Elutia Inc. Q4 FY2023 Earnings Call

Greetings. Welcome to the Elutia Fourth Quarter and Full-Year 2023 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. I will now turn the conference over to Matt Steinberg with Finn Partners. Thank you. 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 and full-year ended December 31, 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 facts 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-K for the year ended December 31, 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 as accurate only as of the live broadcast today, March 7, 2024. 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 or 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 fourth quarter ending December 31, 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, Matt. I am super excited to be with you today and to share the story of Elutia. Our mission is humanizing medicine so that patients can thrive without compromise. We're going to talk about that word, compromise, today and what that means particularly with our flagship product that we're in the process of getting ready to launch, CanGarooRM. But what we're really trying to do is take away those instances in patient care where patients and physicians are forced to choose between two options when, in fact, we could actually give them both. So Elutia is a commercial-stage company. We have two proprietary product platforms: CanGaroo, which is for our pacemaker and internal defibrillator space, and SimpliDerm, which we use in breast reconstruction. But more importantly, and I think what a lot of people are on the call today, we are pioneering the drug-eluting biometrics to solve some of the most complex problems that exist. I'm going to be giving an update in this, and I'm super excited to do it where we're going to be talking about our regulatory progress that we've made. We're really excited about that. For the year, we had an exceptional year. We had a transformational year at Elutia, and I couldn't be more proud of this team. Our commercial teams kept their eye on the ball, delivering 3.4% growth in CanGaroo and a stunning 38% growth in SimpliDerm. All the while, we were making significant strategic shifts within the company, but everybody kept focused and did a beautiful job commercially and operationally. From a development standpoint, we submitted our 510(k) premarket notification in December. The FDA accepted that application, and that review is progressing pretty much exactly the way we expected. We have not had any request for any new data. We've had some requests for clarification, but we are looking squarely at a clearance decision expected in the first half of 2024, which we believe will likely be around May or June. Everything is right on track from our standpoint. In preparation for that launch, we have established a strategic advisory committee to help us prepare and get the most value out of the CanGarooRM launch. CanGarooRM is a very transformational event; we think this is a transformational product for the company. We need to ensure we position it in a way that we can realize not just the most value for the product, but the most value for the company. We have established this strategic advisory committee that includes leading executives from the pacemaker and implantable defibrillator space, people who have led significant marketing and commercial launches of sophisticated biologic products, as well as business development and reimbursement expertise. So, it's a first-class group of advisors to help us get this launch right. One of the things that I'm very proud of at Elutia is our execution. We announced last year that we divested our Orthobiologics business, but the group handling that kept our eye on the ball and closed that divestiture, bringing in gross cash proceeds of $14.6 million. So, thank you to the team all around for an exceptional year. Elutia is developing the drug-eluting biologic to reduce and remove complications that exist at the device-host interface. When a surgeon implants a device into a patient for a long term, there are a number of complications that arise quite predictably, such as device migration, erosion, infection, and pathologic fibrosis, which can lead to capsular contracture. In the pacemaker market, we see complication rates of 7% to 11%, while in breast reconstruction, it's about 20%. We believe this is an area where we can provide significant value and improve outcomes for our patients. We do this with the drug-eluting biologics that solve these problems without compromise. We do not think a patient and a physician should have to decide between a device that offers pharmaceutical payload or a natural biologic that remodels into the patient's own tissue. That's why we've developed the drug-eluting biologic that provides all of those benefits alongside a regenerative scaffold that helps it regenerate in the patient's healthy tissue. Now, let's get into CanGaroo and CanGarooRM. Each year, about 500,000 CIEDs — pacemakers and internal defibrillators — are placed in patients in the United States alone. When looking at that market space, Medtronic has about 40%, while Boston Scientific and Abbott have another 50%. Biotronic holds about 10%. Only one of these players, Medtronic, has an antibiotic-eluting pouch, which is their product TYRX, developed by the TYRX company in the early 2010s. It's a synthetic polymer envelope that releases antibiotics as it dissolves in the body. Medtronic acquired this product for about $200 million and has grown its revenue to around $250 million to $300 million. However, TYRX isn't a perfect product, and that's why we developed CanGarooRM. TYRX does a great job eluting antibiotics but lacks biologic benefits. We developed CanGarooRM, a biologic scaffold that fits better, reduces inflammation, promotes easier change-outs, and remodels into the patient's own tissue. We've spoken with electrophysiologists about our concept, and 88% of those who use TYRX would use CanGaroo once it becomes available, presenting an opportunity to penetrate a $600 million market. We anticipate a significant revenue opportunity with CanGarooRM and understand its value. We are prepared to methodically launch this product to ensure we maximize its potential. Now let's discuss our clearance strategy and activities. We filed the 510(k) on December 18, 2023, after consulting with the FDA, and the interactions have been positive. Importantly, the FDA has not asked for new data, so we believe we are in a good position for clearance in May or June, aligning with our preparation for a potential launch in the latter half of the year. We also pursue indications for NeuroStim, Parkinson's, and sleep apnea, reflecting a larger future for CanGarooRM. Turning quickly to SimpliDerm, it's a huge market with unmet medical needs. We're excited about SimpliDerm's growth of 38% this year, primarily distributed through our proprietary network and Sientra. Our goal is to combine our RM technology with SimpliDerm to assist women facing post-operative infections during breast reconstruction. With that, I'll take a breath and turn the call over to our Chief Financial Officer, Matt Ferguson.

All right. Thanks, Randy. Exciting stuff, and we are really excited about all the progress being made in CanGarooRM and SimpliDerm, along with the value-driving catalysts we see in the near future and continuing for the medium to long-term here at Elutia. As a financial update, I'll highlight a few key points. Our net sales were $24.7 million for 2023, showing modest growth from $23.8 million in 2022. This performance masked the significant growth from our proprietary products, CanGaroo and SimpliDerm, which grew about 19% year-over-year. In cardiovascular, we partnered with LeMaitre Vascular, and for most of 2023, we sold at a transfer price roughly half of end-user pricing. This impacts our revenue optics but allows us to concentrate on our core growth drivers, which has been positive. Our adjusted gross margin looks down slightly year-over-year at 58% compared to 63%, but we expect continued improvement as we advance into 2024. Adjusted EBITDA was $14.6 million for 2023, down from $22.9 million, reflecting not just the revenue growth but good expense control. We ended the year with $19.3 million in cash, boosted by the divestiture of our Orthobiologics business and a financing in Q3 with cash exercise warrants. Those warrants now have strong potential, and their expiration is set for 30 trading days post-clearance of CanGarooRM, which could bring us about $16 million in additional cash. Overall, 2023 was a strong year for us, and we expect further improvements moving forward. We're strategically positioned for growth with multiple value-driving catalysts on the horizon.

Our first question is from Frank Takkinen with Lake Street Capital Markets. Please go ahead.

Congrats on the progress and appreciate all of the background on CanGarooRM's market. I was hoping to start by following up on some of the FDA interactions. Was curious if you're comfortable divulging any more about some of the requests they made. I heard loud and clear that they were not new data requests, which I think is most important to understand. But anything else you can share and bridge us to the expectation of the May or June timeframe?

Yes, Frank. We're not going to go into too much detail about the requests; it's not for a lack of transparency but relates to our intellectual property, which is very important to us. The questions were clarifying in nature and well within the scope of our response to the FDA from the NSC letter. We had four issues, and we provided the necessary data for that. Importantly, no additional data was requested. We were prepared for clarifying questions, and we submitted a substantial package which included validations and scientific reports. About the timeline, I'm being very conservative, anticipating a clearance decision in May or June. The most critical priority for us is ensuring we achieve this clearance, and our R&D teams have a positive, collaborative relationship with the FDA. We want to make sure they have everything they need before moving forward.

Got it. That's helpful. That makes sense. And then, maybe extending on the comments you made around the committee you put in place for launching the product. How quickly could you have supply up and running? Should we assume it will be more of a limited launch in the second half and then a full launch in 2025?

Yes, right now, we are exactly on track. We're looking for a soft launch or limited launch in the third quarter. This involves getting into hospital VACs, getting through hospital formulary approvals, and ramping up supply. We have a capable manufacturing team ready. The main focus will be reimbursement and formulary negotiations. We expect by the fourth quarter to remove the training wheels and be ready to fully launch.

Got it. That makes sense. And then, transitioning for my last question, regarding SimpliDerm, great to see that continue to grow at an impressive clip. How should we view growth expectations for that item in 2024?

Regarding SimpliDerm, we expect to see continued strong performance even in the current quarter. Our distributor, Sientra, is undergoing some restructuring but has continued to perform well throughout the process. We are optimistic they will emerge even stronger. We anticipate that the growth we saw in 2023 will carry into 2024.

I would add that we are actively working on R&D for SimpliDermRM while continuing to leverage both our proprietary and Sientra sales channels. We're excited about both CanGarooRM and SimpliDerm and how they're currently performing.

Our next question is from Ross Osborn with Cantor Fitzgerald. Please proceed.

It's shaping up to be a very transformative year for the company. I apologize for the background noise; I'm traveling today. Starting off, the CanGaroo number for the quarter came in a little below our expectations, but I realize the story is really about where we go this year. Was there anything notable from a market standpoint?

No, we have shifted our focus from CanGaroo to CanGarooRM. Our sales reps and accounts are in place, and while CanGaroo is a successful product, CanGarooRM needs to be an order of magnitude bigger. Our internal marketing team did a restructuring that cut our commercial team in half, but they held together and achieved our highest revenue from CanGaroo. It's a tighter, more focused group of professionals, and I'm eager to give them the product they deserve.

That sounds great. Glad to hear it. One more question regarding SimpliDerm. Given its continued success, at what point does it make sense to allocate more resources to that asset to reach its full potential, around the 2025 story once RM is out?

We think SimpliDerm is a great product, and we are not holding anything back. It continues to perform impressively, and we see growth potential. Our commitment to developing SimpliDermRM remains strong while supporting our proprietary and Sientra sales channels. We're very excited about this product and its growth trajectory.

We have reached the end of our conference call. You may disconnect your lines at this time, and thank you for your participation.