This Regenerative Nerve Company's Growth Continues Into New Year

Dec.30.12 | About: AxoGen, Inc. (AXGN)

Since I began covering AxoGen (NASDAQ:AXGN) at the beginning of the year, I've been intrigued by the strides it has made in the regenerative nerve space. As more surgeons choose the cutting edge allograft products it makes that can be used to repair nerve damage that was once considered untreatable, the company's finances have improved significantly.

Most recently, the company gained more national attention when its Avance® Nerve Graft was highlighted in The Wall Street Journal in an article about a soldier wounded in combat in Afghanistan. He faced having his injured leg amputated or having AxoGen's allograft used to help heal the nerves that had been severed. He chose the latter.

The soldier is one of more than 7,000 patients who have chosen AxoGen's Avance Nerve allograft. The company boasts it as the only commercially available processed nerve allograft for bridging severed nerves. For many of these patients, undergoing surgeries to implant the allograft has helped them regain use of their limbs after they had been rendered useless due to some kind of injury or ailment.

Also noteworthy to highlight are the expanded uses of the company's allograft application in helping patients recover following surgery for prostate cancer. Loewen, Ondaatje, McCutcheon said AxoGen's Avance Nerve Graft is emerging as a promising implant to reduce the risk of erectile dysfunction in patients undergoing a procedure known as a da Vinci Prostatectomy (dVP). Typically, high-grade prostate cancer patients need this type of surgery, but unfortunately the cavernous nerves critical for erectile function are removed to rid the body of the cancerous cells found in the prostate.

According to Loewen, Ondaatje, McCutcheon, nerve reconstruction in this space represents a new $60 million market opportunity for AxoGen. For general nerve repair procedures, AxoGen is tapping a market size that is estimated to be about $500 million. While the potential number of prostate cancer patients who can benefit from the allograft surgery is about 30,000 worldwide, the use of the product for general procedures is estimated to be between 140,000 and 180,000 in the U.S. alone.

The Avance Nerve Graft was also used in a surgery on a six-month old whose brachial plexus nerve had been damaged during her birth. The surgery was performed at the Miami Children's Hospital. This was the first nerve repair surgery of its kind for the hospital.

AxoGen has entered into a revenue interest purchase agreement with PDL BioPharma (NASDAQ: PDLI) in which it received $20.8 million. I expect we'll really begin to see the benefits of the infusion of this money in 2013. It will help the company add to its sales force and increase its marketing efforts to further improve its revenue growth.

As an example of how well-positioned AxoGen is to capitalize on this market, consider this. Loewen, Ondaatje, McCutcheon notes that AxoGen trades at a 201 EV/sales of 2.3X, which is a roughly 40% discount to its peers. Its peer group includes Medtronic (NYSE:MDT) and Stryker Corp. (NYSE:SYK). The firm has reiterated its Buy rating one-year price target of $5.00 per share.

For its most recent quarterly earnings report, the third quarter, the company reported revenues of $1.98 million, a 74% increase over revenues of $1.14 million in the third quarter of 2011. Still, it had to report a net loss of $2.24 million for the period, which amounted to $.20 per share. That compares to a $3.11 million loss for the previous year, which was a significantly higher $2.60 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.