Treace Medical Concepts, Inc. (TMCI) Q2 2021 Earnings Report, Transcript and Summary

Good day. Welcome to the Treace Medical Concepts Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded via webcast. [Operator Instructions] I would now like to hand the conference over to your speaker today, Vivian Cervantes from Gilmartin Group. You may begin.

Thank you, Peter. Good afternoon, everyone, and welcome to our second quarter 2021 earnings call. Participating from the company today will be John Treace, Chief Executive Officer; and Mark Hair, Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our second quarter financial results released after the close of the market today, after which we will host a question-and-answer session. The press release can be found in the Investor Relations section of our website at investors.treace.com. This call is being recorded and will be archived in the Investor Relations section of our website. Before we begin, we'd like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause the actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Treace assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10-Q for the second quarter filed today for detailed presentation of risks. With that, I now turn the call over to John.

Thank you, Vivian. Good afternoon, everyone. And thank you for joining us on our second quarter 2021 earnings conference call. Before I begin, I'd like to thank the team at Treace Medical for their dedication and drive, as well as the ongoing support from our advocates in the clinical community, paving the way for our announcement of another solid quarter. On the heels of better-than-expected Q1 results, we are pleased to report continued strength in the second quarter with solid advancements made in several key business and operating metrics. Revenue in the quarter totaled $20.7 million, registering a 10% sequential growth over the first quarter and 167% growth over the second quarter of 2020, which was highly impacted by COVID-related business disruptions. These results were driven by an increase in the number of active surgeon users, increased utilization of Lapiplasty in our surgeon users practices, increased average revenue per case, benefits from our ongoing shift to direct sales with over 50% of revenue from this channel coming in the second quarter, accelerating traction with our DTC campaigns, including a record number of visits for our patient website and find a doctor searches. Our interim data from ALIGN3D demonstrating lower recurrence rates, along with rapid return to wavering, which was presented from the podium at the ACFAS conference in May. And finally, increased certain adoption of our Lapiplasty Mini-Incision System, which we started rolling out in Q4 2020. All in, we are pleased to see continued growth in the second quarter and early in the third quarter, which is generally a soft quarter for elective procedures. We note ongoing but positive business traction. However, we are closely monitoring the impact of the Delta variant, including potential changes in hospital responses and the impact they may have on electric procedures, which could affect certain reasons more than others. Notwithstanding, we remain cautiously optimistic and are increasing our full year 2021 revenue guidance to $95 million, up from our prior guidance of $87 million to $92 million. For Q3, we anticipate a flat to slight increase in revenue as compared to Q2 2021 levels. Now shifting to talk to our market development activities. We are addressing a market where there is a large unmet need and still relatively early in our commercial efforts. As of the end of Q2 2021, we believe our market share is around 3.3% of the estimated 450,000 annual surgical bunion procedures and about 1.3% of the $5 billion-plus market opportunity, representing approximately 1.1 million annual surgical candidates. Armed with our proprietary Lapiplasty 3D System designed to provide an effective treatment with low recurrence rates, we continue to execute on programs and aim at increasing our market penetration. These include, ongoing investments to build a highly differentiated body of clinical evidence, regular and active surgeon and patient education programs, targeted sales for entities, including an increased investment in the build-out of our direct sales channel, while also expanding customer access via new facility approvals, as well as an increased investment in our R&D programs to continue to deliver next-generation Lapiplasty innovations to our customers. Drilling down, at the American College of Foot and Ankle Surgeons or ACFAS, Annual Scientific Conference last May, we announced positive interim data on our ALIGN3Dstudy in a podium presentation. Data on 128 patients showed consistent positive radiographic and patient-reported outcomes, starting at 6 weeks and maintained at 12-month post surgery. Building on previous interim data analysis, only 1 out of 72 patients that reached a 12-month follow-up point demonstrated a recurrence for an implied returns rate of 1.4%. This compares favorably to recurrence rates reported in the literature with metatarsal osteotomy, which still represents the lion's share of bunion operations today of up to 78%. While we still have a ways to go, with our primary endpoint of recurrence of 24-months post surgery and a final patient readout in the first half of 2023, we are encouraged by this positive trend that builds on our prior published outcomes, and we're pleased to note this data is resonating in the clinical community. Our differentiated certain education programs remain well received as evidenced by high demand and attendance for our in-person training labs throughout the quarter. We continue to see active patient interest -- physician interest and sign-ups with no softening in physician requests to be trained in our procedure, particularly as we enter the third quarter. We also saw a positive result from our targeted market development strategies. During the quarter, we accelerated our investment in DTC and launched a new patient website with features that provide increased engagement from patients. As a result, in Q2, we witnessed a record number of visits to our patient website and a record number of find a doctor searches. We also continue to add talent to our sales organization. Our rapidly growing direct sales team played a key role in this quarter's revenue performance, with over 50% of our Q2 sales coming from our direct channel compared to 44% in Q1 and 35% for 2020. We also recently bolstered our leadership team with a Senior Vice President of Sales, who comes to us with skills and experiences that are very well aligned with our commercial strategies. In addition, we maintain focused investments in R&D initiatives to advance both next-generation Lapiplasty innovations as well as new technologies addressing concomitant conditions. Our goal is to establish a Lapiplasty procedure as the standard-of-care by delivering a more effective surgical treatment for bunion sufferers. Relatively early in our market penetration, we are pleased with the progress of our commercial initiatives, and we believe we are well positioned to drive continued market share gains with our Lapiplasty system, and we remain cautiously optimistic as the U.S. continues to return to normalcy in 2021. With that, I'll now turn the call over to Mark to review our financial performance.

Thank you, John. Good afternoon, everyone. Thank you for joining us for our second quarter 2021 earnings review. Revenue in the second quarter was $20.7 million, an increase of 10% over the first quarter of 2021, and up from $7.7 million a year ago, representing an increase of 167% over the second quarter of 2020. The increase was led by our expanded surgeon base and higher utilization rates, which grew the number of Lapiplasty procedure kits sold. In addition, we saw continued favorable blended average selling prices in the quarter compared to the prior year. We note that 2020 second quarter results were also severely impacted by the COVID-19 pandemic, including restrictions on elective procedures. In the second quarter of 2021, sales of Lapiplasty procedure kits were 3,789, a 147% increase versus the prior year second quarter with a blended average selling price of thousand $5,451, an 8% increase over the second quarter of 2020 and a 2% increase over Q1 of this year. The number of active surgeons performing at least one case in the trailing 12 months in the quarter increased 41% year-over-year to 1,492, while utilization increased 18% year-over-year to an average of 9.8 Lapiplasty procedure kits per active surgeon in the trailing 12 months. Gross margin increased to 80.9% in the second quarter of 2021 compared to 73.1% in the second quarter of 2020. The 780 basis point gross margin expansion was due to increases in the number of Lapiplasty procedure kits sold, increases in blended ASP and operational efficiencies. Gross margin for the 2020 period also reflects pandemic-related disruptions. The operating - total operating expenses were $20.8 million in the second quarter of 2021, including sales and marketing expenses of $14.0 million, research and development expenses of $2.4 million and general and administrative expenses of $4.3 million. This compares to total operating expenses of $7.2 million, including sales and marketing expenses of $4.8 million, research and development expenses of $1.0 million, and general and administrative expenses of $1.4 million in the second quarter of 2020. Second quarter net loss was $5.1 million or a loss of $0.10 per share compared to a net loss of $2.1 million or $0.06 per share for the same period of 2020. Cash and cash equivalents were $119.6 million as of June 30, 2021. Let me turn to our outlook for 2021. We are raising our guidance and now expect revenue for the full year 2021 to range from $90 million to $95 million, up from our previous guidance of $87 million to $92 million, and representing approximately 57% to 65% growth over the company's fiscal year 2020 revenue of $57.4 million. As John noted, while difficult to gauge the impact of the Delta variant and lingering effects of the pandemic going forward, we are regularly monitoring for potential changes in hospital responses to elective surgeries and remain cautiously optimistic. Our outlook assumes continued normalization of procedure trends to pre-pandemic levels in the back half of the year. We expect strength to generally persist despite typical seasonal softness in orthopedic elective surgeries during the third quarter and some recent regional pandemic related elective procedure delays. We now expect Q3 revenue to reflect a flat to slight increase sequentially from revenue reported in Q2, representing strong year-over-year growth. Our 2021 outlook reaffirms our commitment to focus execution and growth in our business. With that, let me turn the call over to the operator to open the line for your questions. Operator?

Thank you. [Operator Instructions] And your first question will come from Robbie Marcus with JPMorgan. Your line is open.

Hi. This is actually Lili on for Robbie. Thanks for taking the question. I was hoping you could just dive a little bit deeper into what you've been seeing on the recovery. So with one month of third quarter onto your belt, have you been seeing procedures start to be deferred or canceled as the Delta variant has spread or has that largely held up?

Hi. Lili, this is John. Yes, sure. Happy to shed a little light on that. We've seen some spots here and there recently of cases getting delayed or pushed from hospitals to an outpatient like an ASC setting so they can preserve capacity for Delta case conditions. Nothing alarming at this point, but the forward impact of this Delta variant is just an unknown for all of us selling in the elective surgery market and it's one that we're closely monitoring.

Okay. And then just one quick follow-up on operating expenses. Can you talk through how you see that progressing over the course of the year? And are you seeing any meaningful headwinds from inflation or supply constraints? Thanks.

Yes. So this is Mark. Thanks, Lili. So from an operating expenses perspective, we're not really being impacted severely from any inflationary matters, and we continue to see similar trends going forward in the back half of the year with respect to our margin and leverage that we're seeing through operating expenses. So we feel good about, as we approach the back half of this year.

Okay. Thank you.

And your next question will come from Drew Ranieri with Morgan Stanley. Your line is open

Hi, John and Mark. Thanks for taking the questions. I guess, first, just on the updated revenue guidance. Can you just give us a better sense of how you're getting to the top and bottom end of the guidance range, just given that we are having variants increase? You're talking about a return to normal as we move into the back half of the year. And I'd also be curious if you're seeing any of the surgeon vacation dynamic that other orthopedic or spine companies have been mentioning through earnings so far? Thank you.

Yes. Thanks, Drew. The way we're looking at it is we did increase the range of our guidance, $3 million, partly due to the beat in Q2 as well as how we're looking at the back half of the year so that there would be a raise in Q3. We are, like John said, we're very much aware in monitoring how the Delta variant and COVID is impacting. We're very much aware that some regions throughout the US are being impacted differently than other regions. And so we're still optimistic, cautiously optimistic that we're going to get to normalcy here. But that's how we really approached it is that we'll be able to have continued growth in both the third quarter and the fourth quarter from where we've been.

Got it. Thank you. And just as you're thinking through the year, I mean, adding surgeons is a key part of growth, but should we be thinking a similar amount to what you've been doing over the past several quarters, in that 100, 150 per quarter? Just curious if, given the environment, you are seeing a slowdown in surgeon initial training or if you're making that up in an uplift in utilization for more experienced surgeons? Thanks for taking the questions.

Drew, this is John. From what we've seen, we're having pretty strong sign-ups and attendance at our surgical training events. We haven't seen a slowdown there. We have a number of other events planned for the back half of the year, and we expect strong attendance, but we'll continue monitoring it. But to date, that clinical evidence, that ALIGN3D data is really starting to permeate and increase surgeon willingness and desire to get trained on Lapiplasty, that and our DTC patient education initiatives that are increasing the number of patients looking for surgeons to do Lapiplasty.

Thanks for taking the questions.

Thanks, Drew.

Your next question will come from Richard Newitter with SVB Leerink. Your line is open. Hey, Rick.

Hi. Thank you. Hi, guys. Thanks for taking the questions. Nice quarter. A couple here for me. Curious if you have a sense for where the adoption is coming from between the two addressable market opportunities that you have to convert the osteotomy, which is the majority of cases for standard-of-care that are done out there today? And then also the LAP diffusion, which are the minority of current cases. But is there a sense of which bucket is getting converted faster as you drive your ramp?

Yes, Rich, it's John. I think we see a blend where some surgeons are more prone to be doing Lapidus type operations in the first place. So when they adopt Lapiplasty, it immediately goes at a higher percentage of their bunion cases just by that nature. And the other is the new surgeon that does the majority of their bunion surgeries as an osteotomy and does the occasional Lapidus. And what they do is they start with Lapiplasty addressing the typical minority patients that they treat with Lapidus. And then over time, what we see is they start carving into their osteotomy practice and adopting Lapiplasty for a larger portion of their overall bunion procedure. So they're cannibalizing the osteotomies over time.

Okay. That's helpful. Maybe just as the second question, it was - it's encouraging to see your utilization creeping higher sequentially despite the denominator, the number of active surgeons going up as well. So I'm just curious, within the different levels of experiences or with the technology from a utilization standpoint, are you seeing a consistent upward trend in your older classes of adopters, those were adopted in maybe 2017, 2018? Are they continuing to move higher at a faster pace? I guess any color you can give on the nature of your user base and how those utilization trends are moving forward?

Yes, great question, Rich, and I'll take the first stab at it. We see every year that our surgeons are performing procedures. The -- on the average, they're increasing the number of procedures done year-after-year. So you made reference to 2017. We're seeing that year-over-year that there's an increase. The longer they're with us, the more opportunities they find to do Lapiplasty within their practice. And so that continues to nicely step-up, which also helps us really think about our business going forward as we now have a more mature customer base. And so it's really helpful. So yes, we're really pleased with the fact that we not only have an increased - healthy number of increased number of surgeons, but on average, they're all doing more.

Okay. That’s great. Thanks for taking the questions.

Of course. Thanks, Drew. Operator [Operator Instructions] And your next question will come from Rick Wise with Stifel. Your line is open.

Good afternoon, gentlemen. Nice to see the excellent quarter. Maybe to start off, there's so many questions. Where are we in the mini rollout? And how far - how much more do you have to go there? And just remind us the impact, if any, that has on price or margins?

Hi, Rick, John. We're probably, in terms of supply, two third supplied out there. We have broadened the user base adoption of the Mini Incision System, and it does come along with a little higher average selling price. And that's - that along with our ancillary kit - broadening of our ancillary kit adoptions is giving us a little tailwind on our average case price or average case revenue.

Okay. And sort of a similar question and my summary question, you understand where I'm going. The same sort of question on the direct reps, 50% of Q2 sales, you continue to progress really nicely. How do we think about that stat as the year unfolds, should - what's a reasonable target for us to imagine you might hit as a percentage of sales as you exit the year? Again, remind us the impact on sales or growth and profitability from this direct rep initiative? And I'll just ask my last question now, which is essentially - so taking this positive mini mix, the direct reps, which maybe the answer is going to be similar, how do we think about average prices as we -- he blended average price, I think you called it, as the year progresses? Thank you.

Sure. Yes, Rick. We're having a Q2, just over 50% in W2 rep mix. As we look out to the future, we're going to be driving that number higher, Rick, and that's our plan, and we're making some significant investments to do that, both in the direct reps and then the sales management team and corporate accounts internally to help open up new facility access for our doctors and for the reps. And over time, we'll drive that to be a strong majority of our revenue on the direct side. I don't think we've given out exact numbers over time, but we also have some very, very excellent independent distributor partners who are very aligned with the company and continue to co-invest along with us. And so we support them as well. I think the question around the blending of the Mini Incision mix and the ancillary kits' impact on our average case price. It's helped us nicely so far. However, going forward, we are going to be entering some larger IDN agreements, potentially GPO contracts that we are going to probably have to concede some pricing on our kits to gain that access. And it's the right thing to do to drive market share. But we're being a little cautious about maintaining this high level on the ASP, if you will, for too long because we could get some dampening in our base kit prices. We have to provide some discounts to get into the larger hospital networks.

Got you. I appreciate the color. Thank you. Great to see the color – such an excellent quarter. Thank you.

Thanks, Rick.

Thank you, Rick.

And your next question will come from Richard Newitter with SVB Leerink.

Hi. Thanks for taking the follow up. I just wanted to go back to the guidance range. I think someone earlier had asked about some assumptions in the lower and the upper end, maybe just isolating for COVID. How should we think about what the assumption would be at the midpoint of the guidance, what does that assume, all else equal, for the COVID trend in your mind as it moves through the year? Is it that the midpoint, is it essentially the things get no worse, the upper end would be things don't - or no worse from what you're seeing now, and then the upper part would be that Delta variant just doesn't do anything from the trend line you saw in 2Q. How do we think about the range if you isolate for COVID?

Yes. That's a good question, Rich. And clearly, with the wide range that we've provided, we're giving ourselves a little more flexibility with some of those unknowns that you just mentioned. And so I think that is our range as we're going into the back half of the year. We are cautiously optimistic. We have our eyes wide open. We're monitoring some hospitals and some regions have been impacted differently than other regions. So we definitely think that, that range is achievable. That is assuming that it's not going to get dramatically worse from where we are now. And we have - we're cautiously optimistic that we'll be able to work through with our doctors and hospitals and their responses to elective surgeries. And so we feel comfortable with that range and that midpoint of that range.

Okay. Thanks.

Excuse me, speakers, I'm showing no further questions at this time. I will now hand it back over to Vivian Cervantes for any closing statements.

Thank you, Peter. On behalf of Treace Medical, thank you for joining us today. This concludes our call, and we look forward to our next update following the close of the third quarter 2021. Thank you. Have a good afternoon.

This concludes today's conference call. Thank you for participating. You may now disconnect.