Aziyo Biologics, Inc. (AZYO) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to the Aziyo Biologics Q1 2021 Earnings Call. My name is Ajen and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. . I'll now turn the call over to Leigh Salvo, Investor Relations. Leigh, you may begin.
Leigh Salvo: Thank you. And thank you all for participating in today's call. Joining me are Ron Lloyd, Chief Executive Officer, and Matt Ferguson, Chief Financial Officer. Earlier today, Aziyo released financial results for the first quarter ended March 31, 2021. A copy of the press release is available on the company's website.
Ronald Lloyd: Thanks, Leigh. Good afternoon, everyone. And thank you for joining us. We were very pleased to see the momentum in our business that emerged in the second half of 2020 continue into our first quarter performance. We saw meaningful traction across our product portfolios, and strong execution towards our mission of providing advanced regenerative medicine products that can improve the outcome in patients undergoing implantable device related surgery. We believe we're on track to meet or exceed our key goals for the year. And we're establishing a solid foundation for the sustained long-term growth of our company. As a quick reminder, our core product platforms address three primary markets – implantable electronic devices such as pacemakers or defibrillators, bone repair in orthopedic and spine procedures, and soft tissue reconstruction. Additionally, we fulfill tissue processing contracts through our Richmond, California manufacturing facility as a highly leverageable component of our business. In my prepared remarks today, I'll cover recent highlights and accomplishments in each of these primary markets, as well as updates on the progress of our goals we set for 2021. Matt will go into more detail on our financials and guidance, and then we'll open the call for your questions. Turning briefly to our recent financial highlights. The Aziyo once again delivered strong results, including total revenue of $12.9 million, a 31% increase over the first quarter of 2020. And despite the seasonality we typically see in the first quarter following higher year-end purchasing patterns as well as ongoing COVID-related impacts in key territories, our total revenue grew 3% sequentially over the fourth quarter of 2020. Core product revenue have contributed the vast majority of this at $10.7 million, representing a 29% increase year-over-year and a 4% sequential increase over the fourth quarter of 2020. Growth in core product revenue also increased substantially in comparison to pre COVID levels, growing 49% from Q1 2019 to Q1 2021. We attribute these strong results to a number of factors, including the performance of our direct sales organization, the strength of our partnerships, and the market share we've been able to capture as a result of the quality of our product portfolio. Turning now to some recent highlights in our business and how we see the trending of this in the current quarter and through the remainder of this year. Starting with our products to address the market for implantable electronic devices, we've made significant progress advancing our CanGaroo Envelope over the past several months. CanGaroo is the only commercially available biological envelope that forms a natural systemically vascularized pocket for holding implantable electronic devices. We're excited about our commercial progress, product advancements and clinical trials currently underway.
Matthew Ferguson : Thank you, Ron. As mentioned, net sales for the three months ended March 31, 2021 were $12.9 million, a 31% increase from the $9.9 million in the same period of the prior year. This included a 29% increase in sales of core products and 36% growth in our non-core products. While our top priority is to continue growth in our core products, we were pleased to see our contract manufacturing business once again contribute more than $2 million to our top line as a result of several recently signed contracts that are driving performance in this area. Gross margin for the first quarter of 2021 was 49% as compared to 53% in the corresponding prior-year period and 48% in the fourth quarter of 2020. We also look at gross margin excluding the impact of non-cash amortization of intangible assets. And on that basis, Q1 would have been 56% versus 61% in the year-ago quarter and 55% in Q4 2020. The lower year-over-year gross margin in Q1 2021 was primarily due to the impact of one-time non-recurring events in the first quarter of 2020, whereas the improvement in gross margin from Q4 of 2020 resulted from continuing improvements in operational efficiency. We're pleased with the sequential improvements in gross margin we've seen in each of the last three quarters and expect continued improvement as we move through the year. Total operating expenses for the first quarter of 2021 were $10 million, a 19% increase from $8.4 million in the first quarter of 2020. The increase primarily resulted from costs related to operating as a public company and development costs associated with our program to add antibiotics to our CanGaroo Envelope. Loss from operations was $3.7 million for the first quarter of 2021 as compared to a $3.2 million loss for the year-ago quarter. Net loss for the quarter was $5.1 million, as compared to a net loss of $4.6 million in the first quarter of 2020. Loss per share in the first quarter of 2021 was $0.50 compared to a loss of $7.03 per share in the year-ago quarter, which was prior to the conversion of the company's preferred stock into common stock in association with the company's Q4 2020 initial public offering. As of March 31, 2021, we had a cash balance of $30.5 million, with an additional $4.5 million available for borrowing under our working capital line of credit. Turning to our outlook for the full-year 2021. As Ron mentioned, we're encouraged by the traction we've continued to make. And while COVID continues to pose some risk of uncertainty to our operating results, we anticipate the macro environment will continue to improve and expect to continue to execute at or above our original plan for the year. We now expect the total net sales to range between $52 million and $54 million, representing growth of approximately 22% to 27% over total net sales for the full year of 2020. This compares to our previous full-year 2021 guidance of $50 million to $52 million provided on March 1, 2021. To the extent we achieve net sales ahead of our original plan for the year, we expect to reinvest those gains back into the business through a variety of commercial and R&D initiatives, which will be designed to bolster long-term growth. In summary, our business and finances are in solid shape. And we look forward to continuing to share our progress with you at future investor events and quarterly calls. And with that, Ron and I would like to open call for your questions.
Operator: . And the first question comes from Matthew O'Brien for Piper Sandler.
Matthew O'Brien: Just for starters, Ron and/or Matt, the core performance was obviously very strong. But I'm sure you had some headwinds in Q1 associated with COVID. And then obviously, probably some tailwind towards the end of the quarter. Can you kind of net out the headwinds versus some of the tailwinds you may have seen, I guess, just for starters? And then, I have a couple of questions on the core business.
Ronald Lloyd: I think we saw pretty much I think what other companies are now reporting. Obviously, in January and February, there were more headwinds from COVID and in certain geographies the impact of weather. With that, actually decreasing in March and kind of a strong return back to normalcy of March. So, I think our headwinds are similar probably across what's been communicated by other companies. But I think if you go back and you think about Aziyo and you look at last year, for example, obviously, our core products, we had a stellar year with 17% growth, despite all the headwinds of COVID. And again, even with the continuing headwinds into Q1, again, posting an overall company growth of 31% and our core products of 29%. So, I think you can see that we're able to drive consistent top line growth. And I think we're doing that really through our commercial execution, the performance of our reps in conjunction with our partnerships. And I think it's also a testament to the product portfolio that we have and the differentiation of our products and the appreciation by our customers based on the performance that they're seeing when they use our products. And so, I think all that collectively has led to excellent growth. And in some ways, we've been less concerned about the actual variations that have happened in the marketplace due to COVID.
Matthew O'Brien: To that end, Ron, I know you don't want to get into product level detail as far as where this outperformance on the core business came from, but can you just talk maybe more qualitatively about where some of this performance came from on the core side that was better than expected? Was it Premier? Was it SimpliDerm? Did you see something from Boston and CanGaroo? Just a little bit more granularity there, I think, would be helpful.
Ronald Lloyd: I think all in all, again, we're really pleased with the portfolio of products that we've built and the differentiation that we have, be it the remolding benefits that CanGaroo offers to patients today, the viable bone matrix platform and the number of products we've been able to derive through that platform for orthopedic and spine repair and, of course, more recently, SimpliDerm for soft tissue reconstruction. And so, again, I think the uniqueness of these products that differentiate these products has really helped us drive growth across that core product portfolio. And so really, it's the totality of these products that's really helped us and benefited us as we think about our Q1 performance. As you know, we don't break out detail by product. If we think about one product category versus the others, probably much like we saw in Q4, our viable bone business also did extremely well this quarter, as has done in the prior quarter. And again, we believe it's back to the differentiation of the product, the messaging of our products to customers with the viable bone matrix, and the fact that we've got more viable healthy cells is really resonating. From that, we're seeing additional market penetration and market growth within that category.
Matthew O'Brien: Just one quick one for Matt. Matt, the expenses in the quarter came in on the OpEx side lower than we were modeling. How much of that is more of just – still kind of keeping the belt tight in the COVID environment versus what you're going to kind of ramp up in terms of spending throughout the rest of the year? What I'm really trying to get to is, how durable are some of these lower sales and marketing and G&A expenses as a percentage of revenue? Thank you.
Matthew Ferguson: We're always careful with how we're spending our money, certainly, but we do think it's important to drive growth and to make the investments in the business that are going to bolster that growth, both this year and for the longer term. And, I will say, when I look at our plan for the year in terms of hiring and otherwise, we are probably a little bit behind schedule in some of the hiring and spending that we have planned for the year. We also do think – given the outperformance that we're seeing on the top line, we do plan to reinvest some of that upside into the business as we move through the year. And so, I think there will be some increases in the OpEx lines as we go through the year, particularly in sales and marketing and R&D. We recently initiated the de novo CanGaroo study with up to 500 patients and we're also enrolling in the HEAL study. So, we will be continuing to spend in certain areas and probably see from increases, but I understand where you're coming from. We are a little bit – we're favorable compared to our original plan on the spending side of things.
Operator: And our next question comes from Josh Jennings for Cowen.
Neil Chatterji: This is Neil on for Josh. First off, just thinking about the CanGaroo, the de novo study and the HEAL studies you just mentioned, so that should help build out the clinical evidence for CanGaroo and supporting utilization, both within primary and replacements, the IUD implants. I guess if you could just talk about the current utilization trends today between primary and replacement, are most of those CanGaroo Envelopes being utilized more in replacement procedures? And then, secondly, if the results from the de novo study are positive, could that open up the primary segment of the market more fully?
Ronald Lloyd: I think as we think about the use of envelopes today, there's a greater propensity to use envelopes during the change out procedures. And I think if you think through the logic here, obviously, during the change-outs, they're often seeing more complex situations with fibrotic capsules that they have to deal with and greater risk to the patients. And to some degree, the light bulbs go off to say this is probably a great candidate to put an envelope in and certainly the CanGaroo Envelope. And I think that's kind of where we stand today. But if you take a step back and think about it logically, the ideal patient to get a CanGaroo is the de novo patient. A person getting an implant for the first time also gets the implantation of CanGaroo. CanGaroo then remodels into native healthy tissue that's vascularized to prep the patient for the life of that device. And so, we think over time, really, the migration should be to de novo patient. That patient will drive the greatest benefit. And so, we've really embarked on two studies here. The HEAL study to show the benefits of CanGaroo once in place the time of change-out compared to patients that don't receive any envelope or competitive envelope. And then, as you mentioned, the de novo study, which again is looking at time of first implantation, and we're going to follow a subgroup of those patients for up to five years, then compare the outcomes versus patients that didn't receive an envelope. And so, we're excited about the data collection. We hear every day, Neil, from our customers about the benefits they're seeing with CanGaroo. And so, what we're trying to do here is actually just have the clinical evidence collected in totality from these studies that we can then use for publications and dissemination back to other customers, so they can also understand the benefits of CanGaroo.
Neil Chatterji: And then, just had one follow-up question as well. There was a recent FDA safety communication that came out kind of indicating a couple competing ADMs potentially having a higher risk profile than another ADMs. Just curious how much of a tailwind that could potentially be for SimpliDerm and its competitive positioning or how does that impact the market, if at all? Just one add-on question quickly was, there's also a potential for a public meeting coming out of that. I was just curious on your expectations for that?
Ronald Lloyd: To start our SimpliDerm, which is our ADM, we actually used our tissue processing expertise and we developed a patented process to be able to decellularize, remove the cells from human dermis and do it in a way that best preserves the native structural matrix that exists in the dermis itself. And our process being unique and patented, we've shown now through a number of studies that our product has lower inflammatory properties and better integration compared to other products on the marketplace, including the market leader AlloDerm. We've actually had a chance now to publish this data on the differentiation of the product through our processing technique. We're out now collecting clinical data in patients with SimpliDerm and comparing that to other acellular dermis products. And we believe we'll hopefully have some publications coming out actually in the second half of this year for this product. So, we think, Neil, to answer your question, we designed this with a unique process to hopefully have better outcomes than what's available in the marketplace today. And so, we're pleased what we've seen so far and feedback from physicians on the product performance. And even though the FDA has put out some safety statements on other products – again, we've designed our product to be superior to hopefully what's out there in the marketplace today. And again, we'll collect the data over time to see if that holds up. But we do think, again, we're in an excellent position for SimpliDerm based on our processing expertise and the patented process that we have. The second part of your question is regarding the FDA. My understanding is that they do plan to hold a workshop later on this year to talk about implantable materials, ADMs, and other materials for breast reconstruction. So, we'll look forward to that meeting and see what the outcomes are from the FDA as it relates to the product labeling and requirement, if any, for any future studies from that meeting. But again, all in all, we're very excited about the product SimpliDerm based on the properties and the physician feedback today.
Operator: And our next question comes to Kaila Krum from Truist Securities.
David Rescott: This is David Rescott on for Kaila. Congrats on the quarter. First, I appreciate the commentary you guys have provided so far on raise. And I just wanted to dig a little bit deeper into that. Is there anything really here specifically that contributed to the quarter and the 29% growth in the core business or any kind of one-time items, maybe the initial bump from the recent add on the contracts that we wouldn't really expect to carry forward? So, I guess, if we annualize kind of the $13 million that you saw in Q1, that really just puts you just below the lower end of your guidance? So, I guess, would it be safe to assume that we think kind of about Q1 as a base for 2021 and then expect the business to improve as elective procedures come back and then really accounting for typical seasonality in the business or other kind of, just like I said, some one-time items or trends in Q2 so far that we should be thinking about. Just any additional color here would be helpful.
Matthew Ferguson: There were not any unusual one-time events in Q1 as it relates to any product performance here. And again, I think as we talked about previously, it's really a testament to the commercial execution that we have through our own commercial organization in conjunction with our partnerships. And then, uniqueness and differentiation of our products, which I believe, as time has gone by, physicians now are starting to better understand the unique properties of our products. They're seeing the benefits of our products in the patients that they treat. And I think that helped lead us to the growth rates that we're seeing. And again, we're seeing additional market development and usage of our products as well as market share gains. I think that the Q1 is just, again, a testament to our execution and our product differentiation.
David Rescott: I guess a second one and a final one for me. The core product portfolio right now kind of spans across cardiology or general medicine and also the spine space. I know you've hinted in the past about potentially being acquisitive or expand through partnerships. So, I guess, given the current financial position of the company, could you provide any commentary on just balancing investment within the core business while staying flexible to either do acquisitions or partnerships? And then, as a second part of that question, if you're thinking about an ideal kind of target for Aziyo, is it something that would be pre-revenue, revenue generating, kind of something that would be a new area to expand into or tuck into an existing market? Any information that would be helpful.
Ronald Lloyd: If you look at Aziyo, we actually think about the go-to-market strategy in a way that best optimize our technology in a way that the majority of patients, the most patients can benefit from it. So, we're looking for how do we get the most patient benefit out there in terms of access to our technology, and so that's led to us having a direct salesforce in conjunction with partners. For example, in Aziyo with Boston and BIOTRONIK helping to sell in conjunction with our sales reps. Or in the case of our orthobiologics, our viable bone matrix platform doing more of a B2B strategy where we've focused on product innovation, manufacturing, data generation, and then partner with our commercial business partners there as it relates to commercial execution. And we found this to be a very effective model. Obviously, it's helping us drive very high growth rates. So, think about our products and the penetration in the marketplace today. It's also very efficient, if you think about the investment back into SG&A&A as well. As it relates to then adding additional business development opportunities, again, we're pretty excited about our current year and future years based on our own assets that we have on market today in our pipeline products. But, again, we've got a very seasoned leadership team. We are actively looking at additional product opportunities and company opportunities. If you just were to describe the best opportunity for us from a fit perspective, we certainly would like to have products that currently match up to our current direct channels, which again is back towards cardiovascular EP marketplace or soft tissue reconstruction. Certainly, like other companies, we like on-market versus pipeline. But again, we also would be open to evolving technologies that would be complementary to the technologies that we have today as well. So, we'll continue to look. I believe, when we do pull the trigger, we're pulling it for the right reasons for the right opportunities. But again, it's opportunistically as we think about it, given the excellent growth opportunities we see with our current assets and pipeline products.
Operator: And this concludes our question-and-answer session. I'll turn the call back over to Ron Lloyd for final remarks.
Ronald Lloyd: Great, thank you. And thanks, everybody, for joining us today. Just want to also give you a heads up that we hope many of you can listen tomorrow. We have a fireside chat at the Truist Life Science Summit. We'll have a live and archived webcast. And this will be available actually beginning tomorrow at 11:20 am. So, again, thanks everybody and take care.
Operator: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
