Treace Medical Concepts, Inc. (NASDAQ:TMCI) Q4 2023 Earnings Call Transcript
Treace Medical Concepts, Inc. (NASDAQ:TMCI) Q4 2023 Earnings Call Transcript February 28, 2024
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Operator: Good day, and thank you for standing by. Welcome to the Treace Medical Concepts Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Julie Dewey. Please go ahead.
Julie Dewey: Good afternoon, everyone, and welcome to our fourth quarter 2023 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Treace's Chief Communications and IR Officer. With me today are John Treace, Chief Executive Officer; and Mark Hair, Chief Financial Officer. During the call, John and Mark will offer commentary on our commercial activity and review our fourth quarter and full year financial results released after the close of the market today, after which we will host a question-and-answer session. The press release and supplemental materials can be found in the Investor Relations section of our website at investors.treace.com. This call is being recorded and will be archived in the Investors section of our website.
Before we begin, we would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Treace assumes no obligation to update these statements.
Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10-K for the full year 2023 to be filed on February 27, 2024, for a detailed presentation of risks. With that, I will now turn the call over to John.
John Treace: Thank you, Julie. Good afternoon, everyone, and thanks for joining us. I'm going to focus my comments today on our full year and fourth quarter 2023 highlights, the exciting progress of our SpeedPlate implant launch and our other growth drivers. Following my comments, Mark will cover the specifics of our Q4 results and our 2024 guidance. 2023 was a busy and productive year for Treace, and we're proud of the significant progress that we've made. We successfully executed on our strategic plan resulting in full year U.S. revenue growth of 32%, surpassing the high end of our previously provided guidance range and growth that we believe is significantly above our foot and ankle peers. We also continue to scale our operations, making encouraging adjusted EBITDA progress that was head of the prior year and delivering gains across our key operating metrics, reaffirming our belief that we have the right strategies in place to expand the market penetration of our differentiated technologies.
Here at Treace, we're driving a fundamental shift in the surgical treatment of bunions through our proprietary Lapiplasty procedure, which is well on its way to becoming a standard of care. Lapiplasty targets a $5 billion-plus addressable market in the U.S. with continued strong adoption by the foot and ankle surgeon community and with nearly 1 in 4 adults in the U.S. affected by bunions, we believe this represents the most compelling opportunity in the foot and ankle reconstructive market today. As for the fourth quarter of 2023, we have penetrated approximately 6.6% of the estimated 450,000 annual bunion surgeries in the U.S. up from 5.5% in the fourth quarter of 2022 and reflecting approximately 2.7% market penetration of the estimated 1.1 million annual U.S. surgical candidates that constitute our $5 billion-plus total addressable market.
We've also expanded our footprint in the foot and ankle market by adding complementary procedures and technologies to treat related deformities such as Adductoplasty and hammertoe correction, both of which frequently coexist with bunions and are addressed at the same time. This has opened up new revenue opportunities and meaningfully expanded our TAM by 15% or approximately $750 million without diluting our focus on the $5 billion-plus U.S. market opportunity for our core Lapiplasty procedure. We initiated commercialization of several new technologies in 2023, including our SpeedPlate fixation platform, hammertoe system, several sterile instruments as well as a limited release of our Micro-Lapiplasty system. We expect all of these new technologies to fuel strong growth for years to come.
As a uniquely focused foot and ankle company, we believe we're distinctly positioned to drive innovation-led growth and deliver long-term shareholder value. Since our founding, we pioneered elegant breakthrough solutions, including our flagship Lapiplasty and Adductoplasty procedures that are designed to deliver predictable, repeatable results supported by differentiating clinical studies. Along the way, we've also taken bold steps to grow and defend the markets we pioneered through our direct sales team, rapid product innovation and our patient awareness and education initiatives, all of which we believe have resulted in a sizable competitive advantage for Treace. With over 90,000 patients now treated with our Lapiplasty procedure, we recognize that our success is not only measured in our numbers, but in the transformative change that our differentiated therapies provided to patients.
Turning now to our Q4 and full year 2023 results. Revenue in the fourth quarter was $62.2 million, up 25% over the prior year, with full year revenue growing 32% over prior year. These results demonstrate the underlying strength and effectiveness of our strategic investments in our direct sales channel, targeted R&D initiatives and direct-to-consumer programs. Fourth quarter was also our first quarter of positive adjusted EBITDA since going public in April of 2021. We continue to advance our key performance metrics in the fourth quarter, including substantial gains in the number of new surgeon users ending Q4 with 2,855 active surgeons, up 164 for the quarter and up 20% year-over-year. A year-over-year increase in trailing 12-month certain utilization with an average of 10.4 kits per active surgeon in Q4, up from 10.3 kits a year ago despite the dilutive effect of the large number of new surgeons added during the year and record blended average selling price of $6,437 per Lapiplasty kits sold in the quarter, up 9% over the prior year, driven by the early impact in the quarter from our new SpeedPlate and hammertoe systems as well as increased adoption of our Adductoplasty procedure and utilization of our new sterile instruments.
Our strategic investments and commercial focus have continued to support the growth of our business, giving us confidence that we have a well-defined, proven and scalable commercial strategy. We intend to continue these targeted investments in 2024 with the goal of increasing our market penetration by expanding the footprint and coverage of our bunion-focused direct sales channel, advancing our patient education and awareness DTC initiatives and driving more targeted R&D innovations into the market. We have a highly specialized team at Treace, including an established and growing direct sales channel, one that is 100% focused on bunion and related mid-foot surgery, the only such one in the industry. We increased the size of this team by 35% during 2023, exiting the year with 227 quota-carrying direct reps that produced roughly 82% of our revenue mix in Q4.
When you include our associate sales reps, clinical specialists and sales managers, our total employee fleet in the field totaled approximately 340 employees at the end of 2023 versus 267 at the end of the year 2022. We plan to appropriately grow the specialized team during 2024 to ensure strong surgeon coverage and support and continued market penetration. As I mentioned earlier, we saw strong growth in our active surgeon base in Q4 and for the full year. As our surgeon base continues to develop and gain tenure, we anticipate utilization gains with increased use of Lapiplasty and Adductoplasty as well as further adoption of our growing portfolio of complementary products, all supported by our expanding direct sales channel, differentiating clinical data sets and patient education and awareness DTC initiatives.
Now, I'd like to turn to our product launches. First, our new SpeedPlate fixation platform. Our SpeedPlate launch is off to a great start, and we saw a very strong demand in the fourth quarter despite its limited availability. In fact, SpeedPlate represented about 1/4 of our case volume in Q4 and about 20% of our active surgeons have already used SpeedPlate. We are on track to have full market availability of SpeedPlate at the end of Q1 and expect broadening adoption and growth throughout 2024 and beyond. Our SpeedPlate fixation technology is designed to deliver the stability of a titanium locking plate with the speed of insertion and compression of the staple, a very attractive combination for many surgeons. We believe this technology is not only enhancing the experience of our existing customers, but is also allowing us to attract and onboard a new audience of surgeons, specifically those who prefer night non-staples for fixation.
While broadly applicable across Lapiplasty and Adductoplasty procedures today, we previewed new SpeedPlate implant configurations at the recent ACFAS meeting that are designed to expand the versatility of our SpeedPlate platform to address an expanded range of fusion procedures throughout the foot. These new SpeedPlate configurations are expected to be available by Q3. Next, our Micro-Lapiplasty system. This is an advanced instrumentation option designed to further reduce both the incision size and related tissue dissection with the Lapiplasty procedure. This exciting evolution of our instrumentation allows the patented Lapiplasty procedure to be performed now through a 2-centimeter incision utilizing our new SpeedPlate fixation technology.
Our Micro-Lapiplasty system is now fully available. While we are excited about the growth opportunity that all of these product launches represent, there's even more to come from our robust product development pipeline. In fact, inclusive of the launches I've just discussed, we have 10 new innovation launches slated for 2024 and more in our R&D pipeline to ensure a steady cadence of new innovations in 2025 and beyond. We were excited to highlight many of our new 2024 innovations at ACFAS, including our new mini-Adductoplasty system and our RedPoint preoperative planning and patient-specific instrumentation. Mini-Adductoplasty features advanced instrumentation designed to allow the Adductoplasty mid-foot correction procedure to be performed through an approximately 50% smaller incision and leverages SpeedPlate technology for fixation.
The Mini-Adductoplasty system is currently in limited clinical release with full commercialization planned in the second half of 2024. We believe this new innovation can drive increased Adductoplasty adoption and market penetration for years to come. Our RedPoint patient-specific instrumentation is our first-to-market technology designed to deliver preoperative planning and patient-specific guides for bunion and mid-foot deformity corrections. We believe this technology can make challenging procedures more approachable to a greater number of surgeons while reducing steps and the [Indiscernible]. RedPoint PSI is currently in limited clinical release with full commercialization planned in the second half of 2024. As pioneers in the procedure markets that we have developed, we believe RedPoint PSI is a core technology with capability to achieve broad market adoption in the years ahead, further strengthening our leadership position.
Finally, we're looking forward to introducing a significant new technology platform in the back half of 2024. We believe this platform will speed our penetration of the bunion market, expand our market opportunity and further reinforce our position as the leader in 3D bunion correction. We will provide additional updates on our new product innovations as we continue to develop our pipeline centered around our core technologies and IP aimed at improving surgeon user experiences, patient outcomes and supporting continued market penetration. As we look specifically to 2024, our guidance provided today reflects our expanding commercial capabilities and increased contribution from the sales repeditions that we made throughout last year, continued adoption of Lapiplasty, Adductoplasty and other complementary procedures as well as multiple new launches that we expect to drive strong growth while we also advance our pipeline opportunities.
We also expect to make solid progress on our pathway to sustainable profitability as we drive towards adjusted EBITDA breakeven for full year 2024. I'm proud of another great quarter of execution at Treace with solid performance from our talented team of employees. With continued strong additions to our surgeon base, increasing productivity of our direct sales channel and a robust pipeline of new technologies fueling our commercial momentum. I am confident that we have the right strategies in place to continue to deliver industry-leading foot and ankle growth and profitably scale our business in 2024 and beyond. With that, I'll now turn the call over to Mark to review our financial performance and guidance. Mark?
Mark Hair: Thank you, John. Good afternoon, everyone. Revenue for 2023 was $187.1 million, representing 32% growth over the prior year. Fourth quarter revenue was $62.2 million, a 25% increase compared to the prior year. Growth in the fourth quarter was driven by increases in procedure volumes and increases in blended average selling price due to increased adoption of the company's newer technologies and expanding portfolio of complementary products. Although the fourth quarter included 1 less selling day than the prior year, the month of December actually had 2 less selling days. On an average daily sales basis, we grew 27% in Q4. We sold 9,665 Lapiplasty procedure kits in the fourth quarter, a 15% increase compared to the same quarter last year.
Blended average selling price was a record $6,437 in the fourth quarter, up 9% over the same prior year quarter. This higher blended average selling price was driven by Lapiplasty and the additional contribution from our expanding portfolio of complementary products such as our Adductoplasty system, sterile single-use instruments and some early impact from SpeedPlate and Hammertoe as our direct sales channel continues to increase their procedure volumes across our surgeon customers. For the full year 2023, revenue was $187.1 million, a 32% increase over 2022. At the top end of our preannounced revenue expectations of $186.7 million to $187.1 million and above the high end of our prior 2023 revenue guidance range of $182 million to $186 million.
We sold 29,675 Lapiplasty procedure kits for the full year 2023, a 20% increase versus prior year with a blended average selling price of $6,306, a 10% increase over the prior year. Gross margin was 81.6% in the fourth quarter of 2023 compared to 81.9% in the fourth quarter of 2022. This 30 basis point decrease was primarily due to changes in product mix and an increase in overhead costs due to headcount to support the growing business, partially offset by lower royalty rates and a decrease in inventory provisions. For the full year 2023 gross margin was 81.2%, down from 82% in the prior year period, primarily due to changes in product mix and increase in inventory provisions and an increase in overhead costs due to head count to support the growing business, partially offset by lower royalty rates.
Total operating expenses were $57.5 million in the fourth quarter of 2023 compared to total operating expenses of $44.2 million in the fourth quarter of 2022. The increase in operating expenses reflects strategic investments in our expanding direct sales channel, investments in product innovation, increased capacity requirements as well as support for our commercial initiatives. For the full year 2023, operating expenses were $203.4 million compared to $151.2 million in the prior year period. The increase in operating expenses reflects increased investments in commercial initiatives as well as other G&A investments supporting our growing business. Fourth quarter net loss was $6.3 million or $0.10 per share compared to a net loss of $4.4 million or $0.08 per share for the same period of 2022.
We ended the fourth quarter, our seasonally strongest, with adjusted EBITDA of $2.6 million compared to an adjusted EBITDA loss of $467,000 for the same period in 2022. As John said, this is our first quarter of positive adjusted EBITDA since going public in 2021. For the full year 2023, we had a modest improvement in adjusted EBITDA compared to the prior year. Cash equivalents, marketable securities and investment receivable totaled $126.2 million as of December 31, 2023. Our total available access to liquidity, including our debt facility, is approximately $190 million. We believe we have a lengthy runway in terms of our current cash level with sufficient balance sheet strength and flexibility to continue aggressively executing on our strategic investments and growth initiatives as well as a clear path to achieve positive adjusted EBITDA.
Before I discuss our 2024 guidance, I wanted to mention that we will now update our key operating metrics annually at the end of the year rather than quarterly. There has been, and we continue to anticipate that there will be variability in these metrics from quarter-to-quarter due to seasonality and the timing and impact of new product launches, surgeon training events and DTC investments. Therefore, our plan is to update these key metrics on an annual basis, which is much more relevant for our business at this point in our growth trajectory. Let me now turn to our outlook for full 2024. We are providing full year 2024 revenue guidance of $220 million to $225 million, which reflects an increase of 18% to 20% compared to 2023. We remain encouraged by the underlying strength and momentum in our business with our strategic investments clearly delivering on growth.
Given that it's early in the year we feel comfortable at the midpoint of this range. We expect to make significant improvement in adjusted EBITDA for the full year 2024 and anticipate adjusted EBITDA to improve approximately 50% compared to full year 2023. Excluding any consideration for the effect of potential future acquisitions or any other material business developments, we anticipate being close to cash flow breakeven for the full year 2025. Our blended ASP has historically grown mid-single digits. And given ongoing surgeon adoption of Lapiplasty, complementary products and procedures and future pipeline opportunities, we expect this trend to persist. As we previously stated, we believe adding approximately 250 to 300 active surgeons annually is a reasonable baseline over the next few years with utilization increases expected to drive higher procedure penetration and the tightening sales rep to surgeon ratio should support increased case coverage and adoption.
These new surgeon additions and training our large active surgeon base on new procedures is expected to expand utilization and drive blended ASP increases. Consistent with previous years, we expect a sequential revenue decrease from Q4 to Q1 due to normal seasonality coming off our usual strong year-end performance. Similar to last year, there has been some carryover of bunion procedures into the first quarter of this year, as patients entering the surgical funnel late in the fourth quarter time frame are often scheduled for bunion procedures into the following year. Given this carryover, we now expect a very slight revenue increase from Q1 to Q2, Q3 to be roughly similar to Q2, followed by a seasonally strong Q4, which is historically the largest revenue quarter of the year.
Now, before we open up the call for questions, let me turn it back to John for some concluding comments. John?
John Treace: Thanks, Mark. In closing, we delivered another year of significant progress in 2023 and expect to remain on track to drive strong growth and profitably scale our business in the years ahead. We are driving a market conversion in a large underserved market as the fastest-growing company in foot and ankle. We believe we're in a great position strategically with best-in-class bunion, midfoot and related complementary offerings and expanding TAM with the addition of new technologies such as Adductoplasty, hammertoe and SpeedPlate with more innovations to come, supported by differentiating clinical studies, continued strong additions to our surgeon base and a powerful and established direct sales team. We look forward to aggressively pursuing these significant opportunities to drive the performance of our business, and I couldn't be more excited about the accelerating momentum we expect as we move through 2024 and beyond.
With that, now let me turn the call over to the operator to open the line for your questions.
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