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

Good morning, everyone, and welcome to the Axogen BioCircuit Technologies Acquisition Conference Call. On today's call is Michael Dale, Axogens' Chief Executive Officer; and Lindsey Hartley, Axogen's Chief Financial Officer. This morning, we issued a press release and posted a slide presentation covering the transaction, both of which can be accessed on the Investor Relations section of Axogen's website at www.axogeninc.com. Today's call and presentation are being broadcast live via webcast, which is available on the Investors section of Axogen's website. Following the end of the live call, a replay will be available on the Investors section of the company's website at www.axogeninc.com. Before we begin, I'd like to remind you that during the conference call, management will be making forward-looking statements. Forward-looking statements include statements regarding the anticipated timing and consummation of the BioCircuit acquisition and related closing conditions, the expected benefits of and integration of BioCircuit, the financial guidance and outlook and anticipated performance of both Axogen and BioCircuit including the expected financial impact of the transaction, clinical development and regulatory efforts, commercial growth initiatives, reimbursement and [ market efforts ], training and education initiatives, research and development activities and overall business strategy and performance. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially, including, without limitation of risks and uncertainties reflected in the company's filings the Securities and Exchange Commission, including the most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and other filings made with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made, and the company undertakes no obligation to update any forward-looking statements, except as required by law. In addition, for a reconciliation of non-GAAP measures, please refer to today's press release, presentation with highlight in today's call and the corporate presentation on the Investors section of the company's website. Now I'll turn the call over to Michael. Michael, please go ahead.

Thank you, operator, and good morning, everyone. Today's call will start with an overview of the transaction we announced this morning. Lindsey will then walk through the financial terms. Following our prepared remarks, we will open the call to questions. Axogen will provide additional details regarding the financial impact of the transaction when we report results post-closing of the acquisition, which is expected in the fourth quarter of 2026. Earlier today, we announced that Axogen and BioCircuit technologies have entered into a definitive agreement under which Axogen will acquire 100% of BioCircuit's outstanding equity for a total price of $200 million in cash subject to customary adjustments for cash, indebtedness, transaction expenses and net working capital. The cash portion will be financed with the equity offering that we announced today. This transaction is a strong strategic fit for us with NerveTape currently selling in the [indiscernible] markets as Axogen and is expected to strengthen our own existing financial profile. It is financially accretive to our revenue growth and adjusted EBITDA margin in 2027, assuming the transaction closes by year-end 2026. In addition, we expect [indiscernible] free cash flow positive. Strategically, we believe BioCircuit is as close to an ideal fit as one could find. It aligns with our mission to make restoration of peripheral nerve function and expected standard of care, and it advances our innovation agenda by adding a differentiated technology that supplies one of the most challenging aspects of neurosurgery. NerveTape is the first FDA-approved device for sutureless nerve repair. Most of the work we do in Nerve Care is addressing one problem, reconnecting to severed nerve ends. Historically, that's been the exclusive domain of microsurgery. Using sutures under a microscope, [indiscernible] painstakingly align and connect the nerve either directly or using a connector or a graft. This is a slow and technically demanding procedure. So it has been limited to a small population of microsurgeons trained to perform this work, which we see as one of the barriers to more patients receiving appropriate nerve care. NerveTape has the potential to change that equation for many applications. It is faster and stronger than traditional micro suturing. Because it's so easy to use surgeons in many applications no longer need the same level of microsurgical training to perform nerve repair. That means we're not just improving how existing neuro surgeons operate. We're also enabling the expansion of the universe of surgeons who can perform nerve repair. That's why we see NerveTape as critical in unlocking the total addressable market of nerve repair. We believe it allows us to address new indications that our current portfolio does not serve and it lowers the barrier to entry on the current indications for our portfolio. We've been following BioCircuit and NerveTape for some time as the technology, commercial adoption and clinical evidence have developed. As clinical data accumulated, the product gained commercial traction and surgeons have gained experience with the product. We've become increasingly confident in the technology's performance and safety profile. That growing confidence and our strategic goal at the forefront of innovation in nerve repair is what brings us to this transaction today. The company's commercial traction is impressive in its short period of commercialization. In just over 2 years, over 14,000 NerveTape implants have been sold to date, mostly in breast and extremities procedures across more than 400 hospitals and ambulatory surgery centers. BioCircuit has achieved $24 million of run rate revenue based on an annualized second quarter 2026 revenue, which is a considerable growth from its $11 million in 2025 revenue, with a gross margin of approximately 80% and positive EBITDA year-to-date on a stand-alone basis. Our plan is to introduce NerveTape into our commercial organization, leveraging our existing direct sales force, surgeon relationships and hospital contracting infrastructure to accelerate adoption. We are acquiring a high-growth product in a market we already serve, [indiscernible] on surgeons we already know, using a sales force that is already in place. We anticipate minimal integration risk and no meaningful commercial disruption. As with any acquisition, our near-term priority is a smooth transition for BioCircuit's customers, employees and surgeon partners. We're truly excited about what this acquisition means for surgeons and for the patients they treat. This transaction checks the box for us by every measure, strategically, it's a great fit, it pushes our innovation frontier and enhances our ability to unlock our under-penetrated total addressable market opportunities. Financially, it is expected to strengthen our existing profile and the integration risk is low. I want to thank the entire BioCircuit team for building NerveTape, a truly novel, simpler, faster, more effective alternative to microsuturing nerve repair. We can't think of a more [indiscernible] synergistic fit with Axogen, and we look forward to welcoming NerveTape and the entire BioCircuit organization to Axogen. Finally, I want to end my comments by reiterating our confidence in our performance and other strategic priorities, particularly in prostate [indiscernible]. As discussed in our last earnings call, our clinical development work remains on [indiscernible], and we expect to share more on the -- in the next phase of our prostate strategy during our third quarter earnings call. This quarter to date, we are pleased with the continued momentum of our business, and we expect this transaction to be additive to our current trajectory. I'd like to now turn the call over to Lindsey.

Thanks, Mike, and good morning, everyone. Under the terms of the agreement with BioCircuit, Axogen will acquire 100% of BioCircuit's outstanding equity at a total price of $200 million in cash, subject to customary adjustments for cash, indebtedness, transaction expenses and net working capital. At closing, $1 million of the estimated merger consideration will be withheld pending determination of the post-closing purchase price adjustment. We anticipate funding the purchase price with the proceeds from the public offering of our common stock announced today. BioCircuit transaction is expected to close in the fourth quarter of 2026 subject to customary closing conditions, including completion of the spin out of BioCircuit's electronics business. As Mike highlighted earlier, this transaction is financially compelling. BioCircuit has achieved $24 million of run rate revenue based on annualized second quarter 2026 revenue, which is considerable growth from its $11 million 2025 revenue with gross margin of approximately 80% and positive EBITDA year-to-date on a stand-alone basis. We are not providing 2026 guidance for the partial year impact at this point. We will provide updated full year 2026 guidance, including the BioCircuit contribution once the transaction closes. Also, assuming a close of the transaction in 2026, Axogen anticipates the acquisition to be additive to 2027 revenue with accretion to gross margin and adjusted EBITDA margin. We will provide full year 2027 guidance in the first quarter of 2027. The impact of this acquisition is equally exciting to unlocking our under-penetrated TAM as the impact on our financial profile of our business. In summary, we are very excited about the significant opportunity this transaction represents. With that, we will now open the line for questions. Operator?

[Operator Instructions] Our first question today is coming from Larry Biegelsen from Wells Fargo.

This is Simran on for Larry. So Mike, I guess our understanding is NerveTape, and I think you addressed this in your prepared remarks as well. But NerveTape appears to be used primarily in the Breast segment, is that the case today? Is that correct? And how broadly applicable is it across your other repair segments? And then maybe can you help us understand what the current attachment rate is of NerveTape to Axogen cases? And like what percent of cases is it currently used? And if it's an easier procedure, where does this help accelerate adoption of Avance and NerveTape today or in future?

Sure. So NerveTape in terms of its initial usage, started primarily in breast applications and oral [indiscernible] or facial. And they started in those applications because those are generally long-duration procedures, and difficult. And so given what NerveTape is about in terms of providing a very simple and extremely fast and rapid but also a very effective attachment mechanism, they thought that, that would be the best place to start. So that's where the bulk of their experience is. It's still relatively small in terms of relative usage, relative to Axogen's total procedures. But from a value-add standpoint, that's where they -- that's their beachhead, if you will, in terms of where they develop their experience. In terms of application, it is applicable to virtually all nerve procedures that we currently prioritize across our portfolio and further extends the potential usage to markets that we don't generally serve. So for example, a very simple nerve transaction when you do a direct nerve repair, it does not require advanced usage and generally does not require our other Axoguard portfolio. In this instance, however, because of what NerveTape does, it actually extends the potential TAM of usage to that market as well. So in our hands, we will -- for each procedure, where physicians are interested, obviously, we'll be extending the use of NerveTape very broadly.

Got it. That's helpful. Maybe another way to put it. If we assume that NerveTape attaches to about half the procedures that Axogen already touches at roughly the current ASP of NerveTape we get to sort of a revenue line somewhere around $50 million, which is about 4x what you paid. Is that the right order of magnitude to think about? And how much higher does the peak sit because as you mentioned, NerveTape opens up procedures that you are in today or opens up a part of the market that you're not in today?

Forgive me if I'm not completely tracking with your question, Simran, but to reiterate. NerveTape can be used in almost every procedure that we presently address across our portfolio, whether it be extremities, breast and oral, macro facial and head & neck. There's a potential application. There's an additional opportunity for NerveTape usage and direct nerve repair. So maybe I misunderstood, but that's the -- it literally can be used very broadly. There are situations where it does not apply, but it fills a void. And just to put a fine point on it, work in nerve repair is about connecting two nerves together. At the end of the day. So all of our work stream, which we're taking down coverage, reimbursement, societal guidelines, building new evidence. In the end, this is all about making and enabling the ability to conduct nerve repair. And at the tactical level, that means connecting two nerves together. NerveTape is exciting to us because it literally represents an entirely new form function and mechanism by which you do that, that is actually superior to what was previously the existing gold standard, which is [indiscernible]. It is simpler. It is very fast and it is a more effective connection in terms of its [indiscernible] strength, and it's also [indiscernible]. And so hopefully, I answered your question. If we look to the future, we'll give guidance in the new year as to what we see with this. But the current growth rate is one that we expect to sustain and obviously extend in our hands just by giving the multiplier of our very large and experienced sales organization.

Next question is coming from Michael Sarcone from Jefferies.

Just to start, can you give us some background on how the transaction came to fruition? How long have you been chatting with the BioCircuit people? Just any context around the deal?

Certainly. I think it's a great question, and it's an important question. If I would ask people to go back a little more than 2 years ago at our Investor Day. One of the priorities we've always laid out is all about innovation. Fundamentally, commercialization and market development is building upon whatever your value is from a product or therapeutic standpoint as compared to an existing standard of care. So innovation has been every bit as much a priority for us as our market development activities. And we explicitly if you go back and look at those slides, we address three areas that we would invest in, both internally and externally. Number one was next-generation Avance. How can we more perfect this very important product. Number two is protection. So when you do a repair, you want to ensure it has the best environment for healing. And so we have work ongoing in that work stream. And then finally, we've always emphasized connection was a major priority for us. Now for proprietary reasons, we didn't did not disclose exactly what we meant by that in great detail. But this is just a natural step in our strategic plan to make the ability to connect two nerves together, more possible and more effective. So to answer your question, we've been watching this asset and others for a very long time. And we concluded in our first inspection that the NerveTape was unequivocally simple and fast. The question was, whether it's benign. And once we got comfortable based upon the clinical evidence and the clinical experience by individual physicians, we felt it was the right asset to add to Axogen so that we continue on our journey.

Got it. That's helpful. And then you mentioned that NerveTape is in over 400 hospitals and ASCs. I was wondering if you could talk about just the overlap between those 400 customers for BioCircuit and how that compares with Axogen's current customer base?

Sure. Amongst the 400 hospitals that they currently have access to, there's almost a complete overlap with our existing customers. Now they don't have full penetration in those 400 hospitals. It's a small organization, but they have access. What we intend to do is extended access to our entire universe that we service, which is more than 2,000 accounts.

Got it. Okay. And then last one for me, is there any potential risk of cannibalization here? Or is NerveTape completely complementary?

Yes. But it's a natural evolution in product mix. So it's no different than a Gen 1 product and a Gen 2 product. One will ultimately [indiscernible] the other. So certain parts of the portfolio will evolve in favor of NerveTape that's expected and planned for. In the end, in totality, this is accretive on a revenue standpoint as well as EBITDA.

Our next question is coming from Mike Kratky from Leerink Partners.

Can you just start with talking a little bit about the size of BioCircuit's existing sales force. To what extent do you see opportunities -- synergies moving forward or any cross-selling opportunities from your existing portfolio?

Sure. So it's principally in engineering and supply chain organization, there's a very small technical support, the clinical support part of the organization. The majority of their distribution is through independent distributors and agents present. So with regards to the team, in general, without disclosing explicitly the details, the vast majority of this organization will come and become part of the Axogen organization. They have a headquarters in Atlanta, and our intention is to continue those operations and welcome them into the team. There is a deep body of engineering and subject matter knowledge in the organization, and we look forward to further building on that.

Awesome. And maybe just one separate one. But Mike, could you just talk a little bit more about the rationale here? And another business development deal announced for you on the buying side. How are you thinking about capital allocation moving forward? And whether this deal at all signals any underlying health of your base business?

The signal that I would speak to is that we're doing great, and our goal is to do even greater. And I'm not trying to be flippant. There's nothing that -- Axogen, everything that we have reiterated heretofore remains sound. Our goal is to build NerveTape -- excuse me, build Axogen as we described. So there's tremendous opportunities to add great clinical value to patients and physicians in the world. And ultimately, that's about continuing all the initiatives we previously described, our market development activities, expanding our commercial footprints, but alongside that is continuing to innovate. Because at the end of the day, you're commercializing innovation. And when your innovation goes stale, your commercialization goes stale, and we will never let that happen. We are currently the leaders today in every element that we practice and our goal is to remain so. And so NerveTape is just part of that natural evolution. So we're not trying to signal there a particular cadence of innovation, but that innovation is core to our future. And so what we don't know if it's going to happen every other year or every year or every quarter, we will continually look and aim towards perfecting. Now in terms of the metrics by which we do that, I would guide people to look at this transaction. This is a fair multiple that is accretive to the organization almost immediately based upon the current plans that we have. And in that sense, it's responsible to shareholders. And that's the kind of discipline that we intend to apply in anything that we do in the future.

Our next question is coming from Jason Bedford from Raymond James.

Congrats on the deal. I guess my first question is, are you starting to see NerveTape used over Axoguard, and how do you position the two in the portfolio?

Sure. Why don't I turn that call to [ Yan ] and just let him describe some of the clinical applications.