Q4 2023 Elutia Inc Earnings Call

Participants

Randal Mills; President & CEO; Elutia Inc

Matthew Ferguson; Chief Financial Officer; Elutia Inc

Matt Steinberg; Vice President; Finn Partners, Inc.

Frank Takkinen; Analyst; Lake Street Capital Markets, LLC

Ross Osborn; Analyst; Cantor Fitzgerald

Presentation

Operator

Greetings. Welcome to Lucia Fourth Quarter and Full Year 2023 financial results call.
(Operator instructions)
Please note this conference is being recorded. I will now turn the conference over to Matt Steinberg with FINN partners. Thank you. You may begin.

Matt Steinberg

Thank you, operator, and thank you all for participating in today's call. Earlier today, Lucia released financial results for the quarter and full year ended December 31, 2023. A copy of the press release is available on the company's website.
Before we begin, I'd 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 or 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 our recent annual report on Form 10-K for year ended December 31, 2023, to be filed with the SEC accessible on the SEC's website at www.SEC.gov. such factors may be updated from time to time solutions and other filings with the SEC.
The conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 7, 2024, for solutions disclaims any intention or obligation, except as required by 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 gross margin, excluding intangible asset amortization, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to most directly comparable GAAP financial measure is available in the company's financial results release for the fourth quarter ended December 31, 2023, which is accessible on the SEC's website and posted on the Investor page of the official website at www.immersion.com. With that, I will turn the call over to Alicia CEO, Randal Mills

Randal Mills

Thank you, Matt Brown. I am super excited to be with you today and to share story evolution, our mission humanizing medicine so that patients can thrive without compromise. When I talked about that were compromised today and what that means, particularly with our flagship product that we're in the process of getting ready to launch Kangaroo program for what we're really trying to do is we're trying to take away those instances in patient care where patients and physicians are forced to choose between two options when in fact, we can actually give them both.
So allusion to commercial stage company. We have two proprietary product platforms can group, which is for our pacemaker and internal later phase and simpler, which we use in breast reconstruction but more importantly, and I think what a lot of you are on the call today, we are pioneering the drug eluting BioMatrix to solve some of the most complex problems that exist.
I'm going to be giving an update in this, and I'm super excited to do it where we're going to be talking about our regulatory progress that we've made. We're really excited about that. We're really excited about moving on and watching this product so that let's just jump right into it for the moment. For the year, we had an exceptional year in a transformational year at Andalucia, and I am I couldn't be more proud of this team.
Our commercial teams kept their eye on the ball, delivering 3.4% growth in 10 grew a stunning 38% growth in simple derm, all the while we were making these rather significant strategic shifts within the Company, but everybody kept a focus and kept their eye on the ball and really did a beautiful, beautiful job commercially and operationally from a development standpoint, as many people on this call, though, we submitted our five 10 K premarket notification in December, the FDA accepted that application.
And that review is progressing really pretty much exactly the way we expected. And we have not had any requests for any new data. We've had some requests for clarification, but we are looking squarely at a clearance decision expected in the first half of 2024 work. We believe actually, this is really going to be a May June timeframe. But for us, we're our standpoint where we are everything is we believe we're right on track in preparation for that launch.
We have established a strategic advisory committee to help us prepare and get the most value out of cangrelor and launched K where it was a very transformational event. We think business this is a transformational product for the Company, and we need to make sure that we're able to position it in a way such that we could realize not just the most value for the product with the most value for the company. So that and we've established as a strategic advisory committee that really has to do with the best been there done that mines from the space. We're talking about leading executives from the pacemaker and implantable defibrillator space, people that have led significant marketing and commercial launches of sophisticated biologic products.
Obviously, business development is in there as well as reimbursement and hospital penetration. So we're really first-class group of advisors to help us make sure we get this launch right. And then we'll honestly one of the things that I'm very proud that we do at Alicia is execution and we continue to execute. We announced last year that we divested our orthobiologics business, but the group handling that kept our eye on the ball and actually closed that divestiture, bringing in gross cash proceeds of $14.6 million.
So thank you to the team all around for an exceptional year.
Quick overview on what we do. So Alicia is developing the drug leading biologic really to reduce and remove the complications that exist at the device host interface and so when a surgeon in play as a device into a patient that's going to be there for a long period of time, there were a number of complications that arise quite predictably, things like device migration, erosion of the device through particularly in skin patient, obviously, infection and pathologic fibrosis, which can lead to things like capsular contracture. And when you look at the two markets that we're in pacemakers, we're seeing complication rates, you're 7% to 11% breast reconstruction and a stunning 20%. So we think this is an area where we can go and add really significant value and improve outcomes for our patients.
So how do we do that? When we do that with the drug-eluting biologics, again, which is able to solve these problems without compromise, we don't think a patient in a position should have to decide, hey, should I should I go with the with the device that offers a pharmaceutical payload and drug efficacy or should I go with the natural biologic that will remodel into the patient's own natural tissue and have a lower fibrotic response?
We look at that we say both should be the answer. And so that's why we've developed the drug with a biologic that provides all of the benefits of an active pharmaceutical payload. But on a regenerative scaffold that enables it to regenerate and patient's own healthy tissue. You're going to get into CanGaroo and Kangaroo REM. So that a little bit of a landscape overview here from a commercial standpoint in here, there are about 500,000 CID's is a term I've used for pacemakers and internal defibrillators that are placed into patients in the United States alone. When you look at that market space, Medtronic has 40% approximately of that space.
Boston Scientific and Abbott have another 50% of them Biotronic a distant fourth in about at about 10%. But these are really some really interesting market dynamics that this sets up because only one of these players actually has an antibiotic eluting pouch, and that's and that's obviously Medtronic, but all of them have really, really significant pacemaker business.
And so we started about Medtronic a little bit in there in their product direct. So tires was actually below, but it's a direct company on the back in the early 2010. It is a synthetic polymer envelope that as it dissolves in the body, it releases antibiotics and this product requires the development and eventually got it's got its clearance from FDA in 2014 and shortly after clearance from Medtronic with expert able to acquire this product for about $200 million.
Again, this is in 2014 numbers and they have since just knocked it out of the park. So they've grown this product to about $250 million to $300 million by our estimates, and they've really done a greater degree than to sit here. So we are focused on they were able to have foresight paid $200 million in 2014 when there was no market for this technology that creates the market.
The second thing that they did was they actually proved out that this market could exist and that the value proposition to physicians and particularly electrophysiologists about local antibiotic delivery, really work these physicians like the idea of having a local antibiotic resin with their surgery so that they don't have to worry about a postoperative infection.
But Medtronic did a great job here, but higher ash is a perfect product and that's why we developed the Kangaroo RM on direction and a really great job leading antibiotics, for example, into Desikan, but it doesn't have any of the benefits of biologic. I said it's a polymer that dissolves in the body. We like the idea of using biologic scaffold could for two reasons. One is a biologic scaffold around the pacemaker fits in force and really like a glove, they grew. It gives the physician a great fit and feel there's less information inflammation. Therefore, there's less pathological remodelling change out easier, and that's better for the patient in the long run then and all regardless of the patient's own tissue.
So again, this was an example where we looked and said, there is an opportunity where a patient and the physician are having to make a compromise and we can remove that compromise. We can Healthvision thrive without compromise, and we've done a pretty good job of that with cabira. We went out and we talk to electrophysiologists about this concept.
This study 88% of electrophysiology city for direct use for 88% of electrophysiology that use direct, which start using 10 grew once the product became available 88%. And we think that gives us a really, really great opportunity to move into the $600 million market and actually have some really great penetration. So back to our market, our favorable market dynamics that slide through the power of that.
So when you look, can you overlay the drug-eluting envelope on top of this, you have Medtronic sitting there with IRX might lead to a $250 million to $300 million in charge-offs. And then you have Boston, Alex and Biotronic and they don't have a balance between the majors. What we found was really mark.
We started doing our own internal market research 50% to 75%, and it's probably more like 70% to 75% of Direct is actually used on mono non Medtronic pacemakers. So a lot of progress is going on with Boston Scientific for an added a pacemaker. And we think when you sort of look at this all together, this does two things. One is it creates a great opportunity for us to go out and launch this product.
We are viewed kind of like Switzerland here. It doesn't matter whether the bonds that are out are Biotronic. If you're going to ask them who's bought a drug-eluting envelope, would you rather have in your case, Elutions or Medtronics, they're going to say Alicia, every single time, quite simple. We don't make a pacemaker and Medtronic does. And so that's a real great opportunity for us.
To go out and take that. That's really low-hanging fruit at $70 million , $75 million direct sales, but really 60% of the market that's essentially uncontested right now in this space. But if you also look at it from the Company's point of view, you're talking about a plug-and-play product here. Could you $100 million , $150 million less than the gross margins in the 70%. There's no additional selling costs, right disease. These players are already in every one of these cases anyway.
And so you do that sort of the math on that you're dropping something like $90 million a year to earnings look at their peak is somewhere between $25 million to $60 million , and you're talking about a product that could add $2.5 billion to $5 billion in value to these companies. So we are really can't tell we are really, really excited about cangrelor and coming to market, but we also understand its value and we'll have that discipline and the patience to methodically roll this thing out and take that to market and launch it so that we get the greatest value for both the product and the Company.
Okay. Now let's move on to our clearance, our clearance strategy and activity. So we filed as you guys know, we filed this 5-K, 10-K on December 18, 2023. We did that after meeting with the FDA a pre-submission meeting, the interactions us since that that we've been having with the FDA have actually been very positive and they're going exactly as we thought, as we've stated on this call and over time, we expected we were going to be asked our question, and we haven't asked questions. Fortunately, they've all been really at the clarification variety.
And importantly, the FDA has asked actually for no new data in this. So we believe we are in really, really good shape here, as I said, and lining up what we think will be a favorable clearance decision in the second quarter May June time frame.
If you're scoring on at home. And we are, therefore, we are internally preparing accordingly for the launch of this product in the second half of the year. That's why the Strategic Advisory Committee we're also doing work with reimbursement, getting ready to get on value-added committees, pulling up manufacturing at all of those other things.
And then just as a reminder, were not done and that was the pacemaker space. We actually expect you get approval in other indications like neurostim, Parkinson's and sleep apnea and the like. And so there is a bigger future here for cangrelor out then just the just the pacemaker market. But we're going to make sure we don't we don't triple we will win here. I'm just going to do our best to do that.
Okay. Turning now just quickly to simpler, I will not bore you guys going over press construction, whatever one again, just to point out, this is a really huge market with a really big unmet medical need. There's about 151,000 mastectomies in the United States each year that are of the variety that require breast reconstruction. That's where we come in with our Southern derm products and so on, we look at how this is going. Here's similar. We think it's just simply a great product. It has better handling characteristics is free hydrated. What that means is it actually comes to the surgeons. They opened it up and it is ready to go. It's already voiced. It doesn't require soaking or anything like that.
It's also sterile. This is a product that's been terminally sterilized, and we've been able to demonstrate that it invokes a lower in inflammatory and therefore, fibrotic response. So the surgeons that use this product loves this product and they keep using. And so that's why we have seen growth of this product quarter after quarter after quarter.
And this year being no exception, 38% growth. So we distribute this product two different ways. One is through our own proprietary network of distributors. The other is with C. Entra, which owns 23% of the breast reconstruction plate. And between these two, they are crushing it on. So we see really, really good things ahead for simpler and going forward.
Our end goal here is to obviously combine our REM technology with this base scaffold of simpler and simpler our end to be able to go after and help those women who experience postoperative infection following breast reconstruction.
With that, I will inhale take a breath and turn the call over to our Chief Financial Officer, Matt Ferguson .

Matthew Ferguson

All right. Thanks, Randy. Exciting stuff and we really are excited about all the progress being made, CanGaroo, REM incentive derm and all the value-driving catalysts that we see in the near future and continuing for the medium to long term here at Solutia from a financial update, I'm just going to touch on a few of the highlights. We provided a lot of information in our earnings release and we're aiming to file our 10 K tomorrow. So there will become more there as well.
But just any kind of a couple of the highlights here.
Our net sales were $24.7 million for 2023 are modestly growing from $23.8 million in 2022. But that promote has actually masked what really is going on underneath, which was the really significant growth of our proprietary products, CanGaroo and simple derm. If you just look at those two growth was about 19% year over year and what was going on in cardiovascular, which, as you probably recall, we partnered with MiMedx vascular as the exclusive distributor in the United States for that.
So for most of 2023 we were selling at a transfer price for that product, roughly half of end user pricing. So while we're selling similar amounts of the product we own, we're not generating as much revenue so that that affects the optics of our top line also affects our gross margin. But at the operating level, that's actually a positive thing for us. And it also has allowed us to really focus on the two main growth drivers for the company, which has been a very positive thing overall.
And for an adjusted gross margin, as I mentioned on may look like it's down a little bit year over year at 58% versus 63% on an adjusted basis. And again, we provide a reconciliation in the earnings release and on our presentation online, I'm really pleased with the operational performance for the Company, and we actually see room to continue to see those numbers grow as we go into 2024.
So the only other point that I'll touch on here are a couple of other points I'll touch on here. Adjusted EBITDA, which really allows us to cut through a number of the noncash and nonrecurring and discontinuing operations within the company from we had adjusted EBITDA of $14.6 million for 2023 compared to $22.9 million for the year.
So that reflects not just the revenue growth, but also really, really good expense control that we had over the course of the year. And we would see as we continue to scale, we would see those numbers also continuing to prove improve going forward.
And then last but not least, from a cash perspective, we ended the year with $19.3 million in cash. That reflects the proceeds from the divestiture of our ortho biologics business that Randy mentioned previously. So we feel like we're in good shape there. But on top of that, and you probably also recall we did a financing in Q3 that had cash exercise warrants attached to it.
Those warrants now are far significantly in the money to the tune of about 150%, and they expire 30 trading days after the clearance of cangrelor oriented. So that's not only a seminal event for us from a strategic perspective, but it also will be the trigger for bringing in about $16 million of additional cash is our expectation.
So on that's the overall picture from a financial perspective, we feel like '23 was a really strong year for us, and we expect to see that continuing to continuing to improve going forward. And before we turn it over to your questions. I would just say that done from a strategic point of view; we feel like we're really well positioned for growth. We have multiple value-driving catalysts in the near future. First and foremost, the clearance of Kangaroo RM., which will come lead to the launch of the product. And we're really excited about all the plans that are coming into place there and then the continued development of our drug, including biologic platform with additional products in the pipeline.
So with that, I will turn it over to you and your questions.

Question and Answer Session

Operator

Thanks you.
Thank you. We will now be conducting a question-and-answer session fuel. (Operator instructions)
Frank Takkinen, Lake Street Capital Markets. Please proceed.

Frank Takkinen

Great. Thanks, for the questions and congrats on all the progress and appreciate all of the background.
The CanGaroo RM market was hoping to start by following up on some of the FDA interactions Was curious if you're comfortable divulging any more about some of the requests they made? I heard loud and clear that they were not new data requests, which I think is most important to understand, but anything else you can divulge and then maybe bridge us to the expectation of a May June time frame and how you got to that?
Our estimation?

Randal Mills

Yes. Right on. So basically, no, we're not going to go too much into the details of the question. That is not for a lack of transparency. It's actually centered around some of the intellectual property that you have is the technology that's you can imagine super important to us. What I can tell you that the questions are if they were of the clarified clarifying variety, right? So they were also completely contained within the scope of what we have responded to FDA from the NSE. letter. So they're only we only had four issues on. We've provided them the data for that. So none of the questions were outside of that. So they're not that's good. They're not.
Are you doing anything else there? And then the questions that I think that we're all sort of have this clarifying writing. We submitted to them a pretty substantial package. You know, when we when we answer these questions, they have validations and all kinds of other Scientific Reports We submitted and have a pretty substantial package. So with the end of that, as you would expect, as we expected and as we said actually on our last call, we fully expected them to have some of these types of questions. We knew what they were we would have answered and Alvheim but the point that they've asked us is these kinds of questions. I'm about to tell us more about this method or submit us this underlying report for this or that like that has that kind of that, that kind of stuff?
As I said, really importantly, they didn't say this isn't sufficient. You're going to need to provide a support here. We had no requests for any additional data there.
With regards to with regards to the time line with banks that may being really conservative on the May June timeframe, and I don't mean just conservative in telling the Street, our expectations. But the most important thing for our Company right now is to get this clearance over the goal line. And so we have a very positive interactive relationship right now going with the FDA. Our R&D teams are in back and forth with them on a collaborative basis. The idea is to make sure the FDA has a exactly what they walk before we before we tell them to go. And it's interesting in the last 30 days or so, we're not going to do anything. We're not going to do anything in order to save off a week or two weeks here or there that would in any way in any way jeopardize that. So I'm being really conservative company, really, we're being really careful, very methodical, but it's the most important thing for us right now. And so it's in my view, that's the only one responsible M&A

Frank Takkinen

Got it.. That's helpful. That makes sense to me. And then maybe extending on some of the comments you made around the committee you put in place for under trying to understand how you're going to launch the product and whatnot. How quickly could you have supply up and running? And should we assume it's more of a limited launch in the second half? And then a full launch in '25? Or how do you think about that assuming it's cleared in the May June time frame?

Randal Mills

Yes. So right now, our and we are right now we are I can't emphasize this enough right now. We are exactly on track of where we thought we would be on. And so right now we are looking or a soft launch or a limited launch, particularly in the third quarter. Most of that has to do with getting into hospital back getting through hospital backs on formulary, moving up supply, although we have a pretty good manufacturing team is that that's ready to go and with this, but really doing the underlying things that we need to do to get to was it most of it has to do with reimbursement getting on formulary, and we'll also be expanding the sales team as well. During that time, we'll be training and the like associated with that. So that's largely third quarter. Our expectation at this point right now it's going into the fourth quarter yet we would be happy to take the training wheels off and be ready and we're ready to go.

Frank Takkinen

Got it. That makes sense. And then maybe just transitioning for my last one talking about simple term, great to see that continue to grow at an impressive clip. How should we be thinking about a growth expectation in that line item for 2024?

Matthew Ferguson

I could speak to that a little bit, Frank. I think we are continuing to see simple derm show really strong performance even as we're going through in the current quarter. As you are aware, we have our distributor in that space.
Sientra is doing some restructuring right now.
We actually have seen them continue to perform well even through that process. And we are optimistic that they'll come out of that even stronger than they were when they're there, they went into it. So we really expect that we can continue to see the same type of growth that we saw in 2023, continue in 2024 as we are as we move forward.

Randal Mills

Perfect.
Yes.
I mean, Ali, particularly West Hub color commentary that a little bit, Frank. We obviously that is came out and we thought about it. And so those are the issues in terms of we haven't seen that. In fact, they've done a nice job with their team. So still the bulk, the vast majority of our product is sold through our online. Um, look, both of them have hit performing really, really well. So we've we are exciting stuff about how can Ryan's one for similar. However, I got I can run them and they have similar areas performing well right now.

Frank Takkinen

We've got it. Perfect cause. Appreciate color commentary. Thanks for the questions.

Operator

Ross Osborn, Cantor Fitzgerald.
Please proceed,

Ross Osborn

Guys Congrats on the progress ambition and questions shaping up to be a very transformative year for the Company. I think we have some guidance. Apologize for the background. Noise is traveling today. But starting off, I think Andrew number for the quarter came in a little bit below where we were expecting and realize the story is really all about REM here, but anything to call out or market and point there?

Randal Mills

No. I mean, we have we have shifted our focus now from Kangaroo to Kangaroo our plan. We still have our sales reps in our accounts in place for CanGaroo. Rm isn't as successful product if it's doing anything like with PEG group and this is a product that literally be that order of magnitude for more of the bigger than that. So well, our reps are freshen it up from a from an internal marketing standpoint, visionary leadership standpoint, we haven't really focused our energy now on the product they're about to sell.
And we have we haven't seen any softness in any of the unrealized market or bleed or in fact, I was blown away that we did a restructuring at the beginning of last year. So we essentially cut the commercial team in half. And at that time we thought you know me if we hold 60% of our sales together there, that would be really impressed with what our team.
Not only did they hold it together. That's the most revenue we've ever had in in Kangaroo. And it's just it’s a tighter, leaner but far, more focused group of really incredible professionals. And I cannot wait to give them the product that frankly, they deserve to have and let them just go Tarantella.

Ross Osborn

Sounds great. And body here at Cobb and then maybe one more. But on some ProDerm limiter on that continues to exceed expectations. At what point does it make sense to devote more resources to that asset to reach its full opportunity in 2025?
Sorry, once you get our analysis.

Randal Mills

We think it's we think it's a great product from two. We're not holding anything back from it. It is, you know, it is performing really impressively and it is continuing to perform really impressively. We are in active work from an R&D standpoint on developing simpler RM, and we are not, you know, continuing to have our own proprietary sales channel and the channel sales channel is kind of we actually feel really good about that product and how it's working and done.
And if we used to say that they're really small numbers. The numbers are getting a little bigger than the growth rates they have high. So we're pretty excited about that, but we're not holding back from us.

Ross Osborn

Sounds great. Thanks for taking my questions and congrats on the progress.

Operator

We have reached the end of our conference call. You may disconnect your lines at this time and thank you for your participation.