Elutia Inc. Q3 FY2023 Earnings Call

Greetings. Welcome to the Elutia Q3 2023 Financial Results Call. Please note this conference is being recorded. I will now turn the conference over to your host, David Carey of Finn Partners. You may begin.

Thank you, operator, and thank you all for participating in today's call. Earlier today, Elutia released financial results for the quarter ended September 30, 2023. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical fact but relate to expectations or predictions of future events, results, or performance are forward-looking statements. Forward-looking statements, including without limitation, those relating to our operating trends and future financial performance, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, including Elutia's annual report on Form 10-Q for the quarter ended September 30, 2023, to be filed with the SEC, accessible on the SEC's website at www.sec.gov. Such factors may be updated from time to time in Elutia's other filings with the SEC. The conference call contains time-sensitive information that is accurate only as of the live broadcast today, November 13, 2023. Elutia disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. Also during this presentation, we refer to gross margin excluding intangible asset amortization, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available in the company’s financial results release for the third quarter and September 30, 2023, which is accessible on the SEC's website and posted on the Investor page of the Elutia website at www.elutia.com. And with that, I’ll turn the call over to Elutia’s CEO, Randy Mills.

Thank you, David, and thank you all for joining the call today. Last quarter, Elutia was born, and we are excited to tell you all about it. Today, I'm going to discuss our very strong third quarter results and the significant progress that we have made advancing our CanGarooRM FDA submission. Matt Ferguson, our CFO, is going to go over our financial results in detail. After that, we're going to open the line up for your questions. But first, since we have so many new listeners on the call today, I would like to start out by providing an overview of Elutia so that everyone has a solid understanding and proper context to evaluate our business strategy and performance. We think that the more you know and understand, the more you will like Elutia. Now as a CEO that's been doing this for more than 25 years, I've come to realize that any great success first starts with a great team. And over my past 25 years, I can honestly say that the collection of people that I get to work with in and out on a daily basis form my greatest hits album of leadership teams. And not just because they are remarkable people with remarkable pedigrees that have claims to tremendous ego and attitude, but because each of them shows up each day with a humble but confident relentless Elutia-first mindset, and it is such a joy and honor to be a CEO with this remarkable team. Elutia is a commercial stage company that is working with a set of proprietary platforms in both the CIED or pacemaker and breast reconstruction space. So CanGarooRM is our product line in the CIED space. SimpliDerm is our product line primarily used in breast reconstruction. And what we're doing is pioneering the drug-eluting biometrics. We'll talk more about this today. But we believe the drug-eluting biologics matrix can solve problems unaddressed by available alternatives. And we expect to launch our first of these CanGarooRM in 2024. CanGarooRM has the potential to be a real blockbuster. It's entering a market with over $600 million in market opportunity and only one other competitor. From there, we intend to leverage this drug-eluting biologic platform into adjacent markets such as neurostimulators, sleep apnea, and drug pumps. Our mission at Elutia has the concept of humanizing medicine so that patients can thrive without compromise. When you implant medical devices, serious challenges can arise. While medical devices have gotten more sophisticated over time, it's often that actual last mile of care where a problem can develop. For example, device migration can occur; a pacemaker that's implanted into the chest wall can literally migrate down the chest wall, putting tension on the leads and causing lead failure. Hematoma formation, eroding devices, and infections can all develop. We see some remarkable procedure failure rates, with 7% to 11% failure rates in pacemakers and 12% to 20% failure rates in breast reconstruction. This is what we are looking to solve at Elutia. Elutia is breaking silos that have led to the development of great solutions. We actually just see the patient. By breaking down historical silos, we can create great solutions that are greater than the individual parts. We start with a great base biological material, extracellular matrix, that provides necessary structural support and reduces inflammation and fibrosis. This leads to our drug-eluting biomatrix, which gives durable structural integrity, enhanced surgical site healing, and targeted therapeutic delivery that remodels into the patient's own healthy tissue. We believe we have created a significant level of protection around this technology, with over 40 issued U.S. patents and exclusive licensing agreements. Now, regarding our two product platforms, SimpliDerm and CanGaroo, let’s dive deeper. SimpliDerm is a product we market through a highly trained group of proprietary distributors. This quarter, SimpliDerm is up 44%, crossing the $10 million annualized run rate, and we are just at the front end of seeing Sientra contribute to this performance. Now regarding CanGaroo, it's the only biologic envelope on the market that stabilizes pacemakers and internal defibrillators. The market dynamics here are worth understanding. CanGaroo encompasses a $600 million market in the U.S. with only one other player. We've focused our sales team solely on CanGaroo, which has led to greater usage and appreciation for the benefits of using a biological envelope. CanGarooRM is our next-generation product that adds powerful antibiotics, and we view it as a clear superior product. Market research shows that 88% of existing antibiotic envelope users would switch to our product. We anticipate a decision on CanGarooRM's FDA approval in the first half of 2024, and we feel very confident about where we are in this process.

Thanks, Randy. This has really been a significant quarter for Elutia from operational, strategic, and financial perspectives. We announced two major transactions this quarter: the divestiture of our Orthobiologics business unit, which streamlined the business and brought in an upfront $15 million, and we executed a private placement financing that brought in $10.5 million. This positions us well moving forward, allowing us to focus on operations and strategy. In Q3, we grew our revenue to $6.1 million, up from the prior year. SimpliDerm grew 44% year-over-year while CanGaroo grew 11% year-over-year. Importantly, we saw a dramatic improvement in efficiency; where we previously spent 76% of revenue to generate it, this year we only used 46%. Our gross margin was 60.2% for the quarter, highlighting a much more high-margin, high-growth profile overall. Other notable highlights include a cash increase to $14.5 million, up from $9.3 million at the end of Q2. Just looking ahead, we expect to see cash increase further as we transition into the next phase of our operations.

Elutia is born. As you can tell, like all proud parents, we like to talk about it. It's a great company. We think it's in a great position, executing and growing at 26%. We have what we think is a promising future with CanGarooRM, which we expect to launch in the first half of next year. Lastly, we have the team and resources to get this job done.

Congrats on the progress. So starting off, maybe just on the new rebranding of Elutia. You're now 100% focused on CanGaroo and SimpliDerm offerings. Have you seen the shift in focus affect your sales force's mindset to further push CanGaroo? Is there a potential for CanGaroo to grow faster ahead of RM?

Thanks, Ross, for the question. We absolutely have seen a shift in mindset because of the focus. Before our deal with LeMaitre, the sales force was split between our cardiovascular product line and our bio envelope product line, CanGaroo. The LeMaitre deal has put the product into the hands of a company that is phenomenal at marketing that kind of product, and they are doing a great job with it. What this focus has allowed is for the sales force to really concentrate on CanGaroo. You’re starting to see it move as we are selling on the science and technology of the biology. This is setting up the launch of CanGarooRM very well.

Congrats on the progress. Maybe I'll start with just following up on Ross' point about the commercial strategy post CanGarooRM clearance. Can you talk about where you think you can take share most easily?

Thank you, Frank. One of the great things about this market is that Medtronic has created awareness around the need for the product. Medtronic is close to 100% penetrated with their pacemaker users. Yes, 88% of those users would like to switch to CanGaroo, but there's also a wide-open market of $400 million to $450 million that’s currently not being addressed. That's why we are so excited about introducing this product.

Talk us through any clinical strategy you may be considering. Do you think you need to run a clinical trial to show the benefits of the drug-eluting pouch?

First, Frank, we are a science-based company, and we have done numerous clinical programs. We are planning several trials once CanGarooRM is approved to showcase its benefits. We think that there is an opportunity to differentiate based on biological components compared to infectious components. We are excited to prove that clinical benefit.

How should we think about a steady state growth rate in the SimpliDerm business? Clearly, it’s growing quickly now, but what are the moving pieces?

SimpliDerm has two different distribution channels: our proprietary distributor network and now the Sientra partnership, which brings about 50 new sales reps. The Sientra team has started contributing, and while we are currently in a wait-and-see mode, we expect to see its potential grow significantly. We see our growth trajectory continuing on the back of both channels.

In Q3, the 44% growth we achieved was largely driven by our existing distributor network. Sientra's contribution has started ramping up, particularly toward the end of the quarter, and we're optimistic about their impact. We don't expect growth to taper off anytime soon.

And we have reached the end of the question-and-answer session. This also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.