Treace Medical Concepts, Inc. (NASDAQ:TMCI) Q1 2024 Earnings Call Transcript

Treace Medical Concepts, Inc. (NASDAQ:TMCI) Q1 2024 Earnings Call Transcript May 11, 2024

Treace Medical Concepts, 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: Good day, and thank you for standing by, and welcome to the Treace Medical Concepts First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only-mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Julie Dewey. Please go ahead.

Julie Dewey: Good afternoon, everyone, and welcome to our first quarter 2024 earnings conference call. We appreciate you joining us. I’m Julie Dewey, Treace’s, Chief Communications and IR Officer. With me today are John Treace, Chief Executive Officer, and Mark Hair, Chief Financial Officer. During the call, John and Mark will offer commentary on our commercial activity and review our first quarter financial results released after the close of the market today, after which we will host a question-and-answer session. The press release and supplemental materials 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’d like to remind you that it is our intent that all forward-looking statements made during today’s call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results, outlook 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 first quarter 2024 filed today and our Form 10-K for the full year 2023 filed on February 27th, 2024, for a detailed presentation of risks. With that, I will now turn the call over to John.

John Treace: Thank you, Julie. Good afternoon, everyone, and thanks for joining us. I’m going to focus my comments today on our first quarter 2024 highlights, the progress of our numerous product launches, including SpeedPlate, our other growth drivers and then spend some time discussing developments in the market environment, which is underpinning our decision to revise our full year guidance, as well as tell you about our exciting opportunities and strategies going forward. Following my comments, Mark will cover specifics about our Q1 results and our 2024 guidance. We grew revenue 21% in the first quarter of 2024. Revenue performance was driven by increased procedure kit volume from our expanding base of surgeons and mix, driven by increased adoption of our newer technologies in our core bunion and related midfoot cases, all supported by our dedicated direct sales team.

We also benefited from strong patient demand trends that extended our seasonally strong fourth quarter into the first quarter. Additionally, we made encouraging progress with respect to our adjusted EBITDA results. Our adjusted EBITDA loss improved 18% to a loss of $8.3 million in the first quarter of 2024 compared to a loss of $10 million for the same period in 2023. We’ve expanded our position in the foot and ankle market by adding complementary procedures and technologies to treat related deformities, namely our Adductoplasty and hammertoe correction systems, both of which coexist frequently with bunions and are addressed at the same time and which together have expanded our TAM by an estimated $750 million without diluting our focus on the $5 billion plus US bunion market opportunity.

Additionally, exiting Q1, we now have full market availability for a number of our newest technologies, including our SpeedPlate fixation platform, hammertoe system, sterile instruments and our minimally invasive Micro-Lapiplasty procedure. We expect all of these new technologies to contribute to our growth going forward. And we recently announced that we’ve now treated more than 100,000 patients with our Lapiplasty procedure. Recognizing that our success is not only measured by numbers toward the transformative change that our differentiated therapies provide to patients to overcome painful, lifestyle limiting bunion and related midfoot deformities. Further highlighting our progress in the first quarter, we delivered gains across our key operating metrics in Q1.

We drove a year-over-year increase in volume of Lapiplasty, Adductoplasty and complementary procedures, which were enabled by our versatile SpeedPlate platform. We also benefited from favorable mix as well with new products like SpeedPlate and our hammertoe systems as well as our expanded offering of procedure-specific sterile instruments all being utilized more frequently in our core procedures. As we previously announced, we established the first ever national bunion day in the United States on April 16th, and we launched our new Future You” Patient Education and Brand Awareness Campaign. The response to this campaign has been very positive and driving significant increases in our website traffic and an amplified activity level on our Find a Doctor locator.

Treace was also named the first medical device partner, an official Foot and Ankle solution partner for The Professional Pickleball Association Tour. Pickleball is the fastest growing sport in the U.S., and we believe we’re uniquely positioned to drive greater awareness of the challenges posed by bunions and educate patients in this demographic on our pioneering Lapiplasty [ph] procedure, the number one most commonly used 3D bunion correction procedure by U.S. surgeons. Now I’d like to turn to our product launches. Our SpeedPlate launch continues to fuel our growth, and we saw strong demand in the first quarter. In fact, SpeedPlate usage nearly doubled in Q1 versus Q4 of 2023. Exiting Q1, we’ve achieved full commercialization of SpeedPlate, and expect adoption to continue steadily through the remainder of 2020.

Additionally, we expect to launch a new SpeedPlate configuration in Q3, which is designed to address some incremental larger bone fusion procedures in the foot. Next, our Micro-Lapiplasty system, this exciting evolution of our instrumentation allows the patented Lapiplasty procedure to be performed now through a two centimeter incision, using our new SpeedPlate fixation technology. Our Micro-Lapiplasty system is now fully available and throughout Q1, we witnessed a growing number of surgeons utilizing this minimally invasive Lapiplasty approach. We’re excited about the growth opportunity that all these product launches represent. There’s even more expected to come from our robust product development pipeline to deliver a steady cadence of new innovations in the second half of 2024, including many Adductoplasty and our RedPoint patient-specific instrumentation.

We believe both of these technologies will reinforce our market leadership position in the bunion and related midfoot correction space. We look forward to providing additional updates on these platforms as well as other new product innovations as we progress throughout the year. Turning to our guidance. Despite our strong start to the year, with expected growth opportunities stemming from product launches and new innovations I just mentioned, it’s become clear that the market environment and competitive landscape is quickly evolving, and we’ve made the decision to revise guidance for fiscal 2024. We have decided to do this now because we’re seeing increased use and surgeon adoption of MIS osteotomy solutions. At the same time we’re facing even more competition from knockoffs of our Lapiplasty products.

Both of these dynamics are creating incremental headwinds to our Lapiplasty growth. Specific to these knockoff, we fundamentally believe that none of these systems match Lapiplasty’s performance and reproducibility at the surgeon [ph] patient interface, nor are they supported by the strong differentiating clinical data sets that Lapiplasty offers. We also believe some of these competing products are violating our IP. With this backdrop, I’d like to spend the next few minutes reviewing our strategy to expand our offerings and advance our business. While building our leading position in the Lapidus [ph] segment of the bunion market, we’ve simultaneously been pursuing a strategy to advance Treace from a company focused solely on Lapidus and related solutions to a comprehensive bunion solutions company.

Meaning, to implement our strategy to expand our bunion solution portfolio, we plan to launch two innovative 3D MIS osteotomy systems in late 2024 into the metatarsal [ph] osteotomy segment of the market, which accounts for 70% of the overall procedure volume today and into our base of nearly 3,000 surgeon customers. Once launched, our customers who love Lapiplasty but still perform on average over half their bunion cases using metatarsal osteotomy’s will then have a Treace product to address all of their Lapidus and osteotomy bunion cases. Additionally, we expect our MIS osteotomy solutions will afford us the opportunity to appeal to a new group of surgeons, those with a strong bias for using osteotomy approaches for the majority of their bunion patients.

We expect to see the positive benefits of these new MIS innovations starting in the fourth quarter of this year and ramping throughout 2025. I continue to believe we are uniquely positioned to build upon our market-leading Lapiplasty position while leveraging that position to make a significant impact in the large osteotomy segment of the bunion market. First, we are confident in our track record of developing, commercializing and rapidly innovating 3D bunion technologies that achieve broad customer acceptance due to their elegant design, reproducibility and clinical effectiveness. We have proven this with Lapiplasty and we’ve applied this expertise in our instrumented approach to our 3D MIS osteotomy systems mentioned earlier, and we are confident in our ability to provide a strong educational resource for our surgeon customers, as well as educate patients about our innovative therapies.

Again, we have proven this with Lapiplasty, and we will apply this experience with our forthcoming 3D MIS osteotomy platforms. Finally, we’re confident in our bunion focused direct sales team’s ability to deliver these 3D MIS technologies to our base of nearly 3,000 Lapiplasty surgeon users and continue to expand the size of our surgeon customer base over time. We recently trained an initial group of surgeons on one of our new ED MIS osteotomy platforms in anticipation of our upcoming limited market release and a surgeon feedback was overwhelmingly positive. I could not be more excited about the significant opportunity we expect from our new ED MIS osteotomy platforms. At the same time, we continue to focus on expanding our product offerings and the total market we serve to become a comprehensive bunion solutions company.

We are taking decisive actions to mitigate the impact of the competitive challenges as well as our revised growth rates by rightsizing our P&L and reducing costs. In addition, we intend to assert and enforce our IP rights. I am confident in our ability to capture the opportunities ahead of us, innovate for our surgeon customer base and deliver value for our shareholders. I’ll now turn the call over to Mark to review our first quarter financial performance and provide more details about guidance. Mark?

Mark Hair: Thank you, John. Good afternoon, everyone. Revenue for the first quarter of 2024 was $51.1 million, a 21% increase with one less selling day than the prior year. Growth in the first quarter was driven by increased procedure kit volume from our expanding base of surgeons and increased adoption of our newer technologies, all supported by our dedicated direct sales team. As John mentioned, similar to what we saw last year, our seasonally strong fourth quarter extended into the first quarter. This year,, there was more carryover from the fourth quarter into the first quarter than originally anticipated, which was the main driver of upside in the quarter. Gross margin was 80.2% in the first quarter of 2024 compared to 80.9% in the first quarter of 2023.

This decrease was primarily due to a shift in product mix to newer products, partially offset by lower royalty rates. Total operating expenses were $59.9 million in the first quarter of 2024 compared to total operating expenses of $47.9 million in the first quarter of 2023. The increase in operating expenses reflects strategic investments in our expanding direct sales channel, investments in product innovation and support for other corporate initiatives. First quarter net loss was $18.7 million, or $0.30 per share compared to a net loss of $13.5 million or $0.23 per share for the same period in 2023. Adjusted EBITDA loss improved 18% to a loss of $8.3 million in the first quarter of 2024 compared to a loss of $10 million for the same period in 2023.

Cash, cash equivalents, marketable securities and investment receivable totaled $112.1 million as of March 31, 2024. We believe we have a lengthy runway in terms of our current cash level with sufficient balance sheet strength and flexibility to continue effectively executing on our strategic investments and growth initiatives for the foreseeable future. Let me now turn to our full year 2024 guidance. As John discussed earlier, we revised our revenue guidance for full year 2024 and now expect revenues of $201 million to $211 million, down from $220 million to $225 million, representing growth of 7% to 13% compared to full year 2023. We continue to anticipate adjusted EBITDA for the full year 2024 to improve approximately 50% compared to the full year 2023.

Given our revised guidance, we now expect relatively flat year-over-year revenue growth in Q2 and high single digit revenue growth in Q3 and in Q4 versus the prior year. Now before we open up the call for questions, let me turn it back to John for some concluding comments. John?

John Treace: Thanks, Mark. As we wrap up, I want to take a minute to highlight what we believe to be the key takeaways from this call. Looking ahead, Treace’s evolution from a purely Lapidus focused company to a comprehensive bunion solution company is underway and on track. We continue to be relentlessly driven by our mission to advance the standard of care and are innovating to meet demand for certain customers and their patients. I’m confident we have the right team in place to navigate the current market challenges we face, achieve our ambitious goals and ultimately deliver long-term value to our shareholders. With that, now let me turn the call over to the operator to open the line for your questions.

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Q&A Session

Operator: Thank you. At this time we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Robbie Marcus of JPMorgan. Your line is now open.

Unidentified Analyst: Hi. This is actually Lily on for Robbie and thanks for taking the question. Maybe just starting with the competitive dynamics, what changed? And it sounds like for a really long time, you really weren’t seeing any competitive impact at all. And now all of a sudden it’s created this pretty meaningful impact to your momentum. So what happened there? And can you give your or talk about your confidence in your ability to recapture some of that share loss that you’re seeing, especially given you’re going up against several larger ortho players?

John Treace: Hi, Lily. John Treace here. As we talked about competition in the past, you know, what we stated is we know there are more competitors entering the market. We recognize there’s competition, but that we had yet to see anything that was of a significant headwind that would thwart our ability to hit our communicated revenue targets. What we’re communicating here and with this revised guide is that we now are feeling that type of competitive pressure that is creating a headwind. So that’s why we had to make the guide change. We’ve discussed the increased use of MIS osteotomy’s in the marketplace, which we believe we have a great solution for later in this year. And specific to Lapiplasty, we’ve seen competitors become a little more aggressive with getting doctors to trial these alternative products.

And that’s another headwind. Surgeons like to often evaluate new things and there’s just a lot of them out there to try right now. So it’s hard to say how many of these surgeons will try it for a competitive product for a while and then ultimately come back to Lapiplasty and then how many might fully convert and stick with a competitive offering. We’ve seen a lot of these scenarios where surgeons evaluate other systems and they do come back to Lapiplasty, but it definitely creates some headwinds. But fundamentally, we believe that as we get more of our osteotomy MIS sets into the market over time, late this year, along with our other planned launches, this should put us in a much stronger position as we’ll have a comprehensive suite of bunion offerings to bring to our base of nearly 3000 Lapiplasty users who, on average are using osteotomy’s for half or more of their cases.

So I think we’ve got a great plan in place. We’ve got a little bit of a headwind here for the next couple of quarters and we’ll look forward to those launches at the end of the year.

Unidentified Analyst: Got it. That’s helpful. And then maybe just to follow up on that. I appreciate that you’re not breaking out kits and physician count and ASP anymore, but can you talk through which of those pieces is really the driver of the step down? Are you not able to train as many physicians? Is utilization declining? Is it the ancillary products that you’re not able to tack on as much? How should we, qualitatively, I guess, be thinking about all those pieces moving forward? Thank you.

Mark Hair: Hey, Lily, this is Mark. Maybe I’ll take a first shot and then John can add any incremental thoughts. You talked about the growth and what is really driving that growth. It came from two things, as we talked about. It’s coming from incremental kit volume as well as mix. And that mix is involving these new products that John talked about. We have SpeedPlate, which is a premium price product. We have Hammertoe. We have these incremental complementary products, sterile use instruments that are used in the procedures. So it’s really coming. The 21% growth in Q1 really came from both volume as well as mix.

Unidentified Analyst: Oh, sorry. It might have been on you. I was more asking for the full year. So how should we be thinking about how those pieces play into the lower guide, appreciating that you’re not breaking them out specifically, but qualitatively, what’s moving lower in those buckets? Thanks.

Mark Hair: Yes, so that’s a great question. So what we will continue to see is increases in both volume as well as our blended ASP. We’ve been talking last year we saw a lot of uplift in what we refer to as blended ASP, meaning that’s really the mix and our new product launches that are used at the same time as our core Lapiplasty procedures. So we will continue to benefit that from that product mix and new product offerings this year, but we will continue to see volume increases as well. So it’s going to come from both the volume increases and then the incremental products. So what we saw in Q1, maybe not at the same growth rate, but we’re going to see similar growth from both.

Unidentified Analyst: Got it. Thank you.

Operator: One moment for our next question. Thank you. Our next question comes from the line of Richard Newitter of Truist Securities. Your line is now open.

Richard Newitter: Hi. Thanks for taking the questions. Just the first one. It sounds like you’re experiencing stepped up competition from the knockoff bucket on your core Lapiplasty offering. So what just – do we think in the updated outlook, are we just supposed to view it as you continue to see that trialing and that competition getting worse, and then you offset that with some of the continued mix items to some extent from the growing portfolio, and then we buy time until the MIS offerings and osteotomy come. And that’s kind of the call down on the outlook or, you know, I’m just trying to understand what the trend is on the core Lapiplasty competitive situation over the next two to three quarters before you even have, and offering to start to make inroads on the MIS osteotomy piece?

Mark Hair: Yeah, Rich, this is Mark. I think the way you articulated it to begin with is right that we see continued competition from competitors in the Lapidus space that are competing directly with Lapiplasty. We have a tougher comp in Q2, and we have easier comps in Q3 and Q4, and we expect to see some benefit from these new product launches in the back half of this year. So that’s going to help us with, with the growth in the back half.

Richard Newitter: Okay. And then just as we think of the, obviously it’s a slower top line growth trajectory, but it sounds like you’re going to accommodate the P&L accordingly. Can you talk a little bit just about how you plan to manage the P&L? I see that you, your updated EBITDA guidance is relatively unchanged on a, is going to increase 50% year-over-year. How much control do you have over the levers there? And it sounds like you need to step up spending as you’re exiting the year. So just help me reconcile that. Thanks.