Karen Zaderej - President, Chief Executive Officer Pete Mariani - Chief Financial Officer Brian Korb - Investor Relations.

Dave Turkaly - JMP Securities Richard Newitter - Leerink Partners Raj Denhoy - Jefferies Kaila Krum - William Blair Craig Bijou - Cantor Fitzgerald Bruce Jackson - Lake Street Capital Markets.

Greetings, and welcome to the AxoGen, First Quarter 2018 Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Brian Korb, Investor Relations. Thank you, sir. Please begin..

Thank you and good afternoon everyone. Thank you for joining us today for the AxoGen, Incorporated conference call to discuss the financial results for the first quarter ended 31, 2018. Today's call is being broadcast live via webcast which is available on the AxoGen website.

Within an hour following the end of the live call, a replay will be available on the company's website at www.axogeninc.com under Investors. Before we get started, I'd like to remind you that during the conference call the company will make projections and forward-looking statements regarding future events.

We encourage you to review the company's past and future filings with the SEC, including without limitation the company's Forms 10-K and 10-Q, which identify the specific factors that may cause the actual results or events to differ materially from those described in these forward-looking statements.

These factors may include without limitation statements regarding product acquisition and/or development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance. With that, I'd like to turn the call over to Karen Zaderej, President and Chief Executive Officer of AxoGen.

Karen?.

building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and introducing new products and expanded applications in nerve repair. I will now comment on our progress over the quarter in each of these areas.

First, we continue to build market awareness of AxoGen and our products by engaging with surgeons at hospitals, clinical conferences and promotional events. In Q1 we participated as a combined meeting of the American Association for Hand Surgery, the American Society for Peripheral Nerve and the American Society for Reconstructive Microsurgery.

There were numerous panels and symposiums focused on Peripheral Nerve, including 12 scientific presentations featuring AxoGen nerve repair platform.

In addition the investigators of the AxoGen sponsored CHANGE study received the Hand Journal Award, a recognition given by the journal’s editorial board to the manuscript that is considered to be the most impactful and interesting of the year.

This recognition is a reflection of the increasing awareness and acceptance of our platform for nerve repair. In addition to scientific presentation AxoGen hosted an educational symposium overcoming challenges in nerve repair, The Recent Evolution of the Evidence Based Algorithm.

The symposium focused the rapidly growing body of peer reviewed literature related to peripheral nerve repair. This symposium was highly attended and discussion reflected the increased acceptance of our algorithms as a new standard of care in peripheral nerve repair.

In addition, we worked year around to increase awareness of tissue donation, including our support of the Donate Life Rose Parade float each New Year's Day and Donate Life Month in April. We share the message and our tissue and organ donation improves lives by featuring stories of patients who received an Avance Nerve Graft.

One of these patients is Sherida; a young mother who’s all her nerves was badly injured when she cut herself on broken glass while she was three months pregnant with her second child. As a result of her injury, Sherida lost the movement of her fingers and sensation in a portion of her hand.

Both of these characteristics are critical to Sherida in her work as a typist. Sherida’s nerve was repaired using an Avance Nerve Graft and an AxoGuard Protector and she is now back to work and living an active life with her husband and two young sons.

As we approach Mother’s Day, it’s nice to recognize a great outcome for a vibrant young mom and her family. Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted three national education events in the first quarter and expect to conclude a total of 18 during 2018.

These surgeon-led programs focus on advances and best practices in nerve repair. They allow surgeons to gain additional confidence in nerve repair techniques, and they drive adoption and increased utilization of our products. On average, we see the utilization from surgeon attendees more than double 6 months after they attend the program.

Our first quarter educational events included a Fellows Programs, where we train the next generation of nerve repair surgeons. We plan to conduct a total of five fellows programs in 2018, training more than two-thirds of all hand and microsurgery fellows for the year.

In the quarter we also conducted our first educational program in oral and maxillofacial surgery with a focus on nerve repair during mandible reconstruction. Similar to our upper extremity symposium, these programs are lead by an academic facility who share best practices in peripheral nerve repair.

Surgeons are excited to now be able to add nerve repair to their standard surgical approach and provide an opportunity for sensory functions for these patients. Our third pillar is to grow the body of clinical evidence. We now have a library of 59 peer-reviewed clinical publications.

We're particularly pleased that seven of the 59 clinical publications focus on the use of our surgical portfolio in oral and maxillofacial procedures. The volume of presentations and publications reinforces both the importance on peripheral nerve repair and the growing both of evidence for AxoGen's products in nerve repair.

Our RANGER Registry has enrolled more than 1,400 Avance Nerve Repairs and continues to provide significant new evidence in the management of nerve injury. Surgeons are using this data to better understand nerve repair outcomes and to expand their treatment algorithms.

We believe this data provides additional evidence for Avance Nerve Graft to continue challenging the norms of historical repair option, becoming a new standard of care for peripheral nerve repair. RECON, our Phase III pivotal study comparing Avance Nerve Graft to manufactured conduits in digital nerve injuries continues to enroll.

We anticipate enrollment to be completed in Q4 of this year. These studies continue to produce important data that assist in clinical decision-making and support the adoption of our platform for nerve repair.

In addition to the adoption we're experiencing with hand and reconstructive plastic surgeons, we continue to see increased adoption of our portfolio in oral and maxillofacial surgery.

As these surgeons become confident with AxoGen's portfolio, we see expanded use of multiunit repairs of iatrogenic injuries and the application of our products to more complex injuries such as mandible reconstruction due to benign tumor resection.

Clinical data showed that repair of these injuries with the AxoGen portfolio of products can provide meaningful recovery in 87% to 94% of these patients. Historically, many of these injuries went untreated, leaving the patient with significant quality of life challenges associated with permanent numbness of the lip, mount and chin.

Surgeons now have an option to reconstruct these nerves giving the patients the opportunities to feel the returns of function. Late last year we announced the launched of our expanded application in breast reconstruction neurotization.

At AxoGen, we believe the ideal breast reconstruction restores size, shape, symmetry, softness and now sensation, without the potential risk and comorbidity associated with autograft nerve harvest.

We have developed the ReSensation surgical technique, which incorporates this vision into a reproducible and efficient solution for reconstructive plastic surgeon. We began surgeon training on the ReSensation technique for breast reconstruction neurotization as part of the application launch.

We will partner with 20 to 25 breast neurotization centers by the end of 2018. We have currently trained two-thirds of these centers on our unique ReSensation surgical techniques for breast reconstruction neurotization and they are beginning to offer breast neurotization to their patients.

Breast reconstruction neurotization provides an important new opportunity for women who choose autologous lap reconstruction following a mastectomy. Using AxoGen's nerve repair portfolio, surgeons can connect peripheral nerves in the autologous lap to nerves in the chest wall, enabling sensory nerve regeneration.

Historically, the sensory nerves were not repaired in these procedures, leaving the women with numb breast. Tissue you can’t feel, doesn’t feel like yours and isn’t normal. Restoring sensation in the breast is an important advancement for woman facing the challenges of mastectomy and reconstruction, allowing them to feel more normal again.

We are now enrolling patients in the Sensation Neurotization Outcomes for Women or Sensation-NOW clinical registry. Sensation-NOW will study the physical and quality-of-life outcomes of breast neurotization.

We believe that data from this registry will demonstrate that the ReSensation technique provides meaningful recovery of sensation and quality-of-life outcomes for women who choose reconstruction following a mastectomy. Our fourth pillar is sales execution.

As I mentioned previously, we added 15 direct sales reps in the last two quarters representing a 28% increase. 10 of our reps are clinical sales specialists focused on supporting our expanded applications in oral and maxillofacial surgery and breast reconstruction neurotization.

Our specialty reps are working with our existing commercial team to increase awareness and educate on clinical technique in these expanded applications. We ended the quarter with 68 direct sales reps.

Half of them have been with us for at least 12 months and we now expect to end this year with at least 80 direct sales reps compared to our previous estimate of 75. In addition to our direct sales force in the U.S. we currently have 19 independent distribution partners supporting the execution of our sales strategy.

We also invested in additional training resources to better prepare our new sales reps, expanded our sales leadership capabilities and increased marketing and support infrastructure. These changes will allow us to scale and enable us to drive continued growth in current and expanded applications in our platform our nerve repair.

Our fifth pillar of growth is the introduction of new products and expanded applications in nerve repair. There are many unmet needs in the surgical repair of peripheral nerves and we as a leading company in this space are positioned to develop new solutions for these needs.

Although our existing products in the upper extremity, trauma, oral and maxillofacial and breast reconstruction markets are our prime revenue sources today, expanded applications in lower extremity surgery, head and neck surgery, urology and the surgical management of pain offer AxoGen expanded revenue opportunities in the future.

Millions of people suffer with recurrent and chronic pain. The surgical management of pain may provide an effective nonpharmacologic resolution for many causes of this pain.

The pain universe is large, and the potential to apply surgical nerve repair and nerve management techniques to address issues such as neuropathy, migraine headaches, pain associated with hernia repair or nerve injuries resulting from total joint replacement creates a significant opportunity for us to introduce new products and expanded applications for our product portfolio.

In November AxoGen announced FDA clearance for AxoGuard Nerve Cap. AxoGuard Nerve Cap provides surgeons with a new option to protect the peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of asymptomatic or painful neuroma.

The first AxoGuard Nerve Cap was implanted during the first quarter and we initiated clinical evaluations to explore specific procedures and techniques using AxoGuard Nerve Cap, in anticipation of a potential launch and as part of an expanded application in the surgical management of pain.

Before I turn the call over to Pete, I want to highlight again that Q1 was a great quarter for AxoGen. We continue to execute against our strategic initiatives. And by doing so, we are driving record revenues and gross margins above 80%.

We exited the quarter strong and we are on track to continue defining and growing the largely up-tapped peripheral nerve repair market. We continued our focus on nerve repair education and awareness, experiencing successful interactions at professional society meetings and at educational programs for surgeons.

Surgeons are demonstrating an increasing awareness and adoption of the AxoGen portfolio in our core applications and are applying our portfolio of surgical solutions in new areas. We are making investments to grow expansion markets in breast reconstruction neurotization, and are exploring the surgical management of pain.

We're pleased with our progress and with our opportunity to continue developing the emerging nerve repair market and driving long-term sustainable growth for AxoGen. I’ll now turn the call over to Pete.

Pete?.

Thanks Karen. First quarter revenue grew 41% to $17.3 million. Revenue growth was primarily the result of increases in unit volume, as well as the net impact of price increases and changes in product mix. As in prior quarters, most of our revenue growth was driven by growth in active accounts.

The number of active accounts grew 30% to 604 in first quarter. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to develop their treatment algorithms.

And as Karen noted earlier, we made additional investments in sales management, sales training, surgeon education and marketing to provide both the sales capacity and infrastructure for growth.

These improvements impacted sales productivity early in the quarter, however we quickly realized the benefits of these investments, closed the quarter with a record month and we believe we are now in a stronger position to continue to drive growth. Gross profit for the first quarter was $14.5 million, a 41% increase compared to Q1 of '17.

Gross margin was 84.3% in the quarter compared to 84.4% in the prior year. Total operating expenses in the first quarter was $19.5 million, up 44% over the prior year.

The increase includes the additional investment in our expanding commercial capabilities, as well as increased investments in clinical, R&D and general corporate expenses associated with our growth. Operating expenses also include non-cash stock compensation expense of $1.7 million in Q1 of ’18 compared to $800,000 in Q1 of last year.

Excluding the impact of non-cash stock comp, total operating expenses for the first quarter increased 40% to $17.8 million or $103% of revenue compared to $12.7 million or 104% of revenue in the prior year. Sales and marketing expense in the first quarter was $12.5 million, up 45% over the prior year.

As a percent of revenue, sales and marketing expense in the quarter was 72% compared to 70% in the prior year.

And as Karen mentioned, we accelerated investment in our commercial capabilities and these investments and organizational changes provide a solid framework to drive continued execution of our growth plans and expand our platform in nerve repair.

Research and development spending in the first quarter was $2.1 million compared to $1.4 million in the prior year's first quarter.

R&D costs include product development and expenditures for clinical efforts focused on our biologics license application for our Avance Nerve Graft, support of the RANGER Registry, as well as studies for the development of new products and applications.

As a percentage of revenue, R&D expense for Q1 was 12% compared to 11% in the prior year's first quarter. General and administrative expenses in the first quarter was $5 million, up 43% over the prior year’s first year.

The increase includes higher compensation expenses, including higher non-cash stock compensation related in support our organizational growth, and as a percentage of revenue G&A expense in the first quarter was flat with the prior year at 29% of sales.

Net loss in the first quarter was $5.6 million or $0.16 per share compared to $3.8 million or $0.11 per share in the prior year. Excluding the impact of non-cash stock compensation, adjusted net loss and net loss per share in Q1 was $3.9 million and $0.11 per share compared to $2.9 million and $0.09 per share in the prior year.

Adjusted EBITDA loss in the quarter, which also excludes the impact on stock comp expenses was $3.1 million compared to an adjusted EBITDA loss of $2.2 million in the prior year's first quarter. We ended the quarter with $30.6 million in cash compared to $36.5 million at the end of Q4 ‘17.

Total cash burn in the quarter was $5.9 million and includes a $2.5 million payment of the 2017 annual performance bonus and awards and related costs. Turning to guidance, we are reiterating our 2018 full year guidance. We expect 2018 revenue will grow at least 40% over 2017 revenues and gross margins will continue to be above 80%.

Additionally, we now expect to have at least 80% direct sales reps by the end of the year compared to our previous estimate of at least 75%. As Karen mentioned, we are pleased with our commercial, clinical and strategic execution in the first quarter.

From a financial perspective we reported 41% growth, our gross margins continue to be above 80% and over the past two quarters we also accelerated investment in our commercial capability that will allow us to continue to drive execution in our core trauma and nerve protection markets, while also brining in additional resources and focus to our expansion opportunities in all OMF and Breast Reconstruction Neurotization.

These investments are having an impact and we believe we are well positioned to continue to drive growth and expand our platform in nerve repair.

We believe we have sufficient cash to achieve profitability while continuing to invest in these initiatives and we will continue to make investments to drive growth and we’ll do so in the manner that demonstrates the annual efficiency of our business model with improved operating margins and cash burn as revenue increases.

And with that, I’ll hand the call back over to Karen..

Thanks Pete. Before we close I’d like to highlight a few upcoming events. AxoGen’s annual shareholder meeting will be in Orlando on May 14. We’ll be at the Jefferies Global Healthcare Conference in New York City on June 5 through 6, and the JMP Securities Life Sciences Management Access Conference in New York City on June 20 and 21.

Information about these events will be available on the AxoGen website. In closing, our efforts to execute against our strategic initiatives focus on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and expanding new products and applications in nerve repair.

We continue to produce record revenues and have positioned AxoGen to lead and grow the peripheral nerve repair market.

We are building awareness, developing additional clinical data and expanding use of our products with innovator and early-adopter surgeons, and are excited to be moving toward developing the much larger middle-adopter segment of the peripheral nerve repair market.

We're pleased to see expanded use of the AxoGen product portfolio across our core markets, increased adoption in mixed and motor nerve repair, as well as long gap nerve repair and are excited to introduce our expanded application in breast reconstruction neurotization to additional surgeons.

We are introducing our platform for nerve repair to fellows, allowing us to train the next generation of nerve repair surgeons. We are building a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications where we believe we can bring meaningful solutions to current clinical challenges.

We will continue to expand our platform and develop new nerve repair applications, challenging the norms of historical nerve repair and positioning our algorithm as the new standard of care in peripheral nerve repair.

Before taking questions, I want to welcome our new investors and thank the AxoGen team for their commitment to our mission and our values. And at this point, I'd like to open up the line for questions.

Rhea?.

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Dave Turkaly with JMP Securities. Please proceed..

Thanks and good evening. I am glad to hear that you continue to attract a lot of sales talent. You mentioned what 68 now and 70 or whatever, 80 by the end of the year, so 12 more to go.

I guess, could you just remind us you know, the sales specialty reps, how many of those do you think you need? Should it be something like 20% of your sales force? Is that sort of included in the 12 adds you still plan on in this year and then if there is any difference in sort of the economics or how you compensate those folks versus your direct reps.

Thank you..

Hi David, this is Karen. So when we looked at expanding our sales team, we’re predominantly thinking about territory expansions, but we’ll continue to analyze this and add reps where we think we’re going to have the biggest impact.

So there is a threshold of reps as clinical specialists may not be able to support additional folks, so I am not sure that these will stay at a ratio at 20%.

We’re really focused right now on developing these techniques, so I think we’re a little heavier on our clinical side than we may need to stabilize out as a percentage of our total sales team in the long term, but we may add some clinical specialists but the predominant growth will be in our territory managers..

Great. And then when you look at you know – obviously when you fall in the range of that registry for a long time, such a massive undertaking. I mean you are mentioning some of these other sensation now and other studies that you are working with.

I guess you know do you think you need to do another sizable one like that or could you just talk to us a little bit about sort of the size of the scale of some of these other registries and studies that you are working on to get the technology you know adopted by new surgeons. Thank you..

Well, one of the things that we see in trauma is trauma we talk about it like its one thing, like nerve repair and trauma is one thing, but trauma is actually many different types of nerve repair. So the RANGER study is really designed to be the landmark study in traumatic peripheral nerve repair, as well as including other types of surgical repairs.

I don’t believe sensation now will need to be at the same size that the RANGER study is, but we do still want to get it to be a critical size so that it’s statistically meaningful and gives good evidence for the surgeons who are starting to adopt in this area.

So I don’t think it is sensational and need to continue to be as largest RANGER, but it will be a size of the study. Now the randomized perspective studies like recon and the way they are structured are a smaller size. So the recon study is expected to be up to 170 subjects and we’ll cut it off at about that point..

Thank you..

Thank you. Our next question comes from the line of Richard Newitter with Leerink Partners. Please proceed..

Hi, thanks for taking the questions. I was hoping you could just elaborate or explain a little bit more about the commercial restructuring or the organizational changes that impacted.

I think you said at the beginning of the quarter, can you quantify what that impact was, the sales or sales rep productivity and what kind of prompted the decision to kind of make those changes?.

Hi Rich. So we believe that with our sales structure we want to maintain a rep to sales management ratio that’s relatively low. So we want to have a manager who can be actively involved in helping to train, again our relatively low and tenured sales team. Half of our sales reps are still less than 12 months with us.

And so we made the choice to go ahead and set up and expand the number of regions that we have, the number of sales management we have and the infrastructure we have to support them, so that we can help to continue to bring on these new associates and ramp and scale the organization.

And you know I think there is a bit of a skill to anytime you change territory realignments and scale the sales organization and that if you don’t think about the infrastructure first, you could bring on sales reps and the productivity goes down.

There is a short term disruption if you’ve thought about the infrastructure that you need to weather through and then the productivity should go back to where you would expect it to be in the overall curve and that’s essentially what we saw within January with the substantial changes that we did within the sales team.

We saw a drop in productivity, but through early February, mid February things seem to level out and March was a record month for us. We are now getting right back on track and exiting the quarter strong.

So I think we stabilized pretty quickly with those changes and allowed us to get again the infrastructure to be able to continue to add additional reps through the end of the year so we can be at least 80 reps and continue to grow..

That’s helpful color.

I guess just as we think of you know an 80 rep target by year end now versus 75 previously, you know it sounds like the rep productivity will kind of grow into the infrastructure, but anything we should be thinking about with respect to the cadence of hiring as we move through the year and how to kind of model rep productivity? In other words – well, not in other words, but you know we had modeled rep productivity actually inching above $1 million per rep in the back half of the year and I am just wondering kind of what the expanded kind of denominator is now.

Is that still possible and how do we think about the cadence?.

Well, Rich hi, it’s Pete. I think that productivity is still possible, but keep in mind as we talked about before, we would continue to look at our revenue guidance fairly conservatively.

You know it takes time to get some of these things in place and get the productivity back to where you want it to be, so I am certain in your models you will see a pull back in productivity here in the near term as the 28% increase in reps comes into play say over the first two quarters.

But I am fully confident that our rep productivity is going to continue to expand in the back half of the year and you know with the [inaudible] in, these additional 12 by the end of the year I think will put us in a great place to continue to launch growth through or into 2019..

Okay, thank you..

Thank you. Our next question comes from the line of Raj Denhoy with Jefferies. Please proceed..

Hi, good afternoon..

Hi Raj..

Hi Raj..

Maybe I could pick up where Rich left off a little bit, because I think the thing that’s somewhat intriguing or interesting is that you are pointing to this kind of period of January where rep productivity slowed and it sounds like you sort of were focused internally than externally and yet you still posted 41% growth in the quarter and you mentioned you sort of finished at record pace.

And so you know I guess the questions is you know what pace are you on right now? I mean you noted that your north of 40% as your guidance, but you know given what we just saw in the quarter where you were sort of pre-occupied for one of the three months, what’s the real pace we should be thinking about you guys growing this year?.

Well our guidance is still greater than 40% growth. We like to be conservative in a way that we do think and like to think about our business as that we can set up for the expectation, but we look to continue to exceed that floor.

We’re pleased with where we are; we’re pleased with where we exited the quarter and yeah, we did still with those exchanges do an excess of 40% growth, so we’re really happy with that..

Okay, I guess that’s fair enough. I guess the other side too is you guys did spend more in the quarter right. So you invested in the business as you described.

Is this sort of a new level of spending and cash burn we should think about for you guys going forward or were there sort of investments that one could think of as kind of one-time as you invested in the quarter?.

Certainly there’s – well we talked about on the cash side, we’ve got the normal Q1 cash additional burn that we talked about and we called that out as $2.5 million in this quarter, but you know we did really accelerate these investments and we talked about this, both Q4 and Q1 together because you get the full impact of the Q4 adds and the Q1 adds coming through in the quarter and as we think about continuing to make investments, we do see that being more moderated through the rest of the year.

So yeah, you saw a sequential step-up in OpEx that was pretty significant Q4 to Q1 and we would not expect that type of step up sequentially going forward.

You know we will still continue to bring in a few additional reps while continuing to make investments that support our growth, but I think you will see expense as a percentage of revenue continuing to make improvements as we’ve done in the past..

Okay, maybe just a few kind of quick fire ones.

You know the number of new accounts in the quarter, if you added 13 to its 604 you mentioned, which I guess is slightly slower than you’ve been adding the last several quarters, again anything notable there or was it just sort of as you described the activity on the sales force in the quarter that it was just maybe a little lighter than normal?.

Yeah, well no.

Again the way we look at it is you know year-over-year it’s still 30% growth and you know it’s still – the combination of our revenue of 41% revenue growth, 30% active account growth, we were still pleased with seeing deeper penetration and a higher revenue per active account in the first quarter and I think that relationship as we talked about, we’ll continue to see where that revenue number is going to be a bit of a gap.

The revenue number growth is going to be higher than the active account growth as we continue to go deeper into these active accounts..

So that’s perfectly fair. And then just lastly, you know the number of distributors went from 20 to 19. I know it’s a minor change, but you did go to 19.

Anything we should think about that or read into that? Will you replace that distributor? Is that something you’ve now taken internally?.

No, I think you know what we – we’re seeing ourselves grow our direct territories and some of those direct territories was only because we’re splitting our current territories and others were finding that our direct territory would be more effective than a distributor territory and it would get plenty of opportunity to balance that out and make the right calls and make sure that we’ve got distributors active where they can be most effective and direct reps active where they can be even more effective in driving more growth..

We even have some shares quite honestly where we’ve decided we want to split a direct territory and club portions of it because it’s simply too much drive times for our direct reps and we may add a tremendous amount of distributors. There would be smaller territories in that case.

So we’re really trying to get our reps focused in driving deep into the accounts that they are in and if they’ve got an account that’s five hours away, it’s very hard for them to spend time in ones right in their hometown and so to make the best use of our rep time, we may actually see some increases in a number of independent distributors at times, but it would be again adding some smaller territories back in..

Okay, and then just sorry, last one just on breast.

I know it’s still early and you sort of described that you’re still training on most of the accounts at this point, but are you generating revenue at this point in breast or is that still largely unaccounted here?.

We are generating revenue and actually very pleased with what we’re seeing so far, but I think like all nerve repair, surgeons need to try a new technique and watch some patients for a period of time and so we’re expecting that we’ll see some of that behavior in breast reconstruction neurotization just as we’ve seen in some of the other segments to the extent that they get excited about it and move a little faster, that might be some upside but our initial plans is that the surgeons will be doing some initial implants following those patients and then kicking in more strongly, certainly in the latter part of the year..

Great, thank you..

Thanks..

Thank you. Our next question comes from the line of Kaila Krum with William Blair. Please proceed..

Hi, Karen. Hi, Pete. Thanks for taking our questions. So first on the 10 specialty reps that you guys added; can you talk through how those specialty reps are being placed into the field.

I guess whether they are at existing accounts or new accounts and specifically I just want to understand if there is any potential risk of overlapping efforts by our existing sales reps and again the new specialty sales reps..

Yeah, this is a team process the way we’re setting it up. So the OMF and the breast groups are slightly different. On the OMF, they work hand-in-hand with the local rep.

The local rep has the quota that’s associated with their oral and maxillofacial surgery and they really work together, because obviously the territory manager is going to be supporting the account for the long term, but these procedures are really technically a little more challenging.

It’s not just repairing the nerves; it’s really around the whole reconstruction of the mandibles, including the nerve repair and our clinical specialist can come in and walk through all the steps of the overall procedure to help the surgeon plan the procedure, as well as execute the nerve repair portion and that’s why we have the clinical specialists because we think that will be helpful as surgeons get comfortable in particular with the mandible reconstruction and oral and maxillofacial surgery.

So it’s very much a team activity.

There is various – they work together on it, so typically the territory manager sets up the procedure, helps identify a target area or surgeon who is interested in oral and maxillofacial surgery and then the clinical specialist will come in and actually work with them on their first five or six procedures to see that they are comfortable with the techniques and then the area manager picks it back up again.

In breast reconstruction, we have identified the targeted centers, so the breast specialists only work with those targeted centers.

Of course they always are in contact with the area manager, but they are more directly associated with a very small number accounts, because we are again trying to build the target center for the – to offer neurotization for the patient.

And so they were with those select numbers of small centers that really helped them in all aspects of their breast reconstruction neurotization. Again it’s coordinated with the local reps that they take much more ownership for all of the breast reconstruction that is done in those accounts..

Got it, okay that’s helpful. And then I guess – I mean you grew your direct rep count by nine reps in 2017 and now you’re planning to essentially double that metric to 20 in 2018.

So can you just help us understand how that spike in headcount in 2018 may ultimately impact your sales growth rate into 2019, because I know you said 40% growth for 2018, but I guess why wouldn’t your growth accelerate into 2019 with that dynamic in mind?.

Well, I think we are adding the reps like this to create that capacity that would allow us to do that.

It could allow us to expand growth in 2019 and beyond and as we talked about before, we sort of get three direct areas that we focus on right now and each of those three areas have opportunities for expanded growth beyond what we are talking about right now, and whether it’s the core trauma and nerve protection business, you know as we move towards the early adopters.

If our early adopters start coming into the business quickly, that could expanded about the 40%.

In oral and maxillofacial space we are very pleased with where we’ve gone there and those surgeons are beginning to work with one another to understand this new opportunity to give patient an opportunity to have a return of function, where in the past they didn’t offer that to their patients.

And as we get move following there, that could drive growth faster than the current rate that we are on right.

And then of course within breast reconstruction neurotization, we do think this is going to pace itself a little bit here in the early part of year but as surgeons become more confident in offering this to all of their patients or at least more of their patients, there is an opportunity for this to take our growth beyond this 40% path that we are on right now.

And then beyond that, we’ve also talked about the surgical management of pain and if we were in a place to talk more about that by the end of this year, then we could potentially have another opportunity to expand our growth in 2019 beyond our current core markets.

So felt it its important toward the end of last year and the first part of this year to insure that we have the right sales capability, the right infrastructure, both from a sales management perspective, sales training, marketing, a lot more of thinking into our surgeon education and how we do that and we are building this capability that will allow us to continue to expand our growth in this very, very untapped market of nerve repair.

.

Great, thanks guys. .

Thank you. .

Thank you. Our next question comes from the line of Craig Bijou with Cantor Fitzgerald. Please proceed..

Hey guys, thanks for talking the questions. A couple of follow-ups and then just one bigger picture question. I’ll start with the follow-ups.

On the 80 reps and there are lot of talk about rep productivity, I was hoping that you guys could kind of layout the productivity ramp you know as a new rep is hired and when you expect them to get to that $2 million or so range that you guys said is probably full capacity?.

Well as we said before, a rep when they come on, the first year it takes about a year to break even, and so the productivity on a new rep in the first year is lower. But then we do see that reps are going to get to about a $2 million number on average in terms of revenue.

And as we talked about before, we proactively split territories that was part of what we have done here, but we’ve been splitting territories for several years when they reach $1.5 million to $2.5 million.

We do started, based on looking at the method of how we sell and the dollars per procedure we think that we can continue to get the growth ramped and not get a flatting of that growth by keeping their territories more focused and keeping them with around $2 million in revenue in a year.

So that’s really our plan as we are going to continue to do that. So we are also putting in place the sales training and the infrastructure this year to see if we can continue to improve the productivity of those new reps as we continue to add them.

I mean that was part of the point of increasing our infrastructure in that case, is to see if we can continue to improve that ramp of – we call it a learning curve, but being established in the territories so that you get a higher productivity of new reps in the first year. We think we’ve got some good potential to be able to do them. .

And the other opportunity, the benefit that we have is a lot of these reps were split, are getting part of a split territory.

And so instead of where in a couple of years ago we would have put him into a Greenfield, now we are giving them some accounts and that will help the ability for them to ramp that productivity a little faster than what we may have done in the past. .

And we have certainly seen some of the reps that we’ve brought on in the last year already doing that. So, it certainly helps when you got a base of business that can you build from rather than starting up at Greenfield. So I think we will see a higher productivity on these new reps. .

Great, that’s very helpful.

The second follow-up, the 30% growth in active accounts, you have done that for all of 2017 now again in Q1, I mean is that how we should think about that active account number growing for the rest of ’18 into 2019?.

Well you know what; we are still early in getting into all of the accounts that are nerve repairs. So we have quite a bit of opportunity to expand by adding new active accounts but that’s balanced by the significant opportunity to drive penetration in the accounts that we are in.

And so if I am choosing between the two I would actually prefer that we continue to drive penetration in the accounts that we are in with 604 active accounts we got quite a base that we can, that I consider the lowest hanging fruits. The greatest opportunities for us to create quick revenue will be driving penetration in the accounts that we are in.

So yes I, think we will still continue to see additional new active accounts, in particular new reps bring in new accounts, I mean that’s – when they are handed a territory, they have some base business hopefully now rather than a full Greenfield, but they don’t have enough active accounts.

The new reps will continue to drive new active accounts, but many of our existing reps have enough base of business, that if they are adding new accounts they are ignoring some of the opportunity in our existing accounts and I think we are better off driving penetration.

So I would now be surprised if you see the rate of new accounts come down, while at the same time the penetration and increase in same store sales continue to go up. .

Okay helpful. And finally just bigger picture, you guys have put a lot of investment into education, into investing in the sales infrastructure. But new products and new applications are still one of your pillars of growth.

So just wanted to get your thoughts on how you balance the investment between the two, the existing applications and new ones and then just the timing on while we may learn about any other new applications?.

Well we look at both new products and new applications, but to be honest new applications is always a shorter timeline than new products. So new applications is probably things that are near – are existing products in new applications is a near term opportunity for us.

In terms of the balance of resources, we go through an internal prioritization process where we look at a number of factors, looking at the potential, but importantly also what we think of is the readiness to change of the market segment.

We are doing market development here and so we need to make a view of how quickly will that segment transaction into the new approaches with nerve repair.

We’ve done that, that’s how we’ve prioritize the opportunities that we are in, that’s how we selected the breast reconstruction neurotization and as we’ve said, we are now looking at the opportunity in the surgical management of pain.

Surgical management of pain is a broad category and I will tell you we will end up breaking it down into sub-segments, particularly around the treating or referring population of the surgeons.

Clearly I can say to today that I think the readiness to change in diabetic neuropathy or migraines maybe quite a bit differently than neuroma revision and amputation. But the amputation market is highly recognizing the issues associated with neuroma and the impact that has on use of prosthetic devices and hand and limb pain.

And so I think there are things that we will move into more quickly, but it doesn’t mean we want to continue to develop applications in other expanded pain segment, as well as functional recovery applications.

It’s just that we want to make sure that we have a significant impact in the applications that we move into, so we will prioritize resources to be highest in the things that we think are the biggest impact. .

Great. Thank you, very helpful. Thanks for taking the questions. .

Thank you. Our next question comes from the line of Bruce Jackson with Lake Street Capital Markets. Please proceed..

Hi, good afternoon.

Firs I wanted to confirm that with the distributors, you were down to 19 from 20 last quarter?.

Yes.

Yes that’s right. .

Okay and then with the transition, could you just tell us how that relates to the sales force increase and then also was there any impact on the gross margins or inventory or revenue as a result of the transition?.

So our distributors are not stocking distributors, so there is no inventory consequence. We handle all the distribution and direct billing to the hospitals, the distributors don’t own any inventory. So that’s while other companies might be structured differently, for us it’s a non-issue in that respect.

For us it’s a sales territory transition when we make a change just like it would be if you transition the direct rep and so we manage it just like that. And in this particular case we made a transition and we did have it go through direct rep but we’ve had, direct territory is good at distributors as well in the past.

Again, we just managed it trying to decide what’s the best way to handle a particular territory. .

Okay, that’s it from me. Nice quarter. .

Thanks Bruce..

Thank you. We have reached the end of our Q&A session. I’d like to hand the floor back over to management for closing remarks. .

Thank you Lori. I want to thank everyone for joining us on today’s call and I look forward to talking with many of you in one of our upcoming investor events. Thank you very much. .

Thank you. This concludes today's conference. You may disconnect your line at this time and thank you for your participation..