AxoGen, Inc. (NASDAQ:AXGN) Q1 2024 Earnings Call Transcript

AxoGen, Inc. (NASDAQ:AXGN) Q1 2024 Earnings Call Transcript May 5, 2024

AxoGen, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the AxoGen, Inc. 2024 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. It’s now my pleasure to introduce your host, Harold Tamayo, Vice President of Finance and Investor Relations. Thank you, Harold. You may begin.

Harold Tamayo: Thank you, Keith. Good morning, everyone. Joining me on today’s call is Karen Zaderej, AxoGen’s Chairman, Chief Executive Officer and President; and Nir Naor, Chief Financial Officer. Karen will discuss the first quarter of 2024 financial results, and Nir will provide an analysis of our financial performance and guidance and discuss our outlook for the year, 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 financial guidance, our expectations regarding our ability to expand our footprint and expand revenue from core accounts, anticipated growth for revenue categories, marketing opportunities with nerve applications associated with breast, OMF protection and surgical treatment of pain and new products; our expectations regarding the timing of the launch of Avive+; our statement regarding the timing of the complete biologics license application submission for Avance nerve graft as well as a statement regarding the timing for approval of the BLA.

Our expectation is that assuming approval of the BLA, Avance nerve graft will be designated as a reference product and the expected market exclusivity of such designation and our expectations around cash flow, including that we will continue trending towards cash flow breakeven and profitability. 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, not without limitation, the risks and uncertainties reflected in the company’s annual and periodic reports such as hospital staffing issues, regulatory processes and approvals, surgeon and product adoption and market awareness of our products. The forward-looking statements are representative only as of the date they are 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 non-GAAP measures, please reference today’s press release in our corporate presentation on the Investors section of the company’s website. Now I would like to turn the call over to Karen. Karen?

Karen Zaderej: Thank you, Harold, and thank you all for joining us today as we discuss our 2024 first quarter financial results. We had a solid first quarter, and we are pleased with both the positive trends in revenue and bottom line. Our performance underscores the progress we continue to make towards profitability and generating positive cash flow. During today’s call, I’m going to highlight the progress we’ve made across our business as well as some changes we’ve made on the disclosure and reporting side, which both Nir and I will discuss later on in the call. Revenue for the quarter increased by 12.9% to $41.4 million compared to last year. We are pleased with this quarter’s top line performance, which was at a run rate above the midpoint of our annual guidance.

Looking closely at the quarter, growth was broad-based across our products and applications. We saw a strong January and February, and our typical step up in volume occurred in April rather than March this year. We remain confident that we will achieve our 2024 top line guidance. As part of the disclosure and reporting changes I alluded to in my opening comments, we’ve made the strategic decision to remove our revenue breakdown between scheduled and emergent trauma applications. Our growth strategy continues to be focused on going deeper and high potential accounts and to build the nerve repair business in these accounts across all of our targeted nerve repair applications. We believe the performance and key metrics pertaining to sales productivity and our progress in our core accounts provide the most clarity on the business model versus estimates of revenue by application.

We will continue to talk qualitatively about the applications for nerve repair and our growth to give you color on both the opportunities in front of us and the progress we are making. As I said earlier, our growth strategy continues to be focused on going deeper in our existing core accounts where we see significant opportunity to expand our footprint in multiple clinical applications as well as increasing the number of core accounts. Most of our core accounts have the opportunity for significant expansion across surgeon users and applications, resulting in upside in total revenue. As a reminder, core accounts are defined as those generating more than $100,000 in revenue over the trailing 12 months and represent approximately 65% of our total revenue.

Today, our largest core accounts are over $1 million annualized, and we look to continue to grow our core accounts towards their full potential. We ended the first quarter with 115 direct sales representatives, down one sequentially and compared to a year ago. We believe our revenue growth can continue to be driven primarily by increased productivity of our sales force, and we will evaluate and add additional sales reps as their territories approach targeted levels. Our direct sales force is supplemented by independent sales agencies that represent approximately 10% of our total revenue. As the leader in the nerve repair market, driving innovation to provide advanced solutions for surgeons and their patients is a key pillar of our growth. We previously announced three innovations to our portfolio, which included two new products to the protection space and the Resensation technique for implant-based breast neurotization.

We saw strong surgeon and patient interest in implant-based breast neurotization and grew the number of surgical teams trained in this new technique. We are on track to expand our education efforts with three national Resensation surgeon training programs in 2024. Nerve protection continues to represent a significant growth opportunity for AxoGen. As previously mentioned, we saw a need for multiple product solutions to address the diverse types of non-transected nerve injuries. Our first portfolio expansion with the launch of AxoGuard HA+ Nerve Protector, and we have been pleased with the surgeon acceptance of the product and the progress of the launch, including the positive impact we are seeing on surgeon activation and new use cases in targeted applications.

We are continuing to expand our offering for nerve protection with a Avive+ Soft Tissue Matrix, which broadens our nerve protection portfolio and targets acutely traumatized nerves. Avive+ Soft Tissue Matrix is a resorbable nerve protection implant that functions as the barrier, providing temporary protection and tissue separation during the critical phase of healing. We are pleased with the initial surgeon feedback we’ve received in our limited market release and on track for a full launch in June. With these additions, we believe we offer the broadest portfolio — a protection portfolio for nerve repair, and this will continue to drive growth in the nerve protection market. Moving on to updates to our growing body of clinical evidence. Over the years, we’ve made significant investments to develop quality clinical evidence to demonstrate the safety, performance, health care economics and utility of our nerve repair solutions.

Our active clinical programs are progressing as expected. As of the end of the quarter, we had 258 peer-reviewed publications, including applications in trauma, breast, OMF and pain. This January, we announced positive top line results from the REPOSE clinical study comparing standard of care and neurectomy of symptomatic neuromas to neurectomy and protection of the terminated nerve and with our AxoGuard Nerve Cap. This post marketing study met its primary endpoint for reduction in pain as measured by the visual analog scale. In addition, the study investigators found that over the full 12-month course of follow-up, AxoGuard Nerve Cap demonstrated statistical superiority for reduction in the total pain reported by the subjects compared to the standard of care neurectomy.

We believe that these findings will play an important role in surgeon clinical decision-making. Turning now to the BLA for Avance nerve grafts. We completed a productive pre-BLA meeting with FDA. We are encouraged by the positive interactions and have aligned with FDA on a rolling submission process and the content of the modules for submission. We believe we are on track for the BLA filing to be completed in the third quarter of 2024, and the submission time line will allow for a potential approval in mid 2025. In addition, as required under the Pediatric Research Equity Act, we’ve submitted and reached agreement with the FDA of an initial pediatric study plan proposal. A final decision of the proposed plan is made by the review division at the time of approval of the biologics marketing application.

Another component of our transition to a biologic was the construction and validation of our new AxoGen processing center. At the end of 2023, we fully transitioned all advanced processing to our new center. We believe the advancements of our processing facility will provide the appropriate biologic processing environment as well as expand our processing capacity. As a reminder, a BLA approval will complete the regulatory transition of Avance nerve graft from a 361 tissue product to a 351 biological product. Importantly, we believe Avance will be designated as the reference product for potential biosimilars, providing 12 years of market exclusivity from the approval. In conclusion, we are pleased with our results from the first quarter, which reflects the execution of our growth strategy.

The exceptional performance of AxoGen’s talented team has been pivotal in achieving these outcomes. Looking ahead, we are focused on delivering and furthering our mission to revolutionize the science of nerve repair. I’ll now hand the call over to Nir, who will provide further details on our reporting changes, review our financial highlights and provide guidance. Nir?

Nir Naor: Thank you, Karen. It’s been very exciting 5 months since I joined the AxoGen team. I’ve been listening carefully to the various teams and quickly learning the vast details behind this robust and innovative business. As part of my diligence, I have seen several different opportunities and changes to enhance our reporting. All of these changes were strictly voluntary. And although our previous practices are acceptable alternatives, I believe that the new practices are more widely used in the industry and provide investors improved comparability of the company’s financial statements to peers. In addition, these changes will provide better transparency and facilitate better resource allocation as we continue our journey to profitability.

Our auditors have reviewed these changes and agree that they are acceptable. One of these changes involve our accounting policy for shipping and handling costs. As of the first quarter of 2024, our shipping and handling costs directly related to bringing our products to their final destination, including facility and warehousing overhead, are now included in cost of goods sold, whereas previously they were included in sales and marketing expenses. Additionally, as of the first quarter of 2024, we ceased allocating certain costs to and from certain departments. Previously, such costs had been allocated based on the company’s estimate of the proportionate share of total expense to each line item. It is important to recognize that all of these changes, which were completely voluntary, had no impact on net revenue, loss from operations, net loss per common share or cash flows.

We’ve made available our 2023 reclassified condensed consolidated statements of operations by quarter in our earnings release this morning to provide full transparency of these changes. Correspondingly, all the 2023 financial results that we refer to include all of these changes. In addition, we will no longer be disclosing the breakout on emerging versus scheduled procedure revenue. This disclosure was based on estimates and provided qualitative information about the applications where our products are used. After looking into this disclosure and speaking with investors and advisers, I came to the conclusion that this disclosure does not provide the best insights into our business model and successful execution of our commercial strategy. Our strategy is focused on increasing our sales productivity and penetration into high potential accounts across multiple surgeon specialties and procedural applications.

As a result, we’ve decided to align our reporting more closely with our strategy. And now turning to our financial results. For this quarter, our revenue was $41.4 million, representing 12.9% growth from the first quarter of 2023. This growth is attributed to a 4.9% increase in unit volume added with a 5.3% mix favorability and a 2.6% increase in price. Our gross profit for the quarter was $32.6 million, an increase from the $28.5 million recorded in the first quarter of 2023. This represents gross margin of 78.8%, up from 77.7% in the same period last year. Our total operating expenses for the quarter increased by 3.8% to $37.2 million, up from $35.8 million in Q1 of 2023. Our sales and marketing expenses for the first quarter grew by 1.9% to $19.8 million.

Sales and marketing expenses as a percentage of total revenue decreased to 47.9% from 53% in the first quarter of 2023 as we saw improved sales productivity as well as the termination of royalty payments on Avance. Research and development expenses increased by 17.1% to $7.4 million from $6.3 million in 2023, driven by costs related to the BLA. As a percentage of total revenue, total R&D expenses increased to 17.9%, up from 17.3% in the last quarter of the previous year. General and administrative expenses remained almost flat at $9.9 million in Q1 of 2024 compared to $10.1 million in the first quarter of 2023. The quarter ended with a net loss of $6.6 million or $0.15 per share compared to a net loss of $7.1 million or $0.17 per share in the first quarter of 2023.

However, we recorded an adjusted net loss of $2.7 million for the quarter or $0.06 per share, a shift from adjusted net loss of $4.1 million or $0.10 per share in the same period last year. Adjusted first quarter EBITDA was $1 million compared to an adjusted EBITDA loss of $3.8 million in the previous year. This change stands as a testament to our focused execution and improvement in operational efficiency and underscores our commitment to optimizing our cost structure. As of March 31, our balance of cash, cash equivalents and investments was $23.6 million compared to $37 million at the end of the fourth quarter of 2023. Turning now to our guidance. As outlined in today’s press release, we are maintaining our full year guidance for 2024. We expect revenue to be in the range of $177 million to $181 million, which represents an annual growth rate of approximately 11% to 14%.

We also reiterate our gross margin guidance for the full year to be in the range of 76% to 79%. Additionally, we expect to be net cash flow positive cumulatively for the period from April 1 through year-end. In summary, we are pleased with our performance in the first quarter. We will continue to execute our strategies, invest in innovation, drive revenue growth and optimize resource allocation and profitability. At this time, we’d like to open the line for questions.

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Q&A Session

Operator: Yes, thank you. [Operator Instructions] And the first question comes from Michael Sarcone with Jefferies.

Michael Sarcone: Good morning and thanks for taking my questions.

Karen Zaderej: Good morning.

Michael Sarcone: Karen, just the first one, your comments on performance through the quarter, you talked about a strong January and February and then a volume uptick in April. Can you maybe give us a little bit of color on what happened in March and how that compares to what you’ve seen historically?

Karen Zaderej: Yes. As you know, we historically have seen as the summer months start a sort of step up in the second quarter, and that usually leads in March. And this year, we did not see the lead in March. We saw it actually, as I said in my notes, get pushed into April is where we saw the step up. I’m going to hypothesize here that it had to do with the timing of the Easter holidays, but that’s just a hypothesis on my part. We have talked to a number of hospital systems that have also said they saw a shift in the March time frame on their elective outpatient procedures that might support that. But what we just saw was a little difference in timing of when we saw that step up occur. Having said that, we are really pleased to see that we saw growth again across products, across applications, continuing to build this business with a real focus in building out those core accounts and driving penetration in core account.

Michael Sarcone: Got it. Thanks. That’s helpful. And just given that you saw the step up in April rather than March, does that have any implications for quarterly sales cadence through the balance of the year, particularly if it differs from prior years?

Karen Zaderej: I think in the end, we are still going to see the cadence that you see a second quarter step up and a third quarter step up that we’ve seen in the past. So I think we are not seeing a difference there. It’s just a slight difference in timing of the week that it occurred in.

Michael Sarcone: Got it. And just one last one for me. Can you give us any updates on the CEO search?

Karen Zaderej: CEO search is in process. There’s a group of independent directors who are leading the search. They’ve hired an outside search firm who is sourcing candidates, and they’re going through the interview process. So still work in process that ultimately we’ll get an announcement as we finalize that. They want to be thoughtful in that selection. And then of course, if you remember, I’ll still be available from a consulting standpoint for a period of time to support that transition.

Michael Sarcone: Great. Thanks for the update, Karen.

Karen Zaderej: Sure. Thanks, Mike.

Operator: Thank you. And the next question comes from Mike Kratky with SMB Securities.

Mike Kratky: Hi, [indiscernible] thanks for taking my questions.

Karen Zaderej: Good morning.

Mike Kratky: Can you just give a little bit more color on the decision to remove the schedule versus the emerging breakdown? I mean, was there anything you saw this quarter that was kind of at odds with what you expected? Or any changes to how we should be thinking about the split between those two moving forward?

Nir Naor: Yes. Thank you for the question. So as we mentioned, this breakout is based on estimates and provide this qualitative breakout between those two procedures. And after looking into that, especially with this emphasis on resource allocations that I promoted and talking to several analysts and investors, I got the conclusion that it doesn’t provide the best insights and the best way to look at our business and our commercial strategy. Our commercial strategy has been to increase our penetration into high potential accounts, which each spend several procedures and applications and surgeon specialties. So that is basically the rationale.

Karen Zaderej: And then in your question, again, from a color commentary standpoint, we continue to see growth across multiple applications and products were not isolated into one area or one product, frankly. We are excited to continue to see the growth that we see in the protection area. If you remember, protection is both part of trauma and part of our scheduled cases. And so we are pleased to see that we are seeing all of these areas continue to grow. And that’s one of the shifts again is to say that growth is predominantly happening in these core accounts. That’s where our focus is. So I’m just thinking that the core account metrics are going to be more indicative of how we’re growing our business.

Mike Kratky: Got it. Yes, really appreciate the helpfully color there. And then maybe just a quick follow-up. But from a product mix standpoint, I know you’re not going to give details on kind of the specifics. But how should we think about the contribution from some of the newer product launches in terms of 2024 and the second half of this year?

Karen Zaderej: I’m sorry. So could you state the question again?

Mike Kratky: Yes, just in terms of how we should think about the contribution from some of the newer product launches that you’ve had for the second half of this year and 2024 in general.

Karen Zaderej: Okay. Well, first, we consider them in our guidance, so they were included in the guidance that aren’t part of a change in guidance with the launch of the two protection products. Avive+ will launch here in June, so it will be ramping up. So like all new products, I think the back half of the year, while surgeons are going to be excited to try it, the revenue impact is still going to be modest because you’ve got to go through value analysis committees to get it into the accounts. So there’s work that has to happen before it can really start to impact revenue. HA+, on the other hand, we’ve gone through a lot of that value analysis submissions, getting it allowed to be bought — either brought into or stocked in hospitals and we are starting to see good, steady use of the product and reuse of the product.