Treace Medical Concepts Inc (TMCI) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Treace Medical Concepts First Quarter 2021 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Vivian Cervantes, Investor Relations. Please go ahead.

Thank you, Joelle. Good afternoon, everyone, and welcome to our first quarter 2021 earnings call. Participating from the company today will be John Treace, Chief Executive Officer; and Mark Hair, Chief Financial Officer.

During the call, we will offer commentary on our commercial activity and review our first quarter financial results released after the close of the market today, after which, we will host a question-and-answer session. The press release can be found in the Investor Relations section of our website at investors.treace.com. This call is being recorded and will be archived in the Investor section of our website.

Before we begin, we would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to material differently -- to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Treace assumes no obligation to update these 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 prospectus filed with the Securities and Exchange Commission on April 26, 2021, in connection with our initial public offering.

With that, I will now turn the call over to John.

Thank you, Vivian, and good afternoon, everyone. And thank you for joining us on our first earnings conference call as a publicly traded company. On behalf of the Board and management team of Treace Medical, we would like to take a moment to acknowledge all who supported us and to welcome new shareholders in our journey to drive market adoption of our novel and proprietary Lapiplasty system.

At Treace Medical, we're just getting started. We were addressing a market where there is a large unmet need. Relatively early in our commercial efforts, we estimate we penetrated about 2.5% share of the estimated 450,000 annual bunion surgical procedures in the U.S. and about 1% of the 1.1 million annual surgical candidates in the U.S., translating to a $5 billion-plus opportunity. So we have a long runway ahead of us.

In the U.S., bunions affect approximately 65 million individuals, and they generally increase in severity over time. From this population, about 4.4 million patients seek medical attention for their bunions each year. Of these, about 1.1 million are considered surgical candidates. This population often suffers from symptoms that worsen over time, including severe and debilitating pain, emotional burden and limited mobility. Yet only 450,000 of this group choose surgery given limitations of traditional surgical procedures.

Bunion surgeries perform to restore a foot's natural anatomy and in doing so, relieve pain so that patients can get back to their normal lives and activities. In the past, it's been thought that bunions are simply a painful bump of bone on the side of the big toe that can be shaved off. However, more recent clinical sciences demonstrated that bunions are actually complex 3-dimensional deformities originating from an unstable joint in the midfoot known as the tarsometatarsal joint, and it's this unstable joint that allows the entire metatarsal bone to both shift and also rotate out of alignment, producing the bump we associate with the bunion.

In fact, recent studies indicate that 87% of bunions have this rotational component to the deformity, and that failure to correct that translates to a 10x greater risk of the bunion returning. And it's this rotational component that's been historically overlooked in traditional surgical procedures, contributing meaningfully to the high-observed recurrence rates.

Approximately 75% of bunion surgeries today are corrected with procedures known as metatarsal osteotomies, where the metatarsal bone is cut in half below the bump and the bump is shifted inward. This is primarily a cosmetic fix, in that it does nothing to address the unstable joint, which, again, is the origin of this deformity and fails to reliably address the important rotational component. Due to these shortcomings, metatarsal osteotomies are associated with high recurrence rates, some as high as 78% in more recent clinical literature.

The alternative conventional treatment known as Lapidus Fusion is performed in approximately 25% of bunion surgeries today. Lapidus Fusion is very different from a metatarsal osteotomy, in that it attempts to realign the entire metatarsal bone while addressing the unstable joint as we do with Lapiplasty. That said, it is a much more technically challenging and sometimes even volatile freehand operation and one that is not historically focused on correcting the important rotational component of the deformity. As such, outcomes tend to be inconsistent from case-to-case and surgeon-to-surgeon.

Given the unstable joint is secured in a Lapidus Fusion, this procedure is generally associated with lower recurrence rates than osteotomy, although Lapidus recurrence rates as high as 46% have been cited in the clinical literature. In addition, Lapidus is typically a hard-sell to patients as it involves a much longer and more restrictive recovery than an osteotomy, with up to 6 to 8 weeks nonweight-bearing and often in a cast. For these reasons, Lapidus Fusion has traditionally been reserved for only the most severe bunion patients, where an osteotomy isn't a viable option.

It's against this backdrop that we developed our novel Lapiplasty 3D Bunion Correction system, which is a combination of proprietary instruments, implants and surgical methods designed to empower surgeons to consistently correct all 3 dimensions of the bunion deformity, including that rotational component and address the unstable joint. This comprehensive approach delivers significantly lower recurrence rates and allows patients to weight-bear quickly, typically within just a few days, to a couple of weeks, in a postoperative boot.

To provide support, build awareness and drive adoption of the Lapiplasty procedure, we've embarked on several programs, including clinical studies that provide a body of evidence for our novel therapy. In 2018, we initiated the ALIGN3D prospective, multicenter study to evaluate for consistent and reliable correction of all 3 dimensions of the bunion deformity with Lapiplasty as well as maintenance of the correction following a rapid return to weight-bearing protocol. The primary effectiveness end point of this study is recurrence at 24 months post-surgery.

At the recently concluded American College of Foot and Ankle Surgeons Annual Scientific Conference, we were pleased to announce positive interim data on the ALIGN3D study in a podium presentation. Data on 128 patients showed consistent positive radiographic and patient-reported outcomes starting at 6 weeks and maintained at 12 months. Building on our previous clinical studies, only 1 out of a total of 72 patients demonstrated a recurrence at the 12-month follow-up point for an implied recurrence rate of just 1.4% in this interim analysis.

While we still have a ways to go with our primary end point of recurrence at 24 months post-surgery and a final patient readout in the first half of 2023, we are encouraged by this positive trend that builds upon our prior clinical data sets. We believe the data on Lapiplasty's recurrence rate compares quite favorably to those reported in the literature relative to both osteotomy and Lapidus Fusion.

Importantly, ALIGN3D interim data also showed an early return to weight-bearing with a boot at approximately 8 days versus 6 to 8 weeks for many traditional Lapidus procedures. The data also demonstrated significant improvements in pain reduction and quality of life measured at 6 months and maintained at 12 months. As such, we are optimistic that our Lapiplasty procedure satisfies the needs of patients who seek treatment to relieve the pain, reduce mobility and quality of life caused by their bunion deformity.

We are encouraged by our growing body of clinical evidence, in addition to real-world data from more than 28,000 Lapiplasty procedures performed through Q1 of this year. Early in our commercial efforts, we note traction in our patient and surgeon education initiatives, which are also benefiting from positive testimonies and word-of-mouth. All combined, we believe we are on solid footing to serve the unmet need of a large underpenetrated market with our Lapiplasty system designed to comprehensively address the bunion deformity; strong intellectual property covering our surgical methods and instrumentation, creating high barriers; differentiated clinical data sets; an expanding direct sales team; active surgeon education programs; impactful patient awareness initiatives; and favorable reimbursement economics.

Net-net, we aim to deliver premium quality care with data demonstrating a more reproducible and effective surgical procedure to bunion sufferers. With approximately 2.5% market penetration of the estimated 450,000 bunion surgeries performed annually in the U.S., we believe we are well positioned to broaden adoption of our Lapiplasty system, and we remain cautiously optimistic as the U.S. returns to normalcy in 2021.

With that, I'll now turn the call over to Mark to go over our financial performance. Mark?

Thank you, John. And good afternoon, everyone, and thanks again for joining us for our first quarter 2021 earnings review. Revenue increased 66% in the quarter to $18.7 million, up from $11.3 million a year ago and at the high end of our $18.5 million to $18.7 million range provided as preliminary Q1 results in our prospective -- prospectus filed with the SEC on April 26. The increase was led by our expanded customer base and higher utilization rates, which grew the number of Lapiplasty Procedure Kits sold, particularly as we exited the quarter.

In the first quarter, sales of Lapiplasty Procedure Kits were 3,503, a 60% increase versus the prior year's first quarter, with a blended average selling price of $5,340, which was a 3.7% increase over the first quarter in 2020. The number of active surgeons performing at least 1 case in the trailing 12 months in the quarter increased 29.7% year-over-year to 1,354, with utilization improving 9.5% year-over-year to an average of 9.2 Lapiplasty Procedure Kits per active surgeon in the trailing 12 months.

In the first quarter 2021, employee sales reps, representatives, our direct sales channel, generated approximately 44% of total revenue in the quarter versus an average of 35% for the full year 2020. Gross margin increased to 82.2% in the first quarter of 2021 compared to 78.8% in the first quarter of 2020. The 340 basis point gross margin expansion was due to increases in the number of Lapiplasty Procedure Kits sold, blended ASP and operational efficiencies.

Total operating expenses were $16.8 million in the first quarter of 2021, including sales and marketing expenses of $12.1 million, research and development expenses of $1.9 million and general and administrative expenses of $2.8 million. This compares to total operating expenses of $10.1 million, including sales and marketing expenses of $7.3 million, research and development expenses of $1.4 million and general and administrative expenses of $1.3 million in the first quarter of 2020.

First quarter net loss was $2.6 million or a loss of $0.07 per share compared to a net loss of $1.8 million or a loss of $0.05 per share for the same period in 2020. Cash and cash equivalents were $16.2 million as of March 31, 2021. Pro forma cash, including net proceeds of $107.1 million from our initial public offering completed in April, were approximately $123.3 million.

Let me turn to our outlook for 2021. We project revenue for the full year 2021 to range from $87 million to $92 million, which represents approximately 52% to 60% growth over the company's fiscal year 2020 revenue of $57.4 million. Our outlook assumes continued normalization of revenue trends to pre-pandemic levels in the back half of the year. With recent strength seen in March, Q1 came in better than we anticipated. Therefore, while we typically see a step-up in Q2 revenue over Q1, we now project Q2 revenue to be roughly in line with revenue reported in Q1 as we continue to emerge from the pandemic in the first half of the year.

As John mentioned, we believe we are well positioned to drive adoption of our Lapiplasty system, and our 2021 outlook reaffirms our commitment to focused execution and growth in our business.

With that, let me turn the call over to the operator to open the line for your questions.

(Operator Instructions) Our first question comes from Robbie Marcus with JPMorgan.

And congratulations on your first quarter public.

Thank you. Hey, Robbie.

Thank you.

So it sounds like second quarter is going better than maybe you thought going into the IPO. I was just hoping you could give us an update on what you're seeing in the market so far in second quarter here as it relates to volume recovery.

Yes. So as we mentioned, we're projecting Q2 to be roughly in line with revenue reported in Q1. And we believe that we're still in that transition time related to -- really our emerging from COVID, so forecasting the business is a little bit more challenging than usual. You may have heard that from some others. So while we are really encouraged by the Q1, especially the latter part of the quarter, it's somewhat difficult to sort out the backlog from the normal demand and how those trends will play out in Q2.

With all that said, we think that it's doing well, and we like the activity that we're seeing. So that's why we're thinking roughly in line with Q1.

Great. And as revenues move up, how are you thinking about the trend of expenses over the balance of the year?

Yes. So the trend of expenses, I think as we think about how we came in, in Q1, it's going to be a similar pattern. Some of our G&A expenses will continue to increase as we are a public company now. But a lot of the trends that we see in Q1 will continue. So not a lot of shifts or changes from what we reported.

Our next question comes from Richard Newitter with SVB Leerink.

Maybe just to start, can you -- thanks for the guidance this quarter, appreciate that. Can you maybe talk a little bit about the underlying assumptions in terms of active surgeons, how many you expect to hire for the rest of the year, utilization and ASP?

Yes. So there's a couple of questions there. So you're talking about active surgeons? Or is it the active sales reps, do you mean, and how many we're hiring for the rest of the year?

Or what are some of the key assumptions as you build up to the range, the lower and the upper ends of the range, or pitching to the balance of the range as you talk about price and utilization, rep hiring, how many accounts do you expect to bring on? Just any of the assumptions that you use to build up there.

Yes. So -- yes, thanks for the question. So a lot of this is going to come back to some of those key metrics that we've talked about in the past, which are really the increase in new surgeon customers, our overall blended ASP and really that utilization rate. And so we've seen that uptick in utilization, which we love across a broader base of surgeons. So as we continue to see those increases year-over-year, that's what's going to really play a factor of whether we're on the low or high end of that range that we just talked about.

Okay. And I'm just curious, anything that you saw in the first quarter and even into the early part of the second quarter that is surprising you or an interesting trend that you think is worth calling out, just we're in this recovery zone. So I'm just curious if there's any kind of behavior on the consumer or doctor end? Is it more osteotomy, is more Lapidus Fusion, that are kind of taking the baton during the recovery? And then also, if you could just talk to the cadence for 3Q and 4Q as you think of the full year guide.

Yes. So as far as -- we talked a little bit about as we emerge from the pandemic, there -- it's a little bit more challenging to predict what's happening out there. With that said, we've been encouraged with Q1. I don't know that there's a dramatic shift in osteotomies versus Lapidus versus Lapiplasty other than we've had a nice growth year-over-year, Q1 versus last year. And we're projecting what we said for Q2 to be a substantial growth year-over-year as well.

So I don't know that we're seeing any of that major shifts in the marketplace. We're not really giving specific guidance on Q3 and Q4 other than that we're on track and we're feeling good about the year such that we increased our overall guidance for the year. So I don't know if -- that we have too many comments right now about Q3 and Q4, but we'll see how Q2 continues to unfold.

Our next question comes from Andrew Ranieri with Morgan Stanley.

Congrats on your first quarter coming out of the gate as a public company. But just to start, just out of the recent Foot and Ankle meeting, if you could just talk about the feedback that you're getting from surgeons. You presented the ALIGN3D data, the interim results, but just how is that resonating among your current utilizers and even just newer surgeons? And how did the -- how has this conference maybe compare to some pre-COVID? Are you kind of getting -- are you seeing more demand for your training and education initiatives? Just any sense there.

Yes. Hey, Drew. It's John. Yes, thanks for the question. I think, in general, the ACFAS Conference was sort of lightly attended. They had some limitations this year from a physical standpoint, but it was also offered remotely. So they did have a pretty good turnout. I think the news about our ALIGN3D, interim results, permeated through the meeting a bit.

And as the surgeon that presented the data relayed to me, he just said this is just continuing to build upon your body of clinical evidence that will slowly work its way towards convincing more people that this is the right treatment for more of their bunion operations. So I think, in general, that's -- it wasn't a firework display, but definitely helpful incremental data, and that interim data looks very good comparatively to the other procedures.

Great. And Mark, this might be more for you, but just with gross margins at 82% for the quarter there, kind of getting to pre-COVID levels, but can you just talk about the sustainability of gross margins through 2021? It sounds like ASPs should likely be stable. But what are you thinking about for gross margins going forward?

Yes. Thanks, Drew. Great question. So we definitely have our eyes on several different factors here as we're coming into the year. One is just the overall cost of goods and materials that go into our products. And so we're keeping our eyes very wide open on that, that, that could have an impact on gross margin if we do have that inflation, and there's a lot of inflationary concerns. And we've seen a little bit of that.

And so there is potential that, that may have some impact. We've also talked a little bit about as we continue to penetrate and get into larger hospital networks, that there could be some pricing pressure from those customers. But that would be the right thing for us to do. So overall, we're feeling pretty good right now about our margins going into -- going forward into Q2 and hopefully, for the back half of the year as well.

(Operator Instructions) Our next question comes from Rick Wise with Stifel.

Let me start off with -- if we could talk about the sales agency conversion. If I remember correctly, in the fourth quarter, something like 1/3 -- a little of 1/3 of revenues came from your direct rep, 65% independent sales reps. And I know you've said that your goal is to have the majority of revenues over time eventually come from the direct sales channel. Just help us understand where are you now with that cadence, that evolution. And just remind us how that transition is going to unfold this year, at least.

Sure. Rick, this is John. I'll take that one. The -- we ended the year, last year for full year, around 35% mix, ended Q1 at 44%, and we continue -- we're going to continue to build upon that through this year and into next year. It will be a progressive process. And we will have a larger percentage of our revenue coming from our direct sales channel. That said, as we've discussed before, we have some excellent, very strong independent agency partners, who we believe will be with the company for a long time. They're very supportive of our program and hitting the numbers that we need them to hit. So that's -- I hope that answers your question there.

Yes. Definitely. And the -- on the product front, can you just give us an update on the Mini-Incision System launch? Obviously, the Mini-Incision launched in 2020 took place. I expect a more full release in '21. We're halfway through the year. Where are we in terms of penetrating the existing surgeon base? And where should we be by the end of this year? And just remind us about pricing -- the impact on pricing and margin. Is that one of the factors that helped pricing in the period?

Yes. It actually did have -- it was definitely a favorable tailwind to the pricing. It didn't elevate it in its own. There were multiple factors going in there, including more of our accessory products being sold and just a higher average selling price of our base kits as well.

As far as the Mini-Incision-System itself and the clinical uptake, I think it continues to gain more traction and more broadened acceptance. We're seeing a lot of great x-rays and clinical pictures of some very small incisions and surgeons enthusiastic about it. So I think it's going to continue to build. We, as we communicated before, expect to be more broadly available in the back half of this year. We're still doing that progressive rollout and training more and more docs, and there, new doctors are starting to implement it in their practice and existing surgeons that have already been users of the Mini-Incision System are finding more ways to apply it.

But it's still not a swap-out for our conventional Lapiplasty. It's a patient-selective application, and I think that's the way we're going to see it for the future.

I'm not showing any further questions at this time. I would now like to turn the call back over to Vivian Cervantes for closing remarks.

Thank you. On behalf of Treace Medical, thank you, everyone, for joining us today. This concludes our call, and we look forward to our next update following the close of the second quarter 2021.

This concludes today's conference call. Thank you for participating. You may now disconnect.