AxoGen's (AXGN) CEO Karen Zaderej on Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: AxoGen, Inc. (AXGN)

AxoGen, Inc. (NASDAQ:AXGN)

Q2 2014 Earnings Conference Call

August 4, 2014 4:30 PM ET

Executives

Michael Polyviou – Investor Relations

Karen Zaderej – President, Chief Executive Officer and Director

Bob Johnston – Chief Financial Officer

Gregory G. Freitag – General Counsel, Senior Vice President Business Development

Analysts

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

David Turklay – JMP Securities

Operator

Good day, ladies and gentlemen and welcome to the AxoGen Inc. Second Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I’ll now like to introduce your host for today’s conference Michael Investor Relations. Please go ahead.

Michael Polyviou

Thank you and good afternoon everyone. Thank you for joining us today August 4, 2014 for the AxoGen Inc. conference call to discuss the financial results for the second quarter ended June 30, 2014 as well as recent corporate developments and management’s perspectives on 2014.

Following today’s market close, AxoGen issued its results release, which is posted on the company’s website at www.axogeninc.com. In addition, the company’s 10-Q for 2014 second quarter was filed with the SEC this afternoon.

Today’s call is being broadcast live via webcast which is available on the AxoGen website. There will be a taped replay of this call, which will be available approximately one hour after the call’s conclusion and will remain available for seven days. The operator will provide the replay instructions at end of today’s call.

Before we get started, I would like to remind you that during the course of this conference call, the company will make projections and forward-looking statements regarding future events.

We encourage you to review the company’s past and future filings with the SEC including, without limitation on company’s Forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, statements regarding product development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance.

And with that I would like to turn the call over to Karen Zaderej, President and Chief Executive Officer of AxoGen. Karen?

Karen Zaderej

Thank you, Michael and good afternoon everyone. Welcome to our second quarter 2014 conference call. Joining me on the call today is Bob Johnston, who became our Chief Financial Officer in May and Greg. Freitag, our General Counsel and Senior Vice President Business Development.

Following today’s market close, we announced our second quarter 2014 results. Record quarterly revenue of $4.2 million, a strong 47% increase over a revenue during the same period in 2013 and solid sequential growth over Q1 2014.

Our revenue growth is a testament to the solid execution of our sales and marketing strategy. Our unparallel portfolio of nerve repair products and continued confirmation of the strong market need for our off-the-self nerve repair option. We achieved a number of significant milestones during the second quarter of 2014 compared to the same quarter and 2013.

We surpass the $4 million quarterly revenue level for the first time in our company’s history setting an all time record high for quarterly revenue of $4.29 even more importantly we grew the number of target accounts. The number of our target accounts by 52%. We increased the number of accounts using two or more of our brands by 87%. We expanded our gross margin to 79% versus 78% for the same period in 2013. We believe we’re poised for success for the following reasons.

A large market that is seeking alternatives, a comprehensive portfolio of off-the-shelf products that address those market needs. A strong team that’s demonstrating successful marketing and sales execution. High barriers to competitive entry and significant opportunities for expansion. Each AxoGen product represents the latest thinking and best practices in nerve repair. And as challenging previous norms a surgeon recognize their benefits and change their approaches to include our products, simply put they offer benefit to know the products or techniques can offer.

The first of those products is Avance Nerve Graft, it is the only commercially available processed human nerve allograft intended for the surgical repair of peripheral nerve discontinuity. AxoGuard Nerve Connector is the only extracellular matrix coaptation aid for tensionless repair of severed peripheral nerves. AxoGuard Nerve Protector is the only extracellular matrix surgical implant used to protect injured nerves and to reinforce the nerve reconstruction while preventing soft tissue attachments.

Over the last several quarters we’ve told you we’ve experienced growing momentum in the awareness of and interest in our products. Our strategies are yielding results and we’re clearly leveraging that momentum into sales. This quarter’s breakout sales growth is very encouraging, we’re clearly demonstrating sales execution and we’ll continue to focus our resources on initiates that drive sustainable revenue growth.

Let me spend a few minutes highlighting our growth strategies and the programs we’ve implemented that directly correlate to driving increased adoption and sales revenue. As I’ve outlined on previous calls we’ve focused on our four product marketing and sales strategy.

Each of these strategies works in constant with the other three to both develop the market and drive AxoGen’s business. The strategies are building market awareness, educate surgeons and develop advocates, growing clinical evidence and executing our sales strategy. Let me begin with building market awareness, we build awareness of our products by engaging with surgeons each and everyday. These interactions are in hospitals and physicians offices as well as at clinical conferences, pure led education seminars, promotional events, our national surgeon, our surgical education courses and a special surgeon meetings that we may sponsor. During the second quarter we held a meeting with leading nerve surgeons from throughout the United States, these are the people that writes textbooks that lead the fellowship programs that perform 100s of nerve surgeries each year and we’re all gathered around the table talking with us, about how we could work together to rethink nerve repair.

And an interesting thing happened at that meeting, the surgeons were challenging each other to think differently including questioning the appropriate use of hollow tubes, defects of tension on the repair and even beginning to challenge why their peers are still using autograft. And they were inviting us to join them in educating surgeons about the right ways to think about nerve repair.

We also strive to make information about nerve repair available to the public, we’ve been highlighted in several publications peer-reviewed journals and media outlets. Further to help raise awareness of nerve repair options, we will be sponsoring a nerve tissue recipient on the 2015 Donate Life Float in the Rose Parade.

The second of our growth strategy is to educate surgeons and develop advocates, at the end of last year we introduced national professional education programs to supplement our local educational efforts providing peer-to-peer education opportunities on the latest science and best practices in surgical nerve repair.

We’ve observed immediate and significant increases and the surgeon awareness and product usage as the direct result of these programs. One of the key contributors to our revenue growth has been the increased awareness and use of AxoGen products by surgeons attending our professional educational forums. We’ve organized four of these events since Q4 of last year.

We’re tracking the impact to these courses and we can report an average 50% increase in revenue from the upper extremity surgeons who have attended these courses. We've follow a two day diagnostic and hands on technique lab format. For 20 to 30 surgeons led by a faculty of permanent nerve surgeons experienced in using our products. The program content is focused entirely on the latest science of nerve repair, best practices, AxoGen products, case presentation and hands-on experience.

By embracing these best practices, surgeons are able to see the benefits and impact AxoGen technologies can have on their practice. Due to the success of our early courses we’ve already increased the number of events originally scheduled for 2014 including the most recent event held just three weeks ago at The Cleveland Clinic. At that course we had 22 surgeons from major academic and trauma hospitals from across the country participate. Already surgeons have increased our usage of AxoGen products since the Cleveland event.

Let me share two example of how valuable that two leads educational forums, have been for us in our growth stories. After attending our event at the Buncke Clinic in San Francisco in February a surgeon from a leading Southeast University has become a major user of our products and less than six months. This was a new account for us and the surgeon had not been an active user prior to the event. However, as a result of learning about the best practice in nerve repair and interacting with the course academic faculty, he returned to its institution and immediately began using all three of our brands.

Another surgeon attending that same course increased its usage of AxoGuard® Nerve Protector more than 72% in the five months following his attendance at the course. Our belief is that this course formats provide surgeons with the opportunity to learn current best practices and nerve repair technique from their peers and thought leaders in the area. We have two more of these events planned for this year for which we are actively enrolling and have several surgeons on a waiting list to account.

Now focus on our strategies for growing our body of clinical data. We continue to make progress building data to assist surgeons in the decision making on treatment algorithm. If you recall that we are the sponsor of Ranger, which has now become the largest multicenter nerve repair clinical study. The Ranger study is an ongoing study and as it continues to grow the clinical data can be evaluated in many ways. The most recent data presented included 431 nerve repairs from 18 different centers and 36 enrolling surgeons. Results from the Ranger study have already been published in two peer-reviewed journals and presented at more than 20 clinical conferences in the US and in Europe.

We continues to impress the surgical community is that the clinical results for Avance Nerve Graft remain comparable to the results of past studies conducted on nerve repair with autograft, without the time, cost and morbidity of the donor site and favorable to the results of past studies for hollow-tube conduits.

Over the past quarter they have also been three peer-reviewed clinical additional peer-reviewed clinical publications on the utility of Avance Nerve Graft. These were independent publication and reinforce the very expanding role and the increasing clinical adoption of Avance Nerve Graft.

In one of these papers published in clinics to plastic surgery Dr. Brian Rinker, Associate Professor of Plastic Surgery at the University of Kentucky stated that processed nerve allograft to represent the most significant advance in the field since the advent of microsurgery.

He follows that by stating that many major hand centers have began to alter their nerve treatment algorithm to include process nerve allograft. The last piece of our strategy is solid sales execution and we saw the results of that strategy in Q2. At the end of the second quarter, we have 22 direct reps about half of which have been with us less than 12 months as we right sized and realigned our territories last year.

The sales team is executing a very targeted strategy. We have Shawn McCarrey, our VP of sales who joined us in early 2013 and his – the sales team is now been under his direction for a full year.

We have 23 independent distributors as well on the field. The result is a combined sales footprint that now covers most of the US market. As I’ve mentioned previously, our focus is on building the breadth, depth and quality of each account. Our goal is to penetrate deeper and to existing accounts since we know that accounts that order all three of our products generates five to seven times more revenue than in account order in just one brand.

During the second quarter, the number of accounts that moves usage from one of our products to two or more increased to 87% compared to the 2013 second quarter. Outside of the United States, we are beginning to build our footprint, we have distributors in seven countries and we are building the regulatory approvals in a number of additional countries.

And most importantly, we are focusing on building the awareness and physician support that promote success. In this regard, we had a significant meeting at the Federation of European Societies for Surgery of the Hand International Congress in Paris with 28 leading European surgeons.

We facilitated the presentations from three leading US surgeons, who shared their clinical results and how the AxoGen products have changed their practices. This has set a solid foundation for building surgeon advocates outside the United States and it’s positioning us for future growth.

In summary, our second quarter results represented another milestone for AxoGen. We see substantial upside in our current business focus of upper extremity as well as expansion opportunities and other areas of nerve repair. I’ll come back to this after Bob provides you with some additional details on our second quarter results. Bob?

Bob Johnston

Thanks, Karen and good afternoon everyone. As Karen said this is my first conference call with AxoGen and I look forward to working with AxoGen team to maximize the company’s growth and valuation. Given that we’ve filed our news release and 10-Q this afternoon I’ll focus my comments on financial highlights during our second quarter.

AxoGen sales increased 47% to $4.2 million, during the second quarter compared to a year ago. This growth is predominately due to increased product usage by existing accounts and sales to new accounts, approximately 57,000 of the revenues from brands, which fund some of the exciting research and development work Karen will review in a few moments.

Second quarter gross margin expanded to 79% compared to 78% a year ago second quarter reflecting price increases in March 2014 and changes in product mix.

Now let me turn to expenses. Sales and marketing expenses increased approximately 33% primarily due to increased investments in sales and marketing efforts, including the surgeon education events, which we just started in the later half of 2013. We are already seeing a strong positive impact in our results from the surgeon events. Sales and marketing expenses as a percentage of sales have declined 80% from 88% in last years second quarter.

General and administrative expenses increased 22% over the 2013 second quarter. The year-over-year increase is due to several factors, including a move to a larger corporate office space and the move to a new distribution facility of Texas, which allows us to expand the shipping hours across the country including the West Coast. We would like to point out the $217,000 of the G&A expenses during the second quarter. We related to non-cash stock compensation.

As a percentage of sales, G&A expenses were 41% down from the 49% in Q2 2013. R&D spending increased 12% to a total of $556,000. The increases are related to clinical activities, including expenses this year related to the biological license application or BLA for the Avance Nerve Graft as well as increased investments in our product development pipeline.

Interest expense was up 14% to approximately $1.4 million to the increased interest related to the PDL royalty contract from higher revenue and interest accrued related to royalty contract.

As the result of the accounting treatment for the royalty contract, interest expense included approximately $1 million of non-cash expense that is expected to be paid in the future upon the terms of the royalty contract.

During the quarter, we actively managed our cash as the monthly burn rate declined from $1.1 million per month in the first quarter to $0.9 million per month in the second quarter.

We ended the quarter with $14.2 million in cash. We have sufficient cash resources to meet our operating needs for at least the next 12 months including meeting our royalty contract obligations.

With that I’ll now turn it back to Karen for her summary comments.

Karen Zaderej

Thank you, Bob. We’ve spoken at length today about our current commercialization strategy and our growth. And now I would like to speak for a moment about our expansion opportunity. First, in the area of upper extremity, we will be exhibiting at and conducting a surgeon panel presentation entitled nerve matters.

At the annual meeting of the American Society for Surgery of the Hand in September with thousands of attendees ASSH is the largest meeting of extremity surgeons in the U.S.

Second, with the success and continuing momentum of our current focus in upper extremity nerve repair, we’ve been evaluating expansion efforts into other nerve market including nerve repair and prostate surgery to address impotence and incontinence, opportunities and oral and maxillofacial surgery, lower extremity nerve injuries, hand associated with nerve entrapment, breast reconstruction, long nerve graft and enhanced nerve regeneration.

I have several updates on our expansion efforts and I’m able to share at this time. With respect to oral and maxillofacial surgery, we’ve announced previously, we entered the oral maxillofacial market on a pilot basis in 2013.

Nerve repair OMF is an exciting market estimated over $129 million with a strong and unmet clinical needs that’s addressed by our current portfolio of products. We were pleased with the revenue generated by the pilot program and recently trained our direct sales team to continue our momentum through the backend of 2014.

We will be exhibiting and conducting a surgeon education panel at the Annual Meeting of the American Association of Oral Maxillofacial Surgeons in September, the biggest industry conference of the year. We will also be conducting a professional education event this fall for the oral and maxillofacial surgeons at the University of Texas Southwest.

In the area of prostate surgery, we are also pleased to announce that the research team at Vanderbilt University has completed patient follow-up on our pilot technique development studies for robotic assisted cavernous nerve reconstruction following non-nerve-sparing radical prostatectomy. This study focused on optimizing the surgical technique and tracking subject quality of life outcomes following the procedure.

Well data analysis will be ongoing over the next nine months we look forward to continuing our efforts in the space until that the Avance Nerve Graft to provide urologic surgeons and patients facing the surgical removal of their prostate a new tool to address the nerve entry and potential negative quality of life side effects of this surgery.

Now, turning for a moment to our development pipeline. We’ve recently partnered with Brigham and Women's Hospital and we’re awarded two Department of Defense Grants related to nerve repair valued at $1.9 billion. The first grant is related to the use of induced pluripotent cells with the Avance Nerve Graft to augment nerve regeneration.

The second grant explores the efficacy of branched and long segment of processed nerve allograft. These types of grafts are particularly important and complex trauma and facial reconstruction. While we are excited to start this work I should note that the revenue impact on these two grants will be minimal in 2014.

Finally, before we move to questions I’d like to announce that we will be presenting at the Wedbush Conference next week in New York. Those of you interested in setting up a meeting are invited to contact EVC our investor’s relations group.

We’ve delivered record quarterly results, our efforts are directly affecting how surgeons approach nerve repair and momentum is growing. Following a strong first half of the year and continued momentum through July. We expect a stronger second half of the year. We are confident of generating $16 million in revenue while maintaining gross margins of at least 75% for 2014.

Thank you, we’re ready now to take questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

Hello, Karen and Bob, can you hear me, okay.

Bob Johnston

Yes.

Karen Zaderej

Yes, Jeff. How are you?

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

Very well, nice revenue number. Could you talk about the sales marketing expense for the quarter seems a little bit heavy relative to what I expected you just speak about the surgeon education event. How might some of the events look for the second half, you already expect the kind of general spend to increase as you are seeing for the traction on the revenue front.

Karen Zaderej

So, our sales and marketing spend is heaviest line of course is the headcount related expenses. And so we will continue to add as I’ve talked about a few reps each quarter, I would look to see adding over the next six months for the six reps in total. We will also continue to do some of the professional education events those are significant factor each time we hold one of those, we have another couple of those plans. So we will see those over the last half of the year.

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

Okay, could you talk about the revenue compositions for the quarter as far as share numbers between the three lines and events are particular and if you took any increases on pricing?

Karen Zaderej

Yes, so we actually don’t break out of the revenue between the products, but we’ve seen revenue growth across …

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

That’s what I asked..

Karen Zaderej

But we’ve seen revenue growth across the full portfolio, so in each of the product is not disproportionally one product during other, I think again representative of driving penetration into the accounts that we’re in. We did take a price increase in March and saw 7%…

Bob Johnston

7.5% approximately of our second quarter revenues were related to the price increase Jeff.

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

7.5% okay, was that for all product lines that took an increase?

Bob Johnston

It’s across the product lines on average.

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

Okay, perfect. And could one more lastly if I may Bob if you could remind us about the minimum segment gain next quarter for the PDL agreement.

Gregory G. Freitag

Yes, for that royalty contract in the fourth quarter there is a minimum of $1.25 million, as I mentioned earlier Jeff, we have sufficient cash for at least the next 12 months to cover our operations as well as the royalty contract obligations.

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

Perfect, thanks for taking my questions.

Karen Zaderej

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is come from David Turklay from JMP Securities. Please go ahead.

David Turklay – JMP Securities

Thanks. Just to clarify early in the call you talking about target accounts being up 52% is that accounts that are using your products what was that comment specifically related to?

Karen Zaderej

Yes, so we – obviously there is many hospitals and surgery centers in the United States and we have created a hierarchy of what we thinking the best potential accounts and we’ve then considered those target accounts for the once that have the highest revenue potential and it’s really and making sure that when we spend effort to get into an account that we’re focusing on an account that has drive the highest dollar value those tend to be Level 1, Level 2 trauma centers, academic centers and some specialty surgery centers that do significant amount of reconstructive surgery.

David Turklay – JMP Securities

Is there anything you just – I mean can we have that number in terms of what you think that might be today as we’re looking today at that opportunity?

Karen Zaderej

Yes, we haven’t released a number of accounts, again given that our friends from Integra tend to be on our call, but I guess when I wanted to do is give you a flavor of that we continue to stay very laser focused on driving things that increase the biggest revenue and continuing to drive penetration then within those accounts.

Again, our model is shifting from getting new accounts so that’s its good that we are getting no accounts just to making sure that we’re in the right accounts and that we’re driving penetration into those existing accounts.

David Turklay – JMP Securities

I know you guys gave us a lot of color on sort of the account season two or more and then in the revenue growth, I guess as you look at that 87% number and the 47, I guess percent growth in the quarter – I guess what I’m trying to figure out. If 10 new segment the deeper penetration versus the new accounts, sort of like you broke out the price at all is that kind of even along those two or you getting more kind of new from these clinics that you’re hosting.

Karen Zaderej

So, if you remember we have characterizing different stages of development. So in new territories, we still need them to acquire new accounts to get the breadth of accounts, that we are looking for so if I go back to our strategy in breadth, depth and quality. We want to make sure that we focused on those high and medium target accounts. And that we then focus once we are in a footprint, that we focus in driving depth which is for smokey brands and getting a regular repeat orders. So the professional education program is a big driver for driving depth. It’s not intended to be something that opens stores for us that’s part of sale execution.

But once we’re in an account, if we want to accelerate the learning curve, we see that doing the professional education event and bringing a key surgeon to one of those courses, is what helps to create a different adaption curve from that surgeon.

David Turklay – JMP Securities

So give your success with the education, I guess we would say that depth is certainly an important part and I think you said you heard a couple of more of those. This year is I mean is it money that would be initiative just kind of is it or is it just really select patient pace in terms of where you can do these things, because I got to believe that’s a big part of why we saw kind of this uptick in the quarter. So I guess any thoughts on what are the variables that would prevent you from doing even more of these.

Karen Zaderej

We will make sure that we provide the same high quality content in each of the courses and still we’re looking at continuing to ramp up. Again we went from what we planned to do three to do four this year. And we’ll look to continue to expand that, but each of these is a significant investment both in dollars and resources here in the company.

And we don’t want to sub optimize the outcomes to just do more so. So we have done a very deliberate strategy and willing out how many we do and we’ll continue to look at the pay back of those.

Gregory G. Freitag

Great, thanks a lot.

Operator

(Operator Instructions) And I’m not showing any further questions I like to turn the call back over to Karen Zaderej for any closing remarks.

Karen Zaderej

Thank you all for joining our call today. As always I would like to thank the investors for their continued support and the entire AxoGen team for their unwavering commitment in helping to restore quality of life to patients with nerve entries. Thank you.

Bob Johnston

Thank you, Zade.

Operator

Ladies and gentlemen this conference will be available for replay after 7:30 PM today through August 6 at 11:59 PM. You may access the remote replay at anytime dialing 404-537-3406 and entering the access code 71503642, international participants dial 800-585-8367 those numbers again are 404-537-3406 and 800-585-8367 access code 71503642. That does concludes our conference today. You may all disconnect. Everyone have a great day.

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AxoGen (NASDAQ:AXGN): Q2 EPS of -$0.21 beats by $0.01. Revenue of $4.21M (+47.2% Y/Y) beats by $0.78M.