Earnings Call Transcript - AXGN Q2 2025

Operator, Operator

Joining me on today's call is Michael Dale, Axogen's Chief Executive Officer and Director; and Lindsey Hartley, Chief Financial Officer. Michael will discuss second quarter 2025 financial results and corporate highlights. Lindsey will then provide details on financial performance, guidance, and overall outlook for the year. This will be followed by a question-and-answer session. Today's call is being broadcast live via webcast, which is available on the Investors section of Axogen's website. 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 the conference call, the company will make projections and forward-looking statements. Forward-looking statements, which are usually identified by the use of words such as objectives, targets, will, believe, expect, estimate, should, guidance, intend, projects, or other similar phrases, include, but are not limited to statements relating to financial guidance, including revenue, margins, cash flow, future profitability, expectations for growth, market development priorities, estimated market opportunities, timing for future product and application launches, and the company's expectations for approval of the Biologics License Application for Avance Nerve Graft, including the anticipated timing of approval and the assumption that Avance Nerve Graft will be designated as a reference product for any future biosimilar nerve graft and that such designation will provide marketplace exclusivity. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the company's SEC filings, including its Form 10-K and 10-Q. The forward-looking statements are representative only as of the date that they are made, and except as required by applicable law, the company assumes no responsibility to publicly update or revise any forward-looking statements. In addition, for a reconciliation of non-GAAP measures, please refer to today's press release and the corporate presentation on the Investors section of the company's website. Now I'll turn the call over to Michael.

Michael D. Dale, CEO

Thank you, operator, and welcome to everyone joining us this morning as we discuss our 2025 second quarter financial results. I'll begin today's call with a financial and corporate overview, highlighting our progress through the second quarter and year-to-date implementing our strategic plan, followed by an update on the Biologics License Application, or BLA, for our Avance Nerve Graft. I will then pass the call to Lindsey to review second quarter's financials and outlook for the remainder of 2025, and then we will open the lines for a question-and-answer session. As remarked in this morning's earnings release, we are delighted with our second quarter performance and progress year-to-date for the business. We believe our strong revenue growth and related business milestone achievements reflect the soundness of both our market development strategies and commercial execution capabilities. I have mentioned publicly on various occasions that I felt our performance through midyear would be an important measure of our progress optimizing our business model. While there will always be opportunities for further optimization, as a leadership team, we believe based on the measures we use for our customer creation business models, we are managing our market opportunities the way we had planned and have high confidence in our ability to grow the business consistent with the guidance we have previously provided for our strategic plan. Regarding the quarter, Q2 sales increased to $56.7 million, growing 18.3% compared to the same period last year. This performance reflects double-digit growth across all of our nerve repair target markets, including extremities, oral maxillofacial and head and neck, and breast. Consistent with prior quarters, our growth is driven by expanding adoption of nerve care using Axogen's nerve algorithm for the treatment of all types of peripheral nerve injuries, including traumatic, iatrogenic, and chronic nerve injuries. The Avance Nerve Graft is the primary growth driver, often complemented based on the clinical situation by one or more of our nerve repair connection, protection, or termination products. In extremities, we continue to execute our high potential account strategy with solid growth in both traumatic and chronic nerve injury procedures in the quarter. In oral maxillofacial and head and neck, surgeon adoption of the Axogen algorithm during the quarter was strong across all procedures, but particularly in mandible reconstruction procedures. Likewise, in breast, we continue to see strong adoption of our breast resensation techniques, supported by new surgeon activation, increased procedure volume, and implant-based reconstruction cases and the expansion of our commercial infrastructure. In summary, we are encouraged by the broad-based adoption of our nerve care portfolio and momentum across each of our three target markets. To assess our progress, we continue to monitor key metrics tied to our plan and 2025 strategic priorities, including high potential accounts, commercial expansion, professional education, new product development, clinical research, and prostate market development. I'll begin with an update on our performance and growth in high potential accounts. We continue to focus on expanding our presence in these accounts to drive more consistent customer creation, algorithm adoption, and improvements in sales force productivity. Our goal for 2025 is to generate at least 66% of revenue from high potential accounts. Through the first half of the year, we continue to exceed our target with approximately 70% of revenue growth driven by high potential accounts. Furthermore, through the first half of the year, average high potential account productivity is up 21% year-over-year, tracking in line with our full-year target. These results reinforce our belief that our focus on high potential accounts is enabling broader and more enduring adoption of nerve care, and as such, more predictable growth. During the first half of 2025, there were 641 active high potential accounts, of the approximately 780 accounts that meet our high potential criteria, which represents an increase of 19 accounts or 3% as compared to the first half of 2024. Regarding our 2025 commercial infrastructure expansion goals, as of the end of the second quarter, we are now at or ahead of our hiring plan for each target market. In breast, we ended the quarter with 19 breast resensation sales specialists and one regional sales director. We are on track to double the breast sales force in 2025 by the end of the year, targeting 22 reps and 2 regional sales directors. To support broader adoption in non-breast markets, we added 5 additional sales representatives in high potential territories in the second quarter, ending with 124 sales professionals, including 12 regional sales directors. In oral maxillofacial and head and neck, consistent with our plan, we added 5 field-based market development managers year-to-date. Surgeon training remains a core component of our customer creation and nerve repair algorithm adoption. Execution of our 2025 professional education programs is on track and we fully expect to meet our 2025 surgeon training targets. In breast, we have trained 35 surgeon pairs year-to-date, and with 3 programs planned in the second half of the year, we are confident we will meet our 2025 target of 75 surgeon pairs trained. Active breast resensation programs increased 9% from the second quarter of 2024 from 116 to 126. We estimate 280 surgeons performed a breast resensation procedure in the second quarter, which represents a 17% increase versus the second quarter of 2024. In extremities, we have trained 67 surgeons year-to-date, up 37 from the first quarter of 2025, with 6 additional programs planned in the second half of the year. We expect to meet our 2025 target of 105 surgeons trained. In oral maxillofacial and head and neck, we have trained 41 surgeons year-to-date, up 15 from the first quarter of 2025. We are on track to meet our 2025 target of 45 surgeons trained. Next, I will provide an update on our clinical research priorities. We continue to advance our 2025 initiatives and are on track to complete a level 1 study protocol for implant-based neurotization, a level 1 clinical evidence plan for Avance versus autograft in mixed and motor nerves, and a clinical evidence plan for oral maxillofacial and head and neck. Regarding research and development, as we have outlined in our strategic plan, innovation is critical to our long-term growth. Through midyear, we continue to progress and advance our innovation platform across three core pillars: therapeutic reconstruction, ease of coaptation, and protection expansion. Regarding coverage and payment, during the quarter, multiple non-coverage policies were removed within the Blue Cross Blue Shield network for nerve care, adding an estimated 10 million additional covered lives. Year-to-date, we estimate 17 million additional lives are now covered for nerve repair for peripheral nerve injuries using synthetic conduits or allografts, which brings coverage among commercial payers to more than 55%. Adding to our progress during the second quarter, we enjoyed significant external validation of Axogen's differentiated technologies and leadership in peripheral nerve repair, with 17 new peer-reviewed publications citing clinical use or discussion of our products. For those interested, these peer-reviewed studies are available on our website. Finally, I will provide an update on our prostate clinical and market development plan. We are excited about the opportunity to improve nerve function outcomes in robotic-assisted radical prostatectomy and continue to work closely with key opinion leaders to advance surgical technique development. During the second quarter, we completed the hiring of our clinical development team, which will provide field-based support to surgeons and pilot sites incorporating nerve repair into their robotic-assisted prostatectomy cases. We added 3 additional clinical pilot sites and now have 6 active sites. We expect to meet the goal of having 10 pilot sites running by year-end. Procedures are ongoing, and we aim to complete 100 cases by year-end. Before I hand it over to Lindsey, I would like to address the status of the Biologics License Application, or BLA, for Avance Nerve Graft. The BLA remains on track and continues to progress as planned. During the second quarter, we completed several key regulatory milestones to support our anticipated approval in September of 2025, the late cycle meeting with the FDA, pre-licensing inspection, and sponsor inspection under the FDA's Bioresearch Monitoring Program. These milestones follow the successful clinical trial inspections we spoke about on our last call, further reinforcing our confidence in the strength and completeness of our Biological License Application submission for Avance Nerve Graft. We reiterate prior guidance that we expect BLA approval in September. The BLA approval will secure 12 years of market exclusivity from biosimilar nerve allografts and establish Avance Nerve Graft as the only implantable biologic indicated for the repair of functional deficits in peripheral nerves. With that, I will turn it over to Lindsey, who is off to a great start as Chief Financial Officer and is adding a great deal of clarity to our operating performance.

Lindsey Hartley, CFO

Thanks, Mike. I'm pleased to report our second quarter results. We reported revenue of $56.7 million, reflecting an 18.3% growth compared to the second quarter of 2024 and a 16.7% sequential increase over the first quarter of 2025. The year-over-year performance was driven by an increase of approximately 3% in price and 15% in unit volume and mix. Our gross profit for the quarter came in at $42 million, up from $35.3 million in the second quarter of 2025 and $34.9 million in the first quarter of 2025. This represents a gross margin of 74.2%, up from 73.8% in the same period last year and up from 71.9% in the first quarter of 2025. The year-over-year increase is primarily due to lower inventory write-offs and shipping costs on products sold, partially offset by slightly higher product costs. Gross margin for the first half of 2025 was 73.1%, 3% less than the first half of 2024. The decrease in gross margin for the first half of 2025 was driven by a 2.8% increase in year-over-year product cost. Product costs increased as a result of the transition of processing Avance Nerve Graft to our Axogen processing center and costs related to the additional steps and tests required as we approach the transition to processing as a biologic in September. We expect the cost of our Avance product to decrease over time as we gain economies of scale at the Axogen processing center, and once the BLA is approved, we can begin implementing a continuous improvement program. Our operating expenses increased to $40.3 million, up from $35.8 million in the second quarter of 2024, and as a percentage of revenue, decreased 3.5%, highlighting our ability to increase our operating leverage. Sales and marketing expenses as a percentage of total revenue were up less than 1 percentage point to 42% from 43.1% in the second quarter of 2024. Research and development expenses increased 2.9% to $6.8 million from $6.7 million in the second quarter of 2024. As a percentage of total revenue, research and development expenses were down 1.8% to 12.1% from 13.9% in the second quarter of 2024. General and administrative expenses increased 2.9% to $9.7 million from $9.4 million in the second quarter of 2024. As a percentage of total revenues, general and administrative expenses were down 2.6% to 17.1% from 19.7% in the second quarter of 2024. Net income for the quarter was $0.6 million or $0.01 per share compared to a net loss of $1.9 million or $0.04 per share in the second quarter of 2024. Adjusted net income for the quarter was $5.7 million or $0.12 per share compared to an adjusted net income of $2 million or $0.05 per share in the second quarter of 2024. Adjusted EBITDA for the quarter was $9.3 million compared to an adjusted EBITDA of $5.6 million in the same period last year. As of June 30, our balance of cash, cash equivalents, and investments increased $7.8 million to $35.9 million from $28.1 million at the end of the first quarter of 2025. Now turning to our full-year financial guidance for 2025. We are raising our revenue growth guidance to at least 17% or revenue of at least $219 million. We reiterate our gross margin guidance in the range of 73% to 75%, inclusive of one-time costs related to the BLA approval for Avance Nerve Graft, which are expected to impact gross margin by approximately 1%. As a reminder, these costs will be incurred around the anticipated BLA approval date, currently expected in September. Also, we estimate that two-thirds of those costs relate to the vesting of our BLA milestone-related stock compensation awards and are noncash. We continue to expect to be net cash flow positive for the year, and we also expect to self-fund our strategic plan with growing cash from operations. In summary, we are pleased with our second quarter performance and the progress we have made. We remain focused on executing strategy, investing in innovation, optimizing our resource allocation, and driving towards profitability. With that, we will now open the lines for questions.

Christopher Thomas Pasquale, Analyst

Congrats on nice results. Mike, I wanted to dig in a little bit more on the progress you've seen in the business through the first six months of the year. The 18% growth this quarter was similar to what you posted in 1Q, but it came against a much tougher comp. So I think arguably, it shows some acceleration in underlying trends. Would just love to know kind of where you think the changes you've implemented are bearing the most fruit here early on? And then maybe juxtapose that with the full-year outlook, which does imply a bit of a deceleration in the back half.

Michael D. Dale, CEO

Certainly. The reasons for our growth align with what we've communicated from the start. It involves applying specific strategies in sales management that are essential for increasing the adoption of nerve care across various clinical application areas. The primary product value proposition is Avance, supported by complementary products that form our algorithm. Our efforts are focused on accounts with the highest potential, leading to this positive outcome. There's nothing particularly groundbreaking here; it follows our strategic plan from early March, which emphasizes how to attract customers and what must be managed and measured to ensure progress. We're effectively executing in each area, and our performance remains consistently solid. The treatment and adoption of nerve care in various disease and presentation scenarios is still quite limited. Thus, the opportunities are significant as we engage with physicians treating these patients. We have organized ourselves to capitalize on this. One area that's exceeded our expectations is the growth of our extremities business, which is outpacing our original internal projections. All other segments of the business are expanding as anticipated. Overall, every aspect of the business is growing, including accounts outside of high potential categories, all of which are experiencing substantial growth. The business trajectory is positive, and our goal is to maintain that momentum. I hope this addresses your question.

Christopher Thomas Pasquale, Analyst

Yes, that's helpful. And then I know the updated guidance calls for at least 17% growth, but anything you'd call out in terms of back half of the year dynamics versus first half?

Michael D. Dale, CEO

Sure. It's part of the BLA process. Until it's final, it's not. We're trying to maintain a level of conservatism given that there may be some change in terms of how we employ our logistics in providing our product, and we planned accordingly. But we think it's prudent until that's completely settled and that we understand exactly what the mechanics will be, that we don't get ahead of ourselves.

Michael Anthony Sarcone, Analyst

I guess just a follow-up there on Chris'. You have this ramping sales rep productivity factor that's playing out through the year. So when we think about historical seasonality or quarterly cadence, do we expect it to be similar to years past? Or do we typically see a slight bump in the third quarter? Could that be exacerbated by productivity improvements as you're growing the rep base?

Michael D. Dale, CEO

In general, the prior history would be something that I don't think will change. If we kind of go through our various segments, on the extremities side, we typically see an increase in procedures when the weather is good and people are outside and active, which is primarily summer. On the chronic nerve injury side, these are elective procedures, and we typically see an increase in those procedures in the last quarter of the year as patients maximize their co-pays. On oral maxillofacial and head and neck, we don't see much in the way of seasonality. On breast, we typically see a slowdown in breast reconstructive procedures during the summer as many women are caretakers for the kids during the summer. They prioritize time with family. Given the expansion of the business, we're looking at our own seasonality.

Michael Anthony Sarcone, Analyst

Got it. And then just one calling out the commercial coverage wins. It seems like you're making pretty good progress there, and that's prior to the BLA approval. So maybe you could dig in a little and just tell us what's helping to drive that progress now? And then is it fair to assume that, those coverage expansion wins can accelerate even more post BLA approval?

Michael D. Dale, CEO

Yes. To the latter point, I think you can absolutely expect that. It took me a while to appreciate that the RECON study, while done some years ago, was only published a little more than 2 years ago. The database, the dossiers, the value dossiers that support our products have only recently been updated and made available to payers and third parties who provide opinions and/or clarification on our product status from an evidence and regulatory standpoint. So as this information is digested and as we engage with those payers, we basically can clarify that this is a therapy that should be covered. And so it starts to build upon itself — it's like the snowball effect. It won't happen overnight. But the long story short, it's why we've said that over the period of our strategic plan, we fully expect to get to nearly complete commercial coverage. It won't happen in one year, but it builds on itself.

Rick Ditto, CRO

The thing I'd add to what Mike said is that I've been pleasantly surprised in my first four months that the health care climate in the US is changing, and I think practitioners acknowledge that they need to stand up and let their voice be heard. As we've engaged with these regional plans and are developing ways to engage national payers toward the backend of this year and early next year, clinicians are activated. They're willing to sign letters. They're willing to reach out to payers and advocate for patient access and coverage. We expect to see the number of patient appeals and surgeon appeals climb over time. When you break down the coverage landscape in the United States, we report that at least 55% of commercially covered lives have access. If three payers flip, that looks good. We've got concrete plans in place and we look forward to moving the mission forward. We think over time, our benefit to risk value proposition is strong. This is a good opportunity for the company, and as patient access improves, it's going to open up one of the main bottlenecks in our business.

Caitlin Cronin, Analyst

Congrats on a great quarter. Just to start off, how was the interaction during the late cycle BLA meeting? Any more color on that? And if there were any processes that you've had to implement as you near the expected approval?

Michael D. Dale, CEO

Sure. First of all, it has been professional, cooperative, and highly interactive, but it does go in waves. So it might be almost every other day of interaction, and sometimes you might go a week at a time. Unlike Class III devices, you don't have finite gates that you go through. You go through the same processes, but you don't get clear indicators that something is done. So I can't say that we know with certainty what will be required, other than we fully expect there will be modifications to our quality system in the discussions we have had with the FDA to date.

Caitlin Cronin, Analyst

Got it. Okay. And then as you work through your hiring process for the year, any change to the cadence and level of OpEx spend expected in the back half?

Michael D. Dale, CEO

No, not yet, although we are looking at what might be possible in terms of incrementally accelerating our hiring plans. It's more evident that one of our greatest opportunities is simply to scale this footprint. There's a lot of need for nerve care. While we have a good-sized sales force, it still remains a pretty small footprint. Our ability to scale that within the context of our ability to fund our operations is what we're looking to do. We're encouraged by the progress we have with the commercial footprint. But at the moment, there's no change in our guidance.

Unidentified Analyst, Analyst

This is Sam on for Mike. I just wanted to dig in on the BLA process a little bit more. Are there any specific major milestones remaining in your back and forth with the FDA prior to the expected approval in September?

Michael D. Dale, CEO

Sure. There's no explicit milestones beyond what we've already shared. The final stages are that we'll work with the FDA upon labeling and final requirements as part of the quality systems. Those conversations will be ongoing for the next 30 days. We will update everybody upon completion.

Unidentified Analyst, Analyst

Got it. And can you provide a bit more detail on specific manufacturing improvements that you're planning to implement following the BLA approval in September? How quickly can you implement these improvements and drive meaningful operating leverage?

Michael D. Dale, CEO

Much of the improvements will involve classic continuous improvement processes. If it takes five steps and you can do it in three, we will start doing it in three. These need to be qualified and verified, but they all reduce inefficiencies. We'll complement those by introducing electronic systems that will reduce a lot of the manual recordkeeping. There's nothing particularly remarkable about what we're going to be doing. It's just that we'll implement them once we have one system upon which we can run day-to-day operations. We're continuously refining processes and enjoy greater yields, but there's tremendous opportunity for basic improvements that we'll commence upon the completion of the BLA.

Jayson Tyler Bedford, Analyst

Congrats on the progress. I guess maybe start with gross margin. What was the biggest change in the 2Q gross margin versus 1Q?

Lindsey Hartley, CFO

The biggest change was really just savings from our product costs year-over-year and the reduction in write-offs.

Jayson Tyler Bedford, Analyst

Okay. Helpful. It looked like there was a fairly big sequential jump in high potential accounts. I think previously you had identified about 780 high potential accounts. I guess, first, is this...

Michael D. Dale, CEO

Able to do that this year, Jayson. Some of this is footprint related. As we enter into next year, we'll codify more goals specific to how we expand that. Each rep was required to pick which high potential accounts they believe they had the greatest opportunity within the survey. They also manage other accounts that are not high potential accounts. A significant part of compensation focuses on those. We did not pick all 780 this year, but we are working towards expanding that target in the next year.

Jayson Tyler Bedford, Analyst

Okay. And just lastly, I think you mentioned earlier some variability due to changes in logistics and mechanics related to the BLA. Can you elaborate on that comment?

Michael D. Dale, CEO

Sure. It primarily involves trunk stock, which is a product we would have as a component of supply during unscheduled procedures. After the BLA, it's unlikely that will be part of our repertoire, so it will require us to supply that product differently for some customers. While we have plans in place for that, we're also being prudent to ensure there are no disruptions until we have things truly codified and finalized with the FDA.

Ross Everett Osborn, Analyst

Congrats on the quarter. So starting off, I was hoping you could provide some more color on where you're seeing above expectation growth within the extremities business.

Michael D. Dale, CEO

It's broad-based growth. We have internal growth targets that we had for the business, and what I can speak to is that we're exceeding those consistently. Stabilizing the organization and slowly adding to that has been part of it. There's clarity of purpose that everyone has. They're excited to wake up and go to work. We have commitments to the future. The focus on high potential accounts is also very important for creating enduring repeatable revenue. There are a lot of opportunities in nerve care, but building nerve care as an expected part of care within institutions and among physicians is essential. All of these factors combined are leading to greater productivity.

Ross Everett Osborn, Analyst

Got it. That's helpful. And then would you remind us of how we should be thinking about the time from training a new doctor to getting to scale?

Jens Schroeder Kemp, VP of Sales

One of the things we've done this year is really continue to expand our surgeon education and training programs, which are critical to activating surgeons. Once they go through a training program, it typically takes about three quarters for them to become fully productive after training. There is some ramp-up time.

David Louis Turkaly, Analyst

Congrats on the results and the clinical progress. Mike, I just want to clarify one thing. I know you've gone through a bunch of inspections. Were there any issues raised or any observations from the FDA?

Michael D. Dale, CEO

No. We don't provide that level of detailed information, but so far, so good. The BLA process is on track, and we'll report out once it's concluded. Most of the work at this point is حولing around the quality systems, which is expected as we move from a device regulatory scheme to a biologic. We are the first of its kind, so adapting quality systems to deal with human tissue is a change, but we've worked with the agency and feel confident.

David Louis Turkaly, Analyst

And any discussions around the labeling? I know you're expecting a broad label, but have they made any comments about injury type or nerve location?

Michael D. Dale, CEO

We're just engaging in that process. We expect it to unfold over the next 30 days. We won't be in a position to provide guidance until the conclusion.

Frank James Takkinen, Analyst

Congrats on a good quarter. I hope to start with a bit more color on breast. It sounds like you had a good quarter of hiring. Can you talk about rep ramp-up and the quality of the reps you've retained through the hiring process? Also, underlying trends in breast throughout the quarter would be great.

Michael D. Dale, CEO

In terms of the ramp-up, we got behind early this year, but we've caught up and expect that cadence to continue. We have no issues attracting talent. We have multitudes of candidates who seek jobs. We're very pleased. It's an exciting space right now. Once more breast resensation is done, physicians look at it from an ethical standpoint — they believe they have an obligation to provide this option to patients. Once introduced to it, that becomes the desire and expectation, and that dynamic continues to grow.

Frank James Takkinen, Analyst

Got it. That's helpful. And then just one more question regarding gross margin. Lindsey, I appreciate the comments on write-downs. Are there any future write-downs you think may occur?

Lindsey Hartley, CFO

Yes. We're identifying process improvements, and while we don’t see any right now, if necessary, we'll take write-offs. In Q3, we expect some impact related to BLA, PSU as disclosed. For Q4, we anticipate returning to a more normal situation and will implement process changes for upsides in 2026.

Operator, Operator

There are no further questions at this time. I would now like to turn the floor back over to Mike Dale, CEO, for closing comments.

Michael D. Dale, CEO

Thank you, operator. On behalf of the Axogen team, I want to thank everyone for their time and interest in our work, to fulfill the promise and potential for all stakeholders in our business purpose, to restore health and improve quality of life by making restoration of peripheral nerve function an expected standard of care. We look forward to updating you on our continued progress and our plans on our earnings call next quarter. Thank you.

Operator, Operator

You may disconnect your lines at this time. Thank you for your participation.