2023-11-09 08:42:11 ET
Summary
- AxoGen, Inc. reported strong Q3 earnings, with sales up 11.6% YoY and beating consensus estimates.
- AxoGen's sales growth was driven by both demand and price, indicating that unit volumes are keeping up with price increases.
- AXGN maintained its guidance for 2023 and has begun production at a new facility, with potential catalysts to watch for.
AxoGen, Inc. ( AXGN ) reported its Q3 numbers yesterday with a strong beat at the top and bottom lines. Sales were up 11.6% YoY and outpaced consensus by ~$1mm. In my last publication of the company, I noted that the "investment case was turning more constructive" on AXGN. With the company's latest results, this looks to have come to fruition, and the market has rewarded AXGN with by lifting the bid by around 37% in yesterday's trade. You can see the rapid reversal in price action over the last few days in Figure 1. As to the investment facts pattern, the following points are relevant:
- The company trades are more than respectable multiples at ~1.3x forward sales,
- Sales growth continues to surprise to the upside and was driven by both demand and price this quarter-key data that unit volumes are keeping up with price increases,
- Management maintained '23 guidance,
- It has also begun production at its new facility and looks to meet the FDA next year regarding its Avance Nerve Graft. These are 2 catalysts to keep an eye out for.
With these points in mind, there is scope for the company to catch a further bid over the coming 12-month period, based on the sales growth and multiples paid if anything. In this vein, I am lifting my rating on the company to a buy from hold, searching for a period of capital appreciation to a market value of $208mm, or 24% upside from the time of writing. Net-net, revise to buy.
Figure 1.
Risks to thesis
Investors must realize the following set of risks before proceeding further, as they may nullify the investment thesis:
- AXGN's investment outlook is heavily dependent on its continued sales growth. The market's response is most sensitive to this fact, pricing in new expectations of growth with each upshift in sales from the company. Should this slow unexpectedly, it may cause a shift in value to the downside.
- We aren't out of the woods when it comes to tightening of monetary and fiscal conditions. The rates/inflation axis continues to play out and mustn't be ignored.
- AXGN's Avance nerve graft segment may not receive BLA approval from the FDA, as there are guarantees on this. Even if it doesn't receive the BLA "on first pass", the market may look on this unfavourably.
Investors must recognise these risks before proceeding any further.
AxoGen Q3 earnings insights
- Top line growth underlined by both segments
Starting with the financials, revenues were up around 12% YoY to $41.3mm, underscored by growth in its emergent trauma procedures segment and scheduled non-traumatic procedures. Specifically, total unit volumes were up 8% YoY accompanied by a 3.5% increase in price, so growth was both demand and price related. This is critical to see in this current inflationary environment as company's cannot simply just pass on price increases to customers and expect to book these as organic revenue growth.
Management estimate around 50% of the top line in Q3 was attributable to non-trauma, with the segment growing 20% YoY. Most of the caseload this division is characterised by nerve conditions and particular nerve diagnoses that require surgical procedure. As a reminder, the company started reporting in 2 primary segments last quarter and this will be the convention moving forward, so in my opinion it was satisfactory to see a strong period of growth in both divisions.
- Moving down the P&L
It pulled these revenues to a gross margin of 80.5%, down ~300bps from Q3 last year, on adj. EBITDA of $2.4mm and a loss of $0.10 per share. I would also point out that revenue growth came with a degree operating leverage, with revenues up 12% but operating expenses increased just 5% to $37.3mm, demonstrating the higher rate on cost. It also allocated ~$7mm to R&D for the quarter, mainly to its clinical programs.
- Critical takeouts
As to the specific unit economics:
- Core accounts increased by 12% YoY to 372, which is also a 700bps increase sequentially from Q2.
- This translated to a substantial portion of the top line, with 65% of Q3 revenues stemming from its core accounts-up from around 60% in prior quarters.
- It also finished the quarter with 116 sales reps adding just one rep from the last quarter. Revenue per rep was therefore c.$35.6K, a substantial increase from both the prior quarter and Q3 last year. This is a good news for the company's efficiency and propensity to grow sales of a relatively stable sales force.
- As a testament to this, management originally planned to add another 20 new surgical teams by the end of this year, but with the momentum going strong across the back end of 2023 it is now looking to add 30 new teams, all trained and ready to start performing procedures.
Collectively these are signs of a company that is gaining momentum in terms of sales traction and unit growth. The market was immediately receptive to this as mentioned earlier, and has rewarded the company with a substantial increase in market value.
- Guidance maintained
Management maintained FY'23 guidance, projecting full year revenues of $150-$159mm, calling for annual growth of 11%-15%. It does see some headwind to gross margin, given the continued transition to its new processing facility in the final quarter (discussed below), and visions around 80% gross on revenues. At this pace, that would call for around $38-$43mm in Q4 sales, around 19% YoY growth at the upper end. Management noted that it is currently trending around the middle of this range leading into the final period of the year.
- Other catalysts to consider
It's also worth noting that the company is moving to its new production facility, and it already began processing tissue at its new site in Q3. The critical point is that this is said to provide up to 3 times its current capacity, which supports the notion for additional revenue upsides and higher order capacity moving forward. If unit demand remains strong and continues to grow, this could be a meaningful catalyst seeing how the market has priced in AXGN's sales growth so far.
The other point is the company is in talks with the FDA regarding the pre-BLA meeting for its Avance nerve graft segment. The scope is to transition the nerve graft "from a 361 tissue-based product to a 361 biological product" as it was put on the earnings call. It anticipates being heard by the FDA early next year and it will request a rolling submission process in that meeting. Perhaps in a bold move, it expects to begin filing the modules early next year as well, and hopes to complete the submission by Q2 next year [note however, there is no date set for the pre-BLA meeting at the time of this this publication]. AXGN's estimate on the BLA's impact is that it "will be helpful for middle adopters to be comfortable in the data that Avance Nerve Graft shows that it is certainly a superior option to conduits" .
So I would be keeping a close eye on these potential catalysts because there is scope the both could positively inflect on the company's stock price in either direction. If it doesn't get heard by the FDA regarding the pre-BLA meeting then it's reasonable to expect a fairly negative response by the market. The opposite is also true.
Liquidity
The company has around $71mm in debt and left a quarter with ~$38.6mm in cash + equivalents on the balance sheet after a $2mm reduction from interest expenditure. It has burnt $4.1mm in net operating cash flow this year to date but increased its cash balance by $16.5mm after factoring in all investment gains in marketable securities. Based on its current burn rate and cash balance, it appears the company has sufficient runway to cover its next 2 years of expenditures. This may change if there's a surge in OpEx, but management haven't hinted at this occurring in the near future.
AXGN stock valuation
The company sells at 1.3x forward sales which is a 50% discount for the sector. It also is priced at 1.7x book value which again is a 5% discount to sector peers.
The return on equity when considering pretax earnings comes to 2.5%, which isn't an attractive number, but investors are treated to a fair portion of the balance sheet in paying the 1.7x multiple. I think it's reasonable to foresee management expectations for 2023 sales as a high probability, given the fact that it maintained the guidance number even with the strong series of earnings beats it has produced this year. At 1.3x the c.$160mm in est. sales, this gets you to $208mm in market capitalisation, otherwise 24% upside potential from the time of writing. This supports a buy rating on the company and I am revising my recommendation, to buy a AXGN at 1.3x forward sales.
Conclusion
In short, AXGN is demonstrating sound economics and attractive sales growth that suggests it has further to run in terms of compounding Mark Ali market value. The market has already been receptive to its latest numbers where it illustrated both demand in price were behind its topline performance. Multiples are more than reasonable at their current prices, and this also provides scope for a period of capital gains into the coming 12 month period. In that vein, I am lifting my rating on AXGN to a buy, eyeing a market value of $208mm or 24% upside potential from the time of writing. Net-net, rate buy.
For further details see:
AxoGen: Continued Sales Growth, 3x Added Capacity, Strong Outlook (Rating Upgrade)