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

Good afternoon. 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 with us. And from the company, John Treace, Chairman and CEO; Mark Hair, CFO; and Julie Dewey, Chief Communication and IR Officer. So thank you all for coming.

Thanks for having us.

Thanks for having us. Great to be here.

So we're just not too far from earnings, week removed for you guys. So I wanted to start with a recap of Q1 results, 21% revenue growth, which I believe is on your toughest comp of the year. So maybe just talk about what the highlights from the quarter and what went well?

Yes, sure thing. Yes, like you said, 21% growth. It was a nice growth quarter. The revenue was strong. Our new customer adds, we communicated that we'd add between 250 and 300 new surgeons during this year, and we were on track for that through the quarter. So we were adding new surgeons. SpeedPlate, our newest fixation technology. It accounted for about 20% of our cases in Q4. In Q1, it accounted for twice that ratio. So really 40% of our cases. So strong uptake from SpeedPlate and strong customer adoption continued. We had nice blended ASPs, good unit volumes. And couple of things that may not have heard happen in the quarter, we received our 510(k) for our 2 new minimally invasive osteotomy systems. And we've recently trained a group of early users that will be the first to try these systems in the somewhat near future and then launch in the fourth quarter.

Great. And I do want to get into that. Obviously, the stock had a reaction, and I think it was largely driven by the cut in guidance for the year. So maybe -- and obviously, want to address that. So maybe just talk about what the cut was, some of the rationale for the cut or the thought process behind the new updated guidance.

And John, maybe I can start and you can add some color.

Sure.

So what we do on a monthly basis and every company does, but we really look and do our analysis to understand the underlying trends. We do benefit from typically, in every Q1, we benefit from a carryover in the fourth quarter. It's our busiest time of the year. We do more case volume in the fourth quarter. It represents a bigger piece of our full year revenue. So, not all those cases coming down in the fourth quarter. So we benefited in the first quarter with some of that what we call that carryover revenue. And so as we were just doing our analytics and understanding what was kind of base business and what's kind of the benefit that from that carryover, we noticed some slowness as we're coming out of the first quarter. What raised some flags. We were looking at those dynamics. And then ultimately, we had a softer April than what we would expect. And so now it became a little bit more of a trend from what we had anticipated. And then you get into what the forecasts are and what the field is saying about May and things. So we had some softness coming out of Q1. We saw it in Q2, and we just said, "Hey, look, we need to say what we're seeing. And so we did. We revised the guidance range to reflect some of these underlying trends." And to John's point, some of the trends were really good. We had some nice volume increases in Q1. We are adding new surgeons. So definitely, surgeons are still interested in comprehensive platform for Lapidus procedures, in our flagship Lapiplasty. But as we were looking at a lot of the analytics, we saw that in the utilization or the frequency that our very large customer surgeon base, it's approaching 3,000 that have used Lapiplasty in the trailing 12 months, the frequency in which they were coming to the table and using Lapiplasty was just a little bit different from what we anticipated. And so we decided to change that guidance to reflect what we were seeing.

Got it. And so I guess, maybe a couple -- I'm trying to, I guess, drill down on some of that, some of those comments. And let me start with the utilization piece that you just talked about, Mark, and trialing, and I think you might have said there's some new products out there for bunion repair and maybe trialing of new products was part of change in utilization. So I guess I want to get your impression and is that one of the -- do you think that's one of the drivers? And we see this a lot in med tech. So it's not uncommon to see new products come, doctors tend to see what -- utilize new product and maybe that hurts some of their existing -- what they -- their normal utilization might be. And then we see it come back. Some come back, some don't. So I guess it's a long-winded way of asking the competition or like what are you seeing in the field? I assume you're talking to your docs when you saw this utilization. So what's the feedback that you're getting from them? And then maybe a follow-up on that, we can get into maybe what you assume comes back or doesn't in the full year guidance?

Yes, I can start there and Mark can clean up maybe. The 2 pieces that we were looking at were yes, numerous new alternatives to Lapiplasty, or Lapiplasty-like product, the knockoffs. We believe some of them are on our IP, frankly. The other piece is the broadening usage of the minimally invasive osteotomy. So in that slightly reduced volume per surgeon data that Mark was speaking to, both of those are playing into that softening. When you have a lot of products out there, like you said, doctors really want to try to use them. Whether they stick with them long term or not, some will, some won't. We saw this to a degree last year as we went through the summer months where other new competitive entrants had entered the market, and you had a combined competitive entries with a seasonal change in behavior of our patient demographic. They were traveling at an extraordinary level and not wanting their surgery in the middle of the year. And then we came back with a very strong surge in number and utilization rate in Q4. So it's not a natural for surgeons to try these new alternatives for a while. They get pressured to do it, they try it. And then very often, they come back to Lapiplasty because there's a lot of our doctors would tell us, I tried this thing, I tried that thing -- Lapiplasty just works. In my hand, it's just so straightforward. It's simple, it's reproducible and I can count on it. So I think in our forward guide, we're trying to contemplate those 2 things. Continued adoption of minimally invasive osteotomies for a portion of more surgeons bunion practice and then continued noise from some of these competitive alternatives.

And I mean, I guess, Thinking about the bunion repair market in general. You talked about some of the MIS and it seems that maybe there's a shift with -- from a procedure perspective, maybe to some more MIS procedures. So I'd love to kind of get your thought on that more broadly, where patient preferences are going, how docs -- obviously, patients are important to docs, docs have their preferred procedures. But maybe just talk about some of the underlying dynamics going on in the bunion repair and are they more temporal? Or I mean, could they be permanent changes? Just I'd love to kind of, given your focus on bunion repair, like you're obviously living it every day, so I would love to kind of understand how you see the market evolving right now.

Sure, sure. And maybe I'll take a step back and talk about kind of the market pie. When we started the -- 8 years ago, when we started selling Lapiplasty, a Lapidus type approach, a joint fusion approach was used for probably 15% of cases and the remainder were metatarsal osteotomy. Over the past 8 years, we've shifted that to where today, it's closer to 30% are the Lapidus type or joint fusion procedures. The newness of some of these minimally invasive osteotomies are very patient attractive and they're attractive to the surgeons as well because once you get up the proficiency curve, they can be done pretty quickly and the recovery for the patient can be pretty quick. The challenge is those procedures have a very long learning curve. And some of the surgeons you talked to about minimally-invasive osteotomy, say, it's 40 to 50 cases in live clinical use before you can start to really get proficient and reliable, reproducible outcomes. And during that phase, you're taking a lot of fluoro shots, a lot of radiation and you may not be getting the best results that you want to be getting. That's a really significant challenge to the current broad adoption of MIS osteotomy. What we've seen is, we can take the approach that we took with Lapiplasty, where before Lapiplasty the Lapidus Fusion was a very difficult Free-Hand operation to perform and it really limited in the marketplace. We brought an instrumented, elegant solution that allowed it to be mass adoptable and we did the third plane fix. We've been working on our own osteotomy, minimally invasive platforms quite a while now. We've enlisted a world renowned group of MIS surgeons to help us with it. And the solutions we're going to be bringing to the market are going to be much like we did with Lapiplasty, highly instrumented, quick learning curve, minimally invasive, fast procedures and that third plane, the rotational plane that can help drive lower recurrence rates. We're going to bring that into the marketplace to our near base of 3,000 surgeons that are doing over half their procedures as metatarsal osteotomies, we don't have a solution today. When our focused direct bunion sales force is armed with a comprehensive suite, now best-in-class osteotomy 3 plane, best-in-class Lapi 3-Plane, we think that's going to be a very powerful position to put the company in.

Got it. Okay. That's helpful. And maybe if I just go back to the guidance and kind of what it implies for the back half and maybe some of the cadence. And maybe you can explain kind of some of the cadence. So 21%, as we talked about in the first quarter. The second quarter, I believe, it's flat year-over-year is the expectation. And then roughly 10%, I guess, to get to the midpoint implied in the back half. So I guess, Q2, Mark, you talked about maybe April, you saw some of that softness. So I'm assuming that's driving that. But then what drives that reacceleration in the second half? And is that -- are you assuming those procedures come back? Is it more the MIS osteotomies, I guess -- I'll let you answer rather than me talk.

Sure. take a shot, Mark, please add to it. But when you look at it, Q2 was a big comp last year. And we -- based on the recent trends -- and as you get into Q3, we're going to have some more surgeons trained. We're going to be at over an easier comp. We were 23% last year in Q3, 40% in Q2. So that's the one to get over. We get into the lower comp. And we've got more trained surgeons, more of our sales force maturing and contributing more. We have a new SpeedPlate product that's going to be launching in the beginning of the third quarter that will address bone fusion procedures that we don't address today with our current SpeedPlate offering. So that's another catalyst. Last but not least, we started our DTC program pretty actively in March. And by the time frame that it takes for patients to do their research and actually schedule an appointment, we could foresee some patients starting to come in from that impact in Q3. So there's catalysts for Q3 where we're an easier comp. And then as you get into Q4, you've got all those other catalysts plus we're going to expand access to our RedPoint PSI technology, and we'll have some impact from the minimal invasive osteotomy platforms. So that's kind of what gives us the kind of momentum build as we go through the year.

And have you said kind of where Q3 revenue might be? I'm just implying numbers for the back half, but you said what that kind of step-up is?

We said Q2 would be roughly flat and then Q3 and Q4 will be consistent in high single digits. And so to your point, that midpoint of the guide range is 10%.

Got it. Okay. And sorry, kind of jumping around here. But I did want to ask, and I don't know if you got it on the call, maybe you've got it subsequently. You were expanding your commercial infrastructure. And I guess when you see a cut in guidance, especially in orthopedics, the assumption is you're losing docs or you're losing reps or maybe both. So I wanted to ask if, Mark, you talked about the utilization, so that may be the bigger driver. But I did want to ask if surgeons are moving away from you doing other procedures, completely? If reps are -- potentially you lost some reps to competitive hires?

Yes. Yes, let's address each of those. So one, as John mentioned, that we gave a guide of 250 to 300 new surgeons this year. So we're on track for that. So we continue to have a lot of interest from surgeons who want to have a more repeatable Lapidus procedures, so they come to get trained on our Lapiplasty. So we haven't seen it there. we're -- with any sales force, it never stays completely stagnant. So we've had, I'll call it, some changes in the size of the team. But a lot of that is nonregrettable and changes that we were making as we are monitoring the effectiveness in all the territories that we have. So I wouldn't really say we've lost key accounts through sales rep turnover that way. And we just want to make sure that our sales organization is as efficient and productive as they absolutely can be. So we're spending a lot of time with them, and they're very energized right now to understanding these incremental dynamics, and we're making sure that they've got all the information at their fingertips to understand even these slight changes in utilization because we don't see any particular competitor per se, it's not one competitor. It's really a lot of things that are happening at the same time. And so what's that -- what that has done is kind of across some of our existing, tenured groups of surgeons, if they're all missing just one case a year, when you have close to 3,000 surgeons, that begins to add up. And so it's more of just around the edges that we're seeing some of that utilization kind of come down, but it doesn't seem to be any dramatic changes in our customer base. We always have some churn in our customer base, and we recognize that. I think that's very common for all companies. But that -- the turn or those that are loss is not really anything that has been different from what we've seen in the past. It's more of a utilization. What mix of their cases are they going to use our flagship Lapiplasty versus other alternatives?

Got it. Okay. That's helpful, Mark. Thank you. And so I guess, with some of the utilization on Lapiplasty with the 2 new MIS bunion osteotomy products, I'll get that word right at some point, and even some of the new other product launches, I think a question that comes up is what's the mix of the business look like going forward? And along with that, what's the right growth rate? You guys had very impressive growth for a number of years. And you still double digit. Your guidance is still double digit now while digesting some of these, I'll call them, temporary headwinds. But how to think about the mix of the business going forward,? How much it comes or how much out of bunion or how -- I guess, how far into a foot and ankle are you planning to lean? And then what is the right growth rate for the business in '25 and going forward?

Yes. Great question. I think the we're in this technology kind of reload phase right here. We had SpeedPlate. We thought it would bridge us to the new osteotomy technologies and bridge that growth rate, the underlying a little bit of softness or dampening of the utilization kind of put a little bit of a headwind on that. So this is a technology reload phase. We're going to get to the minimally invasive osteotomy systems, but we're also going to be continuing to do a connect-the-dots approach to where we expand into. We tend to focus primarily on the bunion and we'll have more broadly focused on the bunion with our mininally invasive osteotomes. We got into the midfoot with adductoplasty. And now we've added SpeedPlate and SpeedPlate has taken us to other areas in the foot, and now we see new opportunities for other implants and fixation systems and other products for those areas of the foot, put our reps in a more fulsome presence with these doctors in these cases as they kind of work their way around the foot over time. Then we'll continue to add and broaden our portfolio, but still keeping that focus on the core bunion and mid-foot related operations.

And Craig, you talked about the mix. I think what we're really excited about is what osteotomy platforms will bring for us. So right now, if you think -- and we believe that the market is really about 70% are still done in osteotomies and 30% is where we've been focusing and building that Lapidus segment of the market. But this opens up a lot of opportunity for us. Even our -- some of our most seasoned surgeons, even when they get to 4, 5, 6 years using Lapiplasty, they're really on average, still doing less than 0.5% -- half of their cases with Lapiplasty. so there's this opportunity for an equal number of osteotomes that they're already doing today. So that's the exciting part is that we have nearly 3,000 customer surgeons today. We know that on the average, they're doing more osteotomies in their practice and to the extent we can do exactly, what John said, make it a very difficult procedure, instrumented, repeatable, adjusted and correct in that third plane, and we think there's a really good opportunity to drive a lot of additional procedures that we've missed out on.