Axogen, Inc. (AXGN) Earnings Call Transcript & Summary

Okay so to -- as one of the closing presentation in the conference. My name is Allen Gong. I'm here representing the medical supplies and devices team here at JPMorgan. It's my pleasure to introduce the President, Chairman and CEO of AxoGen. Karen Zaderej. The breakout will be in the Sussex room down the hall.

Okay. Thank you very much. Nerve injuries affect patients every day in many different ways. It can be the mother who gets a cut working in the kitchen and loses sensation in her hand. It can be a teenager who has wisdom teeth extraction and because of an injury in that procedure, loses sensation in that part of the mouth. It can be a young man in a sports activity with a sports-related trauma that ultimately ends up in chronic pain due to a neuroma in the nerve or it can be associated with a woman who has breast cancer and has a mastectomy. And as a result of that ends up with no sensation in her reconstructed breast. These are all examples of the types of patients that we see every day who are impacted by nerve injuries. So think of nerves as the wires of the body. They allow signals to go through the body from the central nervous system, the brain, allowing -- giving signals for muscles to move or to provide input into the brain about the environment, temperature sensation, vibration, all of those are the signals that are carried on these wires. And just like a wire, if you cut it, no more signals. That's a problem for the surgeons, the surgeon has to come in and do a surgical repair to actually reattach the nerves together. Surgeons have a little bit of a technical challenge in that nerves do not heal under tension. So if there's any loss of segment or gap in the surgical procedure in the trauma, they've got to do something to bridge the gap. Axogen comes in with a portfolio of products, allowing us to solve all of those issues for surgeons, providing good outcomes for patients. We believe Axogen is the preeminent nerve repair company and now has a foundation for long-term sustainable growth. We're exclusively focused in this opportunity in peripheral nerve repair with our differentiated platform of regenerative medicine products. We now have 10-plus years of demonstrated clinical consistency. We continue to build on that clinical data and support that with publications, both from sponsored studies and independent investigators, with now over 105 clinical publications on the portfolio. We're working in commercializing and developing the market with our 5 pillar market development strategy. I'll go through that in a little bit more detail later. But in essence, it's anchored in commercial execution and surgeon education around changing the practices in nerve repair. While we're doing this, we feel we've built some significant barriers to competitive entry, allowing us to continue to build this market with the resources we have on the balance sheet and a management team that has shown proven execution. Q4, we completed with 20% growth. We completed $28.1 million in revenue. And we updated our guidance in a pre-release just this week, so that our guidance for 2019 is revenue will be at least $106.6 million. Gross margin will remain above 80%. Our guidance for 2020, $124 million to $128 million. We'll continue to expand some of our sales teams that will end the year with between $126 million and $131 million direct sales associates here in the U.S. Our gross margins will remain strong with above 80% gross margins and we'll continue to provide some operating margin improvements over the year. So a little bit more about the business. We work with surgeons on these 2 problems that they have with nerve issues. We allow them to repair the nerves to bring them back together when they're cut. We also help them to protect the nerves when nerves are compressed or inflamed. So compression is a way that signals in the nerve are altered. So when you have a compression, an example is thinking about carpal tunnel syndrome. The nerve has pressure on it that alters the signal conduction, you have muscle weakness and you have pain from that. And that concept is true anywhere in the body where the body is compressing or entrapping the nerve, causing that change in signal conduction. And we provide a portfolio that helps surgeons with both of these issues, both the cut and the protection of the nerves. We focus today in 3 primary areas: upper extremity, which is a combination of compression injuries and cubital tunnel revisions, carpal tunnel is the wrist. Cubital tunnel is the elbow, and traumatic injuries, things that present into the emergency department, but are a transaction or an injury of the nerve and are then repaired by either a hand surgeon or a plastic surgeon in the OR. We've added into that oral and maxillofacial surgery, that's the OMF segment here. These are the iatrogenic injuries from dental procedures, wisdom teeth extraction and putting in dental implants, or that the reconstruction due to mandible reconstruction, usually based on a tumor of the jaw, sometimes trauma, most often, the tumor of the jaw. We added about 2 years ago, some early entrées into the area of breast reconstruction. So traditionally, when women had a mastectomy, either prophylactically or because they had cancer, they were provided the shape of breast, but for the women, they don't have sensation. It does not feel normal. What we hear most often from these patients is they want to be able to hug their children and feel them. And you can't do that if you don't have sensation. So we feel it's a substantial improvement of returning to normalcy and the next step-up in breast reconstruction to provide sensation with what's now the resensation technique. So traditionally, nerves have been repaired predominantly with surgical techniques. If it was a sharp laceration, and there was a direct -- sharp laceration that could be repaired directly. In other words, they could bring the nerves together without tension that was done with just sutures at an anastomosis site. If there was a gap between the 2 nerves ends, then they did what's called an autograft, which is really taking a nerve from somewhere else in the patient's body and transplanting it. That means for the patient, you are always giving up something to fix something that you believe is more important. The most common nerve they take is the sural nerve, which gives you sensation for the top and side of your foot. For you as a patient, if that allows you to move your hand, probably a good trade-off. But if it's just to give you sensation in your pinky finger, that's a very personal decision. You're going to have to decide what's more important to you. From an economic standpoint for the hospital, autograft has never been reimbursed as a separate procedure. It's always been considered part of the repair, which means that there's cost embedded in the procedure for this step. So we trade off the cost and morbidity of the autograft and allow them to purchase an off-the-shelf product that allows them to have a value exchange within the DRG or the reimbursement for the procedure, providing a good economic solution for the hospital as well. Now about 20 years ago, there were some commercial products that were introduced. These hollow tubes or synthetic tubes. Think of them as an absorbable hollow straw that they tuck the nerve ends into, blood would seep into the tube and create a rudimentary scaffold or bridge to allow the cells and nerve fibers to cross the gap. But of course, blood breaks down fairly quickly. So the longer the gap is between the 2 nerve ends, the higher the likelihood that these will fail before regeneration happens. And what we see is that they have almost a binary response, where they either work with gaps less than 5 millimeters or gaps greater than 5 millimeters, they have a 34% to 57% total failure rate. So they've been an option for many years, but they had limited utility given the high failure rate, which allowed us to come into the marketplace with a new opportunity for solving the problems that surgeons have with either nerve autografting and the morbidity or the efficacy of the hollow tubes. Avance Nerve Graft is human nerve that's been decellularized so that we preserve the micro architecture of the nerve, think of it as the roads that support the nerve fibers and cells as they go across the gap. We also preserve key biological queues that allow to guide the regenerating nerve fibers to follow those. It's an important component of laminin activity within the grafts. In addition, nerves have a certain propensity to shut down regeneration. Certain proteins give cues to stop the nerve fibers. And we proactively treat these grafts to remove the inhibitors or to remove the things that stop regeneration. Similar to what you hear in spinal cord, we have the same effect in peripheral nerves, we remove those stop signs. So that we end up with a graft that is the roads for regeneration, the guidance for regeneration and the stop signs removed, allowing the optimum opportunity for nerve fibers to reach their distal target. From a surgeon standpoint, this graft is used in the same techniques that they've done in the past with autograft. So learning curve is not a significant part of this. Instead of taking the nerve out of the leg, they take it out of a box. But otherwise, the techniques that they'll use for the surgical implantation are consistent. In addition, we added AxoGuard Nerve Connector. So these are for those sharp lacerations. So things like a kitchen knife injury, where they can bring the nerves directly together. But it allows them to do this without putting a suture line right at the coaptation, which can create small amounts of fibrosis at that critical healing zone. It also seals up the coaptations so you don't get nerve fibers leaking out into the surrounding tissue. Think of it as a biological duct tape for the nerve in terms of sealing it up and providing a secure anastomosis. These provide the solution set that they need for those transected nerves. Same thing in compression, lots of different surgical techniques that surgeon use to try and transplant or move tissue to try and protect nerves from the surrounding tissue to make sure that they don't get compressed or entrapped by surrounding tissue. And we provide the AxoGuard Nerve Protector, which creates essentially a gliding sleeve around the nerve that nerve can move freely within but keeps the surrounding tissue up and off of the nerve, thereby protecting it. We also have the Avive Soft Tissue Membrane, which is a resorbable solution to protect from the surrounding environment for those positions where they do not want a permanent remodeled implant. All of this leads to our full platform for growth. We have patent positions on Avance Nerve Graft. But beyond that, we have a number of unique things that we've done to build a competitive barrier to entry as we changed the regulatory classification of Avance from a tissue product to a licensed biologic. We have enforcement discretion from the FDA allowing us to continue to commercialize, while we make this transition happen. We're well on our way, including receiving an RMAT designation this past year, which highlights the strength of the clinical evidence that we have already and designates this as a high unmet medical need in health care. We're on track in completing the enrollment for the RECON Study, our pivotal study to support this transition of the biologic, and we'll now complete the enrollment, we believe, by the end of second quarter. There's a 1-year follow-up after that. But that allows us to continue to progress towards the submission of our BLA. Supporting that, we're also underway with building out our 70,000 square foot state-of-the-art biologics manufacturing facility, which we expect to have up and running by the end of 2022. In support of this and one of the reasons this is such a strong barrier to entry is that now that processed nerve allografts are designated as a licensed biologic, and others will need to follow the biologics pathway. We believe that we'll be the reference product for the category for biosimilars. And the biosimilars provide an additional 12 years of exclusivity from the time we achieve the biologics license application approval. So it provides us a long runway to continue to develop this market, while we continue to -- without competitors, while we continue to change surgeons' practices. Our market development strategy is really based on these 5 pillars. The first is building market awareness about changes and new advancements in nerve repair, where we're active in many clinical conferences with surgeons predominantly here in the U.S., but beginning to expand internationally and around the world. We do a strong emphasis on surgeon education, and I'm quite proud to say that we've trained the 2 -- 3/4 of all hand and microsurgery fellows in 2019 and expect to do so again in 2020 as well as working with attendings in the area of trauma, breast, OMF and pain, our new market area that we're expanding into, providing a very high-quality hands-on educational programs supported by the science and clinical data. Clinical data continues to be a foundation of the work that we do to help surgeons inform and think about what are the best practices in nerve repair. And as I said, they're now 105 publications associated with the AxoGen portfolio of products. The full bibliography is on our website, but showing an array -- solutions across the array of applications that we work in. The foundation of much of the work we do is our RANGER Registry. RANGER is a broad registry study looking at Avance Nerve repairs across a wide array of types of nerve injuries, and we're now at over 2,000 Avance Nerve repairs in this registry, allowing us to start to get some real critical mass in the data and the information that we can provide to surgeons. From a sales execution standpoint, we've had a strategic goal to continue to focus on our direct channel and reduce the amount of input that we have from the independent agencies that we work with. We're now down to only 10% of our revenue coming from independent agencies with a direct channel of now 109 direct sales associates here in the U.S. One thing I wanted to highlight that's new, just now in January, it was announced that CMS is changing their structure of outpatient reimbursement, which we think will have over the long term, a beneficial impact for surgeons in their outpatient practices. This is, obviously, Medicare, the majority of trauma is commercial pay, not Medicare, but they tend to follow the structure. What's happened here is that CMS has taken direct repair and unbundled it from gap repair, allowing them to take money from the direct repair procedures and put it into the gap repair procedures, providing a higher reimbursement for all gap repair and in particular for the allograft or Avance Nerve Graft repair. So you can see that the reimbursements have gone up. And in the ambulatory surgery center, we now have a 78% increase in the CMS reimbursement rate for allograft repair, while the direct repair rates went down about 60%. And we're excited about the areas that we're in, but we also see areas to expand, and so there are new market applications for us to continue to develop that surgeons both bring to us and that we see in the marketplace as unmet needs as well as expansion internationally and with new products in the area of nerve repair. We are adding in a focus now in the surgical treatment of pain, focused in what our current users are. So these are hand and plastic surgeons who already have a practice in doing nerve repair due to trauma. But trauma, of course, is an inherently unscheduled case, and these surgeons would like to continue to expand the proportion of peripheral nerve that they have in their practice. And there's an opportunity to do that with the surgical treatment of pain. So let me take a step back and explain what this is. So traditionally, we think of nerves as providing functional recovery, but they can be a source of chronic pain as well where nerve fibers become tangled up in the nerve and send back aberrant signals to the brain that the brain interprets as pain. It can be a functioning nerve, where it's called a neuroma in continuity, where it's just -- the nerve is still intact and it's still sending normal signals as well as aberrant signals or it can be due to a nerve that is terminated and not connected for some reason, either due to something like an amputation, obviously, but also in surgery, many times nerves are cut and left unrepaired and can later be a source of chronic pain for those patients. We see an opportunity to really change that state by getting these patients to someone who can actually solve the pain rather than treat the pain with a pharmacological response. So we believe that you can do that in a variety of ways. Obviously, if it's a neuroma in continuity, you can cut out the bad section of the nerve, that removes the pain, but now you've got a gap in the nerve. You need to do something to repair the gap. Well, we have a lovely way to repair the gap, and that's our Avance Nerve Graft. Just in the way they would do that in a traumatic injury, they can do that in a surgical procedure to repair the gap with Avance. When you need to terminate a nerve or end it, so that you don't have -- again, think of it as a wire, a hot wire in the body that will ultimately be a pain source or is a pain source after the neuroma is removed, we now will be releasing the AxoGuard Nerve Cap in February. AxoGuard Nerve Cap is a way to terminate the nerve, give the nerve fibers, something to do, but to keep them calm and contained so that they don't send those aberrant signals. They don't basically cross-talk and send aberrant signals back to the brain. We think we've had clinical work underway in this for a year with the REPOSE Study. That study continues to enroll and are starting to roll this out to our -- again, our current customers so that they can expand this solution for their patients. We have a strong balance sheet and are able to continue to execute on our plan, building this business and really changing the market for surgeons and patients. And just to close, again, we're the preeminent nerve -- we believe we're the preeminent nerve company. And we have a solid foundation for this long-term growth, such that we can continue to do so with our 5-pillar strategy and delivering continued double-digit growth as well as driving penetration into the marketplace. Thank you very much for your attention, and we'll take questions in the breakout.