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

Thank you all for joining us today. My name is Caroline Borowski and I'm a team member here at the JPMorgan Healthcare Group. It is my pleasure to introduce Karen Zaderej, the Chairman, CEO and President of AxoGen. And here, we also have Peter Mariani, the Executive Vice President and CFO; as well as Ed Joyce, Director of IR.

Thank you, and thank you for inviting me to speak today. I'm here to tell you a little bit about AxoGen. So AxoGen is a company that's entirely focused in the area of peripheral nerve repair. And we find peripheral nerves are impacted in many ways across many stages of life, and we want to be able to provide solutions to patients to have a better quality of life by fixing those issues. So a lot of people don't really think about peripheral nerves or know what they do. So we'd like to do the analogy that nerves are like the wires of your body. They carry signals to allow you to have muscle function, to know to move your muscles or to give you feedback from the environment. Things like sensation, vibration, temperature, those are all things that are carried on signals through your peripheral nerves. And just like a wire, if that nerve is cut, it no longer carries the signal. So you lose the function of that nerve. Nerves can also be affected in other ways that can be affected by compression. So pressure on a nerve alters the signal conduction. And you can end up with things like loss of strength or pain as a result of that. And you're probably familiar with that with carpal tunnel syndrome. So carpal tunnel syndrome is an example where there's compression on a nerve and that ends up with weakness in these fingers and thumb. But that concept is true of any nerve in the body. So pressure is something that's not friendly to nerves and a problem that needs to be solved for patients. And then finally, nerves at times are cut in surgery where they're not repaired and they're left like a live wire in the body. And in this case, the nerve will try to form some function, nerve fibers will spring out and look for a distal target, not finding that they'll get tangled up in a scar that's called a neuroma. And that scar can send aberrant signals back to the brand that can cause pain. So you're, again, familiar with this in things like an amputation with phantom limb pain. It is that neuroma that is sending the signals back to an MPT that says their foot hurts, but they don't have a foot. Well, that's because the nerve that used to go to the foot is now sending these aberrant signals. And that neuroma can be managed by removing the neuroma that removes the signals that are causing the pain and then it needs to be managed, that nerve itself needs to be managed in some way. So it doesn't form a neuroma again. So that leads to the solutions that AxoGen has built. So AxoGen has a suite of products, really working with surgeons to solve all of those issues. So when a nerve is cut, the nerve needs to be brought back together in a surgical procedure and allow regeneration of the nerve all the way to the distal target. That may have a difference for the surgeon depending on whether there's a gap in the nerve or not. So one thing that's different about nerves and other types of tissue is that they don't heal well under tension. So if there's a gap in the segment of the nerve, the surgeon cannot just bring the 2 nerve ends together, they've got to do something to bridge the gap. And that's what our flagship product, Avance Nerve Graft provides is a way that surgeons can bridge that gap without creating tension on the nerve to allow restoration of function. There are other times when nerves are cut and it's a sharp laceration. There's no loss of any segment of the nerve. This might be a traumatic injury, like a kitchen knife injury, when you're working in the kitchen sharp transection. In that case, you can bring the nerves together with our AxoGuard Nerve Connector. So AxoGuard Nerve Connector is a way to approximate the 2 nerve ends in a tensionless way, seal up the coaptation and allow healing to occur across that direct transection. As I mentioned, compression can also be an issue and our AxoGuard Nerve Protector allows a tunnel to be formed around the nerve with the nerve freely gliding within that tunnel. It keeps the surrounding tissue up and off of the nerve and helps to reduce that pressure on the nerve that can cause that compression issues. And finally, our AxoGuard Nerve Cap, our newest product is for managing those neuromas at the end of a nerve when it can't be repaired and preventing that symptomatic or painful neuroma. And it is the suite of solutions that we work with surgeons across a variety of specialties to help them solve their patients' needs with peripheral nerve injuries. So as I mentioned, nerves are injured in lots of ways. We've actually narrowed our focus to a select set of areas that we focus on today, but I'll show you some of the areas of opportunity for expansion in the future. Today, we focus on traumatic injuries. So these are injuries that present into the emergency department and then I'll refer to the operating room to be repaired by either a hand surgeon or a plastic surgeon. This is our largest opportunity and has been a place where nerves have historically been repaired. The gold standard that surgeons have used have been an autograph. So taking a nerve from somewhere else in the patient's body and moving it to repair that injured site. But in this case, again, we're offering the opportunity to not have the patient have a deficit somewhere else in the body, but to be able to be repaired with an off-the-shelf solution that gives them an equivalent outcome. We added into this market area of trauma, a couple of areas that are based in oncology. So conceptually, if you think about any time that you remove a tumor or remove tissue, there are nerves that may be transected. And in that reconstruction, we think it gives the best opportunity for quality of life to repair those nerves as a part of the reconstruction. An example of this is in the oral and maxillofacial market. So these are the nerves that are right here in the jaw. You're familiar with these nerves when you go to the dentist and they non-your mouth. Those are the nerves that they numb up. Unfortunately, if that nerve is transected, that becomes a permanent condition. So obviously, it's difficult to chew, it's difficult to talk. It becomes really an uncomfortable situation as you present yourself to the world where you can't feel a part of your face. We are able to restore that function by repairing the nerve in either a tumor reconstruction or when these nerves are accidentally injured in dental procedures. We added into that breast reconstruction. So traditionally, when women have a reconstruction following a mastectomy. They have not had the nerves repaired. So the woman may look normal with that reconstruction, but she does not feel normal. She can't feel her children when she hugs them. She might not feel her clothing or water running on her body, not the skin sensation. Those are sensations that allow you to feel normal again following this episode of cancer. And so we've developed the ReSensation technique to help women be restored back to more normalcy with sensation as a part of their reconstruction. And finally, while it's an area that's emerging, we think the surgical treatment of pain is a substantially underdiagnosed area that these neuromas form frequently when surgery happens, and nerves are left unended or unmanaged. And so by managing those neuromas and removing the painful stimulant and then repairing the nerve, we have the opportunity to keep people out of pain management, off of medications to manage that pain and actually solve the problem rather than managing the symptoms. So we're happy to see that we're returning to some strong growth. We had a year where we had the beginning of the year start out with some challenges with staffing and hospitals being very disruptive to getting ORs consistently operating emergency departments to be consistently staffed. That has really turned the corner here in the middle of the year, allowing us to turn to more consistency in our growth as well. We completed the fourth quarter with 16% growth. For the year, 12% growth and are seeing some continued improvement as we go through -- go forward as hospitals start to manage these staffing challenges and have a much, much more predictable staffing that allows procedures to happen in a consistent way. So everything we're doing is really about a market development strategy. We're transferring surgical techniques that surgeons have been trained on many years like the autograft or raising awareness where nerves weren't repaired at all like in the breast neurotization. And we do this through what we call these 5 pillars of our market development strategy. The first is really built around building awareness. We see key stakeholders in many areas. It's -- the surgeons, of course, who need to understand that there's a new set of technologies and techniques that they can use. But we also see patients as important drivers here as they can be activated as advocates for their own care. This is particularly important in areas like the breast neurotization area where women need to decide is this important to them as a part of their reconstruction. And if it is, we want them to go to a surgeon who's trained on the ReSensation technique. We've been very active in social media, working with the breast advocacy groups to raise awareness about the opportunity for sensation and see that as a key driver to growth in this area. We also, of course, want to continue to raise awareness also with payers and hospitals in general as seeing this as a big opportunity for them to improve the overall care for their constituents. We work with surgeons significantly with education. These are techniques that we need to continue to teach and advance the care in nerve repair. So we've developed a series of programs that are quite advanced in training both fellows. And in fact, 75% of the fellows and are sent to the AxoGen program for peripheral nerve repair as their education and nerve repair. We work with attendings and others at different levels. So we have specialty programs like ReSensation and advanced programs for those surgeons who want to really specialize in nerve repair as they continue to grow their practice. And of course, all of that education is supported with clinical data. We have 7 sponsored studies that we are currently in some stage ups. We're actually winding down. I'll talk about RECON because that when we've done our top line data readout. But we continue to see data as an important part of changing this market. And today, there are 215 peer-reviewed publications on clinical results using the AxoGen portfolio of products, both our sponsored studies as well as many investigator-initiated studies. And of course, all this happens in the marketplace with a field sales team, and we've built a strong commercial engine with 115 direct reps here in the United States, supplemented with some independent agencies so that we have a good reach to trauma centers across the United States. We're building our business focused initially on building an active account, an active account is an account that has at least 6 orders in the last 12 months. That's our definition of it. Essentially, it means it's a place that we can start converting the business. It's a place now that has gone typically through the value analysis committee. There's at least one surgeon who started to change their algorithm, and we hope to build that active account then into a core account. A core account has $100,000 in trailing revenue. Typically, this is one reasonably well converted surgeon at that account. So we certainly have a lot of room to continue to grow core accounts, and that's our highest priority, it's going deeper in our existing accounts. That's where the fastest revenue and the most productive sales effectiveness comes from is now expanding this footprint that we've built with over 300 core accounts that we can go deeper into. And I mentioned there's opportunities to continue to expand. As I said, nerves are all over the body and there are many ways that they're injured and impacted. And so we see a long opportunity to continue to develop new techniques and new areas of expanding peripheral nerve repair over time that will continue to improve and impact patient care. So RECON was our pivotal study in changing Avance Nerve Graft from a human tissue regulatory classification to a biologic. And this was a many-year study that we've worked on, randomized multicenter prospective study comparing Avance Nerve Graft to conduits in digital nerve repairs. So these are the fingers, the nerves that give you sensation in the fingers. And I'm happy to say that we met the top line -- or we met the primary endpoint of the study with our top line data readout that we did in the middle of this past year. We also had some secondary endpoints that I think are very impactful for surgeons as they look at the impact and the data quality here. We demonstrated that Avance shows superiority compared to conduits as the gaps get longer in the fingers. That's something that we've seen in other data sources as well that we continue to show a superiority by providing both the micro architecture and structure of a native nerve while providing the biochemical cues that help to guide regeneration as compared to a conduit, which is hollow and not providing those that support system. We also showed that -- and this was a little bit of a surprise in this study, that Avance demonstrated faster recovery as compared to conduits that it generated up to 3 months earlier return to normal sensation than what we see in conduits. And so it's a pretty meaningful time difference for patients to go back to, again, a normal level of function. And finally, from a safety standpoint, we noted that there were lower incidences of persistent pain. Again, those would be neuromas that are formed when Avance is used as compared to conduits. So we think all of these are meaningful endpoints that will help surgeons in their adoption process. As we look ahead to 2023, we have several big milestones that we're looking forward to hitting. One is the completion of our AxoGen processing center. So this is a state-of-the-art biologics processing center that we've been building in Dayton, Ohio. The construction is now complete. We're in the final stages of validating it as a tissue and then we'll transfer our manufacturing here in the first part of the year. We will run 2 facilities for a period of time, just belt and suspenders to be conservative in the transition, but we should be transitioned over by the mid part of the year fully into the APC center. We'll then transfer -- excuse me, we'll then do a validation as a biologic. And this is the final component for our completion of our BLA application, which we will plan to submit by the end of the year, this year. So a big milestone for us, one that we've been working on for a long time. So I did want to touch on, well, what's the benefit of a BLA? Why are we making this transition happen. And it really is, first of all, based on the science of Avance that we provide biological cues to the regenerative nerve fibers that helps to aid in the recovery and return to normal sensation. And also from a business standpoint, provides significant barriers to entry for others who might want to follow us in this space. A BLA first of all, is a higher regulatory challenge. It takes a higher level of data. Typically, it's going to require a Phase I, Phase II, Phase III clinical study, which, in our estimate, if somebody was to run at a dead run on this, it would probably be 8 years of clinical work. It actually took us a little longer than that to get our studies done. But it gives us a moat for somebody trying to follow us as a biologic. There's another pathway that companies might choose to do, and that's as a biosimilar. So those of you who are not familiar with that, that's the generics of biologics. But in the regulations for biosimilars, there's a 12-year exclusivity for the first mover called the reference product into a category, and we believe, of course, will be the reference product in process nerve allograft as we're the only one available in the marketplace. So ultimately, this helps to create a moat as we're developing these markets, we want to continue to raise awareness, increase essentially the size of the pie here and allows us to do that without having a lot of other competitors that we're ending up needing to compete against. One other piece of data that's recently come out actually just this past week, we announced is a meta analysis looking at nerve repair compared to autograft. Especially as we move from these early adopters in our core accounts to middle adopters or -- middle adopter surgeons, surgeons who may not be as interested in the research and interested in speaking on the podium interested in doing their own research. What they really want to understand is that they're doing the right thing for their patients. And so we've created here a data set looking at 35 publications that shows a comparison of our process nerve allograft, Avance Nerve Graft as compared to autograft. Again, that's taking a nerve out of the patient's body and transplanting it. And what we've shown is that allograft and autograft are statistically equivalent in all types of repairs. So sensory nerves, both short and long gap, motor nerves, both short and long gap. And we do not provide -- and we provide that without the patient having to create a deficit and lose function in one part of their body to fix something somewhere else. That's what an autograph always means is that you lose something to fix something. And with our process nerve allograft, you can get equivalent results without having to lose function. One of the other questions that we often get from surgeons is, but wait is an autograph free? I take it straight out of the patient. So is that just a free tissue that I can use versus having to buy a process nerve allograft. And in addition, in this study, we did a Medicare claims analysis showing that an allograft and an autograft procedure in both an inpatient and an outpatient setting are approximately the same in cost. An autograft takes 30 to 90 minutes of additional time, there are additional supplies, its own separate procedure while not being reimbursed separately. That's part of the repair. And so it isn't free. In fact, it's about the same as what our -- using our product in one of those repairs would be. In addition, autograft has additional risk that creates a risk for the hospital in preventable errors, things like a surgical site infection. And we can say definitively that you will not get a surgical site infection and a leg to take out a donated nerve if you don't cut the lag. And so we reduced the risk profile for the hospitals for those preventable errors. So it's a good economic decision as well as a good clinical decision for those hospitals. We've updated our guidance for this year to be $138.5 million in revenue. We continue to give our guidance that the gross margin is expected to remain above 80%. And ultimately, we look at AxoGen as the preeminent nerve repair company. If we have a foundation that we've built now for long-term sustainable growth. We have over 75,000 advanced nerve grafts that have been implanted to date and significant barriers to entry with all of the clinical data, regulatory work that we've done and have the experienced team that we need to be able to execute and continue to build this market and impact both patient care and the creation of the peripheral nerve space. So with that, I'd like to open up for questions.

So maybe we can touch a little bit more on the performance in 2022 and growth prospects in the long term. Can you maybe talk a little bit more about the major milestones that you're expecting in 2023?

Sure. Well, as I mentioned, 2023 is a really big year for us. We're excited about getting this new APC manufacturing facility up and have our full processing transferred there. Of course, it will be inspected by the FDA as a part of our BLA submission. We expect that actually in early 2024. We also will be submitting our BLA in the end of this coming year. To give you an idea, we have worked on this BLA since 2010. And so this has been a milestone. It's been a long time in coming. There's a tremendous amount of work that's gone into it, and I'm very proud of our team for the rigor of the science that we've put in place in completing this BLA. So it's exciting to get that communicated and in with the FDA.

And I guess just touching upon that a little bit more. Your RECON results were announced in 2022. Do you mind maybe talking a little bit more in detail. You just mentioned a little bit more about the BLA and like how excited you are about it.

Sure. So the RECON results are, I think, impactful for 2 things. One, of course, is they're a big contributor to the BLA. Your pivotal study is always a critical part of that submission process. But it's also impactful to surgeons. At the end of the day, we have a really unique situation in that we have the same product with the same claim that is commercially available today as a tissue product, and we're transitioning it to be a biologic. And so we're really focused on changing surgeons' practices and the way they think about nerve repair. And so RECON is an important part of that, especially for middle adopters. Again, we've worked predominantly up to this point with early adopters and those innovators in nerve repair. But as we move into our core accounts and go deeper into those core accounts, middle adopters are really looking for the validation that they can do the right thing for their patients. And we believe an FDA-regulated trial of this rigor of data is very impactful for the decision-making of those middle adopters. So we continue to be very optimistic about our growth, especially as we see hospitals getting more predictable and stable with staffing.

I think there is a question or there. Do you mind using a microphone?

There's a mic if you want to talk into the mic.

Yes. It's just wanting to know what the capital cost of that new manufacturing facility was.

Yes. The capital cost of that new -- great. It's including the interest that we included in it will be at the end of about $65 million. We've completed most of the capital expenses. We'll have a $3 million or $4 million here that will trail into Q1. But we're basically through the capital expenditures there. And we also, in our early released our cash flow for -- or an estimate of our cash position. So we had about 5.3 capital in the building in Q4 as we were finishing up construction, but we were $900,000 positive in operating expense.

That $65 million is divided over many quarters.

I'm sorry, it's hard to hear you.

Was it weighted towards any quarter, that $65 million?