Aziyo Biologics, Inc. (AZYO) Q4 2022 Earnings Call Transcript

Aziyo Biologics, Inc. (NASDAQ:AZYO) Q4 2022 Earnings Conference Call March 22, 2023 4:30 PM ET

Company Participants

Matt Steinberg - Investor Relations, FINN Partners

Randy Mills - Chief Executive Officer

Matt Ferguson - Chief Financial Officer

Conference Call Participants

Ross Osborn - Cantor Fitzgerald

Josh Jennings - TD Cowen & Company

Operator

Good day, ladies and gentlemen, and welcome to the Aziyo Biologics Fourth Quarter and Full Year 2022 Financial Results Call.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow formal presentation. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference call over to Matt Steinberg, FINN Partners.

Matt Steinberg

Thank you, operator, and thank you all for participating in today's call.

Earlier today, Aziyo released financial results for the quarter and full year ended December 31, 2022. 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 the federal securities laws, which are pursuant to the Safe Harbor provision 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 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 the Aziyo's annual report on Form 10-K for the year ended December 31, 2022 to be filed with the SEC, accessible on the SEC's website at www.sec.gov. Such factors may be updated from time to time in Aziyo's other filings with the SEC.

The conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 22, 2023. 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 measures is available the company's financial results released for the fourth quarter ended December 31, 2022, which is accessible on the SEC's website and posted on the Investor page of the Aziyo website at www.aziyo.com.

And with that, I will turn the call over to Aziyo's CEO, Randy Mills.

Randy Mills

Good afternoon, and thank you for joining the call.

Today, we will provide an overview of our business, including recent achievements, and lay out our key goals and objectives for 2023.

We concluded 2022 on a very strong note, posting record annual revenues of $49.2 million, led by robust sales growth of our SimpliDerm and CanGaroo product lines. Matt will provide additional details on these and other financial results later on in the call.

But first, I would like to address the announcement we made on Monday regarding the receipt of a not substantially equivalent, or NSE, determination from the Food and Drug Administration for our CanGaroo RM antibacterial envelope. As a reminder, CanGaroo RM is the latest advancement of our CanGaroo product line and contains the antibiotics, rifampin and minocycline, which have been shown in preclinical testing to prevent bacterial colonization.

As noted in Monday's announcement, the items in the NSE relate to drug testing and essentially a request by FDA to modify an in vitro drug release assay employed as a manufacturing control that is used primarily to assess batch-to-batch variation and support manufacturing process changes. We believe that the most expeditious path forward is to work with FDA to provide the additional data requested in a timely manner. While we cannot provide a firm timeline of how long this will take right now, we do know that the request does not involve the generation of any additional human or animal data. Our team is already hard at work and we will provide updates on our progress.

While we work diligently to resolve the FDA's outstanding questions around CanGaroo RM, we continue to expand the opportunities for our other product lines. As announced earlier today, we have entered into a distribution agreement with Sientra for our SimpliDerm, acellular dermal matrix. This partnership allows us to further accelerate the rapid growth of SimpliDerm. It also supports our overall growth strategy of profitably expanding our proprietary biologic platforms to improve patient outcomes.

Now, let me provide a quick overview of our company. Everyone at Aziyo is focused on our mission of humanizing medical devices for better patient outcomes. Our marketed products and pipeline programs are designed to mitigate the key mechanisms of failure that commonly occur with implantable medical devices. These failures include migration, fibrosis, erosion and infection. CanGaroo and SimpliDerm are indicated for use in over 700,000 surgical procedures each year and address a staggering $7.5 billion in added cost associated with surgical complications.

Our CanGaroo RM technology is designed to address key mechanisms of device failure, mainly infection, and we are confident that we are strongly positioned to capture a significant portion of the $600 million pacemaker protection market. It is important to reiterate that FDA's completed review did not raise any additional questions surrounding the appropriateness of the pathway or the majority of the data submitted to support the filing. Consequently, we do not expect to appeal the decision, and we believe that the most expeditious path forward is to work with the FDA to provide the additional data requested.

Regarding our SimpliDerm product line, breast reconstruction is a $500 million market, providing us with significant growth potential in an evolving competitive landscape. The market leader in this space was acquired by a major pharma company, creating an opportunity for us to take market share and we have already witnessed rapid uptake of SimpliDerm amongst surgeons who perform breast reconstruction surgery.

And we are not the only ones excited about the benefits that SimpliDerm has to offer. As announced earlier today, we have entered into a sales agreement with Sientra for SimpliDerm. Sientra is a medical aesthetics company focused on progressing the art of plastic surgery and is a leading manufacturer and distributor of silicone breast implants. They have an extensive network with 55 dedicated sales professionals and a trusted surgeon relationship across the United States. We believe this partnership will accelerate the already impressive sales trajectory of SimpliDerm.

I'll now turn the call over to Matt for a review of our financial results. Matt?

Matt Ferguson

Okay. Thanks, Randy.

We continued to generate solid revenue growth in the fourth quarter and closing out a record revenue year. We achieved 17% growth in our fourth quarter 2022 net sales of $12.7 million. This growth was driven by strong performance within our CanGaroo and SimpliDerm product lines, which in aggregate grew by 30% compared to the prior-year period.

Our gross margin expanded by 8 percentage points on a GAAP basis to 39% as compared to 31% in the previous year's period. On a non-GAAP basis, which we considered to be more indicative of our operating performance, gross margin grew to 46%, up from 39% in the fourth quarter of 2021. The increase is due to efficiency improvements primarily in our human tissue processing operations.

Total operating expenses were $13.8 million for the fourth quarter of 2022 compared to $11.2 million in the corresponding prior-year period. The increase was primarily due to legal expenses and updated estimates of contingent liabilities in excess of currently available insurance coverage related to the 2021 recall of our FiberCel product. Increased sales and marketing also contributed to higher operating expenses, partially offset by a decrease in research and development.

Our bottom-line results for the fourth quarter of 2022 also included $5 million of other income related to a reduction of the company's revenue interest obligation, which is based on the forecasted timing and extent of net sales for the company's CanGaroo and cardiovascular product lines and the associated revenue and milestone payments. Combining all of these results, our net loss for Q4 2022 was $5.4 million as compared to $9.1 million in the corresponding prior-year period.

Turning to our full year 2022 results. As Randy mentioned, we achieved record revenue of $49.2 million. Excluding FiberCel sales of $4.9 million in 2021, net sales from current products increased 16% in the full year 2022 compared to the prior year.

To provide greater transparency and perspective on these results, I'll now break down our 2022 revenue performance by each of our four business segments. Device Protection produced $9.1 million in revenue and grew 15%. Women's Health generated $7.5 million, growing 48%. Orthobiologics sales were $25.3 million, representing growth of 15% excluding FiberCel that is. And lastly, cardiovascular produced $7.3 million in sales, which was down 3% from the prior year.

As of year-end 2022, our cash position was $17 million. We remained focus on prudently managing our expenses and reducing our cash burn. In that regard, earlier this week, we implemented a significant reduction in our workforce, whereby we lowered headcount by about 12%. This translates to annualized expense savings of approximately $4 million.

Going forward, we continue to work on a number of strategic transactions and we anticipate these deals will accelerate revenue growth while also reducing cash burn. However, because we can't predict the exact timing or implementation periods for these relationships, it would be difficult to provide specific revenue guidance at this time. So, we've chosen to hold off on that for the time being. We expect to revisit this later in the year as we gain more clarity on CanGaroo RM and other strategic milestones for our business. We look forward to updating you on our progress.

And with that, I'll hand it back to Randy.

Randy Mills

Thanks, Matt.

We're poised for a transformational year at Aziyo. With almost $50 million in revenue, 30% growth in our proprietary lines and the use of our products in over 50,000 surgeries annually, we are well positioned to capitalize on the multitude of opportunities that lie ahead. As we move forward, our priorities are to:

One, run our four business units as effectively as possible, looking for opportunities such as our recent pickups in gross margin to improve our profitability.

Two, work with FDA to gain clearance of CanGaroo RM. We want to do this quickly, but more importantly, we want to get this done to FDA's satisfaction. And we have confidence in our team, now led by our Chief Scientific Officer, Dr. Michelle Williams.

And three, continue to profitably scale our businesses by entering into strategic partnerships like the one we announced today with Sientra that fuel rapid growth in a cost-efficient manner.

Lastly, a note of gratitude. Our ability to continue executing on our strategy for humanizing medical devices for better patient outcomes would not be possible without the dedication of our employees, the ongoing support of our partners and investors, and continued physician and patient trust in our products and mission. Thank you to all involved.

And with that, I'll turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. And ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ross Osborn with Cantor Fitzgerald. Please state your question.

Ross Osborn

Hi, guys. Congrats on the strong 4Q and SimpliDerm partnership. Starting with the FDA notice, I understand you do not want to provide an updated timeline for approval and commercialization, but as far as providing the FDA with the requested data, can you walk us through the lab test and data you need to perform in detail, and a level of difficulty of this quality control test, as well as the bar that the FDA is asking for?

Randy Mills

Ross, thank you. It's Randy. Great question. What I can -- so, the specific test that we're talking about is called the in vitro elution assay. And what I can -- so, what I can tell you about it is, the FDA is looking -- this is a test that's done after manufacturing on each lot. And what it's designed to do is to detect batch-to-batch variability.

What the FDA is looking for us to do is develop a method where we can get the antibiotic off of the eluting disc and off of the CanGaroo membrane itself and into solution in a faster manner than would otherwise happen naturally. So, instead of -- normally we would take the device and we would put it into a beaker of basically water or saline, we would allow the antibiotic to elute over time.

What they've asked us to do is to accelerate that test and to do it instead of what would normally take a few days to be able to get it done within a few hours and more completely get the antibiotic out of the disc off to device and into solution. And there are a number of different ways do that, including using things like detergents and DMSO and acidic conditions and the like. And that's what our R&D team is developing.

It's fairly straightforward. It will require though some assay validation, then we'll have to gather that data and package it up and send it back to FDA. I would say in a pre-COVID environment, this would be a lot easier to nail down. It seems like particularly when something like this requires the use of outside vendors, what normally would have been more predictable becomes a little less predictable. And so that's why we're hesitant to give any more exact timeline on this.

We don't think, though, this is a protracted kind of situation where it's going to require, like I said, long-term sort of animal studies or anything like that. And as soon as we do know more about the timeframe, Ross, we will obviously make that known.

Ross Osborn

Okay, understood. And thanks for the additional color there. And then, maybe turning to a potential partnership for CanGaroo RM following the FDA pushback. If this does not occur or is delayed, how should we think about your burn rate this year? And can you provide a little bit more color just on your cash runway outside of the headcount reduction...

Randy Mills

Sure, I'll just make a quick comment. We are still actively involved in the creation of a partnership for CanGaroo RM. And this setback did not derail that. It might delay it a little bit, but it certainly didn't derail that. So that's something we still think is in our future. And if that changes, we'll let you know.

Matt, you want to provide guidance on...

Matt Ferguson

Sure. So, as we mentioned, Ross, we ended the year at about $17 million. And we have taken some actions recently difficult though they may be to reduce our cash burn and reduce expenses more generally, and that involves some headcount reductions that took place this week. We're also -- we have started to implement and we'll continue to implement other cost savings initiatives that don't have anything to do with headcount.

So, we think that actually will make a very material difference in our cash burn. Historically, if you look back over the last few quarters, we've been averaging about $5 million a quarter in our burn rate. And we actually believe that we can more or less cut that in half, so end up in the $2 million to $3 million per quarter range over the course of the next couple of quarters. So, we're working that process in a very detailed bottoms-up way, but that's our objective, and I'm quite confident that we can get there.

We will also be working on growth initiatives that will actually bring more money to the bottom-line in a cost-efficient way. So, the Sientra deal is a great example of that where we're generating a pretty healthy gross margin on that product line and this way we'll gain access to a much bigger sales footprint in a -- with a company, with a partner, where this is a really strategically important product for them to add to the bag. So, we're actually quite optimistic about what can be done with that partnership and I know that Sientra, as a partner, is very eager to get that up and running as well.

So that's an example of something that we're doing. We actually have a number of other similar initiatives in the works and we're looking forward to rolling that out over the coming weeks and months.

Ross Osborn

Okay, great. Thanks for taking my questions.

Operator

Thank you. [Operator Instructions] Our next question comes from Josh Jennings with TD Cowen & Company. Please state your question.

Josh Jennings

Hi, good afternoon. Thanks for taking the questions. I was hoping to just ask about -- it seems like CanGaroo momentum continued in the fourth quarter, pre CanGaroo RM approval. And was hoping to just better understand where -- what is CanGaroo share today? And how should [investors] (ph) be thinking about continued momentum in front of CanGaroo RM approval? It sounds like it's not going to really slow in 2023 and then RM could accelerate the share gains that you're experiencing. But wanted to get a little bit more color just on share and the momentum it had in 2023 so far?

Randy Mills

Yes. So, Josh, thanks for the question. It would be difficult to sort of describe. I think, CanGaroo has, in a normal way that you would, market share in that -- it really doesn't share the market with anything else. It is not a direct. It is not a direct competitor to any other product and particularly it's not a direct competitor to TYRX. The indications are actually explicitly different. So, in that case, it really is in a class by itself.

We've seen really nice growth in the CanGaroo space absent the addition of RM, and we're very pleased that we have this base business. We also have this partnership with Boston Scientific for the distribution of CanGaroo and that's progressing nicely. Internally, we've also made some changes with our sales organization that we think will hopefully also focus and accelerate our sales force on the opportunities, particularly with RMs. So -- or I'm sorry, with CanGaroo.

So, while we patiently or, if you're like me, impatiently wait the launch of RM, we are seeing continued nice growth with CanGaroo at very healthy gross margins, and that is becoming a progressively more profitable business for us.

Josh Jennings

Understood. Thank you. And then, just on SimpliDerm, just wanted to ask about the Sientra partnership, and congratulations on that. And I don't know if -- I mean, our understanding is that Sientra has kind of mid-teen share in the augmentation segment and maybe stronger share in the recon segment. But just wanted to better understand how you view that opportunity? And does Sientra have any -- just in terms of the Sientra salesperson capabilities to sell SimpliDerm, it sounds pretty straightforward, but any details you can share? And then, is Sientra currently selling an acellular dermal matrix product or partnered with anyone else? Thanks for taking the questions.

Randy Mills

Yes. Thanks, Josh. No, they are currently not selling an acellular dermal matrix. They have the sales force of approximately 55 reps, including a segment of those reps that actually specialize just in reconstruction or actually reconstruction experts. This is -- reconstruction has become a priority for them. And for us, what this -- this is really, for us, it's like shooting SimpliDerm out of a cannon.

We have a limited sales group now of our own that's distributing it. But it opens up the geography for us in the United States really exponentially and does so in a way where the reps -- these 55 reps that are carrying this product are in these cases every day where the product would be used.

And so, we think it's -- for us, we think it could be a very, very significant acceleration of a product that's already growing, like, something in the order of 40% year-over-year. And so that's saying quite a bit. We also think it's a good partnership in terms of the product being as strategically important for Sientra as it is for Aziyo. So, we're super excited about it.

Josh Jennings

That's great to hear. Thanks again. Appreciate it.

Randy Mills

Thanks, Josh.

Operator

Thank you. And there are no further questions today. And with that, we conclude today's conference. All parties may disconnect. Thank you all for your participation.