Business context and reporting period
Axogen, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018; quarterly figures below identify the fourth quarter where provided. The company develops and sells products for peripheral nerve repair and regeneration, led by Avance Nerve Graft, Axoguard products and Avive Soft Tissue Membrane. Most revenue is generated in the United States, and substantially all product revenue comes from four core surgical products. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Revenue | $83.94 | $60.43 | Up 38.9% |
| Gross profit / margin | $71.01 / 84.6% | $51.12 / 84.6% | Gross margin unchanged |
| Operating expenses | $91.51 | $59.07 | Up 54.9% |
| Operating loss | $(20.50) | $(7.95) | Loss widened |
| Net loss / diluted loss per share | $(22.40) / $(0.60) | $(10.45) / $(0.31) | Loss widened |
| Cash used in operating activities | $17.86 | $9.24 | Cash use increased |
Fourth-quarter 2018 revenue was $23.43 million versus $16.97 million in Q4 2017; gross profit was $19.79 million versus $14.36 million. Net loss was $5.22 million versus $2.50 million, and diluted loss per share was $0.13 versus $0.07.
Sales and marketing expense rose 50.4% to $56.62 million, R&D increased 75.7% to $11.77 million, and general and administrative expense increased 57.0% to $23.12 million. Management attributed spending growth to sales-force and infrastructure expansion, clinical and product development, and surgeon education. Stock-based compensation was $7.61 million, compared with $3.61 million in 2017.
At year-end, cash and cash equivalents were $24.29 million, restricted cash was $6.00 million, and investments were $92.31 million. Working capital was $137.91 million and the current ratio was 11.6. The company reported total liabilities of $13.19 million and shareholders’ equity of $146.98 million. It stated it had sufficient resources for at least the next 12 months, while cautioning that future capital needs depend on revenue growth and other factors.
Axogen raised approximately $132.71 million net in a May 2018 stock offering and used $25.60 million to repay its MidCap term and revolving loans in full. Year-end long-term obligations were $35,000, primarily equipment leases. The repayment generated a $2.19 million debt-extinguishment loss, including fees and unamortized financing costs.
Material changes versus the prior comparable period
- Revenue grew 38.9%, and active accounts increased 20% to 712 at year-end from 591. Management cited higher purchasing within existing active accounts and growth in the account base.
- Gross margin held at 84.6%, but operating costs grew faster than revenue, and the operating loss and net loss increased.
- Operating cash use nearly doubled, while the equity offering substantially increased liquidity; the company also retired its MidCap debt.
- R&D spending increased as Axogen advanced clinical trials, BLA-related work and a planned Ohio processing facility.
Outlook, risks, contingencies and unusual items
The filing discusses 2019 commercial expansion: Axogen expected to have more than 115 U.S. direct sales professionals by year-end 2019, compared with 85 at December 31, 2018, and planned 25 national surgeon-education programs versus 18 in 2018. Although the filing refers to 2019 guidance in its forward-looking statements, the provided filing text does not provide a clear numerical revenue or earnings guidance value.
Avance Nerve Graft remained available under FDA enforcement discretion pending transition to a biologics license application (BLA). The pivotal RECON trial completed initial enrollment in January 2019, but no outcome data were available; Axogen was consulting with FDA on whether additional enrollment was needed. A negative regulatory decision, trial delay or failure to meet manufacturing requirements could prevent continued distribution of Avance. FDA granted Avance Regenerative Medicine Advanced Therapy designation in September 2018.
Key operating risks include continued losses and negative operating cash flow; reliance on Avance and a small set of products; donor-tissue supply and processing quality; reliance on Cook Biotech for Axoguard; reimbursement and customer adoption; and regulatory, clinical-trial and manufacturing-facility execution. The filing reported two 2018 biological deviations involving tissue-distribution quality-system issues, with no patient-safety issues, and FDA-accepted corrective action plans for audit observations.
The company disclosed a putative securities class action filed in January 2019 and a separate Colorado lawsuit filed in February 2019 alleging lack of consent in tissue procurement involving four decedents. Axogen disputed both sets of allegations and said it intended to defend itself; outcomes were uncertain. The securities complaint includes allegations concerning pricing, sales practices, consigned inventory, revenue timing and operating metrics; these are allegations, not findings.
Axogen reported $43.58 million of undiscounted operating lease commitments at year-end. This includes a lease for 75,000 square feet in a planned Tampa office building, with annual costs stated as approximately $2.4 million to $3.3 million during its term. The company also acquired a 70,000-square-foot Ohio facility and expected renovations to support future processing capacity. Adoption of the new lease accounting standard in 2019 was expected to add right-of-use assets and lease liabilities to the balance sheet; the final quantitative impact was still being assessed.
Important facts for investors to verify
- Progress, enrollment requirements, results and expected timing of the RECON trial and Avance BLA, including the conditions for continued FDA enforcement discretion.
- Whether revenue growth and the increase to 712 active accounts reflect sustainable product use, and whether the securities-litigation allegations regarding pricing, channel inventory, revenue timing and account metrics are substantiated.
- Cash burn, investment liquidity and the company’s stated 12-month liquidity outlook, particularly if operating losses and working-capital needs continue to rise.
- Buildout costs, capacity, regulatory readiness and timing for the Ohio processing facility, alongside the substantial future lease commitments, including the Tampa lease.
- Potential financial or operational effects of the pending lawsuits, tissue-supply constraints, reimbursement decisions, or any interruption to Avance or Axoguard distribution.