AxoGen Inc (AXGN) 2017 Q3 法說會逐字稿

Greetings, and welcome to the AxoGen, Inc. Third 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, Mr. Patrick Till. Please begin, Mr. Till.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for the AxoGen, Inc. conference call to discuss the financial results for the third quarter ended September 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 get started, I'd like to remind you that during the course of this conference call, the company will make 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-Q and 10-K, 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 acquisition 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, Patrick, and good afternoon, everyone. Welcome to our third 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 third quarter highlights, a brief company overview and an update on our key strategic initiatives. Pete will then provide a review of our third quarter financial results and review financial guidance, after which time, we'll open up the call to Q&A.

We're pleased to report another successful quarter. Third quarter revenue grew 43% to a record $16 million. Our year-to-date growth is 46%, with revenue of $43.5 million. It is gratifying to see surgeons expanding use of our product portfolio in oral and maxillofacial procedures. In addition, we see increased adoption by hand surgeons in response to data and mixed and motor nerve repair as well as long gap nerve repair.

As a reminder, last quarter, we announced 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 moved the current addressable market opportunity to $2 billion in our current markets of trauma, upper extremity and oral and maxillofacial surgery.

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. This increased focus on commercialization will allow us to drive penetration of our existing markets, expand into new applications, introduce new products and build global markets.

These efforts, along with the continued development of our surgeon education events, market awareness activities and further development of clinical data, are helping surgeons develop confidence in the adoption of the AxoGen platform for nerve repair.

We're pleased with 2017 to date and believe we are demonstrating our ability to successfully execute our strategy and continue to drive awareness and growth in the emerging peripheral nerve repair market. We are building awareness of peripheral nerve repair and expanding usage of our products with innovator and early-adopter surgeons and are excited to be moving toward the developing 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 their 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 1 surgeon who has converted a portion of his or her treatment algorithms of nerve repair to the AxoGen portfolio and are ordering AxoGen products at least 6x in the last 12 months.

In the third quarter, the number of active accounts increased 36% to 563, up from 414 in Q3 of 2016. The growing number and penetration of active accounts is driven by increased adoption of our nerve repair products across the surgeon's treatment algorithms. Accounts ordering Avance Nerve Graft, AxoGuard Nerve Connector and AxoGuard Nerve Protector continued to generate greater than 5x the revenue of an account ordering just 1 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 damage and the leading company focused specifically on the science, development and commercialization of technologies for peripheral nerve regeneration and repair. We currently have 4 surgical implants in our portfolio.

Avance Nerve Graft is the only commercially available process nerve allograft used for the bridging nerve gaps of 5 millimeters 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. 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. Health care 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 third quarter, 563 of these centers were active AxoGen accounts. Most of these active accounts are still in the early stage of penetration and provide additional opportunities for growth. As a result, we believe we're 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've continued 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'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.

The recent American Society for Surgery of the Hand annual meeting included 33 instructional sessions related to nerve repair, including an AxoGen-sponsored symposia, current concepts in the surgical treatment of mixed and motor nerve injuries. The symposia included case-based discussions with 3 of the country's leading hand surgeons and was very well attended. In addition to these instructional sessions, there were over 70 presentations and posters related to the peripheral nerve repair, demonstrating the importance of peripheral nerve repair to this target surgeon community.

We also participated in the 99th Annual Meeting of the American Association of Oral and Maxillofacial Surgeons last month. We hosted key thought leaders at our exhibit booth, who demonstrated surgical techniques for OMF nerve repair and discussed the importance of timely referral pathways. These demonstrations, several presentations and a large nerve repair -- excuse me, and a nerve repair symposium helped increase OMF surgeon awareness of AxoGen's comprehensive platform for nerve repair, including solutions to address nerve damage in the jaw resulting from either surgical injuries or reconstruction following benign tumor removal or similar procedures.

Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted a total of 4 national education events in the third 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 the utilization from surgeon attendees more than double 6 months after they attend the program. In September, we conducted our second fellows program, training the next generation of nerve repair surgeons. We plan to conduct 2 additional fellows programs in the fourth quarter, and we're on target to complete a total of 15 national programs in 2017.

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 21 year-to-date and grew peer-reviewed clinical publications for our surgical portfolio to a total of 53. 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.

At the recent American Society for Surgery of the Hand scientific meeting, Dr. Bauback Safa from the Buncke Clinic presented a new subset of the RANGER database. This is largest sample size and longest follow-up presented to date on Avance Nerve Graft in mixed and motor injuries. Historically, these upper extremity nerve injuries have been repaired with nerve autograft.

In the published literature, nerve autograft has achieved an average meaningful recovery of 68% with a range of 57% to 80%. We were pleased to see that in the RANGER Study, 75% of the patients with mixed and motor injuries achieved meaningful recovery, which means -- which compares very favorably to nerve autograft.

Additionally, this subset of data evaluated long gap nerve repair. Nerve autograft is typically believed to have an inverse relationship between gap length and meaningful recovery. In other words, the longer the gap, the lower the expected outcome. Contrary to historical beliefs, data from this subset of the RANGER Study found consistent levels of meaningful outcomes in both long gaps and short gaps when repaired with Avance Nerve Graft. We believe this subset of data indicates additional opportunity for Avance Nerve Graft to continue challenging the norms of historical repair options and evolving the practice of nerve repair.

Our RANGER Registry has enrolled over 1,300 nerve repairs and continues to provide significant new evidence in the management of nerve injuries. Surgeons are using this data to better understand nerve repair outcomes and to expand their treatment algorithms.

RECON, our Phase III pivotal study comparing Avance Nerve Graft to manufactured conduits in digital nerve injuries, continues to enroll. We anticipate enrollment to be completed in Q4 of 2018. These studies continue to produce important data that assist in clinical decision-making and support the adoption of our platform for nerve repair.

In addition to the adoption we're 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 reconstruction due to benign tumor resection.

Recent clinical data show that repair of these injuries with the AxoGen portfolio of products can provide meaningful recovery in 87% to 94% of these patients. The data and techniques presented at the recent AAOMS annual meeting demonstrated the role of our nerve repair platform in both very simple iatrogenic nerve injuries and repairs as well as the large reconstructions with nerve gaps up to 70 millimeters. 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 numbness of the lip, mouth and chin.

Our fourth pillar is sales execution. Our sales organization is solidly executing on driving strong revenue growth. We had 563 active accounts in the third quarter, which is up 36% compared to a year ago. We ended the quarter with 53 direct sales reps, of which 33 have now been with us for at least 12 months. In addition to our direct sales force in the U.S., 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.

During the past 2 years, we've increased the number of direct reps by nearly 50%, and we've developed our sales leadership, sales training, marketing and support structures. We're creating a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications in our platform for peripheral nerve repair.

Our fifth pillar of growth is the introduction of new products and applications in nerve repair. AxoGen believes that 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 have 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 lower limb total joint replacements. 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 better understand the needs of women who choose autologous flap reconstruction following a mastectomy.

We meet regularly to discuss patient, surgeon and health care stakeholder perspective related to restoring breast sensation for these patients. The group is enthusiastic about the potential of neurotizing the breast, and we will continue to collaborate with plastic surgeons to discuss this exciting new application for our nerve repair products.

We are 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. We will announce which of the expanded applications we're pursuing at our upcoming Analyst and Investor Day on November 20.

Before I turn the call over to Pete, I want to highlight again that Q3 was a great quarter for AxoGen. We continue to execute against our strategic initiatives. And by doing so, we increased revenue by 43% to $16 million, with gross margins over 84%. Our year-to-date revenue is strong at $43.5 million, representing 46% year-over-year growth. We continued our 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're 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. Third quarter revenue grew 43% to $16 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 is 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 third quarter was $13.5 million, an increase of 42% compared to the prior year's third quarter. Gross margin for the third quarter was 84.4% compared to 84.9% in the prior year. Total operating expenses in the third quarter were $15 million, up 41% 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 associated with our growth including noncash stock comp 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 of our business model. Sales and marketing expenses in the third quarter were $9.5 million, up 34% over the prior year. As a percent of revenue, sales and marketing expenses in the quarter improved to 59% compared to 63% in the prior year.

As Karen mentioned, we currently have 53 direct sales reps, up from 44 at this time last year. We completed 4 national education programs in the quarter and 12 year-to-date and anticipate conducting 3 additional events this year for a total of 15.

Research and development spending in the third quarter was $1.8 million compared to $1.1 million in the prior year's third 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 Q3 were 11.2% compared to 10% in the prior year.

In the third quarter, general, administrative expenses were $3.8 million, up 52% over the prior year Q3. 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 increased to 23.5% in the third quarter compared to 22.1% in the prior year.

Net loss in the third quarter was $2.1 million or $0.06 per share and includes noncash stock compensation expenses of $919,000. Net loss in the third quarter of 2016 was $2.3 million or $0.08 per share and included noncash stock comp expenses of $294,000. Adjusted EBITDA loss in the quarter was $433,000 compared to an adjusted EBITDA loss of $779,000 in the prior year. Cash at the end of Q3 was $22 million, and total cash burn in Q3 was $1.8 million.

Turning to guidance. 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 finally, we are introducing 2018 financial guidance, and we expect 2018 revenue will grow at least 40% over 2017 revenue, and gross margins will remain above 80%.

As Karen mentioned, we are pleased with our commercial, clinical and strategic execution in Q3. From a financial perspective, we reported 43% growth. Our gross margins continue to be above 80%, and we demonstrated the continued leverage of our business model. We believe we have sufficient cash to achieve profitability while continuing to invest in our current growth initiatives, and we will continue to make investments to drive growth, and we'll do so in a manner that demonstrates the annual efficiency of our business model with improving operating margins and cash burn as revenue increases.

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

Thanks, Pete. Before we close, I'd like to highlight a few events in the coming months that we will be participating in.

Our second annual AxoGen Analyst and Investor Day in New York City will be on November 20; the 29th Annual Piper Jaffray Healthcare Conference in New York City on November 28; Guggenheim's 5th Annual Healthcare Conference in Boston on December 13; The Trout Group annual 1-on-1 Management Access Event in San Francisco, January 9 through the 11; and the 2018 Combined Meeting of the American Association for Hand Surgery, American Society for Peripheral Nerve and the American Society of Reconstructive Microsurgery in Phoenix on January 10 through the 16.

I mentioned our second annual Analyst and Investor Day in New York City on November 20. I invite you to join me, Pete and other company executives as well as our surgeon thought leaders for a discussion of AxoGen's comprehensive platform for nerve repair. I look forward to seeing many of you there. Information about all of these events will be available in 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 revenues and have positioned AxoGen to lead and grow our platform for peripheral nerve repair.

We are building awareness, developing additional clinical data and expanding use of our products with innovator and early-adopter surgeons and are excited to be moving toward developing the middle adopter segment of the nerve repair market. We are also pleased to see expanded use in oral and maxillofacial procedures and increased adoption in mixed and motor nerve repair as well as long gap nerve repair. We're introducing our platform for nerve repair to fellows, allowing us to train the next generation of nerve repair surgeons.

We are creating a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications where we believe we can bring meaningful solutions to current clinical challenges. And we will continue to expand our platform and develop new nerve repair applications, challenging the norms of historical repair options and evolving the practice of nerve repair.

Before taking questions, I want to welcome our new investors and thank all 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. Operator?

(Operator Instructions) Our first question comes from Richard Newitter with Leerink Partners.

This is Jaime on for Rich. Wanted to follow-up on 2018 guidance that you introduced. Of course, you're guiding to again above 40% revenue growth and greater than 80% gross margin. So a question that I have is, is this kind of reflective of a trend that you expect in 4Q? And kind of what gives you confidence in this above 40% revenue growth heading into 2018?

Well, thanks, Jaime. Yes, we're pleased to be able to give that guidance for 2018. I think we've seen nice momentum in the business. We continue to see good momentum in our core trauma business. We're seeing nice expansion into the oral, maxillofacial space. And when we look at our expansion opportunities that we'll talk more about on the 20th, we think all of that together gives us confidence that we're -- we could continue to maintain this minimum growth profile of at least 40%.

Okay, great. And then just to follow-up on that. So you mentioned, of course, the new market opportunities. And just on that front, do you guys actually factor this into the 2018 guidance that you're giving? Or should we be viewing this more as upside? And asked another way, when do you think we will start seeing some sort of revenue contribution from these opportunities assuming you're launching on at least one in the middle of November?

So when we give the guidance on the business, we're really thinking about the total business. But you need to think about nerve repair as we've said in the past that surgeons are going to remain, we believe, relatively cautious adopters. The new segment that we move into will have revenue in 2018, but surgeons will still continue to want to build data and understand in their hands what the outcomes are. And so we'll see the sort of ramp up that we've seen in each of the segments in the past where there's an initial start and then wait period as surgeons begin to adopt the new technologies.

Our next question comes from Dave Turkaly with JMP Securities.

Obviously, yes, 40%, another impressive year on tap it appears. So I was wondering if you might be willing to even share sort of what you think you might need to do from a rep standpoint or active accounts. Do we consider that they grow sort of in line with your revenues as well here? Or any sort of details on some of the components that might get you to that 40% number.

We're not quite ready to share the rep count. We will continue to expand. I mean, the bottom line is, we see expansion both in increasing penetration and active accounts and in adding new accounts. And we'll do that through a strong execution plan, which will include adding some capacity in our sales team. We're not quite ready to roll out those numbers. Actually, I suspect on November 20, we'll have a little more information to share.

Great. And then you look at some of these new market opportunities, breast and the lower limb, joint replacement, neuromas. Do you think as you move forward, will you expand sales force into specialist areas? Will you add distributors maybe that focus on potentially a different area? Or can you kind of tackle all these kind of indications with your core direct group?

Well, actually, we already have some clinical specialists within our sales team, who help and select an application, especially surgeons are starting up. And I would continue to see that in the future where we would have some clinical specialists. Remember, from an account standpoint, these accounts and the applications are overlapping. So we will always have a rep who (inaudible) area and the primary contact for the account, but we will have clinical specialists, who will help support selected applications.

Last one if I might just quickly because it's a topic of interest amongst many companies. Did you have or are you willing to break out any sort of impact from hurricanes or storm-related disruptions in the quarter?

Yes, Dave. I think it was immaterial. I think as we look at it, it did have some impact as in both Texas and Florida but not more than a few hundred thousand dollars.

Our next question comes from Tao Levy with Wedbush Securities.

This is Na. I'm on for Tao. So one of the questions that I have is regarding your -- like the guidance for 2017, it's saying the revenue is continuing to be above 40%. And I'm just looking at the fourth quarter here. Sequentially, do you see continuing on this momentum even if you keep the same revenue going, you're going to be above 45% growth year-over-year for 2017. Is that like a fair assumption? Or do you see like a sequential slight decrease as maybe you're ramping up the reps, spending more energy there?

Yes. No, no. We don't see any negative momentum in the business at all. Now the way we are looking at this now is we're really not trying to guide, and I think all of you have seen, we're not trying to guide to a specific outcome. We're really guiding to a minimum growth profile here, and so we see nothing in the fourth quarter that would cause us to think that there's some concerns in the fourth quarter. Our business has historically had some seasonality where the second and third quarter, you have these very nice sequential step-ups from Q1 to Q2 and then to Q3, and then Q4 and Q1 can be flattish or up a little bit sequentially. No reason to think that historical patterns wouldn't be the same here. But again, our answer is that we're not trying to guide to a specific outcome. And we're more interested in continuing this momentum and looking at the opportunity in '18 to continue to run at, at least 40% top line.

Great. And another question. Productivity per rep, do you see like a slight sequential increase this quarter?

Yes. No, we continue to see -- I mean, when you look at our active account growth of 36%, but our revenue growth in the quarter was 43%. So obviously, our same-store sales and sales rep productivity is increasing on a year-over-year basis. And we see that, we track it, both year-over-year and sequentially. And the group's doing a nice job of continuing to build their effectiveness in the market.

Our next question comes from Bruce Jackson with Lake Street Capital Markets.

So I just wanted to hum in on the account number, which looked really good this quarter. I wanted to know if we could get some more color on whether or not you've got an increase in the number of stocking accounts and whether you're starting to see some adoption by surgeons outside of your core target market.

So stocking accounts are an important thing for us to do as we move forward because it helps to make sure that we don't miss cases. Today, for the most part, we are still ordered 4 cases. And so a lot of our revenue is not based on stocking. Our revenue is based on procedures. But we're in trauma, and trauma is not a scheduled case. And so because of that, we know we miss cases. So getting inventory stock in the hospitals is strategically important to us. We are seeing some increase in the stocking. It's not a significant part of our revenue. It's, in fact, as a percentage of our revenues, it still remained relatively flat. It appears that hospitals do want to go through a period of usage to establish a reorder pattern, so that they're comfortable having the inventory. And so it does take some time to establish that and then work with the account to do what we call par level order, which is an established amount that they keep on stock, and they replenish as they use it.

Okay. And then the other thing we've discussed in the past are the so-called middle adopters, who are trailing behind the early adopters. Do you have any updates or anecdotal stories about the progress you're making with the -- those surgeons?

I would still say that it's something that we're working towards. We're not at that point yet. But anecdotally, you do see significant interest from surgeons that we haven't met before. And you see that at the conferences like The Hand Society Meeting and the Oral and Maxillofacial Meeting that we had earlier this year -- in this quarter. We sponsored a panel meeting at The Hand Society. It was, I believe, the largest that we've had. And what was interesting to me is as I looked around the room, there were a lot of people I didn't know in the room. So we're bringing in new surgeons, surgeons who have not before been interested in the AxoGen portfolio and algorithm of nerve repair and are now gaining interest. And the other interesting thing that I noted in that panel is that the questions and the tone of the questions have totally changed. If I go back a year or 2 ago, the questions were all about the science and how did the product work and really trying to understand the mechanism of action. The questions today are around how do I get inventory stocked in my hospital? How did you get it approved through your [back] committee? What's the right inventory to have for this type of case mix? How do you manage your patient flow in being able to order -- again these are trauma. So if the trauma happens today, if they don't have inventory stocked in the hospital, they have to delay the patient repair until tomorrow, so that we can give them inventory tomorrow. And so there's questions around the logistics of how to use the product, not should they use the product. So I think that's a very interesting change and a good signal that surgeons are starting to think about how would I use this in my practice.

There are no further questions. I would like to turn the floor over to Karen for closing comments.

Thank you, operator, and I want to thank everyone for joining us on today's call. I look forward to seeing many of you in person at our Analyst and Investor Day or at another one of the upcoming investor events. Thank you very much.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.