Mike Sarcone, I'm an analyst on the U.S. Medical Supplies and Devices team here at Jefferies, and welcome to the London Healthcare Conference. This is a session for Axogen, which, if you don't know, is a leader in peripheral nerve repair. And with us from the company, we've got Lindsey Hartley, CFO, and Mike Dale, CEO. Thank you both for joining us today.
Thanks for the opportunity, Mike.
Sure. I guess just to kick it off, you know, Mike, Axogen is a leader in peripheral nerve repair. The company's been around a long time, but you've previously framed the company as very early in its life cycle. Maybe, you know, can you elaborate on Axogen's positioning in the market and how the company is strategically situated to drive uptake of peripheral nerve repair?
Certainly. You know, one of the big questions that I ask myself, and we ask the organization to engage in asking again and answering for themselves as we look to the future, is, you know, what is our business purpose and what really is our opportunity as a standalone company, but most importantly, relative to our purpose, which is to establish nerve care as an expectation in the care continuum. In terms of our positioning to that, we have really focused on some very basic elements that we see as necessary to drive the future of the business. First of all, it is recognizing under-treatment and under-recognition that there are opportunities to address these kinds of problems. When you look at, just to use the U.S
As a market, based upon numbers, the ability to identify incidence rates, you have about 1.5 million nerve injuries which could benefit from treatment, treatments that we provide today. The actual penetration of these particular problems ranges anywhere from 1% to a high of 8%, depending upon the expression of that particular nerve problem. This is a situation where you have both low awareness amongst physicians, you have a lack of established clinical guidelines to make nerve care an expectation, and then the tools and the training necessary to actually do these types of problems. We are positioning ourselves very openly with our customers, leading with our mission purpose that, hey, you know, our role in the future is to restore health and improve quality of life by making nerve care an expectation for care.
Today, just to give you an example of the paradigm that exists in many situations is that, if you, and I'll use trauma, which is the easiest one for people to understand, if you present with an accident and you have a terrible injury to your arm and there's bleeding involved and there's broken bones, you'll be triaged, you'll stop the bleeding, and they'll repair your bones, and that will be concluded as a success. Regardless of the fact that the nerve might have been transected and that arm may no longer have function, there is not a clinical guideline that suggests that nerve care needs to be part of the intervention. Now, this is changing, but it's changing slowly, but this is basically an example of where we are in the development of the nerve care opportunity.
Not a question as to whether or not there's a big need in healthcare, but the actual education levels and the establishment of clinical care guidelines is in development. We are working each of these both strategically as well as tactically in terms of making that different.
Great. That's very helpful to set the stage there. I mean, not to put words in your mouth, it seems like we've got a long runway.
Long runway. We looked at our own strategic plan and in terms of the things that would be required to make changes. The big changes are very important in terms of the leaders within the respective clinical pathways. Cancer, for example, for breast surgery is completely different than that of prostate. Completely different from that from the various schemes within orthopedics and extremities and trauma. You need to deal and engage with each of the societies, you need to deal and engage in a professional way based upon evidence. These individuals need to debate on a peer-reviewed basis that certain care should be an expectation, and they need to establish these kinds of positions formally. In concert with that information, you work with payers to expand coverage and payment for nerve care, so that's not an obstacle.
None of these things are events and milestones that are achieved overnight, but you work them in parallel and in tandem with one another. All this, of course, is built upon the fact that you must have a beneficial therapy that's distinctive and unique and novel, because that's what those work processes are all about. We're engaged in that, and we think over the next three to five years, we will make significant progress in those areas. We already are. Even this year, we've added three societal endorsements, we've expanded coverage. You can see line of sight to what's possible in the future. This is a business that can very easily double within the strategic planning period, which we shared publicly.
Yeah, that makes sense to me. Just as a follow-up there, we have historically heard pushback. You know, maybe it's in the form of, you know, Axogen is a niche product, and there have been people who have historically questioned the TAM. You have accelerated growth more recently. You have talked about medical society guidelines, you are making progress on coverage wins. I guess, you know, what gives you confidence that two or three years from now, if that's the case, you know, investors wake up and say, "Wow, this is a way bigger opportunity than I thought it was"?
Sure. Great question. Very important question. One that I ask myself, because I heard those criticisms before I ever joined the company, is, "Oh, the TAM's not true." You know what? That's a fair question to ask. We did, and we actually discovered the TAM was bigger than we'd publicly disclosed. We did our best to post publicly the various care pathways which we have prioritized. These can all be independently verified by looking at the actual numbers of procedures that transpire today in prostate and in breast and oral maxillofacial. You can count these. You can look at the coding in terms of nerve injuries, and you can look at the actual levels of treatment. We're very comfortable that the TAM is every bit as big as we described.
I think what's fair to add, though, is that the TAM is not the question, it's the addressability of the TAM. These are heterogeneous care pathways. An oncologist in breast surgery is different than a prostate robotic surgeon who is different from an oral maxillofacial head and neck specialist who's also different from a hand specialist who deals with extremities trauma. Each of these areas need to be developed independently. That's where the addressability is more difficult than maybe a typical TAM that you might be talking about in another market.
Got it. I guess, you know, following up there, you talked about these different care pathways, they are heterogeneous. How do you think about the salesforce? Does it need to be stratified? What's the right number to address these different opportunities?
We're constantly looking at the question. Right now, we believe that they need to be stratified. The areas that we have settled on are extremities, oral maxillofacial is one sales organization. We believe that breast requires its own dedicated salesforce, and at the moment, we believe that prostate will require the same. The reasons why are what I just described, is that you have different physicians, different referral networks, different training requirements. The technical burden and the consultant burden to manage these are such that we're skeptical that you can do this with one uniform organization. We're organizing accordingly. Again, because of the nascency of market development in any area that we currently work in, even while the business is doing very well, we have determined that we are grossly undercovered in terms of full penetration potential.
Take breast oncology, there's, you know, more than 1,000 sites of service. We've only so far developed 200 accounts. Each of these accounts have surgeon pairs, one to three pairs that you need to train, both in terms of the reconstructive plastic specialist as well as the oncologist surgeon. They have their respective referral networks. We're early days, it's going great, the businesses are growing double digits, but there's a lot of runway ahead of us in the extendability of these sales models. I can draw the same analogy to oral maxillofacial and the same even to extremities, even though there's a big organization there. That organization, in an ideal world, should probably be closer to 500 people than 100.
Got it. Now, very helpful, and I do want to dig into some of the breast recon stuff. I did want to ask first, in March, you came out, you hosted an investor day, you provided an LRP growth framework for 15%-20% sales growth. So I guess, can you, when you think about what are the most meaningful growth drivers in the near term from an application perspective, like how do you think about that if you had to rank order them?
Sure. This is the real answer, and I do not want to seem like a non-answer, but they are all growing. They are all important. There is no one single part of the business that is carrying the business disproportionately. In other words, sometimes people might think that breast is, "Oh, that must be your driver." No, actually, they are all driving. They are all driving the double-digit at or above the original plan assumption. We are very pleased so far with how things are playing out. The nice thing is that, you know, you always plan, and sometimes reality shows its face. So far, reality is that the plans were mostly correct. How elastic these plans are, time will tell still. We remain appropriately paranoid and constantly measuring and adapting, but value propositions are real.
Every time we connect people with value proposition, there's a natural embrace, because no one argues that your peripheral nerve function isn't essential to good life. When we make it accessible to people, they adopt. You got to be there to help support, because these are not things that you're trained on necessarily in school. Part of our role is to make those connections and do that support. When you look at drivers going forward, all the businesses are very exciting, but the fundamental components of work are commercial. Good business models, different for each individual type of physician. Again, extremities is different than breast, and breast is different than prostate, and so on.
You got to have business models that you execute and that you have metrics on that you can basically decide which you invest in at what rate relative to the others. We've got that figured out for now. This will probably change with time, but we know what it is. Given the fact that we're undercovered across almost every spectrum, the primary driver is managing those business models and then expanding the sales footprint in all areas. We did a bolus to start off with this year. We're going to be incrementally adding quarter to quarter across every workstream hereafter. There won't be any more boluses, it'll just be continued expansion into the opportunities to ensure that we ultimately reach full coverage.
The financial constraint will be that we do all this work funded from our organic cash flows and that we maintain operating leverage. We will pace this based upon our ability to execute accordingly. The other key driver is that of coverage and payment. We have made great progress, but we are about 66% commercial lives covered to date. We believe within the next three to four years, we will close that gap and essentially reach full coverage. We have about three primary payers that we still need to satisfy in terms of removing the designation of Avance as an experimental product to an accepted product. The BLA will help greatly in that. The sales and the payers are all individuals' constituencies you need to service and support just like you would an account.
We're doing that, and it's going well, but we think it'll still take three to four years to complete that work. The other element is just constant education and training. We're always aware every time we wake up in the morning that nerve care is still new for many people. While it might be our world, it's not others. The education and training component, training surgeons, particularly the young fellows, is a key component of our work. When we hold these sessions, they're always universally well attended, taken very seriously, because it's exciting for the customers as well. The other element is that of awareness and patient activation. Particularly in the elective procedures, the patient has a chance to advocate for themselves.
If your situation is, you've been diagnosed with a situation and it requires these types of radical procedures to mitigate your primary cancer risk, if you were to ask someone, as we do the reconstructive process, "Would you like to be restored as close as possible to your prior health status?" the answer will obviously be yes. The truth of the matter is, as many depend upon where you live, you may be completely unaware that that's even an option for consideration. This is another key catalyst driver for us, constantly grows for us, it's very, very effective, and we will continue to do that and do more of that. The final aspect is ensuring that we invest for the future from an R&D standpoint. We have three primary workstreams across the nerve algorithm.
The nerve algorithm is the graft itself, and that's basically enhancing next generation regenerative capabilities. While it's distinctively unique in the world today, we know it can be made more perfect, and we have significant R&D underway to ensure that that happens over the strategic planning period. The second element is simply ease of use, and the ability to connect these grafts. When you do these kinds of procedures right now, they're driven by suturing. These sutures, unlike cardiac surgery, which are all sophisticated, nerve surgery is a higher level. These are hair-like sutures, very microsurgical techniques that are involved, and the procedure is only as good as the outcomes are only as good as the quality of the initial surgical procedure. These are elements that we need to invest in to make easier.
We have some really cool stuff going on, and I'm really hoping in early in 2026, I can speak more openly about exactly what I'm referring to. That is how the project's progressing. We're looking pretty excited. Protection. When we do these procedures, these are very inflamed tissue beds, so it might be trauma or it might be a cancer procedure, and you want to be able to allow that nerve the best possible chance to heal. You need to protect it from scarring and inflammation that can impede that healing process. We have technologies and techniques that we've developed for that, and we continue to invest in that. It is a very, very important part of the procedure, and we're doing investments in each of these areas and have pretty high confidence that we'll succeed in terms of completing those projects.
Great. Yeah, that does sound interesting. You sure you don't want to tell us about some of those now?
I would like to.
We're close to early 2026. I did want to touch on the BLA process. This has been a long process. You're finally getting to the end, December 5 is the PDUFA date. I guess, can you talk to us or just give us an update on where we stand in that process and your level of confidence about ultimate clearance, and then what you think potential labeling or the ability to treat the current patient population would be?
Sure. Our PDUFA date is December 5th, and in our dialogue, which is quite active, I just had communications yesterday. Everything is proceeding on the assumption this will be an approved application and that it will happen as expected on December 5th. We have seen nothing that would suggest otherwise. We need to be mindful that until you get the letter, it's not done. The workstreams that are required to complete the application, whether it be the CMC process, whether it be the labeling, we have lined a site, we have shared all the various markups, the reviews, the discussions. We are as confident as you can be at this point in the process that it will conclude satisfactorily.
Okay, great.
In particular, it will conclude with the ability to continue to service all the patients that we presently service.
Got it. Okay, very helpful. You talked about some potential benefits of a clearance around closing the remaining gap on the commercial coverage. Are there any other commercial benefits, strategic benefits that are going to arise from a BLA clearance?
Sure. One of them will just be the distinction that this will be a first of its kind approval in the Biologics License Application space. This will be the first human biological allograft made available. This will be something that, while the customers already have commercial availability of our products, we'll be able to reaffirm with them that these products have been studied and evaluated for purity, potency, and consistency consistent with the BLA process, and that it's been determined to be safe and effective. It's a big deal. It's another calling card. Even though they're already using it, we can reinforce that. We can also use that as I've described with the payers. This product has been concluded to be safe and effective.
Finally, the material parts to the business, which I've talked about but can't be overstated enough, will be very important from an efficiency standpoint and cost standpoint in the future. Today, we're unusual insofar we're already commercial, but we're operating under a quality system based on a device construct. We've had to prepare all the elements for a biologics license quality and manufacturing system. It's a completely different world in many regards and has its own attendant requirements and monitoring systems and expectations. The intellectual capital that goes into maintaining these two things for a period of time is significant. The real capital that goes into this is also not insignificant.
Very importantly, from a manufacturing and operation standpoint, you're impeded by implementing the kind of continuous improvement you would normally do in a manufacturing system because you're living in two worlds, but you got to stay constant in one. You can't really implement the systems in the other until you're in that other system. On December 5th, when this finally transpires, we'll be able to move toward one quality system, which will then allow us to implement things like electronic batch records. What is that? Just to give you some scale of the manual aspect of our current system, we do about 80,000 manual entries per week. As you might imagine, if you have mistakes or queries you need to make, the human resources that goes into that is huge.
It is wasted time, slows down cycle time, and can lead to potential errors. By implementing an electronic batch record system, this is now all automated. This is basic stuff for most systems, but one that we do not presently enjoy. Our manufacturing execution system, same thing. The modern systems that are available today, you can make your improvement changes instantaneously if you want to, as opposed to stages and waves. I could go on and on, but all of this is basically waiting upon the final approval so that we can move forward. It is a well-run system today. We have made lots of improvements, but post-BLA, we will be able to do even more in terms of lowering costs and cycle times.
I think with that, it's really helpful to provide the context that even with some of these redundancies and inefficiencies, you've got low 70% gross margin, right?
Yes. Just a reminder in our guidance, with this significant achievement of the BLA, we also have some one-time costs that we expect to go through our P&L, some impacting gross margin, which we've disclosed before, about 1% of our 2025 gross margin or $2 million. Two-thirds of that is non-cash related to stock-based compensation directly tied to this milestone. We'll also see that same impact from stock-based compensation through net income. We've disclosed in our 10-K the amount of unrecognized expense. It's about $7 million that will go through net income in OpEx of stock-based compensation.
That's in the form too? Okay, great. That is helpful. I mean, I know you're going to implement some of these efficiencies post-BLA clearance. I don't know if we don't have to hold you to this, but where do gross margins peak, right? Because you're going to continue to scale this business. You're going to have continuous efficiency initiatives that you're going to work on. Who knows? Maybe with exclusivity of pricing power as well, right? When you think about peak gross margins, what do you think about?
We're not prepared to provide that ceiling yet. I know that's obviously an unsatisfying answer. What we have high confidence in is that anyone can look at the business, and it's 75% plus. What we'll do when we get into first quarter and second quarter is we'll provide greater clarity as to what that ceiling might be. We really want to get through the BLA process, that bump in costs which is going to be incurred again, because we've made continuous improvement. We're going to incur another bump in accounting based upon the BLA that'll be absorbed. We're going to be implementing all these systems. Once we get that glide path underway, we're going to have a more open conversation.
The most important thing I would want to reassure people is that this is a minimum 75% gross margin business.
Got it. Okay. We have probably a minute and a half left. I did want to touch on Breast Recon.
Sure.
Talked about making investments in the Salesforce. This year, you doubled the breast-focused Salesforce from 11 to 2022. Maybe that was completed by June or July around there. To me, it seems pretty exciting in that you're going to have this whole new class of reps that are going to be coming into full productivity as we get into 2026. Can you talk about that time to get to productivity and what type of, I guess, contribution relative to this year could those new reps make?
Sure. We do not break out the individual contributions between the Salesforces at this point. In terms of time to break even and then accretion, that ranges between six to nine months for a breast rep. Pretty predictable at this stage. Still a small group that we are analyzing, but that is the visibility that we have today. From a mathematics standpoint, the presumptions based upon the model, which we monitor consistently, is that that math will be the same for them as it is for the present group. It is a very profitable return on the business with high impact.
Okay, great. I think we're at time. Mike, Lindsey, thank you very much for joining us. To the audience, thank you for your interest.
Thank you.