AxoGen, Inc. (AXGN) CEO Karen Zaderej on Q2 2022 Results – Earnings Call Transcript

AxoGen, Inc. (NASDAQ:AXGN) Q2 2022 Results Conference Call August 3, 2022 4:30 PM ET

Company Participants

Ed Joyce – Director, IR

Karen Zaderej – Chairman, President & CEO

Peter Mariani – EVP & CFO

Conference Call Participants


Welcome to the AxoGen Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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.

Ed Joyce

Thank you, Melinda, and good afternoon, 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 closing remarks from Karen and 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 in the Investors section of the company’s website at

Before we get started, I’d like to remind you that during this conference call, the company will be making projections and forward-looking statements regarding future events. Forward-looking statements are based on the 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 impact of COVID-19 on our business, global supply chain issues, record inflation, hospital staffing issues, product development, product potential, expected clinical enrollment timings and outcomes, regulatory processes and approvals, APC renovation timing and expense, financial performance, sales growth, 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 and other factors, including legislative, regulatory, political and economic developments, not within our control.

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, whether as a result of new information, future events, changed circumstances or otherwise.

And with that, I’d like to turn the call over to Karen. Karen?

Karen Zaderej

Thank you, Ed, and good afternoon, everyone. Thank you for joining us today. We’re pleased with our second quarter performance as revenue increased 3% over last year to $34.5 million on an as-reported basis. Excluding the impact of revenue from Avive Soft Tissue Membrane from the second quarter of 2021, our revenue this quarter increased 9%. Year-to-date, we’re pleased with our execution as procedure volumes improve and hospitals continue to adapt to evolving challenges.

Although these issues continue to have a negative impact on the pace of growth in the quarter, we’re encouraged by the sequential improvement in procedure volumes. We remain measured in our near-term outlook, given the broader economic challenges, but continue to be pleased with the improving trends in the market and in our execution. As we discussed on last quarter’s call, we’re extremely pleased with the results of our RECON study, which met its primary endpoints and provides clinical evidence of the performance of Avance Nerve Graft consistent with the results we’ve seen in our registry data collected over the last decade. The results of this study provide Level 1 clinical evidence, the highest quality possible.

And we believe it will provide robust data to support surgeon adoption of Avance as the first biologically active regenerative medicine therapy for Nerve Graft. Over the years, we have built broad capabilities to establish and develop the nerve repair market. These efforts have produced a robust clinical portfolio as well as highly respected surgeon education programs and broad commercial capabilities. As a result, Avance has a well-established track record and solid foundation. We believe the addition of the RECON study will provide compelling evidence for the expansion into the middle adopters, many of whom are in our core accounts.

We plan to leverage the strength of this position to drive increased surgeon engagement and adoption and support continued innovation of our nerve repair portfolio. Our strategy remains anchored with continued focus and execution in our core and active accounts. As of the end of the quarter, we had 299 core accounts and 941 active accounts, which were up sequentially by 4% and 2%, respectively. Excluding the impact of Avive purchases in the second quarter of 2021, year-over-year growth in core and active accounts was 1% and 2%, respectively.

As a reminder, active accounts are those that have ordered at least six times in the last 12 months and may still be in the early stages of adoption. Active accounts continue to represent about 85% of our total revenue, with a top 10% contributing about 35% of revenue. Core accounts represent more penetrated accounts defined as those that had greater than $100,000 in revenue in the trailing 12 months. Our core accounts continue to represent about 60% of our revenue and typically contain at least one surgeon who’s adopted the AxoGen nerve repair algorithm for a significant portion of his or her nerve injury patients.

Leveraging this surgeon’s success with our products, we focus on gaining more cases with that first early adopter surgeon and gaining use by additional middle adopters in that account. We continue to see that our best opportunities for growth is within our core accounts by more deeply penetrating the treatment of traumatic injuries and continuing to expand into other nerve repair applications, including breast, OMF and the surgical treatment of pain.

We ended the quarter with 116 direct sales representatives, consistent with the first quarter of 2022 and up from 109 a year ago. As we commented previously, we continually evaluate the productivity and capacity of our sales representatives and their territories. We believe our growth can be primarily driven first by sales productivity gains, and we’ll continue to add additional sales reps as their territories approach targeted levels. Our direct sales force continues to be supplemented by independent sales agencies that represent approximately 10% of our total revenue.

We continue to build market awareness of nerve repair with healthcare providers and through our direct-to-patient initiatives, particularly for breast and pain applications. We utilize our marketing initiatives to drive patient engagement to our ReSensation and ReThink Pain websites, which are aimed at increasing awareness and education for the potential nerve repair procedures to improve outcomes for patients undergoing [indiscernible] reconstruction and those suffering from chronic neuropathic pain.

We’ve achieved our goals with our surgeon education programs, including our annual goal of training more than 75% of the most recent class of hand and microsurgery fellows. We continue to see strong interest and high levels of attendance at our fellows and our best practices programs, which include hands-on nerve repair experience and insights from faculty from leading institutions. Our RECON study is another key driver of building market awareness and is a significant milestone achievement in the path towards transitioning Avance Nerve Graft to a licensed biologic.

We believe it is a landmark addition to our growing body of clinical evidence used to drive surgeon engagement and adoption. As a reminder, in addition to achieving its primary endpoint of non-inferiority conduit, this study also observed that as the nerve gap length increase, Avance demonstrated statistical superiority over conduit and the return of sensibility as measured by static two-point discrimination in gaps greater than 12 millimeters.

Also for gap lengths greater than 10 millimeters, Avance has statistically superior time to recovery, with patients achieving normal two-point discrimination up to three months earlier than the conduit group. This study also demonstrated lower incidents of persistent and unresolved pain for Avance subjects. So there’s still much work to be done prior to filing the actual BLA submission, which we anticipate will occur in the second half of 2023.

Our team is making great progress. We’re in the process of compiling the appropriate documentation on this clinical study, our facilities, operations, quality systems and much more, all of which is required for a successful application. We continue to be on target for finalizing our new APC facility, which is also part of our BLA filing. Our RANGER and MATCH registries continue to enroll now with 2,700 Avance Nerve Graft nerve repairs enrolled in RANGER. Data from these two clinical registries continue to play an important role in informing surgeons in their clinical decision-making.

REPOSE is our study of Axoguard Nerve Cap compared to standard treatment for reducing Symptomatic Neuroma pain. Earlier this year, we announced strong top line results in the pilot phase of this study. And today, I’m happy to report that we’ve achieved full enrollment with 86 subjects in our comparative phase of this study. We expect top line data readout from the comparative phase in Q4 of 2023. Our newest study, REPOSE-XL, which is the Department of Defense funded pilot study that focuses on Axoguard Nerve Caps with large diameters from 5 millimeters to 7 millimeters is currently enrolling.

The continued development of our robust portfolio of high-quality clinical evidence remains a priority, and we believe that our growing collection of meaningful clinical data publications is the most comprehensive in the area of peripheral nerve repair. We added eight new peer-reviewed publications this quarter now with a total of 196 including a paper in the Journal of Plastic and Aesthetic Research on how peripheral nerve allograft has changed surgical practice in the last 15 years.

The author, Dr. Gregory Buncke commented, the use of engineered derma allograft such as Avance Nerve Graft, show meaningful motor and sensory recovery in nerve gaps up to 70 millimeters in length. And furthermore, the use of nerve allograft as an alternative to autograft circumvents nerve autograft’s comorbidity such as sensory deficits and chronic pain. We remain committed to developing the clinical evidence to demonstrate that safety, performance and utility of our nerve repair solutions to support the continued adoption of the AxoGen algorithm across our full portfolio of nerve repair products.

Moving on to our full year guidance; we continue to expect that full year revenue in 2022 will be in the range of $135 million to $142 million. This revenue guidance represents 10% to 15% growth over 2021, excluding the Avive revenue come last year. Full year gross margin is expected to be above 80%. As we’ve commented prior, we’re very pleased with our execution this year. Our outlook for the second half remains positive as we continue to see increasing procedure volumes to hospitals as hospitals are addressing staffing challenges.

However, given the potential impact to broader economic factors, we also believe it is prudent to remain measured in our near-term outlook. We believe our solid foundation of superior clinical evidence will allow us to deliver sustainable long-term growth. We continue to view AxoGen as a long-term growth company, delivering sustainable annual revenue growth in the high teens to low 20% range.

Now, I’ll turn the call over to Pete for a review of financial highlights. Pete?

Peter Mariani

Thank you, Karen. Revenue this quarter was $34.5 million, a 3% increase over the second quarter of 2021. Excluding the $1.8 million of Avive revenue in the second quarter of ’21, revenue growth was 9%, including unit growth of approximately 4% and a combined impact from changes in price and product mix of approximately 5%. Gross profit for the quarter was $28.2 million as compared to $26.5 million for the second quarter of ’21. Gross margin increased to 81.8% from 78.9% year-over-year. The prior year margin included a provision for the write-down of Avive inventory of approximately $1.4 million.

Total operating expense in the second quarter increased 7% to $36.1 million compared to $33.6 million in the prior year. The increase in total operating expenses was primarily the result of an increased product development and clinical programs as well as total compensation, including noncash stock comp and travel costs. Sales and marketing expense in the second quarter increased 2% to $19.7 million compared to $19.3 million in the prior year. The increase was primarily due to increased sales travel.

As a percentage of total revenue, sales and marketing expense was consistent at 57% in the quarter as well as last year. Research and development expenses increased 23% to $7 million compared to $5.7 million in the prior year. Product development expenses represented approximately 51% of total R&D compared to 52% in the prior year and includes spending in a number of specific programs, including the BLA for Avance Nerve Graft and a next-generation Avance product.

Clinical expenses represented approximately 49% of total R&D compared to 51% in the prior year and includes spending in support of our various clinical programs. As a percent of total revenues, research and development expenses were 20% in Q2 compared to 17% in the prior year. General and administrative expenses increased 8% to $9.4 million in the second quarter compared to $8.7 million in the prior year. The increase was primarily due to higher net compensation expenses, including noncash stock comp. G&A as a percent of revenue was 27% compared to 26% in the prior year.

Adjusted net loss was $2.6 million or approximately $0.06 per share in the second quarter compared to a loss of $3.7 million or $0.09 per share in last year. Adjusted EBITDA loss in the quarter was $1.6 million compared to an adjusted EBITDA loss of $2.4 million in the prior year. The reconciliation of these non-GAAP financial measures to GAAP can be found in today’s earnings release and on our website. The balance of all cash, cash equivalents and investments on June 30, 2022, was $64.3 million compared to a balance of $73.7 million at the end of Q1.

The net change includes net operating cash burn of approximately $5.5 million, which includes a $1.8 million increase in inventory, primarily related to accelerated purchases of certain production materials and donor inventory. Additionally, we spent $3.9 million related to the construction of our new processing facility in Dayton, Ohio. We expect to complete the APC facility over the next few quarters and transition production in the early part of next year.

We expect our operating cash to continue trending towards cash flow breakeven, driven by revenue leverage on our fixed cost infrastructure, along with our continued focus on thoughtful operating expense management. We believe this trend, combined with the return of capital expenditures to more normalized levels will allow us to maintain our strong balance sheet position and it will provide ample support as we continue our path to profitability. Our annual guidance remains unchanged with revenue at $135 million to $142 million, which is about 10% to 15% growth, excluding the $4.1 million of Avive revenue from 2021.

The year is progressing well and in line with our initial expectations, and we anticipate more normalized growth rates in the second half of the year. The top end of our annual guidance reflects accelerating momentum in procedure volumes through the end of the year, and the bottom end includes a more measured view to accommodate the potential impact of broader macroeconomic uncertainty through the end of the year. Additionally, our full year 2022 gross margin is expected to be above 80%.

And at this point, I’d like to turn the line over to questions. Operator?

Question-and-Answer Session


Thank you [Operator Instructions] And we go to Ross Osborn with Cantor Fitzgerald.

Ross Osborn

Hi. Thanks for taking my questions and congrats on the quarter.

Karen Zaderej

Thank you, Ross.

Ross Osborn

Starting off — can we maybe just walk through the revenue cadence throughout the quarter? And if you would, how July shaped up relative to June?

Karen Zaderej

Well, we’ve been pleased to see that we’ve seen a nice ramp in revenue through — from first quarter through second quarter and continuing into July. We see hospitals are learning to manage the staffing shortages, and that’s allowing them to do what’s important to them and that’s get cases completed. We want that and they want that. And so they’re now doing a better job of being able to manage the resources to get those cases completed.

Ross Osborn

Okay. Great. And then I guess switching to guidance. You had a strong quarter but maintained. So I guess looking at the bottom end where you assume some macro headwinds in the second half of this year. Is that primarily staffing shortages? If not, what are you potentially expecting?

Peter Mariani

That’s right. I think if hospitals are able to continue to improve, then we’re going to be towards the top end of the range. But if we see what hospitals experience a broader impact from the inflationary concerns and other issues that are impacting them and their business, then we see a more moderate pace of procedures across the back half of the year. And that’s really it.

Ross Osborn

Okay. Understood. Thanks for taking my question. Congrats again on the quarter.

Peter Mariani



And we move into Kyle Rose with Canaccord.

Caitlin Cronin

Hi, this is Caitlin on for Kyle. Just a quick question on the continued COVID recovery. Can you elaborate on which segments were most affected and continue to be affected? So given that breast recon is largely elective, have you seen any pullback in volumes there? Thanks.

Karen Zaderej

Well, of course, the quarter of our business is trauma. And so we saw a nice continued shift of cases being ramping in trauma. In breast, as I saw through the quarter, we saw breast peaking back out from having the shutdown almost completely in parts of first quarter. Breast, I’ve said in the past, is a highly resource-intensive procedure. They’re a long time in the OR, and they are almost always an in-patient study. And so the combined resource impact can make them — and they can be delayed.

So they are one of the early things that were delayed and deferred. Having said that, while there is a large group of deferred patients that have been built up, there is only so much block time these surgeons are able to get. So while it’s ramped up nicely, it’s back to more organic levels because the deferred group is going to take us over a year to — take the surgeons over a year to work off. So we’ve seen that ramp back up and nicely being done, but not as a kind of being bolus in the quarter.


We return to Karen Zaderej for closing remarks.

Karen Zaderej

Well, I want to thank everyone for joining us on today’s call. We’re happy with the progress we’ve made towards our goals during the first half of the year, and we remain focused ensuring our long-term success. I want to thank all of our members of team AxoGen who remain committed to our mission of improving nerve function and quality life for patients with peripheral nerve injuries. And we look forward to meeting with many of you at the Canaccord Genuity Growth Conference in Boston and the Morgan Stanley Healthcare Conference in New York in the coming months.


This concludes today’s teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.

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