AxoGen, Inc. (NASDAQ:AXGN) Q4 2022 Earnings Call Transcript

AxoGen, Inc. (NASDAQ:AXGN) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Welcome to the AxoGen Fourth Quarter 2022 Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ed Joyce, AxoGen’s Director of Investor Relations. Please begin, Mr. Joyce.

Ed Joyce: Thank you, Rob, and good morning, 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, 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 website. Following the end of the live call, a replay will be available on the Investors section of the company’s website at www.axogeninc.com. Before we get started, I’d like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events, including the 2023 financial outlook, timing of the BLA submission and growth trajectory of the company.

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. Actual results or events could differ materially from those described in any forward-looking statement as a result of various factors including, without limitation, the continued impact of COVID-19 on our business, global supply chain issues, record inflation, the impacts of the failure of Silicon Valley Bank and the recent turmoil in the banking industry, hospital staffing issues, product development, product potential, expected clinical enrollment timing and outcomes, regulatory process and approvals, APC renovation, timing and expense, financial performance, sales growth, surgeon and product adoption, market awareness of our products, data validation, our visibility at and sponsorship of conferences and educational events, global business disruption caused by Russia’s invasion of Ukraine and related sanctions as well as those risk factors described under Part 1, Item 1A, Risk Factors of our annual report on Form 10-K for the most recently ended fiscal year.

Forward-looking statements are not a guarantee of future performance, and actual results may differ materially from those projected. 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 the non-GAAP measures, revenue as reported to revenue, excluding the impact of Avive as well as adjusted core and active account numbers, excluding the impact of Avive purchases, please reference today’s earnings release and materials on the Investors section of the company’s website. And with that, I’d like to turn the call over to Karen. Karen?

Karen Zaderej: Thanks, Ed, and thank you, everyone, for joining us this morning. I’ll start the call today with an overview of our fourth quarter and our full year achievements and review our outlook for 2023. Pete will then provide more detail on our financial performance before we open the line for questions. 2022 was a solid year of key accomplishments and milestones. We delivered high teens revenue growth during the back half of 2022 and drove improved operating efficiencies across the business. In May, we announced our pivotal Recon study successfully achieved its primary endpoint as well as important secondary endpoints. Late in the year, we also saw the publication of an independent landmark meta-analysis of peripheral nerve repair.

This publication provides the strongest clinical evidence to date of the performance of Avance Nerve Graft across all gap lengths and nerve types compared to autograft and conduit. Additionally, construction of our new processing facility in Dayton, Ohio was completed, and the validation and transition is in process. This new facility will support our BLA for Avance Nerve Graft and provide for our long-term processing capacity. We remain on track for submission of our BLA for Avance by the end of 2023 and anticipate our approval in 2024. A BLA approval will complete the regulatory transition of Avance Nerve Graft from a 361 tissue-based product to a 351 biological product. And importantly, Avance will then be designated as a reference product, which would, in turn, provide 12 years of data exclusivity with regard to potential biostimulators .

With over 75,000 Avance Nerve Graft and implanted since launch, we are well positioned to continue to lead and innovate in this large and developing peripheral nerve repair market. I’m proud of our team, and I look forward to continuing our mission of revolutionizing the science of nerve repair. Now turning to fourth quarter performance. Revenue increased 17% to $36.2 million compared to last year, excluding the impact of revenue from Avive Soft Tissue Membrane in the fourth quarter of 2021. For the full year, we achieved revenue of $138.6 million, a 12% increase over the last year, excluding Avive revenue in 2021. As I noted earlier, we were pleased to see our sequential quarterly improvement with high-teens growth in the second half of 2022 versus single digits in the first half.

This improvement reflects improved hospital staffing and surgical capacity in the second half of the year, as well as our ability to execute on our strategy and gain surgeon adoption. Giving more surgeon adopters in our core and active accounts is a key driver of our growth. As a reminder, active accounts are those that have ordered at least six times in the last 12 months and may still be in the early stages of adoption. Core accounts represent more penetrated accounts, defined as those that have had greater than $100,000 in revenue in the trailing 12 months. The number of our core accounts increased to 332 in the quarter, representing growth of 1% sequentially and 18% over a prior year adjusted level of 282 excluding the impact of Avive purchases in 2021.

This represents the impact of our growth strategy to drive deeper penetration into our core and active accounts. Core accounts represent about 60% of our revenue and typically contain at least one surgeon who’s adopted the AxoGen nerve repair algorithm for a significant portion of his or her nerve injury patients. Leveraging this surgeon’s success with our products, we focus on gaining more cases with that first surgeon and gaining use by additional surgeons, including middle adopters in that account. Again, we believe our best opportunity for growth is driving deeper penetration in core accounts across all of our nerve repair applications, including trauma, breast, OMF and the surgical treatment of pain. The number of our active accounts increased to 968 in the quarter, representing growth of 2% sequentially and 3% over an adjusted prior year level of 941.

Active accounts represent about 85% of our total revenue, with the top 10% contributing about 35% of revenue. We ended the year with 115 direct sales representatives, up from 111 at the end of the third quarter. We believe our revenue growth can be primarily supported by increases in our sales rep productivity, and we will modestly add additional sales reps as their territories approach targeted levels. Our direct sales force is also supplemented by independent sales agencies that represent approximately 10% of our total revenue. We strive to build market awareness of nerve repair with health care providers through our direct-to-patient initiatives, particularly for breast and pain applications. We utilize our marketing initiatives to drive patient engagement to our resensation and rethink pain website.

Photo by National Cancer Institute on Unsplash

These sites are aimed at increasing patient awareness and education of the potential for nerve repair procedures to improve outcomes for those undergoing mastectomy and reconstruction and also for those suffering from chronic neuropathic pain. Our surgeon education programs remain a top priority for AxoGen and continue to generate interest in the surgical community. Once again, in 2022, we achieved our annual goal of training more than 75% of the most recent class of hand and microsurgery fellows. We have high engagement from the fellowship training institutions, and we’re well on our way towards achieving the target with the 2023 class. We remain committed to developing the clinical evidence to demonstrate the safety, performance and utility of our nerve repair solutions to support surgeon adoption of the AxoGen algorithm across our full portfolio of nerve repair products.

We added eight new peer-reviewed publications this quarter now with a total of 215 across extremity trauma, breast, OMF and pain. We believe that this portfolio of high-quality clinical evidence is the most comprehensive in the area of peripheral nerve repair and a key part of gaining surgeon adoption. Late in Q4, we saw the publication of the most comprehensive peer-reviewed analysis on peripheral nerve repair outcomes entitled the systematic review and meta-analysis of nerve gap repair. The office compared to meaningful recovery rates between allograft, autograft and conduit across 35 high-quality peer-reviewed studies. The studies were screened for nerve injury type and similar outcome measurements, culminating with an evaluation of over 1,500 nerve repairs included in this analysis.

The authors concluded that meaningful recovery rates for allograft and autograft repairs were comparable across all gap lengths up to 70 millimeters and that there were no statistical differences between allograft and autograft outcomes in both sensory and motor nerve repairs. Additionally, allograft and autograft repairs delivered significantly better rates of meaningful recovery in short gaps up to 30 millimeters as compared to conduit repairs. Lastly, an additional target of this meta-analysis was an examination of the acute procedure-related costs comparing autograft procedures to allograft. And the study found the costs were comparable in both the inpatient and outpatient setting. I would also like to highlight a couple of recent publications in the Oral and Maxillo-Facial segment.

One study found that despite potential concerns the cancer treatment could negatively impact nerve regeneration. The oral cancer patients in the study with allograft nerve repair reported meaningful sensory recovery rate similar to those previously published for benign reconstruction. In addition to that study, another recent publication highlighted the cost effectiveness of allograft nerve repair compared to nonsurgical therapy. Patients with persistent trigeminal neuropathy or nerve damage affecting sensation in their space, tongue or jaw are commonly afflicted with high rates of depression, loss of work and decreased quality of life. This patient compared the total cost of ongoing nonsurgical therapies compared to surgical repair with allograft reconstruction and found that nerve reconstruction was more effective and had lower long-term costs and represents a significant improvement for the patient.

For our AxoGen sponsored research programs, we were pleased to see our Recon study discussed in the most recent annual combined hand, nerve and microsurgery meeting. Our RANGER and MATCH registries continue to enroll, and this data is an important part and informing surgeons in their clinical decision-making. Lastly, we anticipate top line data readout from our closed Axoguard Nerve Cap study in the fourth quarter of this year. Continuous innovation of products and applications is a key strategic pillar for our long-term growth, and we are mission-driven to provide leading innovative treatments for patients with peripheral nerve injuries. Our advanced nerve graft has revolutionized peripheral nerve repair, and we’re excited to see this technology expand into new clinical applications.

I’d like to highlight one of these exciting initiatives for breast reconstruction patients. Restoring sensation as a part of breast reconstruction is an important quality of life attribute for many women. Our resensation technique was developed to provide sensation for patients receiving an autologous flap reconstruction, which represents roughly 20% of the overall breast reconstruction procedures. The remaining 80% of breast reconstruction procedures are implant-based. To support patients undergoing implant-based reconstruction, we have collaborated with pioneering surgeons to develop a procedure to provide neurotization to a subset of this patient population. We believe this new approach can be applied to an incremental 10% to 15% of breast reconstruction patients.

Leading surgeons have seen promising results, and we expect to train 20 breast reconstruction surgical teams in this new procedure in 2023. I’d now like to spend a moment discussing our outlook for this year. We expect the full year 2023 revenue will be in the range of $154 million to $159 million, which represents about 11% to 15% growth over 2022. Our growth in the second half of 2022 reflects our ability to execute in an environment of improved hospital staffing and surgical capacity. We’re confident in our ability to gain adoption and remain measured on the pace of continued improvements as hospitals work – continue to work through these challenges and return to more normalized operating schedules. Additionally, we expect 2023 gross margin will be reduced in the first half of the year with the transition to our new processing facility, and we expect gross margins will return to approximately 80% by the fourth quarter of 2023.

We view AxoGen as a growth company and are confident in our ability to continue our long track record of a surgeon adoption and growth supported with patient-focused, innovative products and applications, high-quality clinical data, surgeon education programs and our commercial execution. We’re pleased with our performance and accomplishments in 2022, which include high teens growth in the second half of the year, the reporting of meaningful clinical data and our progress towards our new processing center and filing the BLA for Avance. We look forward to extending these accomplishments in 2023. By continuing to move into middle adopters, gaining surgeon conversion and bringing new innovation to peripheral nerve repair, we can further solidify our position as the leader in peripheral nerve repair and drive long-term sustainable growth.

Now I’ll turn the call over to Pete for a review of financial highlights. Pete?

Pete Mariani: Thank you, Karen. Before I get into the details of our financial performance, I want to comment on the recent disclosures regarding Silicon Valley Bank. We have approximately $8 million of cash with SVB, which is our sole depository bank. The majority of our cash, cash equivalents and investments, which consist of a variety of short-term and high credit treasury bonds and other liquid investments are held in custodial accounts with U.S. Bank for which SVB Asset Management is the adviser. We are opening new accounts with JPMorgan and have begun the process of moving the cash and investments to those new accounts. And now turning to our results. Fourth quarter revenue was $36.2 million, a 17% increase over the fourth quarter of 2021, excluding Avive revenue in the fourth quarter of 2021.

Growth was driven by increases in unit volume of 11% as well as increases in price and product mix of 4% and 3%, respectively. Gross profit in the quarter was $30 million as compared to $26 million in the fourth quarter of 2021. Gross margin was 83% compared to 83.2% in last year’s fourth quarter. Total operating expense in the fourth quarter increased 13% to $35.6 million compared to $31.5 million in the prior year. The increase in total operating expenses was primarily the result of compensation costs of $4.1 million, including $2.6 million in stock compensation. Sales and marketing expense in the fourth quarter increased 12% to $19.9 million compared to $17.7 million in the prior year. The increase was primarily due to compensation costs.

As a percentage of total revenue, sales and marketing expense was 66% compared to 68% in the fourth quarter of 2021. Fourth quarter research and development expense increased 8% to $6.8 million compared to $6.3 million in the prior year. Product development expenses represented approximately 56% of total R&D in the quarter compared to 73% last year and includes spending in a number of innovation programs across our portfolio, including the next-generation Avance product. Clinical expenses represented approximately 44% of total R&D in the quarter compared to 27% last year. As a percentage of total revenues, research and development expense was 19% in Q4 compared to 20% in the prior year. General and administrative expense increased 20% to $8.9 million in the fourth quarter as compared to $7.4 million in the prior year.

The increase was primarily due to higher net compensation expenses and G&A as a percent of revenue was 30% in the quarter compared to 28% in the prior year. Net loss in the quarter was $5.4 million or $0.13 per share compared to a net loss of $5.3 million or $0.13 per share in the fourth quarter of the prior year. Adjusted net loss was $1.1 million or approximately $0.03 per share in the fourth quarter compared to a loss of $3.3 million or $0.08 per share last year. Adjusted EBITDA loss in the quarter was $700,000 compared to an adjusted EBITDA loss of $2.5 million in the prior year. The balance of our cash, cash equivalents and investments on December 31, 2022 was $55 million compared to a balance of $59.4 million at the end of Q3. The net change includes capital expenditures of $5.5 million related to the construction of our new processing facility in Dayton, Ohio, partially offset by $1.1 million of positive cash flow in the quarter.

As Karen mentioned, our full year revenue guidance of $154 million to $159 million represents 11% to 15% growth. Additionally, we expect gross margin will be reduced in the first half of the year with the transition of our new processing facility. We anticipate improvement in the second half of the year with gross margins of approximately 80% in the fourth quarter. Completion of our Dayton processing facility will include approximately $4 million to $5 million of remaining capital spend in the first half of the year. Additionally, we expect first quarter cash burn to be impacted by additional payments that are unique to the first quarter, including payment of our annual bonus, sales meetings and awards and insurance payments. We’re confident that our balance sheet will continue to provide sufficient liquidity supported by revenue leverage on our fixed cost infrastructure and thoughtful expense management, with a return to more normalized capital expenditures, we expect our operating cash to continue trending towards cash flow breakeven as we continue our path to profitability.

At this point, I’d like to open the line for questions.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. Thank you. And our first question comes from the line of Mike Sarcone with Jefferies. Please proceed with your questions.

Mike Sarcone: Hey. Good morning, Karen, Pete and Ed. Thanks for taking my questions.

Karen Zaderej: Morning.

Pete Mariani: Good morning.

Mike Sarcone: So just the first one for you, Pete. A clarification on the $8 million of cash at Silicon Valley. Is that basically free and clear, and you’re just working through the process of transferring that? Can you just talk a little bit more about the accessibility?

Pete Mariani: Yes, it is. And it is free and clear. We’ve seen – in fact, we’ve seen cash receipts were received into that account even yesterday and our ability to move money out of that account is something that we can do. So we’re making – we’re taking steps to continue to make those transitions.

Mike Sarcone: Got it. Okay, thanks. And then just wanted to get an update. Could you parse out what you’re seeing across trauma, OMF and breast recon so far through the year? And then what’s baked into your assumptions for 2023 at the low and high end of guidance? Thank you.

Pete Mariani: Yes. Well, let me start off with the guidance. I mean our top end of our guidance really takes into consideration the continued predictability and consistency of hospital staffing and surgical schedules, although we recognize that that’s not – it’s still not at capacity. And so we’ve seen improvement over the last half of the year, and we would expect to see just that continued stability and not a lot of improvement is in our top end of our guidance. And the bottom end of our guidance really assumes that there is some disruption to the improvements that we’ve seen over the back half of the year. And I’d say, as we’re starting into the year, we’ve seen some nice stability in those procedures, but we’re going to continue to be measured in our outlook for how we see the rest of the year go.

Karen Zaderej: Yes. And if I look at what we’ve seen, hospitals are still understaffed and they’re not able to run all of their operating rooms to full capacity, but it has to become predictable. And so we see surgeons in breast, you know, meta and pain where the procedures are scheduled to be able to at least schedule their procedures so they understand what their cadence will be of surgery. The breast surgeons are still working off of a long backlog, and that will take a while, as we’ve talked about before, but they are able to work through the cases on a regular cadence. In trauma, there has been through last year and into this year some disruption in the ability to take a patient immediately from the emergency department into an OR just because of the lack of flexibility of resources.

That has stabilized. They’re not always able to do that, but they can refer them and get them into an OR, either at that site of care or an alternate site of care, they may delay it a day, but they are able to do that. And so that’s what we mean by predictability is that we’re seeing that the surgeons and the hospitals are creating work around so that patients can get care and that seems to be holding through the beginning of the year here.

Mike Sarcone: Okay. Thank you.

Operator: Our next question is from the line of Chris Pasquale with Nephron. Please proceed with your questions.

Chris Pasquale: Thanks. Good morning, guys.

Karen Zaderej: Good morning.