Okay. I think we can get started here. My name's Mike Kratky. I'm our senior MedTech analyst over here at Leerink, and I'm very pleased today to be joined by Axogen CEO Karen Zaderej and CFO Nir Naor. So thank you both very much for joining.
Thank you, Mike. Appreciate it.
Yeah, of course. So, you know, it might be helpful just to start with, you know, if you could kinda kick off with an overview of the company for some investors that may be less familiar, some of the key upcoming milestones, and then just the setup for the rest of 2024.
Sure. Well, Axogen is focused in the area of peripheral nerve repair. So we have a suite of products that are surgically implanted to help surgeons do kinda three conceptual things: connect nerves when they've been transected and put them back together to allow functional restoration. Protect nerves from pressure or the surrounding tissue that can alter signal conduction of the nerve, like carpal tunnel. You're probably familiar with that. Or nerve termination. So when a nerve is left in the body, how do you stop it from sending aberrant signals back to the brain, like in phantom limb pain for amputees? And so those are the three things that we try to do working with surgeons across a variety of applications. Now, nerves are all over the body. They're injured in lots of ways. So we've chosen to work in four what we call verticals or applications.
Lots more that we can explore as time goes on, but right now the areas that we focus on are traumatic injuries. These are the things that present into the emergency department and then are repaired by a hand or plastic surgeon. We look at breast reconstruction neurotization, or what we call the Resensation technique. These are women who have a mastectomy and then have a reconstruction allowing them to have a sensate breast rather than just the shape or look of breasts. We work with oral and maxillofacial surgeons, when they do reconstructions due to tumors of the jaw, allowing sensation for that half of the mouth.
And then we've started an effort in the area of, it's a surgical treatment of pain, which is providing a solution for the cause of pain, which may be an aberrant nerve, instead of just sending these patients to the pain center for treating symptoms. And then your question had a lot of things in it, but I'll roll into milestones. You know, 2024 has been already a year of milestones for us. We've had a lot of activities this year that are things that we've worked on for years. And so starting off the year, we moved into our new manufacturing facility that we've been constructing to help us support our transition of Avance Nerve Graft to be a biologic. So we are fully processing all Avance in our new, what we call APC, Axogen Processing Center, which is just a fabulous event.
In fact, in June, we're gonna have the official grand opening. We've been processing there for a little bit, but we'll have the official grand opening, which is very exciting for the whole company. We also mentioned we're transitioning Avance to be a biologic, and we have started our submission process. So we've done the first wave of what's called a rolling submission. And so that marks the actual submission process, and we expect to complete that here by the end of third quarter with all of the submission process. So those alone are two really big milestones, but we also are continuing to grow in our protection market. We launched HA+, Axoguard, HA+ nerve protector, last year and continue to see good adoption and use cases there.
And next month we'll be launching Avive, Avive+, which is another protection product to help where they need temporary protection of a nerve. So kind of action-packed.
Yeah. No, it sounds like it and definitely an exciting time to be involved with the company. You know, I'd love to maybe just start with that on getting your thoughts on the overall commercial opportunity for nerve repair. I mean, when you look at the numbers, this is obviously a huge commercially, you know, addressable patient population. You know, at a high level, how much of an unmet need is there for patients?
We're just scratching the surface in nerve repair. There is a very large opportunity for nerve repair, even if we only look at the four verticals we're in. And again, there's so many places that we can expand beyond this. But in the four verticals in trauma, we're probably single digits penetrated. So there's significant opportunity to continue to expand in trauma. Breast reconstruction neurotization, we've been extremely pleased with patient response and surgeons as a result of that, being very interested in really improving the outcomes and quality of life for patients by adding neurotization as a part of their clinical process and the potential outcomes for patients. And so we see that as a significant growth area for us in the coming years.
Continue to look to apply some of those same patient activation tools into oral maxillofacial surgery so that patients, again, can be advocates for, what's important to them in terms of sensation. And, ultimately, that surgical treatment of pain is at the very beginning stages. So HA+ has been a big plus. There's a pun there.
Yeah.
HA+ has been a big plus in those compression injuries for the surgical treatment of pain. In particular, there's a thing called cubital tunnel. If you ever hit this thing, they call it a funny bone, where it hurts.
Unfortunately, I have, yeah.
Yeah. That can become a chronic condition where your nerve is entrapped and compressed here at the elbow. And Axoguard HA+ Nerve Protector has been a really nice solution for those use cases where surgeons are trying to find a way that can help those patients.
Understood. Very helpful. So, you know, I guess just on this point, based on your commentary with KOLs and kind of the medical community, do you get the sense that the number of patients that are kind of actively seeking treatment in some of these indications has kind of accelerated over the years, or what are gonna be the main drivers to kind of expand this market?
Yeah, I think this concept of patient activation is an important driver so that, again, as I said, I want patients to be good stewards of what's important to them in their healthcare. But the only way they can do that is if they're educated to even know there's a problem. Because very often, and breast neurotization is a great example of that, women did not fully understand that they would have numb breasts when they were going through this whole care pathway. Their first concern, obviously, is they wanna live. They wanna survive breast cancer. But then when they start thinking about what is their life gonna be like after breast cancer, and sensation turns out to be a very important driver to them. They wanna hug their children and be able to feel their children on their chest.
That's an important part of quality of life. And as women start to think about that, we find that this sensation is a big motivator. So for us, we think these tools of applying awareness of the problem and then giving them some education about their choices and then helping them to find a surgeon who can do the treatment is an important part of continuing to grow in these scheduled procedures. Now, on the other hand, trauma's a little different. You don't know today that you're gonna drop a chainsaw on your foot tomorrow or whatever the trauma is, and there's all kinds of things. And so it's very hard to educate those patients so that they can make it actionable.
That's really more working with each hospital and each surgeon so that the surgeon can help guide the patient because they're not gonna be able to find data sources quick enough otherwise.
Yeah. I guess just on that point, I mean, in terms of educating these docs, 'cause to your point, as they come in, it's really gonna be about, you know, the surgeons and the centers that are kind of doing these procedures. You know, what are the initiatives that you have in place to kind of educate the medical community?
Well, we have an extensive surgeon education program and have for a number of years. We think it's really important to continue to train the next generation of hand fellows and microsurgery fellows on advances in nerve repair. And so we run a pretty extensive fellowship training program. In fact, I'm pretty honored that most of the fellowships will continue to send their fellows for this program. It's hard for them to allocate their time, and they think that the quality of what we offer in terms of education is very valuable for their fellows. So most fellows are now trained by Axogen on the nerve repair algorithm. But we also have specialty procedures like teaching surgeons about the breast reconstruction neurotization. That's technically complex.
It takes coordination between both the breast surgeon, who's typically the general surgeon who does the mastectomy, and the plastic surgeon who does the reconstruction. And so we team-teach them. We bring them together and do a training program so that they can get an understanding both about protecting and preserving nerves where possible, but also then how to treat them and manage them so that the patient has the best outcomes or best possibility for outcomes following the reconstruction.
Got it. Yeah, very helpful. You know, I'd love to turn to just your Q1 2024 results, your 2024 guidance. You know, one of the things that stood out to us is congrats on initiating the BLA rolling submission, you know, a couple of weeks back. With that, do you have a better sense of your timing, in terms of the Q3 2024 completion and 2025 approval?
Well, I'd say we're on track to what we've talked about. You know, the rolling submission, we got a lot of really busy people writing and editing and getting into the electronic portal for the FDA, all of the thousands of pages of documentation for the BLA. But I think we're on a clear trajectory for our third quarter complete submission. And then we'll get about 45-60 days after the last module is submitted to FDA, we'll get a response back from FDA that'll give us some clarity on the approval or the PDUFA date or their timeline on approval. We do have the RMAT, Regenerative Medicine Advanced Therapy designation. And one of the potential benefits of that is the opportunity for a priority review. It's not a guarantee. It's an opportunity.
And so we'll find out, again, 45-60 days after our last module is in, if we can get the priority review. Otherwise, for planning purposes, we've been saying we'll think about it as a year.
Understood. You know, you on the commercial performance, you had a solid Q1. What were kind of the main growth drivers behind that in terms of some of the strength? And can you just kind of talk about the seasonality that you introduced there?
Sure. We did have a good Q. We were happy to see things continue with growth kind of a, you know, across the board. We keep thinking about our applications as, it's good to have, a balance across the applications. I think we did talk about that breast continues to be as a percentage our, our, our leading growth area. Trauma is our biggest area, but breast was our leading growth area. So we're excited to see the continued enthusiasm about the, breast neurotization program, continuing to see new adoption, especially driving deeper into what we call our core accounts. We wanna continue to build out centers of excellence in nerve repair where we think about these hospitals as doing really everything in nerve repair across all of the applications and being, again, recognized as a center that does, outstanding nerve repair.
So we continue to focus in on these core accounts as the place that we wanna continue to drive deeper. From a seasonality standpoint, trauma has always had a little bit of an unusual pattern. Trauma, the incidence of trauma goes up as people get more active. And so as we move into the summer months, we typically see a surge in trauma. So if you think about it from a quarter standpoint, you've got first quarter, second quarter, there's a good step up in the incidence of trauma. There's a little bit of a step up in third quarter as compared to second quarter. And then it's flat to down in fourth quarter, and then flat to down again into the following quarter. And so now you overlay our scheduled procedures, which are starting to become a significant part of our business as well.
They follow what many elective procedures do, which is people are worried about the deductible. So they tend to be a little light at the beginning of the year and maybe a little heavier at the end of the year. With one nuance about breast reconstruction is that women very often do not choose to get their breast reconstruction done during the holidays, so it drops off in December. So we do see some shifts in our seasonality. Having said that, in Q1, we saw what I would consider to be expected behavior except for perhaps the last couple of weeks of March. We did see that typically we see a little bit of a lift up at the beginning in March.
We did not see that this year, but I did say in the earnings call, but we saw a nice lift in April, and it seemed that it just sort of shifted into April for a couple of weeks instead of what we typically would see at the end of March. So we've been pleased with the trajectory and happy to see the growth.
Yeah, understood. And, you know, maybe just on that point, you know, you kind of mentioned on the quarterly call that to date in Q2, you'd kind of seen enough strength to say, "Look, this isn't something that we're necessarily worried about being kind of a, a durable, you know, headwind for us." How are you thinking about the overall utilization trends broadly, you know, to kind of give you the confidence that 2024 year is gonna be another year of solid growth?
Yeah, we've been very pleased with what we've seen into the trajectory of the quarter. Again, April was a really nice month. We saw good growth across products and applications. In fact, growth across all areas of the business. But again, the drivers have been breast continues to be a standout with good growth in breast, but also our new products in the area of protection. So both the HA+ Nerve Protector that we launched last year, as surgeons continue to find new use cases there, and we've had a selected surgeon launch on our Avive+, and the full launch will be actually coming up here in June. So excited to see that growth as well.
Got it. Yeah, no, we'll keep an eye on it. You know, the other one I did just wanna kind of ask about was, you know, something we've gotten questions on from investors, but, you know, last year, you kind of made the decision to start providing more disclosures on these trauma versus the scheduled side of the business. You know, this last quarter, that was something that you decided, you know, that's maybe not worth disclosing moving forward. So what really drove that decision, and how are you thinking about ways that you can kind of provide visibility for the street to track utilization?
Well, we'll continue to be very qualitative and talk as I'm talking here about the various areas that we see growth. I'll let Nir, if you wanna talk a little bit about the disclosures as he's joined us as CFO and starting to think about the things that as our new CFO that he'd like to disclose. So I'll pass this to him.
Right. No, thank you. So, you know, one of my top tasks is resource allocation optimization, as we've said, along and then to propel our top-line growth in a cost-efficient manner. And then along those lines, I thought of disclosures that would be then commensurate to that. And I sort of did not really see a best fit between those disclosures, breaking out trauma and scheduled, and this commercial strategy, which basically, again, high-level looks at cost efficiency or cost-efficient growth, and then specifically sales force productivity and penetration into high-potential core accounts. So actually getting this synergy across our various applications and products into accounts that would use multiple ones of them rather than this breakout. So basically getting to high penetration on those accounts that have multiple surgeon specialties and application of our products.
Got it. Yeah, no, that's very helpful c olor. So I appreciate that. You know, I guess just sticking with that point, you know, it's kind of two different elements of the business. So as you think about 2024 and 2025 and beyond, you know, how are you kind of treating the businesses differently between those two different, you know, scheduled versus trauma segments as you kind of think about the different commercial strategies that you'd implement between the two? Are they generally similar? Do you kind of have distinct approaches between the two?
There are some similarities and some differences, if we think about it. So we are very dedicated to this idea that core accounts and growing in core accounts is both the best way to establish a standard of care as well as a way to raise rep productivity and bring our reps up from where they are today to something closer to $2 million or above per rep, which is the goal that we've been working our way up on. And you've seen a nice trajectory of productivity over the last few years. We think we've got a nice growth ramp ahead of us. So those procedures, we tend to be in level one or level two trauma centers. They tend to be academic centers. They tend to have a variety of use cases.
So we can be across all of those applications in many, not all, but many of our core accounts. So that's the similarity. There are some differences. Trauma is, it has some of its own challenges in that the surgeon that you train to do trauma repair actually only does trauma repair a few days a month, because it has to do with the quality of life being on call. And so a very busy on-call plastic surgeon handling trauma would be seven days a month. Some do, you know, four days a month. And so you've got to cover more surgeons different than, to get that conversion process and get all the cases than you do a breast surgeon who comes in and does breast cases basically every week.
The other distinction about trauma is we talk about it like it's one thing, but it's so many different types of procedures and repairs. It's transected nerves. It's crushed nerves. It's nerves that need protection from surrounding tissue. It can be termination due to amputation. So trauma is really a whole lot of different types of applications. And so we've described the adoption process of a surgeon who does trauma as like a stairstep. So even though they might be using Axogen, they might only be using Axogen initially in their digital sensory nerve transections. And then the rep will move them to longer transections and more complex nerve injuries and maybe protection. And so each of those are a stairstep of their adoption curve, which means it's a very long adoption curve of each type of nerve injury type.
Again, contrasting in breast, what we find is there are two or three variations of the breast reconstruction. So that stairstep is a much shorter set of steps.
Understood.
Yeah.
Got it. You know, maybe just to kind of stick with the, the growth drivers, the future growth drivers, and your kind of ability to drive higher penetration within these large markets. I mean, how are you kind of prioritizing some of these different growth drivers specifically for the next kind of 12-18 months in terms of, you know, whether it's hiring and training reps or growing your active and core accounts? What's gonna ultimately lead you to higher penetration here?
Well, when we give our reps sales direction, what we tell them is their first priority is to go deeper in their existing target accounts. Second is to create new, you know, core accounts or larger accounts. And so we say that in those two priorities. Now, in that, we embed; we're thinking about all applications, and we're thinking about new products as well. So we try and measure them on all of those dimensions. It isn't just grow a core account in trauma only. We need to make sure that we're picking up these supporting applications as well to make sure that we're not leaving opportunities behind.
Understood. You know, I know that kind of across your business, you don't have kind of the product-by-product disclosures and the breakouts there. But, you know, could just anecdotally maybe how has the Axoguard Nerve Protector kind of progressed? And can you kind of talk through the strategy to win surgeon mindshare and further penetrate that market?
Yeah, we have been really pleased with Axoguard Nerve Protector in our nerve protection. It is allowing us to expand the use cases. So we've been working in the area of protecting nerves for many years, but we only had what we now call the classic Axoguard Nerve Protector. And, and it's a good product, but we realized that surgeons have multiple reasons that they need to protect a nerve, and we weren't really providing them solutions that met all their needs. And then we needed to go back and segment these opportunities so that we were providing them a more optimized solution. So Axoguard Nerve Protector was introduced because there are areas where you need to both protect a nerve, but that nerve also needs to glide separate from the tissue surrounding.
So the elbow, again, I'm pointing to my elbow, is a great example because your, your nerve is running over a bony channel and moves a lot as you move your arm back and forth. And there are a lot of areas like that where you have large joints and a lot of movement of the nerve. And so the introduction of Axoguard allowed surgeons to suddenly think about those areas where they needed to have that excursion. The HA+ provides a very nice gliding layer as well as some additional tissue separation capabilities for the protector. So what we see is surgeons starting to expand their use cases. Now, there is some cannibalization of our classic Axoguard Nerve Protector, but what we've seen is that's been much less than we expected, and it's actually the growth has been in expanded use cases.
Understood. Now, at this point, I'd love to kind of dive into some of the expectations around the Avance BLA. And I mean, it seems like this has been a long time coming. You know, now more than ever, it seems like there is a very kind of clear path forward from a regulatory standpoint. I'd be really curious to get your sense of, you know, first, is this something when you speak to KOLs that they are thinking could be kind of an uplift in terms of the volumes that they're doing? What does it mean for kind of the commercial standpoint?
Yeah, so from a commercial standpoint, the BLA, well, actually in broad, the BLA gives us a number of advantages. The biggest advantage, from a company standpoint, is that we believe we'll be considered the reference product, which gives us 12 years of exclusivity to not have any kind of similar processed nerve allograft in the U.S. market. So we think that's a tremendous benefit for surgeons to continue to expand their use and understanding of nerve repair using advanced nerve graft. In addition, we think it'll be very supportive as payers continue to think about nerve repair and whether it's experimental or not. So we are fully, we have coverage and coding and payment under Medicare. So there's no issues under Medicare, but there are some commercial payers that still have processed nerve allograft listed as experimental.
We're putting together and have put together a value dossier showing the economic trade-off as compared to autograft. There's been several publications. You can go look at the publications. But we've shown, depending on the population use, that we are either cheaper or the same cost as doing an autograft procedure without the downside where that's just in the surgical episode, without the downside risk of later getting a surgical site infection at the donor site. I can guarantee there's no surgical site infection at the donor site because there's no donor site. So that's a zero possibility. So there's very good financial justification for hospitals to think about this as an alternative to their historical gold standard, autografting.
but then there's also adding in this additional clinical benefit and the review of the FDA in terms of, this is a true approval rather than a release. A tissue, our original registration was as a tissue. It's a release versus an approval process that we think will be supportive for payers to think about, moving us off that experimental list.
Got it. Yeah, no, super helpful. You know, you've kind of alluded to this earlier, but it does seem like there are probably opportunities for indication expansion. I'm curious how you think about that in terms of your strategic priorities from here.
Yeah, there are. Nerves are, that's the fun part of nerves is they're all over the body. They cause all kinds of issues when they're not repaired appropriately. So we spend a lot of time thinking about where do we want to focus our energies next and what are the pipeline opportunities. Now I'm thinking about in terms of applications. There's also a pipeline of new products and product development. So today we talk about sort of three areas that we're exploring from a pipeline standpoint as new applications. One is just looking more at lower extremities. So there are a lot of issues associated with foot pain that are actually nerve-related.
A common one is a thing called a Morton's neuroma, which is an abnormality that comes in your feet, especially with women with pointy-toed shoes like we often like to wear like these, that crushes your toes together and creates this painful neuroma. So our post-study is actually on Morton's neuromas that show that if you remove that neuroma and you cap it, you have a statistically significant lower episode of pain doing this approach. There's a number of other things that are related to foot pain that we think would be beneficial in the Axogen portfolio. So that's an area we're exploring. We're exploring prostatectomies. So these are the erectile dysfunction and incontinence associated with the prostatectomy are nerve injuries when you remove the prostate. And not because you had prostate cancer. It's because the nerves were injured in that surgical procedure.
And so we have, we're in the process of gathering some retrospective data to make a decision about moving forward in prostatectomy. I think that would be very, another area of patient activation where patients would be very motivated to, to not have those complications. And then last is an area, called corneal neurotization. So this is patients that have neurotrophic keratitis, which is a fancy way of saying really bad dry eye. And so, so that is, also a nerve issue. There's not signaling to cause you to tear. And so ultimately, the cornea ulcerates and can cause blindness. And, and we've got a selected number of, clinical procedures that have now been done that we're gathering the clinical data, looking at, again, retrospectively, but looking at, the opportunity to add that as a way that we can, again, help patients, with another another nerve solution.
Yeah, very exciting. We'll stay tuned for updates there. You know, a couple of minutes remaining. So Nir, I'd love to jump to you and maybe just kind of ask, you know, in terms of the gross margin, you know, you reiterated the guidance after a solid Q1 print. So would it be helpful to discuss maybe some of the drivers within the guide and how we should be thinking about the sources of gross margin expansion from here?
Right. So as we mentioned, the gross margin in the second half of the year will be lower than the first one. Why? Because we're selling products during the first half of the year that were produced in the previous processing facility. The new processing facility enables us biologic, the BLA process of Avance. And in addition to that, allows us for long-term expansion. So for the long term, it's a good thing. In the immediate term, it has lower capacity utilization, and it's also something that is new to us. Hence, margin will go down in the short term. As capacity utilization increases, and as our ramp-up and understanding of the facility and our ability to run it in a more efficient manner improves, margin is then expected to gradually go up.
Understood. And, you know, maybe lastly, just in terms of your getting to profitability, this is going to be something that's, you know, increasingly something that we have visibility on. How are you thinking about the ability to drive operating leverage from here, and how much of a strategic priority is getting to profitability?
It is obviously, as I mentioned, very high on my, on our radar screen, and mine is the CFO. That said, the key lever to achieve that is, as we mentioned, cost-efficient top-line growth, salesforce productivity, another key lever. In addition to that, we have several costs that rolled off. For instance, royalties on Avance rolled off towards the end of last year. CapEx that we don't have anymore on our new processing facility. In addition to that, BLA is quite a cost that would also roll off in the near future.
Understood. Very helpful. Well, thank you both so much for joining us. Yeah, pleasure to speak with you and look forward to staying in touch.
Thank you. Glad to be here today. Thank you.