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

Good morning. My name is Craig Bijou. I'm one of the medical device analysts here at BofA. And it's a pleasure to have Treace Medical here and from the company, John Treace, the CEO; and Mark Hair, CFO. So thank you guys for coming.

Thank you, Craig. Really gracious to be here and excited to be at the Bank of America Healthcare Conference. It's our first time.

Well, great. Well, thanks again. Maybe just -- I don't specifically -- or I don't cover you guys, so maybe just from a high level, your unique, high-growth orthopedics company. So would love to hear a little bit more from a high-level perspective, kind of what you do.

Sure thing, sure thing. Happy to. So the company was founded in early 2014 in Pontevedra Beach, Florida, with an emphasis on trying to improve standard of care and clinical outcomes for bunion patients. And we've done that through the development and progressive market penetration with our lapiplasty 3D correction bunion system. Lapiplasty is disruptive technology. It's serving a large market opportunity. There are about 65 million Americans that are affected with abundant deformity. So the prevalence is very high, about 5 million patients each year seek medical attention for their painful bunion and about 450,000 undergo surgery every year to treat that painful bunion. But there's about a 2:1 ratio between the patients that are being treated surgically and those that really need the surgery. So we have about a 1.1 million patient base that need surgery. Bunions are progressive. They only get worse. They don't get better. And so we view that as our $5 billion -- $5 billion plus TAM here in the U.S. We're about 5.8% penetrated revenues of about $142 million as we exited last year, and we just closed out Q1 with a 45% growth rate and upped our guidance for the year.

That's great. And I'll get into some of the specifics on Q1 and then some of the other metrics that you do provide. But again, maybe from a high level, you guys have seen very strong growth in the last couple of years. I think it's 65% in '21, 50% in '22. You just referenced the 45% in Q1 and guidance is mid-30s if I'm correct. And I guess, what's been the key driver to that over the last several years. Maybe you can just kind of walk us through how you've seen what has been the real driver?

Sure. And we've been commercial now for approaching 8 years with the technology. And what we've been investing in is rapid R&D innovation to make the procedure faster, easier to do, better outcomes for the patients. We've also been investing heavily in multicenter prospective clinical data and a really unique and differentiated portfolio of data sets that we can make really good claims about the outcomes that surgeons and patients can expect to see with the technology. So rapid R&D innovation, clinical data sets that are differentiating and our direct sales channel. That's been a really, really strong component of our market penetration strategy over the past few years and then our direct-to-consumer patient awareness campaigns. We leverage our clinical data into being able to make statements to the patient population, inform them that there's a better funding solution out there today. Prior to the introduction of lapiplasty, if you ask a patient that had bunion surgery, if they were satisfied with their bunion case, there's probably a 30% to 50% chance they say no, and they would recommend a peer and not having it. With our line 3D multicenter study, we're now seeing patients that are 3 years out, 97% of them are saying they're satisfied or very satisfied with the outcomes of lapiplasty procedures. So we're really changing the expectations for bunion surgery, and that's what we think can help expand this opportunity from the 450,000 to that 1.1 million patient group over time. So those have been the components directionally.

Great. And maybe let's kind of touch on Q1 that 45% growth, obviously, you saw procedure growth, you saw some ASP growth. So maybe just provide a little bit of perspective on how much each contributed to the overall growth in the quarter.

Yes, it was probably as an overall blend. We had strong underlying continued lapiplasty kit growth rates. But then we also did benefit from the impact of several new product launches that we announced last August. There were several things, the full launch of our lapiplasty system. This is for mid-foot correction that's performed in conjunction with the bunion procedure. And every time a lapiplasty case is performed, it adds several thousand dollars on top of our $4,800 lapiplasty case. And that's a -- that's a system that's been designed to reproducibly correct a challenging midfoot deformity that occurs in up to 30% of bunion patients. And clinical literature shows, if you don't correct that deformity, you don't have as great an outcome with the bunion correction. So all through this focus on the bunion, we've developed these new unique drivers of our blended ASP. We also announced a new plating system called our S4A anatomic plates, and this is a more anatomic design that fits the anatomy better on a broader variety of patients. What it's doing out there is supplanting or replacing our core prior lapiplasty plating kits at a little higher ASP. So the more that carves into and replaces and cannibalizes our other plating systems. It's helping drive the blends be higher. And we announced the launch of a couple of tissue release instruments. These are sterile pack, single-use instruments that are designed to make previously difficult soft tissue release procedures much more simple, much more straightforward and reproducible. So you add all those up and they're starting to drive our blended ASP up, and we ended up with a 6,244 blended ASP in Q1. That was up 13% over Q1 of last year. So we're very pleased with that, and we think that can continue to go up into the right over time as more of our R&D pipeline projects that we have in development now start to commercialize.

Got it. And I know you get asked this the stickiness of lapiplasty or the stick rate with lapiplasty. Do you -- I mean, do you provide that metric? Is it on the majority of cases that you're also getting the lapiplasty?

Well, we've surveyed our surgeons and they say that they could foresee using the Adductoplasty on about 15% of their lapiplasty cases at some point in time. Now we're in the -- we're at a fraction of that in terms of converting that market. So we've got a long runway ahead of us to continue to add more of Adductoplasty cases to our overall mix. So those 2 are performed, though hand-in-hand, 99% of the time. So the stick rate is really high between those super cedars in the same case.

And then in the cases that they're doing lapiplasty but not a Adductoplasty or specifically, what -- and what are they using? Are they using a competitor? What are they using in those cases that they're not using your lapiplasty case?

Well, we typically wouldn't see a situation like that because we teach the 2 techniques hand in hand when we bring doctors to our advanced trainings and teach them how to use a Adductoplasty. They typically do that procedure first to realign the smaller toes and get them straightened out, and then they'll do the lapiplasty on the big toe to straighten it out. So they go together hand.

Okay. And then I do have to ask this. So you -- I think you beat by $3 million versus the Street. You raised guidance by $3 million, I think. We've seen different strategies or different companies take different tax in terms of flowing through the beat to -- or raising guidance, but raising it by more than the Q1 you guys chose just to kind of flow it through. So maybe in conjunction with answering that question, how should we think about the cadence? How is seasonality impacting the rest of your business? Is there anything that we should be aware of for the rest of the year that may have factored into kind of the amount that you've raised guidance, recognizing that your growth is -- guidance is still pretty strong. So...

And Craig, maybe I'll try to answer that one. Hopefully, you can hear me. Yes, we feel really good about Q1. All those things that our strategic focus that John has been talking about our direct channel build, the DTC education programs that we have for patients and our product innovation. So those things were really the focus of last year. So we had a very strong Q4. Q4 is typically our strongest quarter for elective bonding procedures. So we had a really strong Q4. In fact, it was so strong that we really had that trickle into and extend into Q1. So that was a really strong nice thing to see there in Q1. So we had a strong 45% year-over-year in Q1. And then we did raise to 34% to 38% growth over last year. And we feel that we're very well set up for the balance of the year, Q2, Q3 as we prepare for the strong Q4 again. So nothing really new or different from any other year that we've seen. So we feel like we're locked and loaded and excited about Q2 and Q3.

And maybe just following up on one point you made, Mark. We've heard and seen the number of strong ortho procedure numbers from a number of companies. Some of it is comp related or if you look at the growth rate, some of it is the same dynamic where Q4 demand was very strong and the procedures just can get done and they ended up coming into Q1. And I don't know if you're willing to talk at all about kind of trends within Q1, what you see in January, February, March. But what's your view on kind of where procedures are in Q1? It sounds like there was some spillover -- but is there pent-up demand there? I guess we're all trying to figure out exactly what the orthopedic procedure volume environment is like in recognize that foot ankle may be different than hips and knees, but I would just love your perspective on what you're seeing in your market.

Yes. I would say my comments were more specific to the elected bunion procedures, and we've seen this very strong Q4 deductibles are met. It's a great time to get a procedure, you may have additional time off. So a lot of patients come into the Q4 time period. We've seen this benefit of the strong Q4 push into Q1 for a couple of years now. That's just our seasonality. And then we see Q2 and Q3 a little bit different phasing than what we see in Q4 and Q1. So Again, it's difficult for me to speak to the whole orthopedic market or the broader foot and ankle market, but that's definitely what we're seeing. So we feel like it was a very strong Q1. And again, we did raise the guidance by that $3 million beat. So we feel good for where we're positioned for the balance of the year.

Great. Okay. So let me -- one thing that stood out to me or stands out to me is your utilization. And you guys talk about your penetration amongst union surgeons. So that's roughly 25%. But then your penetration in funding procedures is 6%. So obviously, there is a little bit of a delta there. Utilization still continues to be strong and growing. So maybe, John, if you could talk a little bit about kind of that dynamic, how you get those 2 numbers to converge a little bit more? Because that seems like the opportunity that you guys have.

Yes, you're right. It's a huge opportunity. If we can get 10% of the symptomatic surgical candidates penetrated over the next several years at our blended ASP, it's a $600 million business. It doesn't mean we'll stop there, but it speaks to the power of what type of shareholder value, this type of focused strategy and focus on penetrating that market can create. We've got the benefit of 7 years of great data on our user cohorts. So we know today that the average first 12 months, full 12 months a certain uses labels. They do about 6.5, 6.7 procedures. And then that jumps their next year up to 10 procedures. And then by year 3, they're up to 13. So they climb 50% year 1, another 30%, and then by year 5 or so, they're approaching 20%, which is you figure the average bunion surgeon does, call it, 35 cases a year, you're at a pretty good percentage of their overall practice. So what's happening is we have nearly half of our customers have come within the last 24 months. So they're at that lower utilization and they're diluting down. But we've segmented that data. We know that if we take those out, the utilization goes up, market penetration goes up over time. So the way we look at it is, if we can get half the doctors in this country using lapiplasty, 20% of the 450,000 penetrated. We've got a $600 million-plus business in the out year. So -- but that's kind of how those converge. And then all the things we're doing to get more dedicated focused direct reps on the street to call on a smaller group of doctors, evolve the technology, so it's faster, easier, less invasive, continually supercharge our DTC patient awareness campaign so that more patients are getting educated and ultimately booking consultations, all these things, we think, can work to try to speed up that utilization. We do know that this past year's 12-month -- 12 full month cohort has embraced lapiplasty at a higher rate than any prior 12-month cohort. So they did an average around 7 where the average was 6.5% in the past. So they seem to be coming on more aggressively, and we think that's because of all the things that we're doing, plus the fact that lapiplasty is becoming a much more established procedure now. And we're starting to get this sort of I know a respected peer that's using it and getting great results. And that's why I'm getting trained on it and adopting it my practice. So that's what we like to see shows we're in the early majority part of the adoption curve, and we're going to keep running that playbook. Going forward to it.

So I think you said half of the surgeons that you've trained have been in the last 12 months or 24 months...