AxoGen, Inc. (AXGN) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the AxoGen Incorporated First Quarter 2016 Results Conference Call. At this time, all 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. I would now like to turn the conference over to your host Mr. Doug Sherk. Please begin, sir.

Thank you, Tania, 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 ended March 31, 2016. 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 Chief Executive Officer of AxoGen. Karen?

Thanks, Doug and good afternoon everyone. Welcome to our first quarter 2016 conference call. Joining me on his first call today is AxoGen's Chief Financial Officer, Pete Mariani. I begin today's call with a brief review of our first quarter and provide an update on our key strategic initiatives. Pete will then provide a review of our financial results, update our guidance, and then we'll open up the call for your question. We've had a great start to the year; our revenue grew 64%. We generated gross margin just over 82% and we continued to execute on all front, including the successful recruitment of two important executive roles; our Chief Financial Officer, and our Vice President of Marketing. First, Pete Mariani joined us on March as our CFO. He brings important financial leadership experience to our company and has a breadth of commercial, international, and operational experience in both, public and private companies including Guidant and Hansen Medical. Pete's addition to the leadership team has allowed Greg Freitag to return to focusing his efforts on his General Counsel and Business Development responsibility. I would like to thank Greg for his support and efforts as our interim-CFO. His efforts made this a smooth and seamless transition. Kevin Leach, also joined us in March as Vice President of Marketing. Kevin has a great depth in med-tech marketing with 24 years of domestic and international marketing experience with companies including Stryker and Combotech [ph]. And he holds a Diploma in podiatric medicine from Queen Margaret University in Edinburgh. Kevin has proven skills and leadership in med-tech marketing with strategic, operational, and market development experience. He has quickly stepped into his new role here at AxoGen and is driving our strategy for expansion with current and new markets, as well as through enhancement of our portfolio of nerve repair products. Now turning to our results. First quarter revenue of $8.1 million represented growth of approximately 64% compared to the prior year. The execution of our strategic initiatives is continuing to deliver solid results. Our revenue growth reflects the expanding penetration and adoption of AxoGen's portfolio of products and the repair of nerve injuries. The growing demand is a direct result of increased market awareness, surgeon education and other peer-to-peer physician interaction that is reinforcing AxoGen's physician as a preeminent choice for surgeons when considering nerve repair. Growing penetration within our existing customer base continues to be a key driver of our performance. We generated $3.2 million of revenue growth over Q1 2015. The majority of this growth was generated from active accounts which we defined as accounts that order AxoGen products at least six times in the last twelve months. These accounts have typically gone through the committee approved process and have at least one surgeon who has converted a portion of his treatment algorithm to the AxoGen portfolio. We believe increasing the number and penetration of active accounts offers the greatest opportunity for continued growth of our portfolio of nerve repair products, and our active account has increased to approximately 350. The penetration of the active accounts is driven by the increased adoption of our nerve repair products across the surgeon's treatment algorithm and includes the adoption of multiple brands. Accounts ordering all three of our products continue to generate a perfectly approximately five times more revenue than an account ordering just one product. Our objective is to continue expanding the treatment algorithm of surgeons to include all three of our products across their full continuum of nerve repairs. While AxoGen is generating strong growth, the personal nerve repaid market remains largely untapped. We estimate there are approximately 900,000 nerve repairs annually in the U.S. alone and as the sole company completely focused on this market, we have a tremendous opportunity to provide a solution for these injuries. To continue the momentum we've built over the past two years, we are executing on strategic initiatives which we believe will allow us to build long-term sustainable growth as we pursue this $1.6 billion market. We refer to these initiatives as our five pillars of growth. Number one, build market awareness. Number two, educate surgeons and develop advocates. Number three, grow the body of clinical evidence. Number four, execute our sales plan. And number five, introduce new products and new markets in nerve repair. Let me review our recent activities around each of these pillars. First, we're building market awareness by engaging with surgeons at hospitals, clinical conferences and promotional events. On our last earnings call, we noted that we had hosted a panel discussion attended by over 100 physicians at the January. American Academy For Hand Surgery Meeting which was one of our most well attended forums. Last month we attended the 2016 American College of Oral and Maxillofacial Surgeons Annual Scientific Conference. The specialists that repair nerves within the oral and maxillofacial market or OMS are typically from academic teaching hospitals and we find they have tremendous influence in getting new products into the hospitals. During the ACOMS conference, we held an interactive breakfast symposium attended by 80 OMS specialist. Dr. John Zuniga and Dr. Michael Miloro chaired the session discussing current clinical evidence, trends in OMS nerve repair and clinical cases. Both surgeons had previously published data demonstrating the benefit of AxoGen's nerve repair portfolio and the management of these life altering OMS nerve injuries. Their independent clinical publications reported recovery rates similar to those reported in our ranger registry with return of function above 80%. Events such as these panels facilitate peer-to-peer interactions where surgeons share and validate treatment algorithms and outcomes. Recognizing the value of these peer-to-peer interactions, we recently held our first masters in nerve repair roundtable discussion hosted by Dr. Greg Buncke and Dr. Bauback Safa, both from the Buncke Clinic in San Francisco. The discussion included 15 pre-eminent nerve repair specialists and promoted enthusiastic discussion on many topics including the awareness of nerve injuries and repair solutions among both nerve repair and referring surgeons, as well as the latest thinking on surgical approaches for chronic and neuropathic pain. We believe these peer-to-peer forums continue to elevate the discussion around nerve repair and AxoGen's role as a pre-eminent solution provider. In addition to these events, last year we established a private physician-only online community for surgeons that we've branded Nerve Matters. In the nine months since launch the site has enrolled over 750 surgeons specializing in nerve repair. Approximately 85% of the surgeons in this online forum participate on a regular basis by viewing clinical cases, sharing their insights and networking with peers. In Q1, there were over 600 interactions on 90 specific topics allowing physicians to better understand developing options in nerve repair and the use of the AxoGen portfolio of products. Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We continue to conduct large national professional education programs and supplement those with smaller regional educational events. We held three national programs in Q1 and we held an additional two programs in April attended by a total of more than 130 surgeons year-to-date. In addition, we will be hosting our first international program in Luzon, Switzerland later this week. We plan to host a total of twelve of these programs in 2016 versus the nine events that we held in 2015. These courses continue to be an important driver of growth. Annualized average annualized revenue growth in accounts of physicians who have completed these programs has improved from 80% to more than 100% increase. In addition to our national programs, we are providing regional peer-to-peer programs such as Journal clubs, grand rounds, and local labs to review surgical techniques in nerve repair. These additional peer-to-peer contacts are also yielding significant growth. Our third pillar is to grow the body of clinical evidence. Our sponsored clinical projects, Ranger and Recon, are active and enrolling. The ranger study is the largest study in peripheral nerve repair with over 850 nerve injuries enrolled in the study. It continues to produce important data that is being shared in conferences and a growing body of clinical publications. At four separate clinical conferences, there have been a total of five presentations of clinical data from the Ranger registry year-to-date. And additional two clinical papers have been published in 2016 on the utility of the advanced nerve graft, including the report from the change study authored by means at-el [ph] and published in the hand journal. This. sponsored randomized prospective study served as the pilot study for our pivotal trial. And compared advanced nerve graft to manufacturing conduit and digital nerve injuries. Although the study was not powered for superiority, the authors were able to conclude that patients whose digital nerve reconstructions were performed with the advanced nerve graft had significantly improved and more consistent functional sensory outcome as compared with conduits. Recon, our phase 3 pivotal study comparing advanced nerve graft to manufactured conduits and digital nerve injuries continues to enroll. And it's a long-term study to support the transition of the advanced nerve graft to a biologic. We were also pleased to see that there have been six independent investigator presentations of the clinical use of advanced and/or acts this year. These non-sponsored investigator-initiated research projects further reinforce the utility of the AxoGen portfolio. Our fourth pillar is solid sales execution. We have continued to increase our salesforce to strategically focus on key territories, allowing us to increase the number and penetration of active accounts, as well as develop new accounts. We ended the first quarter with 44 direct reps compared to 32 in and last year's Q1. We expect to have between 45 and 50 direct sales reps by year-end 2016. Complementing our direct sales reps, our 23 independent agencies in the U.S. representing our products. The solid execution of this developing team is key to the continued growth in our active and new accounts. Our fifth pillar is the introduction and expansion of new products and mark in nerve repair. On March 30, we commercially launched the AcroVal, neurosensory and motor testing system. And nerve function evaluation system for surgeons and other allied health professionals to electronically measure, math, and monitor patients with peripheral nerve injuries and conditions prior to and following nerve repair. As we've previously stated, AcroVal's direct contribution to AxoGen's revenue growth is expected to be relatively minor. However, it strengthens our position and providing peripheral nerve solutions. And we believe it is an important step to support the standardized evaluation and measurement of nerve function to improve patient's peripheral nerve outcome. We believe there are additional opportunities to expand peripheral nerve repair and we're working towards the second new product that will enhance our current portfolio which we expect to launch later this year. Although the upper extremity and oral maxillofacial markets are the prime revenue sources today, expansion opportunities in head and neck surgery, urology, breast reconstruction, lower extremity and the pain offer AxoGen new revenue opportunities in the future. Together the execution of these pillars have allowed us to further penetrate our existing active customer segment and are fundamental to driving growth both in the number and penetration of active accounts. We are pleased with the progress we're making with each of these pillars and we believe that this progress is allowing us to develop the foundation of long term sustainable growth. I will now turn the call over to Pete who will provide you with additional details about the first quarter results. Pete?

Thanks, Karen and good afternoon everyone. I'm excited to have joined the AxoGen team. I’ve had the opportunity to interact with many of you on the call during my first two months with the company and look forward to continuing the discussion of how AxoGen is driving value and rethinking nerve repair. As Karen mentioned, the company is continuing to make progress with each of the five pillars and we believe that this work is developing a solid foundation for long term sustainable growth. We generated Q1 revenue of $8.1 million, an increase of $3.2 million or 64% over the prior year. This growth is the result of a 55% increase in unit volume and a 9% net impact from price increases and shifts in product mix. And as Karen noted the majority of our revenue growth continues to be driven by growth in both the number and penetration of active accounts. In addition to our active accounts we continue to see growth in both new and developing accounts as surgeons become familiar with our products and begin to develop their treatment algorithms. Gross profit for the first quarter increased 69% to 6.7 million compared to 4 million in the prior year's first quarter. Gross margin was 82.7% compared to 80.1% in the year ago first quarter. The year over year increase is driven by revenue growth and continued efficiencies. It is also important to note that in the first quarter we completed the transition of our manufacturing to a new facility in Dayton, Ohio and expanded the capacity of our Texas distribution center. The disruptions from these projects were minimal and our new Dayton manufacturing team is ramping up effectively. Our total operating expenses in the first quarter were 9.3 million and grew 43% over the prior year. As Karen noted we continued to make important investments as we pursue our strategic initiatives, these investments to expand our sales footprint to increase the physician education, to expand awareness of our current product portfolio and to develop future products and markets are driving growth in operating expenses but importantly at a lower rate than sales growth. Specifically, sales and marketing expenses in the first quarter were $6.2 million, an increase of 59% over prior year. We ended the quarter with 44 direct sales reps up from 32 in the 2015 first quarter and we completed three national search and education events in Q1. As a percentage of revenue sales and marketing expenses decreased to 76.5% compared to 79.4% in the prior year. R&D spending in the first quarter was $978,000 an increase of 46% over prior year. Research and development costs include our product development and clinical efforts which are substantially focused on the biologic license application for the advanced nerve graft and vary from quarter to quarter due to timing of projects. The increase in expense for 2016 relates to the expenditures for RECON and hiring additional personnel to support both RECON and product development activity. General and administrative expenses were $2.1 million an increase of 12% over the prior year and primarily relate to employee compensation and professional fee. As a percentage of revenue general and administrative expenses were 26.4% in the quarter compared to 38.6% in the prior year. We ended the quarter with approximately 20.9 million in cash compared to approximately 25.9 million at the end of 2015. During the quarter our cash spend included strategic investments to transition our manufacturing to Dayton, Ohio and increase the capacity of our distribution facility in Burleson, Texas. These investments included capital, additional inventory and operating costs better unique to this quarter and amounted to approximately $1.1. With the completion of these projects we believe that we will be able to meet anticipated increases in demand continue to drive efficiencies across the company and lower our cash burn as revenues increase. Additionally the first quarter also included the payout of our 2015 annual employee bonus of accrual of approximately $460,000. Finally as we disclosed in our news release today we are reiterating our previous guidance that revenue for the full year 2016 will approach $39 million. We are now increasing our outlook for gross margin from our previously stated high 70% range to an updated expectation that gross margin for the full year 2016 will approach 80%. With that I will hand the call back over to Karen for closing remarks.

Thanks, Steve. In summary our efforts to expand market awareness, position education and enhance sales execution are allowing us to increase both the number and penetration of our active accounts and deliver solid results. Today with our additional initiatives to help develop clinical evidence, new products and new markets we’re reinforcing our position as the preeminent nerve repair company and building a foundation for long term sustainable growth. 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. At this point. I'd like to open up the line for questions. Netanya?

[Operator Instructions]. Our first question comes from Bruce Jackson with Lake Street Capital Markets. Please proceed with your question.

So if you could give us a refresh on the RECON trial, if I recall correctly you were originally looking to enroll about a 150 patients, enrollment started last June. Where are you right now in terms of total enrollment and are you still looking for a 150 patients?

Just to remind everybody that RECON study is our pivotal trial to support the transition of advance nerve graft to a biologic. The number of subjects is 150 subjects to enroll in the trial, it's actually controlled against manufactured conduits. One to one randomization and we do expect the enrollment to take 2.5 years with a one year fall up after that to obtain last results. We're progressing against plan, we really don’t have an index that we're going to be providing on a number of subjects enrolled in the study but we're on plan and the studies continuing to enroll and ramp up as we engage additional sensors and get them all initiated and in the process.

And then with the revenue mix just roughly what percentage of total revenue was Avance?

So as we said in the past we run in revenue a little over half of the revenue is Avance and the remainder is [indiscernible] and also AcroVal now as well.

Our next question comes from Dave Turkaly with JMP Securities. Please proceed with your question.

So Pete, I guess you get to join the company and then take credit for an immediate gross margin raise, so congrats to you for that. Maybe a little early to ask this but I would just love to get your thoughts on sort of joining the company and then what you've seen so far if you'd be willing to kind of share your thoughts on sort of a sales level where you think that a breakeven could be possible?

I'm excited to join the company and the I think the results of the call kind of speak toward the opportunity that I saw when I was being recruited into the company, the company has got a great product, a great management team, the regulatory and patent strategy around this business is strong and the execution has just been stellar over the last several quarters including this quarter. So again I'm excited about the opportunity to join and partner with the team and assist as we figure out a strategy to grow and scale this company well.

The question on the breakeven is it too early for that one?

Yes I think so.

The 9% pricing mix you guys talked about for the growth in the quarter. Would you be willing to split that out for us?

No. I think as you’ve heard Karen say in previous calls we do sort of these single digit price increases once a year and that has a certain impact on our revenue and then we have shifts and mix that has another impact on revenue. We’re continuing to grow the business and continuing to be able to successfully implement price increases on a regular basis.

All right last one from me, maybe for Karen. You mentioned some of the new opportunities in addition to what you're already tackling for with the nerve repair products but when you look at those head and neck [ph] urology [indiscernible] lower extremity pain, which is most near term and when do you think you know you actually start making some headway into those areas. Thank you.

Well that’s a tough question to answer because I think all have opportunity we’re doing market development activities in each of them, we haven't managed direct decision frankly about which one we're going to put the priority resources on. We're really in the midst of doing that now working with key opinion leaders in each of those segments to understand the readiness to adopt, the clinical needs and get key opinion leaders working with us on the segment and so I don't really have an answer for you at this point but we should be putting those plans together over the rest of this year and be able to outline that a little more detail.

[Operator Instructions]. Our next question comes from Michael Wood with Oppenheimer. Please proceed with your question.

So my question revolve around, the sales force you went from a certain level last year to this year from 30 something to 40 something. Was it 10 additional or were there some shrinkage and then some add-on so roughly I'm just trying to get a better idea of how many new people are?

So it's a little bit of each. We have had some transitions in the sales teams over the last year both on promotions, also some people that are no longer with us. So there's a small amount of that but we have at this point over 28 people have been with us for over a year and are really past that initial learning curve and contributing to the business.

So that was my next part of it was you know in your experience if you're a sales person doing what you folks do, talk to us a little bit about the time it takes for that person to actually be really contributing -- or is that three months or is it nine months, how long does it take to be able to come in there, get educate and then walk into a hospital and start actually producing revenue for the firm?

So our sales process, we show that -- when we put them in a new territory are about 12 months to a breakeven point and really isn't as much as them learning the nerve repair market as it is representative of the adoption process of surgeons which is relatively slow in nerve repair. So just a reminder to people as surgeons, adopt the new technology, they tend to do a series of implants in a segment of their treatment algorithm and then wait and see their results and nerve repair is slow. There is not an x-ray of the nerve that you can do that gives you an immediate clinical outcome and so they need to wait until they see clinical results and that can be anywhere from three months to several years depending on the injury that we're talking about. And so typically what we see is a new rep coming into a territory, we will be able to initiate some new accounts to get surgeons to start to use it but they will not be able to generate a steady stream of what we consider an active account until we start to get into the end of their first year beginning of the second year and that’s again just by definition the way surgeons are trying to use the products they don't get into a steady repeat order pattern until it's over a year period. So a year is our breakeven point.

Thank you. At this time I would like to turn the call back over to management for closing comments.

Well, thank you Netanya I appreciate it and I want thank everyone for being on today's call. We had a solid start to 2016 and we’re excited about our progress to-date as we forecast another year of record performance as we approach revenue of 39 million. We look forward to speaking on the Q2 2016 conference call in August. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.