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

Welcome to the AxoGen, Inc. Annual Meeting of Shareholders for 2020. We're excited to be hosting a virtual meeting, which allows us to be more inclusive and reach a greater number of our shareholders as we're unable to convene in person due to concerns related to COVID-19. Thank you for joining us today. I hope that you're all safe and well during these unprecedented times. My name is Karen Zaderej, and I'm the Chairman of the AxoGen Board of Directors and the Chief Executive Officer and President of AxoGen. We're going to start today with some introductions, followed by the formal portion of the meeting and then a company update. After the update, we look forward to answering any questions you may have. First, I'd like to introduce AxoGen Inc.'s current directors and thank them for their service to the company and the opportunities they've provided for AxoGen to move forward and continue its growth and success. First, I'd like to introduce Amy Wendell, Lead Independent Director, and Chairman of the Governance, Nominating and Sustainability Committee of the Board of Directors. The Governance, Nominating and Sustainability Committee provides oversight in relation to the corporate governance of AxoGen and continually assesses the capabilities and needs of the Board of Directors and identifies director nominees for election. In the event of a vacancy midterm, Ms. Wendell and the committee evaluate the size of the Board and establish a plan for filling the vacancy if necessary. The Governance, Nominating and Sustainability Committee's sustainability activities include review and recommendations consistent with the company's policy and performance in relation to sustainability-related matters, including health and safety, the environment, climate change, human rights, heritage and land access, security and emergency management and community relations. Next, I'd like to introduce Guido Neels, Chairman of the Compensation Committee of the Board of Directors. The Compensation Committee determines and periodically evaluates the various levels and methods of compensation for our directors, officers and employees. It is responsible for establishing executive compensation and administering AxoGen's incentive compensation plan. In this regard, the compensation committee reviews information about comparative companies, industry reports and other available information and engages consultants as needed to establish a compensation structure it believes is appropriate for the company, all done with the goal of remaining competitive in order to retain employees for an important AxoGen asset and critical to our growth. Next, I'd like to introduce Quentin Blackford, Chairman of the Audit Committee of the Board of Directors. The Audit Committee conducts reviews of audits, financial reporting and compliance and accounting and internal control policies. The Audit Committee is also responsible for the engagement and compensation of our independent auditors, and provides oversight for the activities and evaluation of their independents. The members of the committee are directors who have the knowledge and experience to properly discharge their duties and our financial experts as required by NASDAQ. The remaining directors, I'd like to introduce Robert Rudelius, Managing Director and CEO of Noble Ventures, LLC; Greg Freitag, who is also AxoGen's General Counsel and Corporate Secretary; Dr. Mark Gold, retired Professor at the University of Florida College of Medicine's McKnight Brain Institute, recognized as a distinguished Professor, eminent scholar and former Chairman of the Department of Psychiatry, Dr. Gold is also Chairman of our Science and Technology Committee; and Alan Levine, Chairman, President and Chief Executive Officer of Ballad Health. I would also like to introduce several other individuals joining us today. Jim [indiscernible] of Deloitte & Touche, our independent registered public accounting firm; Fahd Riaz of DLA Piper, our corporate legal counsel; and from the company, Pete Mariani, CFO; Dave Hansen, Chief Accounting Officer; and Inspector of Elections for today's meeting, Isabelle Billet, Chief Strategy and Business Development Officer; Eric Sandberg, Chief Commercial Officer. At this point, we will proceed with the formal portion of the meeting. I hereby call this Annual Meeting of Shareholders of AxoGen, Inc. for 2020 to order. I'll turn the meeting over to Greg Freitag.

Thank you, Karen. The notice of annual meeting and proxy statement for AxoGen, dated April 17, 2020, were mailed to all shareholders of record as of March 30, 2020. On that date, there were 39,738,767 shares of common stock outstanding and eligible to vote. I've been informed that a majority of those shares are represented at this meeting, either virtually or by proxy, which gives us a quorum for the lawful transaction of business at this meeting. Actually, over 87% of the shares outstanding voted. So thank you, everyone, for participation in this process as it shows the great interest that shareholders have in AxoGen. As noted in the proxy statement, there are 3 items of business to come before this meeting, to elect 8 members to our Board of Directors, to hold office for the ensuing year and until their successors are elected and qualified, to ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2020, and to approve on a nonbinding advisory basis the compensation of the company's named executive officers as disclosed in the company's proxy statement. At this point -- and it can be done through your portal, does anybody have any questions concerning any items of business to be considered at this meeting? Having checked the portal and seeing none, we will proceed to the voting. Supervising the polls and certifying the results of voting today are Dave Hansen, who is acting as the Inspector of Elections. Prior to this meeting, we received proxies representing approximately 34,621,648 shares, which represents a quorum for purposes of conducting the meeting. By means of those proxies, each of the Nominees for Director has received a plurality of the votes cast and as such, these proxies are sufficient to elect each of the 8 Director Nominees. The appointment of Deloitte & Touche LLP has received the affirmative votes for a majority of the shares present and entitled to vote and as such, their appointment has sufficient votes to be ratified. Finally, the approval on a nonadvisory basis of the compensation of the company's named executive officers as disclosed in the company's proxy statement, has received the affirmative vote from a majority of the shares present and entitled to vote. And as such, the compensation on a nonadvisory basis has been approved. If any shareholder, at this point, desires to cast an additional vote or change a vote previously cast, please do so now through the virtual portal. [Voting]

I am checking the portal, and I see none. So the polls are now closed. We'll take a short break while we complete the tabulations and report. We're very fast with our math. All is as confirmed earlier, and I will now turn the meeting back over to Karen.

Thanks, Greg. That concludes the formal portion of the meeting. There being no further items of business, this meeting is adjourned. I will now give a corporate update and then take any questions you may have. AxoGen is the preeminent nerve repair company. We've focused on the area of nerve repair and protection solutions with a full portfolio of products. We completed $24.3 million in revenue in the first quarter, despite the challenges of COVID-19 and showed $106.7 million in revenue, with 27% growth in 2019. We've maintained high gross margins, and have sufficient capital to be able to execute on our plans. In addition to this, we have solid barriers to competitive entry, which we think allow us to continue to expand this platform and provide solutions for patients without significant challenges from competitive entrants. Protecting the health and safety of those we serve has been an important part of our initiatives as the advent of COVID-19 impacted both the nation and our business. We immediately formed an executive COVID-19 core team that's met daily since the advent of the disease, to focus on the safety and operational protocols of the organization to protect both our employees as well as our customers and their patients. We transitioned our field and clinical -- field clinical and sales teams to support customers remotely for 6-plus weeks, doing virtual and limited on-site support only as requested by surgeons to support direct patient care during that time period. We've now returned to be able to support on-site support for patient care as well as working with administrators and hospitals. But doing it within clear guidelines set by AxoGen as well as support for the local guidelines of that hospital and doing it with contact tracing. We also focused on our distribution center to be able to make sure that we could support those patients who had a trauma during COVID-19. Trauma is often not an elective surgery. And therefore, was still -- the surgery is still being completed. So we needed to make sure that we were able to supply product 24/7 as needed for those unexpected cases. And we did so by splitting our distribution organization into 2 teams working on alternate weeks in the event that there was an employee infection. We also established a backup distribution center in our corporate offices. So in the event that there was an issue in Texas, we would still be able to supply product. And I'm proud to say that we have not missed any distribution days through the efforts that we've made. We paused our tissue processing for 6-plus weeks. We have now restarted processing with additional safety protocols in place, in both the office and clean room gowning areas. And we converted our office and lab employees to a work-from-home protocol for a period of time and are now implementing a rotational return to the office and lab plan, while maintaining social distancing, mask and recommended safety protocol to make sure that we provide a safe environment for our teams. In addition to managing the health of our employees, we also looked at the health of our business and felt that we wanted to make sure we did some cost mitigation activities that helped to demonstrate the flexibility of our business model, while maintaining our focus on our commercial execution. Predominantly, we focused on reducing expenses in the areas of things most directly impacted by COVID-19. We implemented compensation reductions for the executive team, Board and other salaried employees. We did complete an employee layoff of approximately 10% of our workforce and have implemented a hiring freeze. We deferred completion of our new biologics processing center in Ohio by up to a year. We temporarily suspended tissue collection and processing. As I said, we've now restarted that, and we reduced certain other discretionary spending that allowed us to preserve cash over the next several quarters and allow us to reset our business on a more efficient run rate. We continue to see early signs of recovery. While our sales declined very quickly through March with a low point of a 70% reduction from Q4 in early April, we see steady weekly improvement since that time. Hospitals are beginning to open up surgical schedules, although there is regional variation in this. Some less impacted geographies are opening up very quickly, others are much more cautious or much more limited. We are confident that we'll return from this downturn to a stronger, leaner, more resilient organization and on a path to profitability. Ultimately, the fundamentals of our business remain intact. We remain focused in our peripheral nerve repair market. We believe that we have a strongly differentiated platform anchored by Avance Nerve Graft that we've now built 10-plus years of clinical consistency and outcomes through the clinical work that we've done. That has resulted in 119 peer-reviewed clinical publications on our full portfolio. In addition, we've talked about our barriers to entry. Our regulatory strategy, allowing us to continue to differentiate our products. That is supported by the RMAT designation, which highlights the clinical evidence for Avance -- the strength of that clinical evidence for Avance and the unmet medical need for improving nerve injuries for patients. All of this is with a solid balance sheet to provide the resources we need to execute on the plan and an experienced management team that has demonstrated the ability to solve problems and work through the challenges that we've faced over the last few months. So we continue to be very optimistic in the opportunities in front of us. So with that, I'll open up the floor to any questions.

So Karen, the first question is what is the product development outlook or strategy for AxoGen? And why has there been no new products released since Avive in 2017? So maybe the first is, react to our new product launch and then our product strategy.

So actually, I'm happy to say that there has been a new product just in February, launched with the AxoGuard Nerve Cap. We're very excited about this as a solution in the surgical treatment of pain. This is a way to manage a neuroma, which is a source of chronic pain. And there are times that the surgeon can cut out the neuroma and repair the 2 ends with Avance, but there are other applications in -- for example, in amputations, where you need to terminate that nerve and do it in such a way that you don't get what's been called, you probably have heard of phantom pain. Phantom pain or chronic pain, sometimes you can't connect that nerve to something else. This is a way to terminate that nerve and help to reduce the formation of a symptomatic neuroma, again, the cause of that pain. So we're excited about this new launch. Obviously, COVID-19 slowed down the momentum of the launch since we launched it in February. But we see that this is a great solution opportunity for patients, and we continue to build clinical evidence on this product with the REPOSE study, which we have already started enrolling in. So from a pipeline standpoint, we see continued opportunity in innovation. We haven't disclosed details of some of the new products that we're working on, but we see a steady cadence of innovations that we can deliver into the marketplace.

Great. Thank. Actually, I can take the next one. The question is, is the executive salary reduction before or after the increased compensation proposed in the proxy vote? And I'm not -- I'm sorry, I'm not sure that increased compensation, but what is in the proxy statement is the salaries and the compensation information that was historical as of that time. Post that information or what is required to be disclosed in the proxy statement, we announced the salary reductions that Karen went over earlier in her presentation, which 20% for the executive team and 10% to 15% for the rest of the salaried employees from AxoGen. So the information was not adjusted for purposes of the proxy. Next question for you, Karen. Now that you've had some experience and the company has had some experience coming through the COVID situation. And as it sits here, generally, what do you believe the outlooks look like? And from a balance sheet standpoint, any concerns you have with liquidity?

I'm very optimistic in the recovery of the surgeries that we focus in as well as recovery overall from the lows that we had with COVID-19. We continue to see a good track record of increasing volumes of surgery as stay-at-home orders have been relaxed and surgical schedules have been opened up. And I'm confident that we're going to continue to see some upticks in that as we go forward. We've also taken measures to mitigate and manage our costs to make sure that we continue to grow in a lean fashion, to manage our balance sheet. Fortunately, we had a strong balance sheet as we went into this situation. So we're in a very strong cash position. And feel that we can continue to get to profitability without doing any dilutive activities that would be detrimental to shareholders. We feel very comfortable that we have the cash capability to be able to continue to run the business without disruption.

If there's anybody else who has any questions, we'll just give a few seconds here. Go into the portal, and you can ask a question. Not seeing any more questions. I think, Karen, I'll turn to you to close off the meeting.

Thanks, Greg. Thank you all for attending our 2020 Annual Meeting of Shareholders. We're happy you were able to join us. I and the AxoGen management team and our directors want you to know that we would not -- could not be more excited about what we're accomplishing, and thank you for your continued support.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.