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spk01: Good day and thank you for standing by. Welcome to the Treats Medical Concepts First Quarter 2021 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. Ask a question during the session. You will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Vivian Cervantes, Investor Relations. Please go ahead.
spk00: Thank you, Joelle. Good afternoon, everyone, and welcome to our first quarter 2021 earnings call. Participating from the company today will be John Treese, Chief Executive Officer, and Mark Hare, Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our first quarter financial results released after the close of the market today, after which we will host a question and answer session. The press release can be found in the investor relations section of our website at investors.trace.com. This call is being recorded and will be archived in the investor section of our website. Before we begin, we would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends, as well as our estimated results or performance or forward-looking statements. All forward-looking statements 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. All forward-looking statements are based upon current available information, and TREES assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. For list and description of the risks and uncertainties associated with our business, please refer to the risk factor section of our prospectus filed with the Securities and Exchange Commission on April 26th, 2021 in connection with our initial public offering. With that, I will now turn the call over to John.
spk02: Thank you, Vivian, and good afternoon, everyone. And thank you for joining us on our first earnings conference call as a publicly traded company. On behalf of the board and management team of Treece Medical, we'd like to take a moment to acknowledge all who supported us and to welcome new shareholders in our journey to drive market adoption of our novel and proprietary lapoplasty system. At Treece Medical, we're just getting started. We're addressing a market where there is a large unmet need. Relatively early in our commercial efforts, we estimate we penetrated about 2.5% share of the estimated 450,000 annual bunion surgical procedures in the U.S., and about 1% of the 1.1 million annual surgical candidates in the U.S., translating to a $5 billion-plus opportunity. So we have a long runway ahead of us. In the U.S., bunions affect approximately 65 million individuals, and they generally increase in severity over time. From this population, about 4.4 million patients seek medical attention for their bunions each year. Of these, about 1.1 million are considered surgical candidates. This population often suffers from symptoms that worsen over time, including severe and debilitating pain, emotional burden, and limited mobility. Yet, only 450,000 of this group choose surgery given limitations of traditional surgical procedures. Bunion surgery is performed to restore a foot's natural anatomy, and in doing so, relieve pain so that patients can get back to their normal lives and activities. In the past, it's been thought that bunions are simply a painful bump of bone on the side of the big toe that can be shaved off. However, more recent clinical science has demonstrated that bunions are actually complex three-dimensional deformities originating from an unstable joint in the midfoot known as the tarsometatarsal joint. And it's this unstable joint that allows the entire metatarsal bone to both shift and also rotate out of alignment, producing the bump we associate with the bunion. In fact, recent studies indicate that 87% of bunions have this rotational component to the deformity, and that failure to correct that translates to a 10 times greater risk of the bunion returning. And it's this rotational component that's been historically overlooked in traditional surgical procedures, contributing meaningfully to the high observed recurrence rates. Approximately 75% of bunion surgeries today are corrected with procedures known as metatarsal osteotomies, where the metatarsal bone is cut in half below the bump and the bump is shifted inward. This is primarily a cosmetic fix in that it does nothing to address the unstable joint, which again is the origin of this deformity and fails to reliably address the important rotational component. Due to these shortcomings, metatarsal osteotomies are associated with high recurrence rates. some as high as 78% in more recent clinical literature. The alternative conventional treatment known as lapidus fusion is performed in approximately 25% of bunion surgeries today. Lapidus fusion is very different from a metatarsal osteotomy in that it attempts to realign the entire metatarsal bone while addressing the unstable joint as we do with lapoplasty. That said, it is a much more technically challenging and sometimes even volatile freehand operation and one that is not historically focused on correcting the important rotational component of the deformity. As such, outcomes tend to be inconsistent from case to case and surgeon to surgeon. Given the unstable joint is secured in a lapidus fusion, this procedure is generally associated with lower recurrence rates than osteotomy, although lapidus recurrence rates as high as 46% have been cited in the clinical literature. In addition, lapidus is typically a hard sell to patients as it involves a much longer and more restrictive recovery than an osteotomy, with up to six to eight weeks non-weight-bearing and often in a cast. For these reasons, lapidus fusion has traditionally been reserved for only the most severe bunion patients where an osteotomy isn't a viable option. It's against this backdrop that we developed our novel Lapoplasty 3D bunion correction system, which is a combination of proprietary instruments, implants, and surgical methods designed to empower surgeons to consistently correct all three dimensions of the bunion deformity including that rotational component, and address the unstable joint. This comprehensive approach delivers significantly lower recurrence rates and allows patients to weight bear quickly, typically within just a few days to a couple weeks in a postoperative boot. To provide support, build awareness, and drive adoption of the lapoplasty procedure, we've embarked on several programs, including clinical studies that provide a body of evidence for our novel therapy. In 2018, we initiated the Align3D prospective multicenter study to evaluate for consistent and reliable correction of all three dimensions of the bunion deformity with lapoplasty, as well as maintenance of the correction following a rapid return to weight-bearing protocol. The primary effectiveness endpoint of this study is recurrence at 24 months post-surgery. At the recently concluded American College of Foot and Ankle Surgeons annual scientific conference, we were pleased to announce positive interim data on the Align3D study in a podium presentation. Data on 128 patients showed consistent positive radiographic and patient-reported outcomes starting at six weeks and maintained at 12 months. Building on our previous clinical studies, only one out of a total of 72 patients demonstrated a recurrence at the 12-month follow-up point. for an implied recurrence rate of just 1.4% in this interim analysis. While we still have a ways to go with our primary endpoint of recurrence at 24 months post-surgery and a final patient readout in the first half of 2023, we are encouraged by this positive trend that builds upon our prior clinical data sets. We believe the data on lapoplasty's recurrence rate compares quite favorably to those reported in the literature relative to both osteotomy and lapidus fusion. Importantly, Align3D interim data also showed an early return to weight-bearing with a boot at approximately eight days versus six to eight weeks for many traditional lapidus procedures. The data also demonstrated significant improvements in pain reduction and quality of life measured at six months and maintained at 12 months. As such, we are optimistic that our lapoplasty procedure satisfies the needs of patients who seek treatment to relieve the pain, reduce mobility, and quality of life caused by their bunion deformity. We're encouraged by our growing body of clinical evidence in addition to real-world data from more than 28,000 lapoplasty procedures performed through Q1 of this year. Early in our commercial efforts, we know traction in our patient and surgeon education initiatives, which are also benefiting from positive testimonies and word of mouth. All combined, we believe we're on solid footing to serve the unmet need of a large, underpenetrated market with our lapoplasty system designed to comprehensively address the bunion deformity. strong intellectual property covering our surgical methods and instrumentation creating high barriers, differentiated clinical data sets, an expanding direct sales team, active surgeon education programs, impactful patient awareness initiatives, and favorable reimbursement economics. Net-net, we aim to deliver premium quality care with data demonstrating a more reproducible and effective surgical procedure to bunion sufferers. With approximately 2.5% market penetration, of the estimated 450,000 bunion surgeries performed annually in the U.S., we believe we are well positioned to broaden adoption of our lapoplasty system, and we remain cautiously optimistic as the U.S. returns to normalcy in 2021. With that, I'll now turn the call over to Mark to go over our financial performance. Mark?
spk07: Thank you, John, and good afternoon, everyone, and thanks again for joining us for our first quarter 2021 earnings review. Revenue increased 66% in the quarter to $18.7 million, up from $11.3 million a year ago, and at the high end of our $18.5 million to $18.7 million range provided as preliminary Q1 results in our prospectus filed with the SEC on April 26th. The increase was led by our expanded customer base and higher utilization rates which grew the number of lapoplasty procedure kits sold, particularly as we exited the quarter. In the first quarter, sales of lapoplasty procedure kits were 3,503, a 60% increase versus the prior year's first quarter, with a blended average selling price of $5,340, which was a 3.7% increase over the first quarter in 2020. The number of active surgeons performing at least one case on the trailing 12 months in the quarter increased 29.7% year-over-year to 1,354, with utilization improving 9.5% year-over-year to an average of 9.2 lapoplasty procedure kits per active surgeon in the trailing 12 months. In the first quarter of 2021, employee sales reps, representatives, our direct sales channel, generated approximately 44% of total revenue in the quarter, versus an average of 35% for the full year 2020. Gross margin increased to 82.2% in the first quarter of 2021, compared to 78.8% in the first quarter of 2020. The 340 basis point gross margin expansion was due to increases in the number of lapoplasty procedure kits sold, blended ASP, and operational efficiencies. Total operating expenses were $16.8 million in the first quarter of 2021, including sales and marketing expenses of 12.1 million, research and development expenses of 1.9 million, and general and administrative expenses of 2.8 million. This compares to total operating expenses of $10.1 million, including sales and marketing expenses of 7.3 million, research and development expenses of 1.4 million, and general and administrative expenses of $1.3 million in the first quarter of 2020. First quarter net loss was $2.6 million, or a loss of 7 cents per share, compared to a net loss of $1.8 million, or a loss of 5 cents per share for the same period in 2020. Cash and cash equivalents were $16.2 million as of March 31, 2021. Pro forma cash, including net proceeds of $107.1 million from our initial public offering completed in April, were approximately $123.3 million. Let me turn to our outlook for 2021. We project revenue for the full year 2021 to range from $87 million to $92 million. which represents approximately 52% to 60% growth over the company's fiscal year 2020 revenue of $57.4 million. Our outlook assumes continued normalization of revenue trends to pre-pandemic levels in the back half of the year. With recent strength seen in March, Q1 came in better than we anticipated. Therefore, while we typically see a step up in Q2 revenue over Q1, We now project Q2 revenue to be roughly in line with revenue reported in Q1 as we continue to emerge from the pandemic in the first half of the year. As John mentioned, we believe we are well positioned to drive adoption of our lapoplasty system, and our 2021 outlook reaffirms our commitment to focused execution and growth in our business. With that, let me turn the call over to the operator to open the line for your questions.
spk01: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Robbie Marcus with J.P. Morgan. Your line is now open.
spk03: Great. And congratulations on your first quarter public. Thank you.
spk02: Hey, Robbie. Thank you.
spk03: Hey. So... It sounds like second quarter is going better than maybe you thought, you know, going into the IPO. I was just hoping you could give us an update on what you're seeing in the markets so far in second quarter here as it relates to volume recovery.
spk07: Yeah. So as we mentioned, we're projecting Q2 to be roughly in line with revenue reported in Q1. And, you know, we believe that we're still in that transition time related to you know, really are emerging from COVID. So forecasting the business is a little bit more challenging than usual. You may have heard that from some others. So while we are really encouraged by the Q1, especially the latter part of the quarter, it's somewhat difficult to sort out the backlog from the normal demand and how those trends will play out in Q2. With all that said, you know, we think that it's doing well and we like the activity that we're seeing. So that's why we're We're thinking roughly in line with Q1.
spk03: Great. And as revenues move up, how are you thinking about the trend of expenses over the balance of the year? Thanks.
spk07: Yeah. So the trend of expenses, you know, I think as we think about how we came in in Q1, it's going to be a similar pattern. Some of our G&A expenses will continue to increase as we are a public company now, but a lot of the trends that we see in Q1 will continue. So not a lot of shifts or changes from what we reported. Great.
spk03: Thanks a lot.
spk01: Thank you. Our next question comes from Richard Newiter with SBB Link. Your line is now open.
spk05: All right. Thanks for taking the question. Maybe just to start, can you – and thanks for the guidance – this quarter, we appreciate that. Could you maybe talk a little bit about the underlying assumptions in terms of, you know, active surgeons, how many you expect to hire for the rest of the year, utilization, and ASP?
spk07: Yeah, so there's a couple questions there. So you're talking about active surgeons, or is it the active sales reps, you mean, and how many we're hiring for the rest of the year?
spk05: Or what are some of the key assumptions that As you build up to the range, the lower and the upper end of the range, what gets you to the balance of the range? As you talk about price and utilization, rep hiring, how many accounts you expect to bring on, just any of the assumptions that you use to build up there. Thanks.
spk07: Yeah, so, yeah, thanks for the question. So a lot of this is going to come back to some of those key metrics that we've talked about in the past, which are really the increase in new surgeon customers, our overall blended ASP, and really that utilization rate. And so we've seen that uptick in utilization, which we love, across a broader base of surgeons. So as we continue to see those increases year over year, that's what's going to really play a factor of whether we're on the low or high end of that range that we just talked about.
spk05: Okay. Thanks for that. And I'm just curious, you know, anything that you saw in the, you know, in the first quarter and even into the early part of the second quarter that is surprising you or an interesting trend that you think is worth calling out? Just we're in this recovery zone, you know, so. You know, I'm just curious if there's any kind of behavior on the consumer or doctor end. Is it more osteotomies, more lapid effusions that are kind of taking the baton during the recovery? And then also if you could just talk to the cadence for 3Q and 4Q as you think of the full year guidance.
spk07: Yeah, so as far as, you know, we talked a little bit about, you know, as we emerge from the pandemic, you know, there are It's a little bit more challenging to predict what's happening out there. With that said, we've been encouraged with Q1. I don't know that there's a dramatic shift in osteotomies versus lapidus versus lapoplasty other than we've had, you know, a nice growth year over year, Q1 versus last year. And, you know, we're projecting, you know, what we said for Q2 to be a substantial growth year over year as well. So I don't know that we're seeing any of that. major shifts in the marketplace. You know, we're not really giving specific guidance on Q3 and Q4 other than that, you know, we're on track and we're feeling good about the year such that we increased our overall guidance for the year. So I don't know that we have too many comments right now about Q3 and Q4, but, you know, we'll see how Q2 continues to unfold. Thank you.
spk01: Thank you. Our next question comes from Drew Ranieri with Morgan Stanley. Your line is now open.
spk05: Hey, Drew.
spk06: Hi, John. Hey. Hey, John and Mark. Congrats on your first quarter coming out of the gate as a public company, and thanks for taking the question. But just to start, just out of the recent foot and ankle meeting, if you could just talk about the feedback that you were getting from surgeons. You presented the Align3D data, the interim results, but just how is that resonating among uh, your, your current utilizers and even just, uh, newer surgeons, uh, and how did the, how has this conference maybe compared to some pre COVID? Are you kind of getting, uh, are you seeing more demand for your training and education initiatives? Just any sense there. Thank you.
spk02: Uh, yeah. Hey, Drew, it's John. Uh, yeah. Thanks for the question. I think, uh, You know, in general, the ACFAS conference was sort of lightly attended. They had some limitations this year from a physical standpoint, but it was also offered remotely. So they did have a pretty good turnout. I think the news about our Align 3D interim results, you know, permeated through the meeting a bit. And as the surgeon that presented the data relayed to me, he just said, this is just continuing to build upon, you know, your body of clinical evidence that will, you know, slowly work its way towards convincing more people that this is the right treatment for more of their bunion operations. So I think in general that's, you know, it wasn't a firework display, but, you know, definitely helpful incremental data, and that interim data looks very good comparatively to the other procedures.
spk06: Great. Thank you. And, Mark, this might be more for you, but just with gross margins at 82% for the quarter, there are kind of getting to pre-COVID levels, but can you just talk about the sustainability of gross margins through 2021? It sounds like ASPs should likely be stable, but what are you thinking about for gross margins going forward? Thank you.
spk07: Yeah, thanks, Drew. Great question. So we definitely have our eyes on several different factors here as we're coming into the year. One is just the overall cost of goods and materials that go into our products. you know, we're keeping our eyes very wide open on that, that could have, you know, an impact on gross margin if we do have that inflation, and there's a lot of inflationary concerns. And we've seen a little bit of that, and so there is potential that that may have some impact. We've also talked a little bit about, as we continue to penetrate and get into larger hospital networks, that there could be some pricing pressure from those customers but that would be the right thing for us to do. So overall, we're feeling pretty good right now about our margins going into, you know, going forward into Q2 and hopefully for the back half of the year as well.
spk06: Thank you.
spk01: Thank you. As a reminder, to ask a question, you will need to press bar one on your telephone. Our next question comes from Rick Wise with Steeple. Your line is now open.
spk04: Good afternoon, gentlemen. Hi. Let me start off with if we could talk about the sales agency conversion. If I remember correctly, in the fourth quarter, something like a third, a little over a third of revenues came from your direct reps, 65% from independent sales reps. And I know you've said that your goal is to have the majority of revenues over time eventually come from the direct sales channel. Just help us understand where are you now with that cadence, that evolution, and just remind us how that transition is going to unfold this year at least.
spk02: Sure. Rick, this is John. I'll take that one. We ended the year last year for full year around 35% mix, ended Q1 at 44%, and we're going to continue to build upon that through this year and In the next year, it'll be a progressive process, and we will have a larger percentage of our revenue coming from our direct sales channel. That said, as we've discussed before, we have some excellent, very strong independent agency partners who we believe will be with the company for a long time. They're very supportive of our program and hitting the numbers that we need them to hit. So I hope that answers your question there.
spk04: Yeah, definitely. And the on the product front. Can you just give us an update on the mini incision system launch? Obviously, the main incision launch in 2020 took place, I expect a more full release in 21. We're halfway through the year, where are we in terms of penetrating the existing surgeon base and where should we be by the end of this year? And just remind us about price, the impact on pricing and margin. Is that one of the factors that helped pricing in the period?
spk02: Yeah, it actually did have, it was definitely a favorable tailwind to the pricing. It didn't elevate it in its own. There were multiple factors going in there, including you know, more of our accessory products being sold and just a higher average selling price of our base kits as well. As far as the mini-incision system itself and the clinical uptake, I think it continues to gain more traction and more broadened acceptance. We're seeing a lot of great, you know, x-rays and clinical pictures of some very small incisions and surgeons enthusiastic about it. So, I think it's going to continue to build. As we communicated before, I expect to be more broadly available in the back half of this year. We're still doing that progressive rollout and training more and more docs, and new doctors are starting to implement it in their practice, and existing surgeons that have already been users of the mini-incision system are finding more ways to apply it, but it's still not a swap out for our conventional lapoplasty. It's a patient-selective application, and I think that's the way we're going to see it for the future.
spk04: Great. Thank you so much.
spk02: Sure.
spk01: Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Vivian Cervantes for closing remarks.
spk00: Thank you. On behalf of Therese Medical, thank you everyone for joining us today. This concludes our call, and we look forward to our next update following the close of the second quarter of 2021.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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