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

Good morning, everyone. Welcome, and thank you for joining us. My name is [indiscernible] I'm an associate in the health care group at JPMorgan. And today, I have the pleasure of introducing the Axogen team. Joining us today is President and CEO, Mike Dale, and we also have CFO, Lindsey Hartley with us. Just a quick reminder on format. This will be a 20-minute presentation followed by 20 minutes of Q&A. Before we start, just be advised that there will be a handheld mic being passed around during Q&A. Thank you, and I'll pass it over to Mike.

Well, thank you. genuinely, thank you to JPMorgan for the opportunity to share Axogen's story. I have the privilege of leading this business now for a little over 1.5 years, and I'll look forward to sharing with each of you what we believe to be the opportunity and the purposes behind Axogen and what that means to all stakeholders. It's always important, of course, to start with what is the purpose of your business. And with respect to Axogen, not unlike a lot of med tech companies, our work is to try to restore someone's health and improve their quality of life. But specifically in terms of how we do that, our work is focused on restoring peripheral nerve function. This image that you're seeing on the screen right now is a perfect representation of the things that we take for granted every day. This mother and her child riding this bike in the late afternoon, you have the sun, you have wind; all of that is something that they're going to sense by virtue of their peripheral nerve function. The ability to pedal this bike, the ability to hold on to these handle bars and to push the bike from behind, that's all dependent upon motor function. These are capacities that we all take for granted until through some unfortunate situation, whether it be through trauma or whether it be through some other disease or incident, we lose. And to that end, our work at Axogen is about trying to restore and making peripheral nerve function restoration and expectation for care in the future. The opportunities that we focus on that are represented as a product of our strategic planning process are these 4 clinical care pathways. They are extremely large and while the company is growing in double digits, still represent a significant under-treatment. And these opportunities are comprised of both emergent procedures as well as elective procedures. Our largest business is that of extremities. It's part of our original history, focused on treating trauma as it presents. And then the care pathways that you see with respect to breast reconstruction, oral maxillofacial and prostate represent elective procedures secondary to the need to intervene to treat typically cancer or other related diseases in that regard. The causes of a peripheral nerve injury are represented as following. Typically, through whether it be trauma or some other unintended surgical procedure, you're actually transecting the nerve. You're cutting it in 2 or you're crushing it or you're stretching that as part of an impact or another procedure. And in cases where the nerves are completely transected over time and unable to be repaired, they develop neuroma. These are all the common presentations of peripheral nerve dysfunction. The solutions for these types of problems that Axogen works on every single day are represented by what we refer to as the Axogen Algorithm. The foundation for our solutions and what makes us distinctive in terms of existing standards of care is out of our advance nerve graft. This is human tissue, that's processed and rendered immunologically benign, but yet still bioactive such that it encourages the regeneration of axons. So the nerve itself serves as a scaffold for that repair process. Our AxoGuard products and our Avive products, these are designed to complement these surgical procedures so that you can ensure that this repair, whatever you might do has the best opportunity to heal so that nerve generation can transpire. Avance really represents the foundation for our business in terms of what makes us distinctive. Avance is a human allograft. This is donated human tissue. It provides literally size for size whenever there's a situation where you need a scaffold, you can match because we have the -- because this is tissues that literally are provided for the surgeon. This makes these procedures very accessible regardless of the circumstance that might transpire. And fundamentally, what makes Avance unique is that it retains the human laminin, which is a protein and is very important for signaling as part of the scaffold construct axons for regeneration in Schwann cell infiltration from both the proximal and distal ends of the grafting. Notably, just this last December, we completed a more than decade process to move from a device regulatory status to the first of its kind approved biological license therapeutic solution for treating nerve discontinuities. This was a work product amongst both the people we collaborate and serve in the clinical community as well as Axogen staff, as I mentioned, for more than a decade. With the completion of this, we now represent the standard of reference for all future technologies in the future. The question, of course, is what are the opportunities to fully develop and serve our business purpose. And specifically, it really boils down to making the treatment of a peripheral nerve dysfunction and expectation. Today, in the clinical care guidelines, they're still -- they're just developing to where we're moving towards a situation where a patient presents regardless of whether it's a trauma or it's an iatrogenic injury secondary to some other surgical procedure, where it's expected that you treat the individual's nerve dysfunction. Avance and the Axogen Algorithm really represent the reasons for this. There are many situations, if you look at the course of the health care industry, whereby there are not markets because there are no solutions. There is now a solution in the way of the Axogen algorithm. And this is the vehicles that we're utilizing to establish entirely new care pathways, raising awareness so that whenever these situations present, we have the opportunity to serve that purpose, mitigate that problem and restore people's health and improve their quality of life. A little more than 1.5 years ago, as we -- as I joined the business, the entire team, along with clinicians and advisers, we entered into a traditional strategic planning process. The question, of course, was not whether or not there was a need, but there was a very important question of prioritization is what is the most effective way to serve our business purpose in an efficient and timely manner. And the product of that exercise is really represented by the strategic plan that we presented at that time and remains unchanged in terms of our priorities and expectations. We believe over the period that we're listing here that we'll be able to grow this business 15% to 20% per annum. The markets in terms of prioritization now include also elective procedures as we described and our newest market application that we're developing will be that of prostate. A fundamental prioritization was made to expand the commercial footprint so that we can drive awareness and accomplish the teaching that's required given the novelty of what we provide. And then finally, commercial excellence. And specifically, what we're focusing on is that each of the care pathways that we serve require their own messaging requirements, they have their own assumptions in terms of capacity, timing, conversion ratios and so on and monitoring those so that we can be as efficient and as effective as possible with regards to that commercial footprint. And then finally, on more on a strategic basis is maintaining a priority in terms of the investments required to attain true standard of care status such that you are in the guidelines and it is an expectation to address peripheral nerve dysfunction whenever it appears. And then lastly, investing for the future. We have a wonderfully distinctive value proposition based upon benefit versus risk. These nonetheless are imperfect, and there's always a way to improve. So both in the near term as longer term, we have significant investments in R&D that we're presently pursuing in order to further perfect those value propositions. We really believe that we are truly positioned to continue to lean into the future, we are today, and the reasons why we are looked upon by the customers and the people we served as the leaders is, first and foremost, our technology. It is distinctive. It solves problems in terms of workflow. It's economic relative to the other options. And finally, we had the expertise based upon the work we've done all these years, particularly in pursuit of the biological license application status and we're considered experts, we're considered good partners in terms of these kinds of work. And finally, we have access by virtue of our presence over time. And as we invest in the future, we're able to drive that awareness and make greater progress towards achieving the standards of care objectives that we've set for ourselves in each individual clinical pathway. Education, which I've already mentioned, is truly 1 of our core competencies. And in my 40-year career, I look at what Axogen has developed and the trust that they have earned and constantly impressed. We engage in terms of teaching the majority of the fellows in the United States in terms of nerve care, we are sought out for these purposes, we have regional meetings on a regular basis, and we are definitively an educational partner. Nerve care is emerging. More than 70% of the clinical literature on nerve care has transpired over the last 5 years. So there's constant growing awareness and therefore, interested, okay, how do I do these procedures. And this is obvious, this is a clinical problem that should be addressed and now can be addressed. And so as a result, education is a very, very important part of our market development effort. Extremities, as I've mentioned, is one of our business platforms. Extremities is the largest business that we have. It's the original focus area for our business. It's emergent, it's basically secondary to trauma. We have a long relationship with key opinion leaders and scientists in this particular area, including the U.S. military. It's the area we're also further along in achieving standard of care status. We've added a number of societal endorsements which have established now that allograft is a suitable solution for treating nerve discontinuities. And we have a large commercial footprint that we're continuing to expand in this area and we continue to believe that this will be a double-digit growth driver for the business long into the future. Oral maxillofacial and head and neck is one of our newest work streams. This is served by our extremity [ sales ] organization, but these are elective procedures. There are significant procedures through injury and/or cancer that involve interventions. Your upper neck and head, as you might imagine, are very nerve rich. And as such, there's morbidity that's associated oftentimes with these procedures. And now with regards to the work that it actually does, we have the ability to help mitigate some of the sequelae and again, add value to an individual's restorative surgical process. Breasts. Again, an elective procedure. This is a situation where a woman is obviously being treated for cancer. As part of her recovery process is long established going back to 1998 through the Women's Health Care Cancer Act that a woman has a right with their physician to determine her reconstructive process and choices thereafter. We've gone a long way in terms of providing women the ability to aesthetically reconstruct the breast. The ability to restore sensation to those breasts as part of that process is where Axogen is adding to that opportunity to give back to you what you -- what God originally gave you, that's the whole part of any health care intervention is the constant journey and the effort to try to restore normality, sensation, of course, secondary to peripheral nerve function is key to that. And we are the leaders in this space. It's one of our fastest high double-digit growth businesses, and we're still early in terms of developing and training all the physicians and all the sites to do this work and that will remain a priority. It's also an area where we've developed a great deal of expertise in direct-to-consumer. This is a unique clinical care pathway in so far as not only does the physician advocate for this treatment, but the patient has a chance to participate in that advocacy as well in terms of the choices that she makes on how she would like to have a reconstruction process transpire. And then finally, prostate. This is in development. As we indicated last year as part of our objectives, we would enter into a clinical program where we would evaluate the teachability of the procedures. Biologically, the basis is pretty simple, a nerve is a nerve is a nerve. So in principle, we can solve the problems that result from cancer procedures to treat prostate cancer by providing nerve protection and nerve grafting. In this particular area, the only question is, can we indeed teach this. So we enrolled 100 patients that we originally set out to do amongst 10 key sites. And as we approach the end, the second half of 2026, we will have the clinical signals upon which to make that judgment. We think this is a tremendously important new opportunity to add value consistent with our mission. And we believe, again, for the same reasons we are elsewhere, we are positioned to achieve these objectives and look forward to reporting further on our efforts in this particular new care pathway towards the end of the year. Coverage and payment is, of course, critical to the adoption of any technology regardless of its efficacy. We're making great progress here. It's incomplete. We still have about 35% of commercial lives, which represents the bulk of the type of patients who present for treatment that are uncovered. But with the achievement of the biologic approval of Avance as a therapeutic, we believe that we will be able to decisively address those remaining objections that exist amongst the remaining payers. We're engaging with them every day. Just this last year, we added almost 20 million covered lives, and we expect in the ensuing years between now and 2028, we will continue to make that progress and ultimately achieve full coverage for nerve care. Very importantly as well in terms of sites of service. We've made great progress just recently, beginning January 1 this year. CMS has provided an entirely new Level 3 code for nerve procedures in the outpatient setting. Previously the reimbursement in the grouping of nerve care was into a group that resulted in payments, which were very uneconomical for providers of health care in these types of settings. With this newest change in terms of the Level 3 codes specific for nerve care that is no longer the case. And so in the future, we expect that nerve care will take place more often in these particular settings where the physicians or the hospital providing system has the resources in order to do that because the barriers that previously existed have now been completely removed. Finally, it's about the future. We have work to do in terms of tactical development and awareness, which I've already described. As we look to the future, we're also investing in R&D. These cover various spectrums of development. First, making the procedures easier to adopt through ease-of-use techniques. This includes improving the ability to literally graft the nerve by making that procedure easier and faster to do. We look forward towards the end of this year of bringing in people up to date on the details of this particular project. It's progressing very well. We think very soon we'll be able to enter verification and validation at which point we'll update already as to exactly what it is what they were referring to. Second, protection, as I mentioned, when you do these procedures, you're in very inflamed tissue beds and the way -- it's very important you protect that grafting procedure that you conduct so that, that nerve heals properly without adhesions. We have some very exciting work going on in this particular area. And then finally, more strategic with respect to therapeutic reconstruction is that of a second-generation events and its capabilities. Avance is truly unique. It's a new standard around the world. We already have line of sight to how we can further incrementally improve the regenerative capabilities of that product. And again, towards the end of this year, we look forward to bringing people a little bit more up to date on exactly what the details are that we're referring to in terms of our work here. And then finally, new clinical applications. Prostate, as I mentioned, is our #1 priority. There are others that we may well add later in the planning period, but at present, that represents the next care pathway that we will invest in. Finally, evidence is key. We have tremendous opportunities to further burnish the reasons why peripheral nerve care should be an expectation and the studies that are planned, we are now implementing beginning first with nipple-areolar complex of breast study that will begin this year, followed by the mixed and motor nerve applications. Both of these are important areas of interest. Our physicians, the people we serve are very excited to participate in these studies. We really represent the opportunity to do very large-scale studies that otherwise are not possible given that this is not historically a device-centric area of health care. And so given the products that we now bring forward, we provide a huge opportunity to do the kind of clinical work that any scientists would like to engage in, and we'll be doing that. Longer term, these will become decisive catalysts that further add and burnish and allow us to bring all these markets to 2 standard of care status. The team that's doing this work as represented here, I am absolutely delighted with the work that they do, their total commitment to our mission, their engagement in strategic planning process. They're getting it done. Virtually everything that we said we wanted to do, they have done, and we fully expect that to continue in the future. Financially, as you've described, this is a business that we projected will grow 10% -- 15% to 20% over the strategic planning period. We just had a very successful year this year. We look forward to updating the specific guidance for 2026 at our regular end of quarter call later this quarter. And then very importantly, we've reached the point where we're achieving operational leverage, generating positive cash flow and profitability. And our commitment to all stakeholders is that we will continue to do that while still funding our organic growth initiatives. Just to reemphasize again, specific to our strategic plan, we maintain the prior guidance that over the course of the period, investors can expect that this business will grow 15% to 20%. We still expect to continue to incrementally improve our gross margins through the initiatives that we previously described in terms of introducing lean augmented work streams, management execution systems, electronic batch records, all good practices, nothing novel in this regard, all of which can build on an already handsome gross margin profile. And then finally, generating positive cash flow continuously from today into the future. In summary, I believe based upon my experience that this represents one of the most significant undeveloped new market opportunities in health care today, based upon the undertreatment exists and the possibilities to treat it. We believe that from a leadership standpoint, this is critical, and we believe that we will be able to capitalize on this. We are recognized for our work done heretofore. And this is what allows us to build the trust to drive adoption into the future. We have multiple opportunities to act on our mission. They're common and so far, they represent peripheral nerve dysfunction. They're different in terms of the various clinical pathways. Each of these have their own unique leverage opportunities, all actionable and as such, individual catalysts that we can drive to grow this business. We have a great momentum in terms of reimbursement. Expect that to continue to ultimately achieve full coverage, therefore removing one of those major barriers to adoption of the technology. Our infrastructure is scalable. We've already demonstrated that. We believe that we'll be able to continue into the future. And we have reached that financial inflection point that allows you to concentrate on your market development but doing so in a profitable way in terms of driving it through organic cash. So with that, I want to thank you again very much for the opportunity to be here today, and I look forward to answering any questions.

I kick it off here with a couple of questions. I know you guys recently just had your BLA approval, which is great. It's an awesome achievement for the company. Congrats to you and the team. I'd be curious to hear what the practical changes will be in 2026 and how you guys operate compared to 2025 post-BLA?

Important question. So with the conclusion of the biological license application process, there are multiple ways that we will act upon that milestone. And the most simplest immediate tactical way is this has been a long journey, and so we're going to be visiting with all of our customers, even though they already have access to this and affirming for them the original trust and use of the Avance product and reminding them that this is a first of its kind approved biologic therapeutic for the treatment of nerve discontinuities. So they're already believers, but affirming the faith in that product is a key opportunity. And as you might imagine, for anyone who still has questions, about its applicability, its safety and its efficacy, we will likewise be making manifest to all stakeholders on the clinical community of this particular milestone. The second element that we'll be acting upon is immediately engaging, and we have already started the process with our payers. They have annual review processes. These are very formal processes and we will be ensuring that these remaining 3 payers understand that Avance is now an approved biologic, it should, therefore, not be considered experimental which, in some cases, is one of the reasons for a denial of coverage, and we'll be working that process to drive ultimate achievement of full coverage. The third element that we will be able to do is to really move forward more aggressively with our Level 1 clinical studies. These studies needed to be ideally referencing a standardized benefit-risk profile under an approved regulatory status and with the achievement of the biologic status that allows us to do that in a formal way so that we can move forward and gain approval to run those studies. And then finally, which I've mentioned many times, is Axogen has been challenged over many years now with running manufacturing operation and a quality system under a device construct, while at the same time, standing up a quality system based upon the biologic expectation. And therefore, this really means that you're doubling your people's workloads as well as significantly increasing cost because you have to run in parallel. And it's quite a challenging situation in so far as it limits the ability to invest into the device construct because you know you're moving to a biologic, but you can't invest in the biologic process because you're not yet approved for that. So you're living and working under a very difficult set of circumstances. They did this well, maintaining quality and even good margins under that circumstance. But with the conclusion of the biologic, we now, as you might appreciate, be able to focus on 1 quality system and then make the investments we've long planned and from a system standpoint in the manufacturing and execution system, electronic back records and then really implementing work streams to go forward so that we can further improve the gross margin of these types of products.

And I guess on that margin point, Lindsey, this might be a question for you. Like margins have moved around with the BLA transition. How should we think about a normalized margin going forward post BLA?

Yes. Post BLA, we believe we're at 75% plus gross margin business. This next year, we'll have a little bit of noise and that we will continue to enjoy the gross margin that we've seen in the last couple of quarters and then we'll feel some pressure in the back half of the year. But then going forward into '27, we expect to see the fruits from all the initiatives that Mike has just told us about at our plant implementing those new systems. We haven't quite guided to what -- how high it could be, but we do see improvements in our future.

That's great. You guys have clearly made an emphasis on expanding the commercial footprint. I'd be curious to hear how the company thinks about sales rep productivity and when new hires become accretive?

Sure. In general, when we bring someone on board, regardless of whether it's breast or extremities, the expectations that it will take about 6 to 9 months for that representative gains to kind of confidence and knowledge to operate independently. From a financial standpoint, that's also the same period of time at which they ultimately become breakeven and also accretive not untypical for a lot of med-tech situations that applies to us as well.

Awesome. And we've seen a lot of acceleration in the resensation business. I guess, like looking forward, how big do you think breast can be as a percentage of revenue?

We haven't guided as to a percentage, but another way to look at this is that in principle, in the future, the way we see it from a benefit-risk standpoint is that if a woman elects to have reconstructive -- reconstruction as part of her follow-up process post mastectomy, that resensation should be a part of that. So in theory, somewhere between 70% to 90% of that entire marketplace is ultimately addressable.

Great. I guess -- moving on to prostate, that's clearly been a clinical priority. Curious to hear about any milestones and things looking forward?

The most important milestone was completing the 100 patients amongst the 10 clinical sites that we previously described. So that was attained. And we now are in the process of working with these clinicians to ensure that the follow-up is complete. In general, based upon the time for nerve recovery, as we enter the second half of the year, we will start to have the clinical signals where the patients will be reporting on their status with the physicians and we'll be able to draw conclusions as to whether or not we can treat -- teach this procedure so that it's effective.

Got it. Just taking a step back, I know right now, the U.S. market is the focus. But when should we expect the company to start thinking about international expansion? And is there any attractive markets you guys are thinking about?

Yes. We're literally in the process with the conclusion of the BLA to make those decisions now internationally as to where we go. We're not at a point where I want to guide in which countries are the priorities. We do have a presence now internationally, but it's de minimis in terms of our focus and investment. And that's really the question you're asking is, so where are you going to invest in the future? We're literally in the process over the next many months of making that final decision as to which markets we prioritize. But in principle, it won't be that much different from other med tech markets. You're going to pick those primarily that have a logical regulatory pathway that also leads to reimbursement. Given the novelty of this, this won't fit into any existing reimbursement system. So you'll typically start out with countries that have a process that you can engage in such that you know if you enter into that process, you have a point at which you will be able to qualify for reimbursement.

Great. I guess shifting to the capital allocation strategy. I'd be curious to hear how you guys are thinking about it, especially now that the business is cash flow positive?

Yes. So we currently we're cash flow positive, and we're able to fund our strategic plan through cash from operations. It's a great -- I've been at Axogen for 4 years. It's a great milestone for us. and we will continue to keep that in mind.

Awesome. And Mike, I know you've been here for probably a little over 1.5 years. What do you think is fundamentally different about the business now compared to when you joined?

I think the most important thing for any business is clarity of purpose, and that may sound obvious, but you need to translate that from a general statement into exactly what should be our guide every single day. And what we spent a lot of time as we engage in this strategic planning process was a reminder to all of us that every business has a purpose and every business's purpose is measurable. And in the context of health care, that's how many customers or patients have you treated today versus what were treated yesterday. If you're furthering your mission, it's about matching patients to therapy where indicated appropriately. And what we've tried to do is remind everybody that they all have a role in that purpose in that process and that we will measure ourselves. Yes, revenue is a number, but that revenue reflects whether or not we're treating patients. And that may sound obvious, but having those kind of conversations with every part of the business, every single employee is critical to creating that commitment to something that's bigger than ourselves. And I think that's what's going on at Axogen today. People are having fun. It's not easy to -- I mean, it's not hard to convince someone that peripheral nerve function is essential to life. And then if you can make it better where it's been affected in a negative way, you've made a contribution to that person and to society. And so we had the chance to do that uniquely and folks are really rallying around that, and they're having fun. We're conscious that we have work to do, and it's quarter-to-quarter but I think that's probably the most significant thing is improved emphasis and focus on that purpose.

That's great to hear. And just looking forward coming off the back of an awesome achievement for the company with the BLA approval, what are 2 or 3 things in the near term that you guys are really focused on executing?

Literally what we just shared. So there's some big strategic milestones down the road beginning in 2027 thereafter. But last year and then 2026, this is pure unadulterated commercial execution through the commercial footprints that we have in place. So we have sales models, we have messaging. We have education requirements. And our job is to do those on schedule, on time without compromising the quality. We will do that, and we'll continue to grow at the rate that we have been.

At this time, love to open it up to the audience for any questions.

Regarding the long-term plan, our midterm plan 15% to 20%, which is acceleration from the past 5 years, 15%. If you break it down by the end market, which market should be contribute the most, so this can break down by the market growth. And other than the reimbursement improvement, would you see -- how do you see the volume also grows?

Well, the procedures are driving our volumes. So in terms of procedure versus volume versus price mix, it's -- our growth is really primarily driven by volume, treating more patients than we did before. We don't break out the explicitly which markets -- what the market growth rates are, but what we have shared is that all the markets are growing in double digit and that the elective markets of oral maxillofacial and breast grow in high double digits. Sometimes in the future we may provide more explicit guidance but at present, that's the extent that we'll share the growth.

Thank you. Could you kind of provide a breakdown of the portion of cases done inpatient versus outpatient currently and where you think that could go in the future, especially in light of the reimbursement change?

Today, given the historical disincentives to outpatient procedures, they're de minimis. So there are exceptions. I mean there are some work going on there. So the real potential for that mix to break out will be sometime later this year as hospitals start to digest this change by CMS. We'll also be helping with that. We'll go to hospitals. We'll sit down with them and make sure that they're aware of this change. There are a lot of hospital systems that obviously have significant investments in these facilities, and they will want to know and understand where nerve care now fits. So the answer to your question is, today, there's not a lot of activity because historically, it was very uneconomical to conduct those procedures. But we do expect it to change. We don't really have a forecast yet because it's -- this is all new. But maybe towards midyear, we might be have some more insight.

I think we have time for 1 last question.

You say historically, this procedure is uneconomical. So the increase in the CMS reimbursement will help a lot. But after this reimbursement, how would you see the economic for the either the inpatient or outpatient centers? Would that be enough to incentivize the adoption?

We're at a point now where the nerve care is economical in these settings. That will continue to improve. The reason why we say that is the way that the health care system works is it's designed to compensate cost and so in order to do that, it needs to see activity. And so as nerve care continues to grow, each hospital system will reflect its own cost, that's typically a 1- to 2-year lag more like 2, but at that point, CMS adjust their payments to reflect that cost. So given the novelty of this therapy as it continues to grow, that reimbursement will likewise. And we're still very early in terms of the market penetration. So we don't expect any change in that cadence. So bottom line is we have now reached a point where nerve care is economical already, and we expect it to further improve.

That concludes our presentation. Thank you for joining us. Thank you, Mike and Lindsey for taking the time. Have a wonderful rest of your day.

Thank you.