AxoGen, Inc. (AXGN) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the AxoGen third quarter 2013 results conference call. (Operator Instructions) As a reminder this conference is being recorded. I would now like to hand the conference over to Carol Ruth from The Ruth Group. Ma'am, please go ahead.

Thank you, and good morning. Thanks for joining us today for AxoGen's third quarter 2013 financial results conference call. On the call with me today are Karen Zaderej, AxoGen’s Chief Executive Officer, and Greg Freitag, Chief Financial Officer. Last night, AxoGen issued a press release announcing its third quarter 2013 financial results. If you have not received a copy of the release, feel free to contact our offices at 646-536-7000 or email investorrelations@axogeninc.com, and we will have one forwarded to you. Today’s call is being made available to a broader audience via the Investor Relations section of the company’s website at www.axogeninc.com. Following remarks by management we will open the call to your questions. We anticipate the duration of the call to be approximately one hour. In addition, replays of this call will be made available on the Investor page of the AxoGen’s website shortly after conclusion of the live call. During the course of this call, management may make certain forward-looking statements regarding future events and the company’s future performance. These forward-looking statements reflect AxoGen’s current perspective on existing trends and information which can be identified by such words as expects, plans, will, may, anticipate, believes, should, intent and other words of similar meanings. Any such forward-looking statements are not guarantees of the company’s future performance and involve risks and uncertainties including those noted in our filings with the SEC on Forms 10-K, 10-Q and 8-K. Actual results may differ materially from those projected in these forward-looking statements. For the benefit of those of you who may be listening to the replay, this call was held and recorded on October 31, at approximately 10:00 AM Eastern Time. Since then the company may have made additional announcements related to the topics discussed. Please reference the company’s most recent press release and current filings with the SEC. AxoGen declines any attempts or obligations to update these forward-looking statements. With that I would like to turn the call over to Karen. Karen?

Thank you. Good morning and Happy Halloween everyone, and thank you all for joining our call today. I would like to extend to a special welcome to those shareholders who are new to AxoGen since our last call. As most of you know it's been a very exciting and busy third quarter at AxoGen. We continue to execute on our long term strategies to drive the awareness and adoption of our products as alternatives to the traditional nerve repair option. We also achieved two really important milestones for our business. In August we raised gross proceeds of $18.6 million in a public offering that strengthened our balance sheet, brought in new investors and will allow us to continue investing in our growth. In conjunction with this financing, we also uplisted to the NASDAQ market which places us in the market among other high growth companies and increased our visibility in the investor community. This has likely contributed to the recent improvement in our trading liquidity which averaged about 6,000 shares per day before the move to NASDAQ, and since the move has been about 44,000 shares per day. At the same time we completed these important business milestones for AxoGen. We continued our efforts in developing the market for peripheral nerve repair and executing on our sales plan. Third quarter revenue grew to a record $2.96 million, up just [indiscernible] or 49% compared to the third quarter 2012. This growth was primarily driven by increased product penetration with existing accounts and sales to new accounts. Our sales reps are targeting key accounts and focusing on driving adoption of the entire portfolio of AxoGen nerve repair products across the multiple potential users and [indiscernible]. In addition to executing on the sales strategy, we are focused on building awareness of the new…

Great. Thanks, Karen. Everyone I would like to remind you that our 10-Q has been filed and that you should look at that along with our press release that were issued yesterday. The press release with the financial details can be found on our website, www.axogeninc.com. As Karen mentioned, we reported record quarterly revenue of $2.96 million in the third quarter 2013, up approximately 49% year-over-year from the $1.98 million in the third quarter 2012. Gross profit for the third quarter 2013 grew approximately 60% and was $2.31 million up from $1.44 million in the third quarter 2012. Gross profit margin for the third quarter was 78%, up 5.4% compared to 72.6% in the third quarter of 2012. Gross margins in the third quarter in 2013 were above our longer term expectations for gross margins in the 73% to 75% range due to manufacturing efficiencies and price increases that maybe offset by other factors in the future. In addition, the year-over-year improvement in gross profit and gross margin was also attributable to revenue growth and a product price increase implemented during the first quarter 2013 respectively. Sales and marketing expense was $2.76 million in the third quarter 2013, up 62% compared to $1.7 million in the third quarter 2012. This increase was primarily due to increased commissions attributable to higher sales and the expansion of the company's direct sales force and marketing efforts. Increased marketing efforts included expansion of surgeon education, including training events and materials and public relations increases. Research and development expense was $594,000 in the third quarter 2013, you 52% compared to $390,000 in the third quarter 2012. The increase was primarily attributable to costs associated with our investment in clinical studies that support the use and regulatory position of our products. General and administrative expense was…

(Operator Instructions) Our first question comes from the line of Dave Turkaly from JMP Securities.

Actually I wanted to get your thoughts, your current thoughts even if they are kind of anecdotal, on a couple of things as we are watching this ramp build out. First of all, sort of a like a turning point, if there is one with your docs today. I know that typically they try, they like to see some good results. Maybe after a certain number they will then adopt it more rapidly. Do we have a good handle on that? Is it three, is it four cases before they really turn it on and use Avance for majority maybe of their repairs.

So what I would say is, if I look at this and the adoption of other surgical products, it takes more than three or four before they are fully solidified in changing their habit. In other markets, and I will tell you we are in the midst of our so I can't tell you that this is firmly a number that we are seeing here, but what I have seen in other surgical implant markets, so generally in the range of six to ten implants before a surgeon starts to feel like it's his new technique. And I don’t see anything that would make me think it's less than that here. One thing that in nerve repair is a little different than in some of the other markets that I have been in is that the time to see results is longer because nerve healing takes longer. So in that respect that cycle may take longer. But I think it's still going to be in the six to ten implants.

Great. And then maybe from a pull-through standpoint with both of your products. Do you have an idea of what percent of your accounts today maybe using both products?

Yeah, we do track that. It is still relatively percentage. We actually track and that’s why I have said a big part of our sales direction is taking the accounts where we have a toe hold, and now expanding that by expanding into all three products. So that actually is a big push forward to the sales team because it's actually, from a ramp standpoint, what we think will be at, a nice [standup] for us to move forward relatively quickly. Because many of the committee hurdles are already through -- already have a surgeon in contact with who is interested in nerve repair. So while today I would say most surgeons use one of our three products, our current initiatives [push it] to expand into the full portfolio of products and across their full portfolio or actually their full treatment algorithm of different types of nerve injuries.

And that’s a really important point that we have talked about before and Karen just touched on it. As we go in, it's very seldom that we go into an account and all of a sudden a physician would use all three products on all of their nerve repair. Normally what occurs is that they dip their toe into one of the products in one area of repair. And as Karen talked about with regards to the usage. They will use it in that narrow area until they get comfort. Then what you will see is them progressing either within the same product and if it's advanced potentially from doing short repairs into longer repairs across their treatment algorithm. And then also as our sales people try to get them to use the rest of the portfolio of the product. On the flip side we have physicians who start out wrapping with AxoGuard and they get comfortable with the AxoGuard. Move maybe to the other AxoGuard connector product as we work with them to get in the advanced. From the standpoint of where most of our clients are right now which shows where all the future growth potential comes from, is we are really working on most of our physicians being in the one area, one product situation. And quite a few [less] who are in the all areas of treatment in all products. And that’s part of the real push and a lot of what Karen talked about with regards to the education that we are doing, the podium presentation, and quite frankly the push that we have on the sales people.

Yeah, and I think, Dave, you really touched on the thing that’s makes us excited about the potential here. As we look in the short-term is that we can expand on our current account footprint.

I am sure it would be a big driver ahead. Last for me, just sales force metrics. Did you tell us specifically what the crew looks like now and what your plans are, I guess either for the rest of this year and next year in terms of adds. Thanks.

Yeah. I didn’t but it's a good question. We did add. We are at 22 -- at the end of the quarter we were at 22 direct sales associates. We still had 22 independent distributors. We are continuing to add and with the same direction it will be two or three a quarter that we expect to add in terms of direct reps. One thing we did do this past quarter is we did add in sales management. Just recognizing that as we gotten a bigger number of direct sales associates we need to continue to expand the management team as well. So that we now have five regions across the United States, so that we get a good touch point with each of these reps. So we are really closely monitoring and developing them as we add them into our sales team.

Thank you. And our next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann.

Karen, could you expand upon what you had just stated about the five regions for sales management. Does that mean there is now five managers as well as 22 direct?

Yes.

Okay. So those were five adds?

No. We had originally -- we originally had three and we now have gone up to five.

Okay.

One other thing, and so that’s four regions within the United States covering our independent and then...

Directs.

Our directs, I am sorry. And one we have specifically focused on our independents which was a shift that we had done as compared to three before that just covered territory. That’s a little bit of the -- that’s a little bit also what you see in the sales and marketing expense in third quarter as we go into it because we have to get those management personal in place in order for them to be able to hire their people as we go forward. So we have got the managements in place over this third quarter. We have had some of the hiring of our directs but we are set up now for what we need to do to continue that expansion.

Okay. So did the number of regions in the U.S. go from three to four? The geographic regions?

Again, it's just been a little confusing. Yes, but we also split out independents from directs so that we continue to really focus where we see the most of the growth coming from, which is from the direct sales division.

Okay.

Part of that [switch], just the region, you know the regions in the United States. And there were -- we still cover the United States, it's just now those managers who are working with our directs have a smaller amount of territory within the U.S. that their directs are focused on. So we still -- it's just carved up a little bit smaller, but that’s just so you can handle bringing in the reps. So we are into more territory, more cities as we add people but it's just more of a jockeying...

Yeah. And just being clear, we didn’t move sales associates around. They are still on their same territory doing the same thing they were before. This is really just making it from a management standpoint. Making sure that as we both have a fairly large sales team now, [we had] planned to expand with that sales team, that we had adequate management in place to do that.

Okay. Got it. Could you comment as far as the gross margins for the quarter? Are you seeing more efficient processing or are you seeing just better margins as a result of higher volumes?

So it's not higher volumes. There can be some depending on where we are in manufacturing. That’s not where we see those. For us for gross margin it really has been manufacturing efficiencies. Over time we have done a very good job. I will tell you, I mean we pushed the limits on that. There also was a price increase that helped those gross margins. We, quite frankly, throughout the manufacturing process itself and part of those efficiencies. We have been doing a while. We haven't had anything that has affected that much but as we go forward in the future, as we do increase the amount we are manufacturing, we can potentially run into some things that could save us a few points here and there. So that’s why we continue to say at 73% to 75% even as we go into the future. We are comfortable being able to do that. The 78% margins are nice and obviously we are always going to try to maintain those or move them higher. But in reality as we look at our business, there are factors that play into this. Product mix in the future could play into it. Some of our other pricing, what we do from year-to-year and our cost, all of that can factor into it. So we are trying to keep people focused on that 73% to 75% range as what we believe is certainly continually doable for many years ahead.

Okay. Got it. That’s helpful. Could you talk about sales outside the U.S.? At least from the third quarter that you have seen or any trends there that are significant?

Our focus outside the United States at this point is still predominantly market development activity. So the sales are still relatively small. But we did have some very good, again, milestones in third quarter. I didn’t touch on those because they are not really material in terms of the overall revenue number. But we started our first shipments to the U.K., Netherlands, Sweden and Israel. We also had a shipment to Guatemala. Now that’s the shipment for [indiscernible] patient, so I don’t think that will be a big excitement for us. But certainly those are some significant markets to begin moving into and getting the regulatory registrations to be able to sell there. So we continue to do the market development work. Working with some of the key surgeons. Building some of the, again, clinical and education forums that we would like to see set up in the future with some small sales today.

We want to be clear though, is that at this point in going into it and as we have said in the past, we don’t expect outside U.S. sales to be a huge revenue driver. As we go through 2014 the focus, as Karen said, is really getting into the countries. Getting established with our distribution partners. Getting our thought leaders within Europe and doing the groundwork as we have been doing in the United States so that Europe is set up as it continues to grow and accepts the products to have the pieces in place. So 2014 is going to continue to represent additional countries, additional capabilities, additional education with a longer term view towards that as a significant revenue producer.

Okay. Could you talk a little bit about the product mix from the third quarter as far as, should we assume that Avance revenue was half to two-thirds of total revenue in that ASPs for Avance or in the low $2000 range which is result in approximately 800 grafts?

Yes. So let me break out a few things in that question. So we have said in the past that basically from a revenue perspective Avance is about 60% and AxoGuard is about 40%. And from a unit perspective, it kinds of flip-flops the other way. And when we have said that in the past also that’s probably give or take 10% on either side, depending on the month. But what's interesting is, as a basis of that as we have gone forward, that’s been a pretty good number of a split. Because of our small base that can move around some. But it seems to want to come back pretty close to that 60:40. We haven't given out what our average sales price is on the [Avance], but people have thrown out that low $2000 number, we haven't said anything against it. And if you do your math--

Just to make a point though, I mean we range in list price from $1300 to about [$3600-$5030]. So we are in that range.

Yeah. And so you are just doing a back calculation to the grafts and I am not going to disagree with your math. It may not be the right number but if using the math you are using, that’s what you come out with.

Okay. And just one more if I may. Karen, could you review what you had spoken about as far as the, within the Ranger study, this controlled arm call the MATCH study. Could you talk about the size of the study? What's planned and what is being measured, why it differentiates from the Ranger study?

Yeah, happy to. This was actually a request from the investigators. That they thought it would be interesting to be able to add and in the same way that we do the Avance Nerve Graft, observational data on the implant that they have done or will do on a go forward basis with other types of products. Either the Autografts or the conduits. Now of course many of these centers are moving over to Avance Nerve Graft, so that may mean that they have fewer of those. So I expect enrollment to not be fast with MATCH. But yet we are interested in getting these control arms in there just so that we can have a comparative data set that’s right within the same study versus doing what we do today, which is comparative historical control. We are in the process of going through the IRB with the centers. Not all centers are up and moving with MATCH. But we are moving forward with that. We have, at this point we only have 29 subjects enrolled into MATCH with one center. But we have four other centers that are in process. So we should be moving forward pretty quickly so that by January I think we will have a nice comparative data set. Remember this allows retrospective review, so we can add in their retrospective data relatively quickly once we are through the IRB.

Okay. Should we assume the one study is the [indiscernible]?

Yes. Having none of these [centers], so they were the first.

Thank you. (Operator Instructions) Our next question comes from the line of [indiscernible] from Noble Financial.

Most of my questions have been answered so it's two quick ones. My first one is, what are your expectations for R&D moving forward?

So for us, let me first make sure I describe -- we have very little R and mostly D and mostly D is clinical for us. So we do expect an increase in our development and research expenses as we both continue the studies that we talked about but also initiate enrollment in Recon, which is our randomized perspective clinical study comparing Avance Nerve Graft to conduits. That study I now expect to begin actually after the first of the year. And so it will, in first quarter of next year we will start to see an increase although we will have some preparation expenses in the fourth quarter. From an increase standpoint it's a very manageable study. So while we will go up, it's not going to be a big spike in overall increase to expenses.

The other thing that we have talked about also in the past and disclosed that we do look at future products, either through product extension. Are always looking for what may be synergistic for our us to bring into the company and then longer-term pipeline. In the longer-term pipeline again which we have disclosed before, we have grant with Vanderbilt that we are working on. We have one with [Dr. Charles Vacanti]. We are working on [pregnant] women. And we are doing, the longer term pipeline relates to grant as it comes into nerve repair. So from the research to development side we do have projects in different phases. But one that relates to the longer term pipeline we try to get grants. And so our anticipation from a research increase expenses is that there will not be any huge expenses on that side as we continue to fund through grant work.

Okay. Thank you, that’s great color. And I guess most of my other questions have been answered so I will hop back into the queue. Thank you.

One of the things, Ken, I was just going to follow back on from Dave Turkaly's question was maybe a little bit of color from the ASSH conference. And just a little bit more on how the tone has changed some as to the physicians and our product from a mainstream perspective or more of seeing the product than just being an experiment that we are doing.

Yeah. That’s good, Greg. So I mean just to again say, I think surgeons, rightly so as potential patients some day, they make very clear, deliberate decisions on changing to a new implant. And that takes seeing good clinical data, that takes hearing about others experiences that they are seeing with the product. And that takes then using it in their own hands as we talked about with Dave, to see their own results with their own patients before they are really fully converted. And so as we have gone to these conferences, we have been doing each of those steps, working with the podium presentations, making sure that there was good data there. Talking with surgeons on an individual basis on their individual usage. But what I really saw at this most recent ASSH meeting was a shift in the conversation where before it's been the challenge of why would you use this new technology in a particular application, to people starting to ask the question why wouldn’t you use it in all applications. And I think that’s a very positive and healthy conversation for us. We saw very significant booth traffic and very directed booth traffic with people walking into the exhibit hall and coming to find our booth saying, I saw your presentations or I saw the presentation from Dr. so and so and thus I would like to know more about your products. Where in past years they instead walked by our booth and said, oh, what do you do, and we told them about our product. Certainly a different flavor in terms of the awareness level and interest in adoption. Now it's our job to now convert that into usage. But I think that we are doing the building blocks we need to convert from what is a gold standard in the Autograft world and our goal is to move to a new gold standard.

Great. As I am looking at it I am not sure if there is any other questions.

I see no other questions at this time. I would like to turn the conference back to AxoGen for any concluding remarks.

I just want to thank everyone for joining us today and look forward to speaking with you at the fourth quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you many now disconnect. Everyone have a good day.