AxoGen, Inc. (AXGN) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the AxoGen, Inc. Fourth Quarter and Full Year 2017 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. Brian Korb. Thank you. Please begin.

Thank you, Rhea, and good afternoon, everyone. Thank you for joining us today for the AxoGen, Incorporated conference call to discuss the financial results for the fourth quarter and full year ended December 31, 2017. 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 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, 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 product acquisitions 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, Brian, and good afternoon, everyone. Welcome to our fourth quarter and full year 2017 conference call. Joining me today is AxoGen's Chief Financial Officer, Pete Mariani. I'd like to begin today's call with a review of our fourth quarter and full year highlight, a brief company overview and an update on our key strategic initiatives. Pete will then provide a review of our fourth quarter and full year financial results and review financial guidance, after which time, we'll open up the call for Q&A. We are pleased report another successful quarter. Fourth quarter revenue grew 49% to a record $17 million. Our full year annual growth is 47%, with revenue of $60.4 million. It's gratifying to see expanded use of the AxoGen product portfolio in our core markets of hand surgery, trauma and oral and maxillofacial surgery. We're seeing increased adoption by surgeons across these applications. We're pleased with increased data in mixed and motor nerve repair, as well as in long gap nerve repair. And we're excited to announce the launch of our expanded application in breast reconstruction neurotization in Q4. We believe new application in breast reconstruction neurotization, along with the expanded use of the AxoGen product portfolio in oral and maxillofacial procedures, changes our addressable market to $2.2 billion across our current target applications. As in prior quarters, our revenue growth is continuing from both active and new accounts as we continue to build and strengthen our commercial team. We're pleased with 2017 results and believe we're demonstrating our ability to successfully execute our strategy and continue to drive awareness and growth in the emerging peripheral nerve repair market. For those of you who are new to our story, AxoGen is a global leader in developing and marketing innovative surgical solutions for peripheral nerves. We're passionate about helping to restore nerve function and quality of life to patients with physical damage or discontinuity to peripheral nerves by providing innovative, clinically proven and economically effective repair solutions for surgeons and health care providers. Peripheral nerves provide pathways for both motor and sensory signals throughout the body. Every day, people suffered traumatic injuries or undergo surgical procedures that impact the function of their nerves. Physical damage to a nerve or the inability to properly reconnect nerves can result in the loss of muscle or organ function, the loss of sensory feeling or the initiation of pain. We currently have four surgical implants in our portfolio. Avance Nerve Graft is the only commercially available process nerve allograft used for the bridging of nerve gaps of 5 millimeters to 70 millimeters. AxoGuard Nerve Connector is a minimally processed porcine extracellular matrix implant for connector-assisted repair of transected nerves with gaps of 5 millimeters or less. AxoGuard Nerve Protector is a minimally processed porcine extracellular matrix implant for wrapping and protecting damage peripheral nerves. And Avive Soft Tissue Membrane is minimally processed human umbilical cord that may be used as a resorbable soft tissue covering to separate tissue layers and modulate inflammation in the surgical bed. Along with these core surgical products, we also offer the AcroVal Neurosensory & Motor Testing System. AcroVal and our AxoTouch Two-Point Discriminator are evaluation and measurement tools. Health care professionals use these tools in detecting changes in sensation, assessing return of sensory grip and pinch functions, evaluating effective treatment interventions and providing feedback to patients on nerve function prior to and following nerve repair. Our products are used primarily by reconstructive plastic surgeons, hand surgeons and oral and maxillofacial surgeons in a wide variety of nerve repair surgeries, including upper extremity trauma, iatrogenic injuries from dental procedures such as third molar extraction, nerve repair during mandible reconstruction, nerve compression surgeries, including recurrent carpal tunnel syndrome, and now breast reconstruction neurotization. We are building awareness of peripheral nerve repair and expanding usage of our products with innovator and early-adopter surgeons, and we're excited to be moving toward the developing market of the middle adopters who are the majority segment of the nerve repair market. We find surgeons are initially cautious adopters for nerve repair products. They typically start with a few cases and then wait to see their results. Active accounts are usually past this wait period and have developed some level of product reorder. These accounts have typically gone through the committee approval process, have at least one surgeon who has converted a portion of his or her treatment algorithm of nerve repair to the AxoGen portfolio and have ordered AxoGen products at least 6 times in the last 12 months. In the fourth quarter, the number of active accounts increased 31% to 591, up from 452 in Q4 of 2016. The growing number and penetration of active accounts is driven by increased adoption of our nerve repair products across the surgeons' treatment algorithms. Accounts ordering Avance Nerve Graft, AxoGuard Nerve Connector and AxoGuard Nerve Protector now generate greater than 6 times the revenue of an account ordering just one of the products. Our objective is to continue expanding the treatment algorithms of surgeons to include all four of our surgical implants across their full continuum of nerve repair. AxoGen is generating strong and consistent revenue growth in a nerve repair market that remains largely untapped. There are more than 900,000 nerve repair surgeries annually in the U.S., pointing to a market opportunity of over $2.2 billion for AxoGen's products. The majority of these procedures are being performed in approximately 5,100 centers. Most of our 591 active accounts are still at an early stage of penetration and provide additional opportunities for growth. As a result, we believe we're just scratching the surface of our available market potential. We continue to develop this market through the execution of our strategic initiatives, which we believe will allow us to build long-term sustainable growth. We refer to these strategic initiatives as our five pillars of growth, building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and introducing new products and expanded applications in nerve repair. I will now comment on our progress over the quarter in each of these areas. First, we continue to build market awareness of AxoGen and our products by engaging with surgeons at hospitals, clinical conferences and promotional events. We've developed strong relationships with many well-known surgeons who are innovators and early adopters of our platform. They've been extremely helpful sharing their experiences using our products with the clinical community and publishing the outcomes they've achieved around peripheral nerve repair solutions. In Q4, we participated in the 99th Annual Meeting of the American Association of Oral and Maxillofacial Surgeons, where we hosted key thought leaders at our exhibit booth who demonstrated surgical techniques for OMF nerve repair and discussed the importance of timely referral pathways. These demonstrations, several presentations and a nerve repair symposium helped increase OMF surgeon awareness of the AxoGen's comprehensive platform for nerve repair, including solutions to address nerve damage in the jaw, resulting from either surgical injuries or reconstruction following benign tumor removal or similar procedures. We hosted our Second Annual Analyst and Investor Day in November, including guest surgeon presenters who shared their experiences using the AxoGen platform for nerve repair. They reviewed current clinical techniques, data and the development of expanded procedures for peripheral nerve repair. We appreciate that many of you on this call joined us for our Analyst Day event. And while we worked to increase awareness of tissue donation year-round, our support of the Donate Life Rose Parade float each New Year's day helps us educate millions of parade viewers about the importance of tissue donation and nerve repair. Each year, we select a patient ambassador to ride on the float, representing patients who have received donated peripheral nerve tissue. Our 2018 patient ambassador, Dylan, is an active young man from Phoenix who was critically injured in a serious motorcycle accident. Once stabilized, Dylan discovered he was unable to move most of his left arm as a result of significant nerve damage. Several physicians told Dylan and his family that he might never regain use of his arm and suggested they consider amputation. His family searched for options and found a surgeon who could help. Dylan underwent several surgeries, including an Avance Nerve Graft implanted in his left arm. Today, Dylan is back to an active lifestyle and has sensation and movement in his previously damaged left arm. He rebuilds cars, helps his father run an electronics business and is pursuing active - acting and film classes. Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted four national education events in the fourth quarter and a total of 15 for the year. These surgeon-led programs focus on advances and best practices in nerve repair. They allow surgeons to gain additional confidence in nerve repair techniques, and they drive adoption and increased utilization of our products. On average, we see the utilization from surgeon attendees more than double 6 months after they attend the program. Fourth quarter educational events included two fellows programs, where we train the next generation of nerve repair surgeons. We conducted a total of four fellows programs in 2017, training more than two thirds of all hand and microsurgery fellows for the year. And we plan to conduct five fellows programs in 2018. Our third pillar is to grow the body of clinical evidence. In 2017, there were 21 clinical and scientific presentations of our surgical portfolio. In addition, we now have a library of 53 peer-reviewed clinical publications. We're particularly pleased that seven of the 53 clinical publications focus on the use of our surgical portfolio in oral and maxillofacial procedures. This increase in presentations and publications reinforces both the importance of peripheral nerve repair and the growing body of evidence for AxoGen's products in nerve repair. Our RANGER Registry has enrolled more than 1,300 nerve repairs and continues to provide significant new evidence in the management of nerve injuries. Surgeons are using this data to better understand nerve repair outcomes and to expand their treatment algorithms. A presentation by Dr. Bauback Safa from the Buncke Clinic during the September meeting of the American Society for Surgery of the Hand provided further focus and clarity on a new subset of the RANGER database. This subset is the largest sample size and the longest follow-up presented to date on Avance Nerve Graft in mixed and motor injuries. Historically, these upper extremity nerve injuries have been repaired with nerve autograft. In the published literature, nerve autograft has achieved an average meaningful recovery rate of 68%, with a range of 57% to 80%. We were pleased to see that in the RANGER Study, 75% of the patients with mixed and motor injuries achieved meaningful recovery, which compares favorably to nerve autograft without the downside, morbidity and costs of an autograft. Also during his presentation, Dr. Safa discussed another subset of RANGER data that evaluated long gap nerve repair. Nerve autograft is typically believed to have an inverse relationship between gap length and meaningful recovery rate. In other words, the longer the gap, the fewer patients who achieve meaningful recovery. Contrary to historical belief, the data from this subset of the RANGER Study found consistent levels of meaningful outcomes in both long gaps and short gaps when repaired with Avance Nerve Graft. We believe this data provides additional opportunity for Avance Nerve Graft to continue challenging the norms of historical repair options and evolving the practice of nerve repair. RECON, our Phase III pivotal study comparing Avance Nerve Graft to manufactured conduits in digital nerve injuries, continues to enroll. We anticipate enrollment to be completed in Q4 of this year. These studies continue to produce important data that assist in clinical decision-making and support the adoption of our platform for nerve repair. In addition to the adoption we're experiencing with hand and reconstructive plastic surgeons, we continue to see increased adoption of our portfolio in oral and maxillofacial surgery. As these surgeons become confident with AxoGen's portfolio, we see expanded use of multiunit repairs in iatrogenic nerve injuries and the application of our products to more complex injuries, such as mandible reconstruction due to benign tumor resection. Clinical data showed that repair of these injuries with the AxoGen portfolio of products can provide meaningful recovery in 87% to 94% of these patients. The data and techniques presented at the October AAOMS annual meeting demonstrated the role of our platform for nerve repair in both simple iatrogenic injury repairs as well as large reconstructions with nerve gaps up to 70 millimeters. Surgeons now have an option to reconstruct these nerves, giving patients the opportunity to see return of function and avoid the social stigma associated with numbness of the lip, mouth and chin. The company's launch in breast reconstruction neurotization includes partnering with 20 to 25 breast neurotization centers by the end of 2018. At AxoGen, we believe the ideal breast reconstruction restores size, shape, symmetry, softness and now sensation, without the potential risk and comorbidity associated with autograft nerve harvest. We have developed the ReSensation surgical technique, which includes this - which incorporates this vision into a reproducible and efficient solution for reconstructive plastic surgeon. We began surgeon training on the ReSensation technique for breast reconstruction neurotization as a part of the application launch. Breast reconstruction neurotization provides an important new opportunity for women who choose autologous lap reconstruction following a mastectomy. Using AxoGen's nerve repair portfolio, surgeons can now connect peripheral nerves in the autologous lap to nerves in the chest wall, enabling sensory nerve regeneration. Historically, the sensory nerves were not repaired in these procedures, leaving the women with no sensory restoration. AxoGen believes that the restoration of sensory function is an important advancement for women facing the challenges of mastectomy and reconstruction. We have initiated the Sensation-NOW outcomes for women. Let me say that again. We have initiated the Sensation Neurotization Outcomes for Women or Sensation-NOW clinical registry. Sensation-NOW will study the physical and quality-of-life outcomes of breast neurotization. We believe that data from this registry will demonstrate that the ReSensation technique provides meaningful recovery in sensation and quality-of-life outcomes for women who choose reconstruction following a mastectomy. Our fourth pillar is sales execution. Our expanded sales organization is solidly executing and driving strong revenue growth. We ended the year with 60 direct sales reps, 36 of whom have been - who have been with us for at least 12 months. We expect to end this year with at least 75 direct reps. And in fact, we estimate we will end the first quarter with 68 direct sales reps. In addition to our direct sales force in the U.S., we have 20 independent distribution partners supporting the execution of our sales strategy. During the past 2 years, we've increased the number of direct sales reps by nearly 50%, and we had invested in and expanded our sales leadership, sales training, marketing and support structures. We have a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications in our platform for peripheral nerve repair. Our fifth pillar of growth is the introduction of new products and expanded applications in nerve repair. AxoGen believes there are many unmet needs in the surgical repair of peripheral nerves. And we, as the leading company in this space, are positioned to develop new solutions for these needs. Although our existing products in the upper extremity, trauma, oral and maxillofacial and breast reconstruction markets are our prime revenue sources today, expanded applications in lower extremity surgery, head and neck surgery, urology and the surgical management of pain offer AxoGen expanded revenue opportunities in the future. We believe that surgical management of pain may provide an effective, nonpharmacologic resolution for many causes of recurrent and chronic pain. The pain universe is large, and the potential to apply surgical nerve repair and nerve management techniques to address issues such as neuropathy, migraine headache, pain associated with hernia repair or nerve injuries resulting from total joint replacement creates a single opportunity for us to introduce new products and expanded applications for our product portfolio. In November, AxoGen announced FDA clearance for AxoGuard Nerve Cap. In certain situations, AxoGuard Nerve Cap provides surgeons with a new option to protect the peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of asymptomatic or painful neuroma. It may be used in both the surgical management of symptomatic neuromas and as a preventative measure at the time of initial surgery to help reduce painful neuroma formation. We will initiate clinical evaluations to explore specific procedures and techniques using AxoGuard Nerve Cap in anticipation of a potential launch as a part of an expanded application in the surgical management of pain. Before I turn the call over to Pete, I want to highlight again that Q4 was a great quarter for AxoGen. We continued to execute against our strategic initiatives. And by doing so, we increased revenue by 49% to $17 million, with gross margins over 84%. We closed 2017 with $60.4 million, representing 47% year-over-year growth. We continued our focus on nerve repair education and awareness, experienced successful interactions at professional society meetings and at educational programs for surgeons. Surgeons are demonstrating an increasing awareness and adoption of the AxoGen portfolio and our core applications and are applying our portfolio of surgical solutions in new areas. We are making investments to grow expansion markets in breast reconstruction neurotization, and we're exploring the surgical management of pain. We're pleased with our progress and with our opportunity to continue developing the emerging nerve repair market and driving long-term sustainable growth for AxoGen. Now I'll turn the call over to Pete. Pete?

Thanks, Karen. Fourth quarter revenue grew 49% to $17 million. Revenue growth was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix. As in prior quarters, most of our revenue growth was driven by growth in the active accounts. As we mentioned, the number of active accounts grew 31% to 591 in Q4. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to develop their treatment algorithms. Gross profit in the fourth quarter was $14.4 million, a 50% increase compared to Q4 of '16. Gross margin was 84.6% for Q4 compared to 84% in the prior year. Total operating expenses in the fourth quarter were $16.2 million, up 31% over the prior year. The increase includes continued investment in our sales force, market development and awareness activities, clinical, R&D and general corporate expenses associated with our growth, including non-cash stock compensation expenses. These investments are driving growth in the company's operating expenses but importantly, at a lower rate than sales growth, demonstrating the continued operating leverage in our business model. Sales and marketing expense in the fourth quarter was $10.1 million, up 21% over the prior year. As a percent of revenue, sales and marketing expense in the quarter improved to 59.6% compared to 73.2% in the prior year. As Karen mentioned, we ended 2017 with 60 direct sales reps, up from 53 at the end of the third quarter. We anticipate having 68 direct sales reps at the end of this quarter and at least 75 by the end of 2018. We completed 4 national education programs in the quarter and 15 for the year, and we anticipate conducting 18 total programs during 2018. Research and development spending in the fourth quarter was $2 million compared to $1.2 million in the prior year's fourth quarter. R&D costs include product development and expenditures for clinical efforts focused on our biologics license application for our Avance Nerve Graft, support of the RANGER Registry as well as studies for the development of new products and applications. As a percentage of revenue, R&D expense for the fourth quarter was 11.6% compared to 10.3% in the prior year's fourth quarter. General and administrative expense in the fourth quarter was $4.1 million, up 47% over the prior year's - over the prior year. The increase includes higher compensation expenses, including higher non-cash stock comp related to supporting our organizational growth. As a percentage of revenue, G&A expense decreased to 24% in the fourth quarter compared to 24.3% in the prior year's fourth quarter. Adjusted net loss for the fourth quarter was $2.5 million or $0.07 per share and includes non-cash stock compensation expense of $1.1 million. Adjusted net loss for the fourth quarter of 2016 was $3.2 million or $0.10 per share and included non-cash stock compensation expense of $344,000. Adjusted EBITDA loss in the quarter was $531,000 compared to an adjusted EBITDA loss of $2.2 million in the prior year's fourth quarter. We ended the quarter with $36.5 million in cash compared to $22 million at the end of the third quarter. The $14.5 million net increase in cash was the result of the company's $15.6 million equity raised in November, partially offset by the net use of cash in the fourth quarter of $1.1 million compared to $1.8 million in the fourth quarter of '16. And turning to guidance. We are reiterating our 2018 full year guidance. We expect 2018 revenue will grow at least 40% over 2017, and gross margins will continue to be above 80%. We are pleased with the commercial, clinical and strategic execution and - in the fourth quarter and throughout 2017. From a financial perspective, 2017 revenue totaled $60.4 million and grew 47% over 2016. Our gross margins continue to be above 80%, and we continue to demonstrate the leverage on our business model by improving our adjusted EBITDA loss to $3.8 million from $6.3 million in the previous year. And we believe we have sufficient cash to achieve profitability while continuing to invest in our current growth initiatives. We will continue to make investments to drive growth, and we'll do so in a manner that demonstrates the annual efficiency of our business model, with improved operating margins and cash burn as revenue increases. And with that, I'd like to hand the call back over to Karen.

Thanks, Pete. Before we close, I'd like to highlight a few investor events next month that we'll be participating in. Canaccord Genuity Musculoskeletal Conference in New Orleans on March 6; and the 30th Annual ROTH Conference in Dana Point, California on March 13. Information about these events will be available on the AxoGen website. In closing, our efforts to execute against our strategic initiatives focus on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and expanding new products and applications in nerve repair. We continue to produce record revenues and have positioned AxoGen to lead and grow the peripheral nerve repair market. We are building awareness, developing additional clinical data and expanding use of our products with innovator and early-adopter surgeons, and we're excited to be moving toward the develop - toward developing the middle-adopter segment of the peripheral nerve repair market. We're pleased to see expanded use of the AxoGen product portfolio across our core markets, increased adoption in mixed and motor nerve repair as well as long gap nerve repair and are excited to introduce our expanded application in breast reconstruction neurotization to additional surgeons. We are introducing our platform for nerve repair to fellows, allowing us to train the next generation of nerve repair surgeons. We're building a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications where we believe we can bring meaningful solutions to current clinical challenges. We will continue to expand our platform and develop new nerve repair applications, challenging the norms of historical repair options and evolving the practice of nerve repair. I'm also happy to share with you that AxoGen was recently named as an Employee Engagement Best Practices Award winner by DecisionWise International. The award recognizes top-performing companies in the areas of employee engagement and company culture. We are passionate about creating solutions for patients with peripheral nerve damage or discontinuities, and our AxoGenic values are central to our culture. Open, honest and respectful communication, along with individual ownership and empowerment, are key characteristics of our culture that allow us to attract, develop, promote and retain outstanding associates. Before taking questions, I want to welcome our new investors and, as always, thank the AxoGen team for their commitment to our mission and our values. And at this point, I'd like to open up the line for questions. Rhea?

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Richard Newitter with Leerink Partners. Please proceed.

Hi. Thank you for taking the questions and congrats to strong finish to the year. I have a couple. The first one, just as it pertains to guidance and pricing. You said you had a price increase in 2017. I was just wondering, is there a price increase in 2018? And when does that go into effect, if so? And then also - sorry, go ahead. Just start with that.

Okay. Rich, thanks for the question. Yes, we - every year, we increase pricing on March 1. And we've - we obviously began that process 4 to 6 weeks ago with our customers, and it will be effective tomorrow.

Okay. That's helpful. And Pete, on guidance, at least 40% growth. Is there anything that we should be thinking about with respect to kind of the cadence between the quarters? Should we be thinking of that more or less kind of steady 40% throughout the year?

Well, I mean, I guess, what I'll speak to is we have seen over the last many years that there is a seasonality cadence to our business. And it generally starts in - with Q1 being sort of flattish to Q4, with a nice sequential step-up in Q2 and Q3, and then less of a sequential move into Q4. And again, all of that is based on, in this trauma space, trauma follows human activity. And in the spring and summer months, human activity picks up, projects get started, more power tools get used, and we see a big step-up in procedures in Q2 and Q3. And again, we - we've seen some variation of that. But when we think about our numbers, we think about Q1 being sort of flattish to Q4, with the step-up being in Q2 and Q3 and then a little bit in Q4.

Okay. That's really helpful. Karen, I think on your opening remarks, you had mentioned that accounts that order across the portfolio, the Avance and AxoGuard portfolio, are generating 6 times the revenue level versus accounts that order just one of them. Is that - that's higher than I think the ratio you used to quote at about 5 times. So I guess, just one, is that right? And what kind of drove that magnification of that increase? And do you have a sense as to what percentage of your account base is in that bucket of ordering across the two portfolio categories?

A lot of questions there but, yes. So it is an increase. You're right. And it reflects the increasing penetration that we see in our active account. And so as we increase penetration and drive that, we continue to see that expression of adoption in a number of ways, and one of them is that ratio of revenue. Now we are still in various stages of development in all of our active accounts, and it is still more than half of the accounts only order 1 or 2 of our products. So we still have, obviously, room to grow in our existing and active accounts. We're really just at the early stages there. And of course, many accounts that we can continue to expand and bring into the active pool. But we're encouraged by that increasing ratio, showing that we're really driving penetration.

Okay. Thank you.

Thank you. Our next question comes from the line of Raj Denhoy with Jefferies. Please proceed.

Hi, good afternoon. I wonder if I could maybe follow-up on Rich's question. In terms of the really strong growth, you saw the 49% in the quarter and the strong growth through the year, is there anything you can share in terms of whether that was evenly balanced between Avance and the AxoGuard family? Or whether one is doing better than the other at this point?

Yes. It continues to be balanced across the product line. We're certainly seeing growth in Avance, but we're also seeing similar growth levels in the AxoGuard product line. And we're seeing more combined usage in cases.

And I'd just add, Avive, of course, was a product that we've only launched a year ago. It's - we're starting to see adoption of Avive. We saw what we expected to see through the year where surgeons tried a few cases. Now they're starting to come out of that wait period where they saw outcomes, and we expect that to continue through this year. But it's still a relatively minor part of our overall revenue. So it will have a higher growth rate but off of a much smaller base.

Got it. One of the other trends you've commented on previously was this idea of consignment in hospitals who were consigning inventory or were using quite a bit more. Is there any updates you can provide in terms of the number of accounts that are consigning inventory at this point? Any thoughts on how this is going to trend this year?

We still have the majority of our active accounts are ordering for cases. So that is a strategic initiative for us this year is to get inventory closer to the patient. And we view that as either doing consigning or having them stocked product and set up a par level on their shelves. Our real goal is to make sure that, that inventory is there, especially for trauma, so that when they have an unexpected case, which is obviously common in trauma, that they have inventory to be able to address that. So that will be a growing area, but we're not there yet.

And what's gating that? I mean, is it simply that the hospitals don't want to hold inventory or put it on the shelf? Or how do you accelerate that - those programs?

Yes, typically, what we see is that you have to establish a regular reorder pattern before the hospital is willing to consider stocking inventory, whether it's consignment or a purchase. And it typically requires going back to either purchasing or, in many cases, back to the value analysis committee to have them look at that suggestion and determine that they do have, again, a reasonable chance of using that inventory. Their fear to - the concern that they would have inventory expire on the shelf, that they would have some accountability for, or inventory that's damaged that they would have accountability for. So they just want to make sure that it's a good use of their funds. On the other hand, once you have a good reorder pattern, it make sense to do that. And so we don't find a lot of pushback once you have - you're in the situation of the time that's gone by that shows that you've got a good reorder pattern. And so we're - it's just - it's part of our evolution of the market. And I think we're at a good time to start to effect that now. We started in that late last year, and we'll continue that through this year.

Yes, it's helpful. And maybe just this one last one on breast neurotization. Is there anything you can offer in terms of where you are in these 20 or 25 accounts that you want to target by year-end? Any initial feedback you've gotten from hospitals around the idea of using the AxoGen products? Any additional costs that could represent to doing these procedures?

Yes. We're very excited about what's happening in breast reconstruction neurotization. I can tell you that at this point, over half of our targeted sensors have been trained or at least have the initial surgeons trained and are starting to offer this to their patients. So we're seeing good early interest, both by the hospital and the surgeon level. Now we do expect that this will - or at least our projection this time is that we'll expect to see that surgeons will follow the same pattern of adoption that we've seen in other nerve repair markets. And that is that they will do a series of patients and then stop and wait and watch for their outcomes and then start back up again. And so I think we're going to see some early activity, and then it'll start to slow down. And then with the goal, of course, of it picking back up as we move out of the wait period. But we've seen really good trajectory at the initial time period here with, frankly, tremendous enthusiasm from the surgeon community.

And anything on the cost front because it does add additional costs to doing reconstructive procedure to use your technologies. How were they thinking about that? Is it being paid by the patient or the hospitals are ordering it? Or is there any discussions around that?

Yes, a great question. Typically not paid for by the patient. It is something that the hospital is absorbing because these are patients that they believe add value to the hospitals. They are very desirable patients, both in the full care pathway of their treatment. Again, these are cancer patients and survivors who will have a care pathway that will include a number of different treatments and attracting patients to their center where they gather reconstruction very often. They have more care that's provided that provides an economic benefit for the hospital, and in addition there, the care deciders for their families. So the premise of this is that these - that the hospitals do believe they want these patients. These are desirable patients, and attracting them is a benefit to the hospital.

That's great. Thank you. And congratulations on the progress.

Thank you.

Thank you. Our next question comes from the line of Kaila Krum with William Blair. Please proceed.

Hi, Karen. Hi, Pete. Thanks for taking our questions. So first, a two part question and then a follow-up on guidance. So first, I think the rate of account - or active account growth, which is still really healthy, it did decelerate a bit. So can you help us understand the reason for that in the quarter, if there is one? And then second, I think you guys had talked about directly targeting hospitals or surgeons based on their procedural makeup. So can you elaborate a little bit on your strategy there? And how that strategy might augment your account - or active account growth over time?

Sure, Kaila. The answer is actually the same to both of your questions. We had - in 2017, had intentionally given our reps an opportunity to focus on targeted accounts and a slight - gave them a slight preference in their compensation to revenue growth in targeted accounts. Some of those were accounts they already had where we wanted them to go deeper, and others were larger centers that we had not been able to penetrate yet, and so when we see - and we saw this all through last year. We saw the growth of active accounts pulling back into the 30% range while the revenue growth continued to be in the 40% range. And we saw that again here in the fourth quarter. And I - what we see there is that, that means that we're being successful in focusing on target accounts and getting deeper into those accounts and seeing a growth and, if you would, same-store sales for these active - for our active accounts.

Great. Now that makes a ton of sense. That's helpful. And then, I guess, as far as guidance goes, I mean, you guys have had this 40%-plus growth guidance out there effectively since the third quarter of last year. But you've also had a lot of, I mean, exciting updates in your business since then that I'd imagine would be additive to how you're thinking or how you were thinking about growth. So I guess, I want to understand what specifically has to happen in order for you to hit the low end of your current guidance range or 40%? Is it steady growth in the existing business where there need to be meaningful contribution from breast neurotization? Just trying to understand the puts and takes there.

No, that's a great question. And again, we continue to take a conservative view on guidance, and we are continuing to guide to what we think is our minimum growth curve that we can maintain for a while. We do not need significant input from breast to achieve this 40%, at minimum, a 40% growth. We see several opportunities for upside to this, including, as we've - as Karen has talked about. At some point, we see middle adopters coming over in the - in our core trauma space more quickly than what they are right now. That would be potential upside. We are very pleased with the progress that we're making in the oral and maxillofacial space. But again, we think there's more upside there as a larger group of surgeons become convinced with that offering for their patients. And then, again, as Karen just mentioned, we really are thinking conservatively on breast revenue for 2018 where these surgeons will likely implant a series and do a series of the ReSensation technique and wait to see the outcomes in their patients. And if they get to a point where they're - they become convinced more quickly, that they offer it to more patients, then that could potentially be additional upside to our guidance. So we're comfortable with staying where we are. We'd like to see - we've made a lot of changes in our sales force here in the fourth quarter. In the first quarter, we've - if you're doing the math, we added about 8 sales reps towards the end of the fourth quarter. We expect to have added another 8 in the first quarter. So I think we're setting ourselves up very well with numbers. And then, again, on strategy, some of those reps are going to be support reps designed for the breast support, and others are going to be clinical support reps for OMF. So again, I think we're laying the foundation to create and continue to maintain this 40% growth path that we're on and lay the foundation for potential higher growth as surgeons become more comfortable with our techniques.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Craig Bijou with Cantor Fitzgerald. Please proceed.

Hi, guys. Thanks for taking the questions. I wanted to start with just the deeper penetration in the active accounts. And obviously, you guys are getting good pull-through with the 6x higher revenue in the accounts that use more than 1 product. But I wanted to ask about surgeons and just how you - what you're seeing from adding additional surgeons within those accounts. And maybe if you could parse out some of the penetration by whether it's a pull-through of the products or additional surgeons.

Yes. It's absolutely both. So we - so the way the evolution of account typically works is you get the innovator or early adopter, the lead person from the center will start using 1 of our products in a portion of his or her treatment. So they pick out a niche. And so you start developing that surgeon along expanding his or her treatment algorithm. And usually, before you go all the way across his or her treatment algorithm, one of their partner's starts to come into the operating room, is intrigued with the changes in nerve repair and starts at the beginning. And so it's sort of a step diagram. You add each surgeon, and each surgeon's adoption is a step-by-step process. And so in roughly half of our active accounts, we have 1 or 2 surgeons who are using, and the other half are starting to expand into some other - into bigger numbers. So now I understand surgeons move from account to account, so it might sometimes be the same surgeon at multiple active centers. In fact, the common adoption process that we see is that we start in a surgery center or a small community hospital because you have greater access to the surgeon, and then work with that surgeon to move to a bigger level one trauma center. So there is a high overlap of surgeons in multiple accounts. But we are starting to see expansion into more surgeons as well as deeper penetration by the individual surgeon.

Okay. That's very helpful. Secondly, I wanted to ask. So I guess, the time - the conversion from a - the pipeline of new accounts to active, and I don't know if you've given a time line or a typical length of time that it takes to move from that, an initial pipeline to an active account. But I - have - well, I guess, the question is, have you provided any kind of time line or timing for that? How is that changed over time? And I guess, if it has changed, has that acceleration - do you kind of tie that to increased awareness amongst surgeons?

Yes. So we have not provided that. But one of the reasons we've not provided it is because it's highly variable, depending on the type of surgeries that the surgeon starts with. And if they start with digital nerve injuries, then the wait period will be 6 months or so. But if they start in brachial plexus, it might be 3 years. And so because you've got such a tremendous range of healing time for different nerves, it really is very dependent on what is the time frame that they started in. And we have not seen that accelerate because they are waiting on the nerves to heal. And we aren't any faster on that. And so as long as they're wanting to wait for results, then I don't anticipate an acceleration for these early adopters and innovators. The exception to that will be as we move into the middle adopters, there is a school of thought that says middle adopters adopt differently than these early adopters and innovators do. And so yet to be seen is will they need to do the results in their own hand? Or will they be completely comfortable that the innovators in the universe of nerve repair have created all this data? And that's why our library of data is so important. Will that give them the comfort to say, I don't need to wait. I'm just going to change what I do because all these people before me have proven that this is a good option. It happens. And you can see a substantial acceleration that would occur because you'd have a large group of surgeons who start to shift their treatment, and you wouldn't have a wait period. I'd put that out there as a hypothetical because I think that's a possibility, but we're not there yet. So I don't know what the future exactly will bring. When we do our forecasting, we don't assume that. We assume that the new guys will adopt just like the old guys have.

Great. Very helpful. Thank you. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from the line of Dave Turkaly with JMP Securities. Please proceed.

Thanks. I think you mentioned that you may have some support reps coming online may be in OMF and breast. Of the 60 that you mentioned and then the 75 for the goal at the end of the year, have you ever sort of quantified how many are support versus, say, your regular sales rep?

No, we haven't. We've actually always had. I don't want to call them support rep. I would call them specialist reps who work with a surgeon on a particular technique. And some of the technique things in the OMF procedures and in the breast procedures, especially in the breast procedure, we really need to make sure we're aware of the whole procedure because we're adding an entirely new subset of the procedure, and it changes the way they do things from start to finish. And so we have some specialists who are going to provide specialist support in these start-up and training phases of the breast centers. And we've always had some specialists who've helped us in the OMF area to help surgeons get comfortable with the new techniques in both the iatrogenic injuries and that we've expanded into the mandible reconstructions. So we don't break that out but they're all quota-carrying reps, and they have a specific set of targets. And those targets cross over, and they work together in those target accounts where they happen to have both a breast center or an OMF specialty, and it's a large trauma center.

Got it. And I guess, if you're looking at your plan for the year, why is 15 the right number of reps? I mean, you guys are growing at such a good clip. I would think you might even be able to support more, but I guess just your thoughts around that number. And could it expand?

Yes, it could expand. I'm not saying it won't. I think what we're looking at is really just the cadence of adoption of bringing in reps and making sure that we maintain a good ratio of sales associates to sales management. I think on the execution side, I'm having - we have a tremendous, talented group of sales directors, and they play a very important role in the overall sales process. And if you start to exceed the number of reps per sales manager or sales director, then we just worry that the ramp-up wouldn't be of the same quality and consistency that we've seen in the past. So that's really our pursuit to make sure that we can manage the right structure around the expanding sales teams, not necessarily the number of reps. But we will keep adding as we think that we can do so and continue to scale up with the same quality.

Well, you certainly hired a great Chief Commercial Officer. I'll give you that. Last one for me.

Yes, we did.

As you look at RECON, you mentioned Q4 complete enrollment. Can you just give us a - refresh our memory in terms of when you'll see the actual sort of outcome and the time line for that trial?

Sure. So RECON, again, is our pivotal trial to support the transition to the biologics license application for Avance Nerve Graft. And that will complete enrollment this year, but there's still a 1 year follow-up after that. So we'll complete enrollment in Q4. The follow-up will be completed the following Q4. And by the time we have the data and break that out, it'll be mid-2020. So that's the significant gating factor to getting then submitting the BLA. So we would be submitting the BLA then in late 2020, early 2021.

Thanks a lot.

Thanks, Dave.

Thank you. And our last question today will come from the line of Bruce Jackson with Lake Street Capital Markets. Please proceed.

Good afternoon. And thank you for taking my question. I just wanted to circle back to the question about the stocking accounts. Roughly what percentage of your accounts right now are stocking accounts or consignment accounts? And how much has that grown over the past year?

Well, I can tell you, we've actually been communicating in terms of revenue, but less than half of our revenue comes from either consignment or a purchase stock account. So we're still - that's still a growth area for us. So it's, again, an opportunity for us to continue to expand and get revenue on the shelf. And we see when you do that, then the number of cases that you get in that account will increase.

All right. That's it from me. Great thorough job. Thank you.

Thanks, Bruce.

Thanks, Bruce.

Thank you. I would now like to hand the floor back over to management for closing remarks.

Thank you. And I want to thank everyone for joining us on today's call. I look forward to talking with many of you at one of our upcoming investor events. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your line at this time, and thank you for your participation.