Treace Medical Concepts, Inc. (TMCI) Earnings Call Transcript & Summary

Thank you, everyone, for turning -- tuning into another session of the Morgan Stanley Healthcare conference. I'm Drew Ranieri, one of the medical device analysts here. From Treace Medical, I'm excited to have CEO, John Treace; and CFO, Mark Hair with us this afternoon for a fireside chat. Before we get into it, just a brief disclaimer. For important disclosures, go to www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

With that, John and Mark, thank you so much for your time today. Looking forward to the discussion. And I thought I would start this conversation a bit differently than some of the other ones at the conference. But just given that you're a newer company and your public company, maybe just, John, give us kind of a brief overview of what Treace is, your technology and how you're positioned versus maybe competitive therapies, to just start with.

Sure. Thanks, Drew, and thanks for having us. Lapiplasty is a -- was really born out of voice of customer, and there was a team of surgeons and company people that got together and said, let's look at the state of affairs in Bunion surgery, which weren't too favorable. And how do we develop a way to address this and get better outcomes for bunion patients with recurrence rates on the conventional treatments as high as 70% to 80% in the literature, we knew we could do better. So we went about looking at the problem, really what's driving it and developing a proprietary procedure to address the problem at its root cause. And address all the anatomic facets of the problem and then let patients be able to bear away quickly and get back to their active lives and with a very low rate of recurrence versus what's been seen traditionally. So when a bunion patient decides to have surgery, there's a very low chance if they receive Lapiplasty that they're going to have that recurrence, which as sort of plagued by bunion surgery for decades. So that's our solution in a nutshell and our value proposition. We have a lot of facets of protecting the technology that we provide. We have a very strong moat of intellectual property patents around the product, 23 issued or granted patents to date. Strong protection around the way we go about doing the procedure from a method standpoint, and that's correcting our whole deformity before making surgical cuts, and that's led to an extremely reproducible and repeatable way of solving this problem and performing the procedure. We have over 15 peer reviewed publications, clinical data sets supporting our product. And as far as I know, the industry's only multi-center prospective clinical trial that we're carrying out to a 2-year primary endpoint and a 5-year secondary endpoint with radiographic results, investing heavily in our direct sales channel, which is going to be another differentiator as we have a specialized fleet of salespeople that know this procedure and know our technology better than any potential competitors could. Strong medical education and training programs with our surgeon team that deliver top-notch training. And a fleet of clinical specialists that will actually go out and attend these surgeons first few cases to make sure everything goes smoothly in the OR and make sure that surgeon gets those great results after being immediately trained. And last but not least, we have a strong presence with DTC or patient outreach, getting patients educated on our novel therapy and explaining the stark differences between Lapiplasty and the osteotomy treatments and that's benefited a lot of clinicians with patients coming in informed, ready for surgery and requesting Lapiplasty.

That's great perspective. Actually, John, instead of diving into COVID off the bat, just given the recent news, the Adductoplasty Midfoot Correction System that you're launching, I mean it sounds like a fantastic product. And I kind of would like to better understand how you're thinking about that product fitting in with Lapiplasty. And I saw the market opportunity, you noted 30% of bunion patients have midfoot deformity corrections. But just how critical is this product in the Treace portfolio and in driving surgeon adoption?

Great. Great question. You know obviously, with a TAM of just over $5 billion in the U.S. for Lapiplasty alone and over 1 million patients that should be getting the surgery and only 40% or so that are actually getting treated. We see a tremendous opportunity for Lapiplasty stand-alone in the U.S. as we advance our strategies towards making that standard of care. So at this point, we do want to keep tight focus on that opportunity. But that said, we're going to not only advance our core Lapiplasty technology as we move forward. But also look at new ancillary products that we can bring into the surgeon's theater targeting these concomitant pathologies that we see in high overlap with the bunion pathology. So we could be that total solution provider when it comes to addressing the bunion deformity and it's related pathology. So yesterday, we did issue a press release on the initial launch of our Adductoplasty Midfoot deformity correction system. And this system brings together specialized instruments and implants and precision instrumentation for kind of the first comprehensive system designed to reproducibly realign, stabilize, and fuse the midfoot deformities. Midfoot deformities occur in up to 30% of these bunion patients and studies have found that the recurrence rate following bunion correction to be meaningfully higher when the deformities of the midfoot are also not addressed in that procedure. So although there's a growing awareness of midfoot deformities and their common coexistence with bunions, there's something really the certain communities lack technology to correct in a reproducible manner. And just as our Lapiplasty system has sort of provided this instrumented and reproducible solution for bunions, we believe the Adductoplasty system enables similar enabling technology designed to convert yet another historically challenging freehand operation into the one that's now instrumented for reproducibility. And we do believe it's going to help advance our market leadership position and the management of bunion deformities. And with the potential of up to 30% of bunion patients also suffering from these midfoot pathologies. We see a real opportunity to help the outcomes for a lot of people.

Got it. Great. And just as we're thinking about the commercial launch, I mean, you're just launching it today, is this kind of a soft launch? Just maybe talk to us about the ramp-up here for commercialization? I'd imagine doctors would have to get trained on this technology. So just how will you kind of factor that in to the growth opportunity?

Great question. This is sort of announcing our initial launch, and we do have a limited number of sets, the instrumentation sets, and we do have broad availability of the implant sets as well. But you'll see this sort of expand as we train more doctors and make more sets available over the next 3, 6, 9 months. And somewhere around that time frame we'll probably reach full U.S. availability of the Adductoplasty system. But we've been able to get the limited number of sets we have out into the hands of a good number of surgeons already to address patients that they've been just waiting for a way to deal with. And now they do have a way. So it's been a very favorable response from the surgeon community, and we're pretty excited about this launch.

And just on an ASP question, I mean, should we see an incremental benefit to the blended ASP? You know it sounded like 6 to 9 months for you to reach kind of that full commercial launch. So maybe not this year, but would next year kind of be the right way to think about maybe another step-up in ASP, about at least a nice increase?

Yes. I look at it a little bit the way that our higher ASP mini incision system rolled out. We started gradually launching it in Q4, late Q4 of last year, and we're now approaching broader availability of that system. It does come along with an implant sale that adds several thousand dollars to the average revenue per case. So we are going to get a nice incremental blended ASP tailwind as we roll out more of these systems and do more of these procedures over time.

Got it. And so with this product, you're expanding into additional foot deformities, you have a broader bag now in the foot. I mean, does this potentially accelerate surgeon adoption or surgeon utilization of Lapiplasty or could we potentially think that this product by itself is maybe a tip of the spear to just bring in potential surgeons?

Great. Great question. I think it works on both sides. We -- a lot of our current customers are excited to get access to this and be able to treat patients that they've either referred to other surgeons or just ignored. And then the other piece is we would have surgeons that will see this and be very attracted to Adductoplasty and want to get trained on Adductoplasty, and now we have an opportunity to expose them to Lapiplasty. And they may have disregarded Lapiplasty in the past, but we find once we get surgeons into our category training labs and they actually experience it, it's a lot different than what they thought or what they heard from maybe another sales rep or peer. So I think it's going to be a good pull-through for added revenue per case and another helpful tool we can use to grow our customer base as well.

Got it. And will this product be kind of showcased at a -- at the upcoming foot meeting towards the end of the month? I think it's in Charlotte.

Yes, we will be; late next week, yes.

Okay. Got it. Anything else we should cover on the new rollout?

I think we've -- you've covered most of the key points, and we've discussed most of the key points. Again, we're excited about it. We are excited to have our second major product coming to market, really address a true unmet need. And this is one that surgeons look at. It's a product we're proud of because it's not an iteration on somebody else's product or an upgrade on somebody else's product. This is truly looking at a problem and it's genesis the way we did with Lapiplasty and try to bring out something that's going to be very meaningful and to some degree, expected from Treace Medical.

And just kind of on that innovation side. I mean, the Lapiplasty system, you can effectively replace osteotomy and Lapidus Fusion. I mean kind of what -- is there a certain procedure that you are replacing or standardizing to make it more reproducible in midfoot now?

There are other procedures that can be used to treat these patients and have been historically. But I would say the vast majority of the patients aren't being treated surgically to correct this other concomitant deformity. And part of that's been because it's a free hand, more difficult, more challenging procedure. And with our instrumentation and our know-how, we've been able to standardize this and give the surgeons that confidence. So I think it's going to benefit a lot of patients that weren't getting this correction performed before, and it makes a dramatic improvement in the cosmesis of the foot in addition to fixing the anatomic problems. And so that's the way we see it today. I think it's going to enable a lot of doctors to give a better treatment to a lot more patients.

Got it. Got it. Maybe let's move on to a near-term topic with just the Delta variant and COVID impact. I mean we've had multiple companies over the past week and even at the Morgan Stanley conference suggests that elective procedure volumes, there's pressure. I mean, I think that's clearly evident. To the extent that you can comment, what are you seeing in terms of pressure on the procedure side on onboarding new accounts or surgeons or training and maybe even on the supply side?

Sure. And Drew, I'll probably go back to some of the things we said in our Q2 earnings call and that we're all aware that Q3 is generally a soft quarter for orthopedic elected procedures in general. And we were closely monitoring this early impact from the Delta variant on elective procedures and hospital responses, which could affect some reasons more than others. We also indicated that for Q3, we expected revenue to be flat to a slight increase over Q2 of 2021. And at this time, with what we're seeing and what we know now, we're not changing that guidance. And we have seen continued disruption from Delta since that Q2 earnings call. But we continue to see strong underlying business trends and opportunities supporting us as we execute on our strategic objectives and commercial programs. And our market is really large, very underpenetrated. We have a very differentiated product offering with a growing clinical data set and steadily increasing surgeon user base and utilization. And we don't really see these procedures as loss procedures, we see more as delays or push outs. So that would be sort of the commentary on that from our side.

Got it. And then just on the supply side, anything that's being disruptive? In terms of gross margins or COGS or even kind of the rollout of the new platform?

Drew, we've been really fortunate. We've not had any disruptions in our supply lines or even significant cost increases. Fortunately being a focused company with our product line being very focused, we have duplicate and tertiary vendors for pretty much everything we make, be that on the implant side, packaging or instrumentation. So with most of our vendors being U.S.-based, we're in pretty good shape.

Okay. We can move on to other topics. And maybe we'll start with just underlying business trends. But you've been talking more -- talking more about the accelerating shift towards ASC. Maybe can you elaborate on the kind of the site of service mix in hospital or ASC? And maybe what are the key differences from your perspective? Are you -- is there a particular site that you're focused on? Just anything that you can provide there?

Sure. And maybe just an overall clarification. So we are an elective procedure, but we are outpatient elective. We don't require an overnight stay. So we're not inpatient. We were for outpatient. All of our procedures are performed in either the hospital outpatient setting, hospital owned freestanding ASC or a private owned ASC. But the patients come in and they leave the same-day they don't stay overnight. In terms of where we derive most of our business, I'd say the majority of our business is in the hospital outpatient setting or hospital owned ASC setting, but we have a significant amount of our business and success in private ambulatory surgery centers as well. We've been successful on both fronts. The product does well in both settings.

So not to push, but is it balanced or is one kind of skewing more towards the other at this point?

Well, I think any outpatient setting is going to be helpful in this period of delta, anywhere that the patients can get in and out quicker, anywhere that the OR capacity or rooms aren't being compromised to preserve space for COVID patients. That's going to be the proper setting. So we're selling into both pretty effectively, and we'll continue to do so.

Got it. I appreciate that. And I guess, looking at our model, I think one striking thing is penetration at the surgeon level and also just a utilization, frankly. So I think the addressable surgeon population, I think you're about 15% penetrated today, but the overall procedure opportunity might be low single digits, maybe 3% or 4%. So how do you close that gap over time? Is it just getting these surgeons more experienced, more comfortable with the procedure and that just naturally is an uplift to volumes. Just what are your perspective there?

Yes. No, great question. And we do have a comprehensive strategy that we're executing on to close that gap over time. And we're pretty pleased with the progress we're seeing to date. We continue to see nice year-over-year increases of Lapiplasty in our surgeons' practices. And in the first year that a surgeon does Lapiplasty, they average around 3 cases. Now that's a little diluted because they could be coming in at the beginning of the year, the end of the year with their first case. So in general, 3 per year. But by year 5, they're averaging over 25 cases. So given the large number of new users that we've added as Lapiplasty customers over the past couple of years, some of this gap is just temporal, but we have a goal to narrow that gap with a lot of initiatives that we currently have in place. And those include our investments in both surgeon and patient education. These are definitely helping and that's bolstered by our positive ALIGN3D, multicenter prospective clinical data. These interim report outs we're making on ALIGN3D are very helpful, demonstrating rapid weight bearing with low recurrence rates, very low recurrence rates. And of course, the faster or easier to perform and less invasive, we can make our procedure through our focused R&D initiatives, the more inclined surgeons will be to apply it to more broadly to their practice over time. And last but not least, we also know we're missing a percentage of our surging customers cases due to lack of facility approvals. So we're working to shore that up with our national accounts group. And over the past week, we actually signed an agreement with a major GPO group, and that's going to provide a lot of benefits in terms of allowing greater access for our surgeons and also hopefully increasing utilization for our existing surgeons.

Can you give a little bit more comment on that GPO? Or is there limited comments today and maybe we could hear more about that on the quarterly call?

Sure. I have to be a little general, but it's a large one, large, very recognized GPO.

Okay. There was a lot to unpack kind of just with what you're talking about. But a couple of things I wanted to go into, which is the ALIGN3D clinical data that you've been talking about, there was interim data, I think, that came out maybe really early summer type time frame. But just kind of what's the rollout or cadence for additional supportive data from that data set? And then second, I'd like to hear more kind of on the DTC campaign for patients. I mean, just what's kind of left to be done there? How -- are you in like the early innings of rolling that out? Or just any perspective on those 2 items?

So the ALIGN3D, I think, was the first question. And we've been trying to target report outs -- interim reports on the data set at the major society meetings, namely ACFAS, which is the annual large meeting of surgical podiatrist and then the AOFAS, which is the largest meeting of the orthopedic foot and ankle surgeon group, which is coming up next week. So we had a report out in May at the ACFAS conference. And we are -- we press released that we're going to be having a report out at the upcoming AOFAS conference this coming week. So those will be progressive, more aged data sets with more patients out and further term. And then finally, we're targeting the final 2 years on all treated patients in the first half of 2023, and we'll be doing a final report out there and then submitting that final report out for publication. But in between now and then, we expect we'll probably submit some of this interim data for publication in a peer-reviewed journal as well.

And then I ask a lot of questions there, I'm sorry. Just on the direct-to-consumer campaign, I mean are you still in the early innings? And could you share maybe some metrics to us so that -- so we can gauge the progress and success the program is having?

Sure. I think the best end metric we have. We survey our surgeons quite frequently on this topic, our surgeon customers. And we know that a meaningful percentage of the patients that they're treating are coming in pre-educated from our website and from our patient outreach initiatives. So we feel pretty good about our investment there from an ROI standpoint and what it's delivering in terms of patients into our doctors' clinics. I think we've got a long way to go. We did message and communicate that we're going to be making substantial investments in our direct sales channel, R&D and DTC, our heavy commercial efforts. And part of that ramp-up is to look at some new venues, new channels where we can start to reach these patients. And we recently completed a multi-city pilot on a TV commercial and hitting both mainstream TV and also streaming. And we're pretty encouraged by the results we've seen there, and you may see more of that in the near to medium-term from us.

Got it. And was some of the commercial investments, let's focus on sales force expansion for a moment, I think 50% of sales now are coming from your direct sales force. I mean, how are you thinking about that mix over time? And really what kind of rep expansion maybe over the balance of the year and into 2022? I mean, how meaningful of an initiative will this be over time?

It's going to be a very meaningful initiative. And we have a lot of effort underway to rapidly expand our focused sales channel. We made good progress this year. As you mentioned, by Q2, we were over 50% direct focus. And as we look out over the next 2 to 3 years, something in the north of 70% range is probably likely. That said, we have some really, really excellent independent 1099 distributors that have co-invested with the company and met the growth rates and objectives that we've been looking for and will probably be with us for quite a long time. We hope so. We're looking ultimately for what's the best distribution we can get in a certain geography. And if that happens to be a direct footprint, it will be direct. And in certain instances, it may be a distributorship.

Got it. Got it. Very helpful. And we're getting close to our time, but I just wanted to hit on the competitive landscape. I mean, you're clearly increasingly more successful in rolling out the procedure to surgeons, increasing penetration. I mean when do we kind of see maybe me new 2 technologies? I mean -- and broadly, kind of what are you seeing from a competitive landscape? Any pressure that you're seeing?

Well, sure. Good question. We've been selling alongside a couple, 2 or 3 for the last couple of years. Frankly, companies that with systems that are promoting themselves to be like Lapiplasty. So that's one trend out there. The other trend out there is this minimally invasive osteotomy trend, which we believe is the same fundamental osteotomy surgery that will probably ultimately be reflected in the recurrence rates, just doing that procedure through a smaller incision. At the end of the day, our largest competitor that we face is the dogma and the mindset of applying the metatarsal osteotomy to the majority of bunion procedures and bunion patients. And this has just been ingrained in the training centers and teaching institutions for decades and decades. And with 75% of the procedures out there still being performed as metatarsal osteotomies, we think we got a lot of opportunity to just change the mindset and the thinking and show the science and show our data and expose more surgeons to our technology. And once they do, like many other surgeons that do the majority of their bunion as osteotomies, we do start to carve into those osteotomy procedures and convert them over time.

And just on that topic, with the ALIGN3D data coming out in the first half of 2023, I mean, will that be kind of a critical component of getting the message out or driving adoption? Or is it really just getting Lapiplasty in a surgeon's hands so they can better appreciate it?

I think it is, and I think it's just going to be a combination of all the components. The iterative report outs we're going to be doing on ALIGN3D will show more aged data, more patients further along and the good outcomes there that we expect to see. And then more focused salespeople, more DTC and patient education going on, more surgeon training and more innovations coming out of our R&D team. All these things are going to work in coordination with each other to drive and accelerate that. The more surgeons we get performing Lapiplasty, the more 6 degree of separation effect we have on a peer, right? So sometimes a surgeon will start because a respected peer started using Lapiplasty or too many patients that come into their practice, impacted by our patient outreach programs, asking if the doctor does Lapiplasty, they have to say no. And they come to our course and say, I've had too many patients walk away. I need to get trained on this. I've seen your data. It looks really good. I want to do [indiscernible].

Unfortunately, we hit the top of our time here, John and Mark. I mean, I feel like we could go on for another 30, 45 minutes here, but this has been a great discussion. And thank you again for being able to participate today.

Thank you, Drew. Appreciate the time.

Thanks for having us. Thanks, Drew.