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

Thank you all for joining us today. Good morning. My name is Drew Ranieri. I work on the medical device team here at Morgan Stanley. Pleased to have with us today, Treace Medical, specifically of John Treace, Founder and CEO; Mark Hair, CFO. Before we get started this morning, everyone's favorite disclosures. But for important disclosures, please see our disclosure website. And if you have any questions, please reach out to the MS sales rep. But John, Mark, thanks for coming up today and speaking with us.

Maybe let's start at a high level today, John. There's been some recent noise kind of on the near-term health of the foot and ankle market in general. You're more of a pure play -- or you are a pure-play bunion company. But kind of what are you seeing in the market today since competitor recently noted some procedure volume weakness in the market? And maybe just as you're kind of looking out through the rest of the year, what are you thinking about in terms of the health of the consumer? Because this is kind of more of an elective procedure at the end of the day.

Yes. Great. Thanks, Drew. And first of all, thanks for having us. We're excited to be here. It's our fourth year presenting at the conference, and you guys put on a great event, and we appreciate it. In terms of the marketplace, we saw the softening in the market late in the first quarter, and we saw it continue into early second quarter. And we attributed that from our lens mainly towards new competitive systems, knockoffs of our Lapiplasty system and also some emerging increasing excitement from the doctor and patient community for minimally invasive osteotomies. So we kind of called it as we saw it as that. There was some noise in the market. Some of our surgeons and other customers being interested in trying some of these other devices leading to some of that softness. That's not to say that what some of the other companies stated that they witnessed [ wanted to play too ], whether that's a timing shift in patient demand due to co-pays hospital block time allocation for these types of procedures, et cetera, those could be at play, too. But we feel pretty good about the way we called the rest of the year at the time. And in terms of the patient population. These are elective procedures, but bunions are -- they continue to become more severe over time. So kind of like hip and knee arthritis, the patient is going to reach a point where they either decide to reduce their activity levels and live with the pain and lower activity level or get a surgical treatment. So the bunion patients are out there. It's not a matter of if, it's when. And last summer, we saw a very high demand for travel, preferential travel in our patient demographic and then a compression of patients into the fourth quarter. So timing can shift during the year with these patients. We always see a seasonally strong fourth quarter. It's typical in orthopedics where you have high elective case make up, and we see it every year. So it's just a matter of kind of if not when it will happen.

Got it. And we'll kind of hit on that dynamic a little later. Maybe just sticking with the market for a second. But -- and how fast do you think the market is growing now between kind of your Lapidus types of procedures and on the osteotomy side. Can you just give us a sense of maybe what you are seeing in the market at this stage?

Sure. And I think at a high level, other companies, analysts, they kind of pegged the foot and ankle U.S. growth rates around 6% to 7%. And since we're the only people or the only company that publicly notes are bunion growth, it's a little hard to say what the overall bunion market is growing at. You can get data reports to say the underlying units are in the 2% to 4% range, but that's what's out there available. So it's a little hard to say what the overall growth rate of the bunion market is in dollars in the U.S. In terms of mix, when we first started selling Lapiplasty back in 2015, Lapidus procedures of the overall bunion volume and call it 450,000 cases in the U.S. per year, it was around 10% to 15% of the mix. And what we've done is expanded that to 30% today. We believe that the Lapidus segment is still growing. But within the Osteotomy segment, the other 70 or so percent of the procedure base, there is an emerging faster growing trend of the minimally invasive osteotomy that makes up about 10% to 15% of that 70% of the overall bunion case volume.

Got you. Do you have a sense of how quick the MIS osteotomy market is growing? I know it's really early days in the technology, but any sense yet?

It's hard to say. I can say the interest level from surgeons and patients is high, but the share is still low, and we believe that's because these are very difficult procedures to learn to master. They're complicated. They're freehand approaches. It's very reminiscent of the way Lapidus Fusion was before we brought Lapiplasty to the market and expanded that. And that's the opportunity we're teeing up with our MIS osteotomy solutions. Can we take that 10% to 15% and really expand that within that Osteotomy segment to speed our penetration, our utilization into the bunion market.

Got it. Maybe shifting gears to some of the revenue drivers for the company. And I wanted to definitely make sure we hit on kind of the reimbursement dynamics kind of -- it's where you hear exciting news out of CMS, but kind of with the proposed outpatient and ASC rule change, I mean it's very much a surprise the upside for your primary code. So just a few questions here. But I mean let's assume like the proposed rates are finalized in the current form. I mean how are you kind of thinking about this as an adoption driver for Treace for Lapiplasty, in the hospital patient department and also ASC? And any sense like what that could do for utilization as well?

Sure. And obviously, they're not finalized, but if they do become final, nothing but positive. It's a matter of what the materiality of those positives will be, and we really won't be able to ascertain that until we're operating in that environment, starting in January of next year. But today, a little over 50% of our patient base we believe is commercially insured. And the other portion of that is a mix between Medicare and Medicaid. So we know commercial payers tend to follow the trend that Medicare sets. So that's a good event all the way around. If you look at the hospital outpatient setting today, roughly 40% to 50% of our procedures are already being reimbursed at that kind of $12,700 level at APC 5115. So that means there's another 50% to 60% that are being reimbursed at APC 5114, the $6,700 level. What this could mean would be 50% to 60% of our cases would be elevated and there'd be more cushion for our higher-end technologies, more complementary products. So that's a benefit there, definitely. And the ASC today, and that's the toughest environment to sell into with Lapiplasty because ASC reimbursement is around $4,500 at the Medicare level. It's going to go to $9,700 on the proposed rule, which will definitely create more opportunity for us to get into more cost-sensitive private ASCs. And then within those ASCs and even somewhere in today, being able to use our more premium end or higher technologies in those accounts. Our SpeedPlate systems, things like RedPoint PSI and some of the new technologies we're coming out with. So we see a lot of ways that this could be really helpful and beneficial. But until it's final, until we see how it impacts the business when it's implemented, these are the theoreticals that would help.

And you're bringing up kind of an interesting point on maybe there's been some facility obstacles given price sensitivity. So maybe just on that topic. I know you previously kind of broke -- or you still kind of give us like surgeons generally active surgeons on a quarter, which are around 3,000 at this point. Can you maybe help us understand where you are from a facility level? And maybe just how much of the facilities in the U.S. have had an issue or has been an obstacle of getting Lapiplasty or some of the more innovative products into the procedure for you?

We continue to make nice steady progress with our national accounts team on gaining new IDN network approvals, new individual facility approvals, getting into ASCs. We -- just to remind you, we have a menu of different technologies and different price points. So we have a pretty good success rate getting into those private ASCs, that lower price point. We can provide a menu and they can decide which technologies they want to use there. So I think as we look into 2025, if these rules are implemented, that could be a tailwind from that standpoint.

Got it. Got it. Shifting over maybe to utilization and surgeon adoption, but you're sitting at 3,000 surgeons today and not to pick on the company, but we haven't necessarily seen kind of an inflection point yet in utilization. You continued to add new surgeons. So I guess some investors kind of question whether the company's algorithm is only -- kind of growth algorithm is only tied to new surgeon adds versus utilization. But when are we going to see kind of this utilization pick up? And how focused are you from a management level from a sales level of really penetrating accounts versus kind of deepening or going wider at this point?

No, no, great question and fair question. We've got a few different vectors of growth opportunity for this company. And it gives us a lot of flexibility in how we can continue to grow. Obviously, we're continuing to add new surgeons users. We said we'd add 250 to 300 per year, and we thought that was a fair outlook for this year and the future couple of years. But -- and we're tracking on that. So we are adding new customers, and that does produce some of our growth. Driving utilization is a big focus for our company. And right now, if you look at our 3,000-plus surgeon users, we're getting on average 25% of their overall bunion cases. If you go to the 5-year cohort plus, we're close to 50 because it takes surgeons years to up their utilization of Lapiplasty over time. By developing our minimally invasive osteotome solutions and bringing those into the market as we head into 2025, we're going to have the opportunity to tap into 75% of our average surgeon users bunion procedures that we're not getting today. And we think we can speed utilization faster by doing that. So that's one. The other way we can grow is by developing more complementary products and new technology platforms feed into our 3,000 surgeon users through our direct focused sales channel and build more business, more complementary procedures per case using more of our technologies per case and expand wallet share per case. So it's a utilization drive. We've got a large stable of customers out there, over 3,000 direct channel. Doctors are telling their reps, they want more products from Treace Medical. And we've got a pipeline, as we mentioned, of 10 really exciting technologies coming out between the rest of the year and 2025 to fuel that.

And maybe can you remind us and maybe this is more for Mark, the numbers guy here. But maybe remind us where average utilization is today. And as you do look at the top accounts, like the cohort that's been around for 5, 6 years using Lapiplasty, where has their kind of utilization level gone to just maybe help us understand where the opportunity on utilization can really go?

Yes. Good question. As you mentioned, we haven't given as much utilization numbers, but when we were talking about it on the average, it was a little over 10 cases, maybe 10.5 cases per surgeon across our entire surgeon base. And those surgeons that were doing higher, like John referred to, those that were getting to their fourth and fifth year of using Lapiplasty, they were approaching 20 cases per year. So it was substantially more. And then when you think about the revenue that we're generating on average per case, it was about $6,500, and then you've got over 10 cases per year. So it was a good healthy sum of revenue per surgeon. And I forgot, what was the second part of that question?

Where average utilization is like where some of the top surgeons are? And I guess, what's the -- what's really going to be the pathway to bring that average up to your maths over...

I'll just kind of repeat a little bit of what John was saying is we've been able to do a fantastic job of penetrating into that Lapidus space. The larger space has always been a different approach to bunions all together. So it's our first opportunity to get into the osteotomy space. And so what we've seen both on a national level is there's this breakout of perhaps 30% of all the bunion cases are done in a Lapidus approach and 70% are osteotomy. But we see that makeup even applying to our own customer base. So there's a lot of our customer surgeons that are doing roughly 25%, 30%, 40%, some do more, but they're using Lapiplasty. So we know that they're good customer surgeons. They're loyal. They like the products that we've given. We've just never had a shot at the remaining 70% of the cases that they're doing. So I think that in and of itself is we're coming out with not 1 but 2 different systems in that MIS osteotomy area. It really gives us an opportunity to really significantly increase our utilization because it's -- again, it's not only to break up nationally, but on an individual surgeon basis, a lot of our customers are doing osteotomies right now. And so it gives us the first opportunity to get some of those.

Got it. And maybe touching on MIS osteotomy really kind of digging in here. But you talked a little bit about how it can catalyze growth of both of you. Maybe just kind of update us on the time lines and the progress there when you're expecting to commercialize? And -- I mean, should we be thinking about this as like a full-scale launch this year? Or will it be more of a limited launch into next year?

Yes. Great. Great, question. So we talked a bit on the call about our first technology to hit the market, it's called nanoplasty. It's a new procedure that we've developed following the Lapiplasty playbook, really elegant instrumentation to allow surgeons to do a nicely controlled, reproducible 3 plain, tiny incision surgery on these patients. So we're really excited about that technology. It's been in development for nearly 3 years. We've been training surgeons on this and getting feedback from them for the past several months, and we're seeing very exciting reactions to this. Most of these surgeons that we're pretraining on it are surgeons that have used or dabbled with other MIS products or techniques. And once they use nanoplasty, their eyes light up, and they say, that is incredible. There's nothing like that. When can I use it? So we've been taking their feedback and building into the product where a kind of final design lock and we're building product right now with our vendors. We anticipate getting a limited market release going late in the fourth quarter. It will have very limited impact in the fourth quarter. But as we go into Q1, we'll be building towards full production levels and continue that through Q2. We really see it as a really strong revenue driver for us in 2025, more than a material impact are in Q4. But they'll be getting -- we'll be getting some buzz out there, some cases done and certain demand building within the fourth quarter itself, we expect.

And that was nanoplasty?

That's nanoplasty. The other platform will have a very limited access to our design surgeons in the fourth quarter, and then we'll continue to build and that system will [ trail ] nanoplasty a little bit. And beyond that, we'll wait until we get a little closer for more details.

Got it. Got it. And one thing that you've kind of highlighted this year on the competitive side is that there has been some, say, surge in mind share loss to the MIS osteotomy products. So as you are thinking about launching these more in a fuller setting into 2025, is it more about just regaining some of the lost mind share with these surgeons? Or are you really going to be going out there on the offense of trying to bring that osteotomy over to Treace?

Yes. We've got a great opportunity because our 3,000 customers, that number continues to build, and we've got this highly experienced direct channel that we found so important when you're trying to teach doctors a new way of performing a surgery and then bring that into the OR and support them. So we see a tremendous opportunity to go to our current 3,000 customers that are pretty loyal to us and bring them the better mousetrap, bring them the better solution for the portion of the osteotomies we're not getting from them. And then the other piece is there's a large number of surgeons that have never had any interest in Treace Medical because we've been all about the Lapidus, all about the procedure that they want to avoid at all costs. Now we can appeal to them with something that's more like what they want to do with a really elegant, instrumented solution that solves a lot of the problems with the current offerings today.

And maybe just kind of on that, one of the things that we've heard in our diligence when we talk to pediatrist with ankle surgeons about the current MIS osteotomies is that it's still even a challenging procedure. So I guess, as you have taken kind of that surgeon feedback into account, what could we expect from maybe an efficiency standpoint or time savings perspective? And do you think these surgeons could actually fit more cases in per day? Just any early thoughts there?

Yes. And this is based off the experience that doctors have in the labs. And I go to a number of these labs and stand at the stations and watch them go through it. And they'll typically do one procedure and that will take x amount of time. They'll do the next procedure and the time is cut by 1/3. And this is a very quick, very efficient procedure. . The big thing is it's so reproducible and the learning curve is so quick. We talk about 40-plus case learning curves with the current minimally invasive osteotomies. This is a dramatic disruptive type of technology that can make it very quick, low single digits type of learning curve. They can go to a lab take this into the OR with one of our skilled, trained expert reps and be doing the procedure day to day, we believe.

Got it. And sticking with a couple of more products I wanted to hit on SpeedPlate and RedPoint. But maybe on the SpeedPlate, you have an upcoming newer generation coming out. Just maybe level set us here on what expectations we should be thinking about for adoption and for really kind of lifting up some of the blended ASP?

Sure. We introduced one in the third quarter, new design, larger SpeedPlate design designed for some of the larger bone fusions further back in the foot that we found were occurring in conjunction with Lapiplasty and Adductoplasty, sometimes when they do the midfoot Adductoplasty procedure they want to treat bones further up in the foot as well, infuse those. So we made implants, especially designed for that. That's been having really nice uptake here since we launched it. We been getting great feedback. We have another design we've yet to really to talk about, but it's called the micro quad SpeedPlate, and it's going to be an implant specialized for high stability and strength in small incision approaches. We have our mini Adductoplasty system that's rolling out towards full commercial launch. We think this is a technology, a fixation technology that can further fuel interest and surgeon comfort in that procedure. And then we have Micro-Lapiplasty, which we talked about quite a bit, but this is a very small but highly stable SpeedPlate implant that we think can make that procedure more efficacious as well and that will be more of an early 2025 type of introduction.

Okay. And maybe just on RedPoint, maybe I'm misremembering, but is it coming out in the back half of 2024. And this was an acquisition you did, I think, in mid-2023. So it hasn't really come up that much on calls. So maybe just level set us on what it is and kind of like what we should be expecting from a technology perspective or a penetration perspective there?

Sure. RedPoint PSI technology, really exciting technology platform for us. What RedPoint allows us to do is a doctor can get a patient's CT scan and send it to us and with a design engineer and software, we can virtually correct the patient's deformity, be that a bunion or an Adductoplasty, a midfoot deformity and then create a cutting guide specifically designed to correct all 3 planes of that patient's deformity, deliver it to the doctor along with a preoperative plan that shows all the corrections they're going to make. They can go into the surgical case, use that product on the patient's foot, make their cuts, pull the bones together, I'm simplifying this. And it's a customized correction to that patient individually. So does a lot of things. It's exciting for the doctors to be able to tell the patient. They're using this cutting-edge technology that they're giving them a personalized treatment for their specific anatomy through this cut guide. And on the surgeon side, it cuts steps. And when you cut steps, you can save time. So it makes things just more efficient. We've been working over the past 12 months to optimize the technology, really make it elegant to our standards with a small design team, and we're beginning now to expand the user base, getting more surgeons to use the technology. And we'll have another expansion of that in Q4 and then be kind of more commercially available fully across the nation probably in Q1 of next year.

Got you. Are your 200, 300 surgeons kind of into those accounts? Any...

It's limited at this point, but we have quite a backlog of surgeons that have already selected patients are getting CT scans and are awaiting that next expansion phase that we're going to bring forward in the fourth quarter.

Got it.

Will it have a material impact on revenue in the fourth quarter? No. These are still small numbers. There's limited access to weight-bearing CT. So there are some rate limiters out there to how many surgeons and how many patients can be treated with this at this point. But we have a longer-term development path to expand that as well.

Okay. Maybe Mark or for John, but just moving to the direct sales organization. We don't get much on the numbers anymore, but last time we checked, you're around 225 reps at the end of last year, and it sounds like you've kind of continued to add a bit maybe in the first half. But just how are you kind of thinking about the sales organization today? And maybe just kind of touch on the productivity aspect, too. I mean, you're much more focused now on utilization versus maybe casting a wider net. But just talk to us more about expansion opportunities or productivity on the rep side?

Maybe I'll start, and John, if I miss something, you can add a little bit more color. Ever since we went public in our first meetings with you, Drew, we're talking about really 3 initiatives. One was growing our direct sales channel, our R&D capabilities to bring innovative products. We've been talking about that in our DTC educating both patients and surgeons. Growing our sales force has always been our big priority. And we're pleased to say that we've really been able to get to this large direct sales channel through last year. And so it's -- our focus now is no longer in building this team the way it has been in the past. We had a number of years where we more than doubled the size. And last year, it was about a 30%, 35% increase. So we feel really good about where we are in that team and the focus is not just to build the team, but to really focus in on their ability to sell, drive into their accounts and to increase utilization. And so I think that's a good news. We're constantly focused on making sure that we've got the best sales reps out there optimizing territories. And we'll continue to do that. But I think we're not saying job is done, but we just don't have the same focus to build because that takes a lot of time energy and resources to be able to do that. So we feel good about the size of the sales force, and that's going to -- it has another benefit to it is there will be some improved leverage when we're not growing it at the same pace and having to pay higher commissions as we're building the process as well.

Got you. And maybe a good segue into the profitability piece. So on the 2Q call, I mean, your words, we look forward to being EBITDA positive next year in 2025. So maybe just kind of like walk us through that. I mean when we look at 2024, there's not that much leverage. I mean, you're seeing a pretty good improvement in EBITDA. But just talk to us about the operating expense line looking ahead and how you kind of get to profitability next year.

Yes. So the way we think about it, this is always going to be a 2-year process. We had an EBITDA loss in 2023. We committed to reducing that adjusted EBITDA loss in 2024 by 50% and then the remaining 50% would be next year. So it's really been a 2-step process. With our growth rate this year, and we talked about in following -- or during our Q1 call, we talked a little bit about it as well on our Q2 call because we've made some optimizations, some cost-cutting in Q2. We really didn't benefit and see it all in Q2 was just a portion of that quarter. We'll begin to see more of those benefits in Q3 because we'll have the full quarter to benefit from that as well as Q4 and then the full year next year. So it was really always going to be a 2-step process. Half of that adjusted EBITDA loss would be approved in '24 then the other half in 2025. We feel good about our ability to do that. And that's because it's going to be for based on our growth and our top line, we'll continue to have strong growth. All these things that John has talked about, all these new product offerings into our skilled and highly focused direct sales channel. And then we've got some improvements throughout the P&L that like I talked a little bit about that we're just not building the sales team as we had in the past. There are some other opportunities as well. We've talked about DTC. And early on in the company, there's a lot of drive to build brand recognition. Lapiplasty for some didn't always roll off the tone. They didn't know what it was. We needed to build that brand awareness through social media for both patients as well as surgeon customers. But now that's not as big of a focus for the company either. So there's going to be additional leverage from a DTC approach as well as we go into next year. So we've got top line growth. We've got strong gross margins, leverage in both the sales and DTC channels. And so we feel good about our positioning to finish out this year as well as to go into next.

So if we think about hypothetically like 10% revenue growth for 2025, you're confident that OpEx will be growing at a lower rate than that to help drive the EBITDA profitability next year?

Yes. So we'll continue -- so we feel good about that adjusted EBITDA that 50% this year, 50% next year. We'll definitely still grow some of our capabilities. So especially with R&D as that becomes those 3 focus areas, R&D is becoming really a point of emphasis for us. As John talked about, having 10 new products coming out in about 12 months, we have about less than 50 sellable SKUs right now. So if you think about that, 10 new products, a few of them which are not just products but systems themselves. I mean, this is a big advancement for the company. So we'll continue to invest in our R&D. It's -- we'll be paced the way we're going to do that. So don't expect a large jump in the R&D line, but we'll continue to invest. We think that's going to be one of the biggest engines to -- for our growth going forward is offering our large customer surgeon base, a lot more products and getting that larger wallet share.

Got you. And maybe nearer term, thinking about the third quarter, we're all kind of focused on utilization trends and summer seasonality and everything. But is there anything that you're seeing from a utilization or a seasonality standpoint to call out? I mean, I think consensus kind of sits around like $44 million for the quarter, up high single digits. But are you comfortable there? Or anything that you'd highlight?

Yes. I don't think there's really any new information to report here. What we see is -- we talked a little bit about this. We have a sizable fourth quarter. Sometimes we referred to it as kind of this bunion season, where we have a lot more patients come in, in that fourth quarter. That season really begins in September. We see that -- it's really the end of summer. A lot of patients get procedures done in September. So we're anticipating that to be kind of the end of the third quarter and the beginning of that uptick in bunion procedures. So nothing really new to report on third quarter. It is kind of that summer seasonality. It tends -- what we tend to see is we have the lowest utilization in that summer and then it builds every month until the end of the year.

And do you have a lot of visibility actually on like the -- like surgeon wait list and their funnel for procedures?

We don't have absolute visibility. We become aware of procedures that are typically 30 days out, sometimes a little bit more, sometimes we become aware of procedures just a week or 2 out as well. So we commonly refer to our visibility is about 30 days out. With that said, we have a lot of data sources, historical trends. We have third-party independent sources that help us really project and analyze what's happening. But yes, it's shaping up the way we would anticipate September to shape up.

Got you. And the fourth quarter, if we kind of take a look back at history, it was up about 50% quarter-over-quarter, about $20 million to $22 million of incremental revenue. So that's kind of the algorithm that you set for 2024, and that's not implying any I guess, to John's point earlier, no new products are really kind of factored in meaningfully there?

That's right. Over the last few years, we've had sequentially fourth quarter has been more than 50% increase over Q3. So I think the guide is a little bit less than that, but we've seen it year after year, especially in times where there may be some macroeconomic concerns. Patients tend to want to push and make sure that their deductibles are met. And so that just means more push into the fourth quarter. We saw some of this impact last year, some of this dynamic where John referred to it, some of this travel was a priority, but that didn't take away from what happened in the fourth quarter. And so we would anticipate that the fourth quarter will be strong again this year for us.

And we only have a minute or so left. But just -- I'll pass this over to both of you. However you want to answer this. But I doubt you want to bless 2025 numbers, but just can you help us maybe appreciate what the Treace growth algorithm looks like on a longer-term basis? I mean, is it about maintaining kind of a high single digit, low double-digit trajectory or kind of given that you'll be in the MIS osteotomy market. You have more SpeedPlate products, you have Redpoint. Why shouldn't that accelerate from here in a minute?

I'll take the guidance-related question. Yes, great question. Obviously, there's a consensus out there for next year. I think the way we see it, given where we are today and where the growth rates are today, we'd like to get through the fourth quarter, we'll be into January and be able to see what type of traction some of these new products and technologies are building, and that will better inform our final guidance in February for 2025. But we have a lot of reasons to -- for optimism and restoring top line growth to a better level that would be expected of this company. These 10 products that we have lined up, we just need to see how they impact things until we really, really make that call. But this is a reload year and it's obviously a proven year from our investors, and we absolutely get that. But we're very optimistic about as we look into 2025 in the long term that the pipeline of products we've built up, the initiatives that we have in place, the cost-cutting measures, efficiency measures that Mark talked about, all coming together and making this a very strong durable growth company for the future.

Well, sadly have to end it there. But John, Mark, thanks for coming up today.

Thanks very much.

Thank you, Drew. Thanks for having us.