AxoGen Inc (AXGN) 2017 Q2 法說會逐字稿

Greetings, and welcome to the AxoGen, Inc. Second Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Tricia Truehart. Please begin, Ms. Truehart.

Thank you, Tim, and good afternoon, everyone. Thank you for joining us today for the AxoGen, Inc. conference call to discuss the financial results for the second quarter ended June 30, 2017. Today's call is being broadcast live via webcast, which is available on the AxoGen website. Within an hour following the end of the live call, a replay will be available on the company's website at www.axogeninc.com, under Investors.

Before we begin, I'd like to remind you that during the course of this conference call, the company will be making projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's Forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, statements regarding product acquisitions and/or development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance.

And with that, I'd like to turn the call over to Karen Zaderej, President and Chief Executive Officer of AxoGen. Karen?

Thanks, Tricia, and good afternoon, everyone. Welcome to our second quarter 2017 conference call. Joining me today is AxoGen's Chief Financial Officer, Pete Mariani. I'd like to begin today's call with a review of our second quarter highlights, a brief company overview and an update on our key strategic initiatives. Pete will then provide a review of our second quarter financial results and 2017 financial guidance, after which time, we'll open up the call to Q&A.

We're pleased to report another successful quarter. Second quarter revenue grew 46% to a record $15.2 million. Our year-to-date revenue growth is 48% with revenue of $27.4 million.

We're also pleased to announce a change in our addressable market opportunity due to expanded use of the AxoGen product portfolio in oral and maxillofacial procedures, including nerve repair during mandible reconstruction due to benign tumor resection. We believe this additional application of our product portfolio moves the current addressable market opportunity to $2 billion in our current markets of trauma, upper extremity and oral and maxillofacial surgery. I'll talk more about this expanded application as well as additional applications for expansion of the AxoGen platform later in my remarks.

As in prior quarters, our revenue growth is continuing from both active and new accounts as we continue to build and strengthen our commercial team. Last month, we welcomed Jon Gingrich to our executive leadership team as Chief Commercial Officer. Jon's extensive medical device experience strengthens our commercial leadership and will help us drive penetration of our existing markets, expand into new applications, introduce new products and build global markets. As a member of the AxoGen executive leadership team, he'll report directly to me and will oversee the development and execution of the company's sales and marketing strategies.

These efforts, along with the continued development of our surgeon education events, market awareness activities and further development of clinical data, are allowing us to help surgeons develop confidence in the adoption of the AxoGen portfolio of products. We're pleased with the first half of 2017 and believe we're demonstrating our ability to successfully execute our strategy and continue to drive awareness and growth in the emerging peripheral nerve repair market. We're building awareness of peripheral nerve repair and expanding usage of our products with innovator and early adopter surgeons and are excited to be moving towards developing the middle adopters who are the majority segment of the nerve repair market.

We find surgeons are initially cautious adopters for nerve repair products. They typically start with a few cases and then wait and see the results. Active accounts are usually past this wait period and have developed some level of product reorder. These accounts have typically gone through the committee approval process, have at least one surgeon who's converted a portion of his or her treatment algorithms of nerve repair to the AxoGen portfolio and are ordering AxoGen products at least 6 times in the last 12 months. In the second quarter, the number of active accounts increased 36% to 510, up from 374 in Q2 of 2016.

The growing number and penetration of active accounts is driven by increased adoption of our nerve repair products across the surgeon treatment algorithms. Accounts ordering Avance Nerve Graft, AxoGuard Nerve Connector and AxoGuard Nerve Protector continue to generate approximately 5x more revenue than an account ordering just one of the products. With the addition of Avive Soft Tissue Membrane, our objective is to continue expanding the treatment algorithms of surgeons to now include all 4 of our surgical implants across their full continuum of nerve repair.

For those of you who are new to our story, AxoGen is a global leader in innovative surgical solutions for peripheral nerve injuries and the only company focused solely on this nerve repair market. We currently have 4 surgical implants in our portfolio. Avance Nerve Graft is the only commercially available process nerve allograft to use for the bridging of nerve gaps of 5 to 70 millimeters. AxoGuard Nerve Connector is a minimally processed porcine extracellular matrix implant for connector-assisted repair of transected nerves with gaps of 5 millimeters or less. AxoGuard Nerve Protector is a minimally processed porcine extracellular matrix implant for wrapping and protecting injured peripheral nerves. And Avive Soft Tissue Membrane is minimally processed human umbilical cord that may be used as a resorbable soft tissue covering to separate tissue layers and modulate inflammation in the surgical bed.

Along with these core surgical products, we also offer the AcroVal Neurosensory & Motor Testing System. AcroVal and our AxoTouch Two-Point Discriminator are evaluation and measurement tools. Healthcare professionals use these tools in detecting changes in sensation, assessing return of sensory grip and pinch function, evaluating effective treatment interventions and providing feedback to patients on nerve function prior to and following nerve repair. Our products are used primarily by plastic surgeons, hand surgeons and oral and maxillofacial surgeons in a wide variety of nerve repair surgeries, including upper extremity trauma, iatrogenic injuries from dental procedures such as third molar extraction, nerve repair during mandible reconstruction as well as nerve compression surgeries including recurrent carpal tunnel syndrome.

AxoGen is generating strong and consistent revenue growth in a nerve repair market that remains largely untapped. There are more than 900,000 nerve repair surgeries annually in the U.S., pointing to a market opportunity of over $2 billion for AxoGen's products. The vast majority of these procedures are being performed in approximately 5,100 centers. In the second quarter, 510 of these centers were active AxoGen accounts. Most of these active accounts are still at an early stage of penetration and provide additional opportunities for growth. As a result, we believe we are just scratching the surface of our available market potential.

We continue to develop this market through the execution of our strategic initiatives, which we believe will allow us to build long-term sustainable growth. We refer to these strategic initiatives as our 5 pillars of growth: building market awareness, educating surgeons and developing advocates; growing the body of clinical evidence; executing on our sales plan; and introducing and expanding new products and applications in nerve repair.

I'll now comment on our progress over the quarter in each of these areas. First, we continue to build market awareness of AxoGen and our products by engaging with surgeons at hospitals, clinical conferences and promotional events. We've developed strong relationships with many well-known surgeons who are innovators and early adopters of our platform. They've been extremely helpful, sharing their experiences using our products with the clinical community and publishing the outcomes they've achieved around nerve injuries and repair solutions. We are building and strengthening our sales and marketing capabilities to keep pace with our current and planned growth.

We're pleased with the increasing presence of nerve repair topics within professional society meetings and conferences. We believe this is an indication of a broader surgeon awareness regarding the importance of peripheral nerve injuries and repair. We are also increasing global awareness of our product portfolio by exhibiting at and conducting surgeon-led symposia at international scientific meetings such as the Federation of European Societies for Surgery of the Hand International Congress in Budapest, Hungary; the International Society of Peripheral Nerve research meeting in Barcelona, Spain; and the World Society for Reconstructive Microsurgery annual meeting in Seoul, South Korea.

Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted a total of 3 national education events in the second quarter. These programs are surgeon-led and focused on the review of clinical data and emerging best practices in nerve repair, including the use of the AxoGen portfolio. They allow surgeons to gain additional confidence in nerve repair best practices, and they drive adoption and increased utilization of our products.

On average, we see account revenue increase by approximately 100% 6 months post program. More importantly, we see the average utilization from the surgeon attendee more than double 6 months after they attend the program. We believe this is an even more important metric as we see multiple surgeons from the same account begin to attend our programs. Because of the positive surgeon response, we have expanded our educational efforts and expect to complete 15 national programs during 2017. We will also continue to host educational symposia at professional conferences as well as smaller regional events throughout the year.

Our third pillar is to grow the body of clinical evidence. We increased the number of clinical and scientific presentations of our surgical portfolio to a total of 18 year-to-date and grew peer-reviewed clinical publications for our surgical portfolio to a total of 52. The increase in presentations and publications reinforces both the importance of peripheral nerve repair and the growing body of evidence for AxoGen's products in nerve repair.

RECON, our Phase III pivotal study comparing Avance Nerve Graft to manufactured conduits in digital nerve injuries continues to enroll. In an effort to accelerate the completion of the study, we requested and were granted approval to increase the number of participating centers in the study from 15 to 20. In addition to the 5 new centers, we have agreement to enroll up to 170 subjects to maintain statistical integrity and robustness of the data. With these changes, we anticipate enrollment to be completed in Q4 of 2018. These changes help us accelerate enrollment of the study as we transition Avance Nerve Graft to a biologic.

Our sponsored RANGER study is the largest multicenter registry in peripheral nerve repair with over 1,200 Avance Nerve Graft repairs enrolled to date. We have supplemented the study with our MATCH study, which provides contemporary controls of both autograft and manufactured conduits. These studies continue to produce important data that assist in clinical decision-making and support the adoption of our surgical portfolio.

In addition to the adoption we are experiencing with hand and plastic surgeons, we continue to see our portfolio expand in oral and maxillofacial surgery. As these surgeons become comfortable with AxoGen's portfolio, we see expanded use of multiunit repairs of iatrogenic nerve injuries and the application of our products to more complex injuries such as mandible reconstructions due to benign tumor resection. Surgeons now have an option to reconstruct these nerves, giving patients the opportunity to see return of function and avoid the social stigma associated with the numbness of the lip, mouth and chin. In support of this expanded application, there have been 3 recent peer-reviewed clinical publications, which focused on the use of AxoGen products in peripheral nerve repair during mandible reconstruction due to benign tumor resection. These papers focus on the reconstructive procedure, detailing the nerve repair techniques as well as providing long-term outcomes data ranging from 86% to 94% meaningful recovery. The expansion of the oral and maxillofacial application provides us with an opportunity to help restore nerve function to more patients and significantly impacts our market opportunity. We believe expanded use of our products in the OMF market moves our addressable market opportunity from $1.8 billion to $2 billion.

Our fourth pillar is sales execution. Our sales organization is solidly executing on driving strong revenue growth. We had 510 active accounts in the second quarter, which is up 36% compared to a year ago. We ended the quarter with 51 direct sales reps and currently have 52, of which 31 have now been with us for at least 12 months. In addition to our direct sales force in the U.S. we had -- we have 20 independent distribution partners supporting the execution of our sales strategy. We expect to end the year with at least 60 direct sales reps.

Our fifth pillar of growth is the introduction of new products and applications in nerve repair. AxoGen believes there are many additional unmet needs in the surgical repair of peripheral nerves. And we, as the leading company in this space, are positioned to develop new solutions for these needs. Although our existing products in the upper extremity and oral and maxillofacial markets are our prime revenue sources today, expansion opportunities in nerve repair in breast reconstruction, lower extremity surgery, head and neck surgery, urology and the surgical intervention for pain offer AxoGen new and expanded revenue opportunities in the future.

We've prioritized 2 of these areas where the AxoGen portfolio of products could bring meaningful solutions to current clinical challenges: breast reconstruction neurotization and the repair of nerve injuries associated with the lower limb total joint replacement. We began market development activities in these applications late last year with an expectation that we will launch with one of these new applications later this year. Breast reconstruction neurotization provides an exciting opportunity for women following a mastectomy.

Currently, when a woman undergoes breast reconstruction, she gets the shape of a breast but does not recover sensory feeling. This forfeiture of sensation can have a profound effect, contributing to quality-of-life issues such as depression and other emotional challenges. We're working with a group of key opinion leading reconstructive breast surgeons to discuss patient, surgeon and healthcare stakeholder perspectives and the needs-related to restoring breast sensation for women who choose autologous flap reconstruction following a mastectomy. The group is enthusiastic about the potential of neurotizing the breast, and we'll continue to collaborate with plastic surgeons to discuss this exciting new application for our nerve repair products.

We're also assessing the repair of nerve injuries that involve damage to nerves as a result of total joint replacement. In accessing the joint, the orthopedic surgeon has to transect a number of nerves. Periodically, these transected nerves form a painful tangle of nerve fibers called a neuroma. Unfortunately, the patient had surgery because of a painful joint, and now they have pain again. Recent clinical data has shown that with proper patient selection, a nerve surgeon can cut out the painful neuroma to reduce the pain and repair the resulting gap in the nerve to restore function. Our current customer base of orthopedic, hand and plastic surgeons are equipped to address these injuries in ways that orthopedic surgeons are not. We believe we have the opportunity to develop referral patterns and awareness that bring these patients to our current customers.

Now before I turn the call over to Pete, I want to highlight again that Q2 was a great quarter for AxoGen. We continued to execute against our strategic initiatives. And by doing so, we increased revenue by 46% to $15.2 million with gross margins of 85%. We've increased our addressable market opportunity to $2 billion with expansion of the OMF opportunity. We strengthened our commercial capabilities with the appointment of Jon Gingrich as our Chief Commercial Officer and recorded strong first half of the year with 48% growth and revenues of $27.4 million.

We continue to focus on nerve repair education and awareness, experiencing successful interactions at professional society meetings and at educational programs for surgeons. Surgeons are demonstrating an increasing awareness and adoption of the AxoGen portfolio in our current applications and are applying our portfolio of surgical solutions in new areas. We are making investments towards potential expansion markets in breast reconstruction neurotization and the repair of symptomatic nerve injuries related to total joint replacements.

We are pleased with our progress and with the opportunity to continue to develop the emerging nerve repair market and drive long-term sustainable growth.

Now I'll turn the call over to Pete. Pete?

Thanks, Karen. Second quarter revenue grew 46% to $15.2 million. The growth in revenue was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix. As in prior quarters, the majority of our revenue growth was driven by growth in active accounts. Additionally, we continue to see growth in our pipeline of new accounts as surgeons become familiar with our products and begin to develop their treatment algorithms.

Gross profit for the second quarter was $12.9 million, an increase of 46% compared to the prior year's second quarter. Gross margin for the second quarter was 85% compared to 85.2% in the prior year.

Total operating expenses in the second quarter were $14.3 million, up 37% over the prior year. The increase includes continued investment in our sales force, market development and awareness activities, clinical, R&D and general corporate expenses. These investments are driving growth in the company's operating expenses but importantly, at a lower rate than sales growth, demonstrating the continued operating leverage in our business model.

Sales and marketing expenses in the second quarter were $9.4 million, up 39% over the prior year. As a percentage of revenue, sales and marketing expenses in the quarter improved to 62% compared to 65% in the prior year.

As Karen mentioned, we currently have 52 direct sales reps, up from 44 at this time last year. We completed 3 national education programs in the quarter and 8 year-to-date and anticipate conducting 7 additional events this year for a total of 15.

Research and development spending in the second quarter was $1.5 million compared to $937,000 in the prior year second quarter. R&D costs include product development and expenditures for clinical efforts focused on our Biologics License Application for our Avance Nerve Graft, support of the RANGER registry as well as studies for the development of new products and applications. As a percent of revenue, R&D expenses for Q2 were 10% compared to 9% in the prior year second quarter.

In the second quarter, general and administrative expenses were $3.4 million, up 23% over the prior year. The increase includes higher compensation expenses, including higher noncash stock compensation related to supporting our organizational growth. As a percentage of revenue, G&A expenses decreased to 22.3% in the second quarter compared to 26.4% in the prior year. Net loss in the second quarter was $2.1 million or $0.06 per share and includes noncash stock compensation expense of $724,000. Net loss in the second quarter of 2016 was $2.8 million or $0.09 per share and included noncash stock compensation expense of $570,000. Adjusted EBITDA loss in the quarter was $593,000 compared to an adjusted EBITDA loss of $932,000 in the prior year. Cash at the end of Q2 was $23.9 million compared to $25.9 million at the end of Q1 of this year. Total cash burn in Q2 was $2 million.

As Karen mentioned, we are pleased with the commercial, clinical and strategic execution in Q2. From a financial perspective, we reported 46% growth. Our gross margins continue to be above 80%, and we demonstrated the continued leverage of our business model. We will continue to make investments to drive growth, and we will do so in a manner that demonstrates the annual efficiency of our business model with improved operating margins and cash burn as revenue increases. We continue to believe we have sufficient cash to achieve profitability while continuing to invest in our current growth initiatives in this emerging peripheral nerve repair market.

And finally, we are reiterating our 2017 full year guidance. We expect 2017 revenue will grow at least 40% over 2016 revenues, and gross margins will continue to be above 80%.

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

Thanks, Pete. Before we close, I'd like to highlight a few events in the coming months that we'll be participating in: the Wedbush PacGrow Healthcare Conference in New York City on August 15; the American Society for Surgery of the Hand Annual Meeting in San Francisco, September 7 through 9; Lake Street Capital Markets Big Ideas Growth Conference in New York City on September 13, Dougherty & Co. Investor Conference in Minneapolis on September 19; Cantor Fitzgerald Healthcare Conference in New York City on September 25; and the American Association of Oral and Maxillofacial Surgeons Scientific Sessions in San Francisco on October 9 through 14.

I also invite you to attend our second Annual Analyst and Investor Day in New York City on November 20. This event provides an additional opportunity to learn more about the company and will include a more detailed review of our current market and expansion opportunities. Information about all of these events will be available on the AxoGen website.

In closing, our efforts to execute against our strategic initiatives focused on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and expanding new products and applications in nerve repair. We continue to produce record revenue and position AxoGen to lead and grow the emerging peripheral nerve repair market. We're building awareness and expanding usage of our products with innovator and early adopter surgeons and are excited to be moving toward the developing middle adopter segment of the nerve repair market. We're introducing our product portfolio to fellows, allowing us to train the next-generation of nerve repair surgeons. And we will continue to expand our platform and develop new nerve repair applications where we believe we can bring meaningful solutions to current clinical challenges.

Before taking questions, I want to welcome our new investors and thank all of the members of the AxoGen team for their commitment to helping patients with nerve injuries. At this point, I'd like to open up the line for questions. Tim?

(Operator Instructions) Our first question comes from the line of Richard Newitter of Leerink Partners.

This is [Jamie] in for Rich. Congrats on a nice quarter. I have 2 questions. I guess I'll start with guidance. Obviously, you guys reiterated your 40% growth for the full year and above 80% gross margin. So my question there is just as we think about the back half of the year, is there anything that we should be thinking about structurally for not raising your guidance despite having a healthy growth profile this quarter and a nice beat?

Jamie, as you know, we believe we're just barely scratching the surface of this opportunity. And we continue to think that growth in excess of 40% is solid and sustainable as we continue to develop this market. We do continue to be conservative as we think about our guidance, and we also think about how we would not necessarily make small incremental changes to our guidance. And we think that the greater than 40% continues to be appropriate as we look to continue to drive growth in the back half of the year.

Okay. And then if I just may, one quick follow-up on account penetration and your revenue per account trends. Can you just talk a little bit about the company's priorities over the next 12 months with regard to account penetration specifically around new account starts versus deeper penetration into existing accounts? And I know you've made a little bit of commentary around the middle adopter segment. So just any comments that you could provide there around the types of accounts that you're seeing interest in and potentially utilization behaviors that we should be expecting.

So when we look at our focus, we still see that our growth will be a combination of driving penetration into our existing accounts. And that's moving really our active account base into same-store sales continuing to increase in that base, but we will still be adding new accounts as well. And particularly, you have to think about as we have territory development and we add new reps, new reps add new accounts. And so we're going to see growth coming from both of those dimensions. Frankly, the majority of our growth comes from growth in our current active accounts. And so new accounts, while are good to start because they're our future growth, they don't add a tremendous amount of dollars in the early periods. It's as they mature that they add to growth. And the majority of our growth comes from our -- in fact our high-potential active accounts.

Our next question comes from the line of Tao Levy of Wedbush Securities.

This is actually Na on for Tao. Congratulations on a great quarter. I just have a couple of questions. It's very interesting that you mentioned expanding your -- the addressable opportunity with oral and maxillofacial procedures. Can you give us an idea of how much of the quarter's revenue came from oral and maxillofacial procedures?

We don't break out each of the segments, and so I'm afraid I can't give you guidance on that. But we do see this as an area where 2 things are happening. One, we're seeing additional pull-through of our products so that we get a multiunit sale in our traditional iatrogenic injuries. And we saw surgeons frankly looking around and recognizing that they had other problems to solve, and they could solve them with our AxoGen portfolio of products. And so they're the ones that actually led us to this opportunity of the benign tumor reconstruction, the mandible reconstruction and saying, "Gee, we've not repaired the nerves in that application and it leaves people permanently numb." And they've started to adopt our products and, again, publish on it, so they've got good, consistent results with that, in that new application. And so we do see a nice readiness to adopt and expand among at least our early adopters. And we see great potential there.

Great. And any new updates on how Avive is used? Is there any special application for it that you're consistently seeing?

We do see surgeons adopting Avive, like we've seen happen in past nerve repair in that they are trying it. They're -- it certainly has wonderful handling characteristics. So I can say, intraoperatively, the experience is exactly what we anticipated when we were developing the product. But of course, they're going to want to use it in their surgical applications and see their results. And so that's what we see surgeons doing today. So the types of places they're using it, where they're concerned about the soft tissue bed being abraded, and they're looking for a temporary barrier in that soft tissue bed or places where they're concerned about inflammation, for example, in a blunt trauma. In a blunt trauma, you'll have, let's think of it as a bruise to the nerve where the nerve has been hit, will be inflamed and swollen. And you want to get the best possible chance for that nerve to regenerate, and that will be without that significant inflammatory response. And the inflammation modulation of Avive is perfect for that application.

Our next question comes from the line of Dave Turkaly of JMP Securities.

Sorry, I apologize upfront. I've been jumping back and forth on a few. I know you highlighted breast recon and repair of lower limb joints again as kind of the next logical expansion for you guys. But you've had some conversations with some of your surgeons about post-surgical pain, and you mentioned some other areas. I'm just curious how did you pick those 2 to start with? And then how soon could you maybe try to go after some of the other opportunities, maybe even a specific comment on the pain market if you wouldn't mind.

Sure. Well, frankly, we have a very long list of expansion opportunities for the platform that we have in peripheral nerve repair. And so actually, we have a wonderful problem in that we have to choose from many different options. And so the areas that we focused in first were things that we thought were the lowest hanging fruit in terms of readiness to adopt and clarity of the call point associated with our current call points. And that's why we felt these were the 2 areas we're looking at. With breast neurotization, breast -- the reconstructive plastic surgeons are often also the people doing the trauma repair or it's their partner who specializes in breast reconstruction. So it's somebody who's very close to our call point.

And in our first foray in thinking about pain, it has been in this area of lower limb injuries associated with total joint replacement. In that case, we're thinking about, can you move the patients to the hand surgeon in that practice who is a partner in the practice who deals with nerve repair and can work with his orthopedic colleagues to help assist them when they have this patient who has the ongoing pain following a total joint replacement? And again, just to be clear, what we see in that application is a nerve is cut, a neuroma is formed. The surgeon removes pain by excising out the neuroma then they have a resulting gap. And of course, we have products to help surgeons deal with gaps. So that's the focus that we have to date.

Now down the road, what do I think about pain? I think pain is a very exciting area. I think it is less structured today than these 2 segments. And so I think we've got some work to do to understands what I would call the physical causes of pain, either compression injuries or a neuroma formation and how it happens across the body, and then how are those patients diagnosed and who do they get referred to? And that's the reason we didn't prioritize that first. I actually think it's a substantial opportunity but the patient care pathway is less clear. And so there is interest in understanding that further and continuing to expand what we can do for that very troubled patient population and provide them some new alternatives.

And then I think you updated the enrollment completion date to the fourth quarter of '18 for the clinical trial, the RECON. And I was just curious, what is the timing beyond that? So assuming you completed then and the data is what you think it's going to be, can you just refresh our memory in terms of what would happen next and when you might actually get that BLA?

Well, we -- there are certainly activities that have to happen after that. Once enrollment is done, you still have a period of time for follow-ups. So there's a year of follow-up for -- and then evaluation of those patients. There's study reports that have to be completed and then the full BLA application submission. We're really looking at the BLA in -- submission in 2020, 2021 time frame. And then we're in the FDA time line. So it could take a year after that. So we're in that time frame. Again for us, this is considered a more minor milestone because, again, we're, in our enforcement discussion, able to continue to commercialize and build the business in parallel with those activities. So it's different than most companies in seeing a BLA approval as a significant milestone for the company. For us, it's part of the transition plan overall and not what I would consider a major milestone but still something we're working diligently towards.

I appreciate that. It's nice to hear that it's moving forward, but it still kind of grants you a long period of time where you're probably the player on the market.

Our next question comes from the line of Chris Lewis of ROTH Capital.

In terms of driving increased penetration within the active account base, can you help us understand how long it takes once you're in an account with at least one surgeon to expand to other surgeons within that practice? And what strategies you have in place to kind of support that process?

So timing is a little harder to answer because part of it depends on where the surgeon starts and the timing period of nerves and healing period of nerves. Nerves heal slowly. Nerves in the fingers, it will take 6 months to get results. Nerves in the middle of the -- of your arm, an injury there would be 12 to 18 months. And if you're talking about the brachial plexus, which is a nerve right at the spine that controls all of the movements of the arm, you're really looking at 2-plus years. And so I will tell you timing varies depending on where the surgeon chooses to start his or her adoption and then how they will expand out from there.

That also affects when the next surgeon is starting to use because what happens is often, a surgeon starts to use the product in an account and starts to use one product in an account. Our rep will start to work with that surgeon to expand his or her treatment algorithm. But of course, they will meet their partners or perhaps we would want to call, in that case, on the orthopedic surgeons or hand surgeons, the plastic surgeons or hand surgeons, the plastic reconstructive surgeons and, if appropriate, the oral and maxillofacial surgeons. So there's a number of call points within the hospital.

So the sales rep will want to meet with all of those groups. And the first surgeon using will often be a reference or a -- will provide additional information to the second, third and progressive users within that account. So that's typically what our rep will do, is just to continue to build out the first surgeon, their full treatment algorithm and move on to the additional surgeons within each of the added departments within the account to expand overall usage.

Okay. Great. Very helpful. And then in terms of the sales force, I think you added a bolus of new reps towards the back half of last year. Just given we're coming up to that 9- to 12-month mark for that group, can you talk about how those reps in terms of productivity have progressed relative to your expectations?

Yes. So typically, our reps -- so we see some changes happening in the territories we're giving the reps. So if I go back historically, we were putting reps in territories that had frankly almost no business. And so a rep that came into a territory with almost no business, it was 12 months before that rep even broke even to pay for their expenses in that territory. So it was a relatively slow ramp, but you had multiple factors going on, again surgeons trying products, they would go through the wait periods. So they'd get a number of people started in new accounts, and then they kind of dip down as those surgeons are waiting for results. They've got to get through the committee approval process. And they really start to rebound out of that just after the 12-month period.

But as we've gotten bigger and have now started splitting territories -- so in some cases, we put reps still in brand-new territories. In some cases, we split territories. And when you give them a base of business, we see that they do have a base to build from and have a bigger impact quicker. So we see a mixture today. I think it is -- we're attracting very high-quality people. But sometimes, they -- in these newer territories, they really have to work to get the new business started. And that just slows them down in those first few months.

Okay. And you had a nice jump in the active accounts from first quarter to second quarter. Can you just kind of elaborate on what drove that increase and how we should think about the growth and number of active accounts per quarter going forward?

Well, I think we will again continue to add new active accounts, but I don't see it as a significant metric that it needs to be at the same rate because the real push for us is to continue to drive penetration in these accounts, while at the same time, we will add new active accounts, again, especially in new territories. So I think both are important, but I'm focused on making sure that we continue to build penetration in the active accounts that we have. We've got a great footprint now. We've got about 10% of the accounts out there. And while we've got a lot of room t grow in adding new active accounts, I think we also have a great opportunity to drive penetration in that footprint.

And one more from me. In terms of the hand surgery annual meeting next month, anything we should look for just in terms of clinical papers or podium presentations into that event?

I think it's going to be a continued expansion of the solid data set that we have today. So it will just be -- again, just strengthening of the position that we have and showing that the portfolio of products that we provide are giving good, consistent results for surgeons in various surgical applications.

(Operator Instructions) Our next question comes from the line of Bruce Jackson of Lake Street Capital Markets.

Nice quarter and thanks for taking my questions. So just to be clear on the sales rep hiring plan. Is it still more than 60 that you're targeting?

Yes, we would look to end the year with at least 60, and it could be higher.

Okay. And then generally, with the gross margin guidance, you guys have been historically fairly conservative, and you're coming in, in the 85% range, and the guidance is generally over 80%. Is there anything on the horizon that would change your gross margin profile going forward?

No. We're doing quite well on the manufacturing side. We're continuing to build efficiencies. We're folding the Avive product into our production capabilities as well. Bruce, as we've talked about before, we think being conservative on the gross margin guidance is the appropriate thing to do. We know that the mix of products could potentially impact our margin at one point. We know that there may always be some sort of pressure that comes along, whether it be some pricing pressure as we get into bigger accounts. That could impact us at some time in the future. But over the near term, we continue to see just a consistent profile on gross margins, and we just feel like to be any more specific on our margin guidance is just not something we want to do.

Okay. And then finally just to round out the discussion on Avive and the adoption rate. You talked a little bit about how Avance goes through a trial process. Is there a similar process for Avive? And then can you give us a rough idea of what the sales levels are right now for Avive and when you might start to see some lift in that product?

We actually see that try-and-wait approach in everything that we've seen in nerve repairs. So AxoGuard Nerve Connector, AxoGuard Nerve Protector, Avance have all had that try and wait. And we hypothesized we would see the same thing with Avive when we started, and we have. It's just kind of the mantra of these early adopters in that they're willing to try things, but they're not willing to change their practice until they really see what their initial results are like. And so in the first year, we -- if you think back what we talked about with Avive, we think the product is great. We got early feedback from surgeons again intraoperatively, but our revenue projections were pretty modest this year. We don't break it out separately. But it was really a modest increase in this first 12 months where we see it starting to impact a little bit stronger in the second year and then ramping from there.

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Thank you, Tim, and I want to thank everyone for joining us on today's call. I look forward to seeing many of you in person at one of the upcoming investor events. And we look forward to speaking with you during our Q3 conference call in November. Thank you.