Elutia Inc. (ELUT) Earnings Call Transcript & Summary

Good afternoon. I'm Josh Jennings from the Cowen Medical Devices team here at the 41st Annual Cowen Healthcare Conference. We're excited to have the Aziyo management team joining us today. I think for the first time as a public company, clearly, because you guys just had your IPO last year. But CEO, Ron Lloyd; and CFO, Matt Ferguson. Gentleman, thank you for joining the Cowen Healthcare Conference this year and working for many more in years to come.

Thanks, Josh, for the invitation. Glad to be here today.

Absolutely.

Glad to be here. Thanks, Josh.

You guys recently reported 4Q results, 10% growth in your core products franchise. Many other med device businesses were not so fortunate and lot showed some revenue -- year-over-year revenue declines. I think it's a testament to the share gain potential of the portfolio. Markets are declining. Aziyo's core products showed double-digit growth. But maybe you can just talk about that dynamic within your core product franchise of just a share gain potential? I know it's a very high-level question, but I wanted to start off there and just get some of your thoughts.

Sure. So certainly, at Aziyo, we are uniquely focused as a regenerative medicine company, and our goal is to bring forth novel and differentiated products. We're predominantly focusing on patients that are receiving implantable medical devices. There's about 2 million patients each year that receive these devices. It could be a pacemaker defibrillator, it could be hardware for orthopedic spine procedures or other devices for soft tissue reconstruction. And any time you put in these foreign devices, these foreign objects, depending on the material location, your body has a foreign body response. And so our products are designed to reduce these complications. Again, this could be scar tissue formation, migration, erosion, nonunion incase of implants or even device rejection. And so again, all of our products uniquely designed to reduce implantable device complications. And so we see this as a large market opportunity, and we have unique products. So if I go through our core products and break them out in a little bit more detail relative to the market, first, looking at the implantable electronic device market, Josh, that's including pacemakers, defibrillators and neurostimulation devices. There's around 600 implantable devices each year, about a $600 million total market opportunity, and we're uniquely situated in having a product called CanGaroo, which is the only biological envelope to be placed on these types of devices, remodels in the native tissue and it protects the patient for the life of the device. So very excited about that technology and a large market opportunity. Moving to the second market opportunity, which is the orthopedic and spine. This is a very large market, as you know, more than 1.5 million procedures, about a $2 billion market opportunity. For here, we have a unique differentiated platform where we derive a number of different products from our ViBone matrix platform. And again, we process human tissue here in a way that best preserves the cells that are in that tissue and the health of the cells. So once implanted, they're healthier and more viable and don't trigger cell death or apoptosis. We've shown compared to competitive products, our product have healthier cells. In fact, our competitive products are about 2.4x more cells that trigger apoptosis. And so we have a number of products that address that market. And then the final market is the soft tissue reconstruction. That's about a $500 million market opportunity, about 100,000 procedures using human dermis. Our product offering gives a product called SimpliDerm. We've shown in animal and in-vitro studies lower immune response and better integration. So we've got unique and differentiated products in each of these large market opportunities. And I think if we reflect back on our performance, the fact that we have these differentiated products, we were able to grow 17% across last year year-over-year growth, in a world, obviously, dramatically impacted by COVID. And then even the fourth quarter with the resurgence that we're seeing in COVID across the country, still able to register a 10% increase for our core products. So very excited about what we have accomplished and more excited about where we're going in '21 and beyond.

Excellent. I think that's a great base to start this discussion off of. And we've been intrigued by your hybrid sales model, combination of direct reps and distributors. And I think there may be some -- there was some -- maybe just -- I don't want to say confusion, but not full understanding of the potential there of the hybrid model. Most small-cap or smaller medical device companies use distributors, a lot of them use distributors, 100% of their sales force. I just want to give you opportunity to talk about the advantages of and the strategy behind your hybrid sales model. I know there's different sales approaches within each of those core product lines, but maybe I could throw that question you, Ron, and get your response?

Sure. So let me go through it. It is a little bit different as our approach here, Josh, is to look at how do I take what we have in terms of our differentiated products and be able to come up with a go-to-market strategy that can benefit as many patients as possible. So we want to make sure that patients have the opportunity to receive our products. And so we look at each of our markets, and then we then determine what's the best go-to-market strategy. So if we start first with CanGaroo, here, we have our own direct sales force. We actually added 3 more sales reps in the fourth quarter. We now are up to 28 sales reps. Our reps are the biological experts to sell CanGaroo to EP doctors within this space. But we also recognize that it would be beneficial to also tap into some of the major device players. So we're able to sign commercial agreements with Boston Scientific and Biotronik. They actually help promote our CanGaroo in conjunction with our own direct sales reps. So it's a way for us to increase share of voice, have somebody that as a point of use, because they're in the procedure when their devices are implanted to also educate and remind on CanGaroo. And so we found this to be very beneficial to increase again our channel reach at very economical terms versus just adding more direct sales reps on ourselves in being wholly -- totally 100% direct sales force. On the orthobiologics side, we have focused on our strengths of product developments, scientific data generation and manufacturing, and then we tapped into our commercial partners to handle the sales and marketing of those products. And those -- again, those products are often used in conjunction with hardware. And so we've selected partners that have the hardware capabilities and the commercial infrastructure and then they promote our products. And then finally, for SimpliDerm, here, we have predominantly a 1099 distributor sales force, but we also have a number of dedicated reps, small number of dedicated reps within Aziyo. So again, lots of different markets here in terms of our hybrid approach and how we structured it. I think the common theme is how do we get the greatest penetration of our products to patients; and then second, how do we do it in the most effective and actually a cost-effective way. And so we found that from an investment standpoint, this hybrid model has been very efficient from an expenditure standpoint. And then finally, I think we've shown that it's actually very productive from a revenue generation and growth perspective. So again 17% growth through this hybrid approach in a world of COVID is a pretty meaningful growth rate as well. So very pleased with this approach. It is different than other companies. It's intentionally different. And again, it's designed to optimize the revenue and patient benefiting from our product.

Great. That's definitely furthers our understanding. And if I wanted to just kind of dig into each core product franchise, if that's okay, starting with CanGaroo, maybe we could start just thinking about the value proposition. And I think it's -- you commented on this publicly during the IPO process in the quarterly call since and in meetings. But just what we're learning recently is, clearly, the remodeling effects, the integration of healthy tissue and then just the sizes that you provide for your customers are having distinct advantages not only in the novo procedure, but also when a replacement is needed. And within that replacement, when you can tuck the leads or the beginning of the leads into the envelope, that's a big advantage when you go for a replacement procedure. And then also on the subcutaneous ICD, the larger size is really the only biologic envelope that fits the subcutaneous site and that's almost -- CanGaroo was meant for those patients because of migration risk. I wonder if you could just comment on those 2 indications and how much those are going to come into vogue in terms of driving adoption?

Yes. So we're excited by the CanGaroo technology. Again, we're the only biologic in the marketplace today. The material once implanted remodels in a native tissue, that tissue is actually vascularized. So you're bringing in a sense, blood flow and white blood cells and providing long-term protection for really the life of the device. And so that's a unique product offering. We are also investing, Josh, into additional clinical data to show that remodeling benefit. So we've just announced the initiation of a HEAL study. This is a 100-patient study, which will look at the health and the remodeling benefits of CanGaroo at time of change out compared to patients that did not receive an envelope or receives our competitors' envelope, which is just a synthetic material that dissolves within 9 weeks and has no remodeling benefit. So we're making that investment to document the biological benefits of CanGaroo and creating this healthy long-term pocket. We've heard back antidotally from doctors that certainly much easier to a change out when you have a CanGaroo patient and you've got this nice health pocket, you're not spending time doing a capsulectomy, you're not digging through calcified tissue or fibrotic tissue to dissect out the leads from the previous one. And we know that the complications from a change-out procedure are much higher than during a de novo procedure, and that's because it takes longer to do the procedure due to the capsulectomy, there's higher risk of bleeding and also higher risk of infection. So if we can then collect the data and show doctors the benefit of putting in CanGaroo, having remodeling benefits, then you'll have a much easier time and change out and you can get protect the patient through the device and the implementation of CanGaroo. So that's what we're focused on. From a product perspective, as you mentioned, we have 5 unique sizes, so we match up very nicely to all the different implantable devices. And including the largest size on the marketplace for SICD, which is a much larger device. And I think you mentioned that actually is a great opportunity for CanGaroo. These are larger devices, so they're more apt to have risk of migration and movement. And because the device itself and how it works, if it does shift, it could actually change the shock vector of that device. So you want a device that's stable. The device is also placed on the side of the body. So again, there can be some discomfort to the patient as well in certain positions and CanGaroo adds an additional layer of natural material. So it actually provides a little bit of protection as well in addition to the stabilization. So again, we're very excited about the CanGaroo, the biological benefit. And then the last part here is that we announced that we've locked our product design to add the antibiotics rifampin and minocycline to CanGaroo. So we are bringing forth our next-generation CanGaroo product. This would then include the embedment of those 2 antibiotics. Those antibiotics once implanted will be released for short-term reduction of infection, and then you still have the biological benefits of the product. So very pleased with the progress on that development. Again, from a timing standpoint, we've locked product design. We're moving forward with manufacturing validation. Then we'll conduct a number of in-vitro and in-vivo studies with the goal to file the 510(k) for this expanded application in Q1 of 2022, with approval hopefully in the second half of 2022. So all in all, very excited about our CanGaroo platform, very unique and differentiated. And again, I think we've got the investment of both the advancement of adding antibiotics as well as the investment of data generation to show the benefits and differentiation and, finally, what CanGaroo can do to improve the outcome of patients.

Fantastic. I wanted to just ask about regional expansion opportunities within the United States. And where do you think you are? I mean you've been building out, as you've referenced earlier in the discussion, some additional direct reps with CanGaroo. You have 2 out of the 4 biggest CRM players, partnered up with Biotronik and Boston. But I mean where do you think you are in terms of coverage within the United States? Is there still a lot of regional expansion opportunity for the CanGaroo franchise?

Yes. I think the -- as we think about our CanGaroo product opportunity, again, we have a relatively small sales force up to 28 reps. We are looking to expand that will expand as we go into 2021 and beyond. We're probably looking to add a little bit more expansion more towards the later part of the year to coincide with our milestone developments of any antibiotics as well as additional market access opportunities through our contracting team. But we do believe there's the opportunity to increase that sales force. But the benefit, though, Josh, is to also having our partnerships is that we don't need hundred or hundreds of reps out there to effectively coverage our target population of hospitals and doctors. And so our partnerships allow for us to have a very cost-effective sales model. And I think if you look at our company and you look at our sales and marketing spend and compare it to other companies of our size, I think you'll see that our sales and marketing spend is much lower in terms of total spend. And we like the efficiency that we get through our partnerships, and that puts us in a position where we're certainly not burning cash at the level of other companies of our size and that really puts in position that I have to go out and do raises from an operating standpoint, given the money that we've already raised from our IPO. So the answer to your question, we want to continue to expand our CanGaroo footprint? We'll add additional reps in '21 and beyond. But again, it's not a dramatic amount that we need to add to effectively cover the universe of population in the United States.

Great. I just wanted to quickly ask about the international expansion opportunity. Biotronik has a bigger percentage of share in Europe. They're one of your distribution partners. I just wanted to be clear, is Boston relationship -- or partnership just in the United States? And then what is your outlook for OUS expansion opportunity with terms of CanGaroo penetrating the cardiac rhythm management, implant volume opportunity in Europe?

Yes. So Boston as well as Biotronik are within our U.S. marketplace within agreements. Outside of the United States, we haven't really sold very much in terms of our CanGaroo volume. We are in European market and a few selected markets around the world. But given a small company, we've really put our energy and effort in the United States. However, there's been some interesting developments. We were now able to actually take our CanGaroo product in Europe and expand the label. We just got CE Mark to allow for the hydration of CanGaroo in the antibiotic gentamicin. And we found that when you hydrate it in gentamicin -- liquid gentamicin, it actually absorbs the gentamicin and releases the antibiotic over a 7-day course. So we were able to expand the label in Europe based on that data that we generated and the elution of gentamicin. So we do have a broader label now in Europe. We have a partnership signed with Biotronik for the European marketplace. And you're right, they're a German-based company and stronger market share within the European market. And so they're in the midst now of rolling out CanGaroo and the expanded label. And then we have a couple of small distributors in a couple of countries as well. So we do see this as an opportunity for expansion. Again, we're coming off a very low base. It's very little product knowledge and awareness on CanGaroo. So it will take some time, but it is another opportunity for us to grow revenue.

Excellent. Just last question on CanGaroo. The U.S. partnerships with Boston and Biotronik, my understanding is they're not exclusive and Abbott is the only player of the big 4 that doesn't have an envelope. I mean is there a potential opportunity down the line to partner up with Abbott as well?

Yes. So we actually, today, informally, have the benefit of working with Abbott. In many ways, they see Medtronic with their Tyrx device as a competitor. Obviously, Tyrx could use on Abbott devices. They see it as a threat of potentially having Medtronic that also capture their device share. So even though we don't have a formal agreement with Abbott, they see us as an informal neutral party and would prefer to -- there is an envelope placed on a device, it would be a CanGaroo, obviously, versus the Tyrx envelope. I can't go through the details of our structures on Boston or Biotronik and the provisions there. But there are opportunities where Abbott could be added and there's also opportunity based on performance of agreements that we have in place that may prohibit that as well. So obviously, a high-level generic play that way.

Understood. Understood. Just moving on to the Spine Biologics portfolio. The partnership with Medtronic, the largest player in spine, is a big deal. No doubt. You've had a lot of strong growth throughout the pandemic in that Spine Biologics franchise. FiberCel is the product that you're manufacturing and supplying Medtronic with. Can you talk about that relationship in terms of -- I know people -- I always use it, and it's probably not the best. But just in terms of innings or you still -- it seems like you're still in the early innings of that relationship, I think Medtronic has about 1,000 spine reps. Maybe just talk about where you are with that Medtronic relationship and where it can go?

Sure. So yes, we're pleased that we've been able to sign a partnership with Medtronic. As you said, they are the largest player within spine marketplace. They recognize they do not have a product within the cellular bone category. They looked at the landscape and were treated by our platform of having our viable cell matrix construct and the data that we've generated related to that platform compared to other cellular bone products. So they certainly are excited about the technology and the data that we've been able to generate from a differentiation standpoint. They rolled out FiberCel kind of mid last year. So we're still in the -- if you want to go with baseball, so I would say we're still in the first couple of innings of the game as it relates to Medtronic, still out there, rolling out the product, getting it through VAC committees and getting it on the shelf and being used. So we're seeing additional hospitals added every month as it relates to that product and the promotion of that product. And we are pleased with the uptick of FiberCel in the growth and the promotional focus of the product within the Medtronic spine sales force. Obviously, a large portfolio of products. But we're pleased with the positioning of this, and they tend to position it with their new Titan Spine technology products as well and position FiberCel with the new Titan Spine hardware. So pleased with the positioning, again, the general uptick of the product. And I think we're still in the early innings as it relates to further penetration of sales of FiberCel.

Excellent. You have a relationship with Surgalign as well for ViBone. You introduced a second iteration of ViBone Moldable. I think those approved late last year. Is there a path for product development within the agreement with Medtronic as well?

Sure. So let me go through first the ViBone, and I'll talk about then Medtronic. So we do have an agreement with Surgalign for ViBone. ViBone is a particle-based product, again, off our ViBone matrix construct. We have found through discussions with Surgalign that there are some doctors that would prefer to have a more moldable version. And so we created ViBone Moldable. We've added fibers to the product. So it still has the healthy cells, but also has a fiber component, leading to a little bit more better cohesion of the product and shaping and forming it for different procedures. So we were able to expand the agreement include ViBone Moldable late last of fourth quarter, and then the product was introduced in January. In fact, the first surgeon using the product was announced in January for ViBone Moldable. So we're now seeing that product being promoted through the [Audio Gap] we're starting to see now uptick of ViBone Moldable. And I think having the 2 different forms will be beneficial in that we have 2 different offerings than for that product for Surgalign. As it relates to Medtronic, obviously, we have the capabilities of creating different iterations of FiberCel. And if Medtronic wants a different iteration, we'll sit down and work with them from a partnership standpoint to make that available. Again, it comes back to what the needs are from a Medtronic perspective if they want a second form of FiberCel or not. But so far, the feedback has been very excellent on FiberCel and physician receptivity has been strong. So we'll wait and see if Medtronic wants another iteration or not.

Excellent. Wanted to just ask about OsteGro as well, it's another product. Can you just remind us who you're partnered up with? I think you have multiple partners potentially and you're selling that product line to. And then just one more question on Spine Biologics after OsteGro, maybe just about the performance of OsteGro well.

Yes. So we introduced OsteGro also last year. We had a number of smaller spine players come to us to want to get access to our technology. And we also had individuals, companies coming to us outside of spine in terms of extremity, procedures and even dental procedures. And so we've signed a number of small partnerships for that product. I think collectively, when you add them up, they become meaningful. And so we're excited to be able to offer this to other smaller players that they can participate in our technology platform as well. So we continue to see progress in sales of that product as well. And again, we're excited about this platform. Again, it's a large market. We now have 3 different products out there. And we're seeing nice growth of this product platform. So excited about where it's going. And our partnership model has worked out very well as it relates to this technology.

Just one last question on Spine Biologics. Just with FiberCel, ViBone, OsteGro, you're still developing products and potentially forming more partnerships with more spine companies. Is that the right way to think about it? And if so, when we could we see another product introduction or another partnership announcement?

Yes. So we're still looking at other products off this platform. So we have some other novel approaches on formulation as it relates to these products. We have products in development. We have potential to bring forth additional product this year. And then it's a matter, as you know, that would be also aligning a partner for that product simultaneously. So we believe it could probably bring forth an additional product this year, and then it's a matter that they're signing the right partner for that product and bringing it to the marketplace.

Great. Sorry, we're not leaving enough time for SimpliDerm, but another important product and earlier stage growing really strongly off a smaller base, but the human acellular dermis opportunity, particularly in breast reconstruction surgeries is a big one. Maybe just because we have limited time, it'd be great to just hear your outlook for prepectoral surgeries, the move there in reconstruction and why human acellular dermis is even more important for those types of reconstruction surgeries. And then I'm sorry, multi-tier question. And why SimpliDerm kind of is it the right technology at the right time as you're seeing this migration of surgical technique to prepectoral reconstructive surgeries?

Sure. So again, using our processing expertise, we look at human dermis. And here, you take the cells out of it so you decellularize it. And we came up with an approach to decellularize it that basically does not damage the remaining structural matrix within the dermis material. And we have found that through our process, we have a lower inflammatory response, we have excellent integration. And so we brought forth this product in the marketplace. We really have a 3-pronged approach. One is to collect clinical data related to the products. We have a number of studies ongoing to collect that data. Second is to expand market access, and we're pleased that we just signed an agreement with HealthTrust to have SimpliDerm added to the HealthTrust members through a contract that was signed effective March 1. And then the last is we'll continue over time to expand our commercial footprint. Again, we use predominantly a distributor sales force and a small internal sales force. As we think about the market, dermis tends to be used predominantly in breast reconstruction. As you mentioned, there's a shift to actually do the implantation above the pectoral muscle versus under the pectoral muscle. When you put it above the pectoral muscle, in terms of a tissue expander and then finally implant, you need generally more dermis to cover the total implant. And so you need the larger sheets. And so when you think about putting in larger sheets, you also have the risk of a greater inflammatory response by having more material. And so we think it sets up nicely where the scientific differentiation of our product having lower inflammatory response, especially as you put in more material. So we're excited about the opportunity. Again, it's probably one that will take some time for an investment to collect the clinical data, get the market access. And then, as I said, we'll add to our commercial footprint over time to expand the sales. So excited with the long-term opportunity. And we've seen some nice uptick already in the product, and the feedback from doctors has been excellent.

Great. Yes. No, we've been excited about your team's commitment to accrue clinical evidence for all your product lines. In simple terms, there's no difference in the strategy. There is a potential kind of pathway decision to make or decision treat relative to how the FDA, I guess, classifies human acellular dermis products and whether or not a BLA trial will be needed. At some point, that decision may come in the near future. But you clearly have outlined whether a BLA trial or no BLA trial, you're going to continue to accrue clinical evidence. Maybe just talk us through the different kind of outlooks in terms of what will be required from a clinical evidence generation standpoint, pending this FDA decision.

Yes. So right now, we're getting clinical experience in the product, given we want to see if the animal data that we've generated translates to patients. And we think it will, given that we looked at it in nonhuman primate studies. And then we'll also look at from an FDA standpoint, how this eventually will get regulated. Initially, it was 361. We'll see if the FDA then since puts it down a PMA path or BLA path. Again, there's multiple different approaches for breast reconstruction, and there's different techniques in different forms. I think there's a strong belief that, especially for prepectoral, you're actually using the tissue to augment dermis in those procedures and that should be close to back to morbid issues. So we'll stay where the FDA lands. And Josh, given the market opportunity and again, the differential we see in our product and the size of the market, certainly could warrant the investment to do a BLA or a PMA study, given the market opportunity that we see with this product. So we'll cross that bridge, I guess, when we eventually get through it from the FDA standpoint and then determine the right approach forward to maximize the opportunity with this technology.

That makes sense. And I just want to ask one last question on the human acellular dermis market opportunity. I think you guys have sized at about a $500 million TAM in the United States. But with the shift to prepectoral in front of the pectoralis muscle recon surgeries, the size requirement differences, I mean, that market could increase nicely as this surgical technique migration comes along. Can you help us think through that and where that TAM could ultimately be or the market could ultimately be in the next 3 to 5 years?

Yes. So certainly, as you shift the pectoralis, you need larger sheets. It tend to be sold at a per square centimeter so that leads to a larger TAM from a revenue perspective. And so I think this $500 million market could translate to a $700 million, $750 million market over the next several years based on the migration of moving to prepectoral. And again, doctors like prepectoral approach because they've seen better outcomes, less painful and invasive for women having reconstruction. And again, the dermis becomes more critical for structural support in that surgical procedure. So it could align very nicely to a growing market opportunity, and again, why we're excited about SimpliDerm.

Great stuff. Well, thank you, gentlemen. Appreciate the time, appreciate your participation in the Cowen Healthcare Conference. We've got to wrap it up there. We hit the top of the half hour, but it's great to see you virtually. And congratulations on all the progress in the post-IPO public company era.

Great. Thanks, Josh, and again, thanks for hosting us this year at the Cowen Conference. Appreciate it very much.

Definitely.

Thank you, Josh.

Thanks a lot.