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Edited Transcript of AXGN earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 AxoGen Inc Earnings Call

Edina Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of AxoGen Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kaila Paige Krum

AxoGen, Inc. - VP of IR & Corporate Development

* Karen Zaderej

AxoGen, Inc. - Chairman, President & CEO

* Peter J. Mariani

AxoGen, Inc. - CFO

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Conference Call Participants

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* Andrew Frederick Brackmann

William Blair & Company L.L.C., Research Division - Associate

* Craig William Bijou

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Kyle William Rose

Canaccord Genuity Corp., Research Division - Senior Analyst

* Rajbir Singh Denhoy

Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst

* Richard S. Newitter

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Director & Medical Technology Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the AxoGen Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Kaila Krum. Thank you. You may begin.

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Kaila Paige Krum, AxoGen, Inc. - VP of IR & Corporate Development [2]

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Thank you, Diego, and good afternoon, everyone. Welcome to AxoGen Second Quarter 2019 Financial Results Conference Call. We appreciate you joining us. I'm Kaila Krum, Vice President of Investor Relations and Corporate Development. With me on the call today are Karen Zaderej, Chairman, Chief Executive Officer and President; and Pete Mariani, Chief Financial Officer. The format for today's call will be as follows. First, Karen will discuss 2019 second quarter highlights and review our full year financial guidance. She will then turn to our key operational and strategic objectives. Next, Pete will then provide details on the financial results outlined in today's press release. We will then open the call for your questions.

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 made available in the Investors section of the company's website at www.axogeninc.com.

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 Form 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 acquisition and/or development, product potential, the 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. Karen?

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [3]

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Thanks, Kaila, and good afternoon, everyone. Second quarter revenue grew 30% to $26.7 million. We're pleased with our continued growth and the progress we've made in strengthening our commercial execution. Sales in the quarter came in at the low end of our annual guidance range due primarily to delayed productivity growth. As a result, we're updating our guidance for the year to reflect this current run rate. We now expect revenues will be in the range of $106 million to $110 million, representing growth of 26% to 31% for the full year.

We now have 100 direct sales representatives and expect to continue to grow to at least 115 by the end of this year. The new reps allow us to split larger territories, add clinical sales specialists and convert independent agency territories to direct. We've increased the number of direct reps by 40%, and our direct business now represents 87% of our revenue versus approximately 80% 1 year ago.

Our direct coverage is much improved over the prior year, with smaller, more dense territories, which we believe will drive productivity improvements as this structure matures. These are important and strategic initiatives that we will -- that will allow us to continue to drive long-term sustainable growth in this developing market.

We're the leading company solely dedicated to restoring quality of life for patients suffering from peripheral nerve damage. Our purpose-driven team of professionals works with skilled clinicians to further our mission to deliver life-changing evidence-based solutions to better serve this patient population. We're advancing this mission through the pursuit of our strategic initiatives, which we refer to as our 5 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 in each of these areas.

First, we continue to build market awareness of AxoGen and our products by engaging with patients and surgeons. We are growing clinical awareness of our products and nerve repair algorithm within the surgeon community. In the quarter, we participated in the 2019 meeting of the International Federation of Societies for Surgery of the Hand, a clinical conference of hand surgeons from around the world.

There were 10 scientific presentations related to AxoGen's products. In addition to these presentations, we hosted 2 educational symposiums, focused on optimizing outcomes by utilizing AxoGen's peripheral nerve repair algorithm. These symposiums were highly attended and proved -- and provided increased awareness of clinical evidence supporting the use of our portfolio of nerve repair products.

Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted 7 national education programs in the second quarter, including 1 Fellows program. We're also growing the number of educational programs specific to our specialty applications, including OMF and breast reconstruction. These surgeon-led events focus on advances and best practices in nerve repair, with participating surgeons gaining confidence in their repair techniques. On average, we see AxoGen product utilization from surgeon attendees more than double in the 6 months after they attend the program.

In 2019, we plan to conduct a total of 25 national education programs, including 6 Fellows programs. We remain committed to training the next-generation of nerve surgeons and expect to train 3/4 of all hand and microsurgery Fellows this year.

Our third pillar is to grow the body of clinical evidence. Recently, we announced the publication of the 100th peer-reviewed paper, featuring results from clinical studies involving our product portfolio, an important milestone for AxoGen that reinforces our ongoing commitment to advancing clinical evidence in peripheral nerve pair. Favorable results have been replicated across both sponsored and independent investigator-initiated studies evaluating our technology. With more than 10 years of comprehensive clinical evidence demonstrating positive outcomes, we are seeing growing surgeon interest and acceptance of the AxoGen portfolio of products. We will continue to sponsor clinical research, where we believe we can make a meaningful difference.

In late April, we provided an update on RECON, our Phase III pivotal study to support our BLA for Avance Nerve Graft. This prospective randomized controlled double-blinded study compares Avance Nerve Graft to synthetic conduits. Specifically, we announced the completion of the blinded interim analysis and our plan to expand enrollment by 50 subjects to support the original (inaudible) study. Over half of our study sites have now been reinitiated and are actively recruiting study subjects, and we're in the process of selecting and onboarding up to 5 new centers. We started the enrollment of additional subjects and continue to anticipate we will reach our goal of 220 subjects by the end of summer 2020.

Our RANGER registry has now enrolled more than 1,800 Avance Nerve Graft repairs and continues to provide significant new evidence in the management of nerve injuries. Data from the registry continues to demonstrate meaningful recovery treating a variety of nerve injuries and gap lengths. The data demonstrates the ability to restore sensory and motor function and shows positive outcomes while eliminating the donor-site comorbidities associated with autograft. Surgeons are using this clinical data to better understand nerve repair outcomes and to expand their treatment algorithms.

We also continue to enroll the MATCH study, which is a contemporary cohort control within the RANGER study that provides reference controls for nerve autograft and synthetic conduits from participating registry centers. We expect data from this study will be presented later this year.

Additionally, we continue to enroll subjects and build clinical evidence in the Sensation Neurotization Outcomes for Women or Sensation-NOW clinical registry. We believe the data from this registry will demonstrate that the ReSensation technique provides meaningful recovery in sensation and improves quality of life for women who choose neurotization, along with their flap reconstruction following a mastectomy.

In 2018, we initiated our REPOSE clinical study. REPOSE is a prospective randomized controlled study evaluating the use of AxoGuard Nerve Cap in the management of painful neuroma as compared to a standard neurectomy procedure. REPOSE is a 2-phase study, consisting of a 15-subject pilot and an 86-subject pivotal phase. We have completed enrollment of the pilot, and we've initiated enrollment of the pivotal phase of the study.

Recently, we have also begun enrollment in our ASSIST clinical study. ASSIST is a cohort study that evaluates the use of soft -- of Avive Soft Tissue Membrane as compared to a nontreatment control in nontransacted acute traumatic nerve injuries. This study will enroll over the next several years and includes a 1-year follow-up.

Our fourth pillar is sales execution. We continue to grow and refine our commercial capabilities across our 3 core nerve repair applications. We ended the quarter with a total of 100 direct sales representatives, an increase of 7 in the quarter and 28 over the last 12 months. We ended the quarter with 19 independent agencies. We have converted certain independent territories to direct territories as well as adding new agencies. We expect to continue to add agencies in select geographies.

With an expanded sales footprint, we've been able to reduce territory size, and we believe this will create efficiencies for our direct sales team, allowing them to drive deeper penetration in our current active accounts, while also adding new active accounts. In the second quarter, our number of active accounts increased 20% to 762, up from 634 in the second quarter of 2018. We define an active account as an account that has typically gone through the committee approval process, has at least one surgeon who's converted a portion of his or her nerve repair algorithm to the AxoGen portfolio and has ordered the AxoGen products at least 6x in the last 12 months.

Our objective is to continue expanding the treatment algorithms of surgeons to include all of our surgical implant products across their full continuum of nerve repair. This is important because accounts ordering at least 3 of our 4 nerve repair products generate more than 6x the revenue of an account ordering just 1 of these products.

Our fifth pillar of growth is the introduction of new products and expanded applications in nerve repair. We are making investments in opportunities to innovate our product portfolio and to expand the application of our nerve repair products to address the many unmet needs in the surgical repair of peripheral nerves. In November of last year, we announced several foundational initiatives planned for 2019 to help support a broader introduction into the surgical treatment of pain, a nerve repair application we believe could expand our total addressable market.

As we've discussed, one of the sources of chronic pain following traumatic injuries or orthopedic procedures is the symptomatic neuroma. Surgeons can surgically remove the neuroma and repair the resulting nerve injury using our products. As we explore this market opportunity, we see significant surgeon interest in treating this underserved patient population.

Before I turn the call over to Pete, I want to reiterate that I'm pleased with our progress as we continue to execute against our strategic initiatives in a large and developing market. I'm confident we're building strong capability to drive long-term sustainable growth across an expanding set of nerve repair applications.

Now I'll turn the call over to Pete for a review of our financial highlights. Pete?

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Peter J. Mariani, AxoGen, Inc. - CFO [4]

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Thanks, Karen. Second quarter revenue grew 30% to $26.7 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, our revenue growth was largely driven by increased revenue in our active accounts and the addition of new active accounts.

We had a net sequential increase of 31 active accounts in the second quarter and now have 762, an increase of 20% over the prior year. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to incorporate them into their treatment algorithms.

Gross profit for the second quarter was $22.5 million, a 29% increase compared to Q2 of '18. Gross margin was 84.1% for the quarter compared to 84.9% in the prior year second quarter. Total operating expense in the second quarter was $30.1 million, up 35% over the prior year. The increase includes investments in our expanded commercial capabilities as well as higher investments in clinical, R&D and general corporate expenses associated with our growth. Operating expenses also include noncash stock compensation expense of $2.7 million in the second quarter compared to $2 million in Q2 of '18.

Sales and marketing expense in the second quarter was $18.5 million, up 32% over the prior year. As a percentage of revenue, sales and marketing expense in the quarter increased to 69% compared to 68% in the prior year. Research and development spending in the second quarter was $4.3 million compared to $2.6 million in the prior year. Our increased investment in R&D includes additional clinical and product development programs as well as expenditures supporting our BLA for our Avance Nerve Graft. As a percentage of revenue, R&D expense for Q2 was 16% compared to 13% in the prior year.

General and administrative expense in the second quarter was $7.4 million, up 30% over the prior year. The increase includes higher compensation expenses, including higher noncash stock compensation and litigation and related costs. As a percentage of revenue, G&A expense in the second quarter was 28%, which is consistent with the prior year second quarter.

Net loss in the quarter was $7 million or $0.18 per share compared to $7.4 million or $0.20 per share in the prior year. Excluding the impact of noncash stock compensation as well as litigation and related charges, adjusted net loss and net loss per share in Q2 was $3.7 million and $0.10 per share compared to $3.2 million and $0.09 per share in the prior year.

Adjusted EBITDA loss in the quarter, which also excludes the impact of stock compensation, litigation and related charges, was $4.1 million compared to an adjusted EBITDA loss of $2.6 million in the prior year. On our balance sheet, we ended the quarter with $109.1 million in cash, cash equivalents and investments compared to $113.8 million at the end of the first quarter.

And now turning to guidance. As Karen mentioned, we are updating our 2019 revenue guidance to be between $106 million and $110 million. We continue to expect gross margins will exceed 80%. And additionally, we expect to have at least 115 direct sales reps by year-end, consistent with our prior comments.

In the second quarter, we continue to make significant investments to build a foundation for long-term sustainable growth. We will continue to invest in our commercial team and broader capabilities, but we are pleased with the moderation of spending growth that we saw in the quarter.

And with that, I'd like to hand the call back over to Karen.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [5]

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Thanks, Pete. AxoGen remains the leading company solely dedicated to improving quality of life for patients suffering from peripheral nerve damage. We believe that we are building a foundation based in science and clinical outcomes that will allow us to address these important unmet clinical challenges. We are confident that the underlying fundamentals driving our business are strong, and we believe that the continued execution of our strategic initiatives will deliver long-term sustainable growth.

As many of you know, a big part of the AxoGen family lives and works in the Dayton, Ohio area. While our employees and their families are safe, our prayers and deepest sympathies are with the El Paso and Dayton communities during this challenging time.

I'd like to thank our investors for their ongoing support and the AxoGen team for their commitment to our values and mission to revolutionize the science of nerve repair. Before taking questions, I'd like to end our prepared remarks by featuring a patient, whose quality of life was improved by a nerve repair using the AxoGen algorithm.

John is a patient from here in Central Florida. He's a fitness enthusiast and an engineering student who loves dogs. One afternoon, he heard his dogs in distress in the backyard and he ran to check on them. Unfortunately, he slipped and fell through his glass patio door badly injuring his hand and arm. The damage left him bleeding significantly and unable to feel or move his hand or fingers but he was able to call 911 using Siri. As he waited for EMS to arrive, all John could think about was whether he'd ever be able to lift weights and have an active lifestyle again.

Dr. Nirav Gupta discovered John has suffered severe lacerations and that both his median and ulnar nerves were transected. The median and ulnar nerves control motor function and sensation in the wrist and hand. His median nerve was repaired using Avance Nerve Graft and his ulnar nerve was repaired using AxoGuard Nerve Connector. As I fast-forward to today, I'm proud to report that John has experienced the return of both sensation and motor function to his hand and arm. He's completing his engineering degree and has returned to lifting weights and his active lifestyle. We encourage you to visit our website to see more of John's story.

At this point, I'd like to open up the line for questions. Diego?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Richard Newitter with Leerink Partners.

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Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [2]

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Karen and Pete, I was hoping maybe we could just start off with guidance. I appreciate that the quarter came in towards the low end of your -- you're at low end of your range. But maybe you could just tease out for us what exactly is being delayed by productivity gains. And what gives you kind of visibility into, I guess, the future productivity contemplation that you have in your guidance for the back half that this is the right range? It feels like productivity and sales force-related issues have kind of made it a little bit challenging to forecast the business, so help us understand what's contemplated in your guidance in the back half, maybe even between the third quarter and the fourth quarter. What exactly led to the delays? And what gives you confidence that you have visibility into the back half and for the new full year target?

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [3]

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Sure. Thanks, Rich. So we've demonstrated that as you take these territories and make them smaller and more geographically dense, that we can generate both better productivity and high growth in those territories. And that is what we're looking to replicate across more metropolitan areas. At the same time, we're taking some of the geographically diffused cities and moving those to independent agencies, so there's some moving pieces in both geography and our percent of revenue to make these changes happen.

We see that as a strong footing and platform for continued long-term growth. The transition, as we looked at our original guidance, was that we would remain flat. We see the productivity has remained relatively flat with our direct reps, and we've not seen the uptick that we expect to see, that we would have originally hoped to see in the full year. But we think it's a timing thing because as we look back at territories that we've done this previously, we do see how they come up when you get that good concentration, allowing the reps to focus. And just from a practical matter, you can see how that would happen in that it reduces driving time for the rep. They're not driving out to cover a trauma case that might be 5 or 6 hours from their house. Instead, they're focusing on the territory -- or in the high-value accounts that are close to their home, where they can spend more time and having better touch points with their surgeons so that we don't lose surgeons during their wait period and can continue to drive penetration in those accounts.

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Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [4]

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Okay. And then just to be clear, what exactly -- what rep productivity assumptions are embedded in the back half? And can you maybe give us a sense as to when in the year you think we should expect, for modeling purposes, between 3Q and 4Q to start seeing that bottom and then maybe start to improve? Help us think about the cadence between 3Q and 4Q.

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Peter J. Mariani, AxoGen, Inc. - CFO [5]

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Yes, Rich. So the way we think about it is as we look at where we came through the first half with sales rep productivity at the low end of the range of our original guidance, we looked at this and said, "What is the current run rate or the top end of the range?" And we set some additional conservativeness around a range of outcomes that could be below that if, for whatever reason, we had some pullback in productivity as we continue to move some things around. So we've set the current run rate at the top end of the range. And I think that gives us, and I hope, investors’ confidence that we've got a range that makes sense for us right now. And that should define where we go to the back half of the year.

When it comes to the Q3-Q4 split, again, I think if you look at where we ended second quarter and apply historical seasonal patterns, that's the way we've looked at it. And I think that would be the right way to go as we think about the rest of the year. Yes. And I guess, and -- so what we are saying is that the current run rate's at the top end of the range. If we see that pick up towards the back end of the range, that puts us in a better position.

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Richard S. Newitter, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Research Analyst [6]

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Right. And maybe just, if I could, one more. As we take a step back, I just think about what the normalized projected growth rate of the company is, you're now in the, call it, 26% to 30% range for 2019. When you come out on the other side of the productivity curve, presumably, assuming all goes to plan, how do you view the longer-term growth profile of the company? Are you now a 25-plus percent growth company? Has anything changed in the end markets or the size of the market?

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Peter J. Mariani, AxoGen, Inc. - CFO [7]

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Yes. No, nothing has changed in the fundamentals of the market. Nothing has changed in the size of the markets, the way we look at it. This -- for us, we continue to see ourselves as a premium growth company. Like Karen mentioned earlier, we've grown our sales reps by over 40% over the last year. We're splitting territories. We're adding clinical sales specialists. We're creating a much better footprint, especially across the larger metropolitan areas. And I think we're doing the things that are going to allow us to continue to be a premium growth company going forward. But from where we're sitting right now, I think this updated range is appropriate based on where we are coming through the first half of the year, and we'll see how things develop in the back half.

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Operator [8]

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Our next question comes from Raj Denhoy with Jefferies.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [9]

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I guess maybe following up on the last line of questions, I'm curious why you think the productivity is perhaps taking longer to ramp with these new sales reps relative to your original expectations. Is there anything different in the market? I think from a competitive standpoint or -- just really what's kind of slowing that progress for these new hires?

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [10]

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Yes. So first, there's nothing that we see that's any different in the marketplace. From a competitive standpoint, there is no new entrants. There's no change in competitive levels of market attention. And as the market is growing, that growth is really coming from the things that we, AxoGen, are doing to build the nerve repair market. So no market dynamics other than the ones we create, which are that we're bringing awareness to nerve repair and helping to teach surgeons an algorithm, a repair that we think will yield optimum results for patients.

In terms of the productivity, I think it is -- we are coming in at the lower end of our range, it's not an unexpected range. We're coming in at the lower end of the range. We're not seeing the pop-up that we could see at a higher end. So we've always talked about how there's a productivity range where reps kind of come in between the 9 to 12 months, and we're just seeing things run on the longer end. And so we felt that it's prudent just to reflect that.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [11]

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That's fair. And I suppose, part of this dynamic -- and you've kind of prepared us for this as you're adding a lot of new or junior reps. And I guess I'm curious what's happening at the other end, right, so reps that have been tenured now for a period of time. What are you seeing in terms of productivity of those folks? Or is there any -- maybe just trying to figure out and get a gauge for where productivity could go over time. I mean is it still improving even with some of the more tenured folks? What are you seeing broadly?

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Peter J. Mariani, AxoGen, Inc. - CFO [12]

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Yes. So we're still seeing the same dynamics in the marketplace with the more tenured reps. We have -- like we've talked about before, as territories get to $2 million, we'll split those territories. Sometimes we'll split them 2 for 1, sometimes we'll split them 3 or 4 to 1, depending on where they're at. And we have many reps who are crossing that level. In fact, we've got some that go above it. And it's okay to keep them above it for a little while based on their specific territory. So there's nothing here fundamentally about the business or the ability of these reps to continue to drive growth. I think as Karen mentioned, this is really about this broader, better organization beginning to mature in its current setting, and we continue to be optimistic about where this could develop.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [13]

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And just to add, I think we've run some of these scenarios where we really looked at what we think the micro potential of the territories are. And when we've added this more concentrated territory, we see very solid results, and that's what we're looking to replicate across the country. So this is something that we've demonstrated, and now we're looking to expand that demonstrated approach in more geographies.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [14]

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That's great. And then just quickly, Pete, you mentioned price -- you took a little price in the quarter. Can you give us more around what that was and what that contributed?

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Peter J. Mariani, AxoGen, Inc. - CFO [15]

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Yes. We continue -- we expected a mid-single-digit net price increase, and that's what we're continuing to see.

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Operator [16]

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Our next question comes from Ryan Zimmerman with BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [17]

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Just to continue to follow up, Karen, you're talking about this territory realignment and you're going deeper in territories. Where are you in that transition process, so are we on the front end of that? What's the time frame for that transition? And then I have a follow-up as well.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [18]

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So we see this as an evolution, not a revolution in changing the market. So we've said we'll have at least 115 direct reps, those will be spread over Q3 and Q4. We're not trying to bunch them all at one time. So -- and we -- that will be reflected just like we've done in the earlier part of the year, where we did some reps in Q1 and some reps in Q2. So you'll see a continued change as we continue to increase our sales team.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [19]

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Right. Okay. And then just a follow-up, similar line of questioning, but as new accounts come online, maybe you can characterize them or talk about them. Are you seeing similar levels of productivity in those new accounts? Or are they more marginal users? And maybe just characterize kind of where you were previously with accounts as they came online, say, 6, 12 months ago to maybe what you're seeing now in the accounts, and if there's any difference between those groups.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [20]

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So when an account starts, it usually is very small. It's one surgeon using one product in one portion of his or her treatment algorithm. And as we talked about, we really see the momentum when they start to adopt the broader range of our algorithm. So it's more than 6x our revenue in an account using 3 of our implants versus 1, right? So it's not a one-to-one relationship. It really is a broader adoption of the algorithm. And if I look at those accounts that have 3 or more products today, the growth rate and the revenue generation is -- it's higher and faster than it was historically. So we see that as positive, that doesn't mean that it happens all at once. It's -- we still go through the stages of adopting the first product, in fact: the surgeon trialing the first product, waiting to see outcomes from that first product and adopting that first product and then starting to expand to the second and third product as they expand the applications that they approach in nerve repair.

And that is still, in my experience, nerve repair is a slower adoption period, a slower adoption path than many other surgical areas because the time to get outcomes is much longer in nerve repair than it would be for a fracture, for example. And so that part, we don't see changing but once we get into it, we don't see also a degradation of that adoption. We don't have a marginalization of the potential of the accounts that we're moving into.

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Operator [21]

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Our next question comes from Craig Bijou with Cantor Fitzgerald.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [22]

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Karen, maybe, I guess, I have a couple of follow-ups or clarifications. Karen, you talked about some of the moving pieces and the territory splits. So I guess I want to get a sense for are those -- were those changes that maybe weren't contemplated earlier in the year? I know you've given the guidance or you have given the guidance about adding reps, so we knew this was coming. But I guess maybe with some of the sales force leadership changes, were there any things that happened in Q2 or maybe additional splits that weren't contemplated, say, at the start of the year?

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [23]

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Our attrition rate has not changed with the addition of the sales leadership. In fact, I think the sales team has rallied well now behind our new sales VP and we continue to execute on the plan that we've had in place. So no, we've not seen that. As I've said before, we do a focused performance management approach, and we would expect to see 10% to 15% attrition in a year, and we're tracking in that range.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [24]

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Okay. And then maybe another one on the rep productivity. And I just want to make sure that I'm clear because I believe that most of the growth this year was going to come from the reps that were more mature. And I know that the delayed productivity growth -- I guess, I'm just trying to understand was that productivity slowdown more focused in reps that had been there over a year? Was it you didn't see the impact or any impact from some of the newer reps? I know you've gotten a couple of questions on it, but just maybe a little bit more of a clarification on exactly where that delay, like what group that delay came from.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [25]

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So we see -- I would say, the original assumptions were that the growth would be from the 85 reps that we had at the end of the year with modest contributions from the new reps that we've hired. And as we've talked about before, new reps as they come on in the first year, we've assumed a very modest growth for all the reasons I talked about in terms of the conversion process of surgeons.

And so if I look at the reps over time, I would say that our more tenured reps have actually grown a little better than we expect. The reps that are sort of the 1-year to 2-year have grown a little worse than we expected. And the reps that have been our recent hires have done, actually on a percentage basis, a little better, but still very small numbers because they do contribute a very modest approach. So I would say it's a mixed bag, not something that I think is a substantial trend.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [26]

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Got it. And just -- go ahead, Pete.

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Peter J. Mariani, AxoGen, Inc. - CFO [27]

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Yes. And I think that some of those is not so much rep specific as it is just the geographies that we're putting folks in and giving them a chance to get rolling in their -- get introduced and get going and get up to speed. It's -- I think we've got a great team. I think we've added tremendous training for our folks. I think the way we're putting the sales reps through training and then updating that training on a regular basis, I think, has gone extremely well. And I think the team is positioned very well. This really is, in our view, moving along well, just at the lower end of the range at this point. And we'll continue to see how things develop in the second half.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [28]

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Yes. And just a reminder in -- when I talked about the 85 reps that we ended 2018 with, 25 of those were hired in 2018, with some of them certainly in fourth quarter, in fact, 9 of them were in fourth quarter. So those folks are still coming up the productivity curve as well as the people that we're hiring this year. And that's the balance that we're trying to look at, is continuing to maximize the productivity of the people that we had in place last year as well as, again, the new hires we're doing now.

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Operator [29]

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Our next question comes from Josh Lamers with William Blair.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [30]

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This is actually Andrew Brackmann on for Brian Weinstein. Maybe just piggybacking off of the previous line questioning there as it relates to the new leaders sort of brought into the sales organization, can you talk to maybe a little bit more about the specific changes they brought to the commercial team, and how is that being received by the reps in the field?

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [31]

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Yes. I think Chris and supported also by Erick, have done a really good job of first coming up to speed on the execution of the strategy that we have in place. The fundamental strategy has not changed. But I think they've done some very good fundamentals that have helped to reinforce the plan that we're on. For example, one of the things that I think the team has done a great job is really laying out and standardizing what is our hiring criteria for new sales associates as we continue to expand the sales team. Obviously with the growth we have this year, that was a really important criteria that we get in place. And they did a nice job of benchmarking what are the best of what we hired, where we've seen the best growth in development to try and set these people that we're hiring up right -- that we're hiring now for the best possible growth, really, again, impacting 2021 -- or excuse me, 2020 next year. But we think we're bringing on a very strong class of people who will have the best potential for success. So they've done a nice job of standardizing there.

They've also put in, I think, the best training program that we've ever had, both for our management and our sales associates in both the way we're delivering it and the messaging that we're delivering to educate the people that we're bringing on board to, again, try and maximize the opportunity for them to ramp up quickly. And so they put a good emphasis on those 2 things that I think set us up for the long term with strength.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [32]

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Okay. And then just one point of clarification. I want to go back, I think, to something that you said around sort of the sales force sort of territory splits throughout the year, was that contemplated as you entered 2019? Or is this a new strategy that's being put in place?

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [33]

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No. Yes, that's -- we've actually done this for a number of years. As we've grown, we have been splitting our territories such that when we are in the range of $2 million, we will split the territory. We set up a compensation plan that rewards and recognizes growth. And as a territory gets larger, it is often harder to get the growth dollars out of it, so it ends up being a good win-win in that the rep will make more money with a smaller base. And the company also wins because we go back to a good growth rate. And we've seen this over and over again that as we split the territories, they continue to then boost up with a better growth rate as the reps are able to focus their time and attention. And that was part of the thinking that allowed us to then, again, pilot in several geographies the focus on the smaller, more directed territories and has also had us then move to some of the changes that we've done in our independent agencies, where we have taken geographically diffuse areas.

Fresno, California is a good example. Their trauma center is good area for -- to have some focus but geographically removed from other areas, and we don't want a rep driving out there. And moving that to an independent, so while our independent -- the revenue that is from independent has gone down from 20% down to 13%, we've actually increased our number of agencies with this idea that it will help us improve our overall efficiency.

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Operator [34]

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Our next question comes from Kyle Rose with Canaccord.

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Kyle William Rose, Canaccord Genuity Corp., Research Division - Senior Analyst [35]

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I just got one. I mean when you talked about expanding the sales force, you also talked about investments in specialty reps. Just wondering if you could talk about, I guess, how many reps you've actually specialized towards some of the smaller markets or at least the smaller, more growing markets, OMF and breast, in particular, and then just kind of how those markets are tracking relative to your expectations and how we should think about them as a contribution to the overall growth.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [36]

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Sure. Well, again, just as a grounding, our largest opportunity and our biggest dollar area is in the traumatic injuries. And so that's the foundation of what we have as a business. But we recognize a number of years ago that there was opportunity in the oral and maxillofacial segment. So these are either mandible reconstruction or iatrogenic injuries in dental procedures that damage the nerves and then also in breast reconstruction neurotization. And so we put in place 2 specialty teams focusing in on this. They work in conjunction with the area manager, so the territory manager. The specialty team for OMF is 6 people across the country -- excuse me, 8 people across the country. And then in the breast team, we focus on selected centers, about 30 centers that really specialize, again, in breast neurotization. And we have 6 specialists to support those 30 centers in addition, again, to the area manager. And those are included in our rep count.

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Operator [37]

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There are no further questions at this time. I'll turn it back to Karen Zaderej for closing remarks. Thank you.

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Karen Zaderej, AxoGen, Inc. - Chairman, President & CEO [38]

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Thank you, Diego. Well, I want to thank everyone for joining us on today's call. And we look forward to seeing many of you at the Canaccord conference this week and at the Morgan Stanley and Cantor conferences in the coming months. Additionally, we'd like to announce we'll be conducting our Analyst and Investor Day in New York City on November 25. More detail about this event will be made available on the AxoGen website in the coming months. Thank you.

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Operator [39]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great day.