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spk07: Ladies and gentlemen, thank you for standing by and welcome to the Azizo Biologics fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to one of your speakers today, Hunter Cobby. Sir, please go ahead.
spk02: Thank you, and thank you all for participating in today's call. Joining me are Ron Lloyd, Chief Executive Officer, and Matt Ferguson, Chief Financial Officer. Earlier today, Ezeo released financial results for the fourth quarter and full year ended December 31, 2020. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meanings of the federal securities laws, which are made pursuant to the state-powered provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical fact or relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, impact of COVID-19 on our business and prospects of recovery, expense management, expectations for hiring, growth in our organization, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and product pipeline development, expected future product launches and milestones, and expected results and performance of our partnerships and commercial products, including patient outcomes, 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 these risks and uncertainties associated with their writtenness, please refer to the Risk Factors section of our Public Violations with Securities and Exchange Commission, including our quarterly report in Form 10-Q for quarterly period ended September 30, 2020. This conference call contains time-sensitive information and is accurately only of the live broadcast today, March 1, 2021. ASEA Biologics 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 non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available on the company's earnings release for the fourth fiscal quarter and full year end of December 31, 2020, which is accessible on the SEC's website and posted on the Investor Relations page of the ASEO's website at www.aseo.com. And with that, I will turn the call over to Ron.
spk06: Thanks, Hunter. Good afternoon, everyone, and thank you for joining us. Today marks our second earnings call as a public company following our IPO last October. Undoubtedly, 2020 was an extraordinary year, but the ASEO team has continued to make meaningful progress on our mission to provide advanced regenerative medicine products to improve the outcome in patients undergoing implantable device-related surgery. Our products are designed to reduce the complications associated with implantable medical devices. We do this through our unique and proprietary platforms based on our deep understanding of the science related to the cells, growth factors, and the structural matrices that best optimize our tissue products. Our core product platforms address three primary markets, implantable electronic devices, such as pacemakers or defibrillators, bone repair and orthopedic and spine procedures, and soft tissue reconstruction. Additionally, we fulfill tissue processing contracts through our Richmond, California manufacturing facility. as a highly leverageable component of our business. In my prepared remarks today, I'll cover recent highlights and accomplishments, and to provide our current view of the market and priorities as we enter 2021. Matt will go into more detail on our financials and guidance, and then we'll open up the call for your questions. In 2020, we made considerable progress bringing to market multiple new products, including Ossigro-V and ViboMultable. We also advanced our pipeline products, most notably completing a feasibility study to achieve targeted antibiotic release for our kangaroo envelope and initiated new clinical studies to demonstrate the benefits of our products. We also expanded our commercial organization and strengthened our partnerships with leaders in the industry, such as Boston Scientific, Medtronic, and Biotronic. Late in the year, we expanded our channel reach through a breakthrough technology contract with Premier that granted access to our Kangaroo envelope to more than 4,000 hospitals and 200,000 other providers in the United States. We also broadened our leadership team, adding Matt as our CFO and Dr. Jerry Reedman as our CMO. And we added two new board members with deep experience in the healthcare sector, Maybel Jordan and Bridget Makes. And, of course, we completed our IPO, which secured the funds that will enable us to continue to disrupt the $3 billion regenerative medicine space. Turning briefly to our recent financial highlights, during the fourth quarter, the ASEO team once again rose to the challenges of the current environment, delivering revenue of $12.5 million, a 3% increase over the fourth quarter of 2019. and a 6% increase over the third quarter of 2020. Core product revenue was $10.3 million, representing a 10% year-over-year increase. For the full year, our core product revenue grew 17% year-over-year, quite an accomplishment considering the business challenges of COVID throughout much of the year. Turning to our business highlights, we finished the year strong and have recently announced meaningful progress on a number of key initiatives that give us even greater confidence in our market opportunity and our differentiated regenerative medicine portfolio. Starting with our products to address the market for implantable electronic devices, an opportunity we believe represents $600 million with around 600,000 procedures performed in the United States in 2019. We have recently met a number of important milestones. Our primary solution for device-related complications in this market is Kangaroo, the only commercially available biological envelope that forms a natural, systemically vascularized pocket for holding implantable electronic devices to regulate the healing response and stimulate the formation of healthy tissue. As a reminder, our go-to-market strategy includes a mix of direct sales and commercial partnership agreements with Boston Scientific and Biotronic, which adds support from their more than 1,400 sales professionals. This blended approach has served us well, especially throughout the past year, where hospital access was limited and we benefited from our partners' broad relationships and access to key medical centers. Our direct sales force has also remained productive, and we are encouraged by the recent progress made in onboarding new reps. At year-end 2020, our sales organization dedicated to this market included 28 reps. Our plan is to selectively continue to add sales headcount throughout 2021. With hiring targeted more heavily weighted towards the second half of the year, as we approach additional development milestones with our pipeline program of adding antibiotics to Kangaroo. As noted earlier, the breakthrough designation with Premier, which significantly expanded the market for Kangaroo in the United States, became effective December 1, 2020. We are pleased with our early progress in obtaining contracts within Premier accounts and now have several new ordering accounts as a result of this partnership. We look forward to the valuable contribution this relationship can make in broadening our reach, as it enables us to accelerate our commercial traction and gives Kangaroo additional validation for the value and safety it offers patients. We recently announced three more exciting developments for Kangaroo. First, we received CE mark approval in January to update the label instructions for Kangaroo to include hydration with the antibiotic gentamicin. This approval is important in that it further differentiates kangaroo as the only natural biologic envelope on the market to also include the potential to reduce post-op infections with an antibiotic solution. We are very pleased to now be able to deliver this enhancement to European customers and patients. In addition, we were delighted to complete the product design for the next generation kangaroo envelope. In this effort, we partnered with Cook Biotech to advance the platform, which will be enhanced by adding the antibiotics rifampin and minocyclin. We remain on track to achieve manufacturing validation, followed by data collection through in vivo and in vitro studies. We look forward to updating you with our progress. our goal remains to prepare the kangaroo with antibiotic data for FDA submission in Q1 2022, with product launch anticipated in the second half of 2022. On the clinical front, we recently announced the first patient enrolled in a study to investigate the biologic and clinical effects of adding envelopes that are placed around cardiovascular implantable electronic devices, or CIDs, at time of implantation surgery. The HEAL study is a multicenter study in the United States of 100 patients who previously went implantation of a CID with a kangaroo envelope, Medtronic's Tyrex, or no envelope, who have had their implants for at least a year and are returning for a change-out or revision procedure. This study focuses on identifying characteristics of soft tissue healing around the implant using tissue biopsies taken at time of change-out or revision procedure for patients treated with or without an envelope at time of device implantation. We believe this study has the potential to validate the significant contributions that our kangaroo envelope can provide to patients. Now turning to our next product group and market, the orthopedic and spine repair market, an estimated $2 billion market opportunity with approximately 1.5 million annual orthopedic and spine repair procedures using bone repair materials. Our product platform in this market consists of Fibrocell, Vibone, and OsteoGroVe. In January 2021, one of our partners in this market, Surgiline Holdings, announced the commercial launch and first completed surgery using Vibone Moldable, which we supply to Surgiline. In addition, we continue to work with our partner Medtronic to expand fiber cell revenues by generating additional data on the product's performance characteristics. And lastly, our third product group of market, soft tissue reconstruction. We estimate this to be a $500 million market opportunity with roughly 100,000 procedures annually using human dermis. Complications arrive when native tissue is not substantial enough to repair the area from the original procedure. Our SimpliDerm product is manufactured through a patented process that decellularizes, enables the product to be more closely resembled natural occurring tissue. We are working on building product awareness and clinical evidence, as well as expanding market access. Effective today, March 1st, SimpliDerm will be on contract with the Health Trust Purchasing Group. Health Trust member facilities represent more than 1,600 hospitals and health systems across the United States. We are continuing to see strong growth of this product through our direct sales organization and distributor partners, and physician customers are providing positive feedback on the performance of this offering. In summary, we've made substantial progress advancing our core product platforms and pipeline, while in parallel driving top line growth. Turning to our contract manufacturing business, where we offer tissue processing for a range of third party healthcare companies, we began to see the benefit in the fourth quarter of several new contracts. And as a result, expect this business to return to stable, more predictable growth. Overall, contract manufacturing, while not a core part of our business, has the potential to positively augment our growth. It is also quite efficient as it leverages available capacity in our manufacturing facility and contributes positively to our bottom line. The additional revenue is also a good source of capital to further drive growth in our core product platforms. As we enter 2021, we believe we are poised for another year of strong growth across all product lines. Although the start of Q1 has presented challenges due to COVID and extreme weather across much of the country, these headwinds appear to be dissipating, and we are optimistic about improving macro environment as we move through the year. We're very excited about the milestones we recently achieved and our potential for sustained revenue growth that can result from our on-market and pipeline products. We believe that as we continue to penetrate our target markets and realize returns on our investments in new technologies and an expanded commercial presence, we'll see those initiatives benefit growth in our core products. Our priorities are unchanged, and as such, we will remain focused in 2021 on, first, the development of our next-generation Kangaroo product, Second, continue to launch new and enhanced orthobiologic products. Three, generating additional clinical data for core products. Four, expanding our direct sales organization for Kangaroo and SimpliDerm. And finally, continuous for opportunities to add synergistic products through partnerships or acquisitions. In summary, we've been able to accomplish quite a bit in a very short period of time. and we're very confident we can continue to build on that momentum. Moreover, we believe we are continuing to advance our vision to establish our differentiated and proprietary products as the standard of care for treating patients undergoing a wide range of implantable device-related procedures. With that, I will now turn the call over to Matt to provide a review of fourth quarter results and outlook for 2021. Thanks, Ron.
spk05: As mentioned, net sales for the three months ended December 31, 2020, were $12.5 million, a 3% increase from the $12.1 million in the same period of the prior year. This included a 10% increase in sales of core products, partially offset by an 18% decline in our non-core products. While our top priority is the continued growth in our core products, we were pleased to see our contract manufacturing business achieve its best quarter of 2020, as a result of several recently signed contracts that are driving performance in this area. Gross margin for the fourth quarter of 2020 was 48 percent as compared to 41 percent in the corresponding prior year period. We also look at gross margin excluding the impact of non-cash amortization of intangible assets. And on that basis, Q4 would have been 55 percent versus 48 percent in the year-ago quarter. The increase in gross margin in Q4 2020 primarily resulted from growth in our higher margin proprietary products and improvements in production and inventory management. Total operating expenses for the fourth quarter of 2020 were $10 million, a 23 percent increase from $8.1 million in the fourth quarter of 2019. The increase primarily resulted from costs related to operating as a public company and development costs associated with our program to add antibiotics to our kangaroo envelope. Loss from operations was $4 million for the fourth quarter of 2020 as compared to $3.2 million, a loss of $3.2 million for the year-ago quarter. Net loss for the period was $5.4 million as compared to a net loss of $2.8 million in Q4 2019. loss per share in the fourth quarter of 2020 was 57 cents compared to a loss of $4.30 per share in the year-ago quarter. We ended 2020 with a cash balance of $39.5 million, and we now have approximately 10.2 million shares of common stock outstanding, which for the fourth quarter of 2020 translated to 9.4 million weighted average shares based on our IPO closing in the month of October. Now, Turning to our full year results, net sales for the full year 2020 were $42.7 million, a 1% decline compared to our full year 2019 net sales of $42.9 million. Gross margin for the full year 2020 was 48% as compared to 46% in 2019. Excluding the impact of non-cash amortization of intangible assets, Gross margin would have been 56 percent in 2020 as compared to 54 percent in 2019. Total operating expenses were $34.2 million for the full year, compared to $28.2 million in 2019. Net loss for the full year was $21.8 million, which compares to $11.9 million in 2019. Loss per share for the full year, including the accretion of deemed dividends to preferred stockholders, was $8.88 compared to $18.48 in 2019. Turning to our outlook for the full year 2021, we are encouraged by the traction we've continued to make as we enter the first quarter. However, we expect the lingering impacts from COVID to be a headwind until the vaccine is more widely available and hospital surgical volumes and access return to normal. Nevertheless, we are confident in our overall growth trajectory and, as such, expect revenues for 2021 to range from $50 to $52 million, representing growth of 17 to 22 percent over 2020. And with that, we'd like to open the call for your questions.
spk07: Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Josh Jennings with Cowan. Your line is open. Please go ahead.
spk01: Thank you. This is Eric home for Josh. Just thinking about the guidance range that you offered here, how should we be thinking about the breakdown of core versus non-core revenue growth in the guidance? How are they contributing to that 17% to 22%? And as part of that question, what assumptions are you guys making for elective procedures and when they'll return to normal? Are you thinking that's 2Q this year or maybe second half of the year? Any detail there would be great. Thanks.
spk06: Thanks. Let me start out with the first part of that question, and then I'll have Matt also comment related to some of the surgical volume projections. So, again, we're excited about our core product business, and as we reported, it grew 10% in Q4 in somewhat of a challenging environment, as we know, with the uptick of COVID at the end of Q4. As we look forward here for 2021, as we've given guidance here, in the range of 17 to 22% across our businesses. We actually think that we're gonna continue to see very strong growth of our core products, but we're also gonna see a return to growth of our non-core manufacturing, contract manufacturing business. And I think when we look at it collectively for the year, we're probably anticipating similar growth rates for both the core products and the non-core products for 2021. Yeah, Eric, I would,
spk05: concur with all of that. And I would just add that we do expect, you know, our business has some seasonality where Q1 is generally a little bit lighter than say Q4 is. So, you know, thinking about the sequential comparisons there and how revenue will grow as we move through the year. And I agree with Ron. We do, you know, while longer term, we expect more growth. I'm talking about longer term beyond 2021. We expect more growth to come from our core products I think in 21, as we're rebounding from a lower year with our contract manufacturing business, we expect that growth rate probably to be in a similar range to what we see with the core products. So hopefully that's helpful. Let us know if you have any follow-ups.
spk01: Great, thank you. That's definitely helpful. And then think about your pursuit of clinical data here. You recently announced the first patient enrollment for HEAL, and you have some other studies like CARE Plus continuing to move forward. We're just wondering how impactful do you think these data sets will be once they hit in driving stronger adoption and utilization trends? Thank you.
spk06: Sure. So we want to make sure that we're collecting the clinical data that shows the differentiation of our products and the benefits our products can bring forth to patients again, in reducing complications associated with employable medical devices. And so we've embarked on a number of studies. You've mentioned the HEAL study. We just announced the first patient enrolled in this study. This is a multi-site study with the United States to collect patients, around 100 patients, that have received Kangaroo or Tyrex from Medtronic or no envelope at all. And at time of change-out, look at histology, look at the pocket itself and the healthiness of the pocket and complications that arise from having fibrotic tissue at time of change-out. And so we're excited to embark on this study. We believe it will demonstrate the benefits of having a biological antithelope and the remodeling benefits of reducing complications associated with scar tissue. And so we're pleased to have this study up and running and the first patient enrolled. And likewise, the CARE Plus study is a single site looking at patients that receive kangaroo, tyrex, or no envelope. It's a short-term study, and we look forward to seeing the data from that study probably in the second half of this year as it looks at some of the short-term complications of putting in envelopes related to treating patients with CIDs. We believe it's important to make these investments to show the clinical differentiation. Again, we're hearing anecdotal feedback from doctors that see the benefit of Tangeroo for reducing complications by having a biological solution in a healthy pocket, and we want to make the investments to collect that same data clinically to have it available to promote to doctors as it relates to our products.
spk01: Excellent. I appreciate you guys taking the questions.
spk07: Thank you. And our next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open. Please go ahead.
spk04: Good afternoon. Thanks for taking the questions. I guess just to be clear on the guidance, either Matt or Ron, you're saying 17% to 22% growth for both core and non-core this year is what we should be expecting?
spk05: Yeah, generally in that range.
spk04: Okay. you know, for 2021, what we're talking about. Okay. Well, the reason I'm asking that, Matt, is that, you know, you've obviously got an easy comp on non-core, but it implies, you know, a little more strength on the core side of the business, which is a key for you guys. And, you know, even in the face of COVID. So I was just hoping to hear a little bit more about some of the strengths that you're calling on now that you hadn't seen maybe this time last year. I don't know if it's the health trust arrangement or premier or what, but just, you know, where that incremental change confidence in the core businesses coming from. And then I do have one quick question for you, Matt.
spk06: Sure. So let me start. So actually, again, we were pleased last year with the core products collectively for the year. They're up 17%. And as we think about our businesses, we continue to build momentum. You've mentioned the expanded market access with the Breakthrough designation that came in December 1st of last year for Kangaroo. Again, we're very excited about that. We're pleased with the initial progress. We focused on the top 120 premier hospital accounts and health systems. We've already been able in the first two months to be able to do presentations to those accounts, and we already have accounts now that have put Kangaroo on contract and are starting to order product. And likewise, we just announced today the acceptance of Simpliderm on Health Trust. Again, another large GPO, looked at the product, the product characteristics, saw the benefits of Simpliderm, and actually added this product mid-cycle. And so we're pleased to be able to have it added in a mid-cycle period for health reps. So we think the expanded market access is going to continue to help us drive volume increases. We're obviously investing as well into the commercial organization as we continue to likely add additional sales reps. We actually get tremendous leverage from our partnerships as it relates to having that share of voice and reach help drive the penetration of our products. And then finally, hopefully we'll start to see some additional data generation and communication of that data generation showing the differentiation of our products start to reach the market here in 2020 as well. So all those factors we believe will help drive a very strong year as it relates to our core products.
spk04: Okay, okay, that's helpful, Ron. And then, Matt, just quickly on gross margin, again, really strong here in Q4. I know there's obviously a benefit on the core side doing better than non-core. That's going to reverse a little bit here in 21. So how durable are some of those production and inventory management improvements that you've made to maybe provide a little bit of upside on the gross margin side as we move through 21 versus what we kind of had expected?
spk05: Yeah. Well, it's true. I mean, our core products obviously are higher margin than the non-core products, but we have a number of gains that we think will be durable, as you say, and we have several more that we'll be working on as we move through 2021 as well. Some of those will take a little bit longer to come into play, so I wouldn't expect much of an increase in gross margin going into this first quarter, especially given that it's a little bit more of a seasonally light quarter from a revenue perspective. But I think if we move through the year, we should see at least that same level of gross margin gain year over year, potentially a bit more even. So we're optimistic and feeling good about that part of the business. Got it. Thank you.
spk07: Thank you. And our next question comes from the line of Kayla Crump with Truist. Your line is open. Please go ahead.
spk08: Hi, guys. Thanks for taking our questions, and congrats on another good quarter. So just starting out, I mean, we're two months into the first quarter. Can you just speak to what you're seeing year-to-date and how you're thinking about the cadence of results as you look out through the year?
spk05: Sure, Kayla. I could speak to that, and perhaps Ron will want to add to it, but... But, yeah, we have the benefit here of having a couple of months under our belt in the first quarter, and we feel good about the business, and we factored that into the guidance that we gave overall for the year. But as we've mentioned, there is a little bit of a seasonal trend where we see greater gains towards the end of the year. And then I think the COVID impact, we all hope, is less as we move through the year than what we have seen in Q1 and certainly the Some of the weather impacts that we've seen just recently here, we wouldn't expect to continue as we move through the year. I guess we feel good about the year. We think there will be strong year-over-year growth compared to Q1 of last year, but maybe it won't be quite at the same percentage rate as what we're projecting for the full year, if all of that makes sense.
spk08: Great. No, that's completely clear. That makes sense. And then you guys completed your product design for the next generation kangaroo with antibiotics. Can you just lay out sort of the steps now from here through the approval and what sort of additional updates investors should be looking for over the next six to 12 months as we get closer to that? Thank you.
spk06: Sure, Kayla. I'll address that one. So, yeah, we're very pleased to be able to lock product design of our next generation Kangaroo product. And again, this is adding the antibiotics for Fampin and Minocyclin to Kangaroo. So we completed actually a number of studies to get to the point to lock the product design, so very pleased with what we've been able to accomplish. We've also gone out and have shown the product to a number of doctors and gotten feedback, and they're very excited about the product design and having the antibiotics added to Kangaroo. So now the next step is to complete our manufacturing validation. We're working with our partner here, Cook Biotech, who's assisting on that. And then once we have that completed, then we'll run a number of in vivo and in vitro studies that will be required for our 510K filing with the FDA. And those will start to take place in the latter half of this year. And I'm sure we'll be able to give updates throughout the year as we go through earning calls on the progress of this project. Again, we're very pleased with the progress we've made to date. We continue to remain on track, as we said, with our goal of filing this product in Q1 of 2022, with approval then in the second half of 2022.
spk08: Great. Thank you, guys.
spk07: Thank you. And our last question will come from the line of Brandon Fulks with Cantor Fitzgerald. Your line is open. Please go ahead.
spk03: Hi, thanks for taking my question and congratulations on a very good call here. So maybe just sort of looking at this from a high level, what do you see the environment currently in business development? Is this something when we look out to sort of, I guess, 2021, 2022, should we expect sort of additional partnerships or maybe in licensing and actually buying in products? What do you have an appetite for And what do you think the environment is currently the most conducive? Is it sort of, you know, these continued vibro and tie partnerships that we should expect in the near term?
spk06: Thank you. Sure, Brandon. Thanks for the question. So we're very excited about the future growth of our company off the assets that we have today, the technologies that we have today, and obviously the pipeline products that we have in development. And so we do believe there's additional growth opportunity Through these assets, we'll continue to look at how to best optimize the commercialization of these assets, which today we continue to use a hybrid model, both direct sales force as well as partnerships. As we evolve additional products, we'll continue to look at the best model for those to optimize the opportunity for patients to benefit from our technologies. And again, from a company perspective, we're very bullish on the growth of a ZL organically from what we have today in the market and what we anticipate to come to market in the near term from our pipeline. On top of that, we want to continue to look at inorganic growth opportunities. And we are constantly doing that. We want to be able to add additional products, technologies to augment the technologies that we have and the channels that we're in today from a commercial standpoint. And if we Find the right opportunity that allows us to bring in a new product, new technology, and or have a company be part of that and roll up within us. We'll explore that. We want to make sure that we're making the right choices here and doing the investments in any acquisition that makes the most sense for the company and for the shareholder. I think we're in a great position to be somewhat selective in that, in that we have great growth prospects off our organic business and our pipeline. that we can be a little bit selective here, and we want to make sure that we're making the right acquisitions to drive the right top-line growth for the company.
spk03: Great. Thank you very much.
spk07: Thank you. And this does conclude today's question and answer session, and I would like to turn the conference back over to Ron Lloyd for any further remarks.
spk06: Thanks. In closing, again, we're very optimistic and confident about our path forward, the foundation that we've laid for optimizing growth for our business as well as for our shareholders. And I just want to close by saying none of this would be possible without the ongoing commitment of the ZIO team and our commitment to our mission of reducing complications that are associated with implantable devices. So we look forward to updating on our business in future quarters. And, again, thanks, everybody, for joining.
spk07: Ladies and gentlemen, this concludes today's program, and you may all disconnect. Everyone, have a great day.
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