Earnings Call Transcript
Axogen, Inc. (AXGN)
Earnings Call Transcript - AXGN Q3 2021
Operator, Operator
Greetings, welcome to AxoGen Reports Third Quarter 2021 Financial Results Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time I would now like to turn the call over to Peter Mariani, Executive Vice President and CFO. Mr. Mariani you may now begin.
Peter Mariani, CFO
Thank you, Rob. Good afternoon everyone. Joining me on today’s call is Karen Zaderej, AxoGen’s Chairman, Chief Executive Officer and President. Karen will begin today’s call with an overview of our third quarter performance and an update on our operational highlights and a review of our revised 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 the AxoGen website. Within an hour following the end of the live call, a replay will be available in the Investors section of the company’s website at www.axogeninc.com. Before we get started, I’d like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company’s past and future filings with the SEC, including, without limitation, the company’s forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements related to the expected impact of COVID-19 on our business, statements regarding our growth, our 2021 financial guidance, product development, product potential, regulatory processes and approvals, APC renovation timing and expense, financial performance, sales growth, and product adoption. And with that, I’d like to turn the call over to Karen. Karen?
Karen Zaderej, CEO
Thank you, Pete, and good afternoon, everyone. Our total revenue for the third quarter was $31.2 million representing a 7% decline versus the prior year period, excluding the impact of revenue from Avive Soft Tissue Membrane and deferred procedures in the prior year period, revenue growth for the quarter was approximately 9% year-over-year. We're encouraged by the underlying growth in our business, in light of the difficult operating environment across our industry during the third quarter. Although we believe the incidence of trauma increased during the third quarter compared to both the prior year and prior quarter, surgical schedules and procedure volumes were negatively impacted by the surge in COVID-19 cases and hospital staffing shortages. These challenges caused some procedures to be deferred, most significantly in the month of August. We saw volumes begin to improve in September and remain consistent in October as hospitals continued to adapt to these challenges. We view the negative impact on our procedure volumes as transitory in nature. Although the timing of recovery is difficult to predict in light of the ongoing staffing shortages being experienced by many of our customers, the continued uncertainty of COVID-19, and ongoing product shipping and transportation challenges. Nevertheless, we remain highly confident in our commercial execution, the underlying demand for our products, and the ability of our customers to overcome the present challenges to deliver important healthcare for patients, including the surgical repair of nerve injuries. We expect to see improvement in our procedure volumes as pressure on hospital operating schedules continues to abate. The impact of the Delta variant and staffing shortages on the quarter varied across nerve repair applications. Similar to our experience during previous surges in COVID-19 cases and hospitalizations, our breast, oral maxillofacial, and surgical treatment of pain applications were impacted more significantly due to the elective nature of these procedures. While we believe the incidence of trauma increased in the quarter, our trauma business was impacted by ER and surgical capacity constraints resulting in deferrals of nerve repair for traumatic injuries. As we experienced last year, we would expect many of the deferred nerve repair procedures will ultimately be completed as surgical schedules improve. However, unfortunately for patients, there will also be a portion of injuries that are ultimately not repaired. As a reminder, while optimal outcomes are achieved by promptly repairing the nerve, nerve repair can result in positive outcomes months after the nerve has been injured. Turning now to commercial execution. We ended the quarter with 109 direct sales representatives in the U.S. compared to 110 one year ago. We expect to end the year with approximately 115 direct sales representatives as we strategically expand our sales team to support growth in 2022 and beyond. Our direct sales channel continues to be supplemented by independent sales agencies that represented approximately 10% of our total revenue for the third quarter. Our commercial team remains focused on our strategy of driving deeper penetration within customer accounts as a key driver of revenue growth. And we are well-positioned to continue to drive growth as procedure volumes recover. Another aspect of our strategy is to increase the number of accounts performing nerve procedures using the AxoGen algorithm. Earlier this year, we introduced a new account metric that we believe demonstrates the strength of this strategy, which tracks those accounts that have developed more consistent use of AxoGen products in their nerve repair algorithm. We refer to these as core accounts, defined as accounts that have purchased at least $100,000 in the last 12 months. Our core accounts typically contain at least one surgeon who has adopted the AxoGen nerve repair algorithm for the majority of his or her nerve injury patients and other surgeons who are at earlier stages of AxoGen product adoption. In the third quarter, we had 292 core accounts, an increase of 18% from 248 one year ago, and down from 306 in the previous quarter. Core accounts continue to represent approximately 60% of our revenue. We continue to see significant opportunities to drive increased revenue as more accounts reach this level of adoption, and as surgeons within these accounts increase their adoption across their nerve repair applications, including extremities trauma, pain, breast, and oral-maxillofacial surgery. The year-over-year growth in core accounts reflects our strategy to develop long-term users of the AxoGen portfolio, while the sequential decrease is consistent with the procedural impact in the third quarter. We have also historically reported our number of active accounts among the estimated 5,100 healthcare facilities that treat nerve injuries in the U.S. These accounts have a lower adoption threshold of at least six orders in the past 12 months. In the third quarter, our active accounts increased to 954 representing a 9% increase compared to 873 one year ago. Active accounts have consistently represented approximately 85% of our total revenue with the top 10% of our active accounts representing approximately 35% of our revenue each quarter. Turning now to our continued focus on building market awareness. During the third quarter, we participated in two clinical conferences. The 76th Annual American Society for Surgery of the Hand, and the 103rd Annual American Association of Oral and Maxillofacial Surgeons. We were pleased with the opportunity to engage with customers in person at these conferences. And with the numerous sessions on nerve injury, nerve repair, and neuroma pain. AxoGen’s nerve repair portfolio was featured in clinical and scientific sessions at each conference. And we hosted an educational symposium at the Hand Society Conference, titled Innovations in Nerve Surgery that Transformed My Practice. We also continue to build awareness among patients of the important benefits of nerve repair. In October, we supported breast cancer awareness month with several activities, highlighting resensation, a surgical technique designed to restore sensation to the reconstructed breast post-mastectomy. To raise awareness of the surgical treatment of pain, we are partnering with the U.S. Pain Foundation. Each November, the foundation runs a campaign called KNOWvember where they explore and educate on a unique area of pain management through events, social media content, and more. This year, the foundation is focusing its campaign to raise awareness of peripheral nerve pain and its treatment options. As a leader in nerve repair, we continue to invest in surgeon education and advocate development and are excited to have returned to hosting in-person national surgeon education programs in the second half of 2021. We remain committed to providing education and training for each class of fellows. And as in prior years, we trained more than three-quarters of the hand and microsurgery fellows in the recently graduated class of 2021. For the current class of 2022, we held three in-person national programs in the last two months and are holding two more programs in November. This fall, we are similarly returning to in-person national programs for surgeons of all experience levels to learn best practices in nerve repair from our expert faculty. We continue to expand our body of clinical evidence in support of our product portfolio and increasing surgeon adoption. Our RANGER and MATCH registries continue to enroll with over 2,500 nerve repairs now enrolled in RANGER. In 2020 analysis of the MATCH registry data, which is a comparative population of conduit and autograft subjects for RANGER demonstrated that Avance Nerve Graft outcomes were statistically better than conduit and were similar to those for autograft. Data from these two clinical programs continues to play an important role in informing surgeons' clinical decision-making. Our RECON study remains on schedule after completing enrollment of 220 subjects in July of 2020. As a reminder, RECON is our Phase 3 pivotal study supporting our biologics license application or BLA, which upon approval will transition our Avance Nerve Graft from a Section 361 tissue product to a Section 351 biological product. We have completed final subject follow-up and we anticipate a top-line study data readout in the second quarter of 2022, followed by the filing of our BLA in 2023. Enrollment in the comparative Phase of REPOSE, our study of Axoguard Nerve Cap compared to standard treatment for symptomatic neuroma is well underway and we expect enrollment to be completed in Q1 2022 with the preliminary study data readout in Q2 of 2023. I’d like to share a few highlights from a recent RANGER publication and some data presentations from this year’s ASSH conference. We are excited to see a new publication from the RANGER investigators on the role of Avance Nerve Graft in nerve reconstruction following the resection of painful neuromas. The study evaluated 25 subjects with painful neuromas who elected to undergo surgery for their neuroma pain. The study found that 80% of subjects who had their neuromas resected and had the resulting gap reconstructed with Avance reported an improvement in their pain. Furthermore, 88% of the subjects reported meaningful return of sensory function. Reconstruction with Avance enabled the return of function following the removal of the painful neuroma, an outcome that is typically not achievable with standard neuroma resection and termination techniques. Additionally, a group of investigators presented on the patient’s perspective of nerve autograft harvest, the traditional nerve repair technique. The study surveyed a group of patients who had undergone nerve repair with autograft and assessed multiple factors related to the donor site function and pain. Critical findings from this study included 88% of patients reported pain at the autograft harvest site. 75% reported persistent and bothersome loss of sensation distal to the harvest site, and 50% of the subjects reported cold intolerance and thermal sensitivity in the harvest site limb. The findings highlight the compromise that patients and surgeons commonly face when choosing to repair nerve injuries with autograft. We've believed that with the growing body of clinical evidence on the performance of Avance Nerve Graft, the increasing understanding of the true morbidity and functional loss of nerve autograft harvest, and the benefits of early referral for nerve surgery, surgeons will continue to adopt Avance Nerve Graft as their standard of care for managing nerve gap repairs. Collecting clinical data on peripheral nerve repair takes a significant amount of time, effort, and expertise. AxoGen has made it a priority to build and develop the knowledge, systems, capabilities, and capacity to deliver high-quality impactful and relevant clinical evidence in peripheral nerve repair. Nerves regenerate slowly, which often necessitates long follow-up times to assess treatment effects and gather meaningful clinical data that surgeons, payers, and regulators have come to expect when making clinical care decisions. We’re fortunate to have an established body of clinical evidence supporting Avance Nerve Graft, including 145 peer-reviewed clinical publications along with more than 50,000 Avance implants since launch. We remain committed to obtaining the clinical evidence to demonstrate the safety, performance, and utility of our nerve repair solutions to support the continued adoption of the AxoGen algorithm across our full portfolio of nerve repair products. Before I turn the call over to Pete, I’d like to discuss our outlook for the remainder of 2021, including our revised financial guidance. We now expect full-year 2021 revenue will be in the range of $127 million to $129 million versus the prior range of $134.5 million to $137.5 million. And we continue to expect full-year gross margins to remain above 80%. Our revised guidance reflects the extended period of impact from the Delta variant and ongoing hospital staffing challenges, which continue to pressure nerve repair procedure volumes. We are remaining measured in our expectations for the fourth quarter as hospitals address these challenges. To help provide further context around our updated guidance, we believe that the low end of our range represents a continuation of our current run rate through the end of the quarter, while the upper end represents a modest, steady improvement as our customers continue to adapt to the challenges they’ve been facing. We believe that a revised guidance for 2021 has no impact on the longer-term growth outlook for our business, though we currently anticipate that there will be a more gradual ramp in procedural volumes. We remain confident in the growth prospects for our business. As we look forward to 2022 and beyond, we continue to view AxoGen as a long-term growth company, delivering sustainable annual revenue growth in the high teens to low 20%. We’re confident that our commercial execution combined with our substantial investments in clinical data over the past decade will continue to support surgeon adoption and our long-term growth as we continue our mission to revolutionize the science of nerve repair. Now, I’ll turn the call over to Pete for a review of financial highlights.
Peter Mariani, CFO
Thank you, Karen. Our third quarter revenue of $31.2 million represents a decrease of 7% versus the prior year. Our lower-than-expected revenue was the result of a 10% decrease in unit volume and a net 3% increase in changes in prices and product mix. Prior year revenue included approximately $3.3 million from procedures deferred from the first half of 2020 as a result of the initial impact of the COVID-19 pandemic, and approximately $1.5 million from Avive Soft Tissue Membrane for which we voluntarily suspended market availability as of June 1, 2021. Excluding the impact of both of these items, revenue growth for the third quarter would have been approximately 9%. Gross profit for the third quarter decreased 6% to $26 million compared to $27.7 million in Q3 of 2020 as a result of lower sales. Gross margin was 83.2% for Q3 compared to 83% in the prior year. Total operating expense in the third quarter increased 13% to $32.7 million compared to $28.8 million in the prior year. Total operating expenses in the third quarter included $2.9 million of non-cash stock compensation consistent with the prior year. The increase in total operating expenses reflects higher facilities costs as well as increased compensation, travel, and project costs. As we have returned to more normalized spending levels over the past few quarters following the steep reduction in spend in Q2 of 2020 due to the company’s cost mitigation initiatives implemented at the beginning of the pandemic, these increases were partially offset by lower bonus commissions and stock compensation charges in the third quarter, primarily due to lower revenue expectations for 2021. Sales and marketing expense in the third quarter increased 4% to $18.4 million compared to $17.7 million in the prior year. As a percent of total revenue, sales and marketing expenses increased to 59% for the three months ended September 30, compared to 53% in the prior year. Research and development spending in the third quarter increased 51% to $6.4 million compared to $4.2 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 all clinical research. The increase in R&D expenses reflected increased spending on specific programs, including the BLA for Avance Nerve Graft and the next generation of Avance product. As a percentage of total revenue, research and development expenses were 21% in Q3 compared to 13% in the prior year. General and administrative expenses in the third quarter increased 16% to $7.9 million or 25% of revenue, compared to $6.8 million or 20% of revenue in the prior year. Adjusted net loss and net loss per share in Q3 of 2021 was $3.6 million and $0.09 per share compared to adjusted net income and net income per share in the prior year of $1.5 million and $0.04 per share. Adjusted EBITDA loss in the quarter was $2.5 million compared to an adjusted EBITDA of $2.3 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 September 30 was $98.1 million compared to a balance of $106.2 million at the end of Q2. The decrease includes facilities capital expenditures of $8 million, including $1.2 million of capitalized interest, primarily on our new biologics processing center in Dayton, Ohio, and net operating cash burn in the quarter of $200,000. We expect completion of the Dayton facility early next year, followed by a one-year validation process, and expect to begin production in the new center in early 2023. Turning to guidance, as Karen noted earlier, we are revising our revenue guidance and now expect full-year 2021 revenue will be in the range of $127 million to $129 million compared to our previous range of $134.5 million to $137.5 million. Additionally, we continue to expect full-year gross margins to remain above 80%. Although we remain measured in our expectations for the fourth quarter as hospitals address capacity constraints and surgical schedules, we are confident that our commercial execution and the underlying demand for our products position us to see improvement as hospitals continue to adapt to these challenges. As we look toward 2022 and beyond, we believe the strength of our strategy and the execution in this underserved healthcare market will allow us to continue to be a long-term growth company, delivering sustainable annualized revenue growth in the high teens to low 20%. And with that, I’d like to hand the call back over to Karen.
Karen Zaderej, CEO
Thank you, Pete. I’m proud of the achievements of the entire AxoGen team in the face of the headwinds during the quarter. We remain committed to delivering our innovative nerve repair solutions to patients, surgeons, and hospitals. And I believe we’re well positioned for success as we move through the final months of 2021 and beyond. At this point, I’d like to open up the line for questions. Rob?
Operator, Operator
Thank you. Our first question comes from the line of Danielle Antalffy with SVB Leerink. Please proceed with your questions.
Erin Soldatis, Analyst
Hi, this is Erin on for Danielle. Thanks for taking our questions. Just one or just a couple from me. I was just hoping you could maybe talk about the impact of hospital staffing shortages and, if there are any steps that you could possibly take to mitigate these impacts and then also just as it relates to the mix of procedures by setting, was there a certain setting maybe like the ASC, that was less impacted by these shortages versus the hospital? And just, do you expect to see a shift of procedures to the ASC going forward? Thanks.
Karen Zaderej, CEO
Sure. That’s a great question. Definitely we saw impacts from actually the combination of the COVID-19 Delta variant rise in certain parts of the country, complicated by the fact that the hospitals have staffing shortages. And so the first thing that we saw impacted were our more elective procedures. Breast reconstruction is a great example in that it’s always an inpatient procedure. It takes a lot of OR time, and it is deferrable without significant complication to the patient. And so that’s usually for us the very first sign that hospitals are starting to push procedures out. But we also saw that in the surgical treatment of pain and oral maxillofacial surgery, all of those being very elective procedures and all of them impacted and delayed as hospitals are trying to manage their flow. In traumatic injuries, it’s actually not quite as clear, because it really depends on the circumstances of the hospital and what they’re trying to do on these more emergent procedures. And so the first thing that we see, similar to what we saw last year, is that these procedures were moved to alternate sites of care. So in the early days in some of the areas where we saw the Delta variant particularly starting to creep up, we saw an increase in moving to outpatient surgery centers or ambulatory surgery centers, which were less affected both by the staffing shortages and the Delta variant. But as the Delta variant became stronger, all of those staffing shortages just came to a head, and we saw procedures delayed and deferred even more. So this is an ongoing situation. We hear from CEOs of hospital systems that they certainly have staffing problems today, but there could potentially be another wave of staffing issues as the Delta variant wanes, leading to more resignations. We’re just trying to be cognizant of that and support the hospitals as they go through this. Recognizing that our elective procedures will continue to be deferred while we try to bring back those traumatic nerve injuries as soon as possible so that those patients can receive the best possible care.
Erin Soldatis, Analyst
Great. Thanks. And then just on the 2021 outlook, it seems like your updated guidance implies about $32 million in revenue for Q4 considering that you did about $31 million in Q3 and it seems like things are getting better since the lows of August that they’ve gotten better in September and have continued into October. Just kind of want to understand the puts and the takes that are being contemplated. And then also just, if you could talk about the backlog and if we should think of the 2022 outlook as contemplated in the 2021 outlook or should we think of any backlog procedures that are made up in Q4 as upside? Thanks.
Peter Mariani, CFO
Yes, I think our outlook is really reflective of the fact that we’ve got a lot of confidence in our ability to come in and help hospitals get through these procedures. But they are challenged with how they are going to schedule these procedures. And so where we saw an uptick in September that September run rate sort of ran consistent for us through October. We didn’t see the additional pickup in October that we would’ve liked to have seen, to have provided a little stronger outlook for the fourth quarter. So we’re trying to put the puts and takes, we’re looking at our current run rate, and if we maintain that through the end of the year, that pretty much defines the bottom end of our guidance. And if as we expect, hospitals are able to get these procedures done and work through some of these staffing challenges, we’ll see a moderate improvement, which will allow us to reach the upper end of the range. So, we’re not trying to bake in any exceptional growth in Q4. And if we see more procedures coming in more quickly, that will move us up in the range.
Erin Soldatis, Analyst
Great. Thanks so much.
Operator, Operator
Our next question is from the line of Anthony Petrone with Jeffries. Please proceed with your questions.
Anthony Petrone, Analyst
Great. Thank you. First question on our end would relate to the RECON study, just an update on next steps into year-end and just whether or not you’re seeing any notable impacts from COVID just in terms of timelines there. And then in terms of just sort of FDA developments during the quarter, Integra had a panel meeting on SurgiMend Acellular dermal matrix products for breast reconstruction obviously a mixed vote from the panel. When you look at the breast neurotization opportunity for AxoGen, anything from that panel meeting that may serve as a tailwind for the Avance business or otherwise? Thanks.
Karen Zaderej, CEO
Sure. Thank you. So on the RECON study, again, we completed enrollment and follow-up of all those subjects. At this point, there’s no impact from hospital staffing associated with the study as we have partnered with the CRO to complete the data table. So, no, we don’t see any impact on RECON despite the staffing challenges at hospitals. We still look forward to having the top-line data readout in the second quarter of next year. In terms of the recent panel that occurred, I think we’ve reviewed it and noted what was presented. I think it is important to ensure that in communicating with these panels, it’s not merely about showing a statistically significant difference, but also about demonstrating clinically relevant and meaningful endpoints, which is an important measure. I think this particular case demonstrated varying thought processes among the panel members around the presentation of clinically meaningful endpoints. It’s a good reminder that we want to ensure both points are shown when conducting these trials. Fortunately for us, as we’ve designed RECON, those considerations are baked into the study. It’s also information that we have, and we will pull data from RANGER and sensation now to support our broader label claim. All of that was in mind when we set those studies up. I anticipate we’ll have that information presented in a form that any potential panel could easily understand.
Anthony Petrone, Analyst
And if I could sneak one follow-up in, it would be on the core business and kind of shifting to the core accounts. That new category announced last quarter. When you think about some of the headwinds you encountered in Q3, Delta and staffing shortages, how did that play in those core accounts? Is there a portion of those accounts that are more insulated or was it evenly distributed across the entirety of accounts in the quarter? Again, the pressures from Delta and staffing? Thanks again.
Karen Zaderej, CEO
Well, Delta definitely had regional differences across the country. So Florida, the Southeast, and Tennessee all had a greater impact overall on volume and on core accounts in those regions. But staffing was much more broadly impacted. If you look at it, we still did show an 18% overall growth year-over-year in this core account. So, we see that as still a continuing funnel and fuel for our overall growth, both increasing the number but also increasing the penetration or volume within accounts. Remember the $100,000 is a floor, not a ceiling. While we saw staffing affecting accounts across the board, we believe that distribution of driving penetration will recover, and as staffing issues resolve, we will see that continue to increase.
Operator, Operator
Thank you. Our next question from the line of Kyle Rose with Canaccord. Please proceed with your question.
Kyle Rose, Analyst
Great. Thank you for taking the question. I wonder if we could just get a little more commentary on what you’re seeing just regarding staffing shortages? I mean, some of the diligence we’ve done suggests that yes, there are staffing shortages, but that’s more related to the inability to flex for overtime or additional operating hours, but that just the queue is full. So it’s hard to flex higher as we do see in some Q4. Is that what you’re seeing or are you seeing actual decreases in procedure volumes in the markets you serve?
Karen Zaderej, CEO
Yes. I have to give a different answer for different segments. So for those elective procedures that require a hospital stay, we are seeing that the staffing shortages are causing those to be pushed out and either not scheduled at all or scheduled way out into the future. Because I would say more acutely, the staffing shortages are in the hospital floors, not necessarily in the ORs. Hospitals are trying to keep the ORs moving at as much capacity as they can. Now, I’ve talked to some hospital CEOs that have in their system, hundreds or thousands of backlog procedures that they need to get through. So there are sizable amounts of backlog and the shortages are causing in the OR an inability to flex and create more capacity, which means they can’t deal with the current procedure volume and tackle the backlog simultaneously. It doesn’t mean they won’t get to it; it’s just going to take a little more time.
Kyle Rose, Analyst
That’s helpful. And then with respect to guidance, I just want to make sure I understand it appropriately. If you see kind of status quo, the exit rate of October for the rest of the quarter, that brings you to the low end. And if you see maybe some gradual improvements, that takes you to the high end, but maybe just talk about how October trended on a month-over-month basis relative to September?
Karen Zaderej, CEO
Yes, we saw – so we saw things get better in September, but then in October, it remained relatively consistent, slightly better, but still I would say relatively consistent. So, we think that, and that’s why we set the low end of the guidance is to say, let’s just assume that because of these headwinds, we remain flat through the quarter. And of course, if we start to get the volume back up to what I would consider a normal throughput, and/or start tackling some of the deferred procedures, we would see some increases through the quarter, which would be the higher end.
Kyle Rose, Analyst
Okay. Very helpful. That’s all for us. Thank you.
Operator, Operator
Thank you. We’ve reached the end of the question-and-answer session. I’ll now turn the call over to Karen Zaderej for closing remarks.
Karen Zaderej, CEO
Thank you, Rob. I want to thank everyone for joining us on today’s call. We look forward to speaking with many of you at the Jeffries London Healthcare Conference and at the Canaccord MedTech & Diagnostics Forum later this month. Thank you.
Operator, Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.