AxoGen Inc (AXGN) 2018 Q2 法說會逐字稿

Greetings, and welcome to the AxoGen, Inc. 2018 Second Quarter 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. Kaila Krum. Thank you. Please begin, Ms. Krum.

Thank you, 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, 2018.

My name is Kaila Krum, and I recently joined AxoGen as Vice President of Investor Relations and Corporate Development. I'm thrilled to have joined AxoGen at such an exciting time of growth and look forward to continuing to work with you, as we expand our platform for nerve repair.

Today's call is being broadcast by -- via webcast, which is available on the AxoGen website. Within an hour following the end of the live call, a replay will be made available on the company's website at www.axogeninc.com under investors.

Before we get started, I'd like to remind you that, during 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-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 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, Chairman, CEO and President of AxoGen. Karen?

Thanks, [Kaila,] and good afternoon, everyone. Welcome to our 2018 second quarter conference call. I know many of you know Kaila from her work in the analyst community, and we couldn't be happier to have her join our team.

In addition, I'd like to welcome Lisa Colleran to the AxoGen Board of Directors. Lisa is the former CEO of LifeCell and brings a wealth of market development and commercialization experience in high-growth companies. Also joining me today is AxoGen's Chief Financial Officer, Pete Mariani.

I'd like to begin today's call with the 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 review financial guidance. After which time, we'll open up the call to Q&A.

We're pleased to report another quarter of strong growth for AxoGen. Second quarter revenue grew 36% to $20.6 million. We continue to invest in our commercial team, and we've made significant organizational enhancement in recent quarters. We are realizing the benefit of those enhancements, and in Q2, our direct sales channel continued to grow revenues above 40%, and that channel now makes up approximately 80% of our total revenues, up from 70% 1 year ago.

We continue to have a hybrid commercial model with 19 independent sales agencies that account for approximately 20% of our revenue. In the quarter, we experienced challenges in a few of these territories. We're addressing these challenges, and we believe sales agencies will continue to be an important aspect of our growth in selected territories.

In our direct channel, we ended the quarter with 72 sales representative, an increase of 4 in the quarter and 21 in the last year. As a reminder, in late 2017 and early 2018, we promoted several of our tenured reps to sales management and marketing positions. We backfilled those positions with new rep hires in addition to the expansion of our total rep headcount. As a result, more than 50% of our current sales representatives have been with AxoGen for less than 12 months.

We have an engaged and enthusiastic commercial team and have experienced very little turnover as we've implemented these changes. We've seen improved initial productivity from our new reps and expect to see continued scaling of their impact. We remain confident in our guidance as we believe our commercial team will continue to drive productivity increases as we execute our growth plan throughout the year and into 2019.

We expect to end 2018 with at least 80 direct sales reps. We will continue to make broad commercial investments across our entire sales channel as we continue to grow and expand our platform for peripheral nerve repair.

For those of you who are new to our story, AxoGen is a global leader in developing and marketing innovative surgical solutions for peripheral nerves. We're passionate about helping to restore nerve function and quality of life to patients with physical damage or discontinuity to peripheral nerves by providing innovative, clinically proven and economically effective repair solutions for surgeons and health-care providers.

Peripheral nerves provide the pathway for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their nerves. Physical damage to a nerve or the inability to properly reconnect nerves can result in the loss of muscle or organ function, the loss of sensory feeling or the initiation of pain.

Our products are used primarily by reconstructive 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; nerve compression surgeries, including recurrent carpal tunnel syndrome; and more recently, breast reconstruction neurotization.

We are building awareness of advances in peripheral nerve repair and see expanding usage of our products with innovator and early adaptor surgeons and are excited to be moving toward developing the middle adopters, who are the majority segment of the nerve repair market. We find surgeons are initially cautious adopters for nerve repair product. They typically start with a few cases and then wait to 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 has converted a portion of his or her treatment algorithms of nerve repair to the AxoGen portfolio and have ordered AxoGen products at least 6 times in the last 12 months.

In the second quarter, the number of active accounts increased 24% to 634, up from 510 in Q2 of 2017. This 24% increase in active accounts, along with the increased penetration of active accounts, are the key drivers of our 36% revenue growth in the quarter. 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 generate greater than 6x the revenue of an account ordering just one of the products. Our objective is to continue expanding the treatment algorithms of surgeons to include all 4 of our surgical implants across their full continuum of nerve repair.

AxoGen (inaudible) strong 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 $2.2 billion for AxoGen's products. The majority of these procedures are being performed in approximately 5,100 centers.

Most of our 634 active accounts are still at an 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 a sales plan, and introducing new products and expanded 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 the surgeons in hospitals, clinical conferences and promotional events. In the quarter, we participated in the 23rd Annual Federation of European Societies for Surgery of the Hand, a multinational gathering of hand surgeons from European and U.S. markets. There were 8 scientific presentations related to AxoGen's surgical portfolio.

In addition to these presentations, AxoGen hosted an educational symposium, clinical evidence and case studies on peripheral nerve allograft. The symposium focused on the rapidly growing body of peer-reviewed literature related to Avance Nerve Graft. This symposium was highly attended and provided increased awareness of Avance Nerve Graft and our peripheral nerve repair algorithm in this expansion market.

We work year round to increase awareness of peripheral nerve damage and options for repair by featuring stories of patients whose quality of life was improved through nerve repair using one or more of our products. One of those patients is David, an active husband, father and grandfather with a goal of running a marathon in all 50 states.

Shortly after finishing his 49th marathon, David found he could barely move his right foot. The peroneal nerve in his right leg was entrapped and could not send enough signals to the muscles in his foot. The compressed nerve made it difficult to walk, much less run, and David thought his marathon days were over.

His damaged nerve was surgically decompressed and then wrapped with an AxoGuard Nerve Protector. The damaged nerve was successfully healed, and David is now a proud member of the 50-state marathon club, having recently completed his 50th marathon in Hawaii. We're proud to have played a role in David achieving this important goal.

Our second pillar of growth is focused on surgeon education and the development of surgeon advocate. We conducted 5 national education events in the second quarter and expect to conduct a total of 18 during 2018. These surgeon-led programs focus on advances in best practices in nerve repair. They allow surgeons to gain additional confidence in nerve-repair techniques, 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 a program. Included in our events for the quarter was an upper-extremity fellows program, where we trained the next generation of nerve-repair surgeons. We plan to conduct a total of 5 fellows programs in 2018, training more than 2/3 of all hand and microsurgery fellows for the year.

Earlier this year, we conducted our first educational program in oral and maxillofacial surgery with a focus on nerve repair during mandible reconstruction. Surgeons are excited to now be able to add nerve repair into their standard surgical approach and provide an opportunity for sensory function for these patients. As we've monitored the impacts on this new program, we're pleased to see the eagerness and high-level engagement from the participants to add nerve repair to their reconstructions. Our second OMF program scheduled for September is already fully enrolled, and we look forward to the opportunity to continue to develop the OMF market.

Our third pillar is to grow the body of clinical evidence. We now have a library of 62 peer-reviewed clinical publications, including 3 that were published in the second quarter. It is encouraging to see that 2 of these 3 publications focused on new techniques in the surgical management of pain, bringing the total number of publications focused on pain to 8.

While these are early studies, they provide promising results and offer techniques and approaches that leverage our portfolio in managing the pains associated with the damaged nerves. As we continue to explore this market opportunity, these papers add to the growing body of peer-reviewed literature for the surgical management of pain.

The volume of presentation and publication reinforces both the importance of peripheral nerve repair and the growing body for evidence for AxoGen's products in nerve repair. Our RANGER Registry has enrolled more than 1,400 of the Avance Nerve Graft 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. We believe this data provides additional evidence for Avance Nerve Graft to continue challenging the norms of historical repair options for peripheral nerve repair.

RECON, our phase III pivotal study comparing Avance Nerve Graft to manufactured (inaudible) and digital nerve injuries continues to enroll. We anticipate enrollment to be completed in Q4 of this year. 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 clinical evidence we continue to build with hand and reconstructive plastic surgeons, we've also grown our experience in oral and maxillofacial surgery. As these surgeons become confident 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.

Clinical data show that repairs of these injuries with the AxoGen portfolio products can provide meaningful recovery in 87% to 94% of these patients. Historically, many of these injuries went untreated, leaving the patient with significant quality-of-life challenges associated with permanent numbness of the lips, mouth and chin. Surgeons now have an option to reconstruct these nerves, giving patients the opportunity to see return of function.

Late last year, we announced the launch of our expanded application in breast reconstruction neurotization. At AxoGen, we believe the idea of breast reconstruction restores size, shape, symmetry, softness and now sensation. Without the potential risk and comorbidity associated with autograft nerve harvest, we've developed the ReSensation surgical technique, which incorporates this vision into a reproducible and efficient solution for reconstructive plastic surgeons.

We began surgeon training on the ReSensation technique for breast reconstruction neurotization as part of the application launch. We will partner with 20 to 25 breast neurotization centers by the end of 2018. We've trained about 3/4 of these centers on our unique ReSensation surgical technique for breast neurotization, and they're beginning to offer breast neurotization to their patients.

Breast reconstruction neurotization provides an important new opportunity for women who choose autologous flap reconstruction following a mastectomy. Using AxoGen's nerve repair portfolio, surgeons can connect peripheral nerves in the autologous flap to nerves in the chest wall, enabling sensory nerve regeneration.

Historically, sensory nerves were not repaired in these procedures, leaving the woman with numb breasts, [meaning] you can't feel, doesn't feel like yours and isn't normal. Restoring sensation to the breast is an important advancement for women facing the challenges of mastectomy and reconstruction, allowing them to feel normal again.

We're now enrolling patients in the sensation neurotization outcomes for women or Sensation-NOW clinical registry. Sensation-NOW will study the physical and quality of life outcomes of breast neurotization. We believe that data from this registry will demonstrate that the ReSensation technique provides meaningful recovery sensation and quality of life outcomes for women who choose reconstruction following a mastectomy.

The historical approach in the direct neurotization focused on neurotizing a single nerve branch on the tissue. Some innovative surgeons demonstrated preliminary results that dual neurotization or the neurotization of 2 nerves per breast provided improved patient outcomes.

In addition to Sensation-NOW, we have developed a randomized prospective study to explore dual neurotization versus single neurotization. The study will assess the benefit of dual neurotization to determine the return of sensation, quality of life and economic parameters associated with this approach. The study will enroll approximately 182 subjects with a 24-month follow-up. Study initiation is targeted for Q4 of 2018. We look forward to bringing additional clinical evidence to both patients and surgeons as neurotization becomes a standard of breast reconstruction.

Our fourth pillar is sales execution. As I mentioned, we ended the quarter with 72 direct sales reps, an increase of 21 compared to a year ago. In total, more than 50% of our current reps have been with AxoGen for less than a year. We have seen improved initial productivity from our new reps and expect to see continued scaling of their impact as well as (inaudible) sales team. We expect to end the year with at least 80 direct sales representatives.

Our fifth pillar of growth is the introduction of new products and expanded applications in nerve repair. There are many unmet needs from the surgical repair of peripheral nerves, and we, as the leading company in this space, are positioned to develop new solutions for these needs. We're making investment in opportunities to innovate with our current portfolio as well as developing new solutions for patients with peripheral nerve damage.

Although our existing products in the upper extremity, trauma, oral and maxillofacial, and breast reconstruction markets are our prime revenue sources today, expanded applications in lower extremity surgery, head and neck surgery, urology and the surgical management of pain offer AxoGen expanded revenue opportunities in the future.

Millions of people suffer from -- with recurrent and chronic pain. The surgical management of pain may provide an effective nonpharmacologic resolution for many causes of this pain. The pain universe is large and the potential to apply surgical nerve repair and nerve management techniques to address issues such as the pain associated with total joint replacement and hernia repair, neuropathy or migraine headaches creates a significant opportunity for us to introduce new products and expanded applications for our product portfolio.

Before I turn the call over to Pete, I want to highlight again that Q2 was a strong quarter, and we remain confident in our guidance as sales representative productivity and penetration of active accounts expands in the second half of the year. We continue to execute against our strategic initiatives and are driving strong revenue growth while maintaining gross margins above 80%.

We continue 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 core applications and are applying our portfolio of surgical solutions in new areas. We're making investment to grow expansion markets in OMF and breast reconstruction neurotization, and we're exploring surgical management of pain. We're pleased with our progress and with our opportunity to continue developing the emerging nerve-repair market and driving long-term sustainable growth for AxoGen.

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

Thanks Karen. Second quarter revenue grew 36% to $20.6 million. Revenue growth 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, most of our revenue growth was driven by growth in active accounts. The number of active accounts grew 24% to 634 in the second quarter.

We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to develop their treatment algorithms. As Karen mentioned, we're pleased with the continued growth from our direct sales channel, including the improved productivity of our recent sales reps hires. Additionally, we continue to make investments in support of our independent sales agencies and believe that our hybrid commercial model will continue to support our growth plans through the rest of the year.

Gross profit for the second quarter was $17.5 million, a 36% increase compared to Q2 of last year. Gross margin was 84.9% in Q2, relatively unchanged compared to the prior year. Total operating expenses in the second quarter was $22.3 million, up 56% over the prior year. The increase includes the additional investments in our expanded-commercial capabilities as well as increased investments in clinical, R&D and general corporate expenses associated with our growth.

Operating expenses also include noncash stock compensation expense of $2 million in the second quarter compared to $724,000 last year. Excluding the impact of noncash stock compensation, total operating expenses for the second quarter increased 49% to $20.3 million or 98.4% of revenue compared to $13.6 million or 89% of revenue in the prior year.

Sales and marketing expense in the second quarter was $14 million, up 49% over the prior year. As a percentage of revenue, sales and marketing expenses in the quarter were 68% compared to 62% in the prior year.

As mentioned, we continue to invest in our commercial capabilities. These investments are having an impact and will provide a solid framework to drive continued execution of our growth plans and expand our platform of nerve repair.

Research and development spend in the quarter was $2.6 million compared to $1.5 million in the prior year. R&D costs include product development and expenditures for 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 expense for Q2 was 12.6% compared to 10% in the prior year.

We also announced today that we completed the purchase of a facility near our current processing center in Dayton, Ohio, for $5 million. This new processing center will be built out in support of our long-term capacity needs. We will be transferring our existing processing operations from our current leased space to the new facility just as we did in the first quarter of 2016 when we transitioned from Virginia Beach to Dayton. The noncapitalized development cost of this new center will be included in R&D spend.

We continue to build out our R&D capabilities and are increasing investments in important clinical work, product development and development work related to BLA and our new facility. General and administrative expenses in the second quarter was $5.7 million, up 68% over the prior year. The increase includes higher compensation expenses, including higher noncash stock comp of $1.1 million compared to $436,000 in the prior year. As a percentage of revenue, G&A expense in Q2 was 27.5% compared to 22.3% in the prior year.

Net loss in the second quarter was $7.4 million or $0.20 per share compared to $2.1 million or $0.06 per share in the prior year. Excluding the impact of noncash stock compensation and fees associated with repayment of our debt, adjusted net loss and net loss per share in Q2 was $3.2 million and $0.09 per share compared to $1.3 million and $0.04 per share in the prior year.

Adjusted EBITDA loss in the quarter, which excludes the impact of stock compensation expense, was $2.6 million compared to an adjusted EBITDA loss of $600,000 in the prior year. In the quarter, we completed an equity offer that netted a total of $132.7 million and subsequently repaid in full our $25 million of outstanding debt with MidCap.

Total net cash burn in the quarter was $2.8 million after excluding the impact of the equity raise and repayment of debt. We ended June with $133.6 million in cash compared to $30.6 million at the end of the first quarter of this year.

Returning to guidance, we are reiterating our 2018 full year guidance. We expect 2018 revenue will grow at least 40% over 2017 revenues, and gross margins will continue to be above 80%. Additionally, we continue to expect to have at least 80 direct sales reps by year-end.

As Karen mentioned, we're pleased with our commercial, clinical and strategic progress in Q2. We are seeing improved productivity of our sales team and penetration of our active accounts, and our gross margins continue to be above 80%. Over the last 2 quarters, we have accelerated investments in our commercial capability that we believe will allow us to continue to drive execution in our core trauma and nerve protection markets but also bring in additional resources and focus to our expansion opportunities in OMF and breast reconstruction neurotization.

These investments are having an impact, and we believe we are well positioned to continue to drive growth and expand our platform for nerve repair. With our recent capital raise, we have the resources available to invest in these strategic initiatives and drive growth. We will continue to do so in a manner that demonstrates the efficiency of our business model.

Before I hand the call back over to Karen, I'd like to point out that we will be participating in several upcoming events. Canaccord Genuity's 38th Annual Growth Conference in Boston on August 8, Morgan Stanley's 16th Annual Global Healthcare Conference in New York on September 12th through the 14th, Cantor Fitzgerald's Global Healthcare Conference in New York from October 1 to October 3, and additionally, we'd also like to announce that we will be conducting our 3rd Annual Analyst and Investor Day in New York City on November 19.

Information about these events will be made available on the AxoGen website with more detail in the coming months. Karen?

In closing, our efforts to executing on our strategic initiatives focused on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plans and expanding new products and applications in nerve repair.

We have positioned AxoGen to lead and grow the peripheral nerve repair market. We're building awareness, developing additional clinical data and expanding use of our products with innovator and early adopter surgeons and are excited to be moving towards developing the much larger middle adopter segment of the peripheral nerve repair market.

We're pleased to see expanded use of the AxoGen product portfolio across our core markets and increased adoption in new categories of our business. We're introducing our platform for nerve repair to fellows, allowing us to train the next generation of nerve-repair surgeons. We're building 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.

We will continue to expand our platform and develop new nerve-repair applications, challenging the norms of historical repair options and positioning our algorithm as a new standard of care in the peripheral nerve repair market, a market that currently represents more than $2.2 billion in existing applications. And we expect, we'll continue to grow.

Before taking questions, I want to welcome our new investors, and I want to thank the AxoGen team for their commitment to our mission and our values.

At this point, I'd like to open up the line for questions. Operator?

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

Karen, I wanted to start with the comment that you made early in your prepared remarks about distributor challenges and if you could just elaborate on that a little bit. This was the first quarter in a while where your growth was below 40%. So -- and I appreciate you reiterating your guidance of greater than 40%, so clearly, you're expecting a reacceleration into 3Q and 4Q to get there. But I'd would love to just kind of hear what was kind of onetime in nature or what would perhaps cause you to kind of come in below that 40% threshold this quarter? And where did that stack up relative to your plan?

Well, there's a couple things that happened there. As you know, we had built out our direct team in the first quarter -- end of last year, first quarter of this year, and some of those reps are still ramping. So that was part of our projected plan to see in second quarter. Again, we don't give quarterly guidance, but second quarter was still a growth quarter for us with looking at how they typically and historically have played out expecting stronger performance in the last half of the year. And that is our expectation, and in fact, I would say, those direct reps are running ahead and more productive than what our historical numbers have been. So we feel confident in that piece. I think the disruption for us is that, in some of our independent agencies and selected territories, since it's not all of the channel, but in some selected territories, we had some distractions that caused their performance to be below our expectations. And so we're addressing those. And in addressing those is that (inaudible) things including adding some resources to help support them. In some cases, it's training and support for that -- the independent agencies, and in other cases, it was dividing out the territories and allowing them to focus, perhaps, in a small regional area where they have strength but putting in a direct rep where they -- and splitting that territory. Where they were not as strong, it was an important area for us to provide ongoing growth.

Okay. So is it safe to say that this little bit of lingering impact from some other kind of the sales force changes that you implemented last quarter lingering into this quarter, that may be understated where your true growth trajectory is? And that's why you're calling out the direct reps being greater than 40%?

Actually, I guess I don't see lingering issues. When you make a change in a bunch of sales territories, there is some disruption factor, and we definitely saw that in January and February. We saw just that sort of loss of focus that you get when you have a lot of new people and new reporting structures in an organization. That's passed us. I don't see any of that now. But what we do still have going on is that 50% of our direct sales teams that are new with us are going through a learning curve and a conversion curve. And if I put a little color on that, historically, when we brought reps -- a new rep into a territory, we brought them into a territory, if you go back a few years, it often would have very little base business, and we've talked about how they would expect to break even within a year. And what's happened was that rep would came into that territory, of course, the first couple of months are training, so there's not a lot of productivity in the first couple of months. Then they start to hit the ground running. They would have grown their revenue in those first few months and then, historically, what we saw was they hit the Valley of Death where all their surgeons went into their wait period, and they didn't have any business. And so in a later period, they would drop, and then they would start to come up towards the end of the year. Today, we see an improvement in our productivity because they're handed a base of business already because we're splitting territories or there's some base and a conversion from a distributor. And so they have a base. They're both maintaining that base and continuing to add incremental revenue that more than pays for their cost of adding that rep in that first year. In addition, we don't see them hitting that Valley of Death. So we don't have a sort of low point where they're worried if they can make house payments and we're worried that they're not going to show quarter-to-quarter growth. We are seeing that they continue to grow, and it's particularly back-end loaded. And so that's a big part of why we're confident that we're on track to do what we plan to do in the last half of the year.

Okay, that's helpful. Maybe just one more, if I can squeeze one in for Pete. Pete, you mentioned the pipeline of new accounts was robust, maybe can you quantify that in any way for us? And also just with respect to kind of the cadence between 3Q and 4Q, should we be thinking about a really more 4Q-weighted versus 3Q? Any color there would be helpful.

Well, when you say new accounts, I mean, there's -- where you're say new active accounts, right. Is that what you mean?

I think, yes. Your active -- I think it said active accounts, you added (inaudible) 24%, and you said you had a very robust pipeline or the pipeline grew or something.

Yes. So what we say is that the active accounts continue to grow. And again, the delta between the percentage of growth that we have in the active accounts and the revenue growth is a good indicator, and that 36% to 24% gap is a good indicator of the fact that we are -- that our average revenue per active account is continuing to increase, and the penetration of our active accounts is continuing to increase. So we'll continue to see that delta. Again, as Karen mentioned, as all these new sales reps continue to get through their first 3, 6 and 9 months, new sales reps are always developing new accounts. So we have lots of optimism that we'll continue to see growth in active accounts as a catalyst and then part of what's going to drive our confidence in the back half of the revenue growth. And then we also do talk about there is a robust pipeline of accounts that haven't hit the active account list yet that are in some stage of evaluation, and we're seeing that continue to grow nicely and should continue to funnel more accounts into that active account list over the next 6, 12 and 18 months.

Our next question is from Raj Denhoy with Jefferies.

Wonder if I could maybe drill into this issue with the distributors a little bit more. You mentioned that there was distractions, and I'm sure there's a lot of questions as to what exactly that was that caused the underperformance in that segment of your sales force. So is there anything more you can give us just to give a little comfort that this is temporary and that you've put it behind you?

I don't think there was one cause. I think it's the things that can happen in a sales organization, especially in -- with independent agencies in that they can get focused on other products. We're not the primary thing in really any of their bags. And so they're providing our product as a service to the people that they -- and surgeons that they already know. So it was only a targeted few of them that had the distraction, but -- and it wasn't all one thing. So it really is just digging in and solving that problem. And as I said, in some cases, it was something that we felt that the independent agency still has a strong value to us and is committed to the line, and we're providing additional resources to get them through that. In that case, it was some new people and their team. So we wanted to make sure that we could provide them training and get -- and help them come up the learning curve. In other cases, we dug in a little bit and decided that they had enough focus in other products that we weren't going to get the attention that we needed, and we traded them out and put in a direct rep. And these are all or part of their territory.

Okay. But I guess you know, as you're probably going to gather, or you might have already gathered, I mean, the result in the quarter of 36% was below the at least 40% guidance, which you've reiterated several times this year. And I guess, I'm just trying to again gauge this level of that we can get back that this distraction in the distributor side of your sales force has been rectified, and as you look into the third and fourth quarter, how do we get comfort as people on the outside that you can actually return to that level of growth. And to follow onto that is given that this has now happened in this segment of your sales force, how do you -- how does this not happen again, in a sense, how do you get these people perhaps more engaged? Or does this take you've been having to perhaps go direct in more segments as opposed to relying on distributors?

Well. First, I'll focus on the 80% of our revenue, which is really the direct channel. So that's the portion of the business that we have clean and direct control over, and that's an increasing part of our business. Doesn't mean that we aren't going to be a hybrid model. The reason we think we're going to be a hybrid model over the long term is because the trauma is by design geographically spread out. And there are some selected trauma centers that are very good trauma centers, but they're geographically difficult to reach and maybe not concentrated enough. Examples are Alaska, Hawaii, Puerto Rico, parts of South Dakota. There are trauma centers in each of those locations, but no one of those in our current call pattern is probably large enough to put in a direct rep, at least at this point. And so what we're really doing is rightsizing what we consider to be some of our independent territories to say we definitely want strong partners in those locations, but in other areas, where we may not be getting the focus, we're going to continue to divide out some of the territories and transition to direct reps, and you've seen us do that over time while the number of independent agencies has stayed about the same, actually, over the last year. The amount of trauma centers that they cover has actually gone down because we've been dividing out their territories, and that's where some of the base has come for many of the direct reps that we've added. And that continues to be our strategy. You can see that we're planning to add some more reps over the rest of the year. They'll come from dividing either distributor or independent agency territories or our direct territories. We still also plan to continue to split territories when they approach $2 million in revenue number on an annualized basis. We think that is where you might start to see some dampening of growth, and that's obviously our goal is to continue to drive significant growth unless we don't want to have that. So we set the expectation with our direct team and do execute such that we split territories when they're somewhere between $1.5 million and $2.5 million. So with all those things combined, I think we're in a good spot having addressed these. We won't eliminate all of our independent distributors, but we will be less reliant on that portion of the channel as we continue to grow.

Okay. And sorry, just last one. As we look at the model on the back half of the year, to get back above 40%, you have to grow north of 40% because you're a little below that in the first half. Is some of this going to linger now into the third quarter, and then you'll have a particularly strong fourth? Or how should we really think about the back half?

Yes. Look, we just think the back half is going to be -- is going to continue to be stronger. I think, again, we don't give quarterly guidance, but I think if you just look at where you -- where we would need to be, it certainly suggests we're going to get back over 40% in both quarters and moving north in that range as well.

Our next question is from Dave Turkaly with JPM Securities (sic) [JMP Securities].

Just quickly back, follow up on the agencies, the 19. Can you give us a broad estimate how many people are working at those places today? And then it sounds like -- I know that number's been fairly consistent, and so this wasn't anything that came up with sort of new early -- ones that were more recently added, but maybe it sounds like the splitting of the territories the same thing that caused disruption in the direct might have caused some disruption there. Is that the right way to think about it?

So in the last question, no. I -- the distraction, actually, I think was external to us, and our solution was to split the territories. When you -- all of these almost -- I think this is the right way to say, all of these agencies have multiple people in them that carry our product, but they range in size quite a bit. Some of them are smaller with only 2 sales associates. And they can be as high as more than 10 to 12 associates carrying our product. They also have quite a bit of variation in geography. Some of them are really a few cities, and others have multiple states. And so what our plan is, is to continue to look at these. And where they perform and do a great job and continue to drive the kind of growth that a direct rep does, I'm very happy to work with them. Where they don't hit their quota and they underperform or get distracted with other aspects of their business or hiring new people and get distracted, then our drive it say that they may not be able to carry our product. And we're very upfront with them about that, that says it's all about hitting the number. And I think they understand that's their job and -- in this type of relationship. And hopefully, we have a good enough communication channel that we can continue to talk to them to say, "Well, if you see something coming, then we'll go ahead and trade it out." I mean, that's really what our goal is, is to end these things in a smooth transition for the people that are their customers as well as our customers. Remember, they call on these customers for other products as well, and they don't want to leave them high and dry. So we have a good win-win to try and do an effective transition in that case.

Got you. And then, sorry to get so technical here, but just over 40% of the direct sales force leaves a lot of room for what the actual number was. I was wondering if you might want to -- if you could kind of quantify, are we talking 45%, 50%? Any color around how well the direct channel grew to give people comfort that 40% is the right number for the year.

Well, no. It's working (inaudible) to grow low to mid-40s on the direct channel, and they're doing very, very well. And what we're really encouraged with is the fact that these new reps, as Karen have talked about, are coming in with a good base of business, and they're growing from that. And so we're seeing really strong initial productivity from our newer reps that we brought on. And as they get through their 3rd, 6 and 9 months with the company, it's -- it gives us a lot of optimism as we look at the back half of the year.

(inaudible) the greater than 40%, with that, we mean, that's their organic growth. Because there's also a bigger number than that. If you do the math, it's because we're adding in some of the distributor territories that we traded over, but their organic growth even with the newer associate is greater than 40%.

It's good to hear, and I appreciate the color. Last one, just quickly. Obviously, this new facility, next year people, obviously, have you kind of exceeding sort of $100 million in revenues, and I guess I'd just love to get color on sort of what kind of capacity you think you'll have with this new facility. Do you see a -- the ability to kind of cover what people might expect for the next 5 years, 10 years? Any color on how much you could process of both Avance and Avive with this facility up to speed.

It's a great question. We're really excited about this building. It's 70,000 square feet as it is with plenty of capacity within the current 4 walls of it to meet our needs over the next many years. And then, one of the reasons why we really like this place is because it's got the room where you could essentially double that 70,000 capacity down the road if you ever thought you needed to. So we've got an opportunity to make a long-term decision here that will certainly handle our capacity needs for the long term.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.

Thank you. And I want to thank everyone for joining us on today's call, and we look forward to talking with many of you at one of our upcoming investor events. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.