Q3 2023 AxoGen Inc Earnings Call
Participants
Karen Zaderej; Chairman of the Board, President, & CEO; Axogen, Inc.
Pete Mariani; CFO & EVP; Axogen, Inc.
Adanna Alexander; IR; Russo Partners LLC
Mike Sarcone; Analyst; Jefferies Group
Mike Kratky; Analyst; Leerink Partners LLC
Caitlin Cronin; Analyst; Canaccord Genuity Group Inc.
David Turkaly; Analyst; JMP Securities
Presentation
Operator
Greetings. Welcome to Axogen reports third-quarter 2023 financial results. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Adanna Alexander, Investor Relations Consultant. Adanna, you may now begin.
Adanna Alexander
Thanks, Rob. Good morning, everyone. Joining me on today's call is Karen Zaderej, Axogen's Chairman, Chief Executive Officer, and President; and Pete Mariani, Executive Vice President and Chief Financial Officer. Karen will discuss the quarter and our outlook for the year, and Pete will provide an analysis of our financial performance and guidance, followed by a question-and-answer session.
Today's call is being broadcast live via webcast, which is available on the Investors section of Axogen's website. Following the end of the live call, a replay will be 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, including our expectations regarding our ability to expand our footprint and expand core accounts; anticipated growth for revenue categories; penetration of core accounts; marketing opportunities with nerve applications associated with immersion, trauma, breast, OMF, and surgical treatment of pain; and new products.
Our expectations regarding the timing of our launch for Avive+; our expectations regarding our ability to make a rolling biologics license application submission for Avance nerve graft, and the timing of the BLA submission for approval; our belief that our balance sheet will continue to be sufficient to bridge through to cash flow breakeven and longer-term profitability.
Our expectation that we will continue trending towards cash flow breakeven and our belief that trends towards operating leverage will allow us to maintain a strong balance sheet position and provide ample support as we work towards profitability; our 2023 financial guidance, including revenue range and gross margin and optimism associated with the adoption of our new products, key strategic pillars, and our balance sheet.
Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including but not without limitation, the risks and uncertainties reflected in the company's annual and periodic reports such as hospital staffing issues, regulatory process and approvals, surgery and product adoption, and market awareness of our products.
The forward-looking statements are representative only as of the date they are made, and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. In addition, for a reconciliation of non-GAAP measures, please reference today's press release and our corporate presentation on the Investors section of the company's website.
Now I would like to turn the call over to Karen. Karen?
Karen Zaderej
Thank you, Adanna, and thank you all for joining us today as we discuss our third-quarter 2023 financial results. We're pleased with the quarter led by revenue of $41.3 million, representing 12% growth year over year. Our performance reflects improvement in emergent trauma as well as continued strength in scheduled procedures. This improvement was the result of stabilization in the hospital operating environment and improved commercial execution.
As you may recall, last quarter, we began reporting estimated revenue and growth across two primary procedure categories: emergent trauma and scheduled procedures. These estimates are based on available data received from hospitals and sales reps and assumptions regarding specific surgeon practice and account information, and as such are subject to the limitations of the data received and our assumptions.
During the quarter, we estimate that emergent trauma procedures represented approximately 50% of revenue and grew in the mid-single-digit percent range versus the prior year. As a reminder, emergent trauma generally results from injuries that initially present in an ER. These procedures are typically referred to and are completed by a specialist either immediately or within a few days following the initial injury.
During the quarter, we began to see stabilization of staffing and procedure scheduling in hospital compared to the first half of 2023. Although we continue to see growth of certain routine procedures and lower-cost settings such as ASCs, access to these procedures within hospitals also improved in the third quarter compared to the first half of the year.
Scheduled procedures also represent approximately half of total revenue. During the quarter, we estimate that this category grew approximately 20% versus the prior year.
As a reminder, scheduled procedures are generally characterized as procedures where a patient is seeking relief of a nerve condition caused by a nerve defect or surgical procedure. These include breast reconstruction following a mastectomy, nerve reconstruction following the surgical removal of a painful neuroma, and oral and maxillofacial procedures such as a mandible reconstruction and nerve decompression.
The growth in this category is reflective of the opportunity to provide improved quality-of-life outcomes for patients. We have built the success with compelling solutions backed by clinical data and supported by surgeon education and effective patient activation programs that educate patients and connect them with trained surgeons.
Our growth strategy continues to be focused on going deeper into core accounts where we believe there's tremendous opportunity to expand our footprint. Core accounts are defined as those with greater than $100,000 in revenue in the trailing 12 months.
During the quarter, core accounts totaled 372, an increase of 12% over the prior year of 331 and an increase of 7% sequentially. Revenues from core accounts now represent approximately 65% of total revenues, up from 60% in prior quarters, demonstrating the strength of our commercial execution and ability to gain deeper surgeon adoption and expanded use cases of our products.
We ended the third quarter with 116 direct sales representatives, up one from the end of the second quarter and five from a year ago. We believe our revenue growth can continue to be driven primarily by increased productivity of our sales force, and we will evaluate and add additional sales reps as their territories approach targeted levels.
Our direct sales force is supplemented by independent sales agencies that represent approximately 10% of our total revenue. Earlier in the year, we were pleased to provide an update on our key strategic pillar of product and procedure innovation, and we expect this will continue to be a driver of long-term growth.
As a summary, we announced three specific innovations across our offering, including an expansion of our Resensation technique for women who choose an implant-based reconstruction, which we believe could apply to an additional 10% to 15% of all breast reconstruction patients. We had initially set a goal of training 20 additional surgical teams by year end, but now expect to have more than 30 new teams trained and performing procedures, and we will continue to train additional teams in early 2024.
We also announced innovation in our nerve protection portfolio. The category of nerve protection represents approximately $800 million of the overall nerve repair market and covers a wide range of injuries and defects, including carpal and cubital tunnel syndromes, crush injuries, and other non-transected traumatic nerve injuries.
We believe that the diversity of these injury types and their anatomical locations present some unique challenges. Optimizing outcomes for these patients requires a targeted portfolio of solutions to adequately address the specific aspects of both the injury and healing process.
Following a successful pilot release, we're happy to announce that in August, we had a national launch for the first of these new products, Axoguard HA+ Nerve Protector. We're very pleased with the initial surge in engagement and feedback as they began to integrate Axoguard HA+ into their nerve protection algorithm. We're confident that Axoguard HA+ will expand the adoption of nerve protection products and will help more patients with nerve injuries.
Additionally, we're continuing the development of a resorbable nerve protection product that functions as a barrier, providing temporary protection and tissue separation during the critical phase appealing to nerve injuries. This new product will be branded Avive+ Soft Tissue Matrix and will be regulated as the Section 361 tissue product. We expect Avive+ will further strengthen our position in nerve protection, supporting emergent trauma and the surgical treatment of pain. We remain on track to launch this product in Q1 2024.
Moving on to updates in our growing body of clinical evidence, over the years, we've made significant investments to develop quality clinical evidence to demonstrate the safety, performance, economics, and utility of our nerve repair solution. Our active clinical programs are progressing as expected.
As of the end of the quarter, we have over 200 peer-reviewed publications across trauma, breast, OMF, and pain. In the quarter, the RECON study was published online in the Journal of Hand Surgery and was recently presented in the 78th Annual American Society for Surgery of the Hand Conference. Both events included the author's analysis of the results, which found that advanced return to greater degree of functional recoveries and conduits and superiority was demonstrated as gap lengths increased.
We are excited to see the addition of this Level 1 evidence supporting the efficacy of Avance nerve graft in published literature and being discussed by surgeons. This data was supplemented by the findings in the meta-analysis and premier all-payer publications. These publications demonstrated that allograft and autograft sensory and motor outcomes as well as procedure costs were comparable.
Notably, the allograft group reduced OR time and reduced patient morbidity as compared to autograft. We believe that these publications will continue to play an important role in surgeon clinical decision making, especially with middle-adopter surgeons.
Turning to our new production facility and our BLA for Avance nerve graft, during the third quarter, we began processing tissue in the new state-of-the-art APC facility, which provides for up to three times our current capacity and was designed for long-term growth and expansion. This represents a key milestone in preparation for our BLA submission.
We continue to anticipate a pre-BLA meeting with the FDA in early first-quarter 2024, where we will request utilization of a rolling submission process. We plan to begin filing the modules in the first quarter and complete the submission in the second quarter. We believe this process will support BLA approval in the first half of 2025.
As a reminder, a BLA approval will complete the regulatory transition of Avance nerve graft from a 361 tissue-based product with 351 biological products. And importantly, we believe that Avance would be designated as the reference product for potential biosimilars providing 12 years of market exclusivity.
Looking ahead, we remain focused on executing our strategic initiatives, anchored in the strength of our clinical data, innovation, market development, and commercial execution to continue to drive surgeon adoption and growth. Importantly, we're also delivering operating leverage across the business and believe our balance sheet will continue to be sufficient as we bridge through to cash flow breakeven and longer-term profitability.
Now I will turn the call over to Pete to provide a review of our financial highlights and guidance. Pete?
Pete Mariani
Thank you, Karen. Revenue for the quarter was $41.3 million, representing a 12% increase compared to the third quarter of 2022. Growth was primarily driven by an increase in unit volume of 8% and a 3.5% increase in price. We estimate the revenue from emergent trauma represented about half our total revenue and grew in the mid-single-digit range versus last year, while scheduled procedures also represented about half of total revenue and grew approximately 20% year over year.
Gross profit for the quarter was approximately $33.2 million compared to gross profit of approximately $30.8 million for the third quarter of '22. Gross margin for the quarter was 80.5%, down from 83.3% year over year, reflecting the initiation of tissue processing in our new newly opened Axogen processing center in the quarter.
Total operating expenses for the quarter increased 5% to $37.3 million compared to $35.6 million in Q3 of 2022. The net increase was primarily the result of increased marketing programs, compensation, and professional services.
Sales and marketing expense in the third quarter increased 8% to $21.4 million compared to $19.8 million in the prior year. The increase was primarily due to compensation, marketing programs, and travel. As a percentage of total revenue, sales and marketing expense decreased to 52% compared to 54% in the third quarter of 2022.
Research and development expenses was $7 million, remained flat year over year. Product development expenses represented approximately 62% of total R&D compared to 50% in the prior year and included costs for a number of specific development programs, along with the non-clinical spend on the BLA for Avance nerve graft.
Clinical expenses represented approximately 38% of total R&D compared to 50% in the prior year. And as a percentage of total revenues, research and development expense decreased to 17% compared to 19% in the third quarter of last year. General administrative expense was $8.8 million in the third quarter, remaining flat as compared to the prior year.
Our net loss in the quarter was $4.1 million, or $0.10 per share compared to a net loss of $4.3 million or $0.10 per share in the third quarter of 2022. We reported adjusted net income in the quarter of $700,000 or approximately $0.01 per share compared to an adjusted net loss of $400,000 or $0.01 per share last year. We also recorded positive adjusted EBITDA in the quarter of $2.4 million compared to positive adjusted EBITDA of $400,000 in the prior year.
The balance of all cash, cash equivalents, and investments on September 30 was $38.6 million compared to a balance of $40.8 million at the end of the second quarter. The net change of $2.2 million includes interest and other charges capitalized into the company's new processing facility in Dayton, Ohio, which was placed into service during the quarter and provides for up to three times our current capacity and is designed for long-term growth and expansion.
Capitalization of interest charges continued through mid-August when the facility was placed into service. Subsequently, all interest charges are recorded as interest expense and other income and loss on our P&L. We are pleased with the operating leverage demonstrated through 2023, and we expect to continue trending towards cash flow breakeven, driven by leverage over our fixed-cost infrastructure and our focus on thoughtful operating expense management.
Additionally, the license fees that we pay on advance revenue will come to an end in the fourth quarter of this year and provide annual cash savings of approximately $3.5 million in 2024. We believe our operating leverage, combined with normalized capital expenditures, will allow us to maintain our strong balance sheet position and provide ample support as we continue our path to profitability.
Now turning to guidance in today's press release, we are maintaining our full-year guidance with 2023 revenue in the range of $154 million to $159 million, which represents annual growth of 11% to 15%. Additionally, we anticipate the gross margins will be reduced with the continued transition to the new processing facility in the fourth quarter and continue to expect that gross margin for the full year of 2023 will be approximately 80%.
In summary, we're pleased with our third-quarter performance. We will continue to execute our strategies, invest in innovation, and drive toward cash flow breakeven and profitability. And at this time, we'd like to open the line for questions. Rob?
Question and Answer Session
Operator
(Operator Instructions) Mike Sarcone, Jefferies.
Mike Sarcone
Good morning, Karen and Pete. Thanks for taking the questions.
Pete Mariani
Good morning.
Karen Zaderej
Good Morning.
Mike Sarcone
So just the first one on the guidance, if I look what's implied for 4Q, that's kind of $38 million to $43 million, which is 5% to 19% year-over-year growth at the low and high end of the range. I was wondering if you could just talk about what are your assumptions that are baked in both ends of the range. And just any more color there would be great to start.
Pete Mariani
Yes, Mike. I think for our guidance, we're trending in the middle of the range. We just didn't feel like, in this current environment, trying to mess with the range at the end of the year would be appropriate. We're comfortable with the range that this is implying. And I think that this makes sense for the company.
Mike Sarcone
Okay, got it. And then, do you think you can just give us some more color on the ASC dynamic and hospitals moving some of those simple procedures to the ASC? In 2Q, you called out an economic impact. I'd just love to get some more granularity on how that situation is playing out.
Karen Zaderej
Sure. We saw actually two things happen. We started to see good execution in ASCs as we see some simple procedures transitioning to ASCs, but we also saw stabilization in the hospital environment where hospitals were able in some cases to restabilize their staffing and allow procedures to be there. And in other cases, they've made their changes to procedures and moved ASCs. But as I said, we're starting to be able to move into those.
So all the way around, we saw an increase in what we would call simple trauma. So these are lacerations that can be repaired with a connector or could be repaired with [a short Avance], and we saw those stabilize and start to grow again.
Mike Sarcone
Okay. Thank you.
Operator
Mike Kratky, Leerink Partners.
Mike Kratky
Hi, everyone. Thanks for taking my questions. I guess just in first of the upcoming BLA approval, I mean, is your expectation that that is going to help drive meaningfully higher utilization from surgeons? What have you heard from your industry contacts? And then just as a follow up, has that pre-BLA meeting been scheduled for 1Q. already? Or is there any other kind of gating factors ahead of that that you need to provide?
Karen Zaderej
Yes. So first, on the schedule, no, we don't have a date yet for the pre-BLA meeting. It's not scheduled, but we are on track to have it scheduled to be in the early part of Q1. And in terms of gating factors, yes, there's certain documents that you provide to the FDA. They go through some logistics internally to then come up with a schedule. So those initiatives have to happen yet. But again, we're on schedule to do what we expect to get it scheduled in the early part of Q1.
In terms of the impact of the BLA, we think the BLA will be helpful for middle adopters to be comfortable in that data that Avance nerve graft has that shows that it is certainly a superior option to conduits, and that combined with the meta-analysis is going to provide a better opportunity for their patients without the morbidity of an autograft.
And as I mentioned in the script, it's also faster for those hospitals that are trying to get their ORs turned over more quickly. And so we think that we've got a good opportunity to continue to build this business as we transition into a BLA with the stamp of being a biological product.
Mike Kratky
Super helpful. Thanks very much.
Operator
Caitlin Cronin, Canaccord Genuity.
Caitlin Cronin
Hi, everyone. Good morning. Congrats on a great quarter. Just maybe to start, touching on core accounts, it became a larger portion of your business this quarter. Historically, it has only been 60%. Now, it's 65%. Do you expect this to keep growing? And has this really been the result of middle adopter growth or penetration of different types of surgeons within an account? Thank you.
Karen Zaderej
Yes, thank you. We're very excited that we're seeing faster growth in both emergent and scheduled procedures in our core accounts, and that's been our strategy. We think there's a significant opportunity to grow that business in those core accounts. That's where we've got a lot of upside potential, and it is all of those.
Now the majority of our -- the vast majority of our core accounts have both some business in trauma and some business in scheduled cases. But we see opportunity to continue to expand both of those and continue to drive that deeper adoption.
And that deeper adoption, really, by definition means we're moving into those middle adopters and becoming the standard of care in those accounts. That's what our goal is and then continue to grow the number of core accounts where we've become the standard of care. So we think that strategy has been effective, and we're happy to see that percentage increase.
Caitlin Cronin
Awesome. And then just a quick one on breast. You noted a higher number of surgeons expected to train this year. Are you starting to see revenue contribution from this new opening of procedures in that segment?
Karen Zaderej
Yes, it's been exciting to see the expansion into the implant-based procedures. The opportunity for Resensation as we're ending breast cancer awareness month has been a meaningful topic of conversation among women who have breast cancer.
And I think the realization that this is an important outcome for women has continued to spur significant interest in the procedure. We had standing-room-only interest in our training programs before the implant-based procedures, and we think this will continue to be an impactful part of our overall growth in the scheduled procedures.
Caitlin Cronin
Thank you.
Operator
(Operator Instructions) Dave Turkaly, JMP Securities.
David Turkaly
Hi. Good morning. Karen, maybe the Avive+, the resorbable -- does anybody else have a resorbable product? I'm just curious. Were surgeons asking for this? I am kind of wondering exactly what -- where it will be used specifically.
Karen Zaderej
Yes. Actually, if you remember, we had an absorbable product prior that was very well received by the market, and we voluntarily withdrew that as some FDA changes in classification of products. I didn't tell you that I regularly receive phone calls from surgeons who were saying that they would like a replacement back for that product, that it was an important part of the overall treatment algorithm.
It's not going to be used -- it's a very niche product. It's not going to be used in all procedures. But in those procedures where there is a trauma that can cause damage to the surrounding tissue of a nerve as well as the nerve, it can be important to have a temporary or resorbable soft tissue matrix that provides protection during the critical healing phase, and surgeons are very interested in having this as a part of their algorithm in addition to the offerings we have with Axoguard. And so we are looking forward to getting this launched in the first quarter.
David Turkaly
Great. And then maybe one follow up for Pete. Pete, can you give us, from a modeling standpoint, sort of what you think interest expense is going to look like maybe just on a quarterly basis moving ahead, given that capitalization is now rolling off?
Pete Mariani
Yes, I think with the structure of our debt, you'll see anywhere from $1.7 million to maybe $1.9 million a quarter, actually. Yes, that's interest expense, and then we'll see interest income as well off the cash that we have of a few hundred thousand.
David Turkaly
Thank you.
Karen Zaderej
Thanks, Dave.
Pete Mariani
Thanks, Dave.
Operator
Thank you. At this time, we've reached the end of our question-and-answer session, and I'll turn the call over to Karen Zaderej for closing remarks.
Karen Zaderej
Thank you, Rob. I'd like to thank the Axogen team who remain committed to our mission of improving nerve function and quality of life for patients with peripheral nerve injuries. We're happy with our current progress, and we remain focused on ensuring our long-term success. I want to thank everyone for joining us this morning and have a great day.
Operator
This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
