Treace Medical Concepts, Inc. (TMCI) Q3 2021 Earnings Report, Transcript and Summary

Welcome to the Treace Medical Concepts Third Quarter 2021 Earnings Conference Call. My name is James, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I’d now like to turn the call over to Sam [indiscernible] Sam, you may begin.

Thanks, James. Good afternoon, everyone, and welcome to our third 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 third 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 Investors section of our website. Before we begin, we would 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 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 third quarter to be filed later today in our prospectus filed on April 26, 2021, for a detailed presentation of risks. With that, I will now turn the call over to John.

Thank you, Sam, and good afternoon, everyone. Thank you for joining us on our third quarter 2021 earnings conference call. The team at Treace Medical has made key business and operating advancements during the quarter in spite of delta-related headwinds. With another quarter behind us as a public company, I’m encouraged once again by strong underlying business fundamentals that we believe positions us well for future growth. Our team continued to build on our momentum, executing on several key financial and operating metrics. Revenue in the quarter totaled $21.6 million, representing 4.7% growth sequentially and 52% growth over the third quarter of 2020. Despite pandemic-related headwinds, including elective surgery delays and cancellations, as well as difficult Q3 seasonal softness in orthopedic elective procedures, our business continues to perform exceptionally well with solid execution across multiple initiatives, including steady expansion of our customer base and the increase in number of active surgeon users; continued increase in surgeon utilization; increased average revenue per case; benefits from our ongoing shift to direct sales with over 53% of revenue from this channel in the third quarter; and increased surgeon adoption of our Lapiplasty Mini-Incision System, which we started rolling out in Q4 of 2020; as well as early positive feedback from our Adductoplasty System for midfoot correction, which we launched during the third quarter. As for the remainder of 2021, given our business trends and COVID-related uncertainties, we are reaffirming our prior guidance of $90 million to $95 million, which reflects an increase of 57% to 65% over our 2020 annual revenue. Turning now to discuss our market development activities. Our addressable market remains large and underserved with a long runway ahead of us. As of the end of Q3 2021, we believe our market share is around 3.5% of the estimated 450,000 annual bunion surgical procedures, which is an increase of 20 basis points sequentially and about 1.4% share of our $5 billion total addressable market, representing approximately 1.1 million annual surgical candidates. A key differentiating driver for our business is our commitment to evidence-based medicine. At the 2021 Annual Meeting of the American Orthopaedic Foot & Ankle Society, which was held in Charlotte in September, we announced new interim data from the ALIGN3D clinical study demonstrating consistent, positive radiographic and patient-reported outcomes starting at six weeks and maintain a 24-month post-surgery for patients following the Lapiplasty procedure. Building upon previous interim data analysis, data on 151 study participants showed: early return to weight-bearing in a walking boot at an average of 8.3 days; significant improvements in radiographic measures of three-dimensional bunion correction; and patient-reported pain reduction and quality of life measurements at 12 months and through 24 months following the Lapiplasty procedure; return to work within four weeks; and a full unrestricted activity within 4.1 months of surgery; and continued low recurrence rate with only one out of 104 patients that reached the 12-month follow-up time point, demonstrating a recurrence for an implied recurrence rate of 0.9%. As a reminder, recurrence rates reported in the literature with metatarsal osteotomy are highly variable and have been shown to be as high as 78%. With our primary endpoint being recurrence at 24 months post-surgery and a final patient readout in the first half of 2023, we are encouraged by this interim data set that continues to demonstrate successful procedural and patient outcomes from Lapiplasty surgery, reinforcing our belief that we’re advancing the standard of care in bunion surgery. Further, in October, we announced our first patient treated in our Mini3D Lapiplasty clinical study. The study, which evaluates patient outcomes using our Lapiplasty Mini-Incision System built upon our ongoing ALIGN3D study, but utilizes a mini-incision approach, providing both surgeons and patients another option to surgically manage bun uniformities. Our Mini-Incision System has been adopted from our standard Lapiplasty System to enable the same three-dimensional correction that addresses the root cause of a bunion, but through a small 3.5-centimeter incision, providing a more minimally invasive option with Lapiplasty for patients. The Lapiplasty Mini-Incision System is designed to realign the entire metatarsal bone to alleviate pain and improve cosmetic appearance as opposed to cutting and shifting the bony bump, which is the case with traditional metatarsal osteotomy procedures. We look forward to advancing the Mini3D study, treating up to 200 patients at up to 20 centers across the U.S., and reporting on long-term outcomes following the procedure with the primary effectiveness endpoint being radiographic recurrence at 24 months. Building on the success of our proprietary Lapiplasty System, in September, we were very pleased to announce the initial launch of our Adductoplasty Midfoot Correction System designed for reproducible correction of the midfoot, providing additional support for bunion patients. Relatively early in our Adductoplasty system rollout, we are encouraged by the favorable response received from the surgeon community. Midfoot deformities may occur in up to 30% of bunion patients and studies have found that the recurrence rates following bunion correction to be meaningfully higher when the deformities of the midfoot are also left uncorrected. The Adductoplasty System is designed to address that issue, and we believe there’s a real opportunity here to improve the outcome for many patients. Just as our Lapiplasty System has provided an instrumented and reproducible approach for bunions, we are confident that our Adductoplasty System similarly offers enabling technology designed to convert another historically challenging freehand operation and the one that’s now instrumented for reproducibility. Turning to surgeon initiatives. We’re pleased to note that our education and training programs remain well received. We recently welcomed large groups of surgeons to our live Lapiplasty advanced training symposiums held in Dallas and Las Vegas for hands-on training sessions led by experienced Lapiplasty and Adductoplasty surgeons. The feedback we received from these events was quite favorable reinforcing that surgeon education and training is a top priority for the company. Certain interest and sign-ups for our training events remain active and do not show any signs of letting up, and we look forward to several additional live training events around the country to be held before the end of the year. Finally, we’re committed to driving innovation with R&D initiatives aimed at advancing both next-generation systems, as well as development of new technologies addressing concomitant conditions and diligently protecting those innovations with a robust portfolio of intellectual property. To this point, we recently announced our 30th granted U.S. patent and yet another that builds off our pioneering work dating back to 2014 related to instrumentation in surgical methods for three-plane or 3D bunion correction. This recent patent complements coverage obtained by another patent granted to us in March of this year. Our R&D and IP innovations in the space of 3D bunion corrections have been prolific since 2014, and we continue to identify and pursue opportunities to expand our intellectual property portfolio. And on a final note, before I turn the call over to Mark, our executive leadership and Board are pleased to welcome two new members to our Board of Directors effective October 1, Betsy Hanna and Deepti Jain. With decades of combined experience and the healthcare leadership between them, both Betsy and Deepti have already made an impact and will help guide us through our next phase of growth as we continue to drive a paradigm shift in the surgical management of bunions and related midfoot deformities. With that, I’ll now turn the call over to Mark to go over our financial performance.

Thank you, John. Good afternoon, everyone. Revenue in the third quarter was $21.6 million, an increase of 4.7% over the second quarter 2021 and up from $14.3 million a year ago, representing an increase of 52% over the third quarter 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 average selling prices in the quarter compared to the prior year. In the third quarter 2021, sales of Lapiplasty procedure kits were 3,963, a 42.5% increase versus the prior year’s third quarter with a blended average selling price of $5,455, a 6% increase over the third quarter in 2020, and a moderate increase over Q2 of this year. The number of active surgeons performing at least one case on trailing 12 months in the third quarter increased 41% year-over-year to 1,592 while utilization increased 16.3% year-over-year to an average of 10.0 Lapiplasty procedure kits per active surgeon. Gross margin increased to 80.4% in the third quarter of 2021, compared to 79.6% in the third quarter of 2020. The 80 basis point gross margin expansion was due to increases in the number of Lapiplasty procedure kits sold, increases in blended ASP, and operational efficiencies. Total operating expenses were $22.8 million in the third quarter of 2021, including sales and marketing expenses of $16.0 million. Research and development expenses of $2.5 million, and general and administrative expenses of $4.3 million. This compares to total operating expenses of $11.4 million, including sales and marketing expense of $8.1 million, research and development expenses of $1.5 million, and general and administrative expenses of $1.8 million in the third quarter of 2020. The increase in expenses reflect investments made to support our growing business. Third quarter net loss was $6.4 million or $0.12 per share, compared to a net loss of $2.8 million or $0.08 per share for the same period of 2020. Cash and equivalents were $109.5 million as of September 30, 2021. Before concluding, let me turn to our outlook for the remainder of 2021. We are reaffirming our full year 2021 revenue expectations of $90 million to $95 million, which represents 57% to 65% growth over 2020 full year revenue. As a reminder, consistent with prior years, the fourth quarter is our seasonally largest quarter as many patients elect to have surgery after meeting their annual insurance deductibles and use the time over winter holidays to recover. We are encouraged by the underlying strength and momentum of our business and comfortable at the midpoint of our revenue guidance range, mindful of the potential for continued COVID headwinds, additional hospital staffing shortages, or other factors that could negatively impact elective surgeries and our revenue. Our 2021 outlook reaffirms our commitment to focused execution and growth in our business. With that, let me turn the call over to the operator to open the line for your questions.

Thank you. We will now begin the Q&A session. [Operator Instructions] And our first question comes from Robbie Marcus of JPMorgan.

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 near-term COVID trends, and how has that trended in the fourth quarter? And what’s assumed in guidance in terms of the recovery?

Hi Lili, this is John. We’re definitely seeing a tail off in Delta case delays and elective case cancellations or deferrals that are occurring mainly in the Southeast. These are the geographies that impacted us most or gave us the most headwind through Q3. And we’re hopeful that the headwinds experienced are going to continue to abate as the quarter progresses. That said, we’re watching for potential hospital staffing constraints impacting elective cases or additional regional Delta flare-ups as the holidays begin with more, large gatherings of people. We continue to believe the disruptions to procedures will be more of a scheduling issue with the surgical procedure being rescheduled to a later time as to – as opposed to an outright cancellation, so.

Okay. That’s helpful. Thanks. And just a quick follow-up. Is there any early feedback you can share on the launch of the Adductoplasty system? How has that ramp progressed? And how significant of a driver to sales can that be in 2021? Thanks.

Yes. While it’s still early in the product rollout and the surgeon training, we’re very pleased with the early response we’re seeing from surgeons using the system, as well as the clinical resource we’re seeing on the patient side, not only in terms of correcting these misalignments of the midfoot, but also improving the cosmetic look to a more normal-appearing and slimmer foot once the midfoot deformity and the bunion have both been corrected. And we probably had a marginally slight impact from the system with the early launch during Q3 on our blended ASP, and we expect that will continue to increase as we expand sort of an adoption over the coming three, six, nine months, so.

Great. Thank you.

Our next question is from Drew Ranieri of Morgan Stanley.

Hey, John and Mark, thanks for taking the questions. Just on Adductoplasty for a moment. I know it’s very early days, but I was just wondering if you could provide a little bit more in terms of maybe the surgeon adoption that you are seeing. Are these existing Lapiplasty users? Are you pulling some surgeons that have maybe been on the sidelines from using your technology and getting their first start with the Adductoplasty?

Yes. Thanks, Drew. John here. We’ve been providing the system in our training labs over the last quarter and training doctors in addition to the Lapiplasty system. I will say at the AOFAS conference in September, the orthopedic surgeon conference, there was a very positive reception to it, Adductoplasty. And we expect to do several trainings of doctors that had interest in that course. But to get to the heart of your question, very positive response to it once they get trained, and we’re starting to see some nice early uptake.

Got it. And appreciate that you…

On both sides, whether it’s a surgeon that hasn’t used Lapiplasty, doing a case with Adductoplasty or our salespeople will bring in the Lapiplasty System too or Lapiplasty customers using the Adductoplasty and the Lapiplasty cases.

Got it. Thank you. And just understandably, I mean, I think you’re one of maybe the only few SMID Cap companies that have met or beaten our expectations kind of in the quarter and even consensus. But just curious if you could quantify maybe what the delta impact or staffing shortage impact might have cost you in the quarter just kind of given the underlying momentum that we’re seeing in the business from surgeon – active surgeon adoption, as well as utilization.

Well, I think clearly, it impacted us. That said, this is such a powerful business with so much underlying momentum that even through those headwinds, we’re able to outperform in Q3. So I think it’s hard to necessarily quantify where the growth rate would have been or how far beyond our overperformance we would have overperformed. But this is just a very strong business with a lot of momentum. The team is executing very, very well, and we’re proud of our performance in Q3 and looking forward to our performance in Q4.

Got it. And then just lastly, on the fourth quarter, I understand the implied revenue guidance there in the fourth. But just looking over the past couple of years, you’ve hit net income positive in the fourth quarter over 2019 and 2020. I mean, is that going to be a similar dynamic here in the fourth quarter 2021? Or should we be thinking that maybe you’re spending a little bit more in the middle of the P&L in terms of building out a direct sales organization? But any color there would be helpful. Thank you.

Yes. Thanks, Drew. This is Mark. I’ll take that. We’re definitely looking to have increased momentum in the investment in our sales and marketing. And that’s ultimately what we’re looking to do. From a net income perspective, our focus remains on really driving the top line, and that’s what we’re really aiming to do. So I don’t necessarily looking to be that net income positive right now, but just to really maintain our first-mover advantage and continue to get that additional support from our marketing efforts and building the commercial team, which we continue to do very successfully. So that’s really been our focus and will continue to be our focus for the next short and medium-term.

Great. Thanks for taking the questions. Appreciate it.

Absolutely. Thanks, Drew.

Our next question is from Danielle Antalffy of SVB Leerink.

Hi, this is Erin on for Danielle. Thanks so much for taking our question. I was just hoping if you could talk a little bit about physician training and kind of what we should expect going forward into the 4Q and into 2022. Should we see kind of a similar rate to what we’ve seen in 3Q? Or do you think it would – could it trend higher? Or was there any impact in the 3Q perhaps from COVID surges? Thanks.

So that with respect to the training of our new surgeon training, is that the question?

Yes, active surgeon training.

Yes, it’s Erin?

Yes.

Yes. Okay. Sorry, this is John. Not meaningful, not a meaningful dampening. You always get some dropout or cancellations the day before or the day out of the course, but that’s typical. But pretty strong demand. It doesn’t appear to be letting up in any way as Lapiplasty becomes more iconic and more accepted and interest grows in Adductoplasty. And I hear about that being taught at these events, and it just gives them more reasons to want to come. So seasonally, we do taper off a little bit in the fourth quarter, really November, December because our surgical volume spike is so high. And frankly, a lot of doctors just don’t have as much time to go to courses in those final few months, because they’re too busy operating. But I think for next year, you’re going to continue to see a robust training program out of our company, a very aggressive training program. It’s at our core, and we would expect certain demand for those training events to remain really strong.

Great. Thanks. And then also just on the adoption kind of within the two market opportunities. Just kind of wanted to get a sense of whether the share gains that you’ve seen have been from either osteotomy or Lapidus Fusion cases primarily or kind of a mix? Thanks so much.

Sure. I think it’s a mix. We convert new customers on both sides with 70% of the incumbent procedures being the metatarsal osteotomy. By volume, we’re probably converting more of those than necessarily transitioning a surgeon that does a lot, but it’s primarily to the Lapiplasty System, which we do as well. But I’d say we’re doing well on both fronts, and we’ll continue to do so.

Great. Thanks so much for taking the question.

Sure.

And our next question, from Rick Wise of Stifel.

Hey, how are you doing?

Hi, Rick.

Hi. Hate to start – go back to COVID again. But we’ve heard – everybody listening and started so many calls, and there’s been so much discussion about monthly trends and – a sort of hate desk. You obviously beat our number and consensus numbers on the top line. But what we’ve heard a lot is like July is strong; August, September, weak; and various things about October, either stable or equivalent to September or improving a little bit. Is there anything to be gleaned from your trends in recent months that would help us think about the setup for the fourth quarter? Or has it been less volatile than others because of the under-penetration of the market, the launch of new technologies? Just wondering how we should think about it.

Yes, I think that’s a great question, Rick. I would say that we definitely felt similar trends to what you were describing. Q3 was a little bit – we felt more the COVID headwinds more in the back half of Q3 just as other companies did. So I think in that respect, not too much different. We’ve definitely, unfortunately, seen a lightning of those headwinds as we’ve entered into Q4, and we’re optimistic that we’ll continue to see that trend throughout the remainder of Q4. With that said, a different kind of headwind we have been noticing and seeing throughout in different pockets is somewhat of the staffing shortages in hospitals. And so we’re still aware of some COVID headwinds in some states. We’re aware of certain hospitals that are still at a reduction in elective surgeries. We’re aware of that. But in addition to that, we’re seeing some hospitals that have staffing shortages. So we’re just not 100% sure how that’s going to play out in the rest of the fourth quarter. But we have seen some loosening of some of those headwinds as we’ve entered the fourth quarter. So, we’re still optimistic.

Got you. And I think, John, you – again, too many calls had – did I hear you say the words something about the innovation pipeline, and obviously, you’re launching new products regularly, but just wondered how we should think about it as we contemplate not so much the next quarter, but next two, three, four quarters. I’m sure you haven’t told us everything. Is there a lot in the pipeline? Should we expect the stated cadence of innovation? And if that’s the case, can talk to us about how you might deal with so many new products and training. Is that the feasibility of doing that, about fishing expedition question?

Okay, okay. Fair enough. Yes. No, I think that’s right. We have developments along a couple of different fronts and a pretty active R&D pipeline. It’s a very active R&D pipeline in advancing the Lapiplasty platform, making it faster, easier to use, less invasive. We have ancillary product development that includes items like the Adductoplasty System that tie into bunion cases or tie into a Lapiplasty case. So as we think about the cadence of new introductions going forward and into next year, I think there will just be kind of a strategically timed next-generation product or ancillary product that you’ll continue to see come out of the company. And then in terms of training and capability, its – these are really synergistic products that you can do with one instructor on one foot within an hour at a training lab, and they all tie into a Lapiplasty surgery. So it’s pretty efficient from that standpoint. And the pathologies overlap. And so the didactic discussions about the science and the deformity and how to treat them. They are all – they all pair well together. We’re not in one session talking about an ankle fracture system and another talking about a total ankle, and then going and talk about bunions. We’d all kind of discuss and talk harmoniously because they’re in case in the same operation.

Got you. Thank you. And just last for me. Mark, obviously, sales and marketing stepped up a couple of million sequentially each quarter this year, and you’re talking about building your commercial team. Maybe you could just give us a little more color on where we are in that process, where these dollars are going to trend in coming quarters. And is that process just going to keep going and going and going?

Yes. Great question, Rick. Absolutely. We continue to plan to invest in that commercial organization. We think that has a great return on investment. And what we’re doing is we’re building the commercial team. We’re adding and hiring a lot of sales reps to drive this business. And in addition to that, we’re spending or investing in the marketing focus. We’ve stepped up our efforts across the board, and we continue to step that up. And so I would look for increased investment in the fourth quarter over what you saw in the third.

Got you. Thank you very much.

Absolutely.

Thanks, Rick.

[Operator Instructions] And we have no more questions.

So 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 fourth quarter and full year of 2021. Thank you.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect.