AxoGen Inc (AXGN) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the AxoGen year-end 2011 financial results conference. Just a reminder that today's call is being recorded.

At this time, I would like to hand the conference over to Mr. Rich Cockrell. Please go ahead, sir.

Thank you and good morning. Thanks for joining us today for the AxoGen 2011 full-year financial results conference call. On the call today are Karen Zaderej, AxoGen's Chief Executive Officer; Greg Freitag, Chief Financial Officer; and Dave Hansen, our Corporate Controller.

During the course of this call, management may make certain forward-looking statements regarding future events and the Company's future performance. These forward-looking statements reflect AxoGen's current perspective on existing trends, and information can be identified by such words as expect, plan, will, may, anticipate, believe, should and other words of similar meaning. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in our 10-K filings and 10-Q filings with the SEC. Actual results may differ materially from those projected in these forward-looking statements.

For the benefit of those of you who may be listening to the replay, this call was held and recorded on March 15, 2012, at approximately 9.00 AM Eastern time. Since then, we may have made announcements related to those topics discussed. Please reference the Company's most recent press release and current filings with the SEC. AxoGen declines any attempts or obligations to update these forward-looking statements.

With that, I would like to turn the call over to Karen.

Thank you, Rich, and good morning, everyone. Welcome to the AxoGen full-year 2011 earnings conference call.

To get things started, I will be covering key highlights and discussing the Company's overall strategic direction. After which, Greg will review the financial results.

Let me start by staying saying that I'm very pleased with our 2011 performance. We delivered solid year-over-year sales growth with 2011 revenues of $4.85 million, and this is a 61% increase over 2010 results. This is high-growth for any company, but it is particularly noteworthy that AxoGen accomplished it during a year of transition.

As you are aware, we completed our merger with LecTec in 2011, which provides the capital needed to drive the current results. The 2011 strong sales growth is a testament to the large market opportunity; our unique product portfolio of peripheral nerve treatment options; and our increased focus on commercialization, including building clinical data and professional education. This year will provide a foundation for growth and momentum in 2012.

Every year, thousands of people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. These injuries could result in a loss of function and feeling and reduce the quality of life for these patients. AxoGen brings the science of nerve repair to life with surgical implants to address this very challenging need. Our products are implanted in hospitals and surgery centers in North America, including military hospitals serving US servicemen and women.

AxoGen's portfolio of developed and licensed technologies include Avance Nerve Graft, which we believe is the first and only commercially available allograft nerve for bridging nerve discontinuities. It also includes the AxoGuard Nerve Connector, a coaptation aid allowing for close approximation of severed nerves, and the AxoGuard Nerve Protector, a bioscaffold used to reinforce a coaptation site, wrap a partially severed nerve, or isolate and protect nerves. This is the only complete portfolio of peripheral nerve products available in the marketplace.

A key component to our sales strategy is to educate the market on the value of our product. We made great progress in this regard. As at September 2011, American Society for Surgery of the Hand conference where Dr. Darrell Brooks of The Buncke Clinic presented the first set of results from the RANGER study, the largest multicenter clinical study of peripheral nerve gap reconstruction. This 12-center, 25-surgeon study reveals an 87.3% meaningful recovery in nerve discontinuities that were reconstructed with the Avance Nerve Graft. This data set included a variety of nerve types, including sensory mix and motor nerves, and a variety of injuries, including challenging military injuries and civilian trauma.

We also reached a key milestone with the publication of this first data set of this study in the January edition of the Journal of Microsurgery.

As a leader in the peripheral nerve market, we are dedicated to providing educational awareness of peripheral nerve issues and solutions. As a component of this educational strategy, in third quarter of 2011, we launched the AboutNerve.com website that provides information on peripheral nerve and treatment options for patients.

As a part of our commercialization efforts, we're committed to expanding our sales and marketing capabilities. We recently hired Jill Schiaparelli to serve as Senior Vice President of Business Strategy and Marketing. Her extensive leadership and healthcare experience will help us execute on our growth initiatives.

Through the year, we also invested in key sales resources and included the expansion of the sales team, resulting in 12 direct reps and 21 independent reps by the end of the year.

You may be interested to know that we continued that growth, and today we have 16 direct reps and 21 independent rep sales territories. While these investments in commercial resources will lead to some greater expenses in the short term, we believe long-term we will benefit from these efforts with continued sales increases.

Commercialization of our products is of great importance, but we also never forget our shareholders and the need to continue on our path to bring better liquidity and value. Since the merger was completed in September of last year, we have presented at a number of conferences such as the Lazard Eighth Annual Healthcare Conference, the Biotech Showcase Conference, the Noble Financial Equity Conference and the Canaccord Genuity Musculoskeletal Conference to expose the financial markets to our story.

We are also excited to have Jeff Cohen of Ladenburg as the first analyst to initiate coverage of AxoGen.

Before I turn the discussion to Greg to review the financials, I also want to highlight some of our strengths and our direction for 2012. AxoGen is the only regenerative medicine company focused on the peripheral nerve reconstruction space, and we address a US market opportunity that exceeds $1 billion.

The Company has a full portfolio of peripheral nerve products to meet the needs of these surgeons, and we've increased our sales reach through expansions of our direct and independent sales teams. And we have a growing body of clinical evidence, including the first data analysis from the largest multicenter clinical study on peripheral nerve reconstruction, which demonstrates an 87% meaningful recovery in sensory motor and mixed nerve injuries treated with the Avance Nerve Graft.

In short, I'm very proud of the strong foundation we've put in place, and we are now poised for growth in 2012. With this, I'll turn the call over to Greg who can now review our financial results.

Thanks, Karen. I want to remind our listeners to refer to the 2011 earnings press release released yesterday, and also our 10-K will be filed today, and so you can refer to that.

For the year ended December 31, 2011 revenue increased to $4.85 million or a 61% increase as compared to $3 million in 2010. For the fourth quarter, our revenues grew 68% to $1.3 million as compared to the fourth quarter of 2010.

Additionally, sequentially fourth-quarter 2011 revenue increased 19% over third quarter of 2011. These increases were principally due to improved sales penetration into the key accounts. Gross profit for 2011 increased 9% to approximately $2.4 million as compared to $1.6 million for 2010. The increase is primarily attributable to the higher revenues in 2011, which were partially offset by an $830,000 inventory and raw material write-off. Excluding the inventory write-off, gross profit for 2011 increased 65% to $3.3 million.

For the fourth quarter of 2011, gross profit, excluding the inventory write-offs, was $828,000, which is a 65% increase over the same period last year. Sales and marketing expenses increased 45.6% to approximately $4.4 million for 2011 as compared to approximately $3 million for 2010. The rise was primarily due to increased sales and marketing activity.

We expanded the number of direct sales reps, while providing additional support to the sales force such as training, clinical publications and sales tools. Research and development expenses increased approximately 60% to $697,000 in 2011 as compared to $436,000 in 2010. Development for AxoGen includes clinical efforts and substantially all of the increase in research and development expenses for 2010 to 2011 related to expenditures for such clinical activity.

Because AxoGen's products are developed for sale in their current use, we conduct limited direct research and development for new products, but intend to pursue new products and new applications for existing products in the future that may result in increased spending. General and administrative expenses increased 62% to approximately $4.3 million for 2011 as compared to $2.7 million for 2010. This increase was principally a result of an increase in consulting, accounting and legal services and other expenses associated with securing additional funding and the merger with LecTec last year.

At December 31, 2011, the Company had $8.2 million in cash and cash equivalents with approximately $5 million in long-term debt. As a general statement for 2011, it had a lot of moving parts. The LecTec P&L components are not taken into account for the 2011 P&L of AxoGen Consolidated. Merger and financing costs and inventory write-offs resulted in greater operating expenses for 2011. Sales and marketing costs also expand in front of the payback from greater sales revenues. However, we believe such payback will show itself in 2012.

With the activities of 2011 behind us, we look forward to a less complicated financial picture in 2012 overall. I'm very excited about what 2012 has in store for us, and we look forward to bringing those results to the shareholders of AxoGen.

At this time, we'll take questions that anybody may have.

(Operator Instructions). Jeffrey Cohen, Ladenburg Thalmann.

Firstly, 11.062 is the share count as of December 31. Is that right?

Yes. That is outstanding.

Got it. Any projections as far as the size of the sales force at least for the AxoGen employees going forward in 2012?

We are not putting out projections just yet, Jeff. I think what we -- as you can see, we've grown quite a bit in the sales team that we have to date. We really think that we've got some good growth potential from the team that we have. We will continue to grow over time, but I don't have a projection to give you for year-end.

Okay. And any thoughts, Karen, on pipeline M&A what you're seeing out there as far as any other products that are being used in nerve repair or traumatic injuries?

Good question. I think that we are generating some interest in peripheral nerve repair, and I see some basic research increasing in peripheral nerve as a result of companies and researchers hearing -- actually predominantly researchers at academic centers hearing and thinking about peripheral nerves in a different way.

Our focus in the short-term is obviously commercialization and building our topline revenue. But we are working with some of these academic centers in terms of grants and providing support predominantly in thinking about regulatory strategies and commercialization. So while none of those things are actively in our pipeline, we certainly have our fingers involved in it.

In addition, we have many applications for our existing products that we can expand into, and we are in review of doing some clinical work that would expand the applications of our existing products still, of course, in peripheral nerve but additional surgical areas.

Jeff, the other thing, too, is, as a result of the merger in our positioning and the public company and as we move our sales force, we also are always looking for any opportunity for synergistic products that we can bring in, and our strong financial position that we have and our public currency really positions us well to take advantage of those types of opportunities. So, as we continue to look forward, we will look at what we can do to put more product in our sales force's possession in order to sell.

Got it. Could you provide any further clarity on the inventory write-off? More specifically, was it an expiration issue, or was it products that were not sold? Could you provide any clarity on that?

Yes. This is -- it was an exploration issue. It goes back to some of the issues from 2009, and that product was just on the shelf in our inventory, and we have made the choice to go ahead and write it off.

Got it. And lastly, any thoughts on guidance for cast projections for 2012 that you want to share?

At this point, we don't have anything that we want to share.

Okay. Thanks very much.

James Terwilliger, Benchmark.

Real quick, I'm just trying to get a tracking of the build of the sales force. So, first of all, outstanding revenue growth numbers. But Karen, did you say currently the sales force is up to 16 people? Is that correct?

Yes. On the direct team, as well as 21 independents.

And if I would have gone back -- I am going through my notes, and, of course, they are a mess -- but if I would have gone back to December, was there approximately 12 people on the sales force at that time?

Yes. So, in December, at the end of 2011, we had 12. So we obviously have four people who are brand-new with us, but we do continue to invest in the sales team and add people on.

And then prior to that -- and I don't want to look backwards too much -- but I'm thinking maybe the sales force was around three in September at the end of Q3. Is that a correct number?

No, we had -- we started the year with three. So that's where that number comes from. With the merger, we started to add -- with actually signing the merger agreement, we started to add a few reps. And so mid-year we added a couple more people, and we started metering people in again with some heavy hiring towards that last quarter.

Okay. Great. That's where the three came from. And then on the independent reps distributors, where was that number, say, in June of last year?.

You know, it went up and down quite a bit. Our high of independents was -- last year was about 30. And we've obviously transitioned some reps to or some territories to some of our direct sales associates, and frankly, we have some territories open. And so that number is, again, today at 21.

Excellent. Now when you hire a typical sales rep in this industry, how long does it take them, do you think, to get completely ramped up and ready to go to where they have close to, if you were looking at it from a consolidated standpoint, close to say 90% to 100% utilization? Is it a six months lead time?

It is at least six months for them to pay for themselves, and then certainly there is always territory development that goes on. We see these territories as having a lot of potential. So even our established three reps have room to continue to grow and get substantial increases. That just comes with entering a market that's very, very underpenetrated, not having significant competition, and again having a large opportunity.

And so, while there is a learning curve that the reps go through, I also don't see them camping out in terms of their growth in at least in any short period. As I said, the reps we've had for a couple of years still have substantial growth opportunities.

So technically, without giving guidance but at 30,000 feet, the second half of this year is the sales and distribution force gets up to speed the second half of this year and into next year. It feels fair that you can maintain some very robust topline revenue growth going forward for the next one to two years based on just getting the sales force ramped up and up to speed.

I think that's a fair statement and matches our vision.

Then just one last question on the revenue side. Again, just to close that off, you've done an excellent job growing the top line. Very few companies are growing at 60% plus. Lastly, are there any pricing trends out there? Are there any pricing pressures that are hitting AxoGen, or is pricing stable with maybe a small creep up, so to speak?

Obviously the healthcare market always has pricing concerns. We have been able to demonstrate very good value in the products that we provide. So we have continued to maintain and even increase our pricing, and so we have not seen some of the pressures that I think some of the major orthopedic companies have seen. And so, at this point, we have not experienced any pressure to push those down on price.

Okay. Great. You've got a great topline revenue growth, and your gross margin position is extremely strong. Keep it up and I'll jump back in queue.

Nathan Cali, Noble Financial.

Congrats on the progress in 2011. Just a couple of quick follow-up questions. A lot of the questions were answered already. How would you say your product mix sales are going as a percentage of revenue with respect to AxoGuard, Avance and the Nerve Protector?

We see sales in all three of the products that we have. So, the -- again, the products are the Avance Nerve Graft, the AxoGuard Protector and the AxoGuard Connector. We will continue to see some shifts in the mix, but, as of today, we have seen them well split between the two. AxoGuard was introduced only a couple of years ago, so it was more of a learning curve or actually an introduction curb last year. But at this point, I think we see a very good distribution across the portfolio. And that's our challenge for our sales team is to make sure that we continue to see that and get penetration and cross selling of all products in the surgical practice of each surgeon that we work with.

And is there any expectations for consistent gross margins going forward, and have you provided any guidance there on what those may be as you get to a ramped up stage?

Yes, we are not providing guidance as to what the gross margins look like. One of the things, however -- and it goes back to an earlier question as to the inventory -- 2010 did have some issues. 2011, we've brought back on our manufacturing and have put a lot of things in place.

So, as we commented, 2012 just from a manufacturing front, we're doing a lot of good things and some things behind us that we've learned in 2011. So, we are comfortable that we are hanging in there with our margins and doing all we can to improve them as we go forward.

And then any additional clinical data coming from your current pipeline?

Yes, we continue -- the RANGER study that I referenced before is an ongoing study, so this was the first data set. We will and are continuing to enroll subjects and expand some of the centers or add some additional centers. So that study will be presented again coming up over the next few months at several of the different conferences coming up.

We also have a number of case studies that have been introduced, and also just recently published was an algorithm based on some -- an algorithm of care utilizing the AxoGuard and Avance products by [Dr. Yvonne Dujeck] of Georgetown. It was based again on some casework that he did.

So we will continue to see that type of work, some of it initiated by us, and again, like [Dr. Dujeck's] paper, a lot of it initiated by clinical researchers who are interested and enthusiastic about the technologies.

[Douglas Wilson], an investor.

I have two questions. First, based on your experience with the ramp-up of sales so far, what is a reasonable expectation for what an experienced sales rep should be able to produce in terms of revenue?

You know, I don't know that we've capped out at this point, so I can't tell you a top number. I can tell you in other products that I've worked in in surgical areas that a sales rep working in surgery generally will cap out at $2 million, $2.5 million per rep in these types of surgical implants. But, again, we have not ended up getting that point with our existing reps. I think that's very possible, but we need to get a little more data to see what it will be with our exact reps.

Thank you. Now the second question, I am looking at cash numbers that I've tried to pull out, but it looks like the current cash is $8.2 million. It looks like what I came up with at the end of September was about $10.5 million, which is a burn rate of $2.3 million realizing that this has to do with revenue growth and working capital requirements and so forth. But it looks like the cash could be running out somewhere around the end of the year, which may be before the Company is cash positive. What plans do you have with respect to providing some additional cash?

Sure. One of the things and you point out correctly is that, as we've gone at the end of 2011 and as you look at the increase in the sales people, our cash spend goes up until we have our reps come online and start bringing that back as to revenue.

So one of the things that we've always talked about is that there is a bolus that is in here that you have to push through as you are bringing up your sales team. We certainly are in the position of looking long-term as to what our cash needs are. As you look at that depending on where revenues come through, we can have additional cash needs, and we're looking at different situations as to what we'll do as to future cash funding.

[Sam Caspersen], an investor.

Most of my questions have already been answered. A couple of quick questions. Do you know what percentage of revenue is based on surgeries on US combat soldiers and Marines and sailors?

Good question. It's certainly not the majority of our sales. I think we have been particularly proud of the clinical results because I think those injuries are extremely devastating, and we really have had great clinical outcomes where some patients who would have had an amputated limb have been able to preserve that limb.

Having said that, in terms of dollars, it's well under 10% of our sales. It's not a substantial part of our total business. But I think it's impactful and meaningful to the surgical community as a testament of what can be done.

Great. Thank you. And I know you take a lot of questions on the sales reps and I recall from the previous conference call that most of the sales reps who had been hired were not really up to speed. When did most -- were not out in the field, they were in training. When did -- you say there were 12 at the end of calendar year 2011. When did most of those individuals kind of hit the field, so to speak?

Yes, just we tried to bring them in in sort of two and three at a time, so we get a little bit of time to onboard them. So they are all at different times, but the majority were in certainly the last half of the year with almost everyone and a pretty big hit in the last quarter of the year.

So most have less than six months with us. We are still in the learning curve with a lot of the reps.

Okay. Great. And have you released Q4 numbers? In other words, I see 2011 numbers overall revenue of $4.8 million, $4.9 million. What were the Q4 numbers for revenue?

So, from a breakdown because we are year-end -- it is in the year-end number. What we did in Q4 for topline revenue was $1.36 million for fourth quarter, which was beat all the quarters before that in 2011.

Nathan Cali, Noble Financial.

I just wanted to ask a quick question on the sales side of things. What are your -- what are you guys hearing from the field when you get out there with your products with respect to the docs on products that they may already be using and then potentially switching over to AxoGen's products? What's kind of the feedback that you guys are hearing?

So the majority of the surgeons out there are doing a technique versus a product when a nerve is transected, and that is the autograft. So an autograft is taking a nerve from somewhere else in the patient and transplanting it to the injury site, and that is the gold standard. That's what most surgeons do for transected nerves.

So what they're looking for is data and confidence that they are doing the right thing for their patients by switching to a new technology. And that's why I said that things like the education that we're doing, the clinical research that we are doing, and even things like the military stories of pretty serious, severe peripheral nerve injuries all help surgeons in their decision process to do the right things for their patients.

There are nerve conduits that are out there. These are nerve tubes that are typically absorbable hollow straws that surgeons use to repair nerve gaps. They've only been the only other alternative compared to an autograft.

What we are hearing from surgeons now is that where traditionally they use them even up to a gap as long as 30 millimeters. As I hear it at the most recent conference, the thought leaders are looking at the data and feeling that now that there are other alternatives that that gap is too long. The podium presence there certainly was saying that while conduits have a place, their place is in very short gaps. That agrees with what we see in the data. We provide a conduit in the AxoGuard Nerve Connector, but we choose to provide it only in a very short length given what we've seen on the clinical data.

So we are pleased to see that the thought leaders are moving in the same direction that AxoGuard believes is the best opportunity for outcomes for patients.

(Operator Instructions). Everyone, there appear to be no further questions. I'll turn the conference back to our speakers for any additional or closing remarks.

Okay. Thank you very much, operator. We appreciate you joining us on today's call, and we will look forward to catching up with you in the first-quarter conference call.

And for everyone, the 10-K is available on the SEC Edgar site, and so for those of you who are waiting for all the numbers, it is available, and it will be up on our website shortly. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.