AxoGen, Inc. (AXGN) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and thank you, for standing by. Welcome to the AxoGen Incorporated First Quarter 2021 Financial Results Conference Call . Please note this conference is being recorded. I will now turn the conference over to your host, Peter Mariani, Executive Vice President and Chief Financial Officer for AxoGen. Thank you. You may begin.
Peter Mariani: Thank you and good afternoon, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman and Chief Executive Officer and President. Karen will begin today's call with an overview of our first quarter performance, update on our operational highlights and review our reinitiated financial guidance. I will then provide an analysis of our financial performance followed by closing remarks from Karen and a question-and-answer session. Today's call is being broadcast live via webcast, which is available on the Investors section of AxoGen's Web site.
Karen Zaderej: Thank you, Pete and good afternoon everyone. Our total revenue for the first quarter was $31 million, representing growth of 28% compared to the prior year. I'm pleased with our Q1 results, which continue to demonstrate our team's ability to execute our strategy despite ongoing COVID-19 challenges. The incidence of trauma and surgical procedures continue to be negatively impacted by new COVID resurgences. They began in late 2020 and continued into the first quarter. Additionally, the severe winter storms across the country in mid-February, further impacted the incidence of procedures. However, procedure volumes quickly recovered through March, resulting in increasing demand for our products. Our revenue volume and growth in the quarter continued to be driven by the repair of traumatic nerve injuries and by the use of Avance Nerve Graft across our nerve repair applications with more than 50,000 Avance implants since launch and 136 peer reviewed clinical publications featuring Avance. Surgeon adoption of our flagship product continues to lead our growth as surgeons adopt the AxoGen algorithm using our portfolio of nerve repair products. In the first quarter, our commercial team remains focused on our strategy of driving deeper penetration of existing accounts and surgeons and hospitals continue to place a high priority on nerve repair procedures with AxoGen products. Throughout the pandemic and despite access restrictions and limited surgical schedules, we've been able to effectively support our customers and remain close to surgeons as they continue their path of adoption. We believe that these efforts have positioned the business for improving growth as the incidence of trauma returns to normal levels, which we expect to occur over the course of the year with the continued roll out of vaccines and a gradual return to more normal activity levels across the country. We're pleased with the continued growth of our application for the surgical treatment of pain.
Peter Mariani: Thank you, Karen. First quarter revenue increased 28% to $31 million. Our revenue increase for the quarter was the result from a 22% increase in unit volume and a 6% net benefit from changes in pricing and product mix. The growth in volume was primarily attributable growth in our active in core accounts and also reflects the initial impact of the COVID- 19 pandemic, which began to negatively impact procedure volumes and revenue in March of 2020. Gross profit for the first quarter increased 33% to $25.9 million compared to $19.4 million in Q1 of 2020. Gross margin was 83.3% for the quarter compared to 80.1% for the prior year first quarter. Prior year gross margin was negatively impacted by lower revenue and additional inventory reserves resulting from the impact of COVID- 19. In the current year, we have continued to ramp our tissue processing capacity across the quarter and increased inventory by nearly $1 million compared to the end of the year. Total operating expense in the first quarter increased 15% to $32.1 million compared to $28 million in the prior year. Total operating expenses in the first quarter included $2.6 million in non-cash stock compensation, compared to $600,000 in the prior year. Prior year stock compensation included a credit of $1.7 million, primarily reflecting lower estimates on performance stock awards. Additionally, the increase over prior year includes incremental investment in our R&D programs, increased compensation, costs associated with our new Tampa office and lab and litigation charges, partially offset by decreases in travel, in-person conferences and surgeon education programs due to the COVID -19 related restrictions in the current year. Sales and marketing expense in the first quarter increased 1% to $18 million compared to $17.8 million in the prior year. As a percent of total revenue, sales and marketing expense decreased to 58% for the three months ended March 31 compared to 74% in the prior year. Research and development spending in the first quarter increased 25% to $5.7 million compared to $4.6 million in the prior year. Research and development costs include product development, including the non-clinical expenses in support of our BLA for Avance Nerve Graft and expenses for clinical research. Product development expenses represented approximately 66% of total R&D in the first quarter compared to 50% in the prior year, while clinical expenses represented the remaining 34% in Q1 compared to 50% in the prior year. The increase in product development expenses reflect increased spending and specific programs, including the BLA for Avance Nerve Graft and the next generation Avance product. Additionally pandemic related restrictions lowered spending on certain clinical study programs beginning in March of 2020. In the first quarter of '21, we reinitiated activities on our Sensation NOW and Rethink Pain registries and we expect that these and other clinical activities will continue to increase across the coming quarters. As a percentage of total revenue, research and development expenses were 18% in the first quarter compared to 19% in the prior year. General and administrative expense in the first quarter increased 52% to $8.4 million or 27% of revenue compared to $5.5 million or 23% revenue in the prior year. The prior-year quarter included $1.8 million of lower non-cash stock compensation primarily related to lower estimates for performance stock units. Additionally, current year general and administrative expenses include litigation charges of approximately $800,000. Adjusting for both these items, G&A expense in the first quarter would have increased approximately 4% to $7.6 million and represented approximately 25% of revenue. Adjusted net loss and net loss per share in Q1 of '21 was 3.1 and $0.08 per share compared to adjusted net loss and loss per share in the prior year of 7.6 and $0.19 per share. Adjusted EBITDA loss in the quarter was $1.9 million compared to an adjusted EBITDA loss of $7.6 million in the prior year. The reconciliation of these non-GAAP financial measures to GAAP can be found in today's earnings release and on our website. The balance of cash, cash equivalents and investments on March 31 was $97.2 million compared to a balance of $110.8 million on December 31 of 20. The $13.6 million change in cash in the quarter included $2.9 million of capital expenditures related to our new facilities in Dayton and Tampa and approximately $9.2 million related to items which typically occur in the first quarter of each year including payment of the 2020 all-employee performance bonus, annual sales awards and related costs and our annual sales meeting. As we noted on our last quarterly call, we resumed construction of our Dayton biologics processing center in January of '21. We anticipate completion of construction later this year, followed by a one-year validation process and expect to convert production to the new center in late '22. We continue to anticipate total capital expenditures of approximately $26 million for this facility in 2021. Additionally, we expect to continue to ramp in investment into projects that were placed on hold for the majority of 2020, including certain clinical trials, product development programs and marketing, and administrative initiatives, all of which are key to driving our long-term growth goals. As a result, we anticipate that operating expenses will increase sequentially and that we will continue to see moderate operating cash burn throughout 2021. Before I turn the call back over to Karen, I wanted to review the regulatory status of our Avive soft tissue membrane. The FDA has previously issued guidance on the regulatory considerations for human cells, tissues and cellular and tissue-based products with enforcement discretion through May 31 of 2021 for relevant products. We are currently in discussions with the FDA to confirm the regulatory classification of Avive soft tissue membrane as a tissue product. These discussions apply only to Avive, which represents approximately 5% of our revenue and have no impact on any other AxoGen products including Avance Nerve Graft, which was granted enforcement discretion by the FDA in 2010, received RMAT designation in 2018 and for which we plan to submit a Biologics License Application in 2023. Additionally, we wanted to note that our existing shelf registration will be expiring on May 7, and we will be filing an updated shelf registration with the SEC, along with the filing of our first quarter 10-Q. This is purely a matter of corporate housekeeping and we have no further plans to raise equity under this new shelf. And we are encouraged by the trends we see in the business and the broader healthcare arena and we remain confident in our ability to drive sustained, meaningful revenue growth as the environment continues to normalize across the second half of the year. We also remain extremely bullish about the long-term growth prospects of our business given the significant underpenetrated growth opportunity and our team's improved commercial execution and our continued investment in an expanding clinical portfolio. And with that, I'd like to hand the call back over to Karen.
Karen Zaderej: Thanks, Pete. I'm proud of the achievements of the entire AxoGen team as we continue to meet the challenges we faced during this quarter. We remain committed to delivering our innovative nerve repair solutions to pay patients, surgeons and hospitals, and I believe we're well positioned for success throughout the rest of 2021 and beyond. At this point, I'd like to open up the line for questions. David?
Operator: Thank you. At this time we will be conducting a question-and-answer session. Our first question is from Richard Newitter with SVB Leerink.
Jaime Morgan: I guess the third off just on the guidance, and thank you for reinstating that and kind of giving us a target to look at. How are you guys thinking about the timing of a return to more normalized level across the different market segments? And then just relative to the guidance, how should we be thinking about the different factors across these segments and what's contemplated in that range?
Karen Zaderej: So if you look at, and I know you guys and for everybody else on the line. Historically, if you look at our biggest segment which is extremity trauma, we see a seasonal impact and a step-up between Q1 and Q2 because of actually just increased activity of people, summer activities leading to an increase in traumatic injuries. We think that as the vaccines expand as people have more confidence to engage in that activity, we'll see that ramp up. It won't be, we believe that the step-up that we've seen in the past, but there still should be a nice ramp through the year really based on overall activity. The other segments are a little different. Obviously there were seasonal, not related to the incidence of trauma and breast reconstruction that is going to really be dependent on again centers opening up surgical schedules. We still have a number of centers that have a reduced surgical schedule for certain procedures including breast reconstruction. We see those as opening up. They are starting to open up now, but it's going to be as gradual process certainly through the summer time period. We also know that there was decreased diagnosis that was done in the last year where patients just sees, I didn't have a mammogram, so they weren't diagnosed with cancer. So there is a sort of air pocket in the flow of patients that we expect by the end of the year will be righted, but at this point we still see some interruptions in patient flow so increasing through the year, but definitely not back to normal yet and surgical treatment of pain, that's actually growing nicely. We're actually pretty pleased that we're seeing our current surgeon customers beginning to expand and bring in these patients so they can help with that neuroma where they cut out the neuroma and then they need to repair the nerve and advance the tools that they have used in that repair and so we've seen some nice increases in that -- again it's a very small segment because we've just launched actually the beginning of last year, but we're seeing some nice growth there and expect that to continue to expand through the year. All I'm asking is the piece that's actually been the most challenging for us and we think that's going to remain dampens through March of this year, although getting better as we go along.
Jaime Morgan: And then I appreciate that you guys are now introducing this new metric of core account. Can you just talk a little bit about the growth trend that you saw in core account over 2020 and what strategies you're focused on in '21 to not only increase the number of core count but also drive up the revenue mix versus the 60% that you saw in the quarter.
Karen Zaderej: So go back to why we introduced the core accounts, we've always had this measure of active accounts, but active accounts are really just a place we're beginning to sell and the threshold was so low that it wasn't really representative of what we saw -- they inform where we're seeing some real growth and repeat usage and so the core account sets a higher threshold. Our strategy has been and continues to be to drive deeper penetration in existing accounts -- first with the existing surgeons and then expanding to additional surgeons at those same accounts. And so we see nice opportunity to continue to build these core accounts in the sizable accounts, our largest core accounts exceed $1 million today and we want to continue to grow these core accounts as they go from the floor of $100,000 up to something higher. So it is both about with the dollar amount per core account as well as increasing the number of core accounts and that's what really drives all of the work we're doing also in rep productivity, because those two things are really tightly related.
Operator: Our next question is from Brandon Folkes with Cantor Fitzgerald.
Brandon Folkes: Congratulations on maybe good quarter and maybe just on gross margin, it's been very good for the last three quarters the granted -- the guidance I saw that. But how do we think about sort of gross margin. Maybe one for the remainder of the year, just any sort of lumpiness or should we expect this to improve. And then maybe just longer term. And then I just going back to this core accounts and following on core accounts we have been following on from the prior question. Any way you can conceptualized in terms of how many of your active accounts you believe you can get into this core account category and then maybe just the focus, is it going to be growing core accounts versus growing revenue within core count. Obviously, you mentioned some of your larger accounts to $18 million. So just, anything to set the expectation from quarter to quarter, should we be focusing a lot on percentage of revenue here versus the actual number of accounts.
Peter Mariani: Why don't I take the gross margin question first. I mean in first, just as a reminder, everyone. It's been a while since we've given guidance and we have historically given guidance that says that our gross margins will continue to be above 80% even though we've been running sort of normalized in the 83% to 84% range, that's just our way of looking at it. We think having gross margins above 80% is outstanding and we believe that will continue to run above 80% and then specifically to this quarter, I think in the 83% to 84% range has been normal for us and I think as we have gotten our processing center back up to full speed that we're getting back to that utilization level that allows us to run the gross margins at this level. And so I wouldn't suggest that it could be within the range a bit. I wouldn't expect significant increases from this and I certainly wouldn't expect significant decreases from that normalized range now that we're at this level of production. And then the core counts.
Karen Zaderej: So in terms of our strategic intent, what we're looking at with both core and active accounts, Think of these as the priority order that our sales team is working. Is that their first working with our existing users to increase their penetration across their algorithm that their first and highest priority by definition that predominantly means they're going to be focused on existing accounts and increasing the dollars per account, but we do know that surgeons may practice at multiple centers, and in that same work that we're increasing that surgeons usage may cause us to add more active accounts because that surgeon may also practice down the road at another hospital where we hadn't historically been in place. And the second priority is to add in new surgeons or expand surgeons at those same centers. And then the third priority is starting up from scratch and centers that we don't have a current users. So all of those are dimensions of growth, but there is a very clear priority in the sales direction of first and foremost grow our existing users.
Operator: Our next question is from David Turkaly with JMP Securities.
David Turkaly: Pete, maybe one for you. You mentioned rep productivity and great to see guidance out there again and I'm just curious, given that the length of time, you guys have been added in some of the trends you've probably seen, do you feel like your visibility is greater today than it was say in prior years? It seems like the performance has been remarkably consistent and better side. Still going to color you'd like to provide around sort of how that visibility is today, maybe it's better than it was in the past? Any thoughts on that front?
Peter Mariani: Yes, I think -- I appreciate the question. And yes, I think we do have better visibility or improving visibility in the sales rep productivity ramp. Remember last year was a point in time when we weren't expanding -- obviously we weren't expanding reps very much. Our reps were focused in their territories for long periods of time, and we were able to connect with the surgeons and remain with them as they continue on their journey of adoption. And I think that's proven beneficial to us on a lot of levels, and it helps us think through what is the appropriate pace at which we might expand reps and when we do think about splitting territories and expanded reps that we do so in a very deliberate fashion that allows us to maintain the connectivity between rep and surgeon and continue to not only grow the top line revenue but do so with increasing overall productivity.
David Turkaly: I mean like looking at the level, it's certainly above where the Street's at so that that's great, maybe as a follow-up to 6% mix and price. Just love to get any color there price evenly spread out maybe across Avance and AxoGuard and I was wondering the mix guard.
Peter Mariani: The 4% of that 6% is price and we are -- we've been successful this year, last year, over the last several years of taking moderate price increases across the product line and we continue to do that, this year's price increase was effective April 1, but we've got, this is the annualized impact of last year's increase coming through, but the additional 2% of mix is actually a reflection of increasing mix of Avance and the overall revenue results. We traditionally said that Avance has been slightly more than 50% of revenue, which is true, but this quarter we have moved that up a few more percentage points in that came through in the mix calculation.
David Turkaly: And then thank you for that. One last one, I think you mentioned an AxoGen advanced product. You may now going to talk about it, but I'd certainly love to know when we might hear more about that or any details you could share.
Karen Zaderej: Yes, we don't have any details at this point, Dave that we can share other than we're excited to continue to look to the future and see opportunities to continue to improve our flagship product.
Operator: Our next question is from Anthony Petrone with Jefferies.
Anthony Petrone: Just hopping between calls here. The first would be on breast neurotization, apologies we're hopping amongst calls. So if any of these are asked, I apologize. On breast neurotization question there, just on backlog, how substantial can that be in terms of a turnaround, once we sort of evolve into the vaccine cycle. So the first question again will be breast neurotization backlog and then on the new key account focus and we think about a champion on the event side, sort of using most of the -- using events across the majority of their procedures and there being at least one surgeon in that site. When you think of an existing in that site, already, how easily scalable is that two additional surgeons within those sites.
Karen Zaderej: Yes, so on breast neurotization, we don't see that there is a sizable backlog net-net, with the air pockets that I talked about that you're going to see a big bubble here, so I wouldn't model and that there is a nice reserving that we're heading into. We think that most of the centers have been able to recover again, about a third of our centers do still continue to have delays, but most have recovered and are back on a reasonable flow and with the air pockets of patient flow that's intermittently picking these centers and impacting them. We think that a little bit of reserve that you have from the third that are shut down or may offset -- are going to offset that backlog. In terms of how easy is it to get surgeons at these centers to continue to adapt, we've not seen a change in the adoption process in nerve repair. The adoption process in nerve repair remain slow and a lot of it is gated by getting surgeon seeing clinical results in each type of nerve repair they do from their own hands. So they want to see the data that we have and then they want to replicate it with their own hands, in their own patients and so what we have seen is historically a surgeon will do a handful of cases and then pause and wait to see results from those first subjects they start with the digital nerve injury. Digital nerve injuries typically take six months before they're going to get results back, so they do three to six cases, they will wait, they'll see those patients back in that 6-month time period and say, hey, this worked and then they will continue to adopt and add maybe the next types of injuries. So that pattern remains the same. And so, while I think we have a good understanding of the pattern and a good method to be able to continue to add those surgeons adoption. It's not quick.
Operator: Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Karen Zaderej for closing remarks.
Karen Zaderej: Thank you, David. I want to thank everyone for joining us on today's call. We look forward to speaking with many of you virtually at the Canaccord Genuity Musculoskeletal Conference on May 20, the Jefferies Virtual Healthcare Conference on June 2 and the JMP Securities Life Sciences Conference on June 16. Thank you.
Operator: This concludes today's conference. Thanks you for your participation. You may disconnect your lines at this time.
