Paragon 28, Inc. (NYSE:FNA) Q3 2022 Earnings Call Transcript

Paragon 28, Inc. (NYSE:FNA) Q3 2022 Earnings Call Transcript November 13, 2022

Operator: Good afternoon, and welcome to Paragon 28 Third Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. I would now like to hand the conference over to your host for today, Mr. Matthew Brinckman. Mr. Brinckman, please go ahead.

Matt Brinckman: Good afternoon, and thank you for joining Paragon 28 third quarter 2022 financial results and earnings call. Presenting on today’s call are: Albert DaCosta, Chairman and CEO; and Steve Deitsch, CFO. Before we begin, I would like to remind you that management will make statements during this call that will include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of future events, results or performance. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause the actual results to differ materially from these forward-looking statements.

All forward-looking statements are based upon current available information, and Paragon 28 assumes no obligation except as required by law to update these statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time to time in the company’s SEC filings and in the press release that was issued earlier today. During this presentation, we’ll refer to the non-GAAP financial measure of adjusted EBITDA. A reconciliation to the most comparable GAAP financial measure, net income, is contained in our press release issued earlier today. And with that, I’ll turn the call over to Albert.

Albert DaCosta: Thanks, Matt. Good afternoon, and welcome to our third quarter 2022 earnings call. I will provide an overview of our third quarter and give a business update. Steve will then provide additional detail regarding our quarterly results and provide an overview of our 2022 revenue guidance. We will then open the call to Q&A. Before we kick off, we have officially touched 1 year as a publicly traded company, and it’s been a phenomenal journey for Paragon 28. This has been a year of substantial growth and investment, and we are feeling great about the future. We’re so grateful for our team, surgeon customers and all of our partners for driving Paragon 28’s continued success over the last 12 months, especially considering the challenging macroeconomic backdrop.

With that, I will begin with our third quarter 2022 revenue performance. We are very pleased with our third quarter results. Total revenue for the third quarter was a record $46 million, representing growth of 28% compared to the third quarter of 2021. Foreign currency headwinds reduced our third quarter net revenue and net revenue growth by approximately $800,000 and 2.1 percentage points, respectively, as compared to the prior year period. Third quarter U.S. revenue was a record $40 million, representing growth of 25% compared to the third quarter of 2021. Our U.S. growth is attributable to the success of our new product launches as well as increased surgeon adoption and utilization driven by investments in medical education. These drivers ultimately resulted in strong increases in sales force productivity.

We have also significantly expanded our sales force over the last 12 months. Third quarter international revenue was a record $6 million, representing impressive reported growth of 52% compared to the third quarter of 2021. Growth in the quarter was once again driven primarily by our 3 largest international markets of Australia, South Africa and the United Kingdom, with Spain also a top driver of our international growth due to increased distribution capabilities. I will now share details around our key U.S. revenue growth drivers. Our broad and innovative product portfolio has been, and will continue to be the tip of the spear of Paragon 28’s success. Our exciting and consistently fresh product line enables us to build deeper relationships with existing surgeon customers and add new surgeon customers, and importantly, it is a key enabler for the expansion of our outstanding sales force.

We have continued to innovate across the portfolio and have launched 10 products year-to-date in 2022. Many of these new products were in categories where we see great potential to improve outcomes and a runway for future growth. Through the third quarter of 2022, we have generated strong momentum with the launch of new products that are highly complementary to the existing products in our portfolio. We are very excited about our recent launches in external fixation and soft tissue, as these products are often used in conjunction with other procedures. So far, 2022 has been a robust year of product development, adding to our tremendous momentum over the past several years. We are approaching 80 product families launched since our inception as a company in 2011, including nearly 50 launches since the start of 2017.

We are focused on driving R&D to improve patient outcomes and address complex foot and ankle cases with high complication rates. For example, in 2020, we launched our Phantom Hindfoot TTC Nail for ankle fusion as well as our APEX 3D Total ankle replacement. In 2021, we added complementary products such as MAVEN Patient Specific Instrumentation and the FasTrac laser alignment system, both for our total ankle replacement. Through 2022, we have also launched a line of external fixation products with monkey bars and monkey rings as well as soft tissue solutions such as Grappler Suture Anchor, TenoTac 2.0 and our R3ACT Stabilization System. We expect to continue this pace and focus within product development, and we’ll bring a balance of new and next-generation technologies to market over the next few years.

I’ve mentioned, many of these new product launches have been in complex cases like total ankle, fractures and severe charcot deformities, which have brought us more opportunities in medical education with both new and existing surgeon customers, while also attracting new sales talent with expertise in such cases. Through the rest of 2022 and going forward, our product pipeline remains as strong as ever, and is expected to continue to drive future growth. Of course, our great products only get us so far without the strength and culture of our phenomenal sales force, which has continued to consistently execute. Once again, sales force productivity in the U.S. increased on a double-digit percentage basis compared to the prior year quarter, a testament to the quality of our sales team, products and medical education programs.

We ended the third quarter of 2022 with approximately 200 producing sales reps. And while we don’t report our total sales force headcount, our total sales force headcount grew nearly 15% year-over-year during the third quarter. We expect productivity gains to continue, and the size of our total sales force, including producing sales reps to increase over time. During the third quarter, we did business with nearly 1,900 U.S. surgeon customers, including 587 U.S. producing surgeons, both records for P28 and an increase compared to the prior year period of 12% and 23% respectively. The number of surgeon customers and producing surgeon customers also both increased compared to the second quarter of 2022. With approximately 15,000 potential surgeon customers that treat foot & ankle in the U.S., we have only scratched the surface and have a long runway of growth in front of us.

On to some more details regarding medical education and surgeon training. 589 surgeons attended in-person P28 medical education events in the third quarter of 2022, bringing the total number of surgeons trained in person at Paragon 28 medical education events to nearly 2,000 year-to-date. We launched our mobile app early in the third quarter which provides surgeons greater flexibility and convenience to access training for our innovative product lines. We are excited about the results from our first quarter on the road with well over 100 surgeons trained across 27 cities. Internationally, we recently hosted a two-day medical education event in London called Bigfoot, with 123 surgeons attending from seven international countries. During the program, leading international surgeons made 46 didactic presentations across 6 distinct foot and ankle clinical topics.

It was an amazing event, and we are sincerely thankful for the incredible physician faculty from around the world, that help make it a great success. While we are on international medical education, this week, we are hosting 45 surgeons from around the world, the largest international medical education event we’ve held at our facility in Denver. The curriculum for this event includes a series of presentations in Cadaver Lab training, allowing surgeons to learn solutions and techniques, expanding our entire portfolio. We are thrilled to have such strong engagement and interest coming from our international markets and customers. Next, I like to touch on some of Paragon 28’s clinical body of work. Since inception, we have invested heavily in nonbiased clinical research to highlight opportunities for improvement in foot and ankle.

To date, Paragon 28 products have been featured in 46 journal publications and scientific meetings, including 9 completed since our IPO. We have also published 14 white papers and case study on our products in collaboration with various surgeons, 3 of which have been published since our IPO. Each of these studies have helped verify areas of opportunity to improve foot and ankle surgery or otherwise demonstrated various benefits of our solutions. Separately, we have completed 32 clinical studies with Disior, focused on the capability of our algorithms. At this time, we have numerous additional studies underway, and we plan to continue investing in our growing body of clinical data to drive improved outcomes in our market. A lot of our clinical work feeds directly into our SMART 28 initiative to increase better patient-specific solutions and drive more reproducible outcomes using various forms of enabling technologies.

As we’ve mentioned in prior calls, SMART 28 includes more tangible products like patient-specific instrumentation and guides, 3D printed patient-specific implants and more abstract solutions like software used for pre-operative planning and diagnostics, intraoperative support or post-operative patient tracking. With Disior in particular, we are increasingly able to instantly make diagnoses and answer questions that previously could take months, if not years. Our growing body of clinical work, combined with the enabling technologies we’re bringing to market through SMART 28 has led to increased surgeon interest from both existing and potential new customers, while also getting us valuable insight to advance product development. We expect the momentum we have in clinical and enabling technologies to continue in the future and allow Paragon 28 to drive further market expansion and share capture.

In summary, we are more optimistic than ever about our business. I am extremely proud of our team’s execution throughout 2022. We’ve taken full advantage of our increased visibility since becoming a public company, which has increased our access to both surgeons and hospitals, and has allowed us to attract great new talents throughout the organization. We have grown our business an impressive 24% year-to-date despite the very challenging business environment. Further, in the last 12 months, we have made targeted investments to position the business for long-term sustainable and profitable growth. We are very excited about the success we’ve had expanding our product development efforts, expanding our sales force and driving record levels of medical education.

We’ve also made tremendous progress in optimizing key corporate and operational functions, including launching SAP, which we expect to drive increased effectiveness, efficiency and profitability in our business. We also just turned the corner on our first full year as a public company. In late October, we were honored to celebrate our 1-year anniversary with the closing bell ceremony at the New York Stock Exchange. I am so thankful for our employees and sales representatives around the world for their diligent efforts and dedication to fulfilling our mission to continuously improve outcomes and experiences of patients suffering from foot and ankle conditions. Lastly, after the devastating events caused by Hurricane Ian, I want to especially thank our teammates in Florida and the Atlantic Coast for their amazing commitment and resilience.

Our hearts go out to all those affected both within the Paragon 28 family and otherwise. I will now turn it over to Steve.

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Stephen Deitsch: Thank you, Albert. Moving to our third quarter 2022 financial results. Paragon’s revenue for the third quarter of 2022 was $46 million, representing 28% growth compared to the third quarter of 2021. Foreign currency headwinds reduced quarterly net revenue and net revenue growth by approximately $800,000 and 2.1 percentage points respectively. Gross profit margin for the third quarter of 2022 was 81.5% compared to 80.2% in the third quarter of 2021. The improvement was primarily due to lower and obsolete inventory expense. Total operating expenses during the third quarter were $46 million compared to $43.9 million in the second quarter of 2022. Operating expense leverage improved for the quarter as operating expenses as a percentage of net revenue decreased by 330 basis points.

Since our IPO in October of 2021, we have made targeted and opportunistic investments to drive long-term sustainable growth, including investments in R&D, sales and marketing to expand our sales force and global medical education programs and in the company’s infrastructure to scale with the company’s rapid growth. These investments have also contributed to our consistently strong performance since our IPO. Revenue growth through the first nine months of 2022 was 24% and was fueled by a 23% expansion of our producing U.S. surgeon base, continued double-digit increases in year-over-year U.S. sales force productivity and record international revenue, including 52% reported growth for the quarter. Moving to further details on the P&L. Research and development expense was $6.3 million or approximately 14% of revenue for the third quarter of 2022, consistent with the previous quarter.

Selling, general and administrative expense was $39.7 million for the third quarter of 2022 compared to $38 million in the second quarter of this year. Third quarter adjusted EBITDA was a $2.7 million loss compared to the $3.2 million loss in the second quarter of 2022. Turning to liquidity. Total liquidity was $116 million at September 30th, 2022, including $56 million of cash and up to $60 million of cash available via our amended senior credit facility. Our strong liquidity position, combined with our anticipated increased operating leverage moving forward and more normalized working capital and CapEx trends will enable P28 to operate without future financings to fund operations. Before turning to our increased 2022 revenue guidance, a few comments on macroeconomic and other external factors and their impact on P28.

Notwithstanding the strong momentum in our business, we remain mindful of the current macroeconomic environment including the potential for reduced elective foot and ankle procedures, inflationary impacts and staffing shortages. However, our company and team are resilient and have delivered strong results in past difficult business environments, including a 24% year-to-date reported net revenue growth rate. The global supply chain remains challenging, but we are confident in our teams and vendors abilities to effectively manage these risks. Consistent with remarks from our past earnings calls, we have and may continue to opportunistically increase inventory and instrument purchases to ensure that we have the product on hand to meet the continued strong demand for our products.

And finally, we expect some degree of COVID headwinds on elective procedures to remain, but we do not expect these headwinds to be significant. Now turning to our increased 2022 revenue guidance. We have increased our 2022 net revenue guidance by $3.5 million to $179.5 million. Net revenue growth for 2022 is now expected to be 22% compared to our previous guidance of 19%. The increased net revenue guidance includes the impact of stronger foreign currency headwinds in both the third and fourth quarters of 2022, which are now expected to reduce 2022 net revenue and net revenue growth by approximately $2.4 million and 1.6 percentage points, respectively. Our previously issued 2022 net revenue guidance includes estimated foreign currency headwinds, reducing net revenue by $1.5 million and 1 percentage point, respectively.

Our increased 2022 annual net revenue guidance includes fourth quarter net revenue of $49.6 million, representing reported net revenue growth of 16% compared to the prior year quarter. Our fourth quarter net revenue guidance includes the impact of stronger foreign currency headwinds, which are now expected to reduce fourth quarter net revenue and net revenue growth by approximately $900,000 and 2.1 percentage points, respectively. Our previously issued fourth quarter revenue guidance included estimated foreign currency headwinds, reducing net revenue and net revenue growth by $400,000 and 1 percentage point, respectively. Our updated guidance for the fourth quarter, therefore, includes an operational net revenue increase of approximately $500,000.

Our updated revenue guidance assumes currency translation rates for our international business remain consistent with current translation rates. While we will not be providing specific adjusted EBITDA or cash flow guidance for 2022, we expect to continue to see sequential improvements and increased operating leverage moving forward. Also, when we release our fourth quarter 2022 earnings, in addition to net revenue guidance, we plan to give guidance on adjusted EBITDA and cash flow for 2023. That is the end of our prepared remarks.

Q&A Session

Operator: The first question today comes from the line of Matthew O’Brien from Piper Sandler.

Unidentified Analyst: This is Phil on for Matt. And congrats on the 1-year mark as a public company. Just for starters, let’s start on the guidance. You’ve raised about the same amount you beat here in Q3. And certainly, there’s an Ex Fix impact there, about $500,000 in the fourth quarter. But let’s just try to get nitty-gritty on why you didn’t bring up fourth quarter expectations maybe a bit more? Maybe what you’re seeing in the market in terms of procedures through fourth quarter here? Is there any potential upside?

Stephen Deitsch: And we’re really, really, really pleased with our full year guidance and our performance year-to-date. Our full year guidance is 24% on an operational basis, which is a significant increase from where we began the year. And one thing that I would tell you about our fourth quarter guidance, it does include a $500,000 increase, as you referenced. And also, our quarterly growth this year has been 25%, 20% and now 30% operationally in this quarter. And so, growth isn’t always linear in the markets that we operate in. And part of that is due to some of the strange year-over-year comps that we have due to COVID headwinds, staffing shortages, et cetera. But I’d tell you, our fourth quarter is going to be strong. We’re really excited about where we’re positioned going into end of the year, and we expect to have a terrific fourth quarter and close out to the year.

Unidentified Analyst: And then, I guess, just turning to the domestic side of things. I mean, you showed unbelievable strength domestically, growing both year-over-year and sequentially, and what amounts to a seasonally soft quarter. Especially one where other companies might have called out an elongated surgeon vacation cycle, I guess just — what are you seeing in terms of market growth versus outright share taking? And again, not to get too nitty-gritty, but what specific areas of your business maybe showed the largest delta between that market growth and perhaps company growth indicating more share taking?

Stephen Deitsch: I would tell you and amplify what Albert said in his prepared remarks that new products are really the tip of the sphere of the growth for P28, has been and will continue to be. And those products, combined with the outstanding medical education programs that we offer, are bringing new products to our existing customer base, and we’re also attracting new customers as we referenced the growth in our producing surgeon count as well as our overall surgeon count. So new products are a great driver of growth for us. We’ve also added to our sales force 15% additional people, and that is clearly a driver for us as well and these are very talented individuals that are doing a great job for us taking the Paragon 28 products to the street.

So new products, sales force expansion on the back of medical education. And then outside of the United States just a terrific continued performance in our 3 largest markets, U.K., South Africa as well as Australia. And this quarter we got a terrific contribution from our new distributor partners in Spain, which really added to a nice fourth quarter — or third quarter for us internationally.

Operator: The next question today comes from the line of Kyle Rose from Canaccord.

Kyle Rose: So I just wondered if we could just talk a little bit about some of the uptake of the new products. When we — particularly when we think about the Ex Fix and some of the soft tissue there, I guess, just what’s the early surgeon feedback? And when we think about all the medical education you’ve been doing, maybe just help us understand how many of those are friends and family like doctors that are close to the business that have already customers versus new competitive potential targets?