AxoGen Inc (AXGN) 2012 Q2 法說會逐字稿

Good day and welcome to the AxoGen second quarter 2012 results call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Rich Cockrell. Please go ahead.

Thanks, Tim. Good morning all and thank you for joining us today for AxoGen's second quarter 2012 financial results call. On the call with me today are Karen Zaderej, AxoGen's Chief Executive Officer, and Greg Freitag, Chief Financial Officer. Last night the Company issued a press release announcing second quarter 2012 financial results. Within which, the Company reported record second quarter 2012 revenues of $2 million, which was a 64% increase over the reported 2Q '11 revenues and in line with analyst consensus estimates of $2 million.

If you have not received a version of the press release, then feel free to contact our offices at 404-942-3369, or e-mail us at Investor Relations at axogeninc.com and we'll have one forwarded to you. Today's call is being made available to a broader audience via the Investor Relations section of the Company's website at www.axogeninc.com. Following today's remarks by Management, we will open the call to questions. During the course of this call Management may make certain forward-looking statements regarding future events and Company's future performance.

These forward-looking statements reflect AxoGen's current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intends and other words of similar meaning. Any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, including those noted in our filings with the SEC on Forms 10-K, 10-Q, and 8-K. 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 August 15, at approximately 11 AM Eastern Time. Since then, the Company may have made additional announcements related to the 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'll turn the call over to Karen.

Thanks, Rich. And good morning everyone. I'll begin by providing highlights on the quarter and Greg will review our financial results for the quarter. We continue to make solid progress with advancing our commercialization efforts to expand our footprint and awareness of our Avance and AxoGuard products. So I'm pleased to share our posting of yet another record quarter, as well as positive year-on-year sales growth. For the second quarter 2012, we reported record revenues and gross profits of $2 million, and $1.5 million respectively. Revenues for the period were 64% higher than second quarter 2011 revenues of $1.23 million, and 22% above reported first quarter revenues of $1.65 million.

Gross profits were higher by 89% over the same period last year, and gross profit margins improved as well, increasing to 75% compared to 65% from the same quarter last year. This improvement is due both to efficiencies in manufacturing as well as realizing a price increase. We continue to see limited price discounting, which we believe is due to the cost effectiveness and value of the products we provide. We believe we can maintain the gross margin in the 73% or higher range. Our strong year-on-year growth was driven by improvements in sales execution and account penetration, as well as growth of our account base.

The greatest proponents of our products have been the surgeons and I believe their support has been the driver of our increased adoption rate and penetration into the existing accounts. The traditional standard of care for nerve injuries is autograft, or taking a nerve from the patient's own body and transplanting it. Our Avance product is beginning to shift the standard of care with a growing body of clinical publications. It is readily available, easy to use, and offered in a variety of lengths to meet the needs of the surgical situation. It is also offered in a variety of diameters to allow the surgeon to match the injured nerve as compared to the existing techniques with autograft where the surgeon has to use multiple strands in order to approximate the diameter needed.

We continue to see increased penetration into accounts and we're seeing surgeons expand their usage into a variety of nerve types including sensory, motor and mixed nerves. As surgeons gain experience utilizing the products in their own hands, we see them moving toward longer lengths and more complex injuries such as brachial plexus injuries, a severe nerve injury at the base of the neck, impacting movement and sensation of the entire arm and hand. We're seeing increased utilization of the AxoGuard products as surgeons utilize the full portfolio to align, wrap and protect nerves, as well as reconstruct the injured nerve.

We also continue to expand our presence internationally. During the first quarter, we announced our inaugural shipment into Austria and for the second quarter, our Avance product is now being sold in Italy. While our main focus continues to be on the US market, our goal in Europe will be to build awareness of our products, just as we began in the United States. To that end, together with our partner, Cook Biotech, we have now submitted our AxoGuard product for the CE Mark approval. This will allow us to extend our complete portfolio of nerve repair and regeneration products into Europe.

We will continue to develop on the strong foundation we have established and I'm very proud of our results to date. I would also like to thank our employees and independent distributors who have been working diligently to develop the AxoGen story. I'll now turn the call over to Greg who will review our financial results.

Thanks, Karen. I will remind our listeners to refer to the second quarter 2012 earnings press release and our Form 10-Q for the second quarter, which was issued yesterday and filed with the SEC. As Karen stated, for the second quarter 2012 we reported record revenues and gross profits which were primarily due to increased sales penetration into key accounts, and the addition of new accounts as a result of the Company's expanding sales and marketing efforts.

Gross profit for the period increased 89% to approximately $1.51 million, as compared to $801,000 for the second quarter of 2011. The increase is primarily attributable to the increase in revenues in 2012 and reduced Avance processing, travel and labor costs. The gross profit margin also improved 10 basis points to 75% during the period, which is a reflection of improved manufacturing efficiencies, pricing, and product mix as commented on by Karen earlier. Sales and marketing expenses increased to $1.58 million during the period, as compared to approximately $948,000 for the year-ago period. This increase was primarily due to the expansion and support of our sales force, as well as increased marketing activities.

Research and development expenses increased to approximately $367,000 during the period, as compared to $101,000 reported for the second quarter of 2011. Substantially all of the increase in research and development expenses from 2011 to 2012 related to expenditures for clinical activity. AxoGen intends to pursue new products and new applications for existing products in the future and these additional development efforts may result in increased spending. We continue to look at how to expand our pipeline, but are committed to efficient capital usage for any projects undertaken.

General and administrative expenses decreased to approximately $1.15 million for the second quarter of 2012, as compared to $1.2 million for the same period during 2011. This decrease was principally due -- was principally a result of a decrease in legal and consulting services as the Company experienced higher costs in 2011 associated with its financing activity, and the merger, partially offset by an increase in payroll and benefits and expenses associated with being a public company.

The Company reported loss from operations of $1.59 million, compared to loss from operations of $1.45 million reported during the same period in 2011. The Company reported a net loss of $1.03 million, or $0.09 per common share, compared to a net loss of $2 million, or $1.65 per common share reported during the same period in 2011. Net loss was reduced by a non-recurring income tax benefit in the amount of approximately $736,000, representing approximately $0.07 per common share.

At June 30, 2012, the Company had $4.6 million in cash and cash equivalents with approximately $4.9 million in debt outstanding. The Company has entered into a two year interim revenue purchase agreement pursuant to which the Company received $1.75 million in exchange for the sale of specific future cash royalty payments. We realize that continued capital availability is important to the Company and continually monitor the financial markets and our needs. In this assessment we take into consideration dilution, cost of capital and market valuation. We believe our transaction with PDL Biopharma as part of our financing plan provides non-dilutive capital that is beneficial to our shareholders. We continue to evaluate additional funding to meet our capital needs. At this time, I'll turn it back to Karen.

Thank you. I want to invite everyone to participate in our shareholders meeting, which will be on Thursday, August 30 at 1 PM Central Time. Please go to the website at www.axogeninc.com for further information regarding location and broadcast information. We hope to see you there.

And everybody who is a shareholder and was a shareholder as of July 9 should have received their proxy materials. We would appreciate if everybody would fill those out and get those back to us prior to the meeting. It's very efficient for us if we can get those back and get them counted and move into the meeting. So thank you for that and Karen and I are both very excited about how the quarter came out.

And I'll now turn the call over to the operator for questions.

(Operator Instructions)

Jeffrey Cohen, Ladenburg Thalmann.

Hi, good morning. Thanks for taking my questions.

Good morning, Jeff.

So I have a bunch. So let me start. Could you talk about composition of sales by products at all for the quarter?

Jeff, I'm sorry, what you're asking is between Avance and AxoGuard?

Yes.

So we do see sales in both. Sales have continued to grow in both categories. From an overall utilization standpoint they of course have different price points but from a unit standpoint, we see approximately equal usage of AxoGuard and Avance.

I got it. Okay. And could you talk about were there any trends that you were seeing with regard to sizing or sizes that you were selling in the Avance product?

Yes, it is interesting. We are seeing some shift in a certain -- we believe as surgeons are continuing to expand their adoption algorithm, we believe that they're using the product more in mixed and motor nerves now and in some cases, more complex cases, and so we have seen some increases in -- toward some of the longer lengths.

Okay. Increase to some of the longer lengths. What about some of the -- what about on the width side, are you seeing increases wider, narrower, or nothing material?

Nothing material.

Got it. Could you talk a little bit about any pricing, were there any pricing differences from the Company or do you anticipate any price changes going forward, at least on the sizes that you're offering now for Avance?

So we did a price increase last year, our price increases are always in the fourth quarter of the year and we have been able to maintain and realize that price increase with very, very limited discounting. And I think, again, there's both list price that you have to consider and the amount that you then discount off list price. We are -- we realized that price increase and have not had to substantially increase the discount, again, given the value that we provide to the hospital. We're evaluating what we will be doing for our price increase this year and have not finalized it.

Thanks. On the account side, did you see greater penetration within existing accounts or did you see more accounts that were becoming active or could you comment on that or perhaps also comment on geographies within the US?

So we see a lot of dynamics happening and so the answer -- the simple answer is yes, we see all of those things happening. We have, from a geography standpoint, still 16 direct reps and 21 independent distributors and in each of those territories, we have increased penetration in some of the target accounts and increasing the number of new accounts.

Okay. Got it. And country-wise, you added Italy and that started in Q2 or it started in Q3?

That was Q2.

Okay. So Q2 start. Okay. And gross profit, what you're saying now is 73%-plus range, to guide for or to think about?

Yes. We did 75% this quarter, but we're comfortable in the 73%-plus range.

Okay. And who would be paying -- I only have a couple more. Who would be paying for the CE Mark pursuit within Europe for AxoGuard? Would that be split between you and Cook or would AxoGen be paying for it?

We have a partnership with Cook that details things like that are confidential, we don't share them, but in that partnership we work together on those efforts.

Perfect. That's great. Thank you very much for answering all the questions.

Thank you, Jeff.

(Operator Instructions)

Lorenza Castellon, Equity Development.

Good morning. Thank you very much for the update and congratulations on the figures. How long do you think it will take to have a CE Mark?

We believe that right now the CE Mark's are running six months or longer, so we would not expect to see that until the end of this year, beginning of next year.

Right. So the sales that you have placed in Austria and in Italy, for what surgical operation are they?

So the sales that we've had to date have been the Avance product. The Avance product, human tissue allograft and is from a regulatory standpoint submitted country by country. It's not the CE Mark.

So the applications will be predominantly for -- same as in the US, it is for continuities of peripheral nerve injuries, predominantly from traumatic nerve injuries, so trauma incidents. Although sometimes there are surgical things that may interrupt the nerve and it still needs to be repaired. And again, the CE Mark is for the AxoGuard product. That's a medical device.

Okay. Are you -- what's the payment time lag in Austria, the healthcare system for you to receive the payment in Austria and Italy, any idea?

So the agreement that we work with our distributors in Europe is that they are buy/resell distributors, so work through those payment lags. So, we work them to get paid from them and we've not seen any substantial delays in payments.

Can you give us also a little bit of color with regards to the R&D expenditure? For this first half we are about $670,000. Going forward, any idea what it's going to be like and also can you give us what are you -- I don't know if you can disclose this, but can you tell us a little bit what you're working on?

So from an R&D standpoint, our expenditures today are predominantly clinical research. We have several ongoing clinical studies that we continue to support, as well as supporting investigator initiated studies. From a sponsored study standpoint, we have the RANGER study. This is an observational study looking at a wide array of nerve injuries and sensory, mixed and motor. From now, we are at 15 centers and this study is an ongoing study. It was the data -- the first data cut was published in January, but we're continuing to expand the study and expand the depth of data that we have.

The second study that we have is a very small comparative study that we call CHANGE, looking at Avance and control against conduits. And then the third sponsored study is a small pilot study looking at prostate cancer and providing grafting of the cavernous nerve, which controls erectile function. That's where our primary expense is. As we go forward, we see expanding both clinical applications into new areas like the prostate cancer. We don't do many sales there, but we think there's a market opportunity.

We believe there are other market opportunities that we can unveil with additional clinical data. And from a pipeline standpoint, I can't tell you the good stuff that we're working on but we are continuing to see tremendous unmet needs in the area of peripheral nerve and believe that we can supplement the products that we have today to provide benefit to surgeons. We're mindful of the cost of that so we look at a variety of ways to fund that, including grants and some other partnerships to be able to fund it in an economical way, yet deliver that.

That really is part of -- as we have gained the stability post merger, we're selling our products. We look at both now -- what we can do for our pipeline increases and also any other opportunities to just bring products straight away into our sales organization. So on that front, we look in both directions and it is business purpose of ours going forward to try to bring additional product, both through organic research capabilities with others and potentially other products that may fit into our portfolio.

I have one more. I'm sorry to anybody else who is waiting. With regard to your cash position at the moment, do you envision to have to raise additional funding and if yes, when?

Yes, so the -- as we've disclosed in the 10-Q, we are continuing to look at our capital needs. We monitor those needs all of the time. What you would have noticed is that we just did a transaction with PDL and had established as an important partner of ours and are part of our assessment of both the financial markets and our future financial needs. So this is something that we pay close attention to, of our funding, and it also does fit into the question of how that funding looks for any needs that we have as to future products, pipelines, acquisition. So all of that factors into our determinations.

But you feel that what will be -- if you need any financing, will be in the next six months, eight months?

Yes, we're continuing to look at our capital. We do have additional capital needs and so we will be pursuing -- obtaining additional capital here as we go forward.

Okay. Thank you very much.

Thank you.

[Felix Raymond], Springboard Capital.

I would like to find out what portion of your revenue comes from external distributors versus your internal sales force, number one. And number two, what would be your projected revenues from internal sales force when they're fully up-to-speed?

So we don't break out the sales results by territory or type of territory. We really look at it as a holistic view of the total sales organization.

From a growth -- from a sales rep standpoint, I think -- well, I know, we've got a tremendous amount of growth potential for all of the reps that we have in place. I don't know exactly where we'll cap out. I think there are benchmarks that say that a good medical device rep in this type of market can do more than $2 million in a territory, and that should be where we should expect to move to. But obviously, we're still at the beginning phase.

Thank you.

At this time there are no other questions in queue.

We'll just give it a little bit here for anybody else.

(Operator Instructions)

[Bill Vesna].

Hi. Good quarter, guys. Question for you. Analysts have you guys between $9 million and $10 million for year end, which you could consider that a growth of 27% over this quarter and maybe 32% next. Are you guys comfortable with estimates at this point?

At this point, we don't give any forward-looking projections or comment to the analysts, but we also have not said that we think that the analysts are out-of-line.

Okay. Fair enough. And the arrangement with PDL Biopharma, they're not really in your space at all, are they, as far as look at what they do?

Yes, and I direct people to look at their website for their activity and their business plan, as this is a transaction now that is in conformity with what PDL has stated is going forward. Generally they, and as we look at them as partners in this, have a very good understanding of life sciences in general. So not directly obviously in nerves, since we are the people in nerve, but certainly synergies in both of our knowledge bases. And so we've been very excited with regards to our interface with them and the knowledge from their activities that they bring to us in a lot of different areas.

Can I ask how you even happened to cross paths, since they're so different than what you do? Are you just in the same space and happen to just talk to them about it or is that not really something you can discuss at this time?

I think that what you need to do is take a look at PDL, because again, we don't want to and can't speak for PDL, but this is not -- I wanted to point out, this is a financing transaction. It is not a strategic investment. That is not in the space that PDL is in.

So it is a financial investment but as the group at PDL, and what you'll see, has a lot of experience -- great experience, again in the life sciences which makes them unique in their abilities to us as a finance partner. And so as you -- and I think what your question is and we want to be clear, this is not some sort of move with a strategic marketing partner or a strategic technical partner. It is a financing partner that has a lot of intellectual capability within life sciences and understanding our markets.

Just one more question, Greg. On the future royalty payments, is that just -- there's no drop dead date on that, that's just until whatever is -- the $1.75 million is paid back through royalty and when it's done it's done?

No. It's a two year facility.

Okay. Two year. I see. I'm sorry. I forgot that.

Not at all. There's some trigger points between close term, far term. One of the questions I was asked, I'll just answer it in advance, and that is the contract, there's no warrants. There's no equity component. It is that cash payment as part of that royalty, so at this point it's not dilutive cash.

Are you calling [a royal] payment commissions off existing customers or royalties from other resellers of your product that aren't part of the independent or your in-house reps?

It's royalty right off of gross.

Okay. Just calling it the different thing. Okay.

Yes.

Very good. I'm done.

Great, thank you very much.

(Operator Instructions)

I think that with that, unless there's other questions, we'll end it here. We look forward with the shareholders meeting coming up, further Company updates. We invite those on the phone, shareholders or not, to either come to the meeting or to be on the broadcast of that meeting and we think that there will be some additional interesting updates and interesting information for people at that point.

We do appreciate you guys calling in and we look forward to speaking with you at the next call. Thank you for calling and have a great day.

That concludes today's conference call. We appreciate your participation.