Axogen, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014, compared with FY 2013. This annual filing does not provide a clear standalone Q4 income statement or Q4 financial results.
Business context
Axogen develops and sells products for peripheral nerve repair, principally Avance Nerve Graft and AxoGuard Nerve Connector and Protector. Revenue is largely derived from these three products. The company attributes growth to increased use by existing customers and new accounts, supported by an expanding sales force and surgeon education.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $16.82 million | $10.95 million |
| Gross profit / margin | $13.38 million / 79.5% | $8.51 million / 77.7% |
| Total operating expenses | $23.18 million | $18.10 million |
| Operating loss | $(9.80) million | $(9.59) million |
| Interest expense, including deferred financing costs | $7.91 million | $5.00 million |
| Net loss | $(17.71) million | $(14.56) million |
| Basic and diluted loss per share | $(0.99) | $(1.08) |
| Cash used in operating activities | $10.45 million | $10.44 million |
- Revenue rose 53.6%; management cited greater product use in existing accounts, new accounts, and grant revenue of approximately $314,000 versus approximately $70,000 in 2013.
- Gross margin improved by 1.8 percentage points, attributed to manufacturing efficiencies, product mix, and a March 2014 price increase. Operating expenses grew 28.0%; sales and marketing rose 28.6%, R&D 42.7%, and G&A 21.6%.
- Cash and cash equivalents were $8.22 million at year-end, down from $20.07 million. Working capital was approximately $11.97 million versus $23.56 million; current ratio was 5.89 versus 12.23.
- Year-end note payable was $25.09 million. In November 2014, Axogen refinanced and paid off its PDL royalty contract for $30.3 million using a $25 million Three Peaks term loan, equity proceeds, and company cash. The loan bears 10% interest at year-end, has a six-year term with principal due at maturity, and is secured by substantially all assets. A separate 10-year revenue-interest agreement requires royalties of 3.75% of revenue, subject to stated terms and caps.
- Operating cash use remained approximately $10.45 million despite higher revenue. Net cash declined $11.85 million in 2014, compared with a $6.16 million increase in 2013.
Material developments, outlook and risks
- In February 2015, Axogen completed a public offering of 5,437,200 shares at $2.75 per share, producing approximately $15.0 million gross and $13.6 million net proceeds. Management stated it believed available cash would meet liquidity needs for at least 12 months; the company also warned that further capital could be needed and could dilute shareholders or increase debt.
- Avance is treated by FDA as a biologic requiring a BLA, but was being sold under FDA enforcement discretion subject to a transition plan. FDA placed its IND on clinical hold in June 2013 pending additional potency, mechanical-characterization, and labeling information. The Phase 3 RECON trial could not begin until the hold was lifted; management expected enrollment to begin in the second half of 2015. Failure to meet the FDA’s conditions or obtain BLA approval could prevent further Avance sales.
- Clinical evidence cited includes published observational outcomes; the filing notes Axogen had not conducted a head-to-head study against leading synthetic or collagen conduits. Comparative study results and further clinical data remained pending.
- Key operating exposures include dependence on three products; donor-tissue supply and processing quality; reliance on LifeNet Health for Avance processing and Cook Biotech for AxoGuard products; supplier concentration; reimbursement and market acceptance; and competition from autografts, conduits, and wraps.
- The company reported no active or pending material legal proceedings. Management reported disclosure controls and internal control over financial reporting effective at year-end; the auditor’s report did not attest to internal control effectiveness. Audited financial statements received an unqualified opinion.
Most important facts to verify
- Progress and timing of FDA responses, lifting the Avance IND clinical hold, RECON enrollment, and BLA requirements.
- Cash runway after the February 2015 offering, operating cash burn, and ability to service the secured term loan and revenue-based royalties.
- Whether revenue growth and gross-margin gains continue to outpace sales, clinical, and administrative spending.
- Supply continuity and contract terms for Avance processing and AxoGuard distribution, including renewal and purchase requirements.
- Clinical evidence, reimbursement coverage, and physician and hospital adoption supporting the company’s growth assumptions.