Axogen, Inc. — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013; comparisons are with FY2012. This filing does not provide separate fourth-quarter financial results.
Business context
Axogen develops and sells surgical products for peripheral nerve repair: Avance Nerve Graft, a processed human nerve allograft, and the porcine-tissue AxoGuard Nerve Connector and Nerve Protector. Revenue depends on these three products. Management attributed growth to new customer accounts and greater use by existing customers.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $10.95 million | $7.69 million |
| Gross profit / margin | $8.51 million / 77.7% | $5.73 million / 74.5% |
| Sales and marketing expense | $10.26 million | $6.88 million |
| Research and development expense | $2.13 million | $1.43 million |
| General and administrative expense | $5.72 million | $5.22 million |
| Loss from operations | $(9.59) million | $(7.80) million |
| Interest expense | $4.82 million | $1.39 million |
| Net loss | $(14.56) million | $(9.42) million |
| Loss per share, basic and diluted | $(1.08) | $(0.85) |
| Net cash used in operating activities | $10.44 million | $8.66 million |
Revenue rose 42.3%; gross profit rose 48.5%. Gross margin improved with higher volume, manufacturing efficiencies, and a March 2013 price increase. Total costs and expenses rose 33.8%, chiefly from sales-force and marketing expansion and clinical-development spending. Interest expense included $3.78 million of non-cash interest added to the PDL note; reported cash paid for interest was $1.03 million.
Liquidity, financing, and balance sheet
- At year-end, cash and cash equivalents were $20.07 million, versus $13.91 million a year earlier. Working capital was approximately $23.56 million; the current ratio was 12.23.
- Total assets were $27.68 million. Shareholders’ equity was $0.14 million, compared with a deficit of $2.83 million in 2012. The filing’s displayed total-liabilities figure is unclear; long-term PDL note payable was $25.36 million.
- Cash from financing activities was $16.85 million, primarily from a 2013 stock offering that generated approximately $16.7 million net proceeds. Shares outstanding increased to 17.34 million at year-end from 11.12 million.
- The PDL revenue-interest agreement is accounted for as debt. PDL received $20.8 million in funding and is entitled to 9.95% of defined product net revenues for eight years, with minimum payments beginning in the fourth quarter of 2014. Minimum annual payments are $1.25 million for 2014, $6.78 million for 2015, and $9.00–$9.23 million for 2016–2018, followed by $9.06 million in 2019 and $6.94 million in 2020.
Outlook, risks, and unusual items
- Management said it believed cash resources were sufficient for the next 12 months, but warned that future capital needs depend on revenue growth and PDL payments. If the royalty calculated on revenue falls below contractual minimums, the cash burden rises; additional financing may be needed and could dilute shareholders.
- PDL may require repurchase of the revenue interests under specified conditions, with a 20% return mechanism. A change of control triggers mandatory repurchase at a price designed to provide PDL a 32.5% return, potentially reducing proceeds to shareholders.
- Avance was not yet approved under a biologics license application (BLA). The FDA permitted continued distribution under a transition plan, subject to compliance and eventual BLA requirements. Axogen had submitted an IND and expected Phase 3 enrollment to begin in the latter part of 2014; the filing emphasizes that failure to meet regulatory requirements could prevent continued sales.
- Clinical evidence included a published RANGER study report of meaningful motor and sensory recovery in 87% of 55 repairs spanning 5–50 mm; this is company-cited study data, not a guarantee of future outcomes. A Phase 3 trial remained a major regulatory and execution risk.
- Other material risks include reliance on donor nerve supply and third-party processing, dependence on Cook Biotech for AxoGuard, reimbursement and adoption uncertainty, competition, and potential need for further financing. One AxoGuard adverse event was reported in 2013; Axogen reported none for Avance and no FDA reports submitted by Axogen. Cook Biotech submitted an MDR for the AxoGuard event.
- No formal revenue or earnings guidance is provided. Management said near-term revenue growth would lag increased market-development costs. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Most important facts to verify
- Progress and FDA requirements for the Avance Phase 3 trial, transition plan, and BLA, including any effect on continued product distribution.
- Revenue growth, gross-margin sustainability, sales-force productivity, and whether operating cash burn is narrowing.
- Cash runway under the PDL minimum-payment schedule and the potential for additional equity or other financing.
- Terms and potential impact of PDL put and change-of-control provisions, including the debt balance and interest accretion.
- Reliability of donor-tissue supply and continued manufacturing/distribution arrangements with LifeNet Health and Cook Biotech.