AxoGen, Inc. (AXGN) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the AxoGen Fourth Quarter and Full-Year 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] As a reminder, this conference is being recorded. Now I’d like to turn the conference over to your host Mr. Michael Polyviou. Thank you, Mr. Polyviou, you may begin.

Thank you and good afternoon everyone. Thank you for joining us today for the AxoGen Inc., conference call to discuss the financial results for the fourth quarter and full-year ended December 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 the live call, a replay will be available on the Company’s website at www.axogeninc.com, under Investors. Before we get started, I’d like to remind you that during the course of this conference call, the Company will make projections and forward-looking statements regarding the future events. We encourage you to review the Company’s past and future filings with the SEC, including without limitation, the 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 the product acquisition and or development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance. And with that, I’d like to turn the call over to Karen Zaderej, President and CEO of AxoGen. Karen?

Thanks, Michael and good afternoon everyone. Welcome to our fourth quarter and full-year 2015 conference call. Joining me on the call today is Greg Freitag, our Chief Financial Officer, General Counsel and Senior VP of Business Development. Before discussing 2015, I am pleased to announce that Pete Mariani will be joining AxoGen as the new Chief Financial Officer effective tomorrow morning. Pete has extensive healthcare and public company experience and his broad commercial, international and operational background is a great addition to the AxoGen management team. I along with the rest of AxoGen look forward to Pete joining the team. I want to thank Greg for his support and contributions as CFO since last August. Greg will continue his role as General Counsel, Senior VP of Business Development and a member of our Board of Directors. Now let’s turn our attention to 2015. Today we reported a strong finish to an exceptional year. I would like to start with an overview of our performance and then provide an update on the continued execution of our strategic growth plan. We generated record revenue of $27.3 million for the full-year, which exceeded our guidance of $26.5 million. We also had record fourth quarter revenue of $7.8 million. Coincidently both totals represent a 63% increase over the respective prior year period. Our annual growth margin was 82.3% and this result was above our stated goal. Our fourth quarter gross margin came in at 81.9% as we transitioned our manufacturing to date in Ohio. As evidenced by the continued strong gross margin this transition has gone smoothly and we are on plan to complete the shutdown of the Virginia Beach facility during the current quarter. Our efforts are creating a steady shift in surgeon treatment algorithms. Based on our teams continued execution and momentum we believe that 2016 will be another year of record performance for our company. Our current forecast is for revenue to approach $39 million and gross margins to be in the high 70% range. There are several factors driving our growth. We continue to drive adoption and repeat use of our products with our existing accounts. At the same time, we continue to add new accounts. We are working to expand the treatment algorithm of surgeons to include all three of our products across their full continuum of nerve injuries. We continue to have over 300 active accounts and the number of active accounts using two or more of our brands grew over 50%, a substantial increase over the fourth quarter in 2014. We demonstrated that accounts ordering all three of our products generate approximately five times more revenue than in account ordering just one product. Our surgeon education events reinforce this changing algorithm and support our sales focus to increase penetration and repeat usage in existing accounts. Peripheral nerve repair is a large and relatively untapped market opportunity that is estimated to be greater than 1.6 billion. I believe AxoGen is uniquely positioned to provide the best solutions to this market. We provide surgeons with treatment options for patients without the potential complications and cause of a second surgery. Our unique products, comprehensive product portfolio and regulatory strategies provide competitive barriers to entry as we develop this market. AxoGen’s portfolio of nerve repair products include Avance Nerve Graft, AxoGuard Nerve Connector, and AxoGuard Nerve Protector. These products provide surgeons with the off-the-shelf options to restore quality of life to patients suffering from peripheral nerve injury. Our products eliminate the need for a second surgery and offer new options to treat the more than 900,000 nerve injuries that will be surgically repaired this year in the U.S. Despite our significant year-over-year growth only a small fraction of these procedures are currently using our products, so we see tremendous upside as more surgeons and their patients experience the benefit of the AxoGen product portfolio. I would like to take a moment to quickly review our market development and sales approach, which our team continues to successfully execute. We referred to this as our five pillar growth strategy. First, building market awareness continues to be a strategic focus and we continue to execute to this pillar. To make surgeons aware of AxoGen’s treatment options, we are interacting with them at hospitals, clinical conferences, promotional events and the AxoGen surgeon education courses. At the American Association of Hand Surgeons in January, we hosted a panel discussion titled how my nerve repair practice has evolved. The panel consisted of leading surgeons Dr. Jeffrey Greenberg, Dr. Greg Buncke and [indiscernible] and over 100 surgeons attended the event making it one of our most well attended forums. We are also looking to raise patient awareness. Matthew, our 2016 patient ambassador was on the Donate Life Rose Parade Float in Pasadena, California on New Year's Day. A teenager Matthew suffered an injury while helping his mother prepare dinner. He dropped a dish and severely cut his foot. This injury from a common everyday task could have impacted his life and reduced his active lifestyle. Matthew’s mother quickly researched nerve repair option for Matthew and she found Dr. Lee Dellon of The Dellon Institute for Peripheral Nerve Surgery. Several days later Dr. Dellon used Avance Nerve Graft and AxoGuard Nerve Connector to repair the nerve injury and today Matthew is back to being an active teenager running, climbing trees and playing sports. Last month as Matthew and AxoGen were interviewed for American Health Journal aired by PBS to educate potential patients on the risk of nerve injuries and the importance of seeking a nerve repair specialist quickly for a peripheral nerve repair. This segment is expected to be rebroadcast on local PBS affiliates throughout this year. Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. Our professional educational programs supplement our local educational efforts and our peer-to-peer educational opportunities, where we review the latest science and best practices in surgical nerve repair. We held nine of these programs in 2015 up from four the previous year and we are planning to sponsor 12 in 2016. These are highly successful events from both the surgeon and the Company perspective and we continue to generate on average a greater than 80% increase in revenue from the surgeons who have attended our professional education programs. We have already been active in this area and we have completed two courses this year in the first quarter. The third pillar we focus on is growing our body of clinical data. We continued to make progress building data to assist surgeons in the decision making process. Through the fourth quarter there were more than 815 nerve repairs with Avance Nerve Graft enrolled in the RANGER Study, which is a multi-center observational study to elevate the utilization and outcomes of surgical repairs of peripheral nerve discontinuities. In addition during the year, we also started enrollment in the RECON Study, a multicenter, prospective, randomized, controlled, double-blinded study comparing Avance Nerve Graft to manufacture collagen tubes and digital nerve repairs. This is the pivotal study to support our Biologics License Application or BLA. The fourth pillar is our solid sales execution. We’ve continued to grow our sales force to strategically focus on key markets allowing us to both simultaneously increase the frequency of usage in existing accounts and develop new accounts. We ended the year with 41 direct reps compared to 29 at the end of 2014. We also had 24 independent agencies in the U.S. representing our products at year-end. Our goal is to add new accounts and drive penetration deeper into existing accounts. And we expect to have 45 to 50 direct reps by the year-end 2016. We feel our sales team provides value-added services to customers as well as delivering a clear and compelling message about all of our nerve repair products. Our fifth and most recent pillar is the expansion of both our new products and new markets in nerve repair. The first product to come out of this effort is the AcroVal, Neurosensory and Motor Testing System. AcroVal can be used to assist healthcare professionals in detecting changes and sensation pinch or grip strength, accessing return of sensory or motor function, establishing effective treatment interventions and providing feedback to patients. Although, AcroVal’s direct contribution to AxoGen’s revenue growth is expected to be relatively minor. We believe it’s an important step to support the standardized devaluation and measurement of nerve function for improving patient outcomes, improve nerve function. We expect to launch AcroVal at the end of the March. In addition, we have other programs in our development pipeline. We anticipate the release of a second new nerve repair product late this year. We believe there are additional opportunities to expand peripheral nerve repair and we are working to access these new market areas. In addition to our current focus in the upper extremity, and the oral and maxillofacial markets, we have identified expansion opportunities in head and neck surgery, urology, breast reconstruction, lower extremity and the pain market. Finally, 2015 was a pivotal year for AxoGen. We continue to accelerate the adoption of our nerve repair solutions and introduced a new product development initiatives. We also attract to the attention of Essex Woodlands, a leading investment firm focused on growth oriented healthcare companies which invested $17.5 million and strengthened our Board with the addition of Guido Neels as an AxoGen director. We entered 2016 in a much stronger position compared to a year ago and we have all the pieces in place to continue our solid execution. I’ll now turn the call over to Greg, who’ll provide you with additional details about the fourth quarter and annual results. Greg?

Thanks, Karen and good afternoon everyone. I would also like to extend a welcome to Pete who is going to provide us with leadership that we need as AxoGen continued on at successful path. Given that Karen has provided details about our revenue performance, I will begin with our gross margin and other components of our P&L and balance sheet. Gross profit for the fourth quarter increased 66.4% to $6.39 million compared to $3.84 million for the prior year’s fourth quarter. Gross margin was 81.9% compared to 80% in the year ago fourth quarter. The year-over-year increase reflects processing efficiencies and a favorable product mix offset by cost associated with our moving and manufacturing to our facility at CTS in Dayton, Ohio. The move of our manufacturing has been efficiently completed, but additional negative margin effect will result as activity continues in early 2016 related to the move. Now, let me turn to expenses. As we have discussed in prior calls, we continue to invest in sales and marketing to raise the awareness of our products in the market and to expand our sales footprint. For the fourth quarter sales and marketing expenses increased to $5.83 million compared to last year’s fourth quarter of $3.87 million. Several factors led to this increase, but primarily it’s due to the expansion of the direct sales force, increased support for and compensation related to for direct sales force and independent distributors and surgeon education. We ended the quarter with 41 direct reps, up from 29 at the end of 2014. For the full-year sales and marketing expenses increased 52.3% to approximately $20.1 million compared to approximately $13.2 million in 2014. As a percentage of revenue, sales and marketing expenses decreased to 73.5% compared to 78.5% for the year ended December 31, 2014. General and administrative expenses increased to $2.3 million compared to $1.7 million in the fourth quarter of 2014. The increase was due to increased expenses related to employee compensation of which 360,000 was non-cash and related to employee stock options and also higher professional fees. As a percentage of revenue, general and administrative expenses for the three months and full-year ended December 31, 2015 continue to decline and represented approximately 29.7% and 30.8% of revenue respectively. This compares to 35.4% and 41.3% for the comparable periods. R&D spending decreased to roughly $894,000 compared to $984,000 in the year ago fourth quarter. For the full-year R&D expenses increased 6.7% to approximately $3.2 million compared to approximately $3 million in 2014. Research and development costs include our product development and clinical efforts which are substantially focused on the Biologics License Application BLA for the Avance Nerve Graft and vary from quarter-to-quarter due to the timing of the certain other projects. The increase in expenses for 2015 relate to expenditures for such clinical activity including preparation for and the start off of the pivotal clinical trial to support to BLA and hiring additional personal to support both clinical and product development activity offset by reduced costs of the companies RANGER Registry and certain projects that have been completed or in near completion. We expect that cost associated with the BLA will continue to increase as more patients are enrolled in the trial of approximately the next two years. As to our cash position we ended the year with $25.9 million in cash. Our strategy is to continue to delivered topline growth while focusing on managing the bottom line and we believe we are demonstrating result as we reduced our net loss. Our fourth quarter net loss was $3.6 million or $0.12 per share compared to a net loss of $6.5 million or $0.35 per share for the fourth quarter of 2014. I also want to point out that in the year ago fourth quarter the net loss included one-time interest expenses and the write-off of non-cash deferred financing charges totaling $2.5 million that were related to the retirement of the PDL Royalty Contract. For the full-year ended December 31, 2015 the net loss was $13.4 million or $0.51 per share compared to a net loss of $17.7 million or $0.99 per share for the full-year ended December 31, 2014. With that, I will hand the call back over to Karen for closing remarks. Karen?

In summary, we had a record fourth quarter revenue culminating in record annual revenue. We continue to generate a healthy gross margin. We have the resources continue implementing our gross strategies and we’re confident about our growth prospectus for 2016. Before taking questions, I want 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 injuries. Speaking of investors Greg will be presenting at the Canaccord Musculoskeletal Conference in nearby Orlando tomorrow. And I will be presenting at this year’s ROTH Capital Partners Conference in mid-March in Southern California. We hope to see many of you at one of these events. At this point, I would like to open up the line for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Tao Levy from Wedbush Securities. Please proceed with your question.

Hi, good afternoon.

Hi, Tao how are you?

Hi, Tao.

I’m good, thank you. Great quarter, again nice to see you guys put up a string of these. Maybe I could ask around the types of surgeons or the types of procedures the surgeons are performing. Are you seeing more than two or three of your products in the same case or is it more - they’re just doing a whole bunch of different types of procedures and some of them require Avance, some of them require one of the AxoGen products or again are you seeing more of a combination?

We see both of those. I mean the obvious thing, that’s an objective measure is for us to see the products that an account purchases and so I can track and measure changes in that, but anecdotally we do hear surgeons continue to think about all of the needs of a repair for example with Matthew where they're looking at both the patient and using an AxoGuard Connector and bridging the gap with an Avance Nerve Graft. And so we see cases like that as well where they’re using multiple products in the same case.

Gotcha. And if you look at the split between Avance and AxoGuard do you have that handy?

Yes, we haven’t seen big shifts in that, it continues to be about the same as it’s been the past, where it’s been running a little over50%, it’s Avance and the remainder are the AxoGuard.

Again that’s [indiscernible].

Right. And so I guess my follow-up question to that is I think you guys really see a record gross margin, you made indication that’s partially due to greater efficiencies and I think you mentioned something about product that is more profitable. And so I think of that more is being Avance with longer measurements of Avance. Is that the correct assessment?

Yes, Tao in the gross margin there is a lot of moving part. So that what you have is you have products mix both between the AxoGuard products and Avance, you have two AxoGuard products Connector and the Protector and then you have margins that are difference within each of the product groups. So there is not a great purity as to being able to pick out in any particular quarter where that mix is, but at times there is some difference that help contribute to that gross margins or and not contribute to the increase. But you also have when we talk about efficiencies, our manufacturing efficiencies with regard to what recovery capabilities to ultimate number of products we get from those recoveries and then also as we discuss the manufacturing, the change of manufacturing at least during these few quarters will have some effect on that. So there is a lot of moving parts around that not so easy to just key-in that, you sell more of something and the margins go up, you sell that may go down.

Okay, great. Thanks a lot and great quarter.

Thank you.

Our next question comes from the line of John Gillings from JMP Securities. Please proceed with your question.

Hey guys, can you hear me okay?

Yes. Good afternoon, John.

Good afternoon. Thanks for taking the questions. So first thing I want to just hit on a little bit, obviously it was a record level for the fourth quarter, but I just wanted to try and understand the sequential dynamics between the third and fourth quarter, was there anything sort of what time on the upside in the third quarter that I missed last time or was there anything in the fourth quarter maybe relating to switching manufacturing to date or anything that may have slowed things down a little bit. How should we think about that sequential progression?

So first I think you need to look the year-over-year and look that we showed continued driving growth of 63% growth year-over-year fourth quarter to fourth quarter. Do you think there are some patterns that are emerging in the quarters and so that we see the strongest growth has historically been in our second and third quarter. There is nothing about the move to date that affected anything we weren’t constrained, we built sufficient inventory to be able to buffer as we transferred and shutdown the manufacturing in Virginia Beach there was nothing associated with that that impacted the fourth quarter results. Is just I think again an emerging pattern and the types of demand that we see in each quarter.

Okay, that’s helpful. And then on the surgeon training events it looks like at least so far in the first quarter you’ve kind of on track to do probably a similar number to what you did last year, is that about what you are aiming for and then in terms of the number of surgeons you are seeing was that 100 surgeon number sort of an outlier or is that in the ballpark of what you think you can see at the majority of these events going forward?

Yes, thanks for the clarification. So we have multiple types of events that we do and so when I talk about the number of events that we have - what I’m really talking about in those cases are bigger two-day events that are where surgeons come in and they do a lab and they have [indiscernible] go through much more in-depth discussion about the best practices in nerve repair. And in 2016 we expect to do 12 of those, we are actually increasing the number that we’ll do. The panel that I mentioned, we also do things to raise awareness, but nerve repair often associated with some of the bigger conferences that can actually not included in the number when I say there is nine or nine last year, we don’t counts the panel meetings that are really more general informational they tend to lag in hour to an hour and a half, but they are very good for raising awareness about new practices in nerve repair and again we are seeing increasing attendance to those panels.

And I think that actually is a good point and others have asked this question. So when we talked about our surgeon education, which are the nine last year, 12 this year. Those will become very effective so we’ve been trying to show some of what can be helpful at those and what the revenue can be. As Karen said a lot of times when we talk about a larger group that’s a lot of times when we have presentations on the podium or things that we are doing at those association or those trade association meetings, but we have every week just about something going on that would either be marketing or education whether it’s a journal club, whether it’s a teaching, whether we are at hospitals. So one of the things I think as we began focus is the surgeon education are big and are a very nice driver, but it doesn’t mean that’s the only thing we are up to. Our team is all over the country all the time, bringing the action more to physicians in a lot of different ways.

All right. That’s great color. I appreciate that. Thanks guys. Great quarter.

Thanks John.

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

Hi, thanks for taking my question and nice quarter.

Thank you, Bruce.

So with the sales hires this year, most of the sales hires in 2014, 2015 came in the second half of the year, do you plan to continue in that pattern or would it be sort of steady throughout the year?

Yes, good question and right now our plans are to be fairly steady through the year. What we ended up during this year is we actually accelerated, excuse me at the end of 2015 we accelerated some of the hires that we had anticipated to do in early this year, but while we had the opportunity to do that if you want to take advantage of some of the growth we saw in the markets we brought in few people a little sooner than we had originally planned.

Okay. And then with the new product that you are planning to launch towards the calendar of 2016, should we assume that it’s going to be something targeted to that list of procedures that you gave us?

Actually it will be targeted in peripheral nerve repair not necessarily outside of our existing co-patterns, we are doing those things in parallel, but our first focus is on the customers that we call on today and oral and maxillofacial markets and in the upper extremity hand surgeon. And so we are really trying to make sure that our products have broader flexibility across the variety of areas of nerve repair.

Okay. Okay and then last question can you give us a little bit just general color on the repeat order rate of the surgeons, so once they start using it brought how many people continue to use the product as they move forward.

We still see the same start up learning curve that we talked about in the past and so what we are tracking now though is the accounts that are showing active repeat orders and we now have over 300 accounts. Most of those accounts are single surgeon although we are working after to expand the number of surgeons in those accounts. So that you can get even obviously more surgeons with initial user and their partners as well adopting the product.

Okay. That’s great. Thank you very much.

All right. Thank you.

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

Thank you. I want to thank everyone for being on today’s call we had a record year in 2015 and we are excited about our progress to date. As we forecast another year of record performance as we approach revenue of $39 million in 2016. We look forward to speaking on the Q1 2016 conference call in May. Thank you everybody.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your time and participation. You may disconnect your lines at this time. And have a wonderful rest of your day.