AxoGen, Inc. (AXGN) Q1 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the AxoGen’s First Quarter 2019 Earnings 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] Please note, this conference is being recorded. I will now turn the conference over to Kaila Krum. You may begin.

Thank you, Brock, and good afternoon, everyone. Welcome to AxoGen’s first quarter 2019 financial results 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 follows: First, Karen will discuss 2019 first quarter highlights. She will then turn to our key operational and strategic objective. Next, Pete will then provide details on the financial results outlined in today’s press release and review our full year guidance for the fiscal year 2019. 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 in Investors section of the Company’s website at www.axogeninc.com. 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 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, the regulatory environment, sales and marketing strategies, capital repurchase or operating performance. And with that, I’d like to turn the call over to Karen Zaderej. Karen?

Thanks, Kaila, and good afternoon, everyone. We are pleased to report a strong start to the year for AxoGen. First quarter revenue grew 35% to $23.3 million. Our performance continues to be fueled by growing surgeon acceptance of the increasing body of clinical evidence across our portfolio of products. In addition, our growing commercial team is driving increased penetration of our active accounts – allowing us to gain access and develop new accounts. We’ve been investing to develop our broader capabilities including strengthening our commercial team and adding clinical and product development programs. With these investments, I’m confident we’re building the foundation for long-term sustainable growth. Before we’re reviewing progress on our strategic initiatives, I want to briefly comment on two of our recent announcements. In late April, we provided an update on RECON, our Phase 3 pivotal study to support our BLA for Avance Nerve Graft. Specifically, we announced the completion of the blinded interim analysis and our plan to expand enrollment by 50 subjects to support the original power of the study. We are now in the process of restarting enrollment at our existing study sites and on boarding up to five additional centers. Several of our sites have already begun – has already been IRB approved to restart recruitment and we expect the other centers to follow in the coming months. We continue to anticipate the additional 50 subjects will be enrolled by the end of summer 2020. Late last week, we announced the appointment of Quentin Blackford and Alan Levine to our Board of Directors. Quentin currently serves as the Executive Vice President and CFO of Dexcom, and Alan is the Chairman, President and CEO of Ballad Health. These new leaders bring a breadth of healthcare leadership experience to our Board of Directors along with an expertise to allow us to strengthen our relationships with key stakeholders, including providers and payers. I want to welcome both Quentin and Alan to our team as their insights and experience will be invaluable as we continue to build and develop our platform for nerve repair. We are the leading company solely dedicated to restoring quality of life for patients suffering from peripheral nerve damage. Our purpose-driven team of professionals works with skilled clinicians to further our mission to deliver life-changing evidence-based solutions to better serve this patient population. We’re advancing this mission through the pursuit of our strategic initiatives, which we refer to as our five pillars of growth: Building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plans, and introducing new products and expanded applications in nerve repair. I’ll now comment on our progress in each of these areas. First, we continue to build market awareness of AxoGen and our products by engaging with patients and surgeons. We continue to grow clinical awareness of our products and repair algorithm within the surgeon community. We had a successful January combined meeting of the American Association for Hand Surgery, the American Society for Peripheral Nerve, and the American Society for Reconstructive Microsurgery. In addition, our product portfolio was well represented at three recent oral and maxillofacial clinical conferences. These are most conferences included several clinical presentations that highlighted the challenges of nerve entry and these procedures and we continue to see enthusiasm from surgeons in this growing nerve repair application. Our second pillar of growth is focused on surgeon education and the development of surgeon advocate. We conducted three national education programs in the first quarter, including one Fellows program. The surgeon led events focus on advances and best practices in nerve repairs with the participating surgeons gaining additional confidence and nerve repair techniques. On average, we see AxoGen product utilization from surgeon attendees more than double in the six months after they attend the program. In 2019, we plan to conduct a total of 25 national education programs including six Fellows program, as we remain committed to training the next generation of neurosurgeons. We trained approximately three quarters of all hand and micro surgery fellows in 2018 and we expect to train three quarters in 2019. Our third pillar is to grow the body of clinical evidence. Our library of peer-reviewed clinical publications now totals 91. We’re seeing an increase in investigator-initiated publications including several specific to the surgical treatment of pain. While we’re still early in our market development efforts for this nerve repair application, we’re pleased with the surgeon enthusiasm we’ve seen and validation that there is a need for a better solution for patients suffering with chronic nerve pain. We also continued to see growth in the number of publications in our core trauma application. Recently, the Journal of Plastic and Reconstructive Surgery published a peer-reviewed manuscripts on the recovery of motor function after mixed in motor nerve repair with process nerve allograft. Comparing data from our RANGER registry with historical control, as consistently demonstrated in the RANGER registry clinical outcomes with Avance Nerve Graft compared favorably to historical autograph controls and exceeded those for synthetic conduit. In addition to publication, I would also like to comment on our pipeline of clinical studies. Our RANGER registry had now enrolled more than 1700 Avance Nerve Graft repairs and continues to provide significant new evidence in the management of nerve injuries. Data from the registry continues to demonstrate meaningful recovery treating a variety of nerve injuries and gap lengths. The data demonstrates the ability to restore sensory and motor functions, and that clinical outcomes using Avance Nerve Graft exceed those associated with synthetic conduits and are comparable to nerve autograft without the associated donor-site morbidities. Surgeons are using this clinical data to better understand nerve repair outcomes and to expand their treatment algorithm. Additionally, we continue to enroll patients and build the clinical evidence in Sensation Neurotization Outcomes for Women or Sensation-NOW a clinical registry. We believe the data from this registry will demonstrate that the Resensation technique provides meaningful recovery of sensation and improved quality of life for women who choose neurotization along with their flat reconstruction following a mastectomy. In 2018, we initiated our REPOSE clinical study. REPOSE is a prospective randomized controlled study evaluating the use of AxoGuard Nerve Cap in the management of painful neuroma as compared to a standard neurectomy procedure. REPOSE is a two-phased study consisting of 15 subject pilot and an 86 subject pivotal phase. This study is currently enrolling and includes a one-year follow-up. Our fourth pillar is sales execution. We continue to grow and refine our commercial capabilities across our three core nerve repair applications. In January, we announced the appointment of Chris Crisman as our VP of U.S. Sales and Eric Sandberg, as our Chief Commercial Officer. These new leaders have integrated quickly and we’re encouraged by the sales team’s energy and commitment to drive consistent execution. We ended the quarter with a total of 93 direct sales representatives and increase of eight in the quarter and 25 over the last 12 months. As we grow our direct sales team, our independent sales agencies continue to be an important part of our overall sales strategy, contributing approximately 15% of our total revenue in the first quarter. We ended the quarter with 18 independent agencies and expect to continue adding agencies in select geographies. With an expanded sales footprint, we’ve been able to reduce territory size and create efficiencies for our direct sales team, allowing them to drive deeper penetration in our current active accounts, while also adding new accounts. In the first quarter, our number of active accounts increased 21% to 731 up from 604 in the first quarter of 2018. We define an active account as an account that has typically gone through the committee approval process, has at least one surgeon who is converted a portion of his or her nerve repair algorithms to the AxoGen portfolio and has ordered AxoGen products at least six times in the last 12 months. Our objective is to continue expanding the treatment algorithms, the surgeons to include all of our surgical implant products across their full continuum of nerve repair. This is important, because accounts ordering at least three of our four nerve repair products generate more than six times the revenue of an account ordering just one of these products. Our fifth pillar of growth is the introduction of new products and expanded applications in their repair. We are making investments and opportunities to innovate our product portfolio and to expand the application of our nerve repair products to address the many unmet needs in the surgical repair of peripheral nerves. In November of last year, we announced several foundational initiatives planned for 2019 to help support a broader launch and to the surgical treatment of pain. A nerve repair application we believe could add more than $1 billion to our total addressable market. As we’ve discussed, we’re initially focusing on patients experiencing pain following traumatic injuries, including amputation or resulting from orthopedic procedures. While we’re still early in our learning about the pain market, we see significant surge in interest in finding new solutions to treat these patients. Before I turn the call over to Pete, I want to reiterate that I’m pleased with our progress as we continue to execute against our strategic initiatives in a large and underserved markets. I’m confident, we are building strong capabilities to drive long-term sustainable growth across an expanding set of nerve repair application. Now, I’ll turn the call over to Pete for a review of financial highlights. Pete?

Thanks, Karen. First quarter revenue grew 35% to $23.3 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, our revenue growth was largely driven by increased revenue and active accounts and the addition of new active accounts. We had a net sequential increase of 19 active accounts in Q1 and now have 731, an increase of 21% over the prior year. We also continue to see growth in our pipeline of new accounts, as surgeons become more familiar with our products and begin to incorporate them into their treatment algorithms. Gross profit for the first quarter was $19.6 million, a 35% increase compared to Q1 of 2018. Gross margin was 84% in Q1 compared to 84.3% in the prior year Total operating expense on the first quarter was $29.8 million up 52% over the prior year. This amount also includes $1.2 million of litigation and related costs in the quarter. Excluding these costs, total operating expense would have been $28.6 million or up 46%. The increase includes investments in our expanding commercial capabilities as well as higher investments in clinical, R&D, and general corporate expenses associated with our growth. Operating expenses also include non-cash stock compensation expense of $2.3 million in Q1 of 2019 compared to $1.7 million in Q1 of 18. Sales and marketing expense in the first quarter was $16.4 million up 32% over the prior year. As a percent of revenue sales and marketing expense in the quarter decreased to 71% compared to 72% in the prior year. Research and development spending in the first quarter was $4.1 million compared to $2.1 million in the prior year’s first quarter. Our increased investment in R&D includes additional clinical and product development programs, as well as expenditure supporting our BLA for Avance Nerve Graft. As a percent of revenue, R&D expense for Q1 was 17.8% compared to 11.9% in the prior year first quarter. General administrative expense in the first quarter was $9.2 million, up 84% over the prior year. The increase includes higher compensation expenses including higher non-cash stock compensation and litigation and related costs. As percentage of revenue, G&A expense in Q1 was 39.5% compared to 29% in the prior year first quarter. Net loss in the first quarter was $9.5 million or $0.24 per share compared to $5.6 million or $0.16 per share in the prior year. Excluding the impact of non-cash stock compensation, as well as litigation and related charges, adjusted net loss and net loss per share in Q1 of 2019 was $6 million and $0.15 per share compared to the $3.9 million and $0.11 per share in the prior year. Adjusted EBITDA loss in the quarter, which also excludes the impact of stock compensation, litigation and related charges was $6.5 million compared to an adjusted EBITDA loss of $3.1 million in the prior year first quarter. On our balance sheet, we ended the quarter with $113.8 million in cash, cash equivalents and investments compared to $122.6 million at the end of the year. The decrease of $8.8 million in the quarter includes $3.8 million for payment of the 2018 all employee annual performance bonuses, awards and related costs. Now turning to guidance, we continue to expect 2019 revenue will be $109 million to $114 million. We expect gross margins will continue to exceed 80% and additionally we expect to have at least 115 direct sales representatives by the end of the year. And in the first quarter, we continue to make significant investments to build the foundation for long-term sustainable growth. These investments resulted in spending growth that outpaced our revenue growth. We will continue to make investments that our commercial team and our broader capabilities that expect spending growth will moderate across the year. And with that, I’d like to hand the call back over to Karen.

Thanks, Pete. AxoGen remains the leading company, solely dedicated to improving quality of life for patients suffering from peripheral nerve damage. We believe that we’re building a foundation based in the science and clinical outcomes that will allow us to address these important unmet clinical challenges. We’re confident that the underlying fundamentals driving our business are strong and we believe that the continued execution of our strategic initiatives will deliver long-term sustainable growth. Before taking questions, I want to thank our investors for their ongoing support and the accident team for their commitment to our values and our mission to revolutionize the science of nerve repair. At this point, I’d like to open up the line for questions. Brock?

Thank you. [Operator Instructions] Our first question today comes from Raj Denhoy of Jefferies. Please go ahead.

Hi, good afternoon. Thanks for taking the question. Maybe you could start with the sales result in the quarter to 35%. I think Pete, you mentioned that it was a combination of both volume, but then also a little bit of pricing mix in there. Anything you can offer in terms of how much pricing mix contributed and volume to that number?

Yes, it is primarily volume and in the net price and net impact continues to be in that mid-single digit range.

Okay. It’s helpful. And then one thing, I just want to clarify too, coming into this quarter, there had been some sales disruption towards end of last year. You turned over sales management and there was some concern that, that the sales force might not respond or there was just a little really uncertainty around all of that. Is there any you can offer in terms of whether you saw any sales turnover or really how the transition in sales management has been perceived in the salesforce thus far?

Sure. At this point, I’d say things are going well, but I would just caution if they were still early in that transition process, our attrition it’s been normal, nothing out of the ordinary through first quarter. And I would say the overall sales team is welcome the new leadership and is enthusiastic. But as I said, it’s a transition process and we’re not done with that transition process.

Understood. And maybe just one last one just on the guidance, 30%, 35%, you guys just did 35% in the first quarter. So I’m curious how we should think about that. I mean is it that your – you’re more confident in that number now given what you did in the first quarter? Or is there still a chance you might see a bit of a deceleration over the course of the year? I just really tried to put that in a bit of context.

Yes. So I just think we’ve got off, we’ve gotten ourselves off to a good start to the year for one quarter end. We like to just get another quarter end, before we say what we do with the rest of the year. I think it’s a good solid start to the year. And no need to make any changes right now.

That’s great. Thanks, congratulations.

Thank you.

The next question comes from Richard Newitter of Leerink Partners. Please go ahead.

Hi, this is Jamie on for Rich. I wanted to start with I guess the direct rep productivity. I believe in the past you’ve kind of provided some directional commentary around how that’s trended in the quarter. I think it’s around the 40% range in 4Q and that was down from about 50% in the third quarter. So I was just wondering if you could give us some color on how that trended in the quarter.

I think we’re trending consistent with what we’ve seen in the past, as we’ve managed through the transition and sales leadership. And that would that – I think that’s a good sign of continued execution with the sales leadership team.

Okay, great. And then…

Hey Jamie, your question is about the contribution of the direct reps to grow versus the independent agents. The direct reps continued to grow above the average of the company. They’re growing faster than the 35% that we delivered for the quarter.

Okay, great. That’s helpful. And then just on the independent agencies, you guys are saying that it remains an important part of your strategy and you’re expecting to add some in select geographies. It’s just curious, can you help us think about this and reconcile versus what, at least we had previously thought the trends where towards less independent agencies at the end of last year. Is this something that’s more of something part of a new strategy that’s coming out of the assessment with the new sales leadership, any sort of color you can share that would be helpful? Thank you.

Sure. This is actually a strategy we implemented and began last year, which is looking at our direct sales territories and recognizing some of our direct sales territories had significant driving distances to reach large trauma centers. And so call out Spokane, Washington is an example is a long drive from Seattle. And so it makes sense to really look at a rationalization of the direct territories and think about what is a good utilization of rep time. We want them selling not behind a windshield. And so to do that, we’re carving off some very good trauma centers, but there are more isolated geographies and finding high quality, but smaller independent agencies that will represent us in the city. So you should see the number of independent agencies will continue to go up. But from a revenue contribution at the same time we have transitioned some of our larger independent agencies to now be direct territories. And it is the split of those that it’s really where a lot of that adds have come from for the last several quarters.

Okay, thanks.

The next question is from a Brian Weinstein of William Blair. Please go ahead.

Hi, Karen, Pete, this is actually Andrew Brackmann on for Brian. Maybe we could take a little bit more of a longer-term question here and talk a little bit about strategically how you’re thinking about sort of the new sales rep adds over the next several years. Because I guess what I’m trying to really get at is sort of the right level of a range of sales reps that you really need here in order to start driving leverage. Thanks.

Sure. So we see both an increase in productivity of the reps. Certainly, we see that increase in productivity in their second year. But we think overall there’ll be an increase in productivity with some of the efforts that we’re putting in place in terms of rationalization of territory size. I’m working on efficiency of the selling process and where their time is spent. And with that we can provide some an increased productivity. With the high growth that we continue to see, we still use a metric that says we think our rep, we should be splitting a territory on average at around $2 million. We’ve historically always done that. As you look ahead in the next few years, I would still say that’s a good number as a rule of thumb. We’ll continue to refine that, but that we still think at our growth, that’s a good number to think about splitting the territory, so that we can maintain the high growth trajectory.

Okay, thanks. And then Pete, maybe a question for you. Your comment on the spending growth sort of moderating here throughout the rest of the year, can you maybe talk a little bit about the drivers within each of the three buckets on the OpEx spend? Thanks.

Yeah, sure. So again the base of this is the fact that we made significant investments in our broad capabilities across R&D including product development and clinical, last year certainly, we did a lot in sales and marketing. And even in the G&A group where we’ve just added capabilities last year that are going to allow us to continue to drive this business well into the future. Those are settling in. We’re getting to see the full year impact of those investments here in the first quarter and we’ll continue to make those selected investments. But I do expect to see OpEx as a percent of revenue or OpEx growth rather continue to come back towards and become more in line with revenue growth as we go across the year.

Got it, thanks.

The next question is from Ryan Zimmerman of BTIG. Please go ahead.

Hi, it’s Sam on for Ryan. Just to go back to wrap productivity, looking at the revenue number that’s a little bit and unexpected here, how much you could associate that with that unexpected productivity ramp of the FY2018 reps that you hired? And then how can that translate into the newer hires are seeing this year?

So as we said in our original guidance, we believe in look at our overall year projection that the majority of this revenue growth will come from the reps that we had hired in 2018. And only modest contributions from some of the new hires that we’ll have throughout the year. Historically, as reps have come on board, they tend to have a sort of a ramp or learning curve that last eight or nine months. And start to contribute much more meaningfully in their second year. And so we think that trend is going to be continuing through the year. And what we’ll see through the year is the majority of the revenue will come again from those 85 reps that we had at the end of last year.

Okay. And then on account growth, what would you say is the right pace given the size of your salesforce that we can expect for account growth for the year?

We haven’t given guidance on a pace of account growth. Actually the bigger dollar contributor is driving penetration into the accounts that we had really in a prior quarter or several quarters before that when is the account first comes on the revenue contribution is still relatively small. So it’s more of a leading indicator than it is a current indicator for revenue, but it tells you sort of a trajectory of as well as continuing to see –continued penetration in the future. I think as we add reps, you’ll see more accounts added, because new reps always open up new accounts. But in our existing territories that aren’t split. Those reps are pretty focused on driving penetration in their existing accounts.

Okay. And then one last one, just on in terms of end market and mix, how much generally of the growth in this quarter was seen from the non-peripheral trauma market. Thanks.

So we haven’t broken down the segments, our largest segment by far is the trauma market. But from a growth percentage standpoint [indiscernible] much smaller basis, our emerging market in OMF and breast are growing at a faster rate. So we’re pleased with the growth on all of our segments, but in terms of dollars, trauma remains the largest.

Great. Thank you.

[Operator Instructions] Our next question comes from Craig Bijou of Cantor Fitzgerald. Please go ahead.

Good afternoon, guys. Thanks for taking the questions. Wanted to start and maybe this is a follow-up on some of your comments, Karen, you’ve talked in the past about early adopters and get into that next level of adoption. So in that regard, just wanted to get your thoughts on, what you’re seeing, getting to that next level in some of those active accounts. And then maybe even if there’s been any change to strategy, there’s a new sales leader, new commercial leader, just – any changes or maybe incremental improvements that have been made to the past strategy.

Thanks and great question. Really appreciate it. It’s obviously for us the theory of crossing the chasm is an important part of our overall strategy. And we start with early adopters in an account. And they go through a slow and cautious adoption process, where they tend to try in one segment of their overall treatment algorithms, one of our products. And then we sort of stepwise move them through that process to expand their treatment algorithm. At along the way, the rep will then start to try and reach out to others as that same center, to start them on that process and most impacting the majority of the accounts that were in. We are still in the early stages of that in the early penetration, but we are beginning to get a second and third user in some of our active accounts. And now they may still be a very light user, but we are expanding from that first user into multiple users. And that will start to move us closer to those middle adopters. And so from a changing strategy, I would say we’re still early to change strategy, because we’re just starting to reach, I think towards the middle adopters in some centers. So if a little early in terms of changing the strategy, we need to continue to convert those early adopters. But we have an eye on the middle adaptors to get their adoption profile expanded as well. And so that’s definitely a big part of what we’re trying to do in our overall messaging and market development activities.

Great. That’s helpful. Maybe I can ask on the RECON trial, and I guess a couple of questions there. I’d just love to hear your confidence in kind of hitting that summer 2020 enrollment. I know you’re adding some onboard in some centers. So just maybe a little bit more on the rationale there. And then remind us on just the overall timing when you could have the BLA submission and potential approval.

Sure. So we’re confident about the timing in late summer 2020 to complete the enrollment. And obviously, we have experience in what the enrollment schedule is from the work that we’ve done already in the trial. We do need to go through a period of time, because if it change in the protocol, the protocol has to go back through IRB and each of the centers. So there’s a little bit of a lag here and getting them started back up again. But we do have the first of the IRB reassessments and approvals. And we’ll continue doing that over the next several months to get the protocol approved in each of the centers. And each of the center has been can start recruiting for enrollment. So very confident and the timing to complete the total study in by summer 2020, when you stack it all up, that means that we’ll be doing the submission in probably late 2021 or early 2022. And then there is an approval period at the FDA, we estimate that at a year. So you can start to think of that timing for the overall process.

Great, that’s helpful. And if I can ask another, just on the educational programs, obviously, it’s a significant driver of future business for you guys. So I mean, any color on maybe the size of those programs or how many surgeons are you plan to kind of run through those programs?

Well, typically the programs has 20 to 25 surgeons, again, it’s a two day program, very hands on and interactive, including both some theoretical work, but also hands on practical experience and understanding the repair of nerve injuries. The curriculum varies between a Fellows program and the attendings program, but I think they have both the same intensity, it’s just a different level. And we do, again, see those as the significant both driver and change of behavior, but also I think confidence and knowledge in nerve repair for the people who attend the program.

Great. Thanks for taking the questions.

Thank you.

Thanks, Craig.

There are no further questions at this time. I’ll now turn the call over to Karen Zaderej for closing remarks.

Thank you, Brock. Well, I want to thank everyone for joining us on today’s call. And we look forward to seeing many of you as the William Blair, Jeffries and JMP conferences in June. Thank you.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.