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

Good day, and welcome to the AxoGen, Inc. 2021 Annual Meeting. I would now like to turn the conference over to Chairman, CEO and President, Karen Zaderej. Please go ahead.

[Audio Gap] Annual Meeting of Shareholders for 2021. We're excited again to be hosting our virtual meeting, which allows us to be a little more inclusive and reach a greater number of shareholders while socially distanced. Thank you all for joining us. We're going to start today with some introductions, followed by the formal portion of the meeting and then a brief 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 support they've provided for AxoGen to move forward and continue its growth and success. I'll start with Amy Wendell, Lead 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 are to review and make recommendations to the Board of Directors, the implementation of which create value consistent with the long-term preservation and enhancement of shareholder value and social well-being regarding 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. And the committee assists in setting annual sustainability performance goals and assessing achievement of such goals, if requested by the Compensation Committee. 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 who are an important AxoGen asset and critical to our growth. I'd like to also 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 ongoing oversight of their activities and evaluation of their independence. The members of the committee are directors who have knowledge and experience to properly discharge their duties and are financial experts as required by NASDAQ. I'd also like to introduce Dr. Mark Gold, Chairman of our Science and Technology Committee of the Board of Directors. The purpose of the Science and Technology Committee is to provide general oversight of the scientific -- of the significant scientific and technological aspects of the company's business. It assists the Board in fulfilling its oversight responsibilities and advising it with respect to the overall role of the technology, science and research and development and executing the business strategy of the company. The committee also reviews the company's overall intellectual property strategies and its IP portfolio. I also want to introduce Greg Freitag, former General Counsel and CFO of the company; Alan Levine, Chairman, President and Chief Executive Officer of Ballad Health; and Paul Thomas, Chief Executive Officer and Co-Founder of Prominex, all part of our Board of Directors. I'd also like to introduce several other individuals joining us. [ Jim Manacelli ] of Deloitte & Touche, our independent registered public accounting firm; Fahd Riaz of DLA Piper, LLP, our Corporate Legal Counsel; and from the company, Pete Mariani, Executive Vice President and CFO; Brad Ottinger, General Counsel and Chief Compliance Officer; Teresa Lipcsey, VP Controller and inspector of elections; Isabelle Billet, Chief Strategy and Business Development Officer; Maria Martinez, Chief Human Resources Officer; Eric Sandberg, Chief Commercial Officer; and Angelo Scopelianos, Research and Development Officer; Ivan Ducic, who's our Medical Director; and Erick DeVinney, our Vice President of Clinical and Translational Sciences. At this point, we'll proceed with the formal portion of the meeting. I hereby call this Annual Meeting of Shareholders of AxoGen, Inc. for 2021 to order. I will turn the meeting over to Brad Ottinger.

Thank you, Karen. The notice of annual meeting and proxy statement for AxoGen, Inc. dated March 31, 2021, were mailed to all shareholders of record as of March 12, 2021. On that date, There were 40,771,956 shares of common stock outstanding and eligible to vote. I have 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. As noted in the proxy statement, there are 4 items of business to come before this meeting: number one, to elect 8 members to our Board of Directors to hold office for the ensuing year and until their successors are elected and qualified; number two, to ratify the selection of Deloitte & Touche as our independent registered public accounting firm for the year ending December 31, 2021; to approve on a nonbinding advisory basis the compensation of the company's named executive officers as disclosed in the company's proxy statement; and four, to approve the AxoGen, Inc. amended and restated 2019 long-term incentive plan primarily to increase the maximum number of shares under the plan from 3 million to 5.5 million shares. If anyone has any questions on any of these items to be considered at this meeting, please enter your question in the online portal. And if you would please include your name or institutional name so we can know who we're speaking with and follow up as needed. Seeing no further questions, we will proceed to voting. Supervising the polls and certifying the results of voting today is Teresa Lipcsey, Vice President, Controller, who is acting as the inspector of elections.

Prior to this meeting, we received proxies representing 33,666,710 shares, which represents a quorum for the purpose of conducting the meeting. By means of these 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 nominee. The appointment of Deloitte & Touche has received the affirmative vote from a majority of the shares present and entitled to vote and as such, their appointment has sufficient votes to be ratified. 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. Approval of AxoGen Inc.'s amended and restated 2019 long-term incentive plan has received the affirmative vote from a majority of the outstanding shares of the company's common stock present and entitled to vote and is therefore approved.

If any shareholder desires to cast an additional vote or change a vote previously cast, please do so now via the virtual portal. The polls are now closed. And with that, I will turn the meeting back over to Karen.

Thank you, Brad. That concludes the formal portion of the meeting. There being no further items of business, this meeting is adjourned. I'll now give a corporate update and then take any questions you may have. So AxoGen, like many companies have had, an adventuresome and outstanding 2021 -- or 2020 and moving into 2021. And I wanted to start with a thank you to the executive team who helped us to navigate what was certainly a challenging year but with the key goals of keeping our employees safe, keeping our customers safe and still supporting our patient customers so that they could have their nerve damage addressed. AxoGen focuses in our platform of nerve repair. So for those of you not as familiar with peripheral nerve, think of nerves as the wires of your body. They carry signals from your brain to allow your muscles to move or to provide you feedback about the environment. Sensation, vibration, temperature, those are all examples of the types of sensation that patients might feel. But of course, just like if you cut a wire, it no longer functions, you cut the cord to the TV, the TV no longer gets power, if you cut a nerve, it no longer provides that needed asset for the patient. So now it takes a surgical intervention to try and repair that nerve. The nerve ends need to be brought closely together, and they need to be brought together without tension. Tension on nerves is detrimental to the regeneration. And so surgeons are left with the challenge of how do they bring the nerves together in a truly tensionless repair to allow the patient the opportunity to restore the function of that nerve. And that's where AxoGen comes in is the preeminent nerve repair company that is helping surgeons in this challenge across an array of surgical areas. AxoGen has built a strong foundation in this area. We are exclusively focused on the peripheral nerve space, developing a deep expertise in this area with a differentiated platform of nerve repair that's anchored by our flagship product, Avance Nerve Graft. We are focused on building solid clinical evidence to help surgeons in their decision-making, and we now have 10-plus years of demonstrated clinical consistency and meaningful outcomes that have yielded 157 peer-reviewed clinical publications featuring the AxoGen portfolio. Surgeons have adopted Avance Nerve Grafts in their treatment algorithm, and we have now over 50,000 Avance Nerve Grafts which have been implanted since launch. We're continuing the progression of our transition of Avance to a biological product, and through that, we've received an RMAT designation from the FDA, which heightens -- or highlights the clinical evidence strength and the significant unmet clinical need in the area of peripheral nerve treatment. And we do this through our market development strategy that I'll touch on it a little bit further that allows us to continue to demonstrate substantial long-term growth of the company. We just did our first quarter call just a week ago, where we demonstrated and reported on $31 million in revenue in the first quarter, 28% year-over-year growth, showing that we've continued even through the pandemic to show year-over-year growth in each year and a compound annual growth rate of greater than 33%. We also updated and provided and reiterated -- or provided guidance for the year. We now are seeing a path forward through what is, we think, more stabilizing COVID incidents and are comfortable to get full year revenue guidance that will be in the range of $133 million to $136 million. We've also given guidance on the gross margin that will remain above 80%. As I said, we focus entirely in the area of peripheral nerve, and we see this in predominantly 4 areas of targeting. We focus on traumatic injuries. So these are injuries that happen in everyday activity, where people get hurt, admit into the emergency department and then they'll refer to either a hand surgeon or a plastic surgeon for repair of their nerve injury. That's the largest segment that we're in, about $1.9 billion in total addressable market. We've added to that some adjacent areas that we think are also very impactful for patient care and to provide substantial opportunities for growth. We've added in oral and maxillofacial surgery. So these are injuries due to either a dental procedure that accidentally transected the nerve or a tumor of the jaw that caused -- resulted in a mandible reconstruction where the nerves are also cut. That's our oral maxillofacial segment at a total addressable market of about $300 million. The breast neurotization market is providing the opportunity for women who have a mastectomy, either because they have cancer or because prophylactically they're predisposed to have cancer. When they have a flap reconstruction to give them the opportunity to have not just the shape of breasts but also to feel normal, to have the opportunity to have sensation in their breasts. What patients tell us over and over is that when they hug their children, they want to be able to feel their children, and we want to provide women that opportunity. This is an important market and has the opportunity to be $250 million. And then our latest opportunity is in the surgical treatment of pain, where nerves that have healed badly can send aberrant signals back to the brain. The brain interprets those as chronic pain. It is possible for a surgeon to come in, identify the bad segment of the nerve, cut out that bad segment of the nerve that removes the pain signals. They now need to do something with that nerve to restore the continuity of the nerve. Just like you would in a traumatic injury, they're able to do that with our suite of products, and we see this as an interesting and a significant opportunity to impact patient care in this area of chronic pain. So if you think conceptually what do we do, we help surgeons connect nerves that are cut. We help them protect nerves that are damaged either through blunt trauma or compression injuries. And we help them terminate a nerve where they have a painful neuroma or that aberrant signal that is provided in the nerve. So you can remove that aberrant signal and terminate the nerve. And we do this with a suite of 5 surgical products that surgeons can use to really repair all of those types of injuries that they might come across. Now this is developing and creating a market, and we have a comprehensive market development strategy that is really built on these 5 pillars, and I'll run through them briefly. First, we're building awareness among both clinicians and patients about the impact of nerve damage. And we do this through social media, through clinical conferences and a patient ambassador program to help patients and clinicians understand the impact of nerve damage and the opportunity to provide outcomes for these patients. We have an emphasis on surgeon education. We've converted much of our national education programs to a virtual platform over the last year, which we found to be well received and impactful for surgeons. We provide both hands-on learning in terms of fellows and surgeons who are learning in their practice as well as this virtual platform for attending who may be further along in their practice. As I mentioned before, we have a strong commitment to developing clinical evidence, and we are sponsoring a variety of studies across both our extremity, breast and pain segments to be able to provide surgeons that clinical data to support their decision-making. That's resulted in, as I mentioned, 157 peer-reviewed clinical papers featuring the AxoGen portfolio. Of course, we need our sales team and sales execution to continue to help support surgeons as they think about their nerve repair algorithm and they transition their practice. Nerve repair is fairly diffused across the United States. There are as many as 5,100 centers that can do nerve repair here in the U.S. We work with a number of centers within that, but of course, we're only lightly penetrated just beginning to really convert this market. We've used for many years a measure we call an active account, an active account is an account that has ordered 6 times in the last 12 months. We've had, at our last earnings call, 919 active accounts. So that number continues to grow. However, we see an opportunity to really develop the market with what we call core accounts. And core accounts are accounts that have ordered, over the last year, at a higher order rate. They actually make up about 60% of our total revenue, and we had 274 core accounts in -- again, in the last earnings call. The financial aspects of surgery is also always important. And one of the things that I'd like to highlight is that we have seen some good progress over the last couple of years in creating a code specifically for processed nerve allograft and then looking at the structure of how reimbursement for nerve repair is done. So they've unbundled direct repair, which is where they use just sutures from where an implant is used. And that allows CMS to provide more reimbursement for where implants are used and take the reimbursement down from direct repair. That sets up a good structure such that it is now cost effective for an ambulatory surgery center or an outpatient center to be able to do the simpler nerve repairs at those alternate sites. Now a reminder, this is just CMS. Commercial payers typically follow this structure, and over time, they'll mirror this. So we expect over the next few years, we'll start to see more commercial payers starting to pick up the structure. But it is a good platform for us to continue to build so that the appropriate site of care, the lowest cost site of care, the most convenient site of care for patients can be used appropriate to the type of nerve injury that they may have. We also want to continue to expand our opportunities in nerve repair. We have obviously expanded into multiple types of procedures. We are also looking at international expansion, having now received approval in Germany and able to start to provide product into that market as well as other countries in Europe. We're in a strong position with our balance sheet and capital structure and able to execute our plans and complete both the capital investments that we're looking to do in building out our biologics processing center as well as continuing our operating of the company and all of the initiatives that we've talked about here with the cash and debt structure that we have. So again, I'd like to just close to say -- I'm pleased to say we're the preeminent nerve repair company. We feel that we've got an opportunity for long-term sustainable growth and able to build this very differentiated platform to help patients and surgeons with their nerve repair injuries. With that, I'd like to open up the floor. Are there any questions?

And I'd like to remind any shareholders that if you have a question, please enter it in the portal and include your name or institutional name so we can follow up if and as necessary. Okay. And we do have one question. It's a multipart question. But I'll read it to you, and you can kind of digest it and answer it as you see fit. Have the early adopters started to accelerate their purchases based on their private clinical studies? Are you making inroads into the early majority of surgeons? What needs to take place to accelerate that? Is there a financial disincentive for the hospitals or surgeons to not use the AxoGen products but instead continue to do autografts? If so, how do you counter that?

Great. It's a multipart question. The majority of our usage today is still from early adopters. So we -- you may be familiar with the market adoption model called crossing the chasm and that it's broken into stages of readiness of adoption of users. And so your innovators and early adopters are the surgeons who will most readily gravitate towards trying new technology. Middle adopters are looking to have certain characteristics of the market solve for them before they will fully adopt the technology. Middle adopters are looking for things like strong clinical evidence. In fact, very often, they'd like to see Level 1 evidence. They want to understand ease-of-use ordering patterns and how it's stocked in hospitals. They want to understand usability in their own hands. They're looking for things like guidelines from the surgical societies. So all of these are the things that we encompass and what we're looking at in our market development plans. I will say, at this point, I think we're still at predominantly an early adopter stage. Our growth is actually coming predominantly from increasing the usage and penetration of our existing users. That's where the primary growth is coming from for the company. But we are starting to see good signs of middle adopters who are trying the product. So while that's still early, it's not the material contributor to the revenue that we have today. You might ask when will we get there, and I think that's very hard to time. But if you look at, from a penetration standpoint, the theoretical model would say you're at about a 15% to 16% penetration of the total addressable market before you're moving into middle adopters. So as you can see, we're still pretty lightly penetrated. So we're still focused appropriately on those early adopters. The second question was around financial incentives. So let me -- that's one of the reasons I wanted to highlight the reimbursement. Let me break it into the different sites of care. From a hospital standpoint, so inpatient hospital, we compare financially very favorably to autograft. Autografts are where they take the nerve from the patient's own body and transplant it to the injury site. But autografts aren't free. Even though the graft comes from the patient, it adds 30 to 90 minutes of additional OR time and has additional cost and potential complications that would come from that second surgical procedure. And so as we've looked at it as we've worked with payers and with hospitals, we see that we provide a very favorable both economic scenario and obviously, better outcomes for the patient because they don't have that second surgery and they don't lose the function of the nerve that was provided for the autograft. Having said that, in the outpatient and ambulatory surgery center setting, not so much compared to autograft because they typically would not do those in that setting, but they might do direct repair. So that's where they try and pull the nerves together. Now that may not be ideal because it may not be, as I mentioned earlier, a tensionless repair because they're slugging the nerve ends together. But they still didn't have the economic room and the reimbursement to always do an implant. With the new structure from CMS, I think it gives it a very comfortable setup so that they -- that the appropriate site of care can be used, and it can still be economically feasible across each of those sites. You can do a simple nerve repair in an ambulatory surgery center, and it's economically feasible for all. Any other questions?

I think that's it. With no other questions, I think we can go to close, Karen.

Right. Thank you, Brad. Well, thank you, everyone, for attending our 2021 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 could not be more excited about what we're accomplishing, and we thank you for your continued support.

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