Greetings, and welcome to the AxoGen, Inc. Fourth Quarter and Full Year 2017 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brian Korb. Thank you. Please begin.

Thank you, Rhea, and good afternoon, everyone. Thank you for joining us today for the AxoGen, Incorporated conference call to discuss the financial results for the fourth quarter and full year ended December 31, 2017. Today's call is being broadcast live via webcast, which is available on the AxoGen website. Within an hour following the end of the live call, a replay will be available on the company's website at www.axogeninc.com under Investors. Before we get started, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's Forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product acquisitions and/or development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance. And with that, I'd like to turn the call over to Karen Zaderej, President and Chief Executive Officer of AxoGen. Karen?

Thanks, Brian, and good afternoon, everyone. Welcome to our fourth quarter and full year 2017 conference call. Joining me today is AxoGen's Chief Financial Officer, Pete Mariani. I'd like to begin today's call with a review of our fourth quarter and full year highlight, a brief company overview and an update on our key strategic initiatives. Pete will then provide a review of our fourth quarter and full year financial results and review financial guidance, after which time, we'll open up the call for Q&A. We are pleased report another successful quarter. Fourth quarter revenue grew 49% to a record $17 million. Our full year annual growth is 47%, with revenue of $60.4 million. It's gratifying to see expanded use of the AxoGen product portfolio in our core markets of hand surgery, trauma and oral and maxillofacial surgery. We're seeing increased adoption by surgeons across these applications. We're pleased with increased data in mixed and motor nerve repair, as well as in long gap nerve repair. And we're excited to announce the launch of our expanded application in breast reconstruction neurotization in Q4. We believe new application in breast reconstruction neurotization, along with the expanded use of the AxoGen product portfolio in oral and maxillofacial procedures, changes our addressable market to $2.2 billion across our current target applications. As in prior quarters, our revenue growth is continuing from both active and new accounts as we continue to build and strengthen our commercial team. We're pleased with 2017 results and believe we're demonstrating our ability to successfully execute our strategy and continue to drive awareness and growth in the emerging peripheral nerve repair market. For those of you who are new to our story, AxoGen is a global leader in developing and marketing innovative surgical solutions for peripheral nerves. We're passionate…

Thanks, Karen. Fourth quarter revenue grew 49% to $17 million. Revenue growth was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix. As in prior quarters, most of our revenue growth was driven by growth in the active accounts. As we mentioned, the number of active accounts grew 31% to 591 in Q4. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to develop their treatment algorithms. Gross profit in the fourth quarter was $14.4 million, a 50% increase compared to Q4 of '16. Gross margin was 84.6% for Q4 compared to 84% in the prior year. Total operating expenses in the fourth quarter were $16.2 million, up 31% over the prior year. The increase includes continued investment in our sales force, market development and awareness activities, clinical, R&D and general corporate expenses associated with our growth, including non-cash stock compensation expenses. These investments are driving growth in the company's operating expenses but importantly, at a lower rate than sales growth, demonstrating the continued operating leverage in our business model. Sales and marketing expense in the fourth quarter was $10.1 million, up 21% over the prior year. As a percent of revenue, sales and marketing expense in the quarter improved to 59.6% compared to 73.2% in the prior year. As Karen mentioned, we ended 2017 with 60 direct sales reps, up from 53 at the end of the third quarter. We anticipate having 68 direct sales reps at the end of this quarter and at least 75 by the end of 2018. We completed 4 national education programs in the quarter and 15 for the year, and we anticipate conducting 18 total programs during…

Thanks, Pete. Before we close, I'd like to highlight a few investor events next month that we'll be participating in. Canaccord Genuity Musculoskeletal Conference in New Orleans on March 6; and the 30th Annual ROTH Conference in Dana Point, California on March 13. Information about these events will be available on the AxoGen website. In closing, our efforts to execute against our strategic initiatives focus on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and expanding new products and applications in nerve repair. We continue to produce record revenues and have positioned AxoGen to lead and grow the peripheral nerve repair market. We are building awareness, developing additional clinical data and expanding use of our products with innovator and early-adopter surgeons, and we're excited to be moving toward the develop - toward developing the middle-adopter segment of the peripheral nerve repair market. We're pleased to see expanded use of the AxoGen product portfolio across our core markets, increased adoption in mixed and motor nerve repair as well as long gap nerve repair and are excited to introduce our expanded application in breast reconstruction neurotization to additional surgeons. We are introducing our platform for nerve repair to fellows, allowing us to train the next generation of nerve repair surgeons. We're building a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications where we believe we can bring meaningful solutions to current clinical challenges. We will continue to expand our platform and develop new nerve repair applications, challenging the norms of historical repair options and evolving the practice of nerve repair. I'm also happy to share with you that AxoGen was recently named as an Employee Engagement Best Practices Award winner by DecisionWise International. The award recognizes top-performing companies in the areas of employee engagement and company culture. We are passionate about creating solutions for patients with peripheral nerve damage or discontinuities, and our AxoGenic values are central to our culture. Open, honest and respectful communication, along with individual ownership and empowerment, are key characteristics of our culture that allow us to attract, develop, promote and retain outstanding associates. Before taking questions, I want to welcome our new investors and, as always, thank the AxoGen team for their commitment to our mission and our values. And at this point, I'd like to open up the line for questions. Rhea?

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Richard Newitter with Leerink Partners. Please proceed.

Hi. Thank you for taking the questions and congrats to strong finish to the year. I have a couple. The first one, just as it pertains to guidance and pricing. You said you had a price increase in 2017. I was just wondering, is there a price increase in 2018? And when does that go into effect, if so? And then also - sorry, go ahead. Just start with that.

Okay. Rich, thanks for the question. Yes, we - every year, we increase pricing on March 1. And we've - we obviously began that process 4 to 6 weeks ago with our customers, and it will be effective tomorrow.

Okay. That's helpful. And Pete, on guidance, at least 40% growth. Is there anything that we should be thinking about with respect to kind of the cadence between the quarters? Should we be thinking of that more or less kind of steady 40% throughout the year?

Well, I mean, I guess, what I'll speak to is we have seen over the last many years that there is a seasonality cadence to our business. And it generally starts in - with Q1 being sort of flattish to Q4, with a nice sequential step-up in Q2 and Q3, and then less of a sequential move into Q4. And again, all of that is based on, in this trauma space, trauma follows human activity. And in the spring and summer months, human activity picks up, projects get started, more power tools get used, and we see a big step-up in procedures in Q2 and Q3. And again, we - we've seen some variation of that. But when we think about our numbers, we think about Q1 being sort of flattish to Q4, with the step-up being in Q2 and Q3 and then a little bit in Q4.

Okay. That's really helpful. Karen, I think on your opening remarks, you had mentioned that accounts that order across the portfolio, the Avance and AxoGuard portfolio, are generating 6 times the revenue level versus accounts that order just one of them. Is that - that's higher than I think the ratio you used to quote at about 5 times. So I guess, just one, is that right? And what kind of drove that magnification of that increase? And do you have a sense as to what percentage of your account base is in that bucket of ordering across the two portfolio categories?

A lot of questions there but, yes. So it is an increase. You're right. And it reflects the increasing penetration that we see in our active account. And so as we increase penetration and drive that, we continue to see that expression of adoption in a number of ways, and one of them is that ratio of revenue. Now we are still in various stages of development in all of our active accounts, and it is still more than half of the accounts only order 1 or 2 of our products. So we still have, obviously, room to grow in our existing and active accounts. We're really just at the early stages there. And of course, many accounts that we can continue to expand and bring into the active pool. But we're encouraged by that increasing ratio, showing that we're really driving penetration.

Okay. Thank you.

Thank you. Our next question comes from the line of Raj Denhoy with Jefferies. Please proceed.

Hi, good afternoon. I wonder if I could maybe follow-up on Rich's question. In terms of the really strong growth, you saw the 49% in the quarter and the strong growth through the year, is there anything you can share in terms of whether that was evenly balanced between Avance and the AxoGuard family? Or whether one is doing better than the other at this point?

Yes. It continues to be balanced across the product line. We're certainly seeing growth in Avance, but we're also seeing similar growth levels in the AxoGuard product line. And we're seeing more combined usage in cases.

And I'd just add, Avive, of course, was a product that we've only launched a year ago. It's - we're starting to see adoption of Avive. We saw what we expected to see through the year where surgeons tried a few cases. Now they're starting to come out of that wait period where they saw outcomes, and we expect that to continue through this year. But it's still a relatively minor part of our overall revenue. So it will have a higher growth rate but off of a much smaller base.

Got it. One of the other trends you've commented on previously was this idea of consignment in hospitals who were consigning inventory or were using quite a bit more. Is there any updates you can provide in terms of the number of accounts that are consigning inventory at this point? Any thoughts on how this is going to trend this year?

We still have the majority of our active accounts are ordering for cases. So that is a strategic initiative for us this year is to get inventory closer to the patient. And we view that as either doing consigning or having them stocked product and set up a par level on their shelves. Our real goal is to make sure that, that inventory is there, especially for trauma, so that when they have an unexpected case, which is obviously common in trauma, that they have inventory to be able to address that. So that will be a growing area, but we're not there yet.

And what's gating that? I mean, is it simply that the hospitals don't want to hold inventory or put it on the shelf? Or how do you accelerate that - those programs?

Yes, typically, what we see is that you have to establish a regular reorder pattern before the hospital is willing to consider stocking inventory, whether it's consignment or a purchase. And it typically requires going back to either purchasing or, in many cases, back to the value analysis committee to have them look at that suggestion and determine that they do have, again, a reasonable chance of using that inventory. Their fear to - the concern that they would have inventory expire on the shelf, that they would have some accountability for, or inventory that's damaged that they would have accountability for. So they just want to make sure that it's a good use of their funds. On the other hand, once you have a good reorder pattern, it make sense to do that. And so we don't find a lot of pushback once you have - you're in the situation of the time that's gone by that shows that you've got a good reorder pattern. And so we're - it's just - it's part of our evolution of the market. And I think we're at a good time to start to effect that now. We started in that late last year, and we'll continue that through this year.

Yes, it's helpful. And maybe just this one last one on breast neurotization. Is there anything you can offer in terms of where you are in these 20 or 25 accounts that you want to target by year-end? Any initial feedback you've gotten from hospitals around the idea of using the AxoGen products? Any additional costs that could represent to doing these procedures?

Yes. We're very excited about what's happening in breast reconstruction neurotization. I can tell you that at this point, over half of our targeted sensors have been trained or at least have the initial surgeons trained and are starting to offer this to their patients. So we're seeing good early interest, both by the hospital and the surgeon level. Now we do expect that this will - or at least our projection this time is that we'll expect to see that surgeons will follow the same pattern of adoption that we've seen in other nerve repair markets. And that is that they will do a series of patients and then stop and wait and watch for their outcomes and then start back up again. And so I think we're going to see some early activity, and then it'll start to slow down. And then with the goal, of course, of it picking back up as we move out of the wait period. But we've seen really good trajectory at the initial time period here with, frankly, tremendous enthusiasm from the surgeon community.

And anything on the cost front because it does add additional costs to doing reconstructive procedure to use your technologies. How were they thinking about that? Is it being paid by the patient or the hospitals are ordering it? Or is there any discussions around that?

Yes, a great question. Typically not paid for by the patient. It is something that the hospital is absorbing because these are patients that they believe add value to the hospitals. They are very desirable patients, both in the full care pathway of their treatment. Again, these are cancer patients and survivors who will have a care pathway that will include a number of different treatments and attracting patients to their center where they gather reconstruction very often. They have more care that's provided that provides an economic benefit for the hospital, and in addition there, the care deciders for their families. So the premise of this is that these - that the hospitals do believe they want these patients. These are desirable patients, and attracting them is a benefit to the hospital.

That's great. Thank you. And congratulations on the progress.

Thank you.

Thank you. Our next question comes from the line of Kaila Krum with William Blair. Please proceed.

Hi, Karen. Hi, Pete. Thanks for taking our questions. So first, a two part question and then a follow-up on guidance. So first, I think the rate of account - or active account growth, which is still really healthy, it did decelerate a bit. So can you help us understand the reason for that in the quarter, if there is one? And then second, I think you guys had talked about directly targeting hospitals or surgeons based on their procedural makeup. So can you elaborate a little bit on your strategy there? And how that strategy might augment your account - or active account growth over time?

Sure, Kaila. The answer is actually the same to both of your questions. We had - in 2017, had intentionally given our reps an opportunity to focus on targeted accounts and a slight - gave them a slight preference in their compensation to revenue growth in targeted accounts. Some of those were accounts they already had where we wanted them to go deeper, and others were larger centers that we had not been able to penetrate yet, and so when we see - and we saw this all through last year. We saw the growth of active accounts pulling back into the 30% range while the revenue growth continued to be in the 40% range. And we saw that again here in the fourth quarter. And I - what we see there is that, that means that we're being successful in focusing on target accounts and getting deeper into those accounts and seeing a growth and, if you would, same-store sales for these active - for our active accounts.

Great. Now that makes a ton of sense. That's helpful. And then, I guess, as far as guidance goes, I mean, you guys have had this 40%-plus growth guidance out there effectively since the third quarter of last year. But you've also had a lot of, I mean, exciting updates in your business since then that I'd imagine would be additive to how you're thinking or how you were thinking about growth. So I guess, I want to understand what specifically has to happen in order for you to hit the low end of your current guidance range or 40%? Is it steady growth in the existing business where there need to be meaningful contribution from breast neurotization? Just trying to understand the puts and takes there.

No, that's a great question. And again, we continue to take a conservative view on guidance, and we are continuing to guide to what we think is our minimum growth curve that we can maintain for a while. We do not need significant input from breast to achieve this 40%, at minimum, a 40% growth. We see several opportunities for upside to this, including, as we've - as Karen has talked about. At some point, we see middle adopters coming over in the - in our core trauma space more quickly than what they are right now. That would be potential upside. We are very pleased with the progress that we're making in the oral and maxillofacial space. But again, we think there's more upside there as a larger group of surgeons become convinced with that offering for their patients. And then, again, as Karen just mentioned, we really are thinking conservatively on breast revenue for 2018 where these surgeons will likely implant a series and do a series of the ReSensation technique and wait to see the outcomes in their patients. And if they get to a point where they're - they become convinced more quickly, that they offer it to more patients, then that could potentially be additional upside to our guidance. So we're comfortable with staying where we are. We'd like to see - we've made a lot of changes in our sales force here in the fourth quarter. In the first quarter, we've - if you're doing the math, we added about 8 sales reps towards the end of the fourth quarter. We expect to have added another 8 in the first quarter. So I think we're setting ourselves up very well with numbers. And then, again, on strategy, some of those reps are going to be support reps designed for the breast support, and others are going to be clinical support reps for OMF. So again, I think we're laying the foundation to create and continue to maintain this 40% growth path that we're on and lay the foundation for potential higher growth as surgeons become more comfortable with our techniques.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Craig Bijou with Cantor Fitzgerald. Please proceed.

Hi, guys. Thanks for taking the questions. I wanted to start with just the deeper penetration in the active accounts. And obviously, you guys are getting good pull-through with the 6x higher revenue in the accounts that use more than 1 product. But I wanted to ask about surgeons and just how you - what you're seeing from adding additional surgeons within those accounts. And maybe if you could parse out some of the penetration by whether it's a pull-through of the products or additional surgeons.

Yes. It's absolutely both. So we - so the way the evolution of account typically works is you get the innovator or early adopter, the lead person from the center will start using 1 of our products in a portion of his or her treatment. So they pick out a niche. And so you start developing that surgeon along expanding his or her treatment algorithm. And usually, before you go all the way across his or her treatment algorithm, one of their partner's starts to come into the operating room, is intrigued with the changes in nerve repair and starts at the beginning. And so it's sort of a step diagram. You add each surgeon, and each surgeon's adoption is a step-by-step process. And so in roughly half of our active accounts, we have 1 or 2 surgeons who are using, and the other half are starting to expand into some other - into bigger numbers. So now I understand surgeons move from account to account, so it might sometimes be the same surgeon at multiple active centers. In fact, the common adoption process that we see is that we start in a surgery center or a small community hospital because you have greater access to the surgeon, and then work with that surgeon to move to a bigger level one trauma center. So there is a high overlap of surgeons in multiple accounts. But we are starting to see expansion into more surgeons as well as deeper penetration by the individual surgeon.

Okay. That's very helpful. Secondly, I wanted to ask. So I guess, the time - the conversion from a - the pipeline of new accounts to active, and I don't know if you've given a time line or a typical length of time that it takes to move from that, an initial pipeline to an active account. But I - have - well, I guess, the question is, have you provided any kind of time line or timing for that? How is that changed over time? And I guess, if it has changed, has that acceleration - do you kind of tie that to increased awareness amongst surgeons?

Yes. So we have not provided that. But one of the reasons we've not provided it is because it's highly variable, depending on the type of surgeries that the surgeon starts with. And if they start with digital nerve injuries, then the wait period will be 6 months or so. But if they start in brachial plexus, it might be 3 years. And so because you've got such a tremendous range of healing time for different nerves, it really is very dependent on what is the time frame that they started in. And we have not seen that accelerate because they are waiting on the nerves to heal. And we aren't any faster on that. And so as long as they're wanting to wait for results, then I don't anticipate an acceleration for these early adopters and innovators. The exception to that will be as we move into the middle adopters, there is a school of thought that says middle adopters adopt differently than these early adopters and innovators do. And so yet to be seen is will they need to do the results in their own hand? Or will they be completely comfortable that the innovators in the universe of nerve repair have created all this data? And that's why our library of data is so important. Will that give them the comfort to say, I don't need to wait. I'm just going to change what I do because all these people before me have proven that this is a good option. It happens. And you can see a substantial acceleration that would occur because you'd have a large group of surgeons who start to shift their treatment, and you wouldn't have a wait period. I'd put that out there as a hypothetical because I think that's a possibility, but we're not there yet. So I don't know what the future exactly will bring. When we do our forecasting, we don't assume that. We assume that the new guys will adopt just like the old guys have.

Great. Very helpful. Thank you. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from the line of Dave Turkaly with JMP Securities. Please proceed.

Thanks. I think you mentioned that you may have some support reps coming online may be in OMF and breast. Of the 60 that you mentioned and then the 75 for the goal at the end of the year, have you ever sort of quantified how many are support versus, say, your regular sales rep?

No, we haven't. We've actually always had. I don't want to call them support rep. I would call them specialist reps who work with a surgeon on a particular technique. And some of the technique things in the OMF procedures and in the breast procedures, especially in the breast procedure, we really need to make sure we're aware of the whole procedure because we're adding an entirely new subset of the procedure, and it changes the way they do things from start to finish. And so we have some specialists who are going to provide specialist support in these start-up and training phases of the breast centers. And we've always had some specialists who've helped us in the OMF area to help surgeons get comfortable with the new techniques in both the iatrogenic injuries and that we've expanded into the mandible reconstructions. So we don't break that out but they're all quota-carrying reps, and they have a specific set of targets. And those targets cross over, and they work together in those target accounts where they happen to have both a breast center or an OMF specialty, and it's a large trauma center.

Got it. And I guess, if you're looking at your plan for the year, why is 15 the right number of reps? I mean, you guys are growing at such a good clip. I would think you might even be able to support more, but I guess just your thoughts around that number. And could it expand?

Yes, it could expand. I'm not saying it won't. I think what we're looking at is really just the cadence of adoption of bringing in reps and making sure that we maintain a good ratio of sales associates to sales management. I think on the execution side, I'm having - we have a tremendous, talented group of sales directors, and they play a very important role in the overall sales process. And if you start to exceed the number of reps per sales manager or sales director, then we just worry that the ramp-up wouldn't be of the same quality and consistency that we've seen in the past. So that's really our pursuit to make sure that we can manage the right structure around the expanding sales teams, not necessarily the number of reps. But we will keep adding as we think that we can do so and continue to scale up with the same quality.

Well, you certainly hired a great Chief Commercial Officer. I'll give you that. Last one for me.

Yes, we did.

As you look at RECON, you mentioned Q4 complete enrollment. Can you just give us a - refresh our memory in terms of when you'll see the actual sort of outcome and the time line for that trial?

Sure. So RECON, again, is our pivotal trial to support the transition to the biologics license application for Avance Nerve Graft. And that will complete enrollment this year, but there's still a 1 year follow-up after that. So we'll complete enrollment in Q4. The follow-up will be completed the following Q4. And by the time we have the data and break that out, it'll be mid-2020. So that's the significant gating factor to getting then submitting the BLA. So we would be submitting the BLA then in late 2020, early 2021.

Thanks a lot.

Thanks, Dave.

Thank you. And our last question today will come from the line of Bruce Jackson with Lake Street Capital Markets. Please proceed.

Good afternoon. And thank you for taking my question. I just wanted to circle back to the question about the stocking accounts. Roughly what percentage of your accounts right now are stocking accounts or consignment accounts? And how much has that grown over the past year?

Well, I can tell you, we've actually been communicating in terms of revenue, but less than half of our revenue comes from either consignment or a purchase stock account. So we're still - that's still a growth area for us. So it's, again, an opportunity for us to continue to expand and get revenue on the shelf. And we see when you do that, then the number of cases that you get in that account will increase.

All right. That's it from me. Great thorough job. Thank you.

Thanks, Bruce.

Thanks, Bruce.

Thank you. I would now like to hand the floor back over to management for closing remarks.

Thank you. And I want to thank everyone for joining us on today's call. I look forward to talking with many of you at one of our upcoming investor events. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your line at this time, and thank you for your participation.