in units, and continue to see that play out with adoption of the products. Some of that certainly comes from a professional education events, we do track that very closely, it’s not only from professional education events. I think the big impact we see from professional education events is that they seem to accelerate the adoption curve of the surgeons who attended and that’s what really results in that 60% increase is that they start to use multiple brands at an increased penetration factored them the surgeons who do not attend the events. And so we see those as being very impactful in growing the market.

And I guess, is there any insights you can provide on sort of like reorder rates, or same-store type sales, I’m just either again trying to get a sense of where these procedures are coming from, is it going deeper within a surgeons patient pool or colleagues within the same hospital or is it new people coming into using the technology?

So, it is a combination of both, it’s actually - we see it predominantly in data from account. Hospitals, are the or the accounts are the ones that order the products, so it is somewhat blinded to us as to whether it’s one surgeon or two surgeons using it. We don't always know that because again we don't intend every single case in our sales process, but having said that we would still see that the majority of our dollar growth comes from existing accounts with the, but we're still regularly adding additional accounts and we see that they grow slower initially, that's part of our adoption process that we’re trying to accelerate with the professional education, but they grow slower initially, but create a footprint for growth in the future.

Okay great, thank you.

Thank you. Our next question comes from the line of John Gillings with JMP Securities; please proceed with your question.

Hey can you hear me guys.

Yes.

Yes John.

Good evening John.

Okay. Good evening. So, I just want to follow-up a little bit on sales question about the sales mix, last quarter you gave us kind of a breakout between the percentage of revenue from existing customers versus new accounts, I was wondering if you’d be willing to do that for us again?

So, the breakout again for the first quarter is roughly in the high 70%, 80% range from existing and the difference than is from new accounts.

Okay, so fairly consistent with…

Fairly consistent with what we've been seeing, but back to Karen's comment we’re seeing growth in both areas, both existing accounts, as well as new accounts.

Okay. And then just to put a little bit more color around that when you see these new accounts come in, you know, you said they typically start out using a single product and then they build-up from there, about how long is it before you start seeing that sort of benefit as incremental penetration in account, is that something that happens over like a 6 months to 12 months timeframe or more like 12 months to 18 months just sort of any color you can give us there would be helpful?

I think it varies quite a bit John. I don’t really have a metric that I think I can give you that's a reliable at this point, it depends on so many different factors, including the type of account it is, obviously large academic centers tend to be slower in both their value analysis committee and their review process. So while you may use some products during that time they aren't even technically fully approved to be used broadly and so that process alone can sometimes take 12 months and then to factor that relying on the surgeon process to adopt and change of treatment algorithm. So it is highly variable, so I don't really have a guidance I can give you.

Okay still some helpful color, I appreciate that. And then I was just hoping to get a quick update on the Oral Maxillofacial side, I know it’s still early days there, but if you could just give us an indication of how things are going and maybe help us understand how the sales process works there, is the surgeon that will be using the product the same one who may have got or damaged a nerve as part of another procedure or do you need to develop like the roof deferred referral network there?

Yeah, good question. We entered into the Oral Maxillofacial space in mid-year of last year and it is a very concentrated market. So, the people we are targeting are the surgeons who are referral practice, who repair these injured nerves; typically they are at academic teaching hospitals. There are about 200 of these specialists who are micro surgically trained in the Oral Maxillofacial field, Oral Maxillofacial market today. We aren't developing the referral network. These injuries have happened and they’ve repaired them in the past using autograft, the same way the hand surgeons would have repaired a traumatic injury. So while they have a new tool to make that happen. They already have referral networks in place to get these patients who have injuries either from dental implants being put in or from wisdom tooth extraction. We are finding some strong support and enthusiasm from this group. We actually had a new publication come out from Dr. John Zuniga in the early part of the year, supporting use of Avance Nerve Graft in these types of injuries, showing results up to 7 centimetres or 70 millimetres and that’s been received well by this community and we continue to rollout to those specialist surgeon.

Okay. Thanks for that. And then just a couple of quick financial ones. So you guided again to sort of mid to high 70s% on the gross margin guidance, but this is the third quarter in a row that you’ve been 80% or higher. Anything sort of onetime in the quarter, did maybe the grant revenue factor into that high margin in the quarter or is it just a matter of the last three quarters have happen to had really good mix?

So we’ve had really good mix. There’s nothing that has been onetime or extraordinary. It’s been our normal operations. But as we’ve said, a particular quarter can depend on the product mix. So we’ve had, as we said earlier in our comments, we’ve had favourable product mixes in the last couple of quarters. We do expect to continue to have good high gross margin. But it can’t depend on the product mix.

Okay. And then just last one on the cash. So you guys came out of 2014 with $8.2 million, you raised a $13.6 million and ended the quarter with $19.3 million, so that would imply a cash burn of about 2.5 for the quarter from doing my math right here. And I think you said in the call that it was more in the neighbourhood of 1.1 per month. Is there anything I’m missing in there or maybe my back of the envelope calculation is not right, does that sound right or am I missing anything there?

No, it was our operational cash. It was $1.1 million per month...

Okay.

...for the first quarter. And that was, as I mentioned earlier, is consistent with what our plan was and strategic. As you’ve heard, we are up to 32 direct reps at the end of March, up from 23 at the end of September. So we are making that investment. And as you’ve also heard, again, for our strategic plan, we are increasing our profit of Avance.

All right. Well, that’s all we have for today. Thank you.

Thanks, John.

Thank you. [Operator Instructions] Our next question comes from the line of Bruce Jackson with Lake Street Capital Markets. Please proceed with your question.

Good afternoon and thanks for taking my questions.

Thanks, Bruce.

So, getting back to the Oral Maxillofacial Surgeons, there was going to be a clinical study proposed at some point starting with advantages of Avance and the Oral Max applications, has that been published yet?

So there is an investigator initiative study. This is the one I referenced just a moment ago. So it’s not sponsored by us, but it is surgeons who have been key opinion leaders and that should help educate other surgeons about use of Avance and Oral Maxillofacial surgery. One of those is named Dr. John Zuniga and his case series has published.

Okay.

So bring it to reference to that, but, yes, there is a case series. And it showed that actually 87% meaningful recovery rate, which is remarkably similar to what we see in RANGER. They have different measurement outcomes obviously [indiscernible] trying to look at different outcomes, but they are still showing a very similar outcome as what we’ve seen in the broader study and trauma.

Okay. And then the – with the RECON study, are the cases for that study going to be reimbursed and will there be any additional expense with that trial?

So the RECON study is going to be a study where it is standard of care producers, yes, are paid for under the reimbursement system that they would be paid for as any patients who came in for those – that nerve repair. In fact, different than most studies, products will actually be sold into the trial. This was – because of any situation we have with Avance Nerve Graft being already available in the marketplace and in that same hospital for that same indication. It was a concern that individual patients would get biased and enrolled in the study. And so just to keep things consistent and normal, whatever the reimbursement is for that patient, however they would have been treated, they will be randomized, virtually come into this study without an economic influence about the product being paid for or not. So, yes, the study does have a cost but it is predominantly data management and study coordination, and so the study over the entire multiyear period will run between $2.0 million and $2.5 million total cost.

Okay. Then moving over to the sales reps, at the end of the quarter, you had 32. The objective for the year is 35 to 39. How are you feeling right now about the – are going to be at the lower end or the higher end of the hiring objective for the year? And how would you expect that – what’s the – how does that hiring play out over the next couple of quarters. So just give me like flat overall or kind of keep moving up certainly.

We will keep moving up, but we are pretty excited about the opportunity in front of us and so we have a range there because I want to make sure that we give ourselves the opportunity to hire absolutely the best talent. So I’d rather not get to a job, I got to fill a job with an absolutely talented individual, but we are leading towards make sure that we start all of those physicians.

Okay. That’s it from me. Thank you.

Thank you, Bruce.

At this time, there are no further questions. I’d like to turn it back to Karen Zaderej for closing comments.

Thank you all for joining our call today. We are proud of this record quarter. We are off to another strong start with a record month of April and we look forward to sharing our results with you in August. Have a good evening.

Thank you. Ladies and gentlemen, this conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.