Greetings. Welcome to the AxoGen, Inc. Reports Second Quarter 2023 Financial 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. At this time, I would like to hand the call over to, Adanna Alexander, Investor Relations Consultant. Thank you. You may begin.

Thank you, Darryl. Good evening, everyone. Joining me on today’s call is Karen Zaderej, AxoGen’s Chairman, Chief Executive Officer and President; and Pete Mariani, Executive Vice President and Chief Financial Officer. Karen will discuss the quarter and our outlook for the year, and Pete will provide an analysis of our financial performance and guidance, followed by a question-and-answer session. Today’s call is being broadcast live via webcast, which is available on the Investors section of the AxoGen’s website. 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 including our 2023 financial outlook and longer-term revenue and growth expectations, timing of our BLA submission, anticipated growth for revenue categories, penetration of core accounts, marketing opportunities with nerve applications associated with emergent trauma, breast, OMF and the surgical treatment of pain and new products, timing for the start of processing and our APC facility, launch of our HA+ Protector, optimism associated with key strategic pillars and our balance sheet. Forward-looking statements are based on current beliefs and assumptions, and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the company’s annual and periodic reports such as hospital staffing issues, regulatory process and approvals, APC renovation, timing and expense, surgeon and product adoption, and market awareness of our products. The – forward-looking statements are representative only as of the date they were made, and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. In addition, for a reconciliation of the non-GAAP measures – including adjusted core and active account numbers, excluding the impact of Avive purchases, please reference today’s press release and our corporate presentation on the Investors section of the company’s website. Now, I’d like to turn the call over to Karen. Karen?

Thank you, Adanna, and thank you all for joining us today as we discuss our second quarter 2023 financial results. We’re pleased to report another quarter of solid performance and growth. Our revenue for the quarter came in at $38.2 million, representing an 11% increase compared to last year’s second quarter. As we begin today’s comments, I wanted to share some additional insights on our revenue and growth that we’ll review today and continue to provide going forward. Our business was originally anchored in emergent trauma. And over the past several years, we’ve introduced a number of new nerve repair applications that utilize our Avance and Axoguard product lines. These new applications share common characteristics that now lead us to think about our business along two primary categories, scheduled non-trauma procedures and emergent trauma procedures. Scheduled procedures are generally characterized as procedures where a patient is seeking relief of a condition caused by a nerve defect or surgical procedure. These include breast reconstruction following a mastectomy, nerve reconstruction following the surgical removal of painful neuromas, oral and maxillofacial procedures and nerve decompression. The nature of scheduled procedures affords patients the opportunity to actively search for treatment options and advocate for solutions that may improve quality of life following the procedure. For example, in breast reconstruction. This may include prioritizing neurotization as a part of their treatment plan. These procedures lend themselves to standardization of surgical techniques and more consistent nerve repair algorithms. In addition, these patients are likely to engage an extended follow-up evaluations with their physicians. Emergent procedures generally result from injuries that initially present into an emergency room. These procedures are typically referred to and completed by a specialist either immediately or within a few days following the initial injury. Given the emergent and diverse nature of traumatic…

Thank you, Karen. Revenue for the quarter was $38.2 million, representing an 11% increase compared to the second quarter of 2022. Growth was driven by increases in unit volume of 6% as well as a 4% increase in price and a 1% increase from changes in product mix. We estimate that revenue from scheduled procedures represented about half of total revenue and grew over 20% year-over-year, while emergent procedures also represented about half of our total revenue and grew in the low single-digit range versus last year. Additionally, we estimate the mix of scheduled and emergent procedures for fiscal 2022 was 45% scheduled and 55% emergent compared to the current 50:50 mix. In the longer-term, we expect the scheduled procedure category will continue to grow above 20% and continue to represent a growing portion of our revenue mix, underscoring its upside potential as we continue to leverage the improved predictability and productivity of these applications. While we are measured in our near-term growth expectations for emergent trauma, we anticipate returning to high single-digit to low double-digit growth in this category over time. Turning to the rest of the financial results. Gross profit for the quarter was approximately $30.9 million compared to a gross profit of approximately $28.2 million for the second quarter of 2022. Gross margin for the quarter was 81.1%, down slightly from 81.8% year-over-year. Total operating expenses for the quarter increased 5% to $37.8 million compared to $36.1 million in the second quarter of ‘22. The increase was primarily the result of increased compensation. Sales and marketing expense in the second quarter increased 6% to $20.8 million compared to $19.7 million in the prior year. The increase was primarily due to compensation, marketing programs and other services costs. As a percentage of total revenue, sales and marketing expense…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Michael Sarcone with Jefferies. Please proceed with your questions.

Good afternoon and thanks for taking my questions.

Hi, Mike.

Just the – hi, just the first one, just on the emergent trauma procedures, and it – grew low single-digits in the quarter. Can you just talk a little bit more about what you think is impeding the return to growth there? Give us some more detail on that front.

Yeah. So in the back half of last year, we saw sort of high single-digit growth in this section and thought we were coming into the target range that we expected it to be. And in the first half of this year, we’ve seen as hospitals are really focusing on really thinking about their resources and profitability that what I would call routine trauma. So these were the simple things like a kitchen knife cut or sort of small gap injuries are, in many places being moved to a lower cost of care setting like an ambulatory surgery center. And while we have some great tools in place in the long-term to be able to deal with that with the work that we’ve put in place with CMC and the cost structure and coding that’s in place, private payers have not adopted that infrastructure yet. And so we’re working actively with the ambulatory surgery centers to continue to get those changes rolled through their contracts. And so ultimately, we think that’s actually a good thing for AxoGen. But in the short-term here, it’s caused some disruption with that simple nerve repair moving to an alternate setting.

I see. I got it. Thank you. That’s helpful. And then just a follow-up on that. I mean, so does that mean the crux of the work to get to that high single-digit, low double-digit normalized growth over time is primarily just getting these private payers on board? And do you have resources working on that? Are you throwing more investment at that? And are there – is there any – are there any other impediments outside of the private payers that you have to overcome?

Well, we want to continue to see the strength we’ve seen in leveraging the Meta analysis and the Premier data. The recent publications that we have, have shown some nice growth on the more complex nerve repairs, and we want to continue to see that. And then, yes, in the ambulatory surgery center setting, we’re working with the sites of care and their payers to get this to be a viable solution in their account. Again, the infrastructure is there with the way CMS has set it up, and we can do this today with CMS. But in trauma, the majority of the injuries are private payers.

Got it. Okay, thank you.

Thank you. Our next questions come from the line of Dave Turkaly with JP – JMP Securities, sorry about that. Please proceed with your questions.

[Inaudible]. Hey, how are you guys.

Good.

Hi, Dave.

Karen, thanks a lot for the breakout of the non-trauma and the emergent. I think I’ll make you regret that fairly quickly. I’m teasing a little. But as you look at the two buckets, I was wondering if you might give us any color on sort of the mix there in the non-trauma component. And then maybe the growth rate, I’m imagining breast is doing the best. But any color on sort of what’s doing well there? And [technical difficulty] ask about procedural ASPs. Like I’m imagining that Axoguard is probably used in [technical difficulty] I don’t know if it’s in the other areas. Any color you might give us on sort of what the ASP for AxoGen is in those two categories?

Sure. Happy to. Well, the scheduled procedures have been growing at a faster rate than trauma has for a number of years. And at least as we’ve seen the information, but it’s been very hard for us to break that data out with clear specificity, because there’s a significant overlap in our core accounts. The majority of our core accounts are both emergent and scheduled procedures. And so we’ve put together some aided tools here that we can now break it out and give you some color and insights into the growth. And the growth is actually multiple areas of scheduled procedures, but it is led by breast and OMF. Those are both areas that we have, frankly, a little more history and longevity. And, in particular, in breast, we’ve highlighted the tools that we’ve built that help with patient activation that we’re now looking to expand into other areas of scheduled procedures and that we think that will be impactful in those procedures. Other benefits actually of these scheduled procedures as compared to emergent trauma and we’re still very dedicated to emergent trauma. I don’t want you really think that we’re not. But there are some benefits that we’ve seen in the scheduled procedures. Not surprisingly, they’re much more predictable. That they’re coming in advance. They don’t drop in on the day or the day after an injury occurs. There’s something that’s scheduled weeks in advance. Patients have time to think about what’s important to them, Surgeons can think about the algorithm that they’re going to do and typically have a more repeatable algorithm of repair once they make a change. As you noted, they also typically have a higher average selling price of AxoGen products used in the procedures a total case mix than what, again, a routine trauma would. Absolutely, the Axoguard products are used in these procedures. We see multiunit sales in many of these procedures. So for example, in a breast reconstruction, there would typically be a long Avance Graft as well as typically these surgeons do a connector-assisted repair to make sure that, that connection is and then coaptation is well protected. So we do see Axoguard and Avance used in our scheduled procedures.

Great. Thank you for that. And I guess if we look at the new – the HA product, I think that was Protector. But, I mean, should we assume that that’s, again, a higher ASP and that over time that, that would be your core product? There wouldn’t be a reason ever to, let’s say, not use the one with HA over time, would there?

Right now, we see that surgeons may have an application choice that they may choose to use one versus the other. We think HA+ is particularly targeted in areas where you need to have a lot of excursion of the nerve relative to the tissue around it, so around major joints. So an example would be a cubital tunnel repair. That’s a decompression of the nerve right over your elbow. And obviously, you have a lot of movement as you move your arm in that situation. So the HA provides a nice gliding surface in the early stages of recovery as well as helping to separate the tissues. And then over time, just like in our classic Axoguard Nerve Protector, the Axoguard remodels into a sleeve around the nerve. And so we think there’s a real application in places like the cubital tunnel, but we think surgeons may choose to have the classic Axoguard in places where they don’t need that much excursion. And so for example, we see Axoguard used frequently in our oral maxillofacial cases where there’s not a lot of excursion on the tissue, and Axoguard will be a fine application for that, the – the traditional Axoguard Protector.

Got it, thank you.

Thank you. Our next questions come from the line of Ryan Zimmerman with BTIG. Please proceed with your questions.

Hi. This is Sam on for Ryan. And thank you for taking our questions. You reaffirmed 2023 guidance at around 11% to 15%. What do you expect the overall market to grow into 2024? I know you’re not providing formal guidance, but any color would be much appreciated. Thank you. Then I have a follow-up as well.

Well, good question. But, keep in mind, for us, the trauma is really a function of human activity. It’s not as if the number of traumatic procedures is going to increase any more than population growth. The real opportunity for us in this is not so much how much trauma might grow. It’s the opportunity for us to utilize the data that we have in these new product launches that we have to capture more procedures and convert surgeons from direct repair or autograft repair to the AxoGen algorithm. So it’s less about the market and more about our ability with our data and products and our sales execution to convert that activity. And then on the scheduled procedures, I’d – look, I think we do see increases in breast reconstruction year-over-year. The number of mastectomies and reconstruction are growing at that rate. And – but again, that’s – the overall population of those is going to grow. But our growth is really based on converting surgeon procedures, training new surgeons, identifying patients and connecting patients with surgeons for these procedures.

Thank you. That’s really helpful. Then I would appreciate if you could provide some update on the sales force productivity. And you indicated that independent sales agencies represented approximately 10% of revenues in the quarter. How should we expect that to trend over time? Thank you.

Yeah. We would expect about 10% for the independent agencies, and the primary growth will be the increased productivity of our direct sales team. And we continue to see that. As we’ve continued to grow, we continue to be able to see through execution improved productivity of the sales reps.

Okay.

Ryan, were you all finished?

Yep, those are all the questions for me. Thank you, again.

Okay. Thank you.

Thank you. Our next questions come from the line of Ross Osborn with Cantor Fitzgerald. Please proceed with your questions.

Hi. Congrats on the quarter and thanks for taking my questions and for the incremental data points. So I’ll just go and ask two quick ones. Would you be able to parse out price and volume growth in the quarter? And are there any pricing dynamics we should be thinking about in the back half? And then my second question is, are you still seeing a trend toward the use of longer Avance grafts in trauma? Thank you.

Yeah. First of all, on price, we’ve been running about, call it, 3% to 4% increase on price every quarter. And I think that range is probably appropriate in the near-term. We do take – we took a price increase in April of this year, and we’re seeing good uptake from that. We take a price increase every year. So we think as that increase annualizes and customers’ accounts annualize that we’ll continue to see that 3% to 4% range. And then your second question was about increase in Avance in trauma, yes, we’re – I think that’s something we talked about last quarter, where we said that Avance had become – had gotten to the point where it was about 60% of our revenue – total revenue. And previously, it was slightly over 50%. And a lot of that is attributed to, again, the growth in these scheduled procedures as well as growth in mixed and motor trauma procedures, a more complex trauma procedures. And again, stemming from – as we get more surgeon uptake on the Meta analysis, which really called out that an Avance Nerve Graft repair performs just as well as an autograft regardless of the length up to 70 millimeters, and regardless of if it was a sensory nerve or mixed and motor nerve. And we think as surgeons are beginning to understand that data, we’re seeing surgeons who were very good adopters of ours, and the sensory nerves are now recognizing that they have an opportunity to offer this same benefit for their patients in mixed and motor category as well. All right. Ross?

Yep. All set. Thanks very much.

Okay, great.

Okay. Thanks so much. Our next questions come from the line of Kyle Rose with Canaccord Genuity. Please proceed with your questions.

Hi. This is Caitlin on for Kyle Rose and thanks for taking the questions.

Hi, Caitlin.

Hi, Caitlin.

Hi. Just to start off, why was validation delayed at the facility in the quarter? And is this something that really affects the margin cadence in the back half of the year? And then also, given what other companies have called out, are you guys seeing any sort of supply challenges?

The supply challenges, I can touch on real quickly. I think our operations team has done a phenomenal job of really trying to de-risk our supply chain and make sure that they’ve looked ahead and worked with suppliers to make sure that we have a steady and sturdy supply chain. And so at this point, no, we’re not seeing any supply challenges that will affect production. They certainly have worked through, you name it, interesting things over the last a year and a half, but nothing that I think is an interruption in what we’re doing or going forward. In terms of the facility, this is a big, complex project. There were a lot of moving parts, and it just took a little longer than what we had originally anticipated. We’re excited to get started in the facility here in the next couple of weeks. And everything is going to be a quick go here, so happy with that. And in terms of the gross margin impact, it will kind of roll over both Q3 and Q4. Just given the timing of when we’re starting, it’ll have some effect in Q3, Q4. But again, for the full year, it’ll end up still being around 80%.

Awesome. Thank you so much.

All right, thank you.

Thank you. Our next questions come from the line of Chris Pasquale with Nephron Research.

Thanks. Hey guys. Karen, a question around the scheduled side of the business. I’m a little surprised that it’s half the business, frankly. I think it’s bigger than we would have guessed. In the past, when you’ve leaned into really trying to maximize the growth opportunities in those scheduled categories, you’ve had some bandwidth issues with reps maybe taking your eye off the ball on core trauma a bit and having a hard time balancing those two. Do you think that you have the proper resources to really maximize both at this point? And how do you maybe avoid trauma getting the short end of the stick given some of the exciting opportunities in the scheduled piece?

Yeah. No, great question. And I think a number of years ago, we did have some challenges, in particular, in OMF, and we certainly learned from that. So today, if I can remind you that today, we have a specialty team that addresses the breast neurotization. Given the complexity of that technique, we’ve decided they still need to have specialists who address that with the surgeons. And as far as the full-line reps who deal with both trauma, OMF, the surgical treatment of pain and compressions, that means, that their call pattern is really focused on hand and plastic surgeons and the oral maxillofacial surgeons. That’s their primary call point. So they still have a focused call point within our core accounts. And so far, we’ve been really pleased with their ability to balance all of those and make sure that they’re both supporting the planned cases in their core accounts as well as being available for emergent trauma, where a surgeon needs to move through that algorithm. And they’ve been actually quite successful at seeing growth both in, again, OMF and pain as well as continuing to move through the algorithm adoption of the mixed and motor nerve. And so I think we’ve got the right formula here and the right balance of resources.

Okay. That’s helpful. And in the BLA timeline, it looks like it’s been pushed out by about 6 months. I think last quarter, you were targeting submission by year-end. Now we’re looking at completing the submission in 2Q of next year. Is that all the facility? Or are there other issues that came up?

Yeah. Well, first of all, just to remind, we’re a little different than any other submission in that we are commercializing at the same time we’re doing this regulatory submission. So speed is not as critical for us as it is to make sure that we are doing things in a methodical way. And one of the options that’s available for a BLA submission is to do what’s called a rolling submission. So you take the various modules and submit them on different dates, which allows you to space out the interactive Q&A session that you have with the FDA so that you’re not dealing with all the topics at one, but you might be dealing with clinical in one time period and then CMC in another time period and your non-clinical in a different time period. And just given the workload of that Q&A session, we decided it was prudent to go ahead and ask for a rolling submission. We’ll get confirmation from the FDA following the pre-BLA meeting that we have in the early part of 2024. But anticipating that they are going to accept that, it would extend out the submission period because of doing that rolling submission.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Karen Zaderej for any closing comments.

Thank you, Darryl. And I want to thank the AxoGen team who’ve remained committed to our mission of improving nerve function and quality of life for patients with peripheral nerve injuries. We’re happy with our progress, and we remain focused on ensuring our long-term success. I want to thank everyone for joining us this evening, and have a great day.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.