Treace Medical Concepts Q3 2024 Earnings Call Transcript

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November 5, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Tris Medical Concepts Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Vivian Cervantes, Investor Relations, Gilmartin Group. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to our Q3 2024 earnings conference call. Participating from the company today will be John Treece, Chief Executive Officer and Mark Hair, Chief Financial Officer. During the call, John will offer commentary on our commercial activities, followed by Mark for a review of our Q3 financial results released after market close today. We will host a question and answer session following our prepared remarks.

Speaker 1

Our press release can be found at the Investor Relations section of our website at investors. Treece.com. This call is being recorded and will be archived in the Investors section of our website. Before we begin, we would like to remind you that it is our intent that all forward looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends, as well as our estimated results or performance are forward looking statements.

Speaker 1

All forward looking statements are based upon our current estimates and various assumptions. These estimates 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. All forward looking statements are based upon current available information and Treat Medical assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10 Q for the Q3 filed today and our Form 10 ks for the full year 2023 filed on February 27, 2024 for a detailed presentation of risks.

Speaker 1

With that, I now turn the call over to John.

Speaker 2

Thank you, Vivian. Good afternoon, everyone, and thank you for joining us on our Q3 2024 earnings conference call. We recognize this is a busy and important day for our country, and we greatly appreciate you taking the time to join us. Our 3rd quarter results reflect our execution to drive solid growth in the business, while steadily improving our operating leverage. In addition, we announced a limited market release of the Nanoplasty 3 d MIS system, representing our first entry into the large metatarsal osteotomy market, supporting our strategy to significantly increase penetration into the overall bunion market and continue to expand our surgeon customer base.

Speaker 2

Related to this announcement, we're pleased to report continued progress on our commercial strategy aimed at broadening our presence in the bunion market by further strengthening our product portfolio to address the evolving needs of both patients and surgeons. Just as we did with our pioneering lapoplasty system in the Lapidus Fusion segment of the bunion market, we are now excited to introduce unique technologies into the metatarsal osteotomy segment, currently estimated to represent 70% of the 450,000 annual bunion cases performed in the U. S, first with our Nanoplasty 3 d procedure to be followed by our 2nd MIS osteotomy system at the end of the year, and we'll discuss more later. Our focused R and D innovation pipeline is loaded and poised to significantly expand our technology and procedure offerings through 2025 beyond. Turning to the quarter.

Speaker 2

3rd quarter revenue was $45,100,000 representing 11% growth over the Q3 of 2023. This growth was fueled by continued commercial execution and driven by product mix shift that resulted from increased adoption of newer technologies such as a ductoplasty and Speed Plate, continued strong demand for our other complementary product offerings as well as increases in our active surgeon users in the quarter. Building on these trends, we are committed to expanding our share of procedure volumes from our growing surgeon base, while also attracting new surgeon customers with the introduction of our new MIS osteotomy platforms and our other forthcoming technologies. With that in mind, let me now provide you with additional color and share our excitement for our limited market release of Nanoplasty. Our Nanoplasty system offers surgeons an elegantly instrumented and reproducible 3 d osteotomy procedure that can be performed through a single discrete 1.5 centimeter incision hidden on the side of the foot.

Speaker 2

This system was developed in conjunction with a team of highly experienced and internationally recognized minimally invasive foot and ankle surgeons and is designed to offer patients a 3 d correction to relieve their lifestyle limiting bunion pain while minimizing incision size and visible scar. We believe Nanoplasty combined with our market leading lapoplasty and adductoplasty systems provides a powerful suite of differentiated technologies to comprehensively address the evolving needs of Bunyan surgeons and patients. And we believe we are uniquely positioned with our expert Bunyan focused sales force to deliver the clinical support needed to successfully integrate these new technologies and procedures into our surgeons' practices. We estimate today's overall procedure volume in the U. S.

Speaker 2

Bunion market is comprised of approximately 30% Lapidus Fusion and 70% metatarsal osteotomies. And we estimate around 10% to 15% of osteotomies are performed using MIS techniques today. Notwithstanding the increasing interest in MIS from surgeons and patients, MIS bunion surgery remains a technically challenging predominantly freehand operation, thus limiting adoption by the broader foot and ankle surgeon community and limiting patient access. With Nanoplasty, we're changing the MIS osteotomy market paradigm with an elegantly instrumented reproducible 3 d correction system. This strategy follows our lapoplasty playbook where we made a challenging freehand 3 d Lapidus procedure reproducible and in doing so democratized it making it accessible to the broad foot and ankle surgeon community.

Speaker 2

Let me now explain why we believe our entry into the osteotomy space represents a significant and immediate opportunity for TRACE and why we expect it will further accelerate our penetration into the bunion market. When we look at our existing base of over 3,000 great lapoplasty customers, lapoplasty makes up roughly 25% of their annual average bunion case mix, and we estimate the majority of the remaining 75% to be metatarsal osteotomies. We've experienced great success with our flagship lapoplasty system and have repeatedly shown increased average utilization within our customer surgeons over time as they progressively utilize lapoplasty, initially applying it to their most severe bunions to those that are more moderate in nature over time. By contrast, natinoplasty is an immediate pathway to capturing surgeons' more moderate to mild bunion cases without the multi year utilization ramp that we experienced with lapoplasty. In other words, we don't have to wait for 2 or more years for surgeons to consistently apply a tree solution for their moderate to mild bunions.

Speaker 2

Nanoplasty provides a sophisticated advancement in osteotomy surgery with strong benefits to surgeons and patients alike. Our customer surgeons are asking for these MIS solutions from Treese and we are delivering. We also believe we have a meaningful opportunity to attract new surgeon customers who today prefer metatarsal osteotomies for the vast majority of their bunion cases and have yet another now reason to engage with Tris. We've already trained a significant cohort of surgeons on nanoplasty in the lab setting and based on their consistently strong and positive feedback, we believe nanoplasty can disrupt the emerging MIS metatarsal osteotomy space due to its advanced 3 d correction capability, rapid learning curve and its cosmetic appeal to patients. We also have a second MIS osteotomy offering coming just behind Nanoplasty.

Speaker 2

This offering is geared towards the existing base of MIS foot surgeons who use specialized screw implants for their fixation of MIS osteotomies. Our goal here is to offer this segment of surgeons a superior option consisting of improved implant designs and importantly, the elegant 3 d correction instrumentation that Treese is known for to help them achieve greater reproducibility and gaining their 3 d bunion correction outcomes. We're excited to deliver this second platform and to continue to lead the bunion correction space with our pioneering technologies. We look forward to sharing more details on this new platform as we initiate our limited market release later in the quarter. In addition to the 2 new MIS osteotomy systems, which I just discussed, I want to update you on pipeline technologies discussed on previous calls and provide updates on their commercial status.

Speaker 2

First, our microlappoplasty 3 d minimally invasive system. This allows the patented lapoplasty procedure to be performed through a 2 centimeter incision. I'm pleased to report microlapoplasty is now fully available to our surgeon customers. Our IntelliGuide patient specific cut guides for lapoplasty and adductoplasty procedures. As a reminder, these utilize our acquired Redpoint PSI technology.

Speaker 2

We continue to perform IntelliGuide procedures with a number of surgeons and we expect expanded surgeon access during Q4 on our pathway to full commercial availability of this exciting technology within the first half of twenty twenty five. Our mini adductoplasty instrumentation, which allows surgeons to perform the adductoplasty midfoot procedure through a 50% smaller incision than with our standard adductoplasty approach. We expect expanded surgeon access within the 4th quarter with full access to this instrumentation within the first half of twenty twenty five. And our Speedplate Micro Quad implant. This is a new Speedplate designed specifically for high stability and anatomic fit in small surgical incision approaches such as microlapoplasty and mini adductoplasty.

Speaker 2

We expect a limited release of Micro Quad to begin in the late in Q4 and reach full commercialization within the first half of twenty twenty five. And there's more coming. Our focused R and D pipeline is loaded and we are poised to significantly expand our technology and procedure offerings through 2025 beyond. I'd now like to give an update on reimbursement. CMS recently released its final 2025 Medicare payment rates for hospital outpatient and ASC services to cover facility costs for surgical procedures, including supplies and implants used in the surgical case.

Speaker 2

These changes take effect on January 1, 2025. As a reminder, our products are used in procedures covered by well established specific CPT codes, and we're pleased to see that CMS has rendered its final rule and accompanying addenda, which includes the reassignment of CPT code 28,297, a primary code used for lapidus fusion and one typically used for the lapoplasty procedure to APC-five thousand one hundred and fifteen with a hospital outpatient payment rate of $12,867 for 20.25. This represents an increase of $6,050 or 89 percent over 2024. In the ASC setting, the 20.25 payment is now $9,820 an increase of 100% compared to 4,900 dollars for 20.24. As the pioneer of the market leading lapoplasty bunion correction system, we are pleased that the final rule recognizes the value that Lapidus Fusion offers patients suffering from painful lifestyle limiting bunion deformities.

Speaker 2

Turning now to our financial outlook. We're revising our full year 2024 revenue guidance to $204,000,000 to $211,000,000 which reflects an increase of 9% to 13% over 2023 revenue. This compares to our previous guidance of $201,000,000 to $211,000,000 For the full year 2024, we continue to expect adjusted EBITDA improvement of approximately 50% compared to full year 2023. Before turning the call over to Mark, I'd like to provide an update on our recently filed patent infringement and unfair competition suit. On October 14, we announced that we filed a lawsuit against Stryker Corporation and its subsidiary Wright Medical alleging patent infringement and unfair competition.

Speaker 2

We are proud of the fact that we are the 1st company to develop, patent and introduce an instrumented 3 d bunion correction system, creating a new segment of the U. S. Bunion market. We've been building our patent portfolio since our inception in 2014, and this lawsuit is consistent with our corporate strategy to assert and enforce our intellectual property rights. With that, let me now turn the call over to Mark to review our financial performance.

Speaker 2

Mark?

Speaker 3

Thank you, John. Good afternoon, everyone. Revenue in the 3rd quarter was $45,100,000 an increase of $4,300,000 and 11% over the prior year period. Growth was driven by product mix shift that resulted from increased adoption of newer technologies, increased sales of ancillary products used in Bunyan cases and an increase in active surgeons in the quarter. Gross margin was 80.1% in the Q3 of 2024 compared to 80.4% in the Q3 of 2023.

Speaker 3

3rd quarter gross margin of 80.1% was relatively unchanged from the 80.2% gross margin reported in Q2. Total operating expenses were $51,300,000 in the Q3 of 2024. Total operating expenses were $50,600,000 in the Q3 of 2023. The increase in operating expenses reflect increased share based compensation expense, investment in product innovation and support for other corporate initiatives. 3rd quarter net loss was $15,400,000 or $0.25 per share compared to a net loss of $17,500,000 or 0.28 dollars per share for the same period of 2023.

Speaker 3

Adjusted EBITDA loss in the 3rd quarter was $5,100,000 an improvement of 45% compared to the loss of $9,200,000 in Q3 2023. Compared to the Q2 2024, adjusted EBITDA loss improved 42%. Cash, cash equivalents and marketable securities were $82,800,000 as of September 30, 2024. Before concluding, let me turn to our outlook for full year 2024. As John mentioned, we are revising full year 2024 revenue guidance to $204,000,000 to 211,000,000 dollars which reflects an increase of 9% to 13% over 2023 revenue.

Speaker 3

This compares to our previous guidance of $201,000,000 to $211,000,000 For the full year 2024, we continue to expect adjusted EBITDA improvement of approximately 50% compared to the full year 2023. With that, let me now turn the call over to the operator to open the line for your questions.

Operator

Thank you. And our first question comes from Robbie Marcus of JPMorgan. Your line is open.

Speaker 4

Great. Good afternoon. Thanks for taking the questions. Maybe to start, I wanted to ask on the new MIS osteotomy product. You came to market with lapoplasty with 2 years best in class data and that was really what got you in the door with surgeons and drove uptake.

Speaker 4

How do you feel about going to market now without clinical data? Is that important? And do you think you'll be able to get the same differentiation in the market with this product as you did with lapoplasty?

Speaker 2

Hi, Robbie. Thanks for the question. It's John. It's a great question. And for the 1st several years that we marketed lapoplasty, we were gathering clinical data.

Speaker 2

We didn't have really the solid evidence yet. So that was an ongoing project that took several years as we were building the business with lapoplasty. Customers were seeing the success in their hands and then we came and reinforced it with the data that further supported the outcomes that they were seeing. With NanoPlasty, we are going to be committed to developing those data sets. The benefit we have is that we're adding the 3rd plane of correction, the rotational component that made lapoplasty so successful.

Speaker 2

We're adding that to the osteotomy. And there's scientific literature and evidence that demonstrates that if you can get the rotation correct and fix all planes, all three planes in an osteotomy, those osteotomies have higher durability than those where all three planes are not corrected. So we feel like we're bringing forth, in multiple ways a more sophisticated osteotomy to the market And we believe there's quite a high degree of surgeon interest in that.

Speaker 4

Great. I appreciate that. Then maybe for Mark as we come up on the end of the year, there's a lot of new product launches next year. I believe you've recommitted towards trying to cut the adjusted EBITDA again to striving towards breakeven next year in 2025. Any early thoughts on the rest of 2025 as we look up and down the P and L?

Speaker 4

Thanks a lot.

Speaker 3

Yes, Robbie, this is Mark. Yes, last call we talked about this year how we're going to improve our adjusted EBITDA of 50% over last year and then we'll get the remaining 50% in 2025. And so that would be to an adjusted EBITDA breakeven in 2025. And we'll continue to do what we've started to do this year is just show improved leverage throughout the middle of the P and L and that should drop down and get us to a better position from an EBITDA perspective at the end of next year. And again, as we've talked about in the past, that's a full year view.

Speaker 3

A lot of the EBITDA comes late in the year especially Q4.

Speaker 4

And any early comments on the top line as we head into next year?

Speaker 3

I think it's a little bit early. What we're happy about is what John talked about in his prepared remarks that we do have a lot of these new products coming. I think we just really want to see how they will be received in the marketplace. We have every reason to believe that they're what surge in customers are asking for. But I think we want a little bit more time as we see the adoption before we talk more about 2025.

Speaker 3

But irrespective of that top line number, we feel really good about managing the cost in the middle of the P and L to get to that adjusted EBITDA line. So more to come on the guide for full year 2025.

Speaker 4

Fair enough. Thanks for taking the questions. Appreciate it.

Speaker 2

Thanks, Robbie. Thanks, Robbie.

Operator

Thank you. Our next question comes from Rick Wise of Stifel. Your line is open.

Speaker 5

Hey guys, this is Anton on for Rick. Thanks for taking the questions. Maybe to start on Speedplate, we continue to hear positive surgeon feedback during our checks earlier this year. I think you highlighted Speedplay was being used in 40% of cases, but you've recently introduced the new larger Speedplay design and have the quad plate on the horizon. I guess, where are we with the Speedplate rollout broadly, supply availability for the new design?

Speaker 5

And with these different Speedplate iterations on the market, is the product being used in the majority of cases now? And what do you see as the ceiling for Speedplate utilization?

Speaker 2

Hey Anton, thanks for the question. It's John. Yes Speedplate has been a real game changer in our product line. Our surgeon customers are they're really preferring it as their go to fixation in more and more of their cases. We have seen the percentage of our fixation climb beyond that 40% without giving exact numbers, but it continues to grow as an overall percentage.

Speaker 2

We did launch the newer larger design for larger bone fusions in the foot and that is in full supply now and it's getting good uptake. And the new configurations that are coming, we think they're going to be well embraced, adopted and they really dovetail nicely with microlafoplasty and mini adductoplasty and allowing surgeons to put more robust fixation into smaller incision sizes. So we think the advances we keep making in Speedplay keep differentiating that line and driving into the market even further.

Speaker 5

All right. That's great to hear. And on the CMS final reimbursement decision, can you kind of help me think through what that means from a margin perspective? I mean the new ASC reimbursement rate would seem to meaningfully narrow the reimbursement gap relative to the hospital outpatient setting and they mitigate a previous pricing headwind. I mean through that lens, is it still right for us to think about Tris' kind of long term kind of gross margin trajectory as being basically stable?

Speaker 3

Yes. Anton, this is Mark. We're pleased with the final ruling with CMS and those associated reimbursement rates. As far as our gross margin, we'll continue to sell into these customer accounts and we are still continuing to target 80% this year. And there may be some minor fluctuations next year, but we don't necessarily look at this event being a change to our gross margin profile, but it's definitely can provide greater access to some patients who are looking for a lapidus type procedure for lapidylasty specifically.

Operator

Thank you. Our next question comes from Richard Newitter of Truist Securities. Your line is open.

Speaker 3

Hey,

Speaker 2

Rich. Rich, are you there?

Operator

Operator, your line is open. I'll move on to the next person. Our next question comes from Ryan Zimmerman of BTIG.

Speaker 6

Hi, guys. This is Izzy on for Ryan. Thanks for taking the questions. So I just wanted to stay on the topic of the finalized reimbursement rates for 2025. How are you guys thinking about how this might influence the competitive dynamics that you're seeing going on in the market right now?

Speaker 6

Do you think it'll be more of a rising tide opportunity? Or do you see a chance to gain more market share particularly among surgeons who may not be currently using TMCI products?

Speaker 2

Hi, Youssik, it's John. Yes, we were really pleased with those adjustments. They are significant and of particular interest to us because we believe we are the single largest Lapidus player in the U. S. U.

Speaker 2

S. There are a lot of ways that this may benefit that Lapidus segment of the market in general. One outcome could be a broadening of patient access to Lapidus procedures at different sites of care. With that said, we just need to see how it's going to play out next year and report back on any changes we see in demand or access.

Speaker 6

Got it. I understand. And just following up on that, if we think about the actual mix of procedures of lapoplasty relative to osteotomies, do you see the opportunity to see the utilization change in that or even drive more utilization towards lapoplasty given the really awesome rates that we're seeing for next year?

Speaker 2

Yes. I mean there's a lot of potentials and theoreticals. That's one of them. But it's just too early to say. And I think we need to get into 2025 and see how things play out and become better informed on what that's going to look like.

Speaker 6

Understood. Thanks for taking my questions.

Speaker 2

Sure thing.

Operator

Thank you. And we have Richard Newitter again from Truist Securities. Your line is open.

Speaker 5

Hi, all. It's Ben on for Rich. Can you hear me?

Speaker 4

We can hear you.

Speaker 5

Yes. Thank you. So I'm wondering what you're seeing in terms of trends in the foot and ankle market. I know there was some commentary from a competitor that they're expecting some reacceleration into 4Q. So I'm wondering if you're seeing similar?

Speaker 2

Hi, Ben. It's John. Thanks for the question. Yes, there have been some comments on the foot and ankle market. We uniquely kind of participate in one segment that highly elected segment bunion surgery.

Speaker 2

Some of those other companies have more diversified portfolios that include things like trauma products and other reconstructed products. So it's hard to make a direct comparison with our business to what these other companies might be saying and seeing. We identified some softening in our space in late Q1 and that continued into Q2, which led to our revised guide in early May. With that said, we're pleased that Q2 and Q3 came in largely as we expected them. And every year we see an acceleration in bunion procedures that starts kind of at the tail end of Q3 and then accelerates as you progress through the Q4.

Speaker 2

So that's kind of the seasonal pattern that we would expect to see in our segment of the foot and ankle market specifically the bunion market.

Speaker 5

Okay. Thank you.

Speaker 2

Sure thing.

Operator

Thank you. And our next question comes from Danielle Antalffy of UBS. Your line is open.

Speaker 7

Hey, good afternoon guys. Thanks so much for taking the question. Congrats on a good quarter here. Just a quick question on the updated guidance for 2024 and particularly the implication for Q4 is a step down in growth. I think at the midpoint it's high single digits.

Speaker 7

Just curious what the sort of puts and takes of that are? Any hurricane impact in that number? And then just a quick follow-up to push a little bit on 2025.

Speaker 3

Yes. Hey, Danielle, this is Mark. Let me start and maybe John can fill in any color that I missed. But yes, we're definitely pleased with the execution that our sales force had in Q3. 11% growth was really largely in line with our projections.

Speaker 3

As you think about this year and last year, Q3 was an easier comp for us. And when we did provide full year guidance back in May, we really felt like we appropriately factored in all the headwinds of competitive activities as well as the tailwinds of some of these new product launches that John has been talking about. Just as you mentioned, there are a few new variables here that have come up with respect to maybe some lingering IV bag rationings and a couple of hurricanes that were candidly in our backyard here in Florida. So balancing all of it, we just felt pleased with our Q3 results, but believe it's prudent to really maintain our guide for Q4 given some of that uncertainty.

Speaker 7

Got it. Okay. That's helpful. And then just to push a little bit on 2025. I mean, I think right now where the Street sits, it's high single digit growth or thereabouts.

Speaker 7

I mean, it feels like things have actually gotten a little bit incrementally better. You've grown low double digits year to date thus far. I mean, is there any reason to believe just given the cadence of new product launches that you have, growth would actually decelerate next year? Or is it safe to say probably the streets a little bit on the low end? Appreciating you're not giving guidance, but just trying to think about this conceptually.

Speaker 7

Thanks so much.

Speaker 3

Yes, Danielle, it's a great question and something that we talk a lot about here. As we talked about, we had single digit growth rate in Q2 and the guide has an implied single digit growth rate as well in Q4. We've got a lot of things that have been in the pipeline and we're just barely beginning to get them to market. Some of these 2 MIS systems that John is talking about are just really coming out in the Q4. So we don't have a lot of history just yet.

Speaker 3

Now we feel really good about all those coming. There are several other products and systems that are coming out next year as well. But I think from where we're sitting right now there has been a lot of change. There's been some challenges this year. And I think we as we think about next year, we've got a great and strong sales force.

Speaker 3

We've got some great products coming including our existing lapoplasty and nanoplasty product lines. We feel like we have a lot of things in order. I think at this time we're going to wait and see a little bit more of how the our surgeon customers adopt these new systems and then we'll be ready and prepared to give a little bit more guidance into next year as it gets a little bit closer.

Speaker 7

Got it. Totally fair. Thanks so much.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn it back to Vivien Cervantes for closing remarks.

Speaker 1

Thank you, operator. Thanks everybody for joining us this afternoon. On behalf of Tris Medical, we are concluding our call and we look forward to our next update following the close of the 4th quarter 2024.

Operator

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

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