Greetings, and welcome to the AxoGen Third Quarter 2018 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. It is now my pleasure to introduce your host Kaila Krum, Vice President, Investor Relations and Corporate Development. Thank you. You may begin.

Thank you, Jesse, and good afternoon, everyone. Welcome to AxoGen third quarter 2018 conference call. We appreciate you joining us. I’m Kaila Krum, Vice President of Investor Relations and Corporate Development. With me on the call today are Karen Zaderej, Chairman, Chief Executive Officer and President; and Pete Mariani, Chief Financial Officer. The format for today’s call will be as follow. First, Karen will discuss highlights from the third quarter, provide a brief company overview and then turn to our key operational and strategic objectives. Next, Pete will provide details on the financial results outlined in that today’s press release and review financial guidance. We will then open the call for your questions. 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 made 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 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. Karen?

Thanks, Kaila, and good afternoon, everyone. Welcome to our 2018 third quarter conference call. We are pleased to report another quarter of strong growth for AxoGen. Third quarter revenue grew 41% to $22.7 million. After investing in significant organization enhancements earlier this year, we’re seeing improvements in the productivity of our direct sales team and stabilization of our independent channel. In the third quarter, revenue from our direct sales team was up nearly 50%. This growth and the productivity improvements we saw were consistent with our expectations. Our growth is driven by increasing surgeon acceptance of the body of clinical evidence in support of our product portfolio. With now more than 1,500 nerve repairs in our RANGER Registry and a growing body of clinical evidence for AxoGen’s products in nerve repair, we’re creating a differentiated algorithm with demonstrated consistency and meaningful recovery outcomes. We’re excited to announce today that the U.S. Food and Drug Administration granted the Regenerative Medicine Advanced Therapy or RMAT designation for Avance Nerve Graft. The RMAT designation under the 21st Century Cures Act aims to streamline development of regenerative medicine therapies intended for the treatment of serious diseases and life-threatening conditions. Our regenerative medicine therapy is eligible for the designation if it is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product has the potential to address unmet medical needs for such a disease or condition. The RMAT designation highlights both the strength of the data within the RANGER Registry and the significant unmet medical need for improved therapy to treat nerve injuries. AxoGen is focused specifically on the science development and commercialization of technologies for peripheral nerve regeneration and repair, and we will continue to challenge the norms of historical repair options.…

Thanks Karen. Good afternoon everyone. Third quarter revenue grew 41% to $22.7 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 Karen noted, most of our revenue growth was driven by increases in both the number and penetration in active accounts. 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 for the third quarter was $19.2 million, a 42% increase compared to Q3 of 2017. Gross margin was 84.7% for Q3, compared to 84.4% in the prior year. Total operating expenses in the third quarter was $24 million, up 60% over the prior year. The increase includes the additional investments in our expanded commercial capabilities, as well as increased investments in clinical, R&D and general corporate expenses associated with our growth. Operating expenses also include non-cash stock compensation expense of $2.2 million in Q3 compared to $919,000 in the prior year. Excluding the impact of non-cash stock comp, total operating expenses for the third quarter increased 53% to $21.8 million or 96.3% of revenue compared to $14.1 million or 88% of revenue in the prior year. Sales and marketing expense in the third quarter was $14.7 million, up 55% over the prior year. As a percentage of revenue, sales and marketing expense in the quarter was 64.7% compared to 59.4% in the prior year. As mentioned, we continue to invest in our commercial capabilities. These investments in our organizational infrastructure will provide a solid framework to drive continued execution of our growth plans and expand our platform for nerve repair. Research and development spending in the quarter was $3.3 million compared to…

Thanks, Pete. Before we close, I’d like to remind everyone that we will be conducting our Third Annual Analyst and Investor Day in New York City on November 19. In closing, our efforts to execute against our strategic initiatives focused 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 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 are excited to be moving towards developing the much larger middle-adopter segment of the peripheral nerve repair market. We’re pleased to see expanded use of the AxoGen product portfolio in our core trauma markets, growing surgeon acceptance of our OMF application and early response to our market development efforts in breast neurotization. We are 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 positioning our algorithm as a new standard-of-care in the peripheral nerve repair market, a market that currently represents more than $2.2 billion in existing applications and we expect will continue to grow. Before taking questions, I do want to welcome our new investors and thank the AxoGen team for their commitment to our mission and our values. At this time, I’d like to open the line for questions. Jesse?

[Operator Instructions] Our first question is coming from the line of Richard Newitter with Leerink Partners. Please proceed with your question.

Hi, thanks for taking the questions. I wanted to start off with the guidance, which you reiterated for 2018 and then also the preliminary guidance you’ve given for 2019. Just on 2018, you’re reiterating your 40% guide and you delivered 41% in the third quarter, with that implying a little bit of an acceleration into the fourth quarter. So first I was just hoping, Karen, maybe you could tell us what gives you confidence that you’re going to see acceleration in growth into the fourth quarter? And then I’ll ask about 2019.

Thanks, Rich. So as we look at this, we’ve looked at the productivity improvements that we’ve seen in our sales team as well as certainly, the reps who are coming into their what I would consider their productivity cycle. As you remember in fourth quarter of last year and first quarter of this year, we added a number of reps and it takes eight to nine months before a rep is really productive. And so we started to see some of that impact in Q4 – excuse me, in Q3, and we’ll see continued impact of those reps as they hit their productivity phase in Q4. And so as we look at the performance of what we already see happening and what we’ve seen happened in the past, we feel confident in what will – the results that will yield in Q4.

Okay, I just want to be clear. Can you maybe – what are the assumptions to get to that acceleration? Do you need to see or are you expecting an improvement even of that 50% direct sales force growth into the 4Q? Or do you see something better than stabilization in the independent channel maybe some rebound in that channel to get there? What’s underlying the assumption there?

Well, I think you bring out several good points. So for us, it is looking at our overall productivity, but, in particular, looking at the productivity enhancements of our new reps, who really just get into their stride again in that ninth month. So that – our assumption is that they’ll continue to do what we’ve seen them do in the past or what others have done before them and so that’s the base of our assumption on the direct team. On the independent channel and again, we get about 80% of revenue from our direct reps but our 20% comes from our independent channel. In our independent channel, we’ve seen a good stabilization. We’re not assuming significant growth coming from the independent channel, but we are assuming that we’ll continue to see the stabilization that we put in place and saw through Q3.

Okay, that’s helpful. And then just for 2019, you’re establishing at least 35% growth for year-over-year for revenue. I guess, just as we think about that number, I’d love to hear how you came up with it. What are some of the puts and the takes we should be thinking about? And I don’t want to pass, you’ve talked about running the business to a 40% to 50% kind of growth business. If you can just maybe reconcile how that 35% fits into kind of the way you’ve historically run the business, that would be helpful. And if it’s potentially just to embed some conservatism for the X factor, which clearly came into play in 2018? Is that kind of the discrepancy between that, I don’t know, internal objective and your guidance or if there’s anything else there to think about? Thank you.

Yes, we’ve been thoughtful in selecting what will be our guidance for next year and thinking about how you would want to model our business going forward. We still fundamentally believe that the market in peripheral nerve repair is very strong. And that we’re just scratching the surface of what is a large growth opportunity. We know from the work that we’ve done with surgeons in the past and what we see continuing, is that surgeons in this market convert their nerve repair solutions slowly in a very deliberate way as they see results in their own hands as they make changes. And we believe we’re uniquely positioned in this market to really capitalize on those factors with a very differentiated product portfolio, the substantial amount of clinical evidence that we’ve built to date and a pipeline of surgeons who are in that trial process. And we look at all of those things as we think about the future and combine that with the productivity of our expanding sales team to lay out what we think is a very thoughtful model that shows continued growth for the long-term. So it is with quite a bit of thought and looking at what we’ve learned over the last many years in the peripheral nerve repair market that we’ve put together the guidance and think that will be a good guidance for you in setting your model.

Okay, thanks.

Thank you. The next question is coming from the line of Raj Denhoy with Jefferies. Please proceed with your question.

Hi, good afternoon. Maybe I could just expand a little bit or ask a few kind of clarifications to Rich’s questions. But in terms of the direct channel, right, so I think what we’ve seen this year is quite a bit of a sort of churn and change in your direct channel in the first part of the year. Now it appears to be relatively stable and you’re seeing increased productivity. So let me see if you can give us in terms of whether that’s impact the case? Are you still seeing some level of turnover in that sales force or do you view it as relatively stable at this point and really what we should see is just increasing productivity for the next several quarters?

Yes. If I go back to first quarter, what we saw in first quarter wasn’t what I would consider turnover as much as reorganization. We grew our sales teams substantially and at the beginning of the year decided that we needed to expand the way they were structured and create more regions and some more sales leadership. And so with that, we ended up making a number of changes in positions that people had, including promoting some people from within, which is what is the turnover that you’re talking about. We actually have very low regrettable losses. So we haven’t seen that historically, we still don’t see that. But we have had because of growth, some of those problems where you’re trying to figure out how do you create the infrastructure for the long term, and we made the choice in the first quarter to go ahead and create that infrastructure for the long term, that caused a little bit of a disruption in the first quarter. You saw some of that disruption in the first quarter, but has stabilized and is not been an ongoing issue and we’ve continued to add reps throughout the year who are on each of their own growth curves, of course, but we’ve been able to continue to support that without added disruption as we both split territories and grow the overall business.

So did you think though that – again, that period of disruption, I didn’t imply this was on a term, but that disruption is sort of behind us, are you expecting another sort of disruptive period or can we really expect just to see sort of productivity? And of course, you’ll keep adding around the edges on the sales force, but how should we think about the trajectory at this point of that sales force?

Yes, we will continue to evolve the sales team. We are still growing. We want to continue to add more sales associates. As we’ve said, it will exit this year with at least 80 associates. So we’ll grow again in fourth quarter and beyond, but we see that more of an – as evolutionary change rather than the dramatic shift that we had in the earlier part of this year.

Okay. And then on the distributor piece, because last quarter obviously, there was, again, some issues with the couple of the distributors. So it sounds like that has largely been rectified although it’s relatively kind of flattish growth. Do you expect we’ll see a resumption in growth out of the channel? Or there’s still a couple of them that are underperforming? It also looks like you added another distributor in the quarter. So really just any comments around that would be helpful.

Sure. Well, again, I think a hybrid channel makes a lot of sense for us for the long term and it’s an important part of our overall strategy. As we talked about before the trauma market by definition is geographically diffused. It’s spread out across the United States. You’re always going in a helicopter ride of a Level I Trauma Center. And that means that there are some very high value accounts that are a long distance from a driving standpoint from our direct reps and that doesn’t necessarily make sense. And so what we want to do is make sure that we have good coverage across the United States with focused territories for our direct teams and local independent channels for those more remote trauma centers. And there are quite, honestly, a lot of them. So that is the work where you’ll see us go up and down some as we try and make sure that we have good coverage for those trauma centers for the long term, while at the same time making sure that our direct territories are designed to be as efficient as possible. So we will continue to see that we will have an independent channel to make sure that we provide that coverage. Now in terms of the stabilization, yes, absolutely, we made some changes in Q2. Now we didn’t make them fast enough to not affect Q2. But we saw that stabilize actually at the end of Q2 and certainly through Q3. From a growth standpoint, I think we are taking a somewhat conservative approach in thinking about the growth of that channel. But it certainly has the opportunity to continue to grow, traditionally independents have not grown the same on average, the same as a direct rep. Yes, we have had some independent agencies that have. So certainly our best independent agencies look just like a direct territory. But on average, have been lower in growth and we try to be conservative in our assumptions there.

Great. And just one last one. So just in terms of the guidance for next year as well. So the 35% or the at least 35%. I guess, trying to square that in light of the fact that you as you noted, you’ve now trained your number of breast centers postsurgical pain is poised to per DAP start to contribute. You’re still seeing productivity increase in this direct channel. How do we square all that with the fact that you’re guiding to 35%? I mean, should we view that as perhaps a starting point for you? Or how should we really be thinking about that in the light of everything else going on in the business?

Well, again, we’ve looked at this in a lot of different ways and still believe that we have a long-term sustainable growth opportunity in the overall market. And in looking how that might fluctuate from quarter-to-quarter, we feel that we’ve been thoughtful in assuming that we can give you guidance for a 2019 number that would be at least 35%, but you’re absolutely right. We have a foundation in our core trauma market that we believe is still at early stages not with depths of penetration. We layer on top of that the OMF market, which has actually getting some good traction with certainly the early adopters and excitement especially in the mandible reconstruction segment and our emerging opportunity in breast neurotization, and we think all of those will contribute to a solid opportunity for overall growth in 2019 and certainly beyond that. The surgical management of pain is still in its very early stages. I would not assume that that will have substantial growth in 2019. Like all of the markets that we’ve talked about, peripheral nerve repair is slow, but we see that as a substantial long-term driver for our business and see that as another growth area.

Great. Thank you very much.

[Operator Instructions] Our next question is coming from the line of Craig Bijou with Cantor Fitzgerald. Please proceed with your question.

Good afternoon. Thanks for taking the questions. Wanted to start with the penetration of the active accounts that you guys talked about and how that’s driving a good portion of your strength. So I think, Karen, you mentioned the middle adopters and I know that’s been a focus getting into that next level of adoption. So just maybe if you can expand upon some of your comments. What you’re seeing from middle adopter perspective? Have you really gotten into that level? Are you seeing more surgeons at these active accounts, maybe a second surgeon start using the products? And I guess, maybe any other color that you’re seeing coming out of these active accounts.

Yes, thanks, and that is our goal. Obviously, if you want to become the standard of care, you need to move into the middle adopters. And the majority of our businesses is very clearly with innovator and early adopter surgeons. And I would say across the country, you would typically be looking at a penetration level that we’re just not at yet to be able to comfortably say that you’re into middle adopters and that’s you’re usually looking at something in the 15% to 16% range, starting to push that into that middle adopter group. However, in local markets, I think we are starting to see some middle adopters with at least interest in the products. We notice at things like the American Society for Surgery of the Hand, the ASSH Meeting that was just recently held in the information sessions that are there, the educational sessions that are there, the types of questions that are being asked start to be more like middle adopter questions than what you would typically see from an early adopter. Early adopters are really trying to understand the science, they’re trying to understand the innovation. Middle adopters are looking at a chance to try and understand how it affects them and their practice. We’ve talked before that they like to be, if you look at the change model, easy, normal and rewarding. And we’re starting to see those types of questions in the sessions rather than the more scienty-based questions. And so I would say we’re catching the interest of the middle adopters. It is very hard to time when middle adopters will make a change, but I am comfortable to say that they’re at least aware that we’re in – that we’ve entered into peripheral nerve repair and that there’s change going on and they’re starting to follow us. They may not be doing the algorithms yet, but they’re starting to follow us out there, so that they don’t get behind. And so I think that’s an exciting trend for us to watch, but I still would say that the majority of our business is with those early adopter surgeons, that’s who our current surgeons are today.

Okay. Thanks. That’s helpful. And maybe a follow-up – another follow-up on 2019 guidance. So just want to get your thoughts on how you guys have thought about some of the recent competitive announcements and how you’ve thought about that factoring into 2019. And then maybe, I don’t believe you said it, I apologize if I missed it, but sales rep hire expectations for 2019.

Well, first on the sales rep hire, we’ll talk more about that at the Analyst and Investor Day in November, we will continue to grow, but we’ll talk a little bit more about it in about a month. In terms of the competitive questions, let me backup just a little bit. We’ve always competed with Synovis, Stryker and Integra, that’s not new for us. They’ve been in the market, in fact, much longer than we have with the synthetic tubes that each of them market. And so competing with these other companies is not a new phenomenon for us. I think you have to step back and think about then what is the product that you have that you’re competing with. And the fundamental things that are important in nerve regeneration are both having structure and actually the right kind of structure to help guide the nerve fibers in the cells across the gap as well as having guidance for bioactivities that allows the nerve fibers to understand the direction that they should follow and nerve fiber when it sprouts out of the end of nerve can equally go forward or backwards and they’re fine to go in either direction. And so you need to have some sort of guidance that gives them the directionality to tell the nerve fiber to get to the other end. Everything we’re doing is about providing enough signal capacity to generate the either sensation or the motor function that is again normal for that patient. And so we feel confident that we still have a unique position in the marketplace with, in particular, in this case Avance Nerve Graft with both the natural structure that is what the – the normal structure that the nerve fibers are looking for in terms of round tubes of a particular diameter that is what’s the nerve fibers prefer and the guidance of our active laminin. And I think this is all recognized with what we saw in the – and that’s why we wanted to point out the RMAT designation. The RMAT designation is for regenerative medicine products that, first of all, address a significant unmet need, which we feel nerve repair is one. But also demonstrate that they have preliminary clinical evidence indicates that the product has the potential to address that need. And with the designation of Avance Nerve Graft as in the RMAT designation, we feel that we’ve got a good position to continue to compete in this space and really make a difference in this important segment of health care in changing peripheral nerve repair.

Great. Very helpful. Thanks for taking the question.

It appears we have no further questions at this time. So I’d like to pass the floor back over to management for any additional or concluding comments.

Thank you, Jesse. And I want to thank everyone for joining us on today’s call. And we look forward to talking with many of you at our upcoming Analyst and Investor Day in November. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation, and you may disconnect your lines at this time.