Treace Medical Concepts, Inc. (NASDAQ:TMCI) Q3 2023 Earnings Call Transcript

Treace Medical Concepts, Inc. (NASDAQ:TMCI) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Good day and thank you for standing by. Welcome to Treace Medical Concepts Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your first speaker today, Julie Dewey. Please go ahead.

Julie Dewey: Good afternoon, everyone, and welcome to our third quarter 2023 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 third quarter financial results released after the close of market today, after which we’ll 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 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 today and our Form 10-K for the full year 2022, filed on March 8, 2023, 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 thank you for joining us. I’m going to focus my comments today on our third quarter results, the exciting progress of our SpeedPlate implant launch and other growth drivers. Following my comments, Mark will cover the specifics of our Q3 results and guidance. We continue to execute on our strategic plan, resulting in year-to-date U.S. revenue growth of 36% that we believe is significantly above foot-and-ankle peers, encouraging adjusted EBITDA progress, and continued gains across our key operating metrics, reaffirming once again that we have the right strategies in place to expand the market penetration of our differentiated technologies. Before I go into details about the quarter, let’s start with our market summary on where we stand today.

Our disruptive Lapiplasty solution was specifically developed to correct the root cause of the bunion and address a large and underserved market. We’ve identified an estimated addressable $5 billion U.S. market of an estimated 1.1 million annual surgical candidates, of which only 450,000 undergo bunion surgery each year, which we believe is mainly due to limitations associated with current standards of care. We believe our proprietary Lapiplasty system addresses these limitations by surgically correcting all 3 planes of the bunion deformity and securing the unstable joint, thereby addressing the root cause of the bunion. As of third quarter 2023, we’ve penetrated approximately 6.3% of the estimated 450,000 annual surgical bunion corrections in the U.S., up from 5% in the third quarter of 2022 and reflecting approximately 2.6% market penetration of the estimated 1.1 million annual U.S. surgical candidates that constitute our $5 billion-plus total addressable market in the U.S. In addition to the large and underpenetrated market for treating bunions, late in the quarter we also initiated commercialization of several new technologies, including our SpeedPlate fixation platform, Hammertoe system, and our LapiTome and RazorTome sterile instruments.

And later in Q4, we’ll begin commercialization of our Micro-Lapiplasty instrumentation. All these new technologies are expected to meaningfully expand our addressable market opportunity and to include additional procedures that complement our proprietary Lapiplasty and Adductoplasty procedures and fuel strong growth for years to come without diluting our focus. We’re particularly excited about the opportunity for our SpeedPlate fixation platform. I’ll cover SpeedPlate in more detail later in my remarks, but this is an exciting launch for our company. In fact, I believe this is one of the most important launches to date for Treace. These new product introductions are expected to begin contributing to our growth profile this quarter, with a more meaningful contribution expected in 2024 and beyond.

Turning now to our Q3 results. Revenue in the third quarter was $40.8 million and grew 23% over prior year and was impacted by prioritized travel and vacations for our patient demographic, which led to lower-than-anticipated demand for our Lapiplasty procedure during the quarter. You’ll also recall that we grew 53% in Q3 of last year and with 1 less selling day this year, this makes for a tough comp. We continued to advance our key performance metrics in the third quarter, including substantial gains in the number of new surgeon users, ending Q3 with 2,691 active surgeon users, up 110 for the quarter and up 21% year over year; a year-over-year increase in trailing 12-month surgeon utilization with an average of 10.6 kits per active surgeon in Q3, up from 10.1 kits a year ago; and record blended average selling price of $6,311 per Lapiplasty kits sold in the quarter, up 9% over prior year and driven by continued market adoption of our S4A Lapiplasty plates, Adductoplasty, and our other problem-solving complementary products such as our SpeedRelease and TriTome sterile instruments.

We also saw some fairly early impact from SpeedPlate in our 2 new sterile use osteotomes in the quarter. Our strategic investments and commercial focus have continued to support the growth of our business, giving us confidence that we have a well-defined, proven and scalable commercial strategy. We are updating our full-year 2023 revenue guidance to $182 million to $186 million, which at the midpoint reflects an increase of 30% over 2022 revenue. There are 2 main reasons that are driving this guidance change: first, our year-to-date surgeon count is lower than anticipated due to prioritized travel and vacations from our patient demographic that started in the second quarter and continued through most of the third quarter. As a reminder, we typically see a large step-up in Q4 bunion procedures which concentrate heavily at year-end, primarily due to insurance deductibles being met.

Second, we also made the strategic decision to further refine our SpeedPlate platform, extending our timeline to achieve full commercial supply until the first quarter of 2024. This decision has enabled us to make a generation 2 SpeedPlate technology which is more broadly applicable across a greater range of clinical applications, which we believe will expand our footprint in the foot-and-ankle market. Shifting to our commercial and market development activities. As we previously discussed, we have continued our targeted investments in 2023 with the goal of increasing our market penetration by expanding the footprint and coverage of our bunion-focused direct sales channel, advancing our patient awareness DTC initiatives, and driving more targeted R&D innovations into the market.

We have a highly-specialized team at Treace, including a rapidly growing direct sales force, one that’s 100% focused on bunion and related midfoot surgery, the only such organization that we’re aware of in the U.S. MedTech industry. We believe this has contributed meaningfully to our revenue and market penetration over the past years. In the third quarter, 81% of our revenue was generated by our direct sales force, up from 74% in the same period last year. We continue to see increasing productivity from our direct reps that we added during 2022, and as we’ve discussed in the past, our historical data demonstrates that our direct reps typically scale with significant revenue and cost leverage achieved within 24 months, primarily because they’re exclusively focused on our expanding offering of technologies and fully utilize our suite of corporate resources and programs.

Further, over the past 1.5 year, we have aggressively invested in our direct sales channel. As of our last earnings call, we achieved our full year target of having 200 quota-carrying direct reps in the end of Q2, which was much earlier than originally planned. We continue to hire more additional reps to ensure that we’re prudently balancing growth and delivering modest improvements in expense leverage, all while increasing revenues from our direct sales channel. Demand for our introductory and advanced surgeon education and training programs, both online and in person, remains robust, and we look forward to executing additional training sessions that we have slated in Q4. These programs play a key role in effective onboarding of new surgeon users through introductory Lapiplasty courses and also, importantly, introducing them to our complementary procedures and technology through our advanced training courses.

By doing this, we are becoming a broader solution provider to our surgeon customers and expanding our footprint in the foot-and-ankle market. We’re encouraged to see continuing growth in our active surgeon base with 2,691 active surgeons in Q3, which is up 21% from the prior year period. Notably, new surgeon additions ramped up substantially in September, which matched the company’s all-time record for the highest number of monthly surgeon adds. As our surgeon base continues to develop and gains tenure, we anticipate utilization gains with increased use of our Lapiplasty and Adductoplasty systems, as well as further adoption of our growing portfolio of complementary products, all supported by our expanding direct sales channel, differentiating clinical datasets, and patient awareness DTC initiatives.

Now I’d like to turn to our new SpeedPlate fixation platform. During September, we announced that we received FDA 510(k) clearance for our second-generation anatomic SpeedPlate design and initiated our early launch activities. Again, our SpeedPlate fixation technology is designed for rapid surgical insertion while providing both stabilization and dynamic compression of the [prepared] joint surfaces during healing. Early feedback on our gen-2 SpeedPlate design has been overwhelmingly positive with users, highlighting the speed of application and the dynamic bone compression as well as broad versatility across Lapiplasty, Adductoplasty, as well as many other common procedures involving stabilization and fusion of the bones in the foot. We believe this technology is now allowing us to attract a new audience of surgeons, those that prefer nitinol staples, which provide dynamic compression of the fusion site.

I can’t overemphasize how important this launch is for our company and the favorable reception that SpeedPlate has already garnered from surgeon users. In fact, we’ve had many surgeons tell us that the SpeedPlate implant is, “the biggest thing from Treace since Lapiplasty” and a “total gamechanger.” We expect the SpeedPlate launch to begin supporting our growth in Q4 and to continue to accelerate through 2024 and beyond. We believe our SpeedPlate platform has the ability to set the standard for fixation in bunion and midfoot corrections and over time achieve broad adoption across many other common bone fusion procedures in the foot-and-ankle. We look forward to bringing this exciting technology to many more surgeons and their patients in the months ahead.

Next our Micro-Lapiplasty system. This is an advanced instrumentation option designed to further reduce both the incision size and related tissue dissection with the Lapiplasty procedure. This exciting evolution of our instrumentation allows the patented Lapiplasty procedure to be performed now through a 2-centimeter incision. We anticipate the launch of our Micro-Lapiplasty instrumentation to begin late in the fourth quarter and will continue to build during the first half of 2024. We’re excited about the potential benefits this Micro-Lapiplasty and SpeedPlate combination could bring to patients. As with any procedure that involves smaller incisions and less tissue dissection and trauma, we believe this could translate to even faster recovery with less pain and less swelling.

We also initiated the launch of our new Hammertoe Fixation System. This is a sterile pack procedure kit that expands our reach into the high-volume hammertoe correction space. With no prior such offering in our portfolio and approximately 700,000 U.S. procedures per year, we believe this launch positions us positively for additional blended ASP growth, surgeon utilization expansion, and continued above-peer revenue growth. Though still early in our limited launch, surgeons who have had the opportunity to use it clinically have commented on its ease of use and have expressed a clear willingness to adopt our implant in their Treace cases. We estimate that approximately 30% of all bunion procedures involve simultaneous hammertoe correction, which is why we believe this represents an important addition to our portfolio that will support continued compelling revenue growth over time.

While we’re very excited about the growth opportunity that all of these product launches represent, there’s even more to come from our robust product development pipeline. In fact, inclusive of the launches I’ve just discussed, we have 10 new innovation launches slated for over the next 12 months. We’ll provide additional updates on our new product innovations as we continue to develop our pipeline centered around our core technologies and IP aimed at improving surgeon user experience, patient outcomes, and supporting continued market penetration. In closing, we’ve made encouraging progress in the third quarter with solid execution from our talented team of employees. We’re at the beginning of what we believe will be a strong cadence of new product launches, as well as cause for real excitement with our new SpeedPlate platform and our other emerging growth drivers still to come in 2024.

With accelerating additions to our surgeon base, increasing productivity of our direct sales channel, and several new technologies that are already starting to make a positive impact on customer demand, I’m confident that we have the right strategy in place to outpace our competitors, drive continued market penetration, and deliver strong top line growth for the remainder of this year and beyond. With that, I’ll now turn the call over to Mark to review our financial performance. Mark?

Mark Hair: Thank you, John. Good afternoon, everyone. Revenue for the first 9 months of 2023 was $124.9 million, representing 36% growth over prior year. Third quarter revenue was $40.8 million, a 23% increase compared to prior year. Growth in the third quarter was driven by increases in procedure volumes and increases in blended average selling price. In addition to the tough comp from last year that John mentioned, this quarter included 1 less selling day than Q3 2022. We sold 6,459 Lapiplasty procedure kits in the third quarter, a 13% increase compared to the same quarter last year, and was impacted by prioritized travel and vacations for our patient demographic, which led to lower-than-anticipated demand for our Lapiplasty procedure in the quarter.

Blended average selling price in the third quarter was a record $6,311, up 9% over the third quarter of 2022. This blended average selling price is driven by Lapiplasty and the additional contribution from our expanding portfolio of complementary products, such as our Adductoplasty system, sterile single-use instruments, and some very early impact from SpeedPlate and Hammertoe, as our direct sales channel continues to increase their procedure access across our surgeon customers. Gross margin was 80.4% in the third quarter of 2023 compared to 81.6% in the third quarter of 2022. The 120 basis point decrease was primarily due to changes in product mix, an increase in inventory provisions, and an increase in overhead due to headcount to support the growing business partially offset by lower royalty rates.

Total operating expenses were $50.6 million in the third quarter of 2023 compared to total operating expenses of $38.3 million in the third quarter of 2022. The increase in operating expenses reflect strategic investments in our expanding direct sales channel, investments in product innovation, increased capacity requirements, as well as support for other commercial initiatives. Third quarter net loss was $17.5 million, or $0.28 per share, compared to a net loss of $12.1 million, or $0.22 per share, for the same period of 2022. Adjusted EBITDA was a loss of $9.2 million in the third quarter of 2023 compared to a loss of $8.6 million for the same period in 2022. Cash, cash equivalents, marketable securities, and investment receivable totaled $128.2 million as of September 30, 2023.

Our total available access to liquidity, including our debt facility, is approximately $214 million. We believe we have a lengthy runway in terms of our current cash level with sufficient balance sheet strength and flexibility to continue aggressively executing on our strategic investments and growth initiatives, as well as a clear pathway to achieve positive adjusted EBITDA. Before concluding, let me turn to our outlook for full year 2023. We are updating our full year 2023 revenue guidance to $182 million to $186 million, which at the midpoint reflects an increase of 30% compared to 2022 revenue. With less than 2 months remaining in the year, this is realistically where we expect the year to land and feel comfortable at the midpoint of the range.

As John mentioned, this guidance reflects our year-to-date surgeon count and our extended timeline to achieve full commercial supply of our gen-2 SpeedPlate technology in Q1 of 2024, both of which are expected to affect our revenue as we enter the fourth quarter, which is historically our highest volume quarter for bunion surgery. Also keep in mind that this year the fourth quarter has 1 less selling day, and specifically the month of December, which is typically when we generate our highest average daily sales of the year, has 2 less selling days. Moving to the rest of the P&L. We are starting to see leverage down the P&L and expect R&D and G&A expenses in Q4 to be roughly in line with Q3 and expect positive adjusted EBITDA in the fourth quarter of 2023.

For the full year 2023, we continue to expect to show modest improvements in adjusted EBITDA compared to 2022. One final item. I’d like to provide some directional comments on 2024. As is our normal mode of operation, we will provide formal 2024 guidance on our Q4 call. However, I wanted to provide you with some thoughts to keep in mind as you begin to develop your 2024 models. Overall, we expect our expanding commercial capabilities, continued adoption of Lapiplasty, and multiple new product launches will drive strong growth while we also advance our pipeline opportunities. We believe our product portfolio, differentiated and protected technologies, and focused salesforce provide us with the advantages that will enable us to grow significantly faster than market and our foot-and-ankle peers for multiple years.

As we look specifically to 2024, we expect to benefit from a positive contribution from a full year of recent new product launches, including SpeedPlate, Micro-Lapiplasty, and Hammertoe, continued market adoption of the Adductoplasty technology, as well as increased contribution from the sales rep additions that were made throughout 2023. In addition, in the back half of 2024, we anticipate adding preoperative planning and patient-specific instrumentation from our acquisition of RedPoint Medical. We also look forward to launching a significant new product platform that we believe will expand our market opportunity, accelerate our penetration, and further advance our leadership position in the bunion market. We believe both opportunities will complement our business strategy and bolster our multiyear growth plans without losing focus on our core bunion and related midfoot procedure growth.

Our blended ASP has historically grown mid-single digits and given ongoing surgeon adoption of Lapiplasty, complementary products and procedures, and future pipeline opportunities, we expect this trend to persist. With regard to new surgeon additions, we believe adding approximately 250 to 300 active surgeons annually is a reasonable baseline over the next few years, with utilization increases expected to drive higher procedure penetration and the tightening sales rep to surgeon ratio should support increased case coverage and adoption. These new surgeon additions and training our large active surgeon base on new procedures is expected to expand utilization and drive blended ASP increases. We expect elective orthopedic procedure seasonality trends for next year to include the typical seasonal stepdown in revenue from Q4 to Q1 and a softer Q3, followed by seasonally strong Q4, which is historically the largest revenue quarter of the year.

Turning to the middle of the P&L. We expect operating leverage to continue to improve in coming quarters with potential for adjusted EBITDA breakeven for full year 2024 and positive cash flow in 2025. We will be able to provide more information on our Q4 earnings call. In closing, we made good progress in the third quarter and remain on track to drive strong growth and scale profitability in our business in the years ahead. We believe we are in a great position strategically with best-in-class bunion, midfoot, and related complementary technologies, and expanding TAM with the addition of new technologies such as Adductoplasty, Hammertoe, and SpeedPlate, and more innovation to follow. Backed by differentiated clinical data and a strong, focused commercial organization, we look forward to aggressively attacking these significant opportunities to drive the performance of the business the rest of the year and believe we have all the elements in place for a successful 2024.

With that, let me turn the call over to the operator to open the line for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Danielle Antalffy with UBS.

Danielle Antalffy : Happy to be back covering Treace. So I guess my first question is on the guidance cut by $10 million at the midpoint. And I was just wondering, Mark, if you could give any color on what’s the impact of the fewer surgeons versus how you were thinking about it entering the year versus delay in SpeedPlate versus the patient travel that you called out. Is there any way to quantify what each of those components make up of the $10 million?

Mark Hair: Danielle, it’s good to hear your voice again. We’ve talked about in the prepared remarks, both of those elements had an impact in Q3, and both of those will have an impact into Q4. So we’re not providing specific detail on which and how much that was in Q3 and Q4. But candidly, we were surprised by that summer seasonality. It was more pronounced than we had expected, and it’s why the case volumes were down in Q3 and why the surgeon adds were down in Q2 and Q3 as well.

Danielle Antalffy : And then maybe my second question, or not maybe, my second question is actually on that point and the summer seasonality. Is there a way to give us the investor community comfort on the rebound and you modeling 45% sequential growth in Q4? I appreciate the seasonality normally, but this was a more meaningful seasonal impact from Q — like in the summer. So what gives you the confidence that the rebound is coming in Q4? Is there something in your conversations with your treating surgeons that you could point to? I guess just how do you build that level of confidence that there’s not something else going on here?

Mark Hair: Yes. Great question, Danielle. So I think there’s a couple of things. First of all, September, the first month post summer, John mentioned that we had a record for our highest surgeon adds. And so we wanted to be thoughtful as we’re thinking about Q4. But we’ve seen that strength in September, and we’ve had continued strength into October as well. When you think about the fundamentals of our business, they really remain strong. And we’ve had really nice continued advancements in a lot of our key metrics. So it doesn’t seem like that is at all an issue. It’s really a strength as we go into Q4. This step up that we have in Q4 is really consistent with prior years. Q4 has always been our highest revenue quarter every year.

And so we also have accelerating additions to our surgeon base, increasing productivity of our direct sales channel, and several new technologies that are already starting to make a positive impact. So with all that in mind, we considered our new updated guidance very appropriate, and we believe we have accounted for all the puts and takes that are coming into Q4. So we feel really comfortable at the end point of that range.

John Treace: Danielle, it’s John. I just wanted to add a little bit on top of that. We’ve gone through this 8 years now of concentrated procedures in Q4 and significant step-ups. I can tell you as we sit here today, halfway through what we refer to as bunion season each year, it feels right and we’re glad to see it again.

Operator: Our next question comes from the line of Robbie Marcus with JP Morgan.

Lilia-Celine Lozada: This is actually Lili on for Robbie. So the 250 to 300 new surgeon adds is a lot lower than what we were thinking for next year and lower than what you’ve done in the past. So are you expecting that same seasonality with doc adds to continue into next year? And if doc adds are going to be a lot lower, I would think that would imply a big step-up in utilization. So what’s giving you that confidence to see that step-up next year?

John Treace: Lily, it’s John. The 250 to 300, we think that’s a reasonable level. The past couple of years, if you go back, we added 500 2 years ago, 600 a year ago, both of those years we more than doubled the size of our salesforce, creating a lot of surgeon contact, we grabbed a lot of low-hanging fruit, and we’re very thankful for that. We’ve got a lot of loyal customers now because of that. This year, we expanded the salesforce size by about 20%, and we continue to add docs at a pretty nice pace here. As with any market, the larger the customer base you try to get, you get the low-hanging fruit and then you have to climb up higher in the tree and reach for that tougher-to-get fruit. And that’s what we’re doing here. One of the pieces that gives us confidence is we’re still continuing to build the customer base at a really nice level through this year, despite not as large of a sales rep increase.

The other thing we’re doing is we found that we need to be able to appeal to a broader range of surgeons, and SpeedPlate plays a very important role in that. There’s a whole group of surgeons out there that have not come to Lapiplasty, not come to Adductoplasty, because they believe in a different fixation philosophy, compression nitinol staples specifically. SpeedPlate gives us an avenue into some of those docs that we’ve never had before. And frankly, to the record new surgeon counts we added in September, SpeedPlate did play a role, even though it was out in limited supply in bringing on some of those new docs. So for a lot of reasons, we’re really confident in our ability to continue to add new surgeons. It’s just that it may not be at the blistering pace that it was in the days where we were more than doubling our sales channel.

Lilia-Celine Lozada: Can you just talk a little bit more about the decision to push out the full launch of SpeedPlate? Is that a supply challenge, regulatory, or is it really just to focus on getting that second-generation product ready?

John Treace: Lily, yes, that’s really the thing. We got out there in our limited market release, had several doctors using it, and very quickly identified things through their feedback and through our observations that we could do that would make this product more broadly appealing to a larger range of surgeons and also be able to treat a larger number of foot-and-ankle conditions, not just Lapiplasty and Adductoplasty procedures. So we found that opportunity so attractive that we did extend our timeline, we incorporated these adjustments, worked with our vendors, filed a new 510(k) with the FDA. It cost us a little time, but I think we stand by that decision. It was the right call. We saw the opportunity to make a really great product awesome and we took it. And we will be very excited and glad that we did that as we enter 2024.