Elutia Inc (ELUT) 2021 Q4 法說會逐字稿

Hello, and thank you for standing by. Welcome to Aziyo Biologics Fourth Quarter and Full Year 2021 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to Leigh Salvo with Investor Relations. Please go ahead.

Thank you, and thank you all for participating in today's call. Joining me are Ron Lloyd, Chief Executive Officer; and Matt Ferguson, Chief Financial Officer. Earlier today, Aziyo released financial results for the quarter and full year ended December 31, 2021. A copy of the press release is available on the company's website.

Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical facts or relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and product pipeline development, expected future product launches and milestones and expected results and performance of our partnership and commercial products including patient outcomes are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, including Aziyo's quarterly report on Form 10-Q for the quarterly period ended September 30, 2021, and such factors may be updated from time to time in Aziyo's other filings with the SEC, including Aziyo's annual report on Form 10-K for the fiscal year ended December 31, 2021, to be filed with the SEC acceptable on the SEC's website at www.sec.gov.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 3, 2022. Aziyo Biologics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

Also during this presentation, we refer to gross margin, excluding intangible asset amortization, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available on the company's earnings release for the fourth fiscal quarter and full year ended December 31, 2021, which is accessible on the SEC's website and posted on the Investor page of Aziyo's website at www.aziyo.com.

With that, I'll turn the call over to Ron.

Thanks, Leigh. Good afternoon, and thank you all for joining us. I'm incredibly proud of the progress we've made in setting up 2022 as a breakout year for Aziyo. By the end of this month, we anticipate submission of a 510(k) application for CanGaroo RM, our next-generation envelope, and continue to plan for this product launch in the second half of the year. Targeting an estimated $600 million annual addressable market, we believe CanGaroo RM has the potential to reach more than $100 million in annual revenues and be a core driver of our value creation over the next several years.

In parallel, we've continued to advance SimpliDerm, our soft tissue reconstruction product as well as our orthopedic and spine repair platform through a combination of product development, clinical data, expanded market access and new distribution partnerships. These products not only contribute to our top line revenue today but are additional drivers of future growth. And in December, we completed a pipe financing that yielded net proceeds of approximately $13.8 million, which enables us to further scale our commercial activities, generate data through our ongoing clinical studies and support the remaining development costs associated with the filing for CanGaroo RM.

As we reflect on 2021, undoubtedly, our team navigated through unprecedented challenges, both from the enduring disruptions associated with the pandemic as well as the FiberCel-related recall. Despite these extraordinary headwinds, the goals and time lines that we've been working towards since our decision to become a publicly traded company in 2020 have remained largely on track. I am confident we have the right levers in place to ensure Aziyo's success and deliver long-term value to our customers and shareholders.

With that as the backdrop, I'll now provide highlights and updates for each of our product portfolios, starting with our flagship product, CanGaroo. The momentum we started to see in the second half of the year carried through most of the fourth quarter. As a reminder, our CanGaroo and cardiovascular products are sold primarily through a direct sales force of approximately 30 representatives. This organization leverages our partnerships with Boston Scientific and Biotronik to enhance our presence throughout the United States. The investments we've made in our commercial organization have translated to significant growth already. But more importantly, we believe the experience and relationships of this group will be a critical asset in driving a successful launch of CanGaroo RM.

As we've discussed on previous calls, we also benefit from multiple agreements with major GPOs and healthcare delivery systems, especially CanGaroo's designation by Premier as a breakthrough technology. During the fourth quarter, we continued to onboard individual Premier member hospitals as new customers, which is an important driver of our growth in the CanGaroo business. Utilization within existing accounts also increased in the fourth quarter, demonstrating that physicians are seeing the benefits of the only biological envelope available on the market. We expect this momentum will continue to expand in 2022.

To further validate CanGaroo's unique biological remodeling benefits, we continue to enroll patients in our HEAL and De Novo clinical studies. As a reminder, the HEAL study compares patients with the CanGaroo envelope against patients with either a synthetic envelope or no envelope at time at CID changeout. The CanGaroo registry study follows De Novo CanGaroo or no envelope patients for up to 5 years. Based on current enrollment trends, we hope to have interim readouts from both studies later this year. And most importantly, we expect FDA submission by the end of the first quarter for CanGaroo RM, our next-generation biological envelope floated with the antibiotics rifampin and minocycline in a dissolvable polymer ring. We are confident this enhancement will drive further utilization and significantly improve our competitive advantage within hospitals and major healthcare systems in the U.S.

We continue to receive feedback from potential customers that this will be a compelling offering once cleared for sale. Notably, in a recent market research study among U.S. electrophysiologists currently using envelopes, more than 80% indicated they would consider using a biological envelope that also contained antibiotics. We look forward to launching CanGaroo RM in the U.S. market given its potential to contribute $100 million or more to our top line in the coming years. We also see upside opportunities to extend the CanGaroo franchise through launches outside the U.S. and by developing additional applications for other implantable electronic devices.

Turning to our other core products. In the soft tissue reconstruction area, we continue to make progress in our SimpliDerm business. Our plan for this product is to generate clinical data, expand access to payers and hospital systems and drive product sales through our national distributor network. Despite the market headwinds in the fourth quarter, we are pleased to see another quarter of significant growth.

Further supporting growth in this part of our business is a recent peer-reviewed publication reporting on a multi-site retrospective study of SimpliDerm use in reconstructive surgery compared to the current market-leading product. The paper reports on procedural statistics and outcomes in more than 100 patients. The study concluded that SimpliDerm is clinically equivalent to the market-leading acellular dermis product. We believe this publication will help increase acceptance of our product, both among practitioners and payers in what is currently an approximately $500 million total market.

And in our products for orthopedic and spine repair, which include ViBone, OsteGro V and our fiber VBM, we saw steady performance through our distribution partners through most of the quarter. Excluding the impact of FiberCel sales, a long-term trend for our orthopedic and spine repair business is headed in the right direction with growth in the high-single digits for the full year of 2021. We are working diligently to complete development of multiple new products as well as to sign new distribution partners for our products within the orthopedic and spine repair business. As the process to onboard new partners takes time, we'll likely see the benefit pay off later this year sitting with a very strong 2023.

Turning to our contract manufacturing business. We continue to see meaningful revenue contribution during the fourth quarter as our partners leverage the tissue processing and development capabilities of our Richmond, California facility. Overall, this part of our business augments our growth while utilizing available capacity at our manufacturing facility and contributes positively to our bottom line.

In summary, as we look towards 2022, we have several important and exciting catalysts ahead. First and foremost, in our CanGaroo business, we have our 510(k) filing and anticipated clearance of CanGaroo RM. We're also expecting data readouts from our clinical trials to support the product lines, remodeling benefits and commercial differentiation. For SimpliDerm, we'll leverage recently published clinical data to expand our customer base and support continued robust growth. In our orthopedic and spine business, new product launches and new partnerships are expected to drive steady growth from the current levels and continue contribution to our bottom line.

And finally, as we've discussed in previous calls, we're pursuing multiple efficiency initiatives across our entire business to increase our margins and improve our productivity.

With that, I'll now turn the call over to Matt to provide a review of our fourth quarter results and outlook for 2022.

Thanks, Ron. Net sales for the 3 months ended December 31, 2021, were $10.9 million, a 13% decrease from $12.5 million in the same period of the prior year. However, excluding the sales of FiberCel, we saw 6% growth over the fourth quarter of 2020. In late December, as was broadly experienced across much of the healthcare sector, the Omicron variant spike had a meaningful impact on our business, which has continued into the current quarter, as COVID-related hospitalizations and labor shortages in the hospital setting impacted patients' ability to move forward with procedures. And while we're starting to see improvement as patients return to hospitals for postponed procedures, we do expect this will have some impact on our sales in the first quarter.

Gross margin for the fourth quarter of 2021 was 31.2% as compared to 48.3% in the corresponding prior-year period. We also look at gross margin excluding the impact of noncash amortization of intangible assets. And on that basis, Q4 would have been 39.0% versus 55.1% in the year-ago quarter. The lower gross margin in Q4 2021 was mainly attributable to increased inventory reserves in our human tissue business, which in total impacted gross margin by approximately 10 percentage points or $1.1 million. Despite gross margins coming in below our target levels over the last 2 quarters, as Ron mentioned, we have a number of efficiency initiatives that are underway, and we expect them to generate meaningful results in 2022. I expect gross margin, excluding intangible asset amortization, to return to 50% or better in the coming quarters.

Total operating expenses for the fourth quarter of 2021 were $11.2 million, a 12% increase from $10.0 million in the fourth quarter of 2020. The increase was mainly due to development costs associated with our CanGaroo RM development program. Loss from operations was $7.8 million for the fourth quarter of 2021 as compared to a $4.0 million loss for the year-ago quarter. Net loss for the period was $9.1 million as compared to a net loss of $5.4 million in Q4 2020. Loss per share in the fourth quarter of 2021 was $0.82 compared to a loss per share of $0.57 in the year-ago quarter.

We ended 2021 with a cash balance of $30.4 million and total liquidity including availability under our revolving line of credit of $32.5 million. Our year-end cash balance includes the $13.8 million in net proceeds from our December equity financing. And including the shares issued in that transaction, we now have approximately 13.6 million shares of common stock outstanding.

Now turning to our full-year results. Net sales for the full year 2021 were $47.4 million, an 11% increase compared to the full-year 2020 net sales of $42.7 million. Excluding the impact of FiberCel, we saw 19% revenue growth over the full year 2020. Gross margin for the full year 2021 was 40.1% as compared to 48.2% in 2020. Excluding the impact of noncash amortization of intangible assets, gross margin would have been 47.3% in 2021 as compared to 56.1% in 2020.

Total operating expenses were $42.1 million for the full year compared to $34.2 million in 2020. Net loss for the full year was $24.8 million, which compares to $21.8 million in 2020. Loss per share for the full year including the accretion of deemed dividends to preferred stockholders was $2.38 compared to $8.88 in 2020.

Turning to our outlook for the full year 2022. We project net sales in the range of $47 million to $50 million. Excluding approximately $4.9 million of FiberCel sales in 2021, this range represents growth of 11% to 18%. The biggest variable in this range has to do with the timing of clearance and launch of CanGaroo RM. The low end of the range assumes no contribution from CanGaroo RM by the end of the year, and the high end assumes clearance and commercial availability during the fourth quarter. This guidance also assumes some continuing impact of COVID during the first half of the year, with procedure volumes largely returning to more normal levels in the second half.

We remain excited about the milestones we expect to achieve in 2022, and we believe we are well positioned to drive growth and shareholder value for years to come. And with that, we'd like to open the call for your questions.

(Operator Instructions) First question is from Matthew O'Brien with Piper Sandler.

I guess, Matt, just for starters, the impact to Q1 that you're kind of expecting in terms of the Omicron softness, and then how that relates to the rest of the year kind of getting to the midpoint of the range without RM. I guess what are you seeing in those new accounts that give you confidence in kind of that step up as we get later in the year?

Sure. Thanks, Matt, for the question. So we definitely did start to see some impact from Omicron as we got into December, in particular, last year. And we have seen it, I would say, so far this quarter, but it does feel like it's tapering off and things are starting to pick up again in the quarter. So I guess as I think about the year, I do think about us ramping up as we go through the year, kind of regardless of the benefit or the contribution that we may get from CanGaroo RM as we get into the latter part of the year. So I mean, hopefully, that's helpful. I guess I would see Q1 kind of being similar to Q4, maybe in that range.

Got it. That's helpful. And then with RM, everybody is excited there. Can you -- Ron, maybe just talk a little bit about what you're hearing from customers as far as the anticipation of that product, the uptake? I'm sure Boston and Biotronik are excited to have it. knowing that you're going to probably roll it out slowly and make sure that things go well, but what kind of appetite is there once you do have that hopefully later this year? And I do have one more quick follow-up.

Sure. Thanks, Matt. Yes, we're very excited about CanGaroo RM. And I think if we look at the product today on CanGaroo, we're actually starting to see nice momentum build on CanGaroo and is due to the remodeling benefits of having a biological product. Again, that's really resonating with customers as we speak today. And we know that when we add an antibiotics to it, we now have 2 benefits from a customer's perspective in terms of the patients that are able to then receive the product and have numerous benefits related to having both the biological and an antibiotic.

And as I alluded to in our comments, we recently conducted some market research. Not surprisingly, the physician excitement to the product is very high with more than 80% of the physicians indicating a desire to want to have both a biological, antibiotic product. So we believe it's going to be a product that brings a lot of benefits in the marketplace. Certainly, the entire Z organization is excited about that. Our partners, Boston, Biotronik are also very excited to have that as an offering as well. And again, as I mentioned earlier, we see it as a key catalyst for growth for the company going forward.

Okay. And then that kind of dovetails into the last question I'll ask. But Ron, you're talking about an exciting '23, and your $5 million is what you lost on FiberCel this year. Hopefully, you have a partner for next year. RM should be a contributor. Those 2 together seem like they could alone be an extra $10 million next year. So you're talking about 14%, 15% midpoint growth this year, excluding FiberCel, I mean, should we think of '23 as 20% plus?

Yes, I don't think we want to get into '23 guidance here from a perspective of the company. But I would just want to iterate back is what you've said, we're very excited about where we're going from a company perspective. We think there's tremendous growth opportunity with the launch of CanGaroo RM. Again, it's a $600 million marketplace. We've got really one competitor that's more than $100 million in sales, a lot of room for market expansion.

And again, the dual benefits of a biologic and antibiotic, we believe, should give us tremendous opportunity to grow that brand. And as you mentioned, we do have other growth catalysts. Just to mention, SimpliDerm continues to perform extraordinarily well, and we continue to believe that will be a key growth component going forward. And as you also mentioned, our viable bone business, we've already been able to go out and sign some additional partners already here in Q1, again, building off our unique platform of our viable bone strategy to best preserve the cells that are in bone reducing apoptosis. And so we think we have the opportunity to, again, bring in additional business through partnerships for that as well. So I think we're excited of where the company is going. We see this, as I mentioned, a breakout year for Aziyo, setting up a very strong 2023.

Our next question comes from David Rescott with Truist Securities.

Matt, I just want to start first on the guidance range that you provided, just some comments around the progression of procedures throughout the year and then some of the assumptions around the contribution of RM in the fourth quarter. And so just what level of penetration, I guess, are you thinking about in the fourth quarter? And when you get to that upper end of the guidance range, does that assume that RM comes in in the beginning of Q4 or maybe towards the back half of the fourth quarter?

Well, Dave, yes, so as we thought about the guidance for the year, the biggest thing that is out of our control that's difficult to predict is the timing of RM clearance, and that's largely going to be in the hands of the FDA. We feel good about the track that we're on in terms of getting the filing done and making that a very high-quality filing. But after that, it's a little bit harder to predict.

So as we were thinking about the range, I would say, the top end of the range assumes that we would have very much of a full quarter worth of contribution. And we would certainly see there's also some factors in terms of ramping up production and getting on contract or getting them on the formularies within hospitals. So there are some start-up effects there. But we're looking forward to that very much. And I guess, at the lower end of the range, if the clearance extends out to the very end of the year, and we have minimal to no contribution for revenue for the year, that would guide us more towards the lower end of the range that we talked about.

Okay. That's helpful. And then I guess, Ron, maybe more on some of the commercialization efforts or the investments you're making around that ahead of the launch. Could you just discuss how you're investing in the business ahead of the launch? And then when you're thinking about either in the back half of the year or into 2023, is there a lot of low-hanging fruit for RM or at least these existing [incomes] that you're currently in? And how do you think about some of this kind of increasing utilization versus going after new accounts once you have the RM formulation approved?

Yes, sure. So as we think about the product, I mean, clearly, there's some low-hanging fruit, we have many customers that said that they would use the product if it also had antibiotics. So I think there's an immediate opportunity to go there. As we think about our launch strategy here, obviously, we're in the midst of doing our launch planning. I would say that part of this is our ongoing investment in data generation as well. So we have 2 studies ongoing right now, the HEAL study and the registry study. We hope to have this year interim readouts from both studies. They'll further, I believe, better demonstrate our remodeling benefits of the product. And again, we think that's an important characteristics to further drive CanGaroo RM growth in addition to antibiotics.

So looking forward to those readouts as well. And then again, we'll make sure that we make the right investments to be able to capitalize on this new product opportunity and to basically look at that in totality. So it's probably at this point a lot premature to get to any specifics as it relates to launch tactics, but we're going to obviously make sure that we do everything we can to ensure that we have the most successful launch of this product.

Our next questions come from Josh Jennings with Cowen.

This is Brian here for Josh. I wanted to ask first about RM. If I look at the review times for your recent 510(k) submissions, I see that the average review time is about 1.5 months. I understand wanting to keep the guidance conservative, but is there a specific reason to assume a longer review for RM? And will you be ready for an earlier launch than 4Q, if you get an early clearance?

Yes. So if you think about CanGaroo RM, it is probably a little bit more complex than your normal 510(k). Obviously, there's a device component and then there's also the drug component. So being a combination device here with the 510(k). So we anticipate probably a little bit more complex. And so we're building a little bit more review time from that perspective. We're hopeful that maybe it goes through faster. Again, we can't predict the FDA. And again, we'll do everything we can to be prepared to launch as soon as possible as it relates to the product. And certainly, having the approval sooner gives us the opportunity to go out and start promoting the benefits of CanGaroo RM from the biologic and antibiotic perspective. So we'll be as ready as we can be for an earlier approval, and hopefully, the FDA from a timing perspective allows us to be on the early end of that approval window.

Great. And I wanted to ask one about the FiberCel recall. So you've commented previously that on the FDA's inspection mid last year without any observations. Is the inspection process definitively done at this point? And is there now an agreement that the recall is really limited to that single lot that's already been identified and acted on?

Yes. The FDA inspection has been completed, again, with no observations. We have moved forward as a company, and we have now raised the bar above industry standards as it relates to donor screening as well as testing of product. And so we believe we, again, are setting a new standard as it relates to the industry. But from an FDA perspective and their inspection and the recall matter, yes, it's contained to the single donor lot.

And I'm not showing any further questions in the queue. I will turn the call back to Ronald Lloyd for final remarks.

Great. Thank you. Just to close, again, I think we're really proud of the progress we've made as the Aziyo team is really setting up 2022 to be a breakout year for the company. We're excited about the number of short-term catalysts that we have, which we believe put us in an excellent position for growth. And as such, we look forward to giving you updates as we go throughout the year. Thank you again for your time today. Take care.

And with that, ladies and gentlemen, we conclude today's program. Thank you for your participation, and you may now disconnect.