The Street Still Highly Skeptical On AxoGen's Growth Story

Summary

• Amidst worries about market size, competition, trial design, and executive turnover, AxoGen has also suffered from a rotation away from growth med-tech that had propelled sector multiples to long-term highs.
• The expansion of the RECON study will push potential FDA approval of an Avance BLA back by around two years, but the RMAT designation suggests some degree of FDA confidence.
• With 30% annualized revenue growth potential over the next five years and better than 20% long-term growth potential, the shares look undervalued below $30.

It’s rough for investors when institutions change their mind about growth sectors, and the performance of some smaller high-growth med-techs over the past year illustrates that, with Abiomed (ABMD), AxoGen (NASDAQ:AXGN), Avanos (AVNS), Inogen (INGN), and Nevro (NVRO) among some of the names that are down substantially from a year ago as the market has shifted away from what was at the time a long-term peak valuation for the sector.

Of course, it’s not just sector allocation that matters, and AxoGen has had some of its own challenges, including a late 2018 short report that rattled investors, a miss in Q4, an enrollment expansion in a key clinical study, and ongoing uncertainty about the real size of the peripheral nerve repair market and AxoGen’s ability to emerge as a long-term winner.

I’ve chosen to shift to much more conservative modeling assumptions, including lower sales force productivity, more competitive pressure, and a slower path toward converting surgeons into active users of nerve conduit products. Even with those changes, though, I still believe AxoGen can generate better than 20% long-term revenue growth and support a fair value in in the $30’s.

A Healthy Quarter Does Nothing

Although AxoGen reported a slightly better than expected first quarter, one in which revenue rose 35%, the shares have been declining fairly steadily since then.

I didn’t really see any bad news in the report. The 35% revenue growth was better than expected (revenue beat the sell-side by about 4%) and wasn’t much of a deceleration from the 38% in the fourth quarter. Moreover, management backed a view for over 30% growth in 2019 – not much of a deceleration from the high-30%’s growth of 2018.

Gross margin slipped a bit (30 bps) but is still healthy at 84%, and management continues to spend on its sales and marketing

Analyst’s Disclosure:I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.