Elutia Inc

NASDAQ:ELUT

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Greetings. Welcome to the Elutia Second Quarter 2021 Financial Results Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I'll turn the conference over to Matt Steinberg with Finn Partners. Please go ahead, Matt.

[Matt Steinberg, executive]

Thank you, Operator. And thank you all for participating in today's call. Earlier today, Elutia released financial results for the quarter ended June 30, 2024. A copy of the press release is available on the company's website.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical facts or relate to expectations or predictions of future events, results or performance are forward-looking statements.

All forward-looking statements include, without limitation, those relating to our operating trends and future financial performance are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, including Elutia's annual report on Form 10-K for the year ended December 31, 2023, that's accessible on the SEC's website at www.sec.gov. Such factors may be updated from time to time in Elutia's other filings with the SEC.

The conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 7, 2024. Elutia disclaims any intention or obligation, except as required by applicable law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

Also during this presentation, we refer to the gross margin, excluding intangible asset amortization, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available in the company's financial results release for the second quarter ended June 30, 2024, which is accessible on the SEC's website and posted on the Investor page of the Elutia website at www.elutia.com.

And with that, I will turn the call over to Elutia's CEO, Randy Mills.

[C. Mills, executive]

Thank you, Matt, and thank you for joining us today on this conference call. Starting out, as we always do, let's just really quickly review the mission of Elutia, why we exist as a company.

So it's humanizing medicine so that patients can thrive without compromise. And when we talk about this concept of humanizing medicine, we're talking about combining traditional therapeutics with biologics so that the actual implant for the first time ever isn't some type of synthetic or plastic or polymer or metal that simply elutes a drug or a therapeutic, but instead, is this living implant that can remodel and incorporate and become the patient's own living tissue over time. With the addition of this sophisticated therapeutic payload. And we do that so that our patients can thrive without compromise.

This word humanizing medicine also means another thing to us. And it means that we recognize and realize that every single customer out there, every single market demographic out there is also a mother, a father, a husband, a brother, a son, a loved one. And we take that very seriously, and we care for those patients and provide them with quality products as if they were our own.

If you are new to Elutia, let's start off really quickly with a high-level investment summary and why we think you should be interested in what we think is a very compelling story. So our -- it's just about EluPro now. Elutia's EluPro envelope is the first and only antibiotic-eluting envelope on the market. We designed it really specifically to protect patients by combining this idea of an active biological matrix with drug deployment technology. And what we're talking about when we say drug deployment with EluPro, we're talking about the powerful antibiotics, rifampin and minocycline. We built EluPro on our earlier successful track record of selling our CanGaroo product, which was like EluPro, but it didn't have the drug elution technology. This monumental event for us happened in the second quarter. This was a June 2024 event, and we are very, very excited and steadily focused on the planned commercial launch of this product, soft launch starting in the second half of this year, full launch starting in January of 2025.

So why is it such a big deal to have an antibiotic eluting envelope for pacemakers and the like? Well, the pacemaker device protection market is a $600 million market with only one other competitor. There is $350 million of white space out there that's uncontested. But I'll say that's not enough for us because this isn't a me-too product. We believe EluPro to be a fully superior product to the other competitor on the market, and we look forward to that challenge.

Worth noting, we also received FDA clearance for indications beyond pacemakers and implantable defibrillators. We collectively call the CIED market. And these include the other aspects of neurostimulation. So pain management; incontinence, both fecal and urinary; sleep apnea and epilepsy. And we're talking about an additional $8 billion device market. So one that is collectively equal in size to the cardiac indication. So we'll talk a little bit more about our efforts going into exploiting those markets as well.

And lastly, I'd like to point out, we didn't develop EluPro to end with EluPro. We developed EluPro as a platform technology of drug-eluting biologics that we are actively growing and building over time. So we're super excited about all that. We'll go into that more. But that is a snapshot of the investment summary of Elutia at a high level.

So today, with our conference call -- I actually wanted -- I wanted to sort of share more granularity to the plan as we talk about it and as we execute it internally. So these are actually the words we use internally. So I'm inviting you into the company to take a look at how we're executing on our plan to continually build the value of Elutia.

So we go through it very methodically. The first thing we had to do was clear it. Last quarter was all about clearing it. Then we have to make sure that we can produce the product, make it -- we have to introduce it to the hospital systems. And then lastly, it's not enough for us to introduce it, but we've got to grow it so that this technology can reach every patient that it's needed, but also this technology can reach every indication that it's needed.

And in order to do all of that kind of great stuff that I get to be super involved in, we also needed to have a strong, sound financial position. And I think we made really tremendous progress this quarter, solidifying our financial position so that we have the resources that we need to go and execute on the strategy.

So this is going to be the game plan for the call today. We're going to go through each of these different boxes in some granularity. So let's kick it off with, Clear It. And under the category of Clear It, this was monumental for us. We received regulatory approval for the world's first drug-eluting BioEnvelope product that was in June, as we talked about. We were really happy for a couple of reasons. One of them was that we received all of the shelf life we asked for, for this product. So we received the full 9-month shelf life.

We received a great indication. And again, a great product, [ shelf life ] if you're new, this is what EluPro looks like. It has the extended release, powerful antibiotics rifampin in minocycline, all wrapped up in this biological matrix. That matrix, from a primary standpoint, prevents that device from migrating and moving down the patient's chest wall and eroding out. We have an indication that allows it to be used both in de novo procedures. So as soon as a pacemaker is put in, and change out procedure. So when it comes time for a battery change, if there's a lead problem, it could be used in both of those.

Physicians love this product because you kind of see from the picture there, this is a product that perfectly and completely conforms to the underlying pacemaker. And as it's reconstituted and wet, it is really like a beautiful slippery -- lubricity of the product allows it to just simply slide easily into the patient's chest wall with absolutely no need to upsize the pocket. And when we hear from the physicians that we've talked to, at HRS and others, this is a really, really big deal for them.

And then lastly, this is an envelope that regenerates. This is not a synthetic, this--it's not a polymer, this not a metal that sits there or dissolves over time. But instead, it remodels into the patient's own healthy vascularized tissue. And you can't have a foreign body response. You don't have a foreign body anymore. And so it completely eliminates in the long term, that type of problem from taking place.

So as we talked about, we were going after, and we were super excited about the cardiac rhythm management market. That device market is an $8 billion market, meaning the devices that get implanted there are currently doing about $8 billion in sales, and that was the primary approval we were seeking.

But there's also this neurostimulation market that we went after for strategic purposes just so everyone realizes that is an additional $8 billion device market that we have now opportunity and we have label claim in order to be able to go in and protect. And so I want to really make sure we describe both of these markets adequately.

Let's first start for us with the most important market and the one we're focused on, which is cardiac rhythm management. So let's dig into that a little bit. This is a market that only has 4 players -- 4 primary players in the pacemaker and defibrillator space. Medtronic is the largest to this at 40%. Behind them, we have Boston Scientific and Abbott at 25%; and then lastly, Biotronik at 10%.

Now Medtronic from a competitive standpoint introduced a product, they actually acquired a product line in the company called TYRX back in 2014, and TYRX is a pretty interesting story in that this is a product with very little sales when it was acquired. And it's a fully synthetic antibiotic eluting envelope. And so it's -- after it's implanted, the envelope kind of dissolves over time, and as it dissolves, it liberates the same antibiotics we use, rifampin and minocycline.

And what Medtronic was able to do is, they acquired this product and they went into the pacemaker and defibrillator market space, and they said, Hey, this is a really good idea for you guys to have this product as you're implanting them. And they were right. And they did a really beautiful job creating this market. And we estimate -- their sales right now are somewhere between $250 million and $300 million a year with this product. And so they have really derisked the marketplace around this idea; will an antibiotic eluting pouch be accepted. The answer to that is definitively yes.

Now it's a product we think that can be improved upon. And so when we look at this, we look at these markets that have at least 60% of the market really uncontested right now, 60% of the market that doesn't have access to a pouch. And you might look at those favorable market dynamics and say that's really pretty good. Like if all of you did was have a me-too product to that 60% whitespace in this. This is pretty fantastic.

But I'm here to tell you, we do not have a me-too product. We believe fully that we have a far superior product to Medtronic's TYRX product, because of, we've taken those same powerful antibiotics rifampin and minocycline, and we have paired them with this biological envelope that does all those great things that a biologic does. And we hear this over and over again from physicians. It is a product they love to use. And so we're really excited about going after the rest of this market space.

Okay. That's the cardiac market. We also picked up this neurostimulation market, which is another $8 billion in devices and we were just briefly looking at what that market looks like. So the neurostimulation market is growing at 12%. So quite a healthy rate. It has 4 major components to it, pain management; incontinence, both urinary and fecal; epilepsy market and sleep apnea. And here's the thing you've got to look at across all of these markets. 3% complication rate, 41% complication, 21% -- about 27% complication rate, 42% complication rate in sleep apnea with 24% of those devices requiring revisions.

These are markets that are screaming for EluPro. And where we think we can go in and not -- and really add significant value, not only to the procedures and the underlying devices, but frankly, to the patients that are having these put in. They're having devices put in for a reason, they need the underlying technology. We believe we can make that underlying technology more successful as it relates to compatibility with the patient.

Okay. So that wraps up Clear it and why we were so excited about having EluPro finally cleared.

Now let's move on. The next step we've got to do is we've got to make that product. I am -- let me just sort of take you in really quickly. First, we manufacture EluPro in the same place we manufacture CanGaroo, which is our facility, manufacturing facility in Roswell, Georgia. We've had operations there since 2013 and have turned out 75,000 units. So this isn't a risky thing for us. Like are you going to be able to manufacture this? This is probably the first time you're doing it? We've been at it for a long time. To be sure the addition of antibiotics into this manufacturing process increases the complexity, but we're not new at this. We've been at it for a while. We have a facility that has really great clean rooms. It also has a lot of capacity. So we're talking about the ability in the current facility to manufacture at a run rate of $140 million of EluPro and to build out from there actually doesn't require a whole lot of sophisticated space. So we have -- we certainly have the capacity to be able to launch and get this thing going. And when the time comes, we will be able to efficiently expand and open that up and increase that capacity. And by the way, we do think we will need more capacity in time beyond $140 million of revenue.

Lastly, and something I'm really proud about of the team is while we were going through review of EluPro submission at FDA, the site also went through a complete FDA audit and inspection in the month of June. It was an inspection that lasted about a week. It was comprehensive, and I'm super proud of the group down there, completed that inspection with no deficiencies, no observations noted from the FDA whatsoever. So we've got a clean bill of health on the approval side, and we've got a clean bill of health on the facility side, and we are ready to manufacture products. And so let's talk about that.

This, ladies and gentlemen, I am super happy to say this is the first unit of EluPro that has ever been manufactured for commercial use, Hannah Le, our senior operations associate in Roswell, Georgia manufactured it and to say, she was a proud parent is an understatement. [indiscernible] applause and cheers that went up in this facility. I will also say the entire leadership team was there to see this monumental event. And so there you go. We are well underway on manufacturing of this product. It's currently in the first lots are in QA review and are expected off the line shortly.

All right. We've cleared it. We've made it. Now we've got to introduce it into the hospital system, and you maybe have heard me talk about this before, but the introduction of this product in the hospital systems is not trivial, and we actually think it's the rate-limiting step. So the first thing we needed was all of the collateral in order to do that. And so you can see over there, whether it be packaging or promotional material forward or value analysis committee packages. This is what the new look of EluPro looks like. We love it. We think it's very consistent with the brand. We think it is very differentiated and really talks about the freshness that this product brings to really what's been a stagnant market for the last 10 years. So where are we on this? Well, we currently have CanGaroo out there in the market. And as we talked about before, we continue to add new hospitals so its approximately 400 active accounts, I like specificity. 398 accounts are active, which is a significant increase since the last time we've talked, and we continue to build out this hospital network.

We are also though -- so just because we have a hospital on account with CanGaroo, it's important to note, doesn't mean they one for one, just transfer over with EluPro. EluPro has to go through the value analysis or VAC committee submission, and that process is underway. So we have completed that assembly of the packages that you need to do in order to submit to VAC. So that is being done. It's done sort of on an account-by-account basis. Our KOLs, our physician champions at these are going in hand-in-hand with the reps in those territories and they are personally submitting them into the VACs. We are obviously prioritizing that from a standpoint of, we are going to our key accounts first for a launch. So our soft launch in the second half of this year has started now. In conjunction with that is the initiation of a registry where we're beginning to collect clinical data. And the full launch of this product starts in the first quarter of 2025, January of 2025.

All right. So it wouldn't be complete without talking about the reception that we're receiving out there. And I've gone through this before where 88% of TYRX users basically want to become EluPro users. This was a market survey that we did, where we were pulling 50 TYRX users and explaining to them about the benefits of having a biologic envelope instead of a synthetic envelope and asking them if they would switch some or all of their business, 88% said yes. And so that was really gratifying as we were building this product as we thought, hey, we're on the right track here. We're on to something that physicians care about.

But I think what's validating this more for us is the enthusiastic reception we are receiving since approval. So not only treating physicians. And by the way, if you're a treating physician out there, I appreciate the enthusiasm. No need to text me in the middle of the night. That is happening. And it actually -- text me in the middle of the night. I love it. Not that's going on. Hey, how can I get my hands on this? How can I bring this into my hospital system? How can I show this to my colleagues? But also other industry partners out there are -- we're receiving inbound calls of interesting, hey, we're super interested and excited about this product. And we are evaluating all of that the way we should responsibly and sorting through making those kinds of decisions.

But the important thing to understand is what that's telling us and what that's validating for us is that this is a product that the industry thinks can move the mark, right? This is a product that the industry thinks can move the CIED market and the neurostim market. And therefore, we think that is clearly validating the value of the product that we've developed. We'll work through all that stuff, responsibly as we should, but it's a very, very exciting time as we get ready for launch.

Okay. And then the last thing we need to do is -- not enough for us to introduce it and stay stagnant. We've got to grow it. And when I say grow it, I mean the brand, I mean the team, I mean the value of the company. So let's talk about how we're doing that right now. First thing is we are methodically, systematically building out our commercial teams. We are now up to 26 reps for the EluPro team and growing, and I put in parenthesis here, intelligently. I want to be really clear that we're not just doing this indiscriminately, we are not throwing reps at this thing and hoping a market comes. We are adding them methodically. We are adding quality people to places where we think they can have a significant contribution.

Same thing as it grows with SimpliDerm. So we haven't talked much about SimpliDerm, it's largely been the EluPro show today. But SimpliDerm is a great product, and it continues to be a great product. And it's one where we are investing more and more on a direct sales team and really controlling the destiny of that asset as well.

We can't do any of the sales stuff if we don't have the product on hand to make. And so towards that end, we were really excited about adding Ryan Marques to the team, as Vice President of Operations, to oversee the manufacturing and production of both of these product lines. Ryan is a really solid guy that we, as a leadership team, got to spend a lot of time with. And really, I think, he's going to be a really quality add to this organization.

I also talked a lot about these new adjacent markets that we all of a sudden have indications for, for EluPro. And what we're doing there is we're going on, and we are starting and intensifying BD efforts into these adjacent markets so that we can see if they make sense to have different partnerships or other types of arrangements there.

And then lastly, we didn't develop EluPro to get to the finish line. We developed EluPro to get to the starting line. This is the first drug-eluting biomatrix that is out there. We think all of the success that we're going to have with EluPro really just validates the sector. We have a platform technology that our R&D teams are aggressively building on. And as they do that from a product level, they are also building out a very broad and robust intellectual property position, which we think makes the products and make the company disproportionately more valuable.

So all in all, really exciting times at Elutia. Couldn't be more proud of the team. And I thank them so much for an incredibly successful quarter. We couldn't do any of this, though, without the financial resources that we need. And so we went to pretty great extents to make sure that we had a solid financial position in which we can really execute on this growth plan.

And I will now stop talking and turn it over to our Chief Financial Officer Matt Ferguson, who will go through some of the financial details.

[Matthew Ferguson, executive]

Okay. Well, thank you, Randy. It is no doubt a very exciting time to be in Elutia and Q2 was really an extremely important quarter. And even what's happened in the week since then has been a very important time for us as well. I'm just going to hit a few of the highlights of our financials. Of course, the full financials are available in our earnings release and our 10-Q will come out early next week.

So from an overall net sales point of view, there was little change this year in Q2 compared to the prior year, coming in at $6.3 million, less than $100,000 difference from $6.4 million last year. But what that masks a bit is the growth that we saw in our 2 most important product lines, CanGaroo and SimpliDerm. CanGaroo, we had a 19% increase to $2.6 million. SimpliDerm also came in at $2.6 million, which is an increase year-over-year of 7%. That will, as you may know, that was a decline from Q1 of this year, which really related to the dislocation associated with our U.S. distributor that went through bankruptcy and a sale during the quarter and is now being integrated into that new organization. And we've actually seen a nice return to the earlier levels of production that we were getting out of that distributor.

So we're doing a number of things in the SimpliDerm area to drive growth that we will keep you apprised of. But overall, we feel very positive about that part of the organization. And of course, we're very excited about what will occur when we have EluPro actually on the market here in the second half of the year.

So in addition to that, cardiovascular, which we don't focus on quite as much, that is exclusively distributed in the U.S. by our distribution partner LeMaitre had a good quarter with $1.1 million in overall sales. We put that relationship in place during the second quarter of 2023. So on a year-over-year basis, that was a decline, but some of the sales last year were at the full end-user price, whereas this year, they're at a transfer price. So that was a decline, but we actually were quite pleased with the $1.1 million performance, which was up sequentially from earlier in the year.

On a gross margin basis, we came in on an adjusted gross margin basis, which excludes noncash amortization expense overall at 58% versus 56%. So we're seeing some nice gains and efficiency overall there. And then I would like to note, while people are not quite a focused usually on our net loss. We had a large number there, but most of that was from a noncash charge associated with the warrants that were exercised in July of this year. But because it does change with our stock price, the warrant liability charge we had an $18 million noncash charge, which will primarily wash out of the P&L if we move forward here.

More importantly and more reflective of our actual operating performance on an adjusted EBITDA basis, we came in at $2.9 million for the quarter, and that was an improvement compared to $3.4 million last year. So we're seeing; with the revenue growth, and the improvement in gross margin, and control of operating expenses; we're seeing nice results on the adjusted EBITDA bottom line level.

And then last but certainly not least, we've made a lot of progress in terms of the overall cash position for the company. We did a financing that brought in $13.3 million during the second quarter of the year in a registered direct offering. And then as I mentioned the warrants that were exercised in July of this year, following the end of the quarter actually brought in an additional $13.8 million, which is not reflected in our quarter end cash balance. But if you think of it more on a pro forma basis, that would put us a little over $30 million in cash on our balance sheet, which is quite an improvement for where we've been over the last year or 2, really.

So excited about what we are looking at here for the second half of the year and beyond. And with that, I think we are going to open it up to your questions. Thank you.

[Operator]

[Operator Instructions] And the first question is from the line of Ross Osborn with Cantor Fitzgerald.

[Junwoo Park, analyst]

This is Matthew Park on for Ross today. Congrats on the progress. I just wanted to start off with EluPro and you get some additional color on how conversations with VACs have gone? How are you guys feeling about the overall VACs as you ramp towards the full commercial launch?

[C. Mills, executive]

Hi, Matthew. It was a little hard to hear, but I think the question was, how is the process going with our VAC submissions, the value analysis committee submissions? Is that correct, Rob? Or Matthew?

[Junwoo Park, analyst]

Yes.

[C. Mills, executive]

Okay. Yes. No, it's going exactly as we expected it. So our VAC submission strategy is a very methodical targeted one. And so the first hospitals that we are submitting to are ones that are part of our soft launch, pilot launch process for the first half. They are ones where we have very, very strong physician champions and those physicians want this technology in their hospital system. They want to be the ones using it first, and they're aggressively walking it, walking the packages through. So we're really excited about that. With that said, there will still be a range just based on how each individual hospital's VAC process works in how long it takes. But we think we will basically have full demand for the quantities that we're targeting in the soft launch from the hospitals. And then more importantly, preparing and starting the VAC submission process so that when our commercial -- the full commercial launch comes January 1, that will have a much broader universe of hospital systems. So very positive.

[Junwoo Park, analyst]

And then I guess just one more from me, moving down the P&L. In terms of OpEx cadence in the back half of the year, how should we think about sales and marketing spend in the second half? Should we expect more of a gradual buildup of reps? Or would these additions be more skewed towards the fourth quarter?

[Matthew Ferguson, executive]

Yes. I can speak to that, Matthew. I would think we are actively recruiting for new sales representatives, both in EluPro and the SimpliDerm categories. So we may see some additional expense there, maybe some additional marketing expense would also show up on that line. However, probably the biggest driver would be, as we continue to grow, we will see additional sales commissions associated with that. So I would expect to see some increase in that line as we move through the year, but it will be roughly -- it will be generally in line with increased revenue, I would say, as we go through the second half of this year and certainly into 2025.

[Junwoo Park, analyst]

And congrats again on the progress.

[Operator]

Our next question is from the line of Frank Takkinen with Lake Street Capital Markets.

[Frank Takkinen, analyst]

Congrats on an exciting quarter. Happy to see how EluPro make it to market. I will apologize I have been bouncing between a couple of calls. So if I ask a repetitive question, I apologize upfront. I wanted to first start with clarifying, Randy, I heard you say 26 reps. Is that today or the goal? And 2, how should we think about the right rep count over a longer period of time, say, 12, 18, 24 months and what the adequate size selling organization looks like?

[C. Mills, executive]

Yes, Frank, that is 26 reps as of today that are on board. We are using a hybrid of direct reps and we also will add the 1099 reps. That's sort of what Matt was alluding to in terms of why we don't have a real significant hit to the P&L that doesn't scale really nicely with revenue because a lot of those are just commission-based reps. But we are taking that number up. And Frank, I don't want to be more specific than that right now, but it will continue to climb as we approach January and launch.

[Frank Takkinen, analyst]

And then maybe shifting over to the -- some pricing discussion. I'm sure you don't want to speak too clearly about it given for competitive reasons. But any thoughts on directional pricing versus CanGaroo Classic or versus TYRX on the market today for EluPro?

[C. Mills, executive]

I can talk directionally about it, no problem. It's obviously CanGaroo, plus the addition of rifampin and minocycline. So it's a better product that. And we think it's a much better product than TYRX. It does more -- it has the biological features. And so we expect directionally, it will be priced in the premium to both of those.

[Frank Takkinen, analyst]

And then maybe last one, just an update on SimpliDerm. I think last quarter, there were discussions around the partnership with now Tiger and whether or not that partnership made the most sense for Elutia on a go-forward basis. What's the latest update on that? And any other thoughts around any partnership opportunities in that side of the business?

[C. Mills, executive]

Well, right now, we have a partnership with Tiger. And because of that, that is a result of Tiger acquiring the distribution contract from the assets of Sientra. So they paid money to acquire that agreement. So right now, we have an agreement in place. As Matt said, there was, as you would expect significant disruption when a company goes bankrupt and gets sold in an auction and acquired and integrated all in the second quarter, that's a lot, and it's a lot to expect that there wasn't going to be some disruption there. And also, as Matt said, we're seeing, I would say, in general, a return to more significant growth. With all that happening, we still had -- the products still grew in the second quarter. And that's largely due to our own our own distribution network. But right now, we have both of those distribution networks in place, and they're both performing reasonably well, but we are putting a lot of emphasis on growing our own distribution network just because they're doing so well, why wouldn't we do more of that proprietary? For a lot of reasons, it makes sense for us to do that. But right now, we have both of those in place and we're seeing the product actually return to, I would say, more SimpliDerm-like growth numbers.

[Frank Takkinen, analyst]

And congrats again.

[Operator]

Ladies and gentlemen, this will conclude our question-and-answer session, and this will also conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.