Paragon 28, Inc.

Good afternoon and welcome to the Paragon 28's first quarter 2022 earnings conference call. Currently, participants are in a listen-only mode. We will be facilitating a question and answer session at the end of today's call. As a reminder, this call is being recorded for replay purposes. I will now pass the call over to your host, Matt Basko with Paragon 28. You may proceed.

Joining me from Paragon 28 are Albert DaCosta, Chairman and CEO, and Steve Deitch, CFO. Earlier today, Paragon 28 released financial results for the quarter ended March 31st, 2022. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including but not limited to those relating to our operating trends and future financial performance, including our revenue guidance for the full year 2022, the impact of COVID-19 on our business, supply chain, expense management, expectations for hiring, growth in our organization, market opportunity, revenue guidance, commercial expansion, and product pipeline development 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 implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Paragon 28 assumes no obligation to update these statements. Accordingly, you should not place under reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of our public filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed with the SEC on March 9, 2022. This conference call contains time-sensitive information and is accurate only as of the live broadcast May 9, 2022. Paragon 28 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. During this presentation, we will refer to non-GAAP financial measures adjusted EBITDA. A reconciliation of adjusted EBITDA to net income or loss the most comparable GAAP financial measure is contained in our press release issued this morning. And with that, I'll turn the call over to Albert.

Thank you, Matt. Good afternoon and thank you for joining Paragon 28's first quarter 2022 earnings call. I will provide an overview of the first quarter 2022 and give a business update. Steve will then provide additional detail regarding our quarterly results and provide an overview of our updated 2022 revenue guidance. We will then open the call to Q&A. Beginning with our first quarter 2022 performance, total revenue for the first quarter was $41.4 million, representing growth of 25% compared to the first quarter of 2021. First quarter U.S. revenue was $36 million, representing growth of 24% compared to the prior year period. Despite COVID-19 headwinds in January and early February, our strong growth during the quarter was driven by double digit revenue gains each month, including record revenue for the month of March. excellent commercial execution including expansion of our sales force and surgeon customer base and increased revenue per sales rep were key drivers of our success during the quarter i will provide more detail on each of these growth drivers later in my prepared remarks first quarter international revenue was a record 5.4 million dollars representing growth of 35 compared to the prior year period and an increase of 15 percent sequentially compared to the fourth quarter of 2021 In addition to our strong operating performance during the first quarter, Paragon28 continues to be focused on our mission to improve foot and ankle patient outcomes, which will enable growth in our business for years to come. During the quarter, we accelerated key investments in medical education, commercial expansion, and new product development, including Smart28. We also closed the acquisition of Dizior, which is a key aspect of Smart28, and we are very excited to welcome our 21 new team members in Helsinki, Finland. Today, Paragon 28 has more exciting growth opportunities than at any time in our past. We will continue to make disciplined and opportunistic investments in commercial expansion, surgeon medical education, and technology advancements to achieve our mission of improving foot and ankle patient outcomes and expanding our market share. On another note, My co-founder and dear friend Frank Bono has decided to retire at the end of 2022 after a career in orthopedics spanning several decades. As co-founder and CTO of Paragon28, Frank has been an integral part of the success of our company for the last decade. I want to personally thank him for all he has done for Paragon28 and wish him all the best in his retirement. To ensure a smooth transition between now and the end of the year, Frank will continue to be involved in the day-to-day operations of the company and partner with our newly hired Chief Technology Officer, Jason Eady. Jason has been a leader in med tech research and development for over 20 years and has a track record of success in foot and ankle. We would like to welcome Jason to the team. Moving to our foot and ankle sub-segment revenue trends. During the first quarter, Paragon 28 experienced very strong growth in the two largest market sub-segments of fracture fixation and hallux valgus, or bunions. Fracture fixation and bunion growth was driven by recent product launches and continued strong commercial execution. Additionally, we continue to see strong momentum and growth across our entire ankle product portfolio, which remains a strategic focus for the company as it is one of the fastest growing markets with opportunities for significant improvements in patient outcomes. I will now provide an update on a few of our key strategic initiatives, starting with the expansion of our commercial team and surgeon training. We ended the first quarter of 2022 with 197 producing sales reps in the United States. As a reminder, our US sales force consists primarily of independent sales representatives, the majority of which are exclusive. Revenue per producing sales rep increased an impressive 20% in the first quarter. Growth in our US surgeon customer base was also impressive, increasing 15% during the quarter to over 1800 customers. Paragon's strategy of developing and putting innovative technologies in the hands of our clinically oriented sales force and providing best-in-class medical education to foot and ankle surgeons is working. Speaking of medical education, over 600 surgeons attended in-person medical education events in the first quarter of 2022. The first quarter is a seasonally strong period for medical education. These specialized events are designed to enhance surgical skills and ultimately improve patient outcomes. Medical education events are also a great opportunity to showcase our innovative product line to both new and existing surgeon customers. We expect to continue to optimize our medical education programs throughout 2022. Moving to recent product development, in mid-April, we launched our REACT syndesmotic stabilization system, which I believe is one of the most innovative products we have brought to market. With an estimated 20% of all ankle injuries requiring implants for soft tissue healing, we believe REACT will be a nice compliment to our entire ankle fracture portfolio. The addition of REACT bolsters our ankle fracture and soft tissue product offering, which includes the Gorilla ankle fracture plating, Gorilla Pilon plating, Mini Monster screws, and release stabilization system. With this comprehensive portfolio, we now offer customers a broad array of innovative solutions for fracture fixation and soft tissue stabilization. Additionally, We recently launched the Paratrooper Planner Plate System for Hammer Toe, a low-profile, all-suture implant offering surgeons a new and innovative approach for planner plate repair and forefoot deformities. Repair of the planner plate has historically been one of the more challenging pathologies within the hammer toe subsegment. We are thrilled to have developed an all-suture-based, low-profile, and versatile implant capable of treating a variety of planner plate conditions. The paratrooper planter plate system adds to our growing portfolio of soft tissue and hammer-toe products, which remains a strategic focus for the company as it is one of the fastest-growing markets with opportunities for significant improvements in patient outcomes. Also, the acquisition of Dizior in January accelerated our SMART28 initiatives by providing us a cutting-edge, three-dimensional preoperative planning technology. We are very excited about putting this technology into the hands of surgeons around the world in the coming years. In summary, we have made considerable progress on all key strategic initiatives and will continue to invest in the business to drive long-term durable growth. We are grateful for the trust our physicians and patients have for Paragon 28. I would also like to thank our sales representatives and employees around the world for their diligent efforts and dedication to fulfilling our mission to continuously improve outcomes and experiences of patients suffering from foot and ankle conditions. I will now turn it over to Steve. Steve.

Thank you, Albert. Moving to our first quarter 2022 financial results. Paragon's revenue for the first quarter of 2022 was $41.4 million, representing growth of $8.3 million, or 25% compared to the first quarter of 2021. U.S. revenue for the first quarter of 2022 was $36 million, representing growth of $6.9 million, or 24% compared to the first quarter of 2021. International revenue for the first quarter of 2022 was a record $5.4 million representing growth of $1.4 million or 35% above the first quarter of 2021 and with $700,000 or 15% higher than the fourth quarter of 2021. Growth in the quarter was driven primarily by strong performances in South Africa and the United Kingdom two of our largest international markets. Gross profit margin for the first quarter of 2022 was 83.6% compared to 80.5% in the first quarter of 2021. The improvement was primarily due to lower excess and obsolete inventory expense in the first quarter of 2022 as compared to the prior year period. Research and development expense was $5.8 million or 14% of revenue for the first quarter of 2022, compared to $3.6 million or 10.7% of revenue in the first quarter of 2021. The increase in research and development was primarily due to additional investments in new product development, primarily SMART28, including the acquisitions of Additive Orthopedics in May 2021 and Dizior in January 2022. Selling general and administrative expense was $37.2 million for the first quarter of 2022, compared to $23.4 million in the first quarter of 2021. The increase was driven primarily by very high demand for in-person U.S. marketing and medical education events, increased variable sales representative commission expense related to revenue growth, investments in commercial team expansion, both in the U.S. and in our international markets, dizzier acquisition-related costs, and increased costs related to becoming a publicly traded company. Compared to the fourth quarter of 2021, SG&A expense increased $2.1 million, primarily driven by more in-person medical education events, increased investments in commercial team expansion, timing of trade shows, which are generally more concentrated in the first quarter of each year, and approximately $800,000 of DSYOR acquisition related costs. Our cash on hand at March 31st, 2022 was $93.7 million. This cash on hand combined with our ability to borrow an additional $40 million via our senior credit facility puts P28 in a position of financial strength. Next, I will speak to the macroeconomic topics of COVID related surgical deferrals supply chain constraints, and inflation. With respect to COVID-related surgical deferrals, we exited the fourth quarter of 2021 and began the first quarter of 2022 experiencing headwinds associated with the Omicron variant in January and early February. As noted in our fourth quarter 2021 earnings call on March 8th, headwinds decreased beginning in mid-February. Since March 8th, COVID headwinds have decreased, and absence a resurgence in headwinds, we expect the elective procedure environment to continue to improve. With respect to the supply chain, the environment has become incrementally more difficult, but we are confident in our team and vendors that they will continue to effectively manage the challenge. Consistent with remarks from our past earning calls, we may opportunistically increase inventory and instrument purchases to ensure that we have product on hand to meet demand. Regarding inflation, at the moment, we are not experiencing material price increases from our inventory and instrument suppliers, and we do not expect gross margins to be significantly impacted in 2022. Turning to our full year 2022 revenue guidance, which takes into account the current level of COVID headwinds and supply chain constraints. We have increased our 2022 annual revenue guidance range to $171 to $175 million, representing growth of approximately 16 to 19%. While we will not be providing specific adjusted EBITDA or cash flow guidance for 2022, we expect to continue to report positive annual adjusted EBITDA. And given this fact, combined with the strength of our balance sheet, We do not expect to raise additional capital to fund operations. That is the end of our prepared remarks. Operator, please open the lines for questions.

Absolutely. We will now begin the QA session. If you would like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question is from the line of Matthew O'Brien with Piper Sandler. You may proceed.

Great. Thanks for taking the questions. I guess maybe a multi-part one here to start with on the Q1 performance. You know, Albert and Steve, you guys mentioned a lot of the A lot of the characteristics that drove that strength, but the productivity in the quarter per rep was great. Can you talk about, you know, where that's coming from as far as, you know, is it reps that have been around for a year, you know, how they're starting to gain steam? And then kind of same thing goes with new accounts in the international. And then on top of that, Steve, just the SG&A spend was quite a bit higher than we were modeling, and I think you talked about it. to some extent, but, um, you know, just if you can break down, you know, some of the medical education costs or, or investments in new, um, a new, uh, Salesforce channel, I think that would be helpful as well. And then I do have one quick follow-up. Thanks.

Yeah, Matt, thanks for that question. And we were really pleased with the performance in the first quarter. Uh, we saw terrific strength, as you mentioned in our rep productivity growing 20% and There were really a handful of drivers there, probably the most significant being the new products that we've launched over the last two or three years, really having the ability to train on those as we got into the second part of 21. And those surgeons becoming comfortable and our reps becoming comfortable selling those products, things like our total ankle replacement, like our fracture product for the ankle. So had a really terrific quarter in both of those franchises. Also had a terrific quarter in Hallux Valgus. So really excited about that. Um, we also continue to add reps and we were having quite a few opportunities driven. We think by the high visibility to our company, since our public offering and the size of our company and the full product line, we've never had more opportunities to hire experienced reps and bring them into the company. And so that's been actually one of our key drivers of our investments increasing in the first quarter as well. as we mentioned in the prepared remarks. We also had opportunities driven by incredible demand, honestly, for our medical education programs. We trained, again, over 600 surgeons in the first quarter in person. And that compares to last year in the first quarter where we had very few in-person trainings because of COVID. So over the last three quarters, we've trained 600 in Q3, 200 in Q4, and then 600 plus again in the first quarter. So Big opportunities there. We're excited about those. We spend money where it matters and we don't spend money where it doesn't matter. When we have opportunities to hire top tier reps and also trained surgeons who are demanding opportunities to see our products, we'll continue to do that and drive some of those opportunities. The other thing that I would say about our first quarter expenses, it's more of a trade show heavy quarter. And last year, we didn't have any trade shows in the first quarter. So AAOS, some of our specific foot and ankle society meetings. We had our first national, not our first, the first in-person since I've been here, national sales meeting where we had our entire sales force together for the first time and really worked on strategic initiatives for the rest of this year and did some training at that as well. So it was an exciting quarter, not just from the performance we put up on the revenue side, but also the investments that we've been making for the future.

Got it. That's very helpful. Makes total sense. And then the second one is you beat by $4 million in the quarter. You raised at the big point of the range by $4 million. What's implied in guidance at the low end versus the high end? Thank you.

That's a great question, Matt. So as you noted, our first quarter was really strong and it was really fundamentally driven by the strength in our business. And some element of backlog recapture, you know, it's kind of Difficult to say exactly how much backlog recapture was in there, but most of the growth in our first quarter was driven by the strength of our business. And as we enter Q2Q, we continue to see strong volumes, not as high as we saw in March, which was a record month, but that's really due to normal seasonality. And when you think about second quarter, year over year, typically, we would be typically flat to down slightly in a normal year. And coming out of a very strong first quarter, that's a consideration to take into mind as you model out the year. But I would tell you at our high end of the range of $175 million, our second half of the year guidance implies approximately 20% growth in both the third and the fourth quarter.

Got it. Thank you so much. You got it. Thanks, Matt. Thanks, Matt.

Thank you. The next question is from the line of Dave Turkley with JMP Securities. You may proceed.

Hey, great. Thanks. I know you gave a comment on the customer base. I think you said it grew over 15%, but did you specifically highlight producing reps versus those total trained? I know you said 600 trained, but the producing number, did you make a comment on that?

Hey Dave, uh, Steve here. So our producing, I think you're asking about producing surgeons. So our producing surgeons during the quarter was about 525, approximately 13% ahead of prior year. And we did business with over 1800 customers in the first quarter.

Got it. And then, uh, thank you for that. And you mentioned sort of an all time record. I think he said, I mean, it was March a record.

month for the company uh for revenues of all time was that the comment that you made it was yeah it was a terrific month of march and all-time record and then our european business excuse me our international business had a record first quarter so two records uh march for the total company and then internationally for the first quarter and i guess you mentioned some of the the strength you know across some of the sub segments some

I'm just curious, you know, the CAGRs that we talked about maybe being 10% in some of the subsectors, maybe a little lower in fracture, but it sounds like you did really well there, ankle maybe stronger. As you look back at some of those, you know, 5%, 10%, 9% were sort of what we were looking at at the IPO time. When you think those markets are actually now growing faster, are you taking share? Thank you.

We think we're taking share. In those franchises, we specifically called out ankle. With the launch of those products, and specifically maybe calling out the total ankle, that really has been a nice share driver for us. Fracture fixation, we've launched new products in that area as well. We're clearly growing above the market rate there. Also, in hallux valgus as well as hammer toe, which we think are closely related. We're growing faster than the market and taking share.

Thank you so much.

And that ankle, just to add to that, the ankle portfolio is doing well. And we mentioned on previous calls that that's a slightly newer product line for us. And that includes ankle fusion, which is doing really well. The nail and the plating systems around ankle fusion. in addition to the total ankle, which is seeing some really nice momentum there. On the fracture fixation side, we're seeing really nice growth in ankle fracture plating system and the complementary products that we're launching to support that, like the syndesmotic devices and some of the soft tissue. That's really demonstrating how complementary it is to that portfolio. So we're seeing some nice momentum there with new products some of those products being younger in their growth cycle, et cetera.

Thank you.

Thanks, Dirk.

Thank you. The next question is from the line of Mike Mattson with Needham & Company. You may proceed.

Yeah, thanks for taking my question. I guess, Steve, I wanted to go back to your comments on the inflation and the supply chain. You're sounding a little bit more optimistic about inflation impact than some of your peers. Admittedly, they're larger in some cases, but I guess titanium prices do seem to be up quite a bit. I don't know to what degree that is used versus other materials in your products, but can you maybe just talk to your confidence there that you won't see price is increasing over the next couple quarters? Sorry, cost increasing.

Yeah, yeah. Thanks, Mike. And we just haven't seen it at the level that some of our publicly traded peers have been reporting and commenting on. And, you know, I can't speak to exactly what they're experiencing, but, you know, Albert and I are very involved with the supply chain and meeting actively with our suppliers. And they are telling us they're able to deliver at the prices that we've been buying for the last couple of quarters. So, you know, at this point in time, we're pretty confident that, you know, that's going to continue. And, you know, without a crystal ball, it's hard to say exactly what's going to happen. But we're, you know, confident and we just haven't seen it. And you see it in our margins again for the first quarter, even without the inventory obsolescence adjustment driven, which was really driven by the higher product growth that we've had the last two quarters. 22 and 25% growth that triggers uses of inventory that in some cases were previously reserved. So strong margins and no expectations or visibility that those are gonna be dropping any time in the future that we have visibility to.

Okay, got it. And then just looking at your cash flow statement, I mean, it looks like nine and a half million was used in operating activities, and then you had $23 million for PP&E, or I guess CapEx. So, can you maybe just comment on what the outlook there is? I heard a comment earlier about maybe it's trying to stock up on some inventory. So, I don't know if you pre-bought certain things and that drove working capital up. And then on the Sorry, the CapEx. I don't know if you're willing to break out the portion of that that's for instrument sets.

Yeah, happy to do that. So maybe starting with the investing activities, we had $41.6 million of investing activities for the quarter. And this is in the 10Q as well, so it's there. So we acquired Dizior, $18.2 million. And we also bought our office building, $18.3 million, with a very, very attractive mortgage that we put in place with our partners. And so those were the two largest elements of investing activities. And then we also had surgical instrumentation of approximately 4.7 million. That's a pretty normal, maybe a little bit higher than normal on the surgical instrumentation. We saw some of that come in this quarter that took a little bit longer than we had seen in the past. And so some of that trickled in from orders last year. And, you know, typically we'll spend $12 to $15 million a year on surgical instrumentation. We don't have any other major CapEx items planned. Our office building, as I mentioned, was opportunistic to take advantage of a unique situation and buy that building and save a bit of money actually. Operating activities, we did increase inventory opportunistically during the quarter. I think we went from 40 to 43 million approximately. And some of that was driven by our new products that we're launching, but also just additional sets based upon a lot of the experienced hires that we've been bringing into our business. So building up stocks of inventory with expectations for additional feet on the street, really starting to contribute more as we move particularly into the second half of the year.

Okay, great. Thank you.

Thank you. Again, to ask a question, please press star 1. There are no additional questions at this time. I will now pass it back to the management team for any closing remarks.

This is Steve. Thank you again for your time today. Albert and I look forward to meeting many of you in the future, and we're at the Bank of America conference here this week in Las Vegas, so look forward to seeing you tomorrow. and speaking to you again in the future.

Thank you. Thank you.

That concludes today's conference call. Thank you. You may now disconnect your lines.