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

All right. Well, thanks to everyone who is here today to learn a little bit about Axogen. Just before I get started, I just want to draw everyone's attention to our forward-looking statements. You're familiar with these, and we will certainly be making forward-looking statements, but we may or may not be updating these on a regular basis. So a little bit about me. My name is Mike Dale. I've been, as you can tell by my gray hair around for a little while. And I've been more than 40 years in med tech and as a CEO since the early 2000s. And I've always made my decisions based upon whether or not the things I engage in provide a -- and present a credible clinical problem that justifies the time and the energies and all the resources that go into developing a company. And then secondly, whether or not that technology or in that particular problem, whether or not you have a technology that in a distinctive way, based upon benefit versus risk can solve that problem. When you do, while it sounds very simple, you have the opportunity to build a great business and solve great problems, and as such, provide a good vehicle for all stakeholders. I joined Axogen a little more than 9 months ago because I believe that in that case, Axogen represented a solution that was both a genuinely credible clinical problem that was in need of solutions. And then finally, that we had products that could solve those problems in a distinctive way. And so what I'd like to do today is spend my time with you explaining to you some of the high-level strategic assumptions underlying our recent strategic plan that we presented publicly. Our progress to that plan and our guidance for the near term with regards to the profile of the business for investors. So first of all, what is Axogen all about? So our business purpose is focused on making and establishing an expectation to treat nerve defects in every clinical situation. Today, that is not the case. So what are peripheral nerves, what functions do they serve? So peripheral nerve function is something we all take for granted until we can't. But in this particular GIF that you see right here, the mother, her motor function in terms of being able to push the bicycle, the child in terms of pedaling the bicycle, that's all completely dependent upon healthy functional nerve function. Feeling the sun in their faces is only possible because of the peripheral nerves within their face, functioning normally, allowing them to feel changes in temperature. So virtually everything that we do every day from swallowing, from tasting and all elements of motor function are dependent upon healthy peripheral nerve function. And so this is indeed something from a health standpoint that's important to all of us. And Axogen is unique in that we are literally the leaders in developing an entire focus area on providing the tools and the products that are necessary to ameliorate these problems when they present either through trauma or because of disease. And I'd like to tell you a little bit more about that. So how big is this opportunity? How often do these problems occur. It's very large as a market opportunities go based upon incidence rate and both the trauma as well as presentation of disease. In the United States alone, we estimate that the market opportunity is more than $5 billion, and it's equally as large outside the United States. Although at present, more than 95% of our entire revenue and activities are domestically focused towards the end of this year and beginning into 2006. And thereafter, we will begin to develop in more earnest an international presence to bring these same products and solutions. One of the key things here is that these markets, while we've been active in these markets doing work are still very underpenetrated in terms of both awareness and actual clinical activity and therein lies the opportunity going forward, which we'll talk about. First of all, what are common nerve injuries? As you might guess, trauma, cuts, lacerations. These situations are 1 of the things that we probably think about if you were to think about a potential nerve injury because of the damage that can happen to an extremity or other parts of the body, but there's also iatrogenic injuries. So other surgical procedures, anytime you're cutting through the skin, you're cutting peripheral nerves. And depending upon that situation, you leave that patient with a deficit. And there's also oncological presentations and other peripheral related diseases, such as diabetes, for example. All of these things can ultimately affect nerve function to either direct transection, stretching, contusions, pressures and then also amputation, where a limb is removed. But unless that nerve is capped in a proper way that patient can develop a neuroma, which can lead to chronic continuous pain, which can range in terms of problem from 1 of simply bothersome to absolute debilitation. So lots of opportunities to do better for patients based upon our products and portfolio, and we'll talk about those. So what are those solutions? In green is Avance. Avance is the foundation that the Axogen home is built around. What is Avance? Avance is what's referred to as an allograft. This is basically donated human tissue that has been processed in such a way that makes it safe for reimplantation without immunological response. However, Avance is unique as allografts go in so far it is still bioactive. So we retain a substance called laminin, which is a protein which reacts as a signal to guide the axonal regeneration. So the nerve itself is a physical scaffold. It's a human nerve. So the actual structure and containment that you anastomose the allograft to the patient's nerve ending is similar. We're able to match these in terms of size and length. But what makes it particularly special is not that just we have the physical scaffold, but we had the laminin to help guide that axonal regeneration and therein lies the foundation for the home. That's a graft we call Avance. Complementing that is what we have and refer to as the algorithm. So when you make these connections of an allograft to another nerve or even in the absence of using Avance. Maybe in this transection, we have a simple nerve reconnection, you need to complement that connection so that it is sort of steady. So it can allow for that regrowth and regeneration. So we use things like connectors. Sometimes in procedures, you have a lot going on. There's metal plates that have been put in as part of the traumatic surgical intervention. And the nerves might be laying over these, and you don't want those to be abraded or irritated. And so we use protection wraps to help avoid that. So there's lots of different things that need to go in to ensure that you get the best chance for nerve regeneration and Axogen leads the way in developing the solutions in both surgical technique as well as the products necessary to support that kind of outcome. So why us? Why are we positioned here to win to use that common phrase that anyone like myself would stand up, so what's my right to win? We've been at this for a while. And while the market is underpenetrated, we've been working for many years to develop the techniques and the science to underlie our rationale, including the clinical studies. Our RECON study, which is our principal Level 1 evidence study, we just published about 2 years ago. And we have been now organizing the company to go forward and to fully develop these opportunities we've worked so many years on. There's more than 100,000 patients that have been treated with our product. Our benefit to risk profile, which is what every single solitary health med tech product is ultimately evaluated upon is profoundly positive. We introduced essentially no risk but offer the potential for great benefit. As a salesman, I can tell you, that's something you can't always say to your customer, and we can literally say that. And to that end, we're well positioned to go forward. We have a foundation to build upon, and we are genuinely appreciated as a trusted partner, committed to good science. So the priorities that we have organized ourselves around with the delivery and presentation publicly in March of our new strategic plan are these 4 clinical application areas. They're all based upon advantage. Trauma, extremities is our first. Why is that still a priority? That's the company was built around. We have our largest commercial footprint and our largest scientific database to build upon and that remains a priority for our business. The other segments that are listed here are all adjacencies and/or new clinical pathways where the benefit to risk proposition and the logistics associated with identifying the customers and the service providers are favorable to Axogen. And while there are many others, these represent the priorities that we have selected for now to develop going forward. So let's talk a little bit about those extremities. Why are we here? Very large incidence rate on an annual basis in the United States alone, not to mention around the world. Where trauma is incurred and the opportunity to restore that patient's function along with treating the other elements, broken bones, vascular injuries and so on, create an opportunity for nerve repair. We have the largest body of physicians that are trained. We are partners in training all new fellows coming out of training in all the medical institutions in the United States. And the penetration level still remains very modest. And so as such, it represents a marketplace that we still have opportunity to create -- to add value. The business is presently growing at double digits, and we think this can continue over the course of the strategic plan period. Oral, maxillofacial and head and neck. This is a very -- a much smaller universe of actual physician practitioners and service providers. These are very -- technically very complex procedures involving head and neck. Head and neck, as you might guess, is proliferated with a huge peripheral nerve network. And so every time these procedures are done, there's damage to peripheral nerves. There is an opportunity for us based upon Avance in particular as well as our other products to help complement these procedures as they treat these patients in these types of situations where we can restore their quality of life and reduce the morbidity associated with these procedures. It's 1 of our fastest-growing new areas of development. We're very excited about the future here. And we have thus made this a priority for development. Our next area moves into oncological space. This is breast resensation. It's a procedure and a technique that we pioneered and developed. We have been working on this for several years and have now decided to double the current sales group, which is a very small team of 12 to more than 24 and we'll probably continue to be expanding this group all into the -- over the strategic plan period. Why is this a problem? Well, breast cancer is a continually growing presenting incident rate in the United States. While a lot of people don't realize is while aesthetic reconstruction has advanced and come a long way post mastectomy that when you do these procedures and remove this tissue, the woman's chest is essentially numb. There is no feeling here. And so as you can imagine, from a quality of life standpoint, that's a difficult element to grasp and to appreciate. A lot of women are even unaware that that's 1 of the side effects that come from this. And so as part of the Women's Health Care Reconstruction Act, 1 of the expectations is that the patient and the family and the physician have the right to discuss and to decide what their reconstruction journey should be for them. So given that we provide a nerve allograft that allows for regeneration and construction. What we are doing is we're pioneering the techniques to teach people how to remove the breast tissue by leaving the opportunity to regraft and then we teach people how to do the regrafting. And so we train the surgeon pairs, both on the reconstructive side as well as the oncological side, how to do these procedures. It's a very rewarding marketplace. The feedback that you get as you might imagine, when you're able to give people some level of sensation restoration is profoundly rewarding and we expect this market to continue to grow in high double digits for years to come. We're very small in terms of penetration levels and sites developed, but therein lies the reason for the investments in this space. Prostate. Similar situation, why are we here? While prostate -- prostatectomy by robot has come a long way, and it's the primary means by which most of these cancers are intervened with, the dysfunction that accompanies these procedures still remains very high. There's almost universal recognition. The problem has not been solved. And while we try to spare the nerves, we're not oftentimes successful. What's the opportunity? Very simply. A nerve is a nerve, is a nerve is you can regraft once you remove that -- those tissues, the Avance allograft, you have the opportunity for that allograft to regenerate and therefore, mitigating the dysfunction that accompanies these types of procedures. This is our newest application area that we're working on in terms of developing the protocols that are necessary to train for this, but we have high expectations for this over the next 4 years as we continue that process. So what this represents, therefore, our strategic plan in terms of the areas of basic focus. There's nothing esoteric about this. These are all focused on areas of market development that come along with any novelty. The reason why we have guided over the course of our strategic plan period, 15% to 20% is based upon the present growth even before we initiate these activities. But as we expand the commercial footprint, as we continue to develop our Level 1 evidence, as we focus on societal associations and development for creating care guidelines. And as we continue to invest in innovation, we believe that these particular opportunities are all imminently developable, and we'll further enhance both the purpose of the business; and then finally, Axogen as an investment vehicle. So 1 of the elements, given that continuing to invest in new products is 1 of our objectives is that Axogen special because of innovation, that's Avance. But Avance is just 1 opportunity among many that we believe still exists. So we will continue to invest both on the product side, on enhancing regeneration through intrinsic improvements in Avance in the future and/or complementary products and form factor that would further enhance regeneration. Those projects are underway. We're funding them as we speak. Next, easy coaptation. So we can talk all about this and all what's possible and it's all true. But technically, these are not easy procedures. And so the more we can make these procedures simple, the more -- and the greater adoption that can transpire and so we're working on that. And then finally, with regards to protection, there's a lot of complementary procedures that are going on. When you do these anastomosis, you want to protect that work that you've just done. And so our wraps and our protection devices are essential for that. Next is evidence. So claims are great. Evidence to support those claims is even better. And these are projects that typically take 3 to 5 years to complete and get to publication or we are committed strategically just as I have throughout my entire career of making sure that we complement and invest accordingly in developing the evidence in the things that we believe in. And these projects that are underway today are just part of them, but we have a number of level 1 evidence efforts that are planned that will commence as soon as we complete our transition to a biological license approved product which is expected in September. I'd like to do now is talk a little bit about the finances. Why do we believe some of these things are possible. What's different today than maybe 3 or 4 years ago. And here's part of the reason. So drawing your attention to accelerating growth. This business has continued to enjoy good growth, what's basic reasons. We have a good focus on science, partnership, and these are highly underpenetrated areas. And this is worth talking about. But that investment has also allowed us to reach a classic point of equilibrium and then scale and now leverage such that we are enjoying the benefits of that in terms of now contributing to positive cash flow. In addition, 1 of the key things that has consumed a great deal of time and cash in recent years has been the development of a new manufacturing facility to support the biological license approval. Those are capital expenditures, huge cash consumers, has been completed. And so those monies are now available for other parts of the business. And as you can see in 2024, we moved to positive cash flow and we predict and expect that will absolutely continue into the future and allow us to fund our entire strategic plan. So therefore, our guidance will be provided to at 15% to 20% over the next 4 to 5 years. We continue to expect gross margins to incrementally improve over that period of time once we have 1 quality system that we can work upon as opposed to 2, which is our current environment. And then finally, the ability to self-fund all of these activities in-house. A little bit about the growth. One of the questions we constantly get is, as you might guess, you guys can grow, you sure you can grow. Well, you can see what we've grown in 2022 to 2024. We believe there's no reason this business can't support that for the reasons I've already described dramatic underpenetration. We're expanding the commercial teams. We're completely committed to classic market development exercises and then finally, we're adding new clinical application areas for development, which will further leverage this opportunity. Our financial guidance for the year was 15% to 17%. We are on track as of Q1. Our gross margin, we've guided based upon the transition to the BLA to be a little bit lower this year and noisy, 73% to 75%. It has certainly started out that way. We did have 1 miss in Q1. These are episodic, and we believe transitory. We still maintain our gross margin guidance for the year and that will ultimately exit the year at around 75%. In operational cash flow, we consumed $11 million in Q1. This is fully expected and consistent with prior history, why this is national sales meetings and payout of annual bonuses to employees based upon the performance of the company. But going forward, each quarter, we will be net cash flow positive. Our measures of success, we published secondary strategic plans, so that people can kind of watch and ask questions. As we report quarter-to-quarter, I'm not going to go through all the elements of the slide, but these are available publicly online on the website along with the rest of the strategic plan in detail. The takeaway that I would ask investors to note is that we are on track. The things that we said that we do, we're doing. The business is growing in double digits across the entire portfolio and we expect that to continue. Our high potential accounts were due to the primary target customers that we have decided to develop and concentrate our resources upon, has improved productivity and we have more of them than we have in the past, and we've continued to add to those professional education, which is key. It's all about training people to do the things that we believe need to be done. Those are on track. We're -- and that's an expansion of our prior year's activities. And then finally, from a market development standpoint, we've had just 8 new publications added to the clinical compendium just this quarter alone. And the takeaway from all of this is that the benefit risk proposition is broad, it's transparent both in the control as well as contemporary publication standpoint and remains very positive. And with that, thank you for your time. I look forward to those who are interested to continue to watch us if you have any questions. We look forward to answering those in the future. I'd also like to introduce Lindsey Hartley. Lindsey has recently joined the team and taken on the position of Chief Financial Officer for Axogen. So thank you again.

How does this -- what are other treatments for nerve damage, like where does peripheral nerve stimulation or technologies like that fit into the continuum of treatment? Like maybe sort of can you contextualize where nerve repair fits into like kind of the patient journey or the other alternative modalities that we see under development now?

Okay. So in the big picture, and I'll speak very generally at a high level. So peripheral nerve care ranges from the following. One is no recognition that it's a requirement or expectation, which means literally it's there, it's obvious, but there is no treatment. So you cannot find a clinical evidence that I need to do this, except an oral maxillofacial and ironically doesn't get done. So that's the one extreme and that's actually the preponderance of situations. Why does this happen? Patient comes in for trauma. You are dealing with the triage of the trauma. You've got broken bones, you've got vessels, you've got bleeding. You deal with all of that and people say "Whoa, I saved your life. You are good." Well, I can't feel my fingers anymore and they are just most of the time, just not even aware that there is opportunity or solution and they don't do that kind of work. So they would need to call a hand surgeon or a neurosurgeon, if one exists in the institution and bring him in. So that's the current state of immaturity in terms of nerve care and expectation of care. So that's one extreme. The other extreme is you have some of the original work that was done 30 years ago, utilizing autografts. What is an autograft? You typically go to the back of the leg. They remove, what's called a sural nerve, which is a flat different kind of nerve, it doesn't necessarily match very well, but it's a place where people have to determine, well, if I have to create a deficit somewhere else, I will create it here. It's not going to destroy your life. You are not going to like it, but it's better than no chance at all and they would take those nerves and use those. It is generally declining as a solution, if it is used at all, but that's the other option, that will be used is occasionally allografts. But the simple way to say is the biggest challenge or barrier to nerve care is awareness that these things should be treated and can be treated and then developing the techniques to do that. Now what else is going on in nerve care? There's very little going on in terms of developing products similar to Avance. There's a couple of projects I've heard about in Asia, but there's nothing of any consequence, nothing anywhere near term. There is a lot of interest in trying to figure out how to promote innate nerve regeneration. Stimulation is one of them. A lot of people are very excited about what might be possible using stimulation techniques. I would characterize those as interesting, but very early in terms of establishing fundamental proofs of efficacy. Most of the stimulation is used on the diagnostic side to identify viable areas of nerve for re-coaptation. And then there's a fair amount of activity on the peripheral and the algorithm side where people trying to figure out easier ways to connect 2 nerves together to include even the allograft. But actual solutions to restore end-to-end anastomosis of nerves like Avance, we're the only game in town and should probably be so for the next decade at the very least.

And how procedure types. You mentioned before the presentation, being connected to microsurgery previously, I think. Those procedures took like 8 hours under a microscope, I think, they are pretty niche applications, they need time, they need training, learning curve, et cetera. What are the procedure time and learning curve here like there?

If you're using an allograft, those procedure times are fortunately not that long. So we're typically talking anywhere from 30 minutes to 1 hour, 1.5 hours would be kind of the outer bounds. The really complex stuff is typically oral maxillofacial and brachial plexus, some of these children procedures, those can be pretty long procedures. But the 8-hour type procedure that's outside the norm. Did I answer all your questions? Any other questions?

I guess I'll ask one more on the sub kind of the backup to, I guess, the kind of the strategic plan. What are some of the key like medical meetings or other venues that you look to present some of this additional data that you're collecting? And like what are any kind of key clinical or product-related milestones over the next 6 to 12 months in the commercial launching?

Sure. The next big meeting is in Finland in a couple of weeks. It's called [ FISH ], but there's 4 major societies on the microsurgical side for extremities. And we attend all of those. The most recent presentation of note that was published and highly regarded was the zone of injury work. And zone of injury was novel because it provided the first insights for a neurosurgeon to understand that just connecting 2 things together, even if you surgically, physically do that well is insufficient. And the reason why those oftentimes fail is you have not identified properly what is still viable. And so it's not always visually obvious and there it's a big clinical problem. That was basic research done and led by Axogen, ultimately in cooperation with other researchers, and that was published, and that was a really big deal. So it's elucidated for everybody like, okay, it's not just enough, my surgical thing. I need to make sure that my surgical technique is applied to viable nerve area. And so I would say that's probably the most significant recent publications by us. But like I said, we're getting to the point now where there's enough activity where like this last quarter, there were 8 different publications using Axogen products for nerve injury. The big ones will be 2006, 2007 (sic) [ 2026, 2027 ]. The next big ones and those will be things workaround breast -- recent -- more workaround breast resensation. The kicks off of the pivotal studies against autograft and then finally the pilot clinical work for prostate. Maybe the one thing, I didn't touch upon, I presume everyone gets, is that we talked about moving to a biological license approval. That is a formative milestone for the company. We have spent millions upon millions on that effort. Essentially what's underway is the FDA has asked many years ago that we move from the classical device quality system approval on regulatory construct to the drug construct. Basically a biological license approval is what it is referred to. This is an effort that has consumed probably $150 million over a decade. That's off the top of my head, but that's at least close and a tremendous amount of time. Once that's complete, Axogen will be the first of its kind in that category. It will be the precedent and the comparator. This will also be relevant to payers and covered. We have -- we've made great progress, about 64% of covered lives today, but we still have gaps. This will allow us to move forward from a reference standpoint, making it easier to navigate the final barriers there. It will also provide a reference for competent authorities outside the United States, when we go to develop, so that we have a similar regulatory framework, when we go do our work there. So it's a really big deal for us. Most of our customers actually will be invisible to them, but it won't be invisible to payers and to regulators. And it is also important that all the new clinical work we want to do, will have to build upon this new status, not the device status. So it's also critical that we make that final transition in order to go forward. Okay, thanks everybody for your time, appreciate it.