Welcome to the AxoGen Inc. Third Quarter 2019 Fiscal 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] Please note this conference is being recorded. I will now turn the conference over to your host Pete Mariani, Chief Financial Officer. Please go ahead.

Thank you Saachi and good afternoon everyone. Welcome to AxoGen's third quarter 2019 financial results conference call. We appreciate you joining us. Joining me today on the call is Karen Zaderej, our Chairman Chief Executive Officer and President. The format for today's call will be as follows; Karen will discuss the 2019 third quarter financial and operating highlights and then I will provide details on the financial results outlined in today's press release. We will then open the call for your questions. Today's call is being broadcast via webcast which is available on the AxoGen website. Within an hour following the end of the live call, a replay will be available in the 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 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, the regulatory environment, sales and marketing strategies, capital resources, or operating performance. And with that, I'd like to turn the call over to Karen.

Thanks Pete and good afternoon everyone. I'm pleased with the company's solid growth and financial performance in the third quarter. Total revenue grew 26% to $28.6 million, driven by our strength in our core trauma business and growth in our number of active accounts, which increased 16% year-over-year to 791. We ended the quarter with 105 direct sales representatives and 19 independent sales agencies. By splitting sales territories and strategically converting agency territories to direct reps during the year, we've expanded our commercial footprint providing our direct reps with smaller geographic territories allowing them to spend more time developing surgeons and accounts. However, as we've discussed in prior quarters, the rapid growth of our commercial organization over the past two years including our pursuit of new nerve repair market opportunities has created challenges. It has been an ongoing priority of ours to address these challenges and improve our commercial execution. I'm encouraged with the progress we've made identifying and implementing improvement and like to spend a few minutes reviewing them. First, we are rebalancing our commercial efforts and sales resources back toward extremity trauma as this remains our largest market opportunity and the most efficient and effective path to sustainable growth. At the same time, we will continue to invest and grow in the breast reconstruction neurotization and oral and maxillofacial markets as these nascent markets develop. Second, we have been slowing the rate of our salesforce expansion to allow for the development of efficiencies across our commercial footprint. Although early, these two changes are already providing sequential improvements and we plan to continue building upon these and other initiatives during the remainder of the year and into 2020. Let me provide some additional context for these changes. Nerve repair for extremity injuries, including trauma and compression, is our largest…

Thanks, Karen. Third quarter revenue grew 26% to $28.6 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 29 active accounts in Q3. And now have 791, an increase of 16% over the prior year. We also continue to see growth in our pipeline of new accounts that surgeons become more familiar with our products and begin to incorporate them into their treatment algorithms. -- : Operating expenses also include non-cash stock compensation expense of $2.4 million in the third quarter, compared to $2.2 million in the prior year. Sales and marketing expense in the second quarter was $18.2 million, up 25% over the prior year. As a percentage of revenue, sales and marketing expense in the quarter decreased to 64% compared to 65% in the prior year. Research and development spending in the second quarter was $4.2 million compared to $3.3 million in the prior year's third quarter. Our increased investment in R&D includes additional clinical and product development programs as well as expenditures supporting our BLA for our Avance Nerve Graft. As a percentage of revenue, R&D expense for Q3 was 15% consistent with the prior year. General and administrative expense in the third quarter was $7.7 million, up 28% over the prior year. The increase includes higher compensation expenses including higher non-cash stock compensation and litigation and related costs. As a percentage of revenue, G&A expense in Q3 was 27% consistent with the prior year. Net loss in the third quarter was $5.6 million or $0.14 per share, compared to…

Thanks, Pete. AxoGen remains a leading company solely dedicated to improving the quality of life for patients suffering from peripheral nerve damage. We believe that we're building a foundation based in science and clinical outcome 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. I want to thank our investors for their ongoing support and the AxoGen team for their commitment to our values and mission to revolutionize the science of nerve repair. Before taking questions, I'd like to end our prepared remarks by featuring a patient, Jessica, whose quality of life was improved by a nerve repair using the AxoGen algorithm. After receiving a breast cancer diagnosis in June 2017, Jessica underwent a grueling five months of chemotherapy followed by a double mastectomy the day after Christmas. While she braved her treatment to save her life, she worried about what life would be like after cancer. During a mastectomy, when the breast issue was removed, the nerves that provide healing to the breast skin and nipple are also severed. When nerves are severed, nerve signals are disrupted. This typically results in numbness and loss of feeling in the breast area. While Jessica was planning to have her breast reconstructed, she was concerned about how she would ever feel connected to a chest that would be permanently numb. But thanks to Avance Nerve Graft and the ReSensation technique, Jessica's surgeon was able to reconnect the nerves in her chest with nerves in her newly reconstructed breast. The procedure ultimately allowed the nerves to regenerate restoring sensation. Jessica is now back to work as a nurse and a patient advocate, and can once again feel the hugs of her two children and these were the things she holds most precious. As we exit October, Breast Cancer Awareness Month, we're encouraged by the response of patients and surgeons to a growing awareness of the importance of sensory restoration and breast reconstruction. Stories about ReSensation from patients like Jessica appeared in 30 media news stories nationwide last month, helping to educate women on their reconstruction options. At this point, I'd like to open up the line for questions. Saachi?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] The first question is from Richard Newitter of SVB Leerink. Please go ahead.

Hi, Pete. Hi, Karen. This is Jaime on for Rich.

Hi, Jaime.

So just wanted to start on potentially how we should be thinking about 2020 growth for the business. Considering it in the context of a fast-growing company like yourself, I was just wondering if you could maybe provide some color or level set on expectations on how we should be thinking about the business. Is it the right way to be thinking about it potentially as an at least 20% growth business, or perhaps something more in the 20% to 25% range? Just looking to get your thoughts based on some of the rebalancing that you're doing within the sales organization.

As you might remember we mentioned that we'd be giving our guidance for 2020 in Q1 -- in the early part of the Q1 time period. So we haven't given guidance for next year, but I can tell you that we look confidently that we continue to see AxoGen as a high-growth company. We've been building this foundation of reps who will continue to expand in their experience as well as the efficiency measures that we're putting in place to allow productivity to continue to improve. And we think those will continue to help play out next year allowing us to continue to show strong growth.

Okay. Great. And if I could just follow up on the rebalancing sales efforts. With lowering anticipated rep down in 2019 here I was just curious how we should be thinking about rep productivity ramp into 2020 and potentially on new account openings in that. Should people be thinking about dialing back sort of their expectations into 2020 considering how you've kind of changed course a little bit within 2019 with the rebalancing efforts?

So our growth historically has been in two dimensions. It's been both in adding new active accounts and driving penetration within our existing active accounts. And through this year we've really been addressing and focusing, how do we drive more penetration within the active accounts. That's a part of what our rebalancing effort is focused on is it seem that we have tremendous opportunities in the accounts that are already active. And we will continue to have that as a focus through next year. So we will still add new active accounts that that will be an important part of our overall growth. We will still add some new reps next year as well, but we will see an increasing focus on driving penetration within the existing active accounts. And that's where we expect to see some of the productivity gains.

Got it. Thanks for taking my questions.

Thank you.

The next question is from Raj Denhoy of Jefferies. Please go ahead.

Hi. Good afternoon. Maybe I could follow-up a little bit on that last question just in terms of the idea of rep productivity increasing. Perhaps you could maybe kind of ground us in terms of the tenure of the reps that you have currently. And when you look at the ones that have been with you for longer, how does the productivity actually look in those more experienced folks relative to some that might be new to the organization?

So if you look at our sales organization, we still have a little over half of the sales organization that's been with us for less than a year. Slowing rep hiring will help to shift a bit of that balance, but we also expect to see efficiencies occur through many of the other initiatives that we've done. Part of this is the rebalancing of the sales team with efforts without redundant efforts between the OMF specialty team, as well as the full-line reps. And other things that we've talked about like the geographic review of the territories, so that we reduce the amount of inefficient travel time that the reps have where they can spend more time in their active accounts. And again, our goal is to drive that penetration within those active accounts. That combined with some of the coaching and training that we've put in place this year I think gives us the framework to be able to drive that efficiency.

Yes. So I guess I get that you've added a lot of folks right in less than half or more than a year, I suppose but when you think about someone who's been there for more than a year versus someone who's just starting out just as we try and look at what a maturing sales force could do to the revenue over the next year or two what kind of productivity increases do you typically see when someone's been there for more than a year?

So historically we've seen -- if I look back historically we saw a substantial ramp-up in productivity and growth. For a rep who had been with us for more than a year and within a territory that remains consistent. And one of the things that we're doing as we continue to evaluate our data is we started to look and recognize -- and this is where some of the redundancy came in that in this year in that group of people who are, sort of, one to two years we felt that we had redundancy with the OMF specialty team. And that was what was reducing the productivity of that group. We believe that by eliminating that redundancy, we'll restore the productivity that we saw in that group as well as the people with more tenure.

Okay. Maybe I could -- well I'll ask maybe a different line of questioning, but we think about the pace of new sales reps it's been 20 -- 25 per year for the last couple of years, we think about slowing the patient new hires and you look out into 2020 do you have any sort of rough framework around what kind of new hires we should look for over the next 12 months?

We'll continue to hire. It will be at a slower rate than what we're -- than what we've done over the last year.

Now we've doubled over the last two -- more than double now over the last two years. It's been 40% plus over the last few years -- or a couple of years. And so we'll be moderating that back. We'll continue to add but it will be at a -- and we haven't completely settled in on what that number will be for next year. But we'll dial it in based on the growth metrics that we're seeing and the improvements and productivity that we continue to monitor and drive in the organization.

Right, right. Yes. I guess that's kind of what I'm trying to get at but it didn't sound like you guys are going to give us much on that front. But the when the sales force starts to mature over the next year right so there's 100 and plus reps you have, I mean, I guess right now the average rep is doing kind of well less than $1 million right around that number. We don't have the exact numbers but something like that. Does that number go to $1.5 million? Does it go to $2 million? What's the kind of sweet spot that you think these folks can get to on an average basis over the next couple of years?

Well, when we modeled this we see the opportunity for reps to come in around the $2 million mark. Now we're not there yet so it will take us a while to ramp to that but that's what we think is very possible. We've certainly demonstrated that and territories have matured. Now as we've talked before we still split territories when they become very large. So somewhere typically between $1.5 million and $2.5 million we would split a territory. But we believe that is the level that we think reps can get to and continue to show growth at that level.

Okay. That's helpful. Maybe just one follow-up as well. So you mentioned pain you're still moving forward with neuropathic pain next year. I think you said first quarter 2020. And I realized it's going to take a while for that to ramp and to build the data needed and everything that goes along with that. But do you have some thoughts around what that could start to contribute just given the size of that market opportunity?

I think it's too early to give you direction on that. It's an area that we think has a tremendous amount of clinical need, but the rate-limiting factor of the referral pathway is something I think we need to get more data on before I can give you some guidance on what the actual growth rate will be. So again, clinically, I think there's a tremendous opportunity, but we are factoring it in as a modest contributor for next year.

Okay. Fair enough. Thank you.

Thanks,

The next question is from David Turkaly of JMP Securities. Please go ahead.

Yeah. Hi. It's actually Dan on for Dave. Thanks for taking the question. First off…

Hi, Dan.

Hey. Just on the contribution to sales growth. In the second quarter you mentioned mid single-digit net price increase. Can you just give us an idea of what this effect was in this quarter or rather how the growth compared directionally to 2Q? Thanks.

It was about the same so still mid single-digits.

Okay. Great. And then just one quick follow-up. As far as sales force attrition you mentioned last quarter that you expected to be in the typical 10% to 15% annual rate. Has this changed at all? And then any color on at what point you see the most attrition in terms of number of months onboard for a rep? Thanks.

So, no. We haven't seen any change in attrition. We'd expect this year to continue to be in that same sort of range. Second question months of attrition. I don't know that we see any particular pattern on that, so I don't have any color on that.

Okay. All right. Thanks a lot.

Thank you.

We have reached the end of the question-and-answer session, and I will now turn the call back over to Karen Zaderej, Chairman, CEO and President.

Thank you, Saachi. Well, I want to thank everyone for joining us on today's call and we look forward to seeing many of you at the Jefferies London Healthcare Conference later this month and at the 31st Annual Piper Jaffray Healthcare Conference on December 5 in New York City. Thank you.

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