Axogen, Inc.

Greetings and welcome to the AxiGEN Incorporated Fourth Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Pete Mariani, AxiGEN's Chief Financial Officer. Please begin, Mr. Mariani.

Thank you, Victor, and good afternoon, everyone. Joining me on today's call is Karen Zatteray, Hexagen's Chairman, Chief Executive Officer, and President. Karen will begin today's call with an overview of our fourth quarter performance and an update on our operational highlights. I will then provide an analysis of our fourth quarter and full year financial performance, followed by closing remarks from Karen and a question and answer session. Today's call is being broadcast live by webcast. which is available on the investor section of the Axigen website. Within an hour following the end of the live call, a replay will be available in the investor section of the company's website at www.axigeninc.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 product acquisition and or development, product potential, the regulatory environment, Sales and Marketing Strategies, Capital Resources, or Operating Performance. And with that, I'd like to turn the call over to Karen. Karen?

Thank you, Pete. And good afternoon, everyone. Our total revenue for the fourth quarter was $32.5 million, representing growth of 15% compared to the prior year. I'm pleased with our Q4 results, which reflect our team's continued focus on commercial execution, are customers' ability to successfully navigate the ongoing challenges of COVID-19, and surgeons and hospitals continuing to prioritize nerve repair. At the same time, COVID-19 continued to dampen our revenue in Q4 as trauma remained below normal levels, access for sales representatives to customer facilities remained restricted, and the resurgence in COVID cases further reduced elective procedure volumes particularly late in the quarter. We're also pleased with the pace of our overall recovery in the second half of 2020, with mid-teens growth each quarter allowing us to deliver total revenue of $112.3 million for the year, representing growth of 5% compared to 2019. In addition to achieving year-over-year growth in 2020, We reached a noteworthy milestone during the year, surpassing 50,000 advanced nerve grafts implanted since launch. AVANCE has been featured in more than 125 peer-reviewed clinical publications and has demonstrated clinical outcomes that exceed those reported for conduits and are comparable to those for autograft. The challenges of COVID-19 have further highlighted the benefits of advanced nerve grafts as an off-the-shelf alternative to the surgical harvesting of an autograft for the repair of transected nerves. Along with avoiding the risk of complications from a second surgical site, the desire to shorten procedure time to increase patient and healthcare worker safety and to minimize resource utilization favors the use of our advanced nerve graft. Reviewing our first quarter, We believe revenue that can be attributed to the catch-up of previously deferred procedures decreased considerably compared to the prior quarter and represented approximately $1 million, primarily in our breast, pain, and OMS applications. Our trauma business continued to be the key driver of volume and revenue growth in the fourth quarter, although we believe our growth continued to be dampened by a below-normal incidence of traumatic injuries. At the same time, our trauma business has proven resilient during the pandemic, with surgeons and hospitals continuing to prioritize nerve repair procedures. More importantly, we believe that our efforts to refocus on the core trauma opportunity beginning in late 2019 have led to sustainable improvements in our ability to drive growth and have positioned us well as the market continues to recover and the incidence of trauma returns to normal levels. The recovery of our breast neurotization business continued in the fourth quarter, including meaningful contribution from the onboarding of new surgeons at targeted programs during the year. Despite the ongoing recovery in this application during the second half of 2020, we remain cautious in the near term as several programs again suspended breast reconstruction procedures late in the fourth quarter and into Q1 due to local COVID-19 resurgence. Additionally, new cancer screenings were significantly reduced for several months during 2020 due to the pandemic, which may impact breast reconstruction procedure volumes in the short term. Although cancer diagnosis and reconstruction procedure scheduling may continue to be lower than normal, we are confident in the long term and our growth potential of our breast neurotization business. Our emerging business in the surgical treatment of pain improved during the fourth quarter and remains an exciting opportunity for the company. Prior to Q4, patients with chronic pain due to neuroma formation were particularly reluctant to undergo a surgical procedure, choosing to live with the pain and often relying on pain medications. The recovery and growth of oral maxillofacial nerve repair continued to lag our other applications as procedures remained below normal levels. OMF repair is a highly invasive procedure involving the head and neck area. potentially increasing the risk associated with COVID-19. We expect our OMF application to return to growth during 2021 as COVID cases eventually decline and procedure volume recovers. Turning now to commercial execution. While the pandemic presented many challenges throughout the year, the rebalance of our commercial organization around extremity trauma, our largest market opportunity, and driving deeper penetration with our existing surgeon customers was a meaningful catalyst to our growth during the second half of 2020. The time we invested in extensive sales training during the second quarter strengthened our sales team and improved our ability to support surgeons and their patients and to drive continued growth going forward. We ended the fourth quarter with 111 direct sales representatives in the U.S., an increase of one representative during the quarter. Our direct sales channel was supplemented by 23 independent sales agencies that generally cover more remote geographies. Our independent agencies represented 12% of our total revenue in the fourth quarter compared to 13% in the prior quarter. In recent months, we've selectively added new independent agencies to cover largely untapped remote accounts to reduce travel time of our direct sales team which allows our direct reps to focus on going deeper in the highest potential accounts. Although we are increasing our number of independent agencies, we expect the portion of our revenue covered by the independent agencies to remain similar to recent levels. Throughout the pandemic, we kept our sales team and the broader commercial organization intact and benefited from the stability of our sales territories, customer relationships, and support. as well as from the increasing tenure and experience of our sales team. In 2021, we plan to achieve revenue growth primarily by driving sales productivity while strategically adding up to 10 sales representatives in the second half of the year. To increase sales productivity, our team remains focused on our largest market opportunity, Extremity Trauma, and on driving deeper penetration with our existing surge in customers and accounts. In fourth quarter, we had 893 active accounts, an increase of 12% from 797 one year ago. The increase in active accounts is primarily due to the impact of existing surgeon customers expanding their use of oxygen nerve repair algorithm across multiple facilities, including alternate sites of care. The top 10% of our active accounts continue to represent approximately 35% of our revenue, further demonstrating the meaningful growth opportunity within our existing accounts. Turning now to our continued focus on building market awareness, we participated in the American Society for Surgery of the Hand Conference in October, which was held virtually. In January, we participated in the virtual combined meeting of the American Association for Hand Surgery, American Society for Peripheral Nerve, and the American Society for Reconstructive Microsurgery. AXIGEN's Neurorecare Portfolio was featured in several clinical and scientific presentations during these meetings, including data from the AXIGEN-sponsored Ranger Registry. During 2020, in response to the pandemic and resulting access restrictions to healthcare facilities, we accelerated the development of our digital marketing capabilities, which enabled continued engagement with our surgeon customers. In the second half of the year, We launched a series of email marketing campaigns delivering important and timely nerve repair news and content to targeted surgeons. Monitoring of these activities has showed a high level of engagement, and we're confident that our newly developed digital marketing capabilities have improved our ability to support our sales and market development efforts in 2021 and beyond. Additionally, our surgeon customers continue to participate in our Nerve Matters online surgeon community. discussing their use of peripheral nerve injury solutions. In Q4 alone, over 2,200 surgeons engaged with the platform. We have also continued to increase awareness of the resensation technique. Our efforts to raise awareness around breast neurotization were spearheaded by a media strategy targeting both regional and national news outlets. In 2020, More than 35 million people had the opportunity to learn about resensation through news media coverage. As a result, we've seen a significant increase in organic traffic to resensation.com and a marked increase in visits to the Surgeon Locator tool on the website. I'd like to take a moment to highlight the impact of changes in CMS reimbursements for nerve repair in the outpatient setting. Over the last two years, Reimbursement of direct repairs, or repairs where no implant is used, has been reduced by approximately 60% in both the hospital outpatient and ambulatory surgery centers, while reimbursement for procedures using a van increased 25% in hospital outpatient centers and 97% in ambulatory surgery centers. During the same timeframe, Reimbursement rates for procedures involving conduits and connectors were also increased 25% in hospital outpatient centers and 45% in ambulatory surgery centers. While Medicare patients represent a relatively small percentage of trauma cases, commercial payers often follow the lead of CMS, which we believe bodes well for future reimbursement for nerve repair and could lead to increased procedure volume of short-gap nerve repairs using oxygen products in ambulatory surgery centers. Surgeon education and advocate development continued as a high priority during the fourth quarter and year. Our transition to virtual education, which occurred during the second quarter, has included several events led by surgeon experts in nerve repair and involves multiple constituencies, including fellows, early career surgeons, and all nerve repair surgeons. In particular, We've seen a very positive response from our invitation-only program for early career upper extremity surgeons. And despite COVID-19 restrictions, we were able to train more than three-quarters of the hand and microsurgery fellows in the class of 2020. To highlight our commitment to training fellows, During the fourth quarter, we partnered with an academic center on an educational event that featured a cadaveric session, which was live-streamed to an at-capacity audience of approximately 100 surgeons in academic centers across the country. The event featured a hybrid learning experience with virtual education, interactive clinical decision-making, and hands-on skills labs. Experts in hand surgery and nerve repair were able to broadcast dissections and nerve repair skills in real time, as well as conduct interactive clinical decision-making sessions. The event was a resounding success, and according to the host surgeon, sets the standard for what a virtual course should look like. In addition, in anticipation of continued restrictions on in-person programs, we've created over 20 nerve repair technique videos as valuable teaching tools to help educate residents and fellows during the years ahead. We continue to expand our body of clinical evidence in support of our product portfolio and increasing surgeon adoption. As announced last Thursday, we've completed analysis of the 15 subject pilot stage of the REPOSE study, evaluating the use of Astragard nerve cap in the management of painful neuroma. Findings from the pilot phase demonstrated that subjects experienced a clinically significant reduction in pain from baseline at each of the 3, 6, 9, and 12-month time points following surgical excision of the neuroma and placement of Axigard nerve cap. Specifically, the study observed a statistically significant mean reduction in pain of 69 points at 3 months and 80 points at 12 months as measured on the 100-point visual analog scale. Additionally, subjects experienced clinically meaningful improvements in secondary endpoints evaluating quality of life, including fatigue, physical function, sleep disturbance, pain interference, pain intensity, and pain behavior as measured by the validated PROMIS questionnaires. Pain medication utilization data showed positive indicators for a reduction of pain medication burden, including opioids, following the procedure. There were no AxiGuard NerveCap safety issues reported and no observed recurrence of symptomatic neuroma. Although a small sample, we're encouraged by the promising results of the proposed pilot phase supporting the ongoing safety and performance of AxiGuard NerveCap in the management of painful neuromas. Enrollment in the comparative phase of repose is well underway, and assuming limited impact from COVID-19, the company expects enrollment to be completed in Q1 of 2022 with a data readout in Q2 of 2023. Our RECON study remains on schedule. As a reminder, RECON is our phase three pivotal study supporting our biologics license application, or BLA, which will transition our advanced nerve graft from a section Our last subject was enrolled in July of 2020. Our protocol includes a 12-month follow-up visit for all subjects, and given the impact of COVID-19, our plans allow for an additional three months for subjects to complete their final visit. We anticipate the final follow-up visit to occur no later than October of 2021. A study report in the second quarter of 2022 and filing of our BLA in 2023. Our ranger and match registries continue to enroll, with over 2,300 nerve repairs now enrolled in ranger. In 2020, the match registry, which is a comparative population of conduit and autographed repairs, provided a publication on the comparison of conduit and advanced outcomes, and a presentation on the preliminary findings of autografts and advanced outcomes. Findings from these analyses demonstrate that the outcomes of advanced nerve grafts were statistically better than conduit and were comparable to those for autograft. Data from these two clinical programs continue to play an important role in informing surgeons' clinical decision making. Additionally, during the clinical and scientific sessions at the American Association for Hand Surgery annual meeting in January, a group of independent investigators presented on the comparative clinical outcomes for nerve autografts, conduits, and allografts, of which all allografts were advanced nerve grafts. The study was a large, systematic review of the available literature, including 35 clinical studies and over 1,500 nerve repairs. Similar to the findings from our match studies, this large review found that outcomes for nerve allografts were statistically better than those for nerve conduits and comparable to those for autografts. Investigators also analyzed procedure cost data from 340 Medicare claims and found that hospital facility procedure costs, both inpatient and outpatient, were also comparable. These findings further highlight the growing body of clinical evidence on the role of advanced nerve graft as an alternative to nerve autograft. Current data suggests advanced nerve graft provides both comparable outcomes and similar procedure costs compared to nerve autograft without the donor site morbidity and potential complications associated with the harvest of nerve autograft. In January, a new publication with the first clinical outcomes data from the resensation procedure published in the Plastic and Reconstructive Surgery Global Open Journal. The publication from Stanford University reported on 36 breast reconstructions that included 22 breast reconstructions utilizing the resensation neurotization technique and 14 standard non-neurotized breast reconstructions. The study found that neurotization using the re-sensation technique allowed for attention-free co-optation to sensory nerves. Return of protective sensation was reported in 73% of the neurotized subjects as compared to 36% of the non-neurotized group. Although an early time point, the subjects who underwent neurotization were more likely to see a return of sensation to the reconstructed breast and also more likely to have sensation in the majority of the breasts. This single center study is part of our larger Sensation Now registry, and we look forward to providing additional long-term sensory and quality of life data on the role of resensation for women undergoing breast reconstruction following mastectomy. As we advance the science of nerve repair, we remain committed to providing meaningful and impactful clinical evidence on the utility of our nerve repair portfolio. Reflecting on 2020, I'm extremely proud of the results delivered by our Axigen team and the creativity, resilience, and grit required to navigate the unprecedented market challenges that occurred throughout the year. Despite the pandemic, we entered the new year a stronger company, positioned well to drive meaningful growth in a more normalized environment. Before I turn the call over to Pete, I'd like to spend a moment discussing our outlook for 2021 and the first quarter. As mentioned previously, overall procedure volumes were further impacted late in the fourth quarter by increased COVID-19 cases, and this impact has continued into the first quarter. Given the uncertainty around the ongoing impact of COVID-19, including the timing of vaccine rollout to a larger portion of the population and the potential for new, more contagious variants of the virus, We believe it's appropriate to remain measured in our near-term outlook for the business. Accordingly, we are not providing full-year guidance at this time. Now, I'll turn the call over to Pete for a review of financial highlights. Pete?

Thank you, Karen. Fourth quarter revenue increased 15% to $32.5 million. Our revenue increase for the quarter was the result of a 12% increase in unit volume and a 3% net benefit from changes in pricing and product mix. The growth in unit volume was primarily attributable to unit growth in our active accounts. Gross profit for the fourth quarter was $27 million compared to $23.3 million in Q4 of 19. Gross margin was 83.2% for the quarter compared to 82.7% the prior year. After temporarily suspending tissue processing in the second quarter, we restarted in late Q2 and returned to normal levels in January of 21. Our quarterly gross margins continued to improve sequentially as revenue and tissue processing volumes have increased. Our inventory levels have also increased slightly in Q4, and we expect inventory will continue to build across 2021 as we support customer demand. Total operating expense in the fourth quarter increased 6% to $32.4 million compared to $30.7 million in the prior year. Total operating expense in the fourth quarter included $2.8 million in non-cash stock compensation compared to $2.9 million in the prior year. Total operating expenses increased over the prior year primarily due to higher sales commissions and other compensation-related costs which were partially offset by decreases in travel, in-person conferences, and search and education programs due to pandemic-related restrictions. Sales and marketing expense in the fourth quarter increased 5% to $19.8 million compared to $18.8 million in the prior year. As a percentage of total revenue, sales and marketing expense decreased to 61% for the three months ended December 31st compared to 67% in the prior year. Research and development spending in the fourth quarter was $4.9 million, which is consistent with the prior year. Research and development costs include product development, including non-clinical expenses in support of our BLA for advanced nerve graft and expenses for clinical research. Product development expenses represented approximately 55% of total R&D in the fourth quarter compared to 49% in the prior year, while clinical expenses represented the remaining 45% in Q4 of 20 compared to 51% in the prior year. As a percentage of total revenues, research and development expenses were 15% in Q4 compared to 17% in the prior year. General and administrative expense in the fourth quarter increased 10% to $7.7 million for 24% of revenue compared to $7 million or 25% of revenue in the prior year. The increase is primarily related to higher compensation-related expenses. Adjusted net loss and net loss per share in Q4 of 2020 was $3.3 million and 8 cents per share compared to adjusted net loss and loss per share in the prior year of $4 million and 10 cents per share. Adjusted EBITDA loss in the quarter was $2.1 million compared to an adjusted EBITDA loss of $4.2 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. Turning to our balance sheet, on June 30th, We announced a new seven-year interest-only financing agreement with Oberlin Capital, which provides up to $75 million in total financing commitments, with $35 million drawn as of December 31st. Interest is paid at approximately 9.5%, a portion of which is capitalized into the construction cost of our Dayton Biologics Processing Center. The agreement with Oberlin Capital also provided Oberlin the right to purchase 3.5 million dollars of oxygen common stock based on a trailing 45-day weighted average trading price. On December 10th of 2020, Oberman fully exercised this option and purchased 247,699 shares at $14.13 per share. Balance of cash, cash equivalents, and investments on December 31st was 110.8 million dollars compared to a balance of $106.7 million on September 30. The net change includes the $3.5 million in equity proceeds from exercise of Overland's option and positive operating cash flow of $3.4 million, partially offset by capital expenditures of $2.8 million related to our new facilities in Tampa and Dayton. As previously discussed, we opened our new Tampa office and lab facility in the fourth quarter. This facility represents a great milestone for the company that will allow us to continue to recruit exceptional talent and execute meaningful scientific discovery and development over many years to come. Additionally, we resumed construction of our Dayton Biologics Processing Center in January of this year. We anticipate completing construction of the facility later this year followed by a one-year validation process and expect to convert production to the new center in late 2022. We anticipate capital expenditures of approximately $26 million for this facility in 2021. Our positive operating cash flow in both the third and fourth quarters were the result of a unique confluence of events that allowed us to over-deliver from a profitability perspective as revenue growth exceeded expense growth. We are ramping investment into projects previously placed on hold, including certain clinical trials, product development, and marketing administrative initiatives, all of which are key to driving long-term sustainable growth. As a result, we anticipate that operating expenses will increase sequentially and that we will see a modest increase in operating cash burn in 2021. We are encouraged by the strength of our business in the fourth quarter as we continue to realize improvements driven by increasing demand across our markets and by our team's improved commercial execution. As the healthcare community in general, and our business specifically, moves toward a normalized environment, we are confident that the operating improvements that we have implemented and the investments we are making will position us to grow the business meaningfully and emerge from this pandemic-related downturn a stronger, leaner organization on a path to profitability. And with that, I'd like to hand the call back over to Karen.

Thank you, Pete. I am proud of the achievements of the entire Actigen team in 2020 in the face of unprecedented challenges. We remain committed to delivering our innovative nerve repair solutions to patients, surgeons, and hospitals. And I believe we're well positioned for success in 2021 and beyond. At this point, I'd like to open up the line for questions. Victor?

Ladies and gentlemen, we will now have our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. One moment, please, while we now poll for questions. Our first question comes from Brandon Foulkes with Cancer Fitzgerald. Please proceed with your question.

Hi, thanks for taking my question, and congratulations on another good call, Tim. Maybe just digging first off into the 4Q results, I know you did pre-release them, but they were quite a lot better than expected when you had your 3Q call, and we heard from a number of companies that the impact of COVID came from mid-November or December, depending on the company. So I guess what changed from the positive from when we last had the earnings quarter mid-November? What did you see in the quarter that was actually better than expectation? And then similarly, in 2021 to date, are you seeing things get better or at this stage are we more just sort of a continuation of the trends we saw towards the end of 2020? Thank you.

Bank Brand. So if I just look at the cadence, it's been a little bit of a roller coaster over time. We had a very strong entry into Q4, seeing continued growth in our extremity trauma business, but also starting to see some recovery in our, again, smaller segments, but more elective procedures in breast reconstruction. and surgical treatment of pain and the beginning to see some recovery in OMF. In the December timeframe, as COVID levels increased, we saw certainly the more elective procedures shutting down, but we also saw some parts of the United States where the COVID levels became so high that they even again started to defer things that are not quite as elective like our surgical trauma cases. That decreased continued into Q1 where we saw again where COVID became quite high in some regions of the country decreased levels of nerve repair. Now what we saw in the past was that those procedures are brought back pretty quickly. We've done a strong job, I think, of educating both the surgeons and the hospitals that nerve repair outcomes are always better when they're done sooner. You can get a meaningful recovery up to a year of a delay, but sooner is always better. And so we anticipate that we'll be able to see a lot of these deferred procedures occur still here in this quarter. We're beginning to see that now up until the snowstorm disrupted things over the last week, but we were starting to see that recovery in terms of COVID. And so we think it'll continue to follow that pattern that we'll get those deferred cases in pretty quickly.

Great. And one follow-up, if I may, maybe just jumping ahead a little bit. So on exams, you know, of course, With the filing of the BLA, I'd imagine that allows you a lot more flexibility in terms of perhaps sort of innovation around the product. Pete, you mentioned about investing in some programs in 2021. You know, I guess maybe call it events 2.0 or innovation around this post-BLA. Is this something we may hear about prior to the BLA approval, or should we expect not to hear anything about that, whether it be for competitive reasons or just from a regulatory perspective, not trying to push the SDA, in terms of what you may have in store for Advance once it's approved under BLA. Thank you.

Yeah, no, great question, and one that we're not prepared to answer just yet. So in terms of innovation of Advance, we continue to see opportunities to continue to have, as you said, an Advance 2.0 and maybe a 3.0 down the road. But for both reasons, both for competitive reasons as well as not wanting to get out ahead of ourselves in front of the FDA, we've not released any information about what those will look like. But we do continue to invest in innovation, both in thinking about advance, but also in new products like you've seen with our AxiGuard NerveCap, which is a new product that we released actually in February of last year. and continue to be pleased with its both clinical utility and the opportunities for growth in the future with that product.

Great. Thank you very much.

Thank you. Our next question comes from Richard Newiter with SVB Lyric. Please proceed with your question.

Hi, thank you for taking the questions. A couple here. So first, congrats on the positive data readout that you had on NERVCAP there. Can you just remind us how you size the NERVCAP market opportunity and when we might start to see that become a meaningful revenue contributor?

So first of all, activate our nerve cap is used in those locations where you want to terminate or end the nerve and manage or prevent a symptomatic neuroma, which is one of what we believe substantially underdiagnosed causes of chronic pain. And where these patients historically have been referred to a pain center to be managed predominantly pharmacologically, but maybe other pain types of treatments We think that there's an opportunity to go in and remove the physical source of the pain and reduce the painful stimulus and therefore make people have a much better quality of life. And we see that at least in the early results we see from the pilot phase of our repose study. We see the application here is actually all across the body, but we're initially focusing on both trauma procedures and injuries due to orthopedic procedures. And that has a lot more to do with referral patterns than it is necessarily about market size. So we just think that that's a simpler way to manage the referral of these patients because they're still within the orthopedic practice. In a long way, that's a long-winded answer to say we decided it's big enough that we think it's important for us to focus on it and it is not distracting to the business interests that we have to date and that we're taking our existing customers and expanding the amount of nerve repair that they can do. Sizing this opportunity is very difficult because, again, it has been underdiagnosed. We believe it's been underdiagnosed as a cause of the pain. So therefore, it's very hard to find references that actually identify how often people who have pain have pain that's due to a symptomatic neuroma. So when we talk about a total addressable market of $2.7 billion, we asterisk that and say this doesn't include what we think are the pain applications because they're on top of this. But because it has been so hard to size it, again, with our focused approach that we're doing, I don't have an addressable market that I've I'm comfortable to give you at this time.

Okay, that's helpful, caller. Thanks for that. I guess, you know, you've made tremendous progress on, you know, getting the focus, direct rep productivity efforts and the focus that you've brought to the organization and getting that direct productivity growing again and over the $1 million marker, if my math is correct, two quarters in a row now. You said that you're going to hire... Ten reps in the second half of 2021. And, you know, that's a big step up again. And I guess the first – it's a multi-question here. The first part of it is, you know, what can you say to investors just to give them confidence now that you're ramping up rep hiring again that, you know, you've got the onboarding process down and that you won't run into maybe some of the issues that you previously have in the past. And then two, I think, Pete, you said that you expect productivity to increase year over year. And if you're hiring 10 reps in 2021, that would suggest some pretty meaningful growth. So maybe just is that rep productivity on an annual basis? Should we be thinking on that on a quarterly basis? Just help me get a better understanding of that comment in the context of the rep hiring.

Thanks. Sure. So first of all, just to be clear, we're saying up to 10. What we're really looking at is we believe that we're going to have some territories that will become large enough by the end of the year that just be unwieldy. But we're going to make judgment calls about when and how many territories to split. So if we end up doing six, that's because that's our judgment. That's how many we need, not because we couldn't hire 10. So just kind of take that as we're really trying to dial this in to be very careful in our splitting of territories. We do believe that on an annualized basis, we will continue to see productivity enhancements With our reps and we've got a series of plans that we think will continue to deliver that productivity growth so that productivity will be the primary driver. We still believe that when we hire new reps in their first year, they'll be less productive on a per person basis than some of our more established reps have been. So obviously you'll have some dilution of productivity in a particular quarter as we add a few people, but it will be in a much smaller percentage than what you've seen in past years. And so we are very mindful of the disruption that adding reps cause, and we think that we've gone through in setting the right footprint for our sales team. So this is Not so much about the organizational shifts that we had to do before, but really in selected territories where we, again, just think that the territory has gotten so large, we'll be better off by adding some resources.

Thank you very much.

Thank you. Our next question comes from Chris Pasquale with Guggenheim. Please proceed with your question.

Thanks. A couple questions. One, just to follow up on repose, those results were pretty impressive, pretty profound impact relative to the VAAS scale there. I'm curious whether there is any good data to compare that to in terms of the alternative treatment options that are available to these patients.

There have been some publications, and we use those actually empowering the study. We see that from the past work that's been done, the minimum clinically meaningful difference is a VAS of 17. So we felt actually pretty encouraged by seeing the 69 at three months and 80-point reduction at 12 months.

Okay. And can you share anything about what you assumed in the comparative study?

in terms of what, well, we powered it on the VASc scores, and we have an 80% power, and again, using that 17 millimeter, 17 difference as what we assume is the clinically meaningful difference, minimum clinical meaning, now I'm getting my terms tangled up, minimum clinical difference for the study.

Okay. And I'm curious whether you can talk about the practical implications of the improved reimbursement environment for Allograft and for Conduits. It may be difficult to sort of suss this out relative to the COVID environment, because I'm sure that's had an impact on setting of care as well. But that improved ASC reimbursement, I'm curious whether you're seeing that change customer behavior, maybe bring some customers on board who were previously not that interested in adding this to their practice, but now that the economics have changed, does it put you on a different level in terms of being able to engage a wider customer base?

So I would just remind everybody that the change is actually a very strong structure for the future in that CMS unbundled direct repair where there's no implant used from where an implant is used. So they took down the reimbursement when no implant is used and raised the reimbursement for both allograft and connectors. We think that's a very Reasonable and meaningful change that will allow surgeons to be able to do nerve repair in their ambulatory surgery centers or hospitals to do them more economically in their outpatient setting. Having said that, only very small amounts of traumatic injuries are actually the Medicare population. Trauma tends to be a younger population than that. And so it's going to take time for commercial payers to mirror this structure We were looking forward to seeing that happen actually in 2020. I can tell you anecdotally that there are some centers that either negotiated that with their commercial payers or their contract happened to be that they mirrored exactly whatever was in CMS. And so we saw some shifts at those centers. But because of COVID, many centers actually just sort of punted for a year and pushed back their renewal dates. So we're really thinking it's going to take another couple years to see this as ambulatory surgery centers go through their negotiations with their commercial payers. Again, I think anecdotally we saw some nice wins where surgeons were able to put patients into where they thought was the appropriate site of care. And there are some real opportunities that are a win-win-win for the patient, the surgeon, and the payer. to move them to the ambulatory surgery center. But there are other things that will remain more appropriate to be done either inpatient or outpatient in a hospital, and the surgeon will have the flexibility to choose that. Thanks.

Thank you. Our next question comes from Ryan Zimmerman with VTIG. Please proceed with your question.

Hey, thanks for taking the questions. Long time, no talk. Just wanted to ask a few. Karen, you know, you talked about the amount you made up in the quarter. I think it was around a million dollars, particularly in brass, to know a mess. But there was an impact in COVID in the fourth quarter. I'm wondering if you can maybe size that up for us and, you know, maybe attempt, if you will, at least I'll try asking, kind of where you were run rating before you saw that impact, you know, start to slow down, I guess, at the tail end of the fourth quarter.

Yeah, I don't really have a quantification of what that December impact was, but I would say it's still not a material impact. Really for us, you're really only looking at two or three weeks in December where we saw a slowdown. Again, a slowdown wasn't like a slowdown in April. It was just definitely some trending in some regions of the country. that were affected. When we've looked ahead, in our thinking and the way I think about modeling things is that we think the impact of deferred procedures will not be material in any quarter this year, that it'll be again in that million or less and we won't see the big swings. That's the benefit of having been able to get our procedures in quickly and now it's going to be really focusing on that organic growth.

Okay, that's helpful. And then two short ones for me here. Just do you plan to add – you stepped up independent distributors, you know, by a couple this quarter. Do you expect to hold that level of independent distributors in 21 and beyond, or could you see more step-ups in kind of these far-flung territories where you want to just kind of fill the gaps?

Yeah, I think we will have more in number of independent agencies over the next year. You know, maybe not adding every quarter, but as we identify these, call it corners of the territory, that's what we're really trying to do is to carve off corners of the territory so that our direct reps are not driving four or five hours to help a surgeon with a case. And we think that's part and parcel of what we're doing to help with productivity. It's one step of things we're helping to improve the productivity of our direct reps. So, yes, I think the number will go up. Having said that, we still think that the percentage of our total revenue that will be from independent agencies will not appreciably change. It'll still be in that same range that we are today of 12% to 13%.

Yeah, no, understood. And appreciating the productivity implications for that segment of the business. And then just lastly for me, and I'll hop in, Hugh, You mentioned the breast neurotization business and some of the sites. You added some sites, but then they did selectively slow down because of COVID. I think if we last recall, you were probably around 20 to 25 sites in breast neurotization. And that might be an old number. Maybe just help us understand kind of where you're at in selective sites that you've added to focus on this breast neurotization business. Thank you.

Yeah, we still remain very selective about the sites that we work with in breast neurotization. So we work with 35 specialty centers today that do flap reconstructions. So remember, this is not breast implants.

These are tissue, autologous tissue flap reconstructions.

And we want to make sure that the surgeons are trained in understanding how to do the nerdization in combination with, of course, doing the full flap procedure. And so we spent quite a bit of time working on educating on the technique. And so that's why we keep it limited to the number of sites that we work with. And we've spent time in those 35 sites, especially over the last several quarters, of expanding across the surgeons at the site so that we're now trying to get have all of the surgeons who are doing flap neurotization or flap reconstructions at a site to offer neurotization as a part of their treatment options.

Got it. Thank you.

Thank you. Our next question comes from Kyle Rose with Canaccord Genuity. Please proceed with your question.

Great, thank you very much for fitting me in tonight. Just had a few questions, a bit more high level, because a lot's been asked. But Karen, maybe you've always given the metrics with respect to the top 10% of accounts and how much revenue they account for. You've been pretty clear about calling out going deeper into accounts as being the biggest driver of growth moving forward. So could you just maybe help us understand frame out what those top 10% of accounts are doing differently than the broader base, and maybe your confidence with respect to translating some of those productivity gains across your broader group. I mean, obviously, you're always going to have different deciles of productivity. However, what are the top 10% doing that's different than the remainder of the business?

Yeah, no, that's a great question. When we looked Just to remind people, the top 10% of our active accounts remain approximately 35% of our overall revenue. And that metric has been relatively constant over the last many quarters, which just shows that our top accounts continue to get bigger, which is what our strategy is, is yes, we're adding new active accounts, but we want to continue to drive penetration in our existing accounts. We are also putting focused effort on following our surgeons to every site of care that they go to to make sure that we're helping them to convert their algorithm irrespective of where they do their nerve surgery. And so that's part of our account growth is making sure that as our surgeons move, they have access to our products across all of those sites. We're seeing that that is actually probably the biggest driver in our productivity improvements is our lowest hanging fruit is continuing to take our existing users who often may, there may be one active user who uses, remember we have five implants, who typically may use three of our implants. So we have room to expand that user. We have room to expand into types of nerve repair that even that big active user does. and then of course every site has multiple surgeons who would be taking trauma call. And so we see a significant opportunity to drive penetration in those biggest accounts and continue to take that same approach to begin the next tier of accounts and continue to drive productivity of our sales team using those tools.

Okay, that's helpful. You have talked about, you do have the five products. You've obviously had some big data just in the last couple weeks with respect to one of those products. Can you just maybe help level set us with respect to the overall mix of your business as it stands across the different product types and then maybe geographically as well, U.S. to O.U.S.? ?

Sure. So, Avance has remained a little over half of our revenue. As we've grown over the years, that has actually been a pretty consistent metric. The rest of our new products make up the remainder of our revenue. Obviously, actually, our NerveCap is new, so it's It'll add its own dimension over the next year or two as it continues to grow. We're optimistic about it, but at this point, it's still a relatively small part of our overall business. We are also still predominantly a U.S. company. We have some revenue ex-U.S., predominantly in Europe, but at this point, it's a minor part of our revenue, and we see it as a growth opportunity to expand into for the future.

Great, thank you for taking the questions.

Thank you. Our next question comes from Anthony Petrone with Jefferies. Please proceed with your question.

Thanks and good afternoon. I think I'll have two here. One will be on new active sites and then I'll go back to account penetration as well. And so when you look at total new active sites in 2020, almost 100 were added. I think it's about 93. Those new active sites sort of came online during COVID. And so I'm wondering, as we get to the second half, vaccine rollouts are more widely dispersed around the country. What do you think that those new active accounts could actually settle? Or said another way, those new active accounts, how depressed of a level have they been operating at since they've been onboarded last year? And then I'll have one on account penetration.

Well, before we even get to accounts, I'll talk about the overall incidence of trauma. So the overall incidence of trauma is still depressed in the mid-teens from what we would consider a normal level of trauma. If you look at emergency room visits as a way to measure the incidence of traumatic injuries, we're still seeing... a decrease in the incidence of trauma as people are less active in this current COVID environment. So we see an opportunity to have more trauma, but there will be more trauma as people return to a more active lifestyle as they get vaccinated and more comfortable with doing activities. In terms of the active accounts, We've not given projections on the active account growth. Again, if I go back to our strategy, our strategy is to drive penetration first and foremost in our existing active accounts with our existing users. We then add users at our existing active accounts and we then follow users to alternate sites of care. So it's not our first driver for growth. Our first driver for growth is continuing to drive penetration into the existing accounts with existing users.

And then the follow-up on penetration would be when you look at the top 10% of accounts, another way to ask it would be when you look at those top 10%, how penetrated are those sites in terms of active AVANCE users and sort of what is the mix of AVANCE In those accounts versus the combined nerve grafting and conduit mix. And so out of 100 procedures, where is that today and where can it go? And I would assume over time, the goal is to get 30% or more of the 893 active accounts to that level over time. And so is that sort of an accurate sort of long term goal to think about? Thanks.

Yeah, great question and it does frame out what we're trying to do is we see that we're still at the, if I look at the average of those top 10% of our active accounts, we are still lightly penetrated into those accounts. We have room to continue to expand with quite a bit of runway in even just those centers. and then, yeah, we want to continue to take what we're doing in that top 10% and translate that to, you know, let's call it even the next tier, not even all of the rest of the active accounts, but the next tier of accounts to grow them like our top 10% have. And so we see, you know, these are stages of development of these accounts, but we think we've got a strong runway to continue to be able to drive penetration in each of those levels of accounts, and then ultimately to expand in places that we're not today. There are a little over 5,000 accounts that do nerve repair, and obviously we're not active in many of them, so that's our future growth. So again, if I just recap, driving penetration with our existing users, expanding to the other surgeons at that same account, but a big account, there'll be 10 to 15 surgeons that would be in the range of, you know, if I roll in breast and trauma and oral maxillofacial and the surgical treatment of pain that we would consider very good targets. And very often we have one active user. So we've got an opportunity to expand.

That's helpful. Thanks.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Thank you, Victor. I want to thank everyone for joining us on today's call. We look forward to speaking with many of you virtually at the upcoming 10th Annual SPV Larynx Global Healthcare Conference on February 24th. Thank you.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.