Treace Medical Concepts, Inc.
Q4 2021 Earnings Call Transcript

Published: 26 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Treace Medical Concepts First Quarter 2021 Earnings Conference Call. . I would now like to turn the conference over to our speaker today, Vivian Cervantes Investor Relations, please go ahead.

[Vivian Cervantes:]

Thank you, Jowel, good afternoon, everyone, and welcome to our first quarter 2021 earnings call. Participating from the company today will be John tree, Chief Executive Officer, and Mark hare Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our first quarter financial results released after the close of the market today, after which we will host a question and answer session.

[John Tree:]

Thank you Vivian, and good afternoon, everyone, and thank you for joining us on our first earnings conference call as a publicly traded company. On behalf of the board and management team of Treace Medical, we'd like to take a moment to acknowledge all who supported us, and to welcome new shareholders in our journey to drive market adoption of our novel, and proprietary lapiplasty system. At Treace Medical, we're just getting started, we were addressing a market where there is a large unmet need, relatively early in our commercial efforts, we estimate we penetrated about 2.5% share of the estimated 450,000 annual Bunyan surgical procedures in the US, and about 1% of the 1.1 million annual surgical candidates in the US translating to a $5 billion plus opportunity, so we have a long runway ahead of US. And the US bunnies affect approximately 65 million individuals, and they generally increase in severity over time, from this population, about 4.4 million patients seek medical attention for their Bunyan's each year of these, about 1.1 million are considered surgical candidates. This population often suffers from symptoms that worsen over time, including severe and debilitating pain, emotional burden and limited mobility, yet only 450,000 of this group choose surgery given limitations of traditional surgical procedures, Bunya surgeries performed to restore a foots natural anatomy and in doing, so relieve pain, so that patients can get back to their normal lives and activities, in the past, it's been thought that Bunyan's are simply a painful bump a bone on the side of the big toe that can be shaved off.

[Mark Hare:]

Thank you, john. And good afternoon, everyone, and thanks again for joining us for our first quarter 2021 earnings review. Revenue increased 66% in the quarter to $18.7 million, up from $11.3 million a year ago, and at the high end of our $18.5 million to $18.7 million range provided as preliminary Q1 results in our purse prospective prospectus filed with the SEC on April 26th. The increase was led by our expanded customer base and higher utilization rates, which grew the number of lack of plasty procedure kits sold, particularly as we exited the quarter. In the first quarter sales and lack of classy procedure kits were 3503 is 60% increase versus the prior year's first quarter, with a blended average selling price of $5,340, which was a 3.7% increase over the first quarter in 2020. The number of active surgeons performing at least one case on the trailing 12 months in the quarter increased 29.7% year-over-year to 1354, with utilization improving 9.5% year-over-year to an average of 9.2 lap a classy procedure kits per active surgeon in the trailing 12 months. In the first quarter 2021 employee sales reps representatives, our direct sales channel generated approximately 44% of total revenue in the quarter, versus an average of 35% for the full year 2020. Gross Margin increased to 82.2% in the first quarter of 2021 compared to 78.8% in the first quarter of 2020, the 340 basis point gross margin expansion was due to increases in the number of lack of plastic procedure kits sold, blended ASP and operational efficiencies. Total operating expenses were $16.8 million in the first quarter of 2021, including sales and marketing expenses of 12.1 million, research and development expenses of 1.9 million in general and administrative expenses of 2.8 million.

[Operator:]

Our first question comes from Robbie Marcus with JPMorgan. Your line is open.

[Robbie Marcus:]

Great, and congratulations on your first quarter public.

[John Tree:]

Thank you. Hey, Robbie.

[Mark Hare:]

Thank you.

[Robbie Marcus:]

Hey. So, it sounds like second quarter is going better than maybe you thought, you know, going into the IPO, I was just hoping you could give us an update on what you're seeing in the market, so far in in second quarter here as it relates to volume recovery?

[John Tree:]

Yes, so as we mentioned that we're projecting Q2 to be roughly in line with revenue reported in Q1, and, you know, we believe that we're still in in that transition time related to, you know, really are emerging from COVID. So, forecasting the business is a little bit more challenging than usual, you may have heard that from some others, so while we're really encouraged by the Q1, especially the latter part of the quarter, it's somewhat difficult to sort out the backlog from the normal demand and how those trends will play out in Q2.

[Robbie Marcus:]

Great, and as revenues move up, how are you thinking about the trend of expenses over the balance of the year? Thanks.

[John Tree:]

Yes. So, the trend of expenses, you know, I think, as we think about how we came in, and Q1, it's going to be a similar pattern, some of our DNA expenses will continue to increase, as we are a public company now. But, a lot of the trends that we see in Q1 will continue, so not a lot of shifts, or changes from what we reported.

[Robbie Marcus:]

Great, thanks a lot.

[Operator:]

Thank you. Our next question comes from Richard Newletter, with SBB Liang, Carolina. So your line is open.

[Richard Newletter:]

Alright, thanks for taking the question. Maybe just to start. Thank you. Thanks for the guidance. This quarter, appreciate that. Can you maybe talk a little bit of the underlying assumptions in terms of, you know, activist surgeons? How many you expect to hire for the rest of the year utilization and ASP?

[John Tree:]

So, there's a couple questions there. So you're talking about active surgeons, or is it the active sales reps? You mean, and how many were hiring for last year?

[Richard Newletter:]

Or what? What are some of the key assumptions? As you build up to the range, the lower and the upper ends of the range, we're pitching to the balance of the range? Is you talking about price and utilization? Red firing? How many empty accounts you expect to bring on just, if any of the assumptions that you used to build up?

[John Tree:]

Yes, so yes, thanks for the question, so a lot of this is going to come back to some of those key metrics that we've talked about in the past, which are really the increase in new surgeon customers, our overall blended ASP. And, and really that utilization rate, and so we've seen that uptick and utilization, which we love across a broader base of surgeon. So, as we continue to see those increases year-over-year, that's what's going to, you know, really play a factor of whether we're on the lower high end of that, that range that we just talked about.

[Richard Newletter:]

Okay. Thanks for that. And I'm just curious, you know, anything that you saw in the, you know, in the first quarter, and even into the early part of the second quarter, that is surprising you, or an interesting trend, that you think is worth calling, it calling out just we're in this recovery zone, you know. So, you know, I'm just curious, if there's any kind of behavior on the consumer, a doctor, and is it more osteotomy is more laughing decisions that are kind of taking the baton during the recovery, and then also to be just talked to the cadence for 3q to 4q, as you think of the full year, good?

[Mark Hare:]

Yes, so as far as, you know, we talked a little bit about, you know, as we emerge from the pandemic, you know, there, it's a little bit more challenging to predict what happening out there. With that said, we've been encouraged with Q1. I don't know that there's a dramatic shift in osteotomy versus Lapidus, versus lapiplasty, other than we've had, you know, a nice growth year-over-year, Q1 versus last year, and, you know, we're projecting, you know, what we said for Q2 to be a substantial growth year-over-year as well. So, I don't know that we're seeing any of that major shifts in the marketplace, you know, we're not really giving specific guidance on q3 and q4. other than that, you know, we're on track and we're feeling good about the year such that we increased our overall guidance for the year. So, I don't know that we have too many comments right now about q3 and q4, but we'll see how to choose your portfolio.

[Richard Newletter:]

Thank you.

[Operator:]

Thank you. Our next question comes from Drury Near you with Morgan Stanley. Gentlemen. So open

[John Tree:]

Hi group.

[Drury Near:]

Hi, john. Hey, hey, john, Mark, congrats on your first quarter coming out of the gate and as a public company, and thanks for taking the question. But just the start just out of the recent foot and ankle meeting, if you could just talk about the feedback that you're getting from surgeons, you presented the Align 3D data, the interim results. But, just how's that resonating among your, your current utilizers, and even just newer surgeons, and how did the, how is this conference maybe compared to some pre COVID? Are you kind of getting? Are you seeing more demand for your training and education initiatives, just any sense there? Thank you.

[John Tree:]

Yes. Hey, Drury, it's john. Yes, thanks for the question. I think, you know, in general, the ACC bass conference was sort of lightly attended. They had some limitations this year, from a physical standpoint, but it was also offered remotely. So, they did have a pretty good turnout. I think the news about our align 3D interim results, you know, permeated through the meeting a bit, and as the surgeon that presented the data relayed to me just said, this is just continuing to build upon, you know, your body of clinical evidence that will, you know, slowly work its way towards convincing more people that this is the right treatment for more of their been in operation. So, I think in general, that's, you know, it wasn't a firework display, but, you know, definitely helpful incremental data, and that internet data looks very good comparatively to the other procedures.

[Drury Near:]

Okay, thank you. And, Mark, this might be more for you, but just with course, margins at 82% for the quarter, they're kind of getting to pre-COVID levels. But, you just talked about the sustainability of gross margins through 2021, it sounds like ASPS should likely be stable. But, what are you thinking about for gross margins going forward? Thank you.

[Mark Hare:]

Yes. Thanks, Drury. Great, great question. So we definitely have our eyes on several different factors here, as we were coming into the year, one is just the overall cost of goods and materials that go into our products. And so, you know, we're keeping our eyes very wide open on that can have, you know, an impact on gross margin, if we do have that inflation, and there's a lot of inflationary concerns, and we've seen a little bit of that, and so there is potential that that may have some impact. We've also talked a little bit about, as we continue to penetrate, and get into larger hospital networks that there could be some pricing pressure from those customers, but, with that would be the right thing for us to do. So, overall, we're feeling pretty good right now about our margins going into, you know, going forward into Q2, and hopefully for the backup of

[Drury Near:]

Thank you.

[Operator:]

Thank you. And next question comes from Rick Wise with steeple Magellan, your line is open.

[Rick Wise:]

Good afternoon, gentlemen.

[John Tree:]

Hi.

[Rick Wise:]

Hi. Let me start off with if we can talk about the sales agency conversion. If I remember correctly, in the fourth quarter, something I guess third, over a third of revenues came from your direct rep 65% independent sales reps. And I know, you've said that you're going to have the majority of revenues over time, eventually come from the direct sales channel. Just help us understand, where are you now with that cadence that , and remind you how that transition is going to unfold this year, at least?

[John Tree:]

Sure, right. This is john, I'll take that one, the, you know, we ended the year last year for full year around 35% mix into Q1 at 44%. And we continue we're going to continue to build upon that through this year, and in the next year, It'll be a progressive process, and we will have a larger percentage of our revenue coming from our direct sales channel. That said, as we've discussed before, we have some excellent, very strong, independent agency partners that we believe will be with the company for a long time, they're very supportive of our program and, you know, hitting the numbers that we need them to hit. So, that's hope that answers your question there.

[Rick Wise:]

Yes, definitely. And the on the prime front. Can you just give us an update on the mini incision system launched out honestly, the main incision, launched in 2023, 2020 took place, I expected more full release in 2021, we're halfway through the year. Where are we, in terms of penetrating the existing surgeon base? And where should we be by the end of this year and just remind us about pricing impact on pricing? And margin? Is that one of the factors that helped pricing in the period?

[John Tree:]

Yes, it actually did have, it was definitely a favorable tailwind to the pricing, it didn't elevate it in its own, there were multiple factors going in there including, you know, more of our accessory products being sold and just a higher average selling price of our base kits as well. As far as the mini incision system itself and the clinical uptake, I think it continues to gain more traction and more broadened acceptance, we're seeing a lot of great, you know, X-rays and clinical pictures of some very small incisions and surgeons enthusiastic about it. So, I think it's going to continue to build, as we've communicated before, expect to be more broadly available in the back half of this year, we're still doing that progressive rollout and training more and more Doc's and their new doctors are starting to implement it in their practice, and existing surgeons that have already been users of the mini incision system are finding more ways to apply it. But, it's still not a swap out for our conventional lap of classy it's a patient selective, application, and I think that's the way we're going to see it for the for the future.

[Rick Wise:]

Great. Thank you so much.

[John Tree:]

Sure.

[Operator:]

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Vivian Cervantes for closing remarks.

[Vivian Cervantes:]

Thank you. On behalf of Treace Medical, thank you everyone for joining us today. This concludes our call it, we look forward to our next update following the close of the second quarter of 2021.

[Operator:]

This concludes today's conference call. Thank you for participating, you may now disconnect.