Welcome to the AxoGen Fourth Quarter 2022 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ed Joyce, AxoGen's Director of Investor Relations. Please begin, Mr. Joyce.

Thank you, Rob, and good morning, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer and President; and Pete Mariani, Executive Vice President and Chief Financial Officer. Karen will discuss the quarter and our outlook for the year, and Pete will provide an analysis of our financial performance, followed by a question-and-answer session. Today's call is being broadcast live via webcast, which is available on the Investors section of the AxoGen website. Following the end of the live call, a replay will be available on the Investors section of the company's website at www.axogeninc.com. 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, including the 2023 financial outlook, timing of the BLA submission and growth trajectory of the company. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the company's annual and periodic reports. Actual results or events could differ materially from those described in any forward-looking statement as a result of various factors including, without limitation, the continued impact of COVID-19 on our business, global supply chain issues, record inflation, the impacts of the failure of Silicon Valley Bank and the recent turmoil in the banking industry, hospital staffing issues, product development, product potential, expected clinical enrollment timing and outcomes, regulatory process and approvals, APC renovation, timing and expense, financial performance, sales growth, surgeon and product adoption, market awareness of our products, data validation, our visibility at and sponsorship of conferences and educational events, global business disruption caused by Russia's invasion of Ukraine and related sanctions as well as those risk factors described under Part 1, Item 1A, Risk Factors of our annual report on Form 10-K for the most recently ended fiscal year. Forward-looking statements are not a guarantee of future performance, and actual results may differ materially from those projected. The forward-looking statements are representative only as of the date they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. In addition, for a reconciliation of the non-GAAP measures, revenue as reported to revenue, excluding the impact of Avive as well as adjusted core and active account numbers, excluding the impact of Avive purchases, please reference today's earnings release and materials on the Investors section of the company's website. And with that, I'd like to turn the call over to Karen. Karen?

Thanks, Ed, and thank you, everyone, for joining us this morning. I'll start the call today with an overview of our fourth quarter and our full year achievements and review our outlook for 2023. Pete will then provide more detail on our financial performance before we open the line for questions. 2022 was a solid year of key accomplishments and milestones. We delivered high teens revenue growth during the back half of 2022 and drove improved operating efficiencies across the business. In May, we announced our pivotal Recon study successfully achieved its primary endpoint as well as important secondary endpoints. Late in the year, we also saw the publication of an independent landmark meta-analysis of peripheral nerve repair. This publication provides the strongest clinical evidence to date of the performance of Avance Nerve Graft across all gap lengths and nerve types compared to autograft and conduit. Additionally, construction of our new processing facility in Dayton, Ohio was completed, and the validation and transition is in process. This new facility will support our BLA for Avance Nerve Graft and provide for our long-term processing capacity. We remain on track for submission of our BLA for Avance by the end of 2023 and anticipate our approval in 2024. A BLA approval will complete the regulatory transition of Avance Nerve Graft from a 361 tissue-based product to a 351 biological product. And importantly, Avance will then be designated as a reference product, which would, in turn, provide 12 years of data exclusivity with regard to potential biostimulators [ph]. With over 75,000 Avance Nerve Graft and implanted since launch, we are well positioned to continue to lead and innovate in this large and developing peripheral nerve repair market. I'm proud of our team, and I look forward to continuing our mission of revolutionizing the…

Thank you, Karen. Before I get into the details of our financial performance, I want to comment on the recent disclosures regarding Silicon Valley Bank. We have approximately $8 million of cash with SVB, which is our sole depository bank. The majority of our cash, cash equivalents and investments, which consist of a variety of short-term and high credit treasury bonds and other liquid investments are held in custodial accounts with U.S. Bank for which SVB Asset Management is the adviser. We are opening new accounts with JPMorgan and have begun the process of moving the cash and investments to those new accounts. And now turning to our results. Fourth quarter revenue was $36.2 million, a 17% increase over the fourth quarter of 2021, excluding Avive revenue in the fourth quarter of 2021. Growth was driven by increases in unit volume of 11% as well as increases in price and product mix of 4% and 3%, respectively. Gross profit in the quarter was $30 million as compared to $26 million in the fourth quarter of 2021. Gross margin was 83% compared to 83.2% in last year's fourth quarter. Total operating expense in the fourth quarter increased 13% to $35.6 million compared to $31.5 million in the prior year. The increase in total operating expenses was primarily the result of compensation costs of $4.1 million, including $2.6 million in stock compensation. Sales and marketing expense in the fourth quarter increased 12% to $19.9 million compared to $17.7 million in the prior year. The increase was primarily due to compensation costs. As a percentage of total revenue, sales and marketing expense was 66% compared to 68% in the fourth quarter of 2021. Fourth quarter research and development expense increased 8% to $6.8 million compared to $6.3 million in the prior year. Product…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Mike Sarcone with Jefferies. Please proceed with your questions.

Hey. Good morning, Karen, Pete and Ed. Thanks for taking my questions.

Morning.

Good morning.

So just the first one for you, Pete. A clarification on the $8 million of cash at Silicon Valley. Is that basically free and clear, and you're just working through the process of transferring that? Can you just talk a little bit more about the accessibility?

Yes, it is. And it is free and clear. We've seen - in fact, we've seen cash receipts were received into that account even yesterday and our ability to move money out of that account is something that we can do. So we're making - we're taking steps to continue to make those transitions.

Got it. Okay, thanks. And then just wanted to get an update. Could you parse out what you're seeing across trauma, OMF and breast recon so far through the year? And then what's baked into your assumptions for 2023 at the low and high end of guidance? Thank you.

Yes. Well, let me start off with the guidance. I mean our top end of our guidance really takes into consideration the continued predictability and consistency of hospital staffing and surgical schedules, although we recognize that that's not - it's still not at capacity. And so we've seen improvement over the last half of the year, and we would expect to see just that continued stability and not a lot of improvement is in our top end of our guidance. And the bottom end of our guidance really assumes that there is some disruption to the improvements that we've seen over the back half of the year. And I'd say, as we're starting into the year, we've seen some nice stability in those procedures, but we're going to continue to be measured in our outlook for how we see the rest of the year go.

Yes. And if I look at what we've seen, hospitals are still understaffed and they're not able to run all of their operating rooms to full capacity, but it has to become predictable. And so we see surgeons in breast, you know, meta and pain where the procedures are scheduled to be able to at least schedule their procedures so they understand what their cadence will be of surgery. The breast surgeons are still working off of a long backlog, and that will take a while, as we've talked about before, but they are able to work through the cases on a regular cadence. In trauma, there has been through last year and into this year some disruption in the ability to take a patient immediately from the emergency department into an OR just because of the lack of flexibility of resources. That has stabilized. They're not always able to do that, but they can refer them and get them into an OR, either at that site of care or an alternate site of care, they may delay it a day, but they are able to do that. And so that's what we mean by predictability is that we're seeing that the surgeons and the hospitals are creating work around so that patients can get care and that seems to be holding through the beginning of the year here.

Okay. Thank you.

Our next question is from the line of Chris Pasquale with Nephron. Please proceed with your questions.

Thanks. Good morning, guys.

Good morning.

Given the fact that its mid-March and I was hoping that you could provide some thoughts on first quarter. Historically, you get about 22% of full year revenue in the first quarter of the year. Do you expect a similar seasonality in '23? And any other considerations we should take into account in terms of how the year is going to come together?

Yes, I think we are returning to typical seasonality. We have these overlays in the past of COVID and hospitals being shut down and then staffing challenges. But we are seeing, again, in this pattern, while they're still constrained in OR capacity, we're seeing a return to what I think are more predictable patterns. And so we would expect our big step up in revenue to be during the times of more activities where people unfortunately have more injuries, which is our summer months. So we see a step up in second quarter, another step up in third quarter as our bigger growth periods with things being more level in Q1 and Q2. So I don't want to give guidance for the Q1 so far, but I think our patterns are certainly being more predictable.

How do you think about the revenue potential for the Nerve Cap product and whether you get some incremental commercial momentum post the REPOSE results?

Yes. I think we published the pilot results from the Nerve Cap product, and we're quite pleased with the pilot data that we own [ph] And again, it's a smaller uncontrolled series. We're completing the randomized portion of that study now. But I think what we've seen is that this concept of surgically managing neuroma is something that has a significant impact to patients. And so we're working through really educating surgeons on the ability to use Nerve Cap in a variety of applications. And those would include things from amputations of digits, fingers, toes through some surgical procedures in the orthopedic space where you need to cut nerves to access the joint or the surgery that you're trying to get to, but sometimes those patients end up in chronic pain. And we think we have applications to all of those, and now there'll be an opportunity to educate surgeons on the benefit they can provide their patients with that surgery.

Thanks.

Our next question comes from the line of Kyle Rose with Canaccord Genuity. Please proceed with your questions.

Great. Thanks for taking the questions. Just wanted to - as we think about guidance in 2023, how should we be thinking about the growth of the underlying new - or active accounts and core account growth? And I guess, put another way, how much of the growth in '23 comes from volume versus price and mix? And if you could just break out those dynamics, that would be helpful.

Yes. I - if you apply revenue guidance of 11% to 15%, I think we've been successful at taking price over the last several years, and we would continue to expect as we sort of low single-digit price again in 2023. We've also had some mix impact in revenue here in the fourth quarter and in some previous quarters. The way we think about the mix impact is more flattish in the coming years. So the rest of that based on where you put your model, the rest of that would be in units. And I think that's - we've had 11% unit growth in this quarter and similar Q3. So that's the way we kind of think about it from a unit and price perspective. What was the first part of your question...

Yes. And it's more...

Given core accounts...

Just in current accounts.

Yes. It's - this is mainly about rep productivity. We continue to believe we have a lot of opportunity to drive growth through rep productivity in our accounts, these reps have been in their accounts, most of them have been in accounts for years now. And we've got good connections with surgeons, good connections with the support staff within the hospitals and their ability to continue to drive growth along with the data that we've come out with recently. I think allows them to continue to drive their own increased productivity and do so within their core accounts. And so we could see a mix of both increase of core accounts as well as revenue per core account across 2023.

Okay. Thank you. And then obviously, the ramp of the manufacturing facility and the submission and eventual regulatory decision on the BLA, those are big milestones for the company. So I'm just wondering, can you frame out any interim, I guess, things that need to happen along the way before your manufacturer is fully up certified and running? And then also similarly on the BLA filing, just making sure that investors understand all the milestones over the course of the next, call it, 2 years?

Yes. So we are initially transitioning Avance into the new manufacturing facility as a tissue product. So that's the first milestone, and that's the work that we're doing right now. So that transition will be completed here in the first half of the year. We then revalidate as a biological product. And I know that sounds like double work, but we did spend a lot of time in conjunction with the FDA trying to figure out the best way to do this validation and decided a two stage validation, just made it cleaner. So we will revalidate the facility as a biologic. Again, there's no specific process changes, but the data on how you gather data is different between the two validations. That's probably the biggest milestone for filing the deal - what is the long lead time item and the biggest milestone for filing the BLA yet this year. We do expect to get the BLA completed by the end of the year and submitted. And then it's into the FDA process. So I'm not sure that there will be milestones that we can really see until they come.

Great. Thank you for taking the questions.

Our next question is from the line of Ryan Zimmerman with BTIG. Please proceed with your questions.

Good morning. Karen and Pete. Thanks for taking my questions. Just following up on Kyle's question about the BLA. I just want to understand kind of your confidence level in getting the BLA. And after it's submitted, is it - remind me, is a 180 days that they have to respond? How long just as we kind of think about '24 and where that could come in?

Yes. So confidence is we passed our primary - our endpoint in our pivotal study. So we feel pretty confident in this process. Now there's a lot of information that we are compiling and providing to the FDA, including this manufacturing facility, but we're far enough along in the manufacturing facility. I feel very comfortable that it's - while it's a big project, it's just making sure we have all the documentation right. The - actually the facility is beautiful. So we think it will be a very effective biologics processing center. In terms of the submission time, I'm going to hesitate a bit. We do technically have the RMAT designation, which gives us an accelerated review. I'm not - I think we have to be flexible on that because I'm not sure all the timings have been as accelerated, but FDA has been catching up. So if we get that, then we should see something with a six month clock. If not, it may be a little longer.

Okay. That's helpful, Karen. And then a couple of other quick questions for me. If I look at account growth, active account growth for the year, so about 17 accounts relative to kind of what you've done historically. How do you think about the pace of account growth, active account growth and core account growth for that matter as we look ahead to next year, given that it has slowed down, is it even a good proxy for us to think about? It's a metric you guys have given out for some time now.

Yes. I think it's helpful, but our first priority is now driving deeper penetration within those accounts. The accounts we're in, we're by far and away, lightly penetrated. And so that is our lowest hanging fruit and the way that we think that we can achieve better sales rep productivity. So we will move some active accounts into being core accounts. There'll be some growth just organically in active accounts. That threshold is actually quite low. But I think the number that you want to continue to watch also is the average revenue per account or just think about what's the penetration into those accounts.

That's helpful, Karen. And then squeeze one more in. You mentioned flap reconstruction for breast recon. Just curious if you could kind of size the market opportunity that you're referring to. I think you said it was around 20% of those cases and that you guys - I know you're targeting 20 today, but help us understand, I mean, if - I don't know if there's x breast recon procedures and 20% of those are the flap reconstruction. What is that on an annual basis? Just in absolute terms?

Sure. So breast - so got to back up a second and just explain a little bit about breast reconstruction. The breast reconstruction for women who have a mastectomy can be done by a variety of techniques, but they fall into predominantly two buckets. One is a flap where they use autologous tissue to reconstruct the breast mount and the second are implant-based procedures. And so we have historically been focused only on the flap procedures. Those are about 15,000 to 20,000 procedures a year, just depending on the data, but 15,000 to 20,000 procedures or excuse me, patients per year. So we have really been focused in that segment. But as happens when there's a new tool available, some leading surgeons have really been looking at that other portion, the implant-based repairs and saying, well, these women have numb breast as well, and that's a problem. And is there something that we can do to assist these women. And obviously, you can't innovate the implant, but they often have a lack of sensation on the skin and the nipple-areolar complex. And that's an important part of sensation. And so techniques were developed that would allow some a subset of some of those patients. And it really has to do with length and size of the implant and whether we can actually have the sufficient length to reach the target at the nipple-areolar complex. So that's why we're saying, as we are seeing this process or procedure expand into implant-based procedures, we are seeing - we're estimating that it's going to be for a portion today. Now this is evolving as surgeons are figuring out enhanced surgical techniques to try and reach better - a broader set of patients. But right now, we would estimate that in this implant-based group that we can assist about 15% to 20% of those patients.

Thank you, Karen.

Next question is from the line of Ross Osborn with Cantor Fitzgerald. Please proceed with your questions.

Hi. Good morning. Congrats on progress. So starting off with some of your smaller vehicles. Have you seen any return of growth on OMF to start off the year with those surgeons that were using Avance for COVID to improve quality of life? And what can you do to accelerate growth in this segment?

Yes. Thanks for the question. Yes, we saw OMF depressed during COVID, people became concerned about having surgery in their mouth. And it was - has just been the neurotization in OMF has been slow to recover. And we're starting to see that in the Q4 time frame. We see that the two publications that I mentioned will also be very helpful. One of the things - the majority of the work that we've done in OMF has been in benign mandible reconstructions and then some of the injuries from dental procedures, so with some teeth extraction and putting in dental implants. And of the two papers that I mentioned, this is the first case series looking at patients with malignant tumors and having a mandible reconstruction. And the concern is then, well, with the follow-on treatment radiation in particular, that these patients have affect the nerve regeneration and what this paper showed is that these patients actually achieved quite good meaningful recovery rates. And so we think that will be very helpful for surgeons as they're making decisions about the care pathway for these patients, and they're really trying to achieve quality of life for patients in both benign and malignant tumor reconstruction. The second paper had to do with the iatrogenic injuries from dental procedures and just recognizing that these have a lifelong impact to patients when they have numbness in the lips and the tongue and the mouth that, that can have an impact in both self-esteem as well as sort of practical things in the way that you interact and chew and shave and sort of live your life. And so that will be helpful, I think, as we reengage surgeons. So we're optimistic in what we see. Long answer is we're optimistic with what we see with OMF and expanding into head and neck with mandible constructions. We think that will be a nice opportunity to continue to reengage with those surgeons and bring in new surgeons who can adopt this procedure.

Okay. Great. And then would you discuss your efforts on accelerating the referral process from patient showing up on your re-think pain website?

I'm sorry, it's hard to hear the question. Can you say it again?

Sure. Would you discuss your efforts on accelerating the referral process from patients showing up in your re-think pain website?

Sure. Thank you. Yes, we really have learned a lot on activating patients through the work that we've done in resensation. So helping women in that case be advocates for their own health care to go in and have - be armed with the questions to ask their surgeon and decide if sensation and breast reconstruction is important to you. Then if it is important, then here are questions to ask your surgeon, here's what you can do to take control of your care. And we're looking to apply a lot of those same tools into helping patients who suffer from chronic pain, determine do they have potentially a neuroma that it's because of the pain or was it neuropathic pain? And if it is, how can they find a surgeon who does a surgical treatment of pain or a pain surgeon, rather than ending up in a pain clinic as their primary care, which will address the symptoms but not address the cause of the pain. And so we're seeing early success in applying those same tools. We still need to build out more information for patients. In pain, it is more complex than in a reconstruction. If you're a woman, you have a mastectomy, you know you have a mastectomy and are thinking about reconstruction in pain, you know you have pain, but you don't know that it's a neuroma pain. And so we have added some tools to help those patients determine do they have neuroma pain and are they an appropriate potential surgical candidate with, of course, the final decision always being made by the health care practitioner. And so we're going to continue to build out those tools this year, but we think that we can help activate these patients, again, to be good stewards of their own care.

Great. Thank you for taking my questions.

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

Great. Good morning.

Hey, Dave.

Karen, the meta analysis that you talked about that large review. Who actually did that? And where was that published?

Its published - its e-published in PRS. It's a group of independent authors who actually wrote it, but they did this, again, deep review of the data and prepared a very solid analysis of nerve repair across autograft, allograft and conduits. So we're very excited to see the data. And it was e-published at the end of December. It will be in print in one of the coming journals. It's actually not been out in the - so PRS is plastic and reconstructive surgery.

Great. Thank you for that. I know people have asked a little bit about the guidance and I was looking at the sort of rep productivity. And I was wondering if you had any color or comments there in terms of kind of where your average folks are today and sort of where you think they can go? Is there still room for that to expand?

Yes. No, we're seeing that rep productivity has - it's now over about $1.1 million per rep. And we've always said we've got reps that do $2 million a year and maybe a little bit more. And we - as of rep is getting close to $2 million, that's when we split those territories and bring additional resources in to cover those hospitals. So we think that there's plenty of opportunity for rep productivity to go from $1.1 billion up to $1.3 million, $1.5 million plus on average as we continue to drive deeper into these accounts. Now that's not all this year, obviously. But over time, we're going to increase rep productivity, we think, fairly solidly. And then as we move up the curve from 1.1 to 1.2 to 1.3, we'll continue to add more reps, and we'll do so in a way that allows us to not only drive additional rep growth but continue to drive rep productivity growth. And so we think we've got a lot of opportunity with rep productivity to be the primary driver of growth. And we certainly believe we're still in the very early stages of growth even in our best core accounts to continue to bring in additional surgeons within those accounts across our applications.

Thank you for that. And one last one for me, maybe for Karen. The timing of the next-gen Avance product, I think you said is later this year. But I guess, would that be sort of like used across all indications or will it be designed more specifically for one? Or I guess any color or thoughts on timing and what might be new about it, if you can elaborate. Thank you.

So this is - you're asking specifically about next-gen Avance?

Yes. Yes.

Yes. So we haven't given any updates on a description of the product. I can tell you it won't be available this year. We'll complete the BLA and then be talking with the FDA about the second generation and - on Avance. And then we are also working on some concepts for a third-generation Avance with the idea that we would like to have a third-generation Avance 12 years from now.

Thank you.

Thank you. At this time, we've reached end of our question-and-answer session. I'll hand the floor back to Karen Zaderej for closing remarks.

Thank you, Rob, and I'd like to thank the AxoGen team who remain very committed to our mission of improving the quality of life for patients with peripheral nerve injuries. We're happy with the progress we've made towards our goal this year, and we remain focused on ensuring our long-term success. I want to thank everyone for joining us this morning. Thank you, and have a great day.

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.