Treace Medical Concepts, Inc.

Good day, and thank you for standing by. Welcome to the Trace Medical Concepts Second Quarter 2023 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 the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Julie Dewey. Please go ahead.

Good afternoon, everyone, and welcome to our second quarter 2023 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Teresa's Chief Communications and IR Officer. With me today are John Treese, Chief Executive Officer, and Mark Hare, Chief Financial Officer. During the call, John and Mark will offer commentary on our commercial activity and review our second quarter financial results released after the close of market today, after which we'll host a question and answer session. The press release and supplemental materials can be found in the investor relations section of our website at investors.treese.com. This call is being recorded and will be archived in the investor section of our website. Before we begin, we'd 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, are 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 Teresa assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10-Q for the second quarter to be filed tomorrow, our Form 10-Q for the first quarter, filed on May 9, 2023, and our Form 10-K for the full year, 2022, filed on March 8, 2023, for a detailed presentation of risks. With that, I'll now turn the call over to John.

Thank you, Julie. Good afternoon, everyone, and thank you for joining us on our second quarter 2023 earnings conference call. Before we begin the call, I'd like to start off by saying how proud I am of what our team was able to accomplish since our last earnings call and in the first half of the year. We're pleased with the progress we're making, and we believe we are well positioned for the second half of 2023. In the second quarter, we continue to execute on our strategic plan, resulting in sustained strong revenue growth, encouraging adjusted EBITDA progress, and continued gains across our key operating metrics, reaffirming once again that we have the right strategies in place to expand the market penetration of our differentiated technologies. Before I go into details about the quarter, let's start with our market summary on where we stand today. Our disruptive Laplacian solution was specifically developed to correct the root cause of the bunion and address a large and underserved market. We have identified an estimated addressable $5 billion-plus U.S. market of an estimated 1.1 million annual surgical candidates, of which only 450,000 undergo bunion surgery each year, which we believe is mainly due to limitations associated with current standards of care. We believe our proprietary lapoplasty system addresses these limitations by surgically correcting all three planes of the bunion deformity and securing the unstable joint, thereby addressing the root cause of the bunion. As of the second quarter of 2023, we penetrated approximately 6.2% of the estimated 450,000 annual surgical bunion procedures in the U.S., up from 4.6% in the second quarter of 2022, and reflecting approximately 2.5% market penetration of the estimated 1.1 million annual U.S. surgical candidates that constitute our $5 billion plus total addressable market in the U.S. Turning to our Q2 results. Revenue in the second quarter was $42 million, representing 40% growth over the second quarter of 2022. During the second quarter, we continued to execute on our commercial strategies and benefit from our investments, even as we saw some patients and surgeons prioritizing travel and time away from their practices. We're extremely pleased not only with our top-line growth, but our sustained positive trends in our key operating metrics, including Our expanding direct bunion-focused sales team, which accounted for 79% of our revenue mix in Q2, compared to 68% during the second quarter of 2022. Steady increases in the number of new surgeon users, ending Q2 with 2,581 active surgeons, up 26% year over year. A year over year increase in trailing 12-month surgeon utilization, with an average of 10.7 kits per active surgeon in Q2, up from 10.1 kits a year ago. and strong blended average selling prices of $6,176 per lapoplasty kit sold in the quarter, representing 8% growth over the prior year as our expanding direct sales team educates our customers on our broader portfolio of problem-solving complementary products such as a ductoplasty, our fast pitch screws, our speed release and tritone tissue release instruments, and other products. Our strategic investments and commercial focus have continued to support the growth of our business giving us confidence that we have a well-defined, proven, and scalable commercial strategy. Given these positive trends, we are raising our full year 2023 revenue guidance to 191 to 197 million, which reflects an increase of 35% to 39% over 2022 revenue. We remain committed to balancing aggressive execution of our targeted commercial initiatives to maximize our growth and market penetration while delivering modest improvement in expense leverage. shifting to our commercial and market development activities. As we previously discussed, we have continued our targeted investments in 2023 with the goal of increasing our market penetration by expanding the footprint and coverage of our Bunyan-focused direct sales channel, advancing our patient awareness DTC initiatives, and driving more targeted R&D innovations into the market. We have a highly specialized team at Treece, including a rapidly growing direct sales force, one that is 100% focused on bunion and related midfoot surgery, and the only such organization that we're aware of in the US med tech industry. We believe this has contributed meaningfully to our revenue and market penetration over the past years. As previously mentioned, in the second quarter, 79% of our revenue was generated by our direct sales force, up from 68% over the same period last year. We continue to see increasing productivity from the direct sales reps that we added during 2022, And as we've discussed in the past, our historic data demonstrates that our direct sales reps typically scale with significant revenue and cost leverage achieved within 24 months, primarily because they're exclusively focused on our products and fully utilize our suite of corporate resources and programs. Further, over the past year and a half, we've aggressively invested in our direct sales channel. We ended 2022 with 168 quota carrying direct sales reps. and began this year with a target of having over 200 quota-carrying direct reps by year-end. With strong interest from candidates to join our direct sales team, we're happy to announce that we've already achieved our full-year target by the end of Q2. We plan to continue to opportunistically hire to ensure that we are prudently balancing growth and delivering modest improvements in expense leverage, all while increasing revenues from our direct sales channel. Our patient awareness DTC initiatives are a key component of our commercial strategy. As you may recall, our investment in DTC is resulting in hundreds of thousands of potential patients visiting our website every month. On this strong momentum, we've increased our DTC investments in 2023, incorporating new digital tools to make it easier for patients to connect with lapoplasty doctors. And as a result, we've seen a significant increase in patient initiated physician contacts on our website, which have more than doubled in the first half of this year compared to the same period last year. With one in four surgeons in the US using the Lapoplasty procedure, we have a large and expanding national surgeon base that can now field inquiries from this higher volume of potential patients. To further support this increased patient interest, during Q2, we ramped up a new Lapoplasty call center. This call center is integrated with our patient website and serves as another communication and education channel for both potential lapoplasty patients by answering basic questions about the lapoplasty procedure with the goal of ultimately connecting these patients with trained surgeons in their area. Although early, we're encouraged by the volume of calls this center is already receiving and believe this will meaningfully increase the number of informed patients who enter the lapoplasty treatment funnel over time. Our surgeon education and training programs continue to be well received. These programs play a key role in the effective onboarding of new surgeon users and increasing the skills of existing surgeons, broadening their patient indications. We're encouraged to see continuing growth in our active surgeon base with 2,581 active surgeons in Q2, which is up 26% from the prior year period. Demand for our introductory and advanced surgeon training programs, both online and in person, remains robust, and we look forward to executing additional training sessions that we have slated for the back half of this year. As our surgeon base continues to develop, we anticipate utilization gains with increased use of our lapoplasty and adductoplasty systems, as well as further adoption of our growing portfolio of complementary products, all supported by our expanding direct sales channel, differentiating clinical data sets, and patient awareness DTC initiatives. Speaking now to our product development strategy. We have an R&D team committed to driving innovation to maintain our industry leadership with programs for both next-generation bunion correction systems as well as the development of new complementary technologies addressing other bunion-related pathologies and IP defense of our technology and innovations. We now have 49 granted U.S. patents and 72 U.S. patent applications pending. We continue to advance our product pipeline with the development of several new technologies. First, our micro-lapoplasty system. This is an advanced instrumentation option designed to further reduce both the incision size and related tissue dissection with the lapoplasty procedure. This exciting evolution of our instrumentation allows the patented lapoplasty procedure to be performed now through a two centimeter incision. And our speed plate implant fixation platform. This is a new fixation technology platform designed for rapid insertion while providing dynamic compression of the joint surfaces. And since it can be implanted through small two centimeter incisions, SpeedPlate not only offers broad applicability with both our standard lapoplasty and adductoplasty systems, but also serves as an enabling fixation technology for our microlapoplasty system. We have been performing limited launch clinical cases with SpeedPlate for several months in preparation for our full anticipated launch in Q4. Initial response from surgeons who received early clinical access has been overwhelmingly positive. specifically with regard to time savings, stability, and the dynamic compression benefits that the speed plate is designed to provide. We're also hearing positive feedback from these early surgeon users related to the bone healing they're seeing in their speed plate treated patients. We continue to anticipate the commercial launch of our speed plate implants and microlapoplasty instrumentation to begin in the fourth quarter of this year and will continue to build during the first half of 2024. We're excited about the potential benefits this microlapoplasty speed plate combination can bring to patients. As with any procedure that involves smaller incisions and less tissue dissection and trauma, we believe this could translate to even faster recovery with less pain and swelling. We will provide additional updates on our new product innovations as we continue to develop our pipeline centered upon our core technologies in IP aimed at improving surgeon user experience, patient outcomes, and supporting continued market penetration. Turning to clinical data. A key differentiating driver for our business is our commitment to clinical evidence, which we believe resonates with both surgeons and patients. From what we can see in the marketplace, we believe we're the only industry participant with a growing body of clinical data. We look forward to presenting new interim data, including our two-year primary endpoint data on 157 patients from our Align 3D Lapoplasty Study at the upcoming 2023 American Orthopedic Foot and Ankle Society or AOFAS conference in September. Although the primary endpoint of this five-year study is at two years, we now have a sizable number of patients demonstrating significant improvement in clinical and radiographic and patient-reported outcomes at three years post-procedure. Building upon this, later this year, we plan to submit our primary endpoint Align3D manuscript for publication in a top-tier peer-reviewed foot and ankle journal. This is an exciting milestone culmination of activities that began five years ago with the first patient enrolled in 2018. Again, we believe the positive interim patient data coming from our differentiated aligned 3D study resonates strongly with surgeon and patient communities and is reinforcing further market adoption of our lapoplasty procedure. I would also like to highlight that at the end of the second quarter, we acquired certain assets from Redpoint Medical 3D adding FDA-cleared patient-specific instrumentation, or PSI, technologies and capabilities to our portfolio, building upon our pioneering 3D bunion correction and related midfoot solutions. This transaction is well aligned with our commercial strategy to increase investments in R&D to continually advance our core lapoplasty and adductoplasty procedures, delivering an expanding portfolio of unique problem-solving technologies for our customers, which are marketed through our direct bunion-focused sales force. We're excited about adding this technology platform, which is highly complementary to our core lapoplasty and inductoplasty systems. Finally, I'd like to note that CMS recently released its proposed 2024 Medicare payment rates for hospital, outpatient, and ASC services to cover facility costs for surgical procedures, including supplies and implants used in the surgical case. As a reminder, our products are used in procedures covered by specific, well-established CPT codes, and we're pleased to report that the proposed 2024 reimbursement rates for these codes are slated for low to mid single digit increases. Assuming the proposed 2024 rates are finalized, this will continue a multi-year trend of low to mid single digit increases in facility reimbursement rates for CPT codes associated with our procedures. In closing, I'm proud of another great quarter of execution at Treece, with solid execution from our talented team of employees Our proven strategic investments, supported by our strong balance sheet, continue to drive our momentum on both the top and the bottom line. We have a specialized and scalable business model that's fueling our growth strategy and our mission to advance a standard of care in the surgical correction of bunion and related midfoot deformities. With that, I'll now turn the call over to Mark to review our financial performance. Mark? Thank you, John.