Axogen Needs RECON More Than Ever To Recharge The Bull Case

 

A couple more quarters have gone by, but nothing has really changed for the good at Axogen (AXGN), as the company continues to struggle to gain real traction with its nerve repair products (Avance in particular). While explanations like disruptions and delays due to COVID-19 are valid to a point, the reality is that the adoption curve wasn’t tracking to expectations even before the pandemic, and quite a lot more is riding on the company’s upcoming RECON study read-out.

While I continue to believe in the clinical case for Avance and allograft nerve repair, the reality is that changing how surgeons practice is difficult and time-consuming. Axogen has been investing a lot of resources into training surgeons, but clinical data (namely the RECON study) are likely the best chance Axogen has to alter opinions and practice. After a nearly 50% drop since my last update, I’m still bullish on Axogen based largely on the results seen in the RANGER and MATCH studies, but this stock is only suitable for aggressive investors who can accept biotech-like binary outcomes.

 

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Axogen Needs RECON More Than Ever To Recharge The Bull Case

Axogen: Renewed Covid-19 Worries Hitting, But The Growth Story Is Very Appealing

 

I’ve said in the past that it’s often a fool’s errand to try to figure out short-term moves in stocks that don’t have clear-cut causes, but I’ll throw caution to the wind and risk being foolish – I think Axogen’s (AXGN) (formerly "AxoGen") recent pullback from around $22 (and closer to $21 when I last wrote about the stock) has a lot to do with fears that resurgent COVID-19 infections will yet again drive lower procedure counts and deferrals in the company’s addressable markets of trauma, breast reconstruction, and oral-maxillofacial surgery (or OMF).

I don’t dismiss that short-term risk, but I do believe it is just a short-term issue. Axogen’s numbers continue to show increasing use among its core surgeons, and whenever pandemic-driven restrictions lift, there will be meaningful sales and education opportunities. Further down the road, clinical data should further drive the case for using Axogen’s nerve repair products. With 20% annualized revenue growth over the next five years and close to 20% growth on a longer-term basis, I believe Axogen shares are worth another look on this pullback.

 

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Axogen: Renewed Covid-19 Worries Hitting, But The Growth Story Is Very Appealing

Recovering Trauma Cases Should Highlight AxoGen's Improving Execution

Last year was already going to be a challenging one for AxoGen (AXGN), as this small-cap med-tech was recovering from past strategic missteps and execution issues stemming largely from trying to do too many things at once. Since refocusing on its core trauma opportunities results have improved, and as trauma cases increase on post-pandemic normalization, I expect those improvements to become more apparent.

Between trauma, breast reconstruction, and some surgical pain indications, I believe that AxoGen has addressable markets that can and will drive significant revenue growth in the coming years, growth backed in no small part by a differentiated product lineup that has a growing base of clinical data behind it.

The shares aren't the bargain they were when I last wrote about the stock, but I still like them. With the potential of 20%-growth over the next few years, a multiple of 7x or more to revenue does not seem unreasonable, supporting a fair value in the low-to-mid-$20's for the near term.

 

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Recovering Trauma Cases Should Highlight AxoGen's Improving Execution

AxoGen Struggling Through A Protracted Restructuring

Small-cap med-tech AxoGen (AXGN) already had plenty of long-running challenges to deal with before the pandemic, and the decline in elective pressures has only added to the challenges and pressures. While AxoGen’s core product offers what I believe to be meaningful advantages over autografts and synthetic conduits, the company’s sales effort became too aggressive and too unfocused too early, and the company has had to retrench around its core opportunities in trauma – a process that was already wearing out investors’ patience before COVID-19 came onto the scene.

AxoGen is a good case-in-point regarding the risks and challenges of a small company trying to disrupt established surgical practices. I don’t want to push the similarities too hard, but investors can look at AtriCure (ATRC) as an example of how long it can take for these stories to work. I do believe AxoGen’s products are superior, though, and I believe that clinical data will eventually win over more surgeons. These shares look undervalued today on both discounted free cash flow and EV/revenue, but AxoGen is going to need time to win back investor confidence.

 

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AxoGen Struggling Through A Protracted Restructuring

AxoGen Working Its Way Out Of The Penalty Box, But Execution Is Key

With much less progress than expected on sales productivity and surgeon utilization, 2019 has been a tough year for AxoGen (AXGN). The shares have recovered quite a lot of ground from their September/October lows, but if this rally is going to continue, the company must shift to beat-and-raise quarters and reassure the Street that 20%-plus revenue growth is attainable – a development that I believe will hinge on improving sales rep productivity and surgeon utilization of the company’s grafts.

It’s not unusual for small med-tech stories to stumble, but that makes it no less frustrating for shareholders. I continue to believe that AxoGen has a differentiated product platform backed by legitimate data, but that’s not all it takes to run a successful med-tech business. These shares are still in Wall Street’s penalty box for having missed revenue growth expectations, but there is still upside into the mid-$20s over the next 12-18 months if management can deliver on improved productivity and utilization metrics and rebuild the buy side’s confidence in the name as a growth med-tech story.

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AxoGen Working Its Way Out Of The Penalty Box, But Execution Is Key

The Street Still Highly Skeptical On AxoGen's Growth Story

It’s rough for investors when institutions change their mind about growth sectors, and the performance of some smaller high-growth med-techs over the past year illustrates that, with Abiomed (ABMD), AxoGen (AXGN), Avanos (AVNS), Inogen (INGN), and Nevro (NVRO) among some of the names that are down substantially from a year ago as the market has shifted away from what was at the time a long-term peak valuation for the sector.

Of course, it’s not just sector allocation that matters, and AxoGen has had some of its own challenges, including a late 2018 short report that rattled investors, a miss in Q4, an enrollment expansion in a key clinical study, and ongoing uncertainty about the real size of the peripheral nerve repair market and AxoGen’s ability to emerge as a long-term winner.

I’ve chosen to shift to much more conservative modeling assumptions, including lower sales force productivity, more competitive pressure, and a slower path toward converting surgeons into active users of nerve conduit products. Even with those changes, though, I still believe AxoGen can generate better than 20% long-term revenue growth and support a fair value in in the $30’s.

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The Street Still Highly Skeptical On AxoGen's Growth Story

AxoGen Still In The Doghouse, But The Opportunity Is Compelling

The going hasn’t gotten any easier for AxoGen (AXGN). This up-and-coming med-tech company specializing in nerve repair has spooked growth investors with regard to its revenue growth rate and investors have also grown more concerned over the possibility of more intense competition from companies like Integra (IART) and Baxter (BAX) in the nerve repair market. While all that’s been going on, there seems to have been a general shift away from higher-growth (and higher-risk) stories in the med-tech space.

I’m still bullish on AxoGen, as I believe it addresses a large and under-served market with better products, but sentiment won’t turn around overnight. The 30%-plus long-term revenue growth I expect from AxoGen is hardly conservative, but I do believe these shares can outperform as surgeons become more familiar and comfortable with the procedure/products and increase their orders in the coming years.

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AxoGen Still In The Doghouse, But The Opportunity Is Compelling

Taking Another Look At AxoGen After A Nasty Post-Earnings Tumble

With great multiples come great expectations, and institutional growth investors can be merciless and indiscriminate in selling out of high-multiple growth stocks that don’t quite live up to expectations (or produce beat-and-raise quarters). This was one of my biggest concerns with AxoGen (AXGN) when I wrote about the company earlier this year, and the stock got hammered after what I believe was a quite modest second quarter shortfall that didn’t seem to have much to do with end-market demand.

To be sure, AxoGen is still in many respects a “story stock”, and a story with above-average risk at that. The addressable market opportunity is large and poorly-served today, and AxoGen’s clinical results have been pretty impressive, but driving adoption of new surgical procedures is not simple (or fast), competition may yet become an issue, and expectations aren’t exactly low. Still, when factoring in the incremental opportunities from future applications like total joint replacement, this is looking more and more like a risk worth taking.

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Taking Another Look At AxoGen After A Nasty Post-Earnings Tumble

AxoGen Offers An Exciting Story At Nosebleed Prices

When the stocks of real companies go up more than 250% in a year, it’s a safe bet that there are at least two factors in play – the company has a great growth story and institutions have caught wind of it. And so it would seem with AxoGen (AXGN), where the company’s products for peripheral nerve repair are legitimately exciting, but where the growth expectations are already quite robust.

AxoGen shares seem to be pricing in a scenario where the company holds close to one-third of its addressable market in 2027 with FCF margins in the mid-20%s. That’s achievable, but it doesn’t leave much room for stumbles or disappointments. I can’t make a value case for AxoGen, but I know there are investors who care more about story and growth, and maybe there’s still some appeal here for that group.

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AxoGen Offers An Exciting Story At Nosebleed Prices