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spk04: Welcome to the Exogen second quarter 2022 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, Ed Joyce, Exogen's Director of Investor Relations. Please begin, Mr. Joyce.
spk01: Thank you, Melinda, and good afternoon, everyone. Joining me on today's call is Karen Datteray, Accident's Chairman, Chief Executive Officer and President, and Pete Mariani, Executive Vice President and Chief Financial Officer. Karen will discuss the quarter and our outlook for the year, and Pete will provide an analysis of our financial performance, followed by closing remarks from Karen and a question and answer session. Today's call is being broadcast live via webcast, which is available on the Investor section of the Accident website. 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 be making projections and forward-looking statements regarding future events. Forward-looking statements are based on the 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 annual and periodic reports. Actual results or events could differ materially from those described in any forward-looking statement as a result of various factors, including without limitation, the impact of COVID-19 on our business, global supply chain issues, record inflation, hospital staffing issues, product development, product potential, expected clinical enrollment timings and outcomes, regulatory processes and approvals, APC renovation timing and expense, financial performance, sales growth, product adoption, market awareness of our products, data validation, our visibility app, and sponsorship of conferences and educational events. global business disruption caused by Russia's invasion of Ukraine and related sanctions, and other factors including legislative, regulatory, political, and economic developments not within our control. The forward-looking statements are representative only as of the date they are made, and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or otherwise. And with that, I'd like to send the call over to Karen. Karen?
spk05: Thank you, Ed. And good afternoon, everyone. Thank you for joining us today. We're pleased with our second quarter performance as revenue increased 3% over last year to $34.5 million on an as-reported basis. Excluding the impact of revenue from a by soft tissue membrane from the second quarter of 2021, our revenue this quarter increased 9%. Year to date, we're pleased with our execution as procedure volumes improve and hospitals continue to adapt to evolving challenges. Although these issues continue to have a negative impact on the pace of growth in the quarter, we're encouraged by the sequential improvement in procedure volumes. We remain measured in our near-term outlook, given the broader economic challenges, but continue to be pleased with the improving trends in the market and in our executions. As we discussed on last quarter's call, we're extremely pleased with the results of our RECON study, which met its primary endpoint and provides clinical evidence of the performance of advanced nerve graft consistent with the results we've seen in our registry data collected over the last decade. The results of this study provide level one clinical evidence, the highest quality possible, and we believe it will provide robust data to support search and adoption of advanced as the first biologically active regenerative medicine therapy for nerve gaps. Over the years, we have built broad capabilities to establish and develop the nerve repair market. These efforts have produced a robust clinical portfolio, as well as highly respected surgeon education programs and broad commercial capabilities. As a result, Avance has a well-established track record and solid foundations. We believe the addition of the RECON study will provide compelling evidence for the expansion into the middle adopters, many of whom are in our core accounts. We plan to leverage the strength of this position to drive increased surgeon engagement and adoption and support continued innovation of our nerve repair portfolios. Our strategy remained anchored with continued focus and execution in our core and active accounts. As of the end of the quarter, we had 299 core accounts and 941 active accounts, which were up sequentially by 4% and 2%, respectively. Excluding the impact of revised purchases in the second quarter of 2021, Year-over-year growth in core and active accounts was 1% and 2%, respectively. As a reminder, active accounts are those that have ordered at least six times in the last 12 months and may still be in the early stages of adoption. Active accounts continue to represent about 85% of our total revenue, with the top 10% contributing about 35% of revenue. Core accounts represent more penetrated accounts, defined as those that had greater than $100,000 in revenue in the trailing 12 months. Our core accounts continue to represent about 60% of our revenue and typically contain at least one surgeon who's adopted the Axigen nerve repair algorithm for a significant portion of his or her nerve injury patients. Leveraging this surgeon's success with our product, we focused on gaining more cases with that first early adopter surgeon, and gaining use by additional middle adopters in that account. We continue to see that our best opportunity for growth is within our core account by more deeply penetrating the treatment of traumatic injuries and continuing to expand into other nerve repair applications, including breast, OMS, and the surgical treatment of pain. We ended the quarter with 116 direct sales representatives, consistent with the first quarter of 2022 and up from 109 a year ago. As we commented previously, we continually evaluate the productivity and capacity of our sales representatives and their territories. We believe our growth can be primarily driven first by sales rep productivity gains, and we'll continue to add additional sales reps as their territories approach targeted levels. Our direct sales force continues to be supplemented by independent sales agencies that represent approximately 10% of our total revenue. We continue to build market awareness of nerve repair with healthcare providers and through our direct-to-patient initiatives, particularly for breast and pain applications. We utilize our marketing initiatives to drive patient engagement to our Resensation and Resync Pain websites, which are aimed at increasing awareness and education for the potential nerve repair procedures to improve outcomes for patients undergoing mastectomy and reconstruction and those suffering from chronic neuropathic pain. We've achieved our goals with our surgeon education programs, including our annual goal of training more than 75% of the most recent class of hand and microsurgery fellows. we continue to see strong interest and high levels of attendance at our fellows and our best practices programs, which include hands-on nerve repair experience and insights from faculty from leading institutions. Our RECOM study is another key driver of building market awareness and is a significant milestone achievement in the path towards transitioning advanced nerve grafts to a licensed biologic. We believe it is a landmark addition to our growing body of clinical evidence used to drive surgeon engagement and adoption. As a reminder, in addition to achieving its primary endpoint of non-inferiority to conduits, the study also observed that as the nerve gap length increased, Avance demonstrated statistical superiority over conduits in the return of sensibility as measured by static two-point discrimination in gaps greater than 12 millimeters. Also for gap lengths greater than 10 millimeters, AVANCE has statistically superior time to recovery, with patients achieving normal two-point discrimination up to three months earlier than the conduit group. The study also demonstrated lower incidence of persistent and unresolved pain for AVANCE subjects. So there's still much work to be done prior to filing the actual BLA submission, which we anticipate will occur in the second half of 2023. Our team is making great progress. We're in the process of compiling the appropriate documentation on this clinical study, our facilities, operations, quality systems, and much more, all of which is required for a successful application. We continue to be on target for finalizing our new APC facility, which is also part of our BLA filing. Our ranger and match registries continue to enroll, now with 2,700 advanced nerve graft nerve repairs enrolled in ranger. Data from these two clinical registries continue to play an important role in informing surgeons in their clinical decision-making. Repose is our study of axigard nerve cap compared to standard treatment for reducing symptomatic neuroma pain. Earlier this year, we announced strong top-line results in the pilot phase of this study. And today, I'm happy to report that we've achieved full enrollment with 86 subjects in our comparative phase of this study. We expect offline data readout from the comparative phase in Q4 of 2023. Our newest study, REPOSE XL, which is a Department of Defense-funded pilot study that focuses on Axigard nerve caps with large diameters from 5 to 7 millimeters, is currently enrolling. The continued development of our robust portfolio of high-quality clinical evidence remains a priority, and we believe that our growing collection of meaningful clinical data publications is the most comprehensive in the area of peripheral nerve repair. We added eight new peer-reviewed publications this quarter, now with a total of 196, including a paper in the Journal of Plastic and Aesthetic Research on how peripheral nerve allograft has changed surgical practice in the last 15 years. The author, Dr. Gregory Bunky, commented, the use of engineered nerve allografts, such as advanced nerve grafts, show meaningful motor and sensory recovery in nerve gaps up to 70 millimeters in length. And furthermore, the use of nerve allografts as an alternative to autografts circumvents nerve autograft comorbidities, such as sensory deficits and chronic pain. We remain committed to developing the clinical evidence to demonstrate the safety, performance, and utility of our nerve repair solution to support the continued adoption of the Axigen algorithm across our full portfolio of nerve repair products. Moving on to our full-year guidance, we continue to expect that full-year revenue in 2022 will be in the range of $135 to $142 million. This revenue guidance represents 10% to 15% growth over 2021, excluding the above revenue from last year. Full year gross margin is expected to be above 80%. As we've commented prior, we're very pleased with our execution this year. Our outlook for the second half remains positive as we continue to see increasing procedure volumes as hospitals are addressing staffing challenges. However, given the potential impact of broader economic factors, we also believe it is prudent to remain measured in our near-term outlook. We believe our solid foundation of superior clinical evidence will allow us to deliver sustainable long-term growth. We continue to view Axigen as a long-term growth company, delivering sustainable annual revenue growth on the high teens to low 20% range. Now I'll turn the call over to Pete for a review of financial highlights.
spk00: Thank you, Karen. Revenue this quarter was $34.5 million, a 3% increase over the second quarter of 2021. Excluding the $1.8 million of Avive revenue in the second quarter of 2021, revenue growth was 9%, including unit growth of approximately 4%, and a combined impact from changes in price and product mix of approximately 5%. Gross profit for the quarter was $28.2 million as compared to $26.5 million for the second quarter of 21. Gross margin increased to 81.8% from 78.9% year-over-year. The prior year margin included a provision for the write-down of a VIVE inventory of approximately $1.4 million. Total operating expense in the second quarter increased 7% to $36.1 million, compared to $33.6 million in the prior year. The increase in total operating expenses was primarily the result of an increased product development and clinical programs, as well as total compensation, including non-cast stock comp and travel costs. Sales and marketing expense in the second quarter increased 2% to $19.7 million compared to $19.3 million in the prior year. The increase was primarily due to increased sales travel. As a percentage of total revenue, sales and marketing expense was consistent at 57% in the quarter as well as last year. Research and development expenses increased 23% to $7 million, compared to $5.7 million in the prior year. Product development expenses represented approximately 51% of total R&D, compared to 52% in the prior year, and includes spending in a number of specific programs, including the BLA for advanced nerve graft and a next-generation advanced product. Clinical expenses represented approximately 49% of total R&D compared to 51% in the prior year and includes spending in support of our various clinical programs. As a percent of total revenues, research and development expenses were 20% in Q2 compared to 17% in the prior year. General and administrative expenses increased 8% to $9.4 million in the second quarter compared to $8.7 million in the prior year. The increase was primarily due to higher net compensation expenses, including non-cash stock comp. G&A as a percent of revenue was 27% compared to 26% in the prior year. Adjusted net loss was $2.6 million, or approximately $0.06 per share in the second quarter, compared to a loss of $3.7 million, or $0.09 per share in last year. Adjusted EBITDA loss in the quarter was $1.6 million, compared to an adjusted EBITDA loss of $2.4 million in the prior year. The reconciliation of these non-GAAP financial measures to GAAP can be found in today's earnings release and on our website. The balance of all cash, cash equivalents, and investments on June 30, 2022 was $64.3 million, compared to a balance of $73.7 million at the end of Q1. The net change includes net operating cash burn of approximately $5.5 million, which includes a $1.8 million increase in inventory primarily related to accelerated purchases of certain production materials and donor inventory. Additionally, we spent $3.9 million related to the construction of our new processing facility in Dayton, Ohio. We expect a complete BAPC facility over the next few quarters and transition production in the early part of next year. We expect our operating cash to continue trending towards cash flow break-even, driven by revenue leverage on our fixed-cost infrastructure, along with our continued focus on thoughtful operating expense management. We believe this trend, combined with the return of capital expenditures to more normalized levels, will allow us to maintain our strong balance sheet position, and it will provide ample support as we continue our path to profitability. Our annual guidance remains unchanged with revenue out of $135 to $142 million, which is about 10% to 15% growth, excluding the $4.1 million of Avive revenue from 2021. The year is progressing well and in line with our initial expectations, and we anticipate more normalized growth rates in the second half of the year. The top end of our annual guidance reflects accelerating momentum and procedure volumes through the end of the year, and the bottom end includes a more measured view to accommodate the potential impact of broader macroeconomic uncertainty through the end of the year. Additionally, our full year 2022 gross margin is expected to be above 80%. And at this point, I'd like to turn the line over to questions. Operator?
spk04: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to signal for a question. And we go to Ross Osborne with Cantor Fitzgerald. Please go ahead.
spk02: Hi. Thanks for taking my questions and congrats on the quarter. Thank you. Starting off, hey, can we maybe just walk through the revenue cadence throughout the quarter? And if you would, how July is shaped up relative to June?
spk05: Well, we've been pleased to see that we've seen a nice ramp in revenue from first quarter through second quarter and continuing into July. We see hospitals are learning to manage the staffing shortages, and that's allowing them to do what's important to them, and that's get cases completed. We want that, and they want that, and so they're now doing a better job of being able to manage the resources to get those cases completed.
spk02: Okay, great. And then I guess switching to guidance, you had a strong quarter but maintained. So I guess looking at the bottom end where you assume some macro headwinds in the second half of this year, is that primarily staffing shortages? If not, what are you potentially expecting?
spk00: That's right. I think if hospitals are able to continue to improve, then we're going to be toward the top end of the range. But if we see or if hospitals experience a broader impact from these inflationary concerns and other issues that are impacting them and their business, then we see a more moderate pace of procedures across the back half of the year. And that's really it.
spk02: Okay, understood. Thanks for taking my question, and congrats again on the quarter. Thanks.
spk04: And we move into Kyle Rose with Canaccord. Please go ahead. Your line is open.
spk03: Hi, this is Caitlin. I'm for Kyle. Just a quick question on the continued COVID recovery. Can you elaborate on which segments were most affected and continue to be affected? So, you know, given that breast recon is largely elective, have you seen any pullback in volumes there? Thanks.
spk05: Well, of course, the core of our business is trauma, and so we saw a nice continued shift of cases being ramping in trauma. In breast, as I saw through the quarter, we saw breast picking back up from having been shut down almost completely in parts of first quarter. Breast, as I've said in the past, is a highly resource-intensive procedure. They're a long time in the OR. and they are almost always in patient stay. And so the combined resource impact can make them, and they can be delayed. So they are one of the early things that were delayed and deferred. Having said that, while there is a large group of deferred patients that have been built up, there is only so much block time these surgeons are able to get. While it's ramped up nicely, it's back to more organic levels because the deferred group is going to take the surgeons over a year to work off. So we've seen that ramp back up and nicely being done, but it's not a big bull list in the quarter.
spk04: We return to Karen Zetterer for closing remarks.
spk05: Well, I want to thank everyone for joining us on today's call. We're happy with the progress we've made towards our goals during the first half of the year, and we remain focused ensuring our long-term success. I want to thank all of our members of Team Axigen who remain committed to our mission of improving nerve function and quality of life for patients with peripheral nerve injuries. And we look forward to meeting with many of you at the Canaccord Genuity Growth Conference in Boston and the Morgan Stanley Healthcare Conference in New York in the coming months.
spk04: This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.
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