AxoGen, Inc. (AXGN) CEO Karen Zaderej on Q2 2018 Results - Earnings Call Transcript

AxoGen, Inc. (NASDAQ:AXGN) Q2 2018 Results Earnings Conference Call August 1, 2018 4:30 PM ET

Executives

Kaila Krum - VP, IR and Corporate Development

Karen Zaderej - President and CEO

Pete Mariani - CFO

Analysts

Richard Newitter - Leerink Partners

Raj Denhoy - Jefferies

Dave Turkaly - JMP Securities

Operator

Greetings and welcome to the AxoGen Inc., First Quarter 2018 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Brian Korb, Investor Relations. Thank you, sir. Please begin.

Kaila Krum

Thank you and good afternoon everyone. Thank you for joining us today for the AxoGen, Inc. conference call to discuss the financial results for the second quarter ended June 30, 2018.

My name is Kaila Krum and I recently joined AxoGen as Vice President of Investor Relations and Corporate Development. I'm thrilled to have joined AxoGen at such an exciting time of growth and look forward to continuing to work with you as we expand our platform for nerve repair.

Today's call is being broadcast live via webcast which is available on the AxoGen website. Within an hour following the end of the live call, a replay will be available on the company's website at www.axogeninc.com under Investors.

Before we get started, I'd like to remind you that during 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, the company's Forms 10-K and 10-Q, which identify the specific factors that may cause the actual results or events to differ materially from those described in these forward-looking statements.

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

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

Karen Zaderej

Thanks Kaila and good afternoon everyone. Welcome to our 2018 second quarter conference call.

I know many of you know Kaila from her work in the analyst community and we couldn't be happier to have her joined our team. In addition, I'd like to welcome Lisa Colleran to the AxoGen Board of Directors. Lisa is the former CEO of LifeCell and brings a wealth of market development and commercialization experience in high growth companies. Also joining me today is AxoGen's Chief Financial Officer, Pete Mariani.

I'd like to begin today's call with the review of our second quarter highlights, a brief company overview, and an update our key strategic initiatives. Pete will then provide a review of our second quarter financial results and review financial guidance, after which time, we'll open up the call to Q&A.

We're pleased to report another quarter of strong growth for AxoGen. Second quarter revenue grew 36% to $20.6 million. We continue to invest in our commercial team and we've made significant organizational enhancements in recent quarters.

We are realizing the benefit of those enhancements and in Q2, our direct sales channel continue to grow revenues above 40% and that channel now makes up approximately 80% of our total revenues up from 70% one year ago.

We continue to have a hybrid commercial model with 19 independent sales agencies that account for approximately 20% of our revenue. In the quarter, we experienced challenges in a few of these territories. We are addressing these challenges and we believe sales agencies will continue to be an important aspect of our growth in selected territory.

In our direct channel, we ended the quarter with 72 sales representatives, an increase if four in the quarter and 21 in the last year. As a reminder, in late 2017 and early 2018, we promoted several of our tenured reps to sales management and marketing position. We backed up those positions with new rep hire in addition to the expansion of our total rep headcount. As a result, more than 50% of our current sales representatives have been with AxoGen for less than 12 months.

We have an engaged and enthusiastic commercial team and have experienced very little turnover as we've implemented these changes. We've seen improved initial productivity from our new reps and expect to see continued scaling of their impact.

We remain confident in our guidance as we believe our commercial team will continue to drive productivity increases as we execute our growth plan throughout the year and into 2019.

We expect to end 2018 with at least 80 direct sales reps. We will continue to make broad commercial investments across our entire sales channel and we continue to grow and expand our platform for peripheral nerve repair.

For those of you who are new to our story, AxoGen is a global leader in developing and marketing innovative surgical solutions for peripheral nerves. We're passionate about helping to restore nerve function and quality of life in patients with physical damage or discontinuity to peripheral nerves by providing innovative clinically-proven and economically effective repair solutions through surgeons and healthcare providers.

Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day people suffer traumatic injuries or undergo surgical procedures that impact the function of their nerves. Physical damage to nerves or the inability to properly reconnect nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.

Our products are used primarily by reconstructive plastic surgeons, hand surgeons, and oral and maxillofacial surgeons in a wide variety of nerve repair surgeries including upper extremity trauma, iatrogenic injuries from dental procedures such as third molar extraction, nerve repair during mandible reconstruction, nerve compression surgeries, including recurrent carpal tunnel syndrome, and more recently breast reconstruction neurotization.

We are building awareness of advances in peripheral nerve repair and see expanding usage of our products with innovator and early-adopter surgeons, and are excited to be moving toward developing the middle adopters who are the majority segment of the nerve repair market.

We find surgeons are initially cautious adopters for nerve repair products. They typically start with a few cases and then wait to see their results. Active accounts are usually past this wait period and have developed some level of product reorder.

These accounts have typically gone through the committee approval process, have at least one surgeon who has converted a portion of his or her treatment algorithms of nerve repair to the AxoGen portfolio, and have ordered AxoGen products at least six times in the last 12 months.

In the second quarter, the number of active accounts increased 24% to 634, up from 510 in Q2 of 2017. This 24% increase in active accounts along with the increased penetration of active accounts are the key drivers of our 36% revenue growth in the quarter. The growing number and penetration of active accounts is driven by increased adoption of our nerve repair products across the surgeons' treatment algorithms.

Accounts ordering Avance Nerve Graft, AxoGuard Nerve Connector and AxoGuard Nerve Protector generate greater than six times the revenue of an account ordering just one of the products. Our objective is to continue expanding the treatment algorithms to surgeons to include all four of our surgical implants across their full continuum of nerve repair.

AxoGen is generating strong revenue growth in a nerve repair market that remains largely untapped. There are more than 900,000 nerve repair surgeries annually in the U.S., pointing to a market opportunity of over $2.2 billion for AxoGen's products.

The majority of these procedures are being performed in approximately 5,100 centers. Most of our 634 active accounts are still at an early stage of penetration and provide additional opportunities for growth. As a result, we believe we're just scratching the surface of our available market potential.

We continue to develop this market through the execution of our strategic initiatives, which we believe will allow us to build long-term sustainable growth. We refer to these strategic initiatives as our five pillars of growth; building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan, and introducing new products and expanded applications in nerve repair.

I'll now comment on our progress over the quarter in each of these areas. First, we continue to build market awareness of AxoGen and our products by engaging with surgeons at hospitals, clinical conferences, and promotional events.

In the quarter, we participated in the 23rd Annual Federation of European Society for Surgery of the Hand, a multinational gathering of hand surgeons from European and U.S. markets. There were eight scientific presentations related to AxoGen surgical portfolio.

In addition to the presentations, AxoGen hosted an Educational Symposium, clinical evidence and case studies on peripheral nerve allograft. The symposium focused on the rapidly rising body of peer reviews literature related to events. The symposium was highly attended and provided increased awareness of Advanced Nerve Graft in our peripheral nerve repair algorithm in this expansion market.

We worked year around to increase awareness of peripheral nerve damage and options for repair by featuring stories of patients whose quality of life was improved through nerve repair using one or more of our products.

One of those patients is David, an active husband, father, and grandfather with the goal of running a marathon in all 50 states. Shortly after finishing his 49th marathon, David found he could barely move his right foot. The peroneal nerve in his right leg was entrapped and could not send enough signals to the muscles in his foot. The compressed never made it difficult to walk; much less run and David thought his marathon days were over. His damage nerve was surgically decompressed and then wrapped with an AxoGuard Nerve Protector. Damaged nerve was successfully healed and David is now a proud member of the 50 States Marathon Club having recently completed his 50th marathon in Hawaii. We're proud to play to role in David achieving this important goal.

Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted five national education events in the second quarter and expect to conclude a total of 18 during 2018.

These surgeon-led programs focus on advances and best practices in nerve repair. They allow surgeons to gain additional confidence in nerve repair techniques, and they drive adoption and increased utilization of our products. On average, we see the utilization from surgeon attendees more than double six months after they attend the program.

Including the events for the quarter was an Upper Extremity Fellows Program where we train the next generation of nerve repair surgeons. We plan to conduct a total of five Fellows Programs in 2018 training more than two-thirds of our hand and micro surgery fellows for the year.

Earlier this year, we conducted our first educational program in oral and maxillofacial surgery with a focus on nerve repair during mandible reconstruction. Surgeons are excited to now be able to add nerve repair into their standard surgical approach and provide an opportunity for sensory function to these patients.

As we've monitored the impact from this new program, we're pleased to see the eagerness and high level engagement from the participants to add nerve repair to their reconstructions. Our second OMF program scheduled for September is already full enrolled and we look for every opportunity to continue to develop the OMF market.

Our third pillar is to grow the body of clinical evidence. We now have a library of 62 peer-reviewed clinical publications, including three that were published in the second quarter. It is encouraging to see that two of these three publications focused on new techniques in the surgical management pain, bringing the total number of publications focused on pain to eight.

While these are early signs, they provide promising results and offer techniques and approaches that leverage our portfolio and managing the pain associated with the damaged nerves.

As we continue to explore this market opportunity, these papers add to the growing body of peer-reviewed literature for the surgical management of pain.

The volume of presentations and publications reinforces both the importance of peripheral nerve repair and the growing body of evidence for AxoGen's products in nerve repair.

Our RANGER Registry has enrolled more than 1,400 Avance Nerve Repairs and continues to provide significant new evidence in the management of nerve injury. Surgeons are using this data to better understand nerve repair outcomes and to expand their treatment algorithms. We believe this data provides additional evidence for Avance Nerve Graft to continue challenging the norms of historical repair options for peripheral nerve repair.

RECON, our Phase III pivotal study comparing Avance Nerve Graft to manufactured conduits in digital nerve injuries continues to enroll. We anticipate enrollment to be completed in Q4 of this year. These studies continue to produce important data that assist in clinical decision-making and support the adoption of our platform for nerve repair.

In addition to the clinical evidence we continue to build with hand and reconstructive plastic surgeons, we've also grown our experience in oral and maxillofacial surgery. As these surgeons become confident with AxoGen's portfolio, we see expanded use of multiunit repairs of iatrogenic injuries and the application of our products to more complex injuries such as mandible reconstruction due to benign tumor resection.

Clinical data showed that repair of these injuries with the AxoGen portfolio of products can provide meaningful recovery in 87% to 94% of these patients. Historically, many of these injuries went untreated, leaving the patient with significant quality of life challenges associated with permanent numbness of the lips, mouth, and chin. Surgeons now have an option to reconstruct these nerves giving the patients the opportunities to see return of function.

Late last year, we announced the launched of our expanded application in breast reconstruction neurotization. At AxoGen, we believe the ideal breast reconstruction restores size, shape, symmetry, softness, and now sensation, without the potential risk and comorbidity associated with allograft nerve harvest. We have developed the ReSensation surgical technique, which incorporates this vision into a reproducible and efficient solution for reconstructive plastic surgeon.

We began surgeon training on the ReSensation technique for breast reconstruction neurotization as part of the application launch. We will partner with 20 to 25 breast neurotization centers by the end of 2018. We have currently trained about three-quarters of these centers on our unique ReSensation surgical techniques for breast reconstruction neurotization and they are beginning to offer breast neurotization to their patients.

Breast reconstruction neurotization provides an important new opportunity for women who choose autologous flap reconstruction following a mastectomy. Using AxoGen's nerve repair portfolio, surgeons can connect peripheral nerves in the autologous flap to nerves in the chest wall, enabling sensory nerve regeneration.

Historically, the sensory nerves were not repaired in these procedures, leaving the women with numb breast; tissue you can’t feel, doesn’t feel like yours and isn’t normal. Restoring sensation in the breast is an important advancement for woman facing the challenges of mastectomy and reconstruction, allowing them to feel more normal again.

We are now enrolling patients in the Sensation Neurotization Outcomes for Women or Sensation-NOW clinical registry. Sensation-NOW will study the physical and quality of life outcomes of breast neurotization. We believe that data from this registry will demonstrate that the ReSensation technique provides meaningful recovery of sensation and quality of life outcomes for women who choose reconstruction following a mastectomy.

Historical approach to breast neurotization focused on neurotization a single nerve branch in the tissue. Some innovative surgeons demonstrating preliminary results that dual neurotization or the neurotization of two nerves per graft provided improved patient outcomes.

In addition to the Sensation-NOW, we have developed a randomize protective study to explore dual neurotization versus single neurotization. The study lists the benefit of dual neurotization to determine the return of sensation, quality of life, and economic parameters associated with this approach. The study enrolment of our plan, 182 subjects with a 24 months follow-up. Study initiation is targeted for Q4 of 2018.

We look forward to bringing additional medical evidence to both patients and surgeons as neurotization becomes a standard of breast reconstruction.

Our fourth pillar is sales execution. As I mentioned previously, we ended the quarter with 72 direct sales reps, an increase to 21 compared to a year ago. In total, more than 50% of our current reps have been AxoGen for less than a year. We have seen improved initial productivity from our new reps and expect to see continued scaling of their impact as well as fund the full sales team. We expect to end the year with at least 80 direct sales representatives.

Our fifth pillar of growth is the introduction of new products and expanded applications in nerve repair. There are many unmet needs in the surgical repair of peripheral nerves and we, as a leading company in this space, are positioned to develop new solutions for these needs. We're making investments in opportunities to innovate with our current portfolio as well as developing new solutions for patients with peripheral nerve damage.

Although our existing products in the upper extremity, trauma, oral and maxillofacial and breast reconstruction markets are our prime revenue sources today, expanded applications in lower extremity surgery, head and neck surgery, urology, and the surgical management of pain offer AxoGen expanded revenue opportunities in the future.

Millions of people suffer from -- with recurrent and chronic pain. The surgical management of pain may provide an effective non-pharmacologic resolution for many causes of this pain.

The pain universe is large and the potential to apply surgical nerve repair and nerve management techniques to address issues such as pain associated with total joint replacement and hernia repair, neuropathy or migraine headaches creates a significant opportunity for us to introduce new products and expanded applications for our product portfolio.

Before I turn the call over to Pete, I want to highlight again that Q2 was a strong quarter and we remain confident in our guidance as sales representative productivity and penetration of active accounts expand in the second half of the year.

We continue to execute against our strategic initiatives and are driving strong revenue growth while maintaining gross margins above 80%. We continue our focus on nerve repair education and awareness, experiencing successful interactions at professional society meetings and at educational programs for surgeons. Surgeons are demonstrating an increasing awareness and adoption of the AxoGen portfolio in our core applications and are applying our portfolio of surgical solutions in new areas.

We are making investments to grow expansion markets in OMF and breast reconstruction neurotization, and we are exploring with surgical management of pain. We're pleased with our progress and with our opportunity to continue developing the emerging nerve repair market and driving long-term sustainable growth for AxoGen.

Now, I'll turn the call over to Pete. Pete?

Pete Mariani

Thanks Karen. Second quarter revenue grew 36% to $20.6 million. Revenue growth was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix.

As in prior quarters, most of our revenue growth was driven by growth in active accounts. The number of active accounts grew 24% to 634 in second quarter. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to develop their treatment algorithms.

As Karen mentioned, we're pleased with the continued growth from our direct sales channel and including the improved productivity of our recent reps hires. Additionally, we continue to make investments in support of our independent sales agencies and believe that our hybrid commercial model will continue to support our growth plans through the rest of the year.

Gross profit for the first quarter was $17.5 million, a 36% increase compared to Q2 of last year. Gross margin was 84.9% in Q2, relatively unchanged compared to the prior year.

Total operating expenses in the second quarter was $22.3 million, up 56% over the prior year. The increase includes the additional investments in our expanding commercial capabilities, as well as increased investments in clinical, R&D, and general corporate expenses associated with our growth.

Operating expenses also include non-cash stock compensation expense of $2 million in the second quarter compared to $724,000 of last year. Excluding the impact of non-cash stock compensation, total operating expenses for the second quarter increased 49% to $20.3 million or 98.4% of revenue compared to $13.6 million or 89% of revenue in the prior year.

Sales and marketing expense in the second quarter was $14 million, up 49% over the prior year. As a percentage of revenue, sales and marketing expense in the quarter were 68% compared to 62% in the prior year.

As mentioned, we continue to invest in our commercial capabilities. These investments are having an impact and will provide solid framework to drive continued execution of our growth plans and expand our platform in nerve repair.

Research and development spend in the quarter was $2.6 million compared to $1.5 million in the prior year. R&D cost include product development and expenditures for our biologics license application for our Avance Nerve Graft, support of the RANGER Registry, as well as studies for the development of new products and applications. As a percent of revenue, R&D expense for Q2 was 12.6% compared to 10% in the prior year.

We also announced today that we completed the purchase of a facility near our current processing center in Dayton, Ohio for $5 million. This new processing center will be built out in support of our long-term capacity needs. We will be transferring our existing processing operations from our current leased space to the new facility just as we did in the first quarter of 2016 when we transitioned from Virginia Beach to Dayton.

The non-capitalized development cost of this new center will be included in R&D spend. We continue to build out our R&D capabilities and are increasing investments in important clinical work, product development, and development work related to the BLA and our new facility.

General and administrative expenses in the second quarter was $5.7 million, up 68% over the prior year. The increase includes higher compensation expenses, including higher non-cash stock comp of $1.1 million compared to $436,000 in the prior year. As a percentage of revenue, G&A expense in the Q2 was 27.5% compared to 22.3% in the prior year.

Net loss in the second quarter was $7.4 million or $0.20 per share compared to $2.1 million or $0.06 per share in the prior year. Excluding the impact of non-cash stock compensation and fees associated with repayment of our debt, adjusted net loss and net loss per share in Q2 was $3.2 million and $0.09 per share compared to $1.3 million and $0.04 per share in the prior year.

Adjusted EBITDA loss in the quarter, which also excludes the impact on stock compensation expenses was $2.6 million compared to an adjusted EBITDA loss of $600,000 in the prior year.

In the quarter, we completed an equity offering that netted a total of $132.7 million and subsequently repaid in full our $25 million of outstanding debt with mid-cap. Total net cash burn in the quarter $2.8 million after excluding the impact of the equity raised and repayment of debt. We ended June with $133.6 million in cash compared to $30.6 million at the end of first quarter of this year.

Turning to guidance, we are reiterating our 2018 full year guidance. We expect 2018 revenue will grow at least 40% over 2017 revenues and gross margins will continue to be above 80%. Additionally, we continue to expect to have at least 80 direct sales reps by year end.

As Karen mentioned, we are pleased with our commercial, clinical, and strategic progress in Q2. We are seeing productivity of our sales team and penetration of our active accounts. And our gross margins continue to be above 80%.

Over the last two quarters, we have accelerated investments in our commercial capability that we believe will allow us to continue to drive execution in our core trauma and nerve protection markets, while also bringing additional resources and focus to our expansion opportunities in OMF and breast reconstruction neurotization. These investments are having an impact and we believe we are well-positioned to continue to drive growth and expand our platform for nerve repair.

With our with our recent capital raise, we have the resources available to invest in these strategic initiatives and drive growth. We will continue to do so in a manner that demonstrates the efficiency of our business model.

Before I hand the call back over to Karen, I'd like to point out that we will be participating in several upcoming events. Canaccord Genuity's 38th Annual Growth Conference in Boston on August 8th; Morgan Stanley's 16th Annual Global Healthcare Conference in New York on September 12th through the 14th; Cantor Fitzgerald's Global Healthcare Conference in New York from October 1st to October 3rd; and additionally, we'd also like to announce that we will be conducting our third Annual Analyst and Investor Day in New York City on November 19th.

Information about these events will be made available on the AxoGen website with more detail in the coming months. Karen?

Karen Zaderej

In closing, our efforts to execute against our strategic initiatives focus on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan, and expanding new products and applications in nerve repair.

We have positioned AxoGen to lead and grow the peripheral nerve repair market. We are building awareness, developing additional clinical data, and expanding use of our products with innovator and early-adopter surgeons, and are excited to be moving towards developing the much larger middle-adopter segment of the peripheral nerve repair market.

We're pleased to see expanded use of the AxoGen product portfolio across our core markets and increased adoption in new categories of our business. We are introducing our platform for nerve repair to fellows, allowing us to train the next generation of nerve repair surgeons.

We are building a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications where we believe we can bring meaningful solutions to current clinical challenges.

We will continue to expand our platform and develop new nerve repair applications, challenging the norms of historical repair options, and positioning our algorithm as a new standard-of-care in the peripheral nerve repair, a market that currently represents more than $2.2 billion in existing applications and we expect will continue to grow.

Before taking questions, I want to welcome our new investors and I want to thank the AxoGen team for their commitment to our mission and our values.

And at this point, I'd like to open up the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]

Our first question is from Richard Newitter with Leerink Partners. Please proceed.

Richard Newitter

Hi, thanks for taking the questions.

Pete Mariani

Hey Richard.

Richard Newitter

Hey, how are you doing Pete? Karen, I wanted to start with a comment that you made earlier in your prepared remarks about distributor challenges and if you could just elaborate on that a little bit? This was a first quarter in a while where your growth is below 40%. So, -- and I appreciate you reiterating your guidance of greater than 40%. So, clearly you're expecting a reacceleration into 3Q and 4Q to get there. But I'd love to just kind of hear what was kind of one-time in nature or what perhaps cause you to kind of come in below that that 40% threshold this quarter? And where did that stack-up relative to your plan?

Karen Zaderej

Well, there's a couple of things to add here. As you know we had built out our direct team in the first quarter -- end of last year first quarter of this year and some of those reps are still ramping. So, that was part of our projected plan to see in second quarter. Again, we don't give quarterly guidance, but second quarter was still a growth quarter for us with looking at how it typically and historically have play out, expecting stronger performance in the last half of the year.

And that is our expectation and in fact, I would say those direct reps are running ahead and more productive than what our historical numbers have been. So, we feel confident in that piece.

I think the disruption for us is that in some of our independent agencies in selected territories, not all of the channel, but in some selected territories, we had some distractions that caused their performance to be below our expectations.

And so we're addressing those and addressing those -- things including adding some resources to help support them. In some cases, its training and support for that -- the independent agencies. And in other cases, it was dividing out the territories and allowing them to focus perhaps in a small regional area where they have strength, but putting in a direct rep where they -- and splitting that territory where they were not as strong or it was an important area for us to provide ongoing growth.

Richard Newitter

Okay. So, is it safe to say that there's a little bit of lingering impact from some other kind of the salesforce changes they implemented last quarter, lingering into this quarter that maybe understated where your true growth trajectory is and that's why you're calling out the direct reps being greater than 40%?

Karen Zaderej

Actually -- I guess I don't see lingering issues. When you make a change in a bunch of sales territories, there is some disruption factor and we definitely saw that in January and February. We saw just that for a lot of the focus that you get when you have a lot of new people and new reporting structures in an organization. That's passed us. I don't see any event now. But what we do still have going on is that 50% of our direct sales teams that are new with us are going through a learning curve and the conversion curve.

And if I put a little color on that, historically, when we brought reps -- a new rep into a territory, we brought them into it a territory, if you go back a few years and often we have very little base business, and we've talked about how they would expect to breakeven within a year. And what happened was that rep would come into that territory across the first couple of months of training, so there's not a lot of productivity in the first couple of months.

Then they start to hit the ground running. They would have grown their revenue in those first few months and then historically, what we saw was they hit the valley of death where all their surgeons went into their wait period and they didn't have any business. And so in a later period, they would drop and then they would start to come up towards the end of the year.

Today, we see an improvement in our productivity because they're handed a base of business already because we're splitting territories, or some base and a conversion from a distributor. And so they have a base. They are both maintaining that base and continuing to add incremental revenue that more than pays for their -- the cost of adding that rep in that first year.

In addition we don't see them hitting that valley of death. So, we don't have a sort of low point where they're worried if they can make house payments and we're worried that their actual quarter-to-quarter growth. We are seeing that they continue to grow and it's particularly backend loaded. And so that's a big part of why we're confident that we're on-track to do what we plan to do in the last half of the year.

Richard Newitter

Okay, that's helpful. Maybe just one more if I can squeeze one in for Pete. Pete, you mentioned the pipeline of new accounts was robust; maybe can you quantify that in any way for us? And also just with respect to kind of the cadence between 3Q and 4Q, should we be thinking about the -- really more 4Q-weighted verse 3Q. Any color there would be helpful. Thank you.

Pete Mariani

Well, when you say new accounts, I mean there's -- were you saying new active accounts, right? Is that what you mean?

Richard Newitter

I think, yes, your active. I think you had said active accounts, you added 24% and you said you had a fairly robust pipeline -- or the pipeline grew or something?

Pete Mariani

Yes. So, what we say is that the active accounts continue to grow. And again, the delta between the percentage of growth that we have in the active accounts and the revenue growth is a good indicator. That 36% to 24% gap is a good indicator of the fact that we are -- that our average revenue per active account is continuing to increase and the penetration of our active accounts is continuing to increase. So, we'll continue to see that delta.

Again as Karen mentioned, as all these new sales reps continues to get through their first three, six, and nine months, new sales reps are always developing new accounts. So, we have lots of optimism that we'll continue to see growth in active accounts as a catalyst and part of what's going to drive our confidence in the back half of the revenue growth.

And then we also do talk about there is a robust pipeline of accounts that haven't hit the active account list yet that are in some stage of evaluation. And we're seeing that continue to grow nicely and should continue to funnel more accounts into that active account list over the next six, 12, and 18 months.

Richard Newitter

Thanks.

Operator

Our next question is from Raj Denhoy with Jefferies. Please proceed with your question.

Raj Denhoy

Hi, how are you guys doing?

Pete Mariani

Good Raj.

Raj Denhoy

I wonder if I could maybe drill into this issue with the distributors a little bit more. You mentioned that that there was distractions, and I'm sure you got question as to what exactly that was that caused underperformance in that segment of your salesforce? So, was anything more you can give us just to give a little comfort that this is temporary and that you've put it behind you?

Karen Zaderej

I don't think there was one cause. I think it's the things that are going to happen in a sales organization, especially with independent agencies and that they can get focused on other price. We're not the primary thing in really any of their bags. And so they're providing our product as a service to the people that they -- and surgeons that they already know.

So, it was only a targeted few of them that had the distractions, but -- and it wasn't all one thing. So, it really is just digging in and solving that problem. And as I said in some cases, it was something that we felt that the independent agency still has a strong value to us and is committed to the line and we're providing additional resources to get them through that. In that case with some people in their team, so we wanted to make sure that we could provide them training and help them come up the learning curve.

In other cases, we dug in a little bit and decided that they had enough focus in other products that we weren't going to get the attention that we needed. And we traded them out and put in a direct rep in either all or part of their part of their territory.

Raj Denhoy

Okay. But I guess as you've probably going to gather -- you might have already gathered, I mean the results in the quarter of 36% was below the -- at least 40% guidance which you've reiterated several times this year. And I guess just try to again gauge this level of that that we can get back this distraction in the distributor side of your salesforce has been rectified and as you look into the third and fourth quarter, how do we get comfort as people on the outside that you can actually return to that level of growth?

And the follow-on to that is given that this has now happened in this segment of our salesforce, how do you -- how does this not happen again? In a sense, how do you get these people perhaps more engaged or does this take you then having to perhaps go direct in more segments as opposed to relying on distributors?

Karen Zaderej

Well, first off, I'll focus on the 80% of our revenue, which is really the direct channel. So, that's a portion of the business that we have clean and direct control over. And that's an increasing part of our business. Doesn't mean that we are going to be a hybrid model. The reason we think we want to be a hybrid model over the long-term is because their trauma is by design geographically spread out. And there are some selected trauma centers that are very good trauma centers, but they're geographically difficult to reach and maybe not concentrated enough. Examples are Alaska, Hawaii, Puerto Rico, parts of South Dakota.

There are trauma centers in each of those locations, but no one of those in our current call pattern is probably large enough to put in a direct rep, at least at this point. And so what we're really doing is right-sizing what we consider to be some of our independent territories to say we definitely want strong partners in those locations.

But in other areas where we may not be getting the focus, we're going to continue to divide out some of the territories and transition to direct reps. And you've seen us do that over time while the number of independent agencies has stayed about the same actually over the last year. The amount of trauma centers that they cover has actually gone down because we've been dividing out their territory and that's where some of the base has come for many of the direct reps that we've added.

And that continues to be our strategy. You can see that we're planning to add some more reps over the rest of the year that will come from dividing either distributor or independent agencies territories or are direct territories. We still also plan to continue to split territories when they approach $2 million revenue number on any unrealized basis.

We think that is where you might start to see some dampening of growth and that's obviously our goal is to continue to drive significant growth. And so we don't want to have that, so we set the expectation with our direct team and do execute such that we split territories when they are somewhere between a $1.5 million and $2.5 million.

So, with all those things combined, I think we're in a good spot having addressed these. We won't eliminate all of our independent distributors, but we will be less reliant on that portion of the channel as we continue to grow.

Raj Denhoy

Okay. And sorry just last one. As we look at the model in the back half of the year and get back above 40%, you have to grow north of 40% because you're a little below that in the first half. Is some of those going to linger now into the third quarter and then you'll have a particularly strong quarter, how should we really think about the back half?

Pete Mariani

Yes. Look, we just think the back half is going to be -- is going to continue to be stronger. I think -- again, we don't give quarterly guidance, but I think if you just look at where you -- where we would need to be, it certainly suggests that we're going to get back over 40% in both quarters and moving north in that range as well.

Raj Denhoy

Okay, that's helpful. Thank you.

Operator

Our next question is from the Dave Turkaly with JMP Securities. Please proceed with your question.

Dave Turkaly

Thanks. Just quickly back, I want to follow-up on the agencies, the 19. Can you give us a broad estimate of how many people are working at those places today? And then it sounds like I know that number has been fairly consistent, so this wasn't anything that came up with sort of new early ones that were more recently added, but maybe it sounds like the splitting of the territory is the same thing that caused disruption -- in the direct might have caused some disruption there, is that the right way to think about it?

Karen Zaderej

So, in the last question, no, the distraction actually I think was external to us. Our solution was to split the territories. When you -- all of these, I think -- what do I see, all of these agencies have multiple people in them that carry our products, but they range in size quite a bit.

Some of them are small and with only two sales associates and they can be as high as more than 10 to 12 associates carrying our product. They also have quite a bit of variation in geography. Some of them are -- really a few cities and others have multiple states. And so what our plan is to continue to look at these and will they perform and do a great job and continue to drive the kind of growth that a direct rep does. I'm very happy to work with them.

Where they don't hit their quota and they underperform or get distracted with other aspects of their business or are worth hiring new people and get distracted, then our drive is to say that they may not be able to carry our products. And we are very upfront with them about that. It says it's all about hitting the number.

And I think they understand that's their job. And they have a relationship. And we have an good enough communications channel that we can continue to talk to them to say well if you see something coming, then we'll go ahead and trade it out. I mean that's what our goal is to end these things in a smooth transition for the people that are their customers as well as our customers. Remember they are calling these customers for other products as well and they don't want to leave them high and dry. So, we have a good win-win to try and do an effective transition in that case.

Dave Turkaly

Got you. And then sorry, I didn’t get the technical here, but just over 40% of the direct salesforce leaves a lot of room for what the actual number was. I was wondering if you might want to -- if you could kind of quantify we're talking 45, 50. Any color around how well the direct channel grew to give people comfort that 40% is the right number for the year.

Pete Mariani

Well, look I answered, we're continuing to grow low to mid 40s on the on the direct channel. And they're doing very, very well and what we're really encouraged with is the fact that these new reps as Karen had talked about are coming in with a good base of business and they're growing from that.

And so we're seeing really strong initial productivity from our newer reps that we brought on and as they get through their third, six and nine months with the company. It gives us a lot of optimism as we look at the back half of the year.

Karen Zaderej

The greater than 40%, by that we mean that that's their organic growth because it also -- it's bigger number than that if you do the math it's because we're adding in some of the distributor territories that we traded over. But their organic growth even with the newer associates is greater than 40%.

Dave Turkaly

It's good to hear and I appreciate the color. Last one just quickly, obviously, this new facility. Next year people obviously having exceeding sort of $100 million in revenues and I guess I just love to get color on sort of what kind of capacity you think you'll have with this new facility. Do see the ability to kind of cover what people might expect for the next five years, 10 years, just any color on how much you could process both Avance and Avive with this facility up to speed? Thanks.

Pete Mariani

Yes. No, it’s a great question. We're really excited about this building; it's 70,000 square feet as it is with plenty of capacity within the current four walls of it to meet our needs over the next many years.

And then one of the reasons why really like this place is because it's got a room where you can essentially double that 70,000 capacity down the road if you ever felt you needed. So, we've got a good opportunity to make a long-term decision here that will certainly handle our capacity needs for the long-term.

Dave Turkaly

Thank you.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.

Karen Zaderej

Thank you. And I want to thank everyone for joining us on today's call. And we look forward to talking with many of you at one of our upcoming investor events. Thank you.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.